UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
000-27763
(Commission file number)
SITESTAR CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 88-0397234
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
15303 Ventura Boulevard, Suite 1510, Sherman Oaks, CA 91403
(Address of principal executive offices) (Zip Code)
(818) 380-8180
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by referenced in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Revenue for the year ended December 31, 2001: $3,997,350
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant at March 31, 2002 was $1,852,320. The number of
shares outstanding of the registrant's Common Stock as of March 31, 2002 was
95,624,892.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I
This Annual Report on Form 10-KSB contains statements that are
forward-looking, including statements relating to anticipated operating results,
growth, financial resources, the development of new markets, the development,
and acceptance of our business strategy and new applications for Sitestar
Corporation's existing products. Investors are cautioned that, although Sitestar
believes that its expectations are based on reasonable assumptions,
forward-looking statements involve risks and uncertainties which may affect
Sitestar 's business and prospects, including changes in economic and market
conditions, acceptance of Sitestar 's products, maintenance of strategic
alliances and other factors discussed elsewhere in this Form 10KSB.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
We are a technology holding company with a broad strategy of acquiring
and investing in technology related enterprises. Our primary strategy is
acquiring and operating small independent Internet Service Providers ("ISP") in
the rural areas of the mid-Atlantic region. Our specific mission is to develop
our operating ISP subsidiaries and future ISP acquisitions into a successful
collaborative ISP network. We intend to achieve this success by harnessing the
synergistic potentials that exists among these acquisitions by consolidating all
the administrative functions and streamlining the corporate functions that may
exist with each acquisition.
In July 1999, we began to implement our broader strategy of acquiring
and investing in emerging technology-based enterprises to create a broad and
diverse set of core electronic businesses that deliver a variety of online
solutions. In addition to developing and integrating technology-based
enterprises, our broader objective is to create a mix of Internet operating
companies and technology-related portfolio investments that will enhance the
value of our core holdings.
Our Internet operating subsidiaries provide Internet services to our
customers 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 and residential users
located in selected high growth secondary markets. We currently provide our
customers, which total approximately 15,000 as of December 31, 2001, 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:
o Internet access services;
o Web design services;
o Web hosting services;
o End to end e-commerce solutions;
o Online marketing consulting; and
o Management of mission critical Internet applications.
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Our ISP 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 also generate income
from the development of computer software for companies principally in the
manufacturing industries and from sales from our retail computer store in
Lynchburg, Virginia.
Our most recent acquisition was Advanced Internet Services, Inc. (ADVI).
ADVI is an Internet service provider located in Mt. Airy, North Carolina. This
acquisition provided us with an expanded geographic footprint, broader
management depth and enhanced profitability.
In July 2001, we successfully spun off the content services division of our
wholly owned subsidiary, Sitestar.net, Inc. into TriVantage Group, Inc., a
separate public company exclusively focused in content development services. We
owned 90% of TriVantage after the spinoff. On December 28, 2001, we contributed
the assets of the content service division back to Sitestar.net and sold the
TriVantage public shell. We recognized an actual cash gain on the sale of
TriVantage of $188,158. Since we owned the content service division for the
entire year either directly or indirectly through TriVantage, the operations of
this division have been consolidated with our operations for the entire year.
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 July 1999 a partnership consisting of a majority of our shareholders,
including our Executive Chairman Mr. Manlunas, acquired all the issued and
outstanding shares of Sitestar, Inc., a Delaware corporation, in exchange for
3,491,428 shares of our common stock owned by those shareholders. Simultaneous
with the closing of this transaction, those shareholders contributed all the
issued and outstanding shares of Sitestar, Inc. to us as contributed capital.
Sitestar, Inc. is an Internet access, Web development, design and hosting
company formed in 1996 and is based in Annapolis, Maryland. This acquisition
included Soccersite.com which is currently one of our operating divisions.
Soccersite.com was an operating division of Sitestar, Inc. To better reflect our
new primary corporate focus as an Internet holding company, we changed our
corporate name from Interfoods Consolidated, Inc. to Sitestar Corporation in
July 1999.
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In August 1999 we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our common stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
managed by our Executive Chairman Frederick Manlunas, 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
Holland American International Specialties to IFCO Group, LLC, whose members
consist of certain of our shareholders, including Frederick T. Manlunas, our
Chairman of the Board. We retained the assets consisting of the Internet web
site Holland-American.com. Holland American International Specialties will
continue to serve as Holland-American.com's exclusive fulfillment center. The
purchase consideration of $900,000 was based upon a business appraisal by an
independent third party appraiser. The consideration included $200,000 which was
to be offset against a liability we had 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
the accounts receivable and inventory of Holland American International
Specialties.
Effective December 15, 1999, we consummated the acquisition of Neocom
Microspecialists, Inc. ("Neocom") in exchange for 6,782,353 shares of our common
stock for 100% of the outstanding shares of Neocom. Effective upon the closing
of the acquisition, we issued 4,782,353 shares of our common stock and have
reserved 2,000,000 shares of common stock that we have agreed to issue on the
second anniversary of the acquisition based on certain contingencies. The
certain contingencies are related to potential unrecorded liabilities. As of
January 2002, the remaining 2,000,000 have been issued to the former
shareholders of Neocom. Of the 6,782,353 shares issued for Neocom, 900,000
shares were issued in exchange for certain liabilities that the majority of
Neocom's selling shareholders have agreed to assume based on a debt assumption
agreement executed and delivered at the closing of the acquisition. In 2000, the
purchase agreement was amended so that we assumed the debt that was originally
to be assumed by the selling shareholders in exchange for the 900,000 shares.
Neocom is an Internet service provider and Web development company based in
Martinsville, Virginia. Neocom provides Internet access and other Internet
services to approximately 7,500 customers in the Southern Virginia area.
Effective November 22, 2000, we consummated the acquisition of FRE
Enterprises, Inc. and FRE Communications, Inc., both Virginia corporations
(collectively doing business as "Lynchburg.net") in exchange for 16,583,980
shares of our common stock for 100% of the outstanding shares of Lynchburg.net.
Effective upon the closing of the acquisition, we issued 12,437,985 shares of
our common stock and have reserved 4,145,995 shares of our common stock that we
have agreed to issue on the third anniversary of the acquisition based on
certain contingencies. The certain contingencies are related to potential
unrecorded and unknown liabilities. We used the market price of our common stock
at the acquisition date to determine the acquisition price of $2,487,597.
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Lynchburg.net is an Internet service provider, web development and computer
sales and service company based in Lynchburg, Virginia. As of December 31, 2001,
Lynchburg.net provided Internet access, computer sales and service and other
Internet services to approximately 4,500 customers in the Southern Virginia
area.
We believe the acquisition of Lynchburg.net enhanced our primary strategy of
consolidating small Internet service providers in the rural markets of the
mid-Atlantic region by enlarging our service footprint. This acquisition
increased our Internet access customer base to approximately 12,000 subscribers.
On July 1, 2001, we acquired 100% of the equity and voting interest of
Advanced Internet Services, Inc., a North Carolina corporation which is a
successor in interest to two sole proprietorships one having the same name as
the corporation and the other with the name Professional Data Systems
(collectively "ADVI"). ADVI is an Internet service provider located in Mt. Airy,
North Carolina. The purchase price was $965,980, which consisted of $150,000 in
cash, 6,021,818 of our common shares valued at $301,091 a non-interest bearing
promissory note for $1,199,990 payable in 24 quarterly installments of $49,995
and transaction costs of $30,000. However, due to the non-interest bearing
nature of the note, we imputed a discount rate of 36% to calculate the present
value of the note. This discount rate is an estimate of our current cost of
capital. Based on this calculation, the present value of the non-interest
promissory note is $484,889.
We believe the acquisition of ADVI, with about 3,000 subscribers, enhanced
ours primary strategy of consolidating small Internet service providers in the
rural markets of the mid-Atlantic region by enlarging our service footprint. We
also believe this transaction opened other acquisition opportunities for us to
further increase our presence in the northern areas of North Carolina. This
recent acquisition increased our Internet access customer base to over 15,000
subscribers. This acquisition included goodwill of $702,642 that was the premium
we paid to have the opportunity to generate revenues and earnings in this
market. Furthermore, this acquisition generated us cost savings with the
integration and consolidation of ADVI's corporate and administrative functions
with our existing infrastructure. This estimated cost savings, along with the
accretive nature of the transaction from an operating cash flow perspective,
will further allow us to enhance our revenue streams and increase our operating
cash flow.
Internet Industry Background
Market Opportunity
------------------
Overview. We believe that the Internet has become an important global
medium enabling growing numbers of people to obtain and share information and
conduct business electronically. Its expanded use has made the Internet a
critical tool for information and communications for many users. We believe that
Internet access and enhanced Internet services, including Web hosting and
electronic commerce services, represent two of the fastest growing segments of
the telecommunications services market. We believe that the availability of
Internet access, advancements in technologies required to navigate the Internet,
and the proliferation of content and applications available over the Internet
have attracted a rapidly growing number of Internet users.
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Growth in Business Use of the Internet. We believe that the dramatic growth
in Internet usage in recent years, combined with enhanced functionality,
accessibility and security, has made the Internet increasingly attractive to
businesses as a medium for communication and commerce. We feel that for many
businesses, the Internet has created a new communication and sales channel which
enables large numbers of geographically dispersed organizations and consumers to
be reached quickly and cost-effectively. International Data Corporation
estimates that the number of consumers buying goods and services on the Internet
will grow 128.4 million in 2002, and that the total value of goods and services
purchased over the Internet will increase to approximately $426 billion by 2002.
We believe that businesses will increasingly add a variety of enhanced
services and applications to their basic Internet access, Web sites and
e-commerce applications in order to more fully capitalize on the power of the
Internet. We feel that these services and applications will allow them to more
efficiently and securely communicate company information, expand and enhance
their distribution channels, increase productivity through back-office
automation, ensure reliability and reduce costs. We see opportunities for growth
in the following areas:
o Demand for Internet Access Services
Internet access services represent the means by which ISPs
interconnect their customers to the Internet or corporate Intranets
and extranets. According to Forrester Research, Internet access
revenues from businesses are expected to increase from less than $1
billion in 1997 to more than $16 billion in 2002. Due, in part, to
their size, small and medium sized enterprises often seek to outsource
these services.
o Demand for Web Hosting Services
Many businesses are seeking to outsource to ISPs services such as Web
hosting, collocation and file transfer protocol data storage and
retrieval.
o Demand for Secure Private Networks
We believe that concerns relating to the security of internal and
proprietary information, data loss and reduced transmission speed has
led businesses to demand Internet services that include the ability to
provide electronic security monitoring and threat responses.
The Small and Medium Sized Enterprise Market. We define this market as
business enterprises having sales of less than $20.0 million per annum and
enterprises having less than 100 employees. We have specifically targeted small
and medium sized enterprises because:
o We believe that these enterprises increasingly need high-speed data
and Internet connections to access business information and to
communicate more effectively with employees, customers and vendors.
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.
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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.
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.
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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 acquired Neocom, a provider of Web hosting and
co-location services in the Mid-Atlantic region. We also acquired Lynchburg.net,
an Internet service provider, web development and computer sales and service
company based in Lynchburg, Virginia. In addition, we acquired Advanced
Internet, an Internet service provider based in Mt. Airy, North Carolina. These
acquisitions are 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.
Growth in Electronic Commerce
We feel strongly that the growing popularity of the Internet represents an
opportunity for companies like us to take advantage of the potential for
commercial transactions conducted online, referred to as electronic commerce or
e-commerce. International Data, Inc., a market research firm, estimates that
business-to-consumer commerce over the Internet will increase from over $12
billion worldwide at the end of 1997 to approximately $425 billion worldwide by
the end of 2002. In addition, Jupiter Communications, another market research
firm, predicts that by 2002, 44% of Internet users will make purchases online,
as compared to an estimated 22% that did so in 1997. Several factors are driving
the growth in both business to consumer and business to business electronic
commerce.
These factors include:
o increasing familiarity with the Internet;
o broadening consumer acceptance of online shopping;
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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.
Changing Demographics
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
We believe broadening consumer acceptance and retailer ambitions will
combine to fuel a rapid growth in online retail sales and to drive more than 40
million U.S. households to shop online by 2003, producing $108 billion revenues.
According to Forrester Research, online retail sales will account for 6% of U.S.
consumer retail spending in the U.S. by 2003. Analysts estimate that by the end
of 1998, nearly 9 million U.S. households will have shopped online for travel
services and retail goods other than automobiles, generating $7.8 billion in
online sales. We expect these numbers to grow rapidly over the next five years
as high-speed Internet connections become more popular and consumers overcome
security and privacy concerns and embrace the convenience of Web shopping.
Corporate E-Commerce
Forrester Research estimates that by year 2003, consumers will spend $108
billion to buy goods online, while businesses will spend $1.3 trillion. As
expected, computing and electronic equipment will remain one of the largest
categories of goods traded between businesses, reaching $395 billion in revenue
by 2003, while other industries, such as cars and petrochemicals, will also top
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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.
Our Internet Subsidiaries and Services
Product Offerings
-----------------
Internet Access
We provide dial-up and private Internet access, design customized web
sites, host customer web sites on our computer networks, and offer related
e-commerce services to individual and business subscribers outside of large
metropolitan areas in the mid-Atlantic region, particularly southern Virginia.
We offer subscribers comprehensive technical assistance, large modem banks
providing rapid access to the Internet, and high-speed connectivity. In
addition, our home page web sites serve as regional portals, offering local and
national news and weather, community resources, advertising, and links to other
local and national content providers.
Our Web services help organizations and individuals implement their Web
site goals. We offer complete Web hosting services that enable customers to
establish a Web site presence without maintaining their own Web servers and
high-speed connectivity to the Internet.
Web Hosting
We offer a variety of Web hosting services which enable our customers to
establish and maintain a Web site on the Internet using Web servers and related
equipment owned and administered by us.
E-commerce
We also provide electronic commerce solutions for consumers and
businesses. We develop and operate an on-line "storefront" and sell merchandise
over the Internet.
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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.
Website Design
We have provided web site design services since 1996 and have developed
web sites for approximately 350 customers.
Online Marketing
We offer web site marketing services that continually build upon our
customer's current search engine listing to improve their placement in the
different search engines.
Customers and Marketing
Our customer base consists primarily of small and medium sized enterprises
and dial-up customers located in secondary markets.
We use targeted marketing and media advertising to develop brand awareness
and supplement these efforts with our highly customized sales process and
personalized customer service. Through our marketing managers, we seek to
develop strong customer relationships within local communities.
Competition
The Internet services market is extremely competitive and highly
fragmented. We face competition from numerous types of ISPs, including national
ISPs, and anticipate that competition will only intensify in the future as the
ISP industry consolidates. We believe that the primary competitive factors in
the Internet services market include:
o Pricing;
o Quality and breadth of products and services;
o Ease of use;
o Personal customer support and service; and
o Brand awareness.
We believe that we compete favorably based on these factors, particularly
due to our:
o Regionally focused operating strategy;
o Highly responsive customer support and service;
o High performance; and
o Competitive pricing.
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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 Earthlink, MSN and AT&T
Worldnet;
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 IBM and
Microsoft;
o national long distance carriers such as AT&T, MCI WorldCom, Qwest and
Sprint;
o regional Bell operating companies and local telephone companies;
o providers of free Internet service, including United Online and
MicroWorkz Computer Corporation; cable operators or their affiliates,
including Time Warner;
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.
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We also believe that manufacturers of computer hardware and software products,
media and telecommunications companies and others will continue to enter the
Internet services market, which will also intensify competition, especially for
dial-up access providers. If we are unable to compete with lower-cost providers
by providing superior service and support, our revenues and profit margins may
decline materially, and our ability to attract additional customers may suffer.
We also believe that new competitors will continue to enter the Internet
access market, such as large computer hardware and software companies, media and
telecommunications entities, and companies that provide direct service to
residential customers, including cable television operators, wireless
communication companies, local and long distance telephone companies and
electric utility companies.
Many of our competitors are larger and have greater financial, technical,
and operating resources than we do. We cannot assure you of our survival in this
intensely competitive environment. We will need to distinguish ourselves by our
product and service knowledge, our responsiveness to our targeted market of
small to medium sized businesses, our ability to market and sell customized
combinations of products and services within our market, and our capacity to
offer a diverse Internet product line. We also believe that our ability to be
flexible and to respond quickly in providing solutions to our customer's
Internet needs will be an advantage over some of our competitors.
Acquisition Strategy
Our strategy is to rapidly build a base of Internet subscribers through
acquisitions and internal growth. We believe there are acquisition opportunities
among the Internet service providers in our geographic target. In furtherance of
our acquisition strategy, we anticipate reviewing and conducting investigations
of potential acquisitions. As of the date hereof, we do not have any agreements
or pending acquisitions and have not entered into any letters of intent with
respect to pending acquisitions. No assurance can be given that we will identify
satisfactory acquisition candidates or, if identified, that we will be able to
consummate an acquisition on terms acceptable to us.
Government Regulations
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to these issues. The nature of any new laws and
regulations and the manner in which existing and new laws and regulations may be
interpreted and enforced cannot be fully determined.
13
In addition, there is substantial uncertainty as to the applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws was adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
and environment of the Internet. Future developments in the law might decrease
the growth of the Internet, impose taxes or other costly technical requirements,
create uncertainty in the market or in some other manner have an adverse effect
on the Internet. These developments could, in turn, have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We provide our services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies. These
transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. However, we are not subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses generally. Nevertheless, as Internet
services and telecommunications services converge or the services we offer
expand, there may be increased regulation of our business, including regulation
by agencies having jurisdiction over telecommunications services. Additionally,
existing telecommunications regulations affect our business through regulation
of the prices we pay for transmission services, and through regulation of
competition in the telecommunications industry.
The Federal Communications Commission has ruled that calls to Internet
service providers are jurisdictionally interstate and that Internet service
providers should not pay access charges applicable to telecommunications
carriers. Several telecommunications carriers are advocating that the Federal
Communications Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. The Federal Communications Commission is examining inter-carrier
compensation for calls to Internet service providers, which could affect
Internet service providers' costs and consequently substantially increase the
costs of communicating via the Internet. This increase in costs could slow the
growth of Internet use and thereby decrease the demand for our services.
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.
14
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
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.
A High Percentage of Our Assets Are Intangible Assets
-----------------------------------------------------
The change in our corporate focus from a food holding company to an
Internet holding company has resulted in a dramatic change in the composition of
our assets and expenses. With the recent acquisitions of Internet companies, the
intangible assets purchased as a result of these acquisitions represent
approximately 62% of our total assets and approximately 104% of our
stockholders' equity at December 31, 2000. Further, amortization of these
intangible assets will be the largest single expense item in our statement of
operations. This material concentration of intangible assets increases the risk
of a large charge to earnings in the event that the recoverability of these
intangible assets is impaired.
Our Business Depends Upon the Performance of Our Operating Companies,
-----------------------------------------------------------------------
Which is Uncertain
------------------
Economic, governmental, industry and internal company factors outside our
control affect each of our operating companies. If our operating companies do
not succeed, the value of our assets will decline. The material risks relating
to our operating companies include:
o lack of the widespread commercial use of the Internet, which may
prevent our operating companies from succeeding; and
o Intensifying competition for the products and services our operating
companies offer, which could lead to the failure of some of our
operating companies.
The other material risks relating to our operating companies are more fully
described below under "Risks Particular to Our Operating Divisions."
15
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:
o the operating results of our operating companies;
o changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in operating
companies;
o changes in our methods of accounting for our operating company
interests, which may result from changes in our ownership percentages
of our operating companies;
o sales of equity securities by our operating companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
o the pace of development or a decline in growth of the e-commerce
market;
o 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
o our ability to effectively manage our growth and the growth of our
operating companies during the anticipated rapid growth of the
e-commerce market.
We believe that period-to-period comparisons of our operating results are
not meaningful. Additionally, if our operating results in one or more quarters
do not meet securities analysts' or your expectations, the price of our common
stock could decrease.
Our Success is Dependent on Our Key Personnel
---------------------------------------------
We believe that our success will depend on continued employment by us and
our operating divisions of senior management and key technical personnel. If one
or more members of our senior management or our operating companies' senior
management were unable or unwilling to continue in their present positions, our
business and operations could be disrupted. Although, our management team has
had their own successes in other industries, our senior management team has
limited experience in the Internet industry.
As of December 31, 2001, all of our executive management personnel have
worked for us for over one year. However, management of our Neocom,
Lynchburg.net and Advanced Internet subsidiaries has operated those companies
for several years. Our efficiency may be limited while these employees and
future employees are being integrated into our operations. In addition, we may
be unable to find and hire additional qualified management and professional
personnel to help lead our operating divisions and us.
16
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 Grow Our Business
--------------------------------------------------
Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
o broaden our operating company support capabilities;
o explore acquisition opportunities and alliances with other companies;
and o facilitate business arrangements among our operating companies.
We May Be Unable to Obtain Maximum Value For Our Operating Company
-------------------------------------------------------------------
Interests
---------
We have significant positions in our operating companies. While we
generally do not anticipate selling our interests in our operating companies, if
we were to divest all or part of them, we may not receive maximum value for
these positions. For future operating companies with publicly traded stock, we
may be unable to sell our interest at then-quoted market prices. Furthermore,
for those operating companies that do not have publicly traded stock, the
realizable value of our interests may ultimately prove to be lower than the
carrying value currently reflected in our consolidated financial statements.
RISKS INHERENT TO OUR ACQUISITION STRATEGY
We have in the past, and intend to in the future, to expand through the
acquisition of businesses, technologies, products and services, such as the
recent acquisitions of Neocom and Lynchburg.net. 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.
17
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. Our
ability to engage in any such transactions, the timing of such transactions and
the amount of proceeds from such transactions are dependent on market and other
conditions largely beyond our control. Accordingly, there can be no assurance
that we will be able to engage in such transactions in the future or that when
we are able to engage in such transactions they will be at favorable prices. If
we were unable to liquidate portions of its portfolio companies at favorable
prices, our business, financial condition and results of operations would be
adversely affected.
Uncertainties of the Recoverability of Intangible Assets
--------------------------------------------------------
As a result of our change in corporate focus from a food holding company to
an Internet holding company, the composition of our assets and expenses have
dramatically changed. With the recent acquisitions of Internet companies, the
intangible assets purchased as a result of these acquisitions represent
approximately 62% of our total assets and approximately 104% of our
stockholders' equity. Further amortization of these intangible assets will be
the largest single expense item in our statement of operations. If we are unable
to recover the costs of these intangible assets, our financial performance may
be negatively impacted in the coming periods through a write down or write off
of these intangible assets.
We May Not Have Opportunities to Acquire Interests in Additional
-----------------------------------------------------------------
Companies
---------
We may be unable to identify companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable to
acquire an interest in the company for many reasons, including:
o failure to agree on the terms of the acquisition, such as the amount
or price of our acquired interest;
o incompatibility between us and management of the company;
o competition from other acquirers of e-commerce companies;
o a lack of capital to acquire an interest in the company; and
o 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.
18
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:
o 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.
o We may acquire interests in companies in e-commerce markets in which
we have little experience.
o We may not be able to facilitate collaboration between our operating
companies and new companies that we acquire.
o To fund future acquisitions we may be required to incur debt or issue
equity securities, which may be dilutive to existing shareholders.
RISKS PARTICULAR TO OUR OPERATING DIVISIONs
We and our operating divisions' result of operations, and accordingly the
price of its common stock, may be adversely affected by the following factors:
o lack of acceptance of the Internet as an advertising or electronic
commerce medium;
o inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
o lower advertising rates;
o slow development of the e-commerce market;
o lack of acceptance of its Internet content;
o loss of key content providers;
o intense competition;
o loss of key personnel; and
o inability to manage growth.
19
Dependence on Vendor Relationships
----------------------------------
Our operating divisions are currently, and expect to be in the future,
dependent on a number of vendor relationships. These relationships include
arrangements relating to the creation of traffic on our affiliated Web sites and
resulting generation of advertising and commerce-related revenue. The
termination of, or the failure of such our affiliated Web sites to renew on
reasonable terms, such relationships could have an adverse effect on our
business, results of operations and financial condition. Our operating divisions
also are generally dependent on other vendor relationships with advertisers,
sponsors and partners. Most of these arrangements do not require future minimum
commitments to use our services, are often not exclusive and are often
short-term or may be terminated at the convenience of the other party. There can
be no assurance that these vendors will not reassess their commitment to our
operating divisions 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 divisions will achieve market acceptance or
commercial success and therefore there can be no assurance that our existing
relationships will result in sustained or successful business partnerships or
significant revenues for us.
Some of Our Operating Divisions May Be Unable to Protect Their
----------------------------------------------------------------
Proprietary Rights and May Infringe on the Proprietary Rights of Others
------------------------------------------------------------------------
Proprietary rights, particularly in the form of copyrights, are important
to the success and competitive position of many of our operating divisions.
Although our operating divisions 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 divisions to control
the dissemination of their work and use of their services. Some of our operating
divisions 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 divisions 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 divisions to costly litigation and
the diversion of their technical and management personnel. If our operating
divisions incur costly litigation and their personnel are not effectively
deployed the expenses and losses incurred by our operating divisions will
increase and their profits, if any, will decrease.
Our Business May Be Disrupted If They Are Unable To Upgrade Their
------------------------------------------------------------------
Systems To Meet Increased Demand
--------------------------------
Capacity limits on some of our operating divisions' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may not be able to expand and upgrade their systems to meet increased
use.
20
As traffic on our operating divisions' Web sites continues to increase,
they must expand and upgrade their technology, transaction processing systems
and network hardware and software. Our operating divisions may be unable to
accurately project the rate of increase in use of their Web sites. In addition,
our operating divisions may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of their
Web sites. If our operating divisions are unable to appropriately upgrade their
systems and network hardware and software, the operations and processes of our
operating divisions may be disrupted.
RISKS RELATING TO THE INTERNET INDUSTRY
Concerns Regarding Security of Transactions and Transmitting
--------------------------------------------------------------
Confidential Information Over the Internet May Have An Adverse Impact on
-------------------------------------------------------------------------
Our Business
-------------
We believe that concern regarding the security of confidential information
transmitted over the Internet prevents many potential customers from engaging in
online transactions. If our operating divisions that depend on such transactions
do not add sufficient security features to their future product releases, our
operating divisions' products may not gain market acceptance or there may be
additional legal exposure to them.
Despite the measures some of our operating divisions have taken, the
infrastructure of each of them is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents the
security measures imposed by any one of our operating divisions, he or she could
misappropriate proprietary information or cause interruption in operations of
the operating divisions. Security breaches that result in access to confidential
information could damage the reputation of any one of our operating divisions
and expose the operating division affected to a risk of loss or liability. Some
of our operating divisions 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 divisions' customers will
become more concerned about security. If our operating divisions are unable to
adequately address these concerns, they may be unable to sell their goods and
services.
Rapid Technological Changes May Prevent Our Operating Divisions
-------------------------------------------------------------------
From Remaining Current With Their Technical Resources and Maintaining
-----------------------------------------------------------------------
Competitive Product and Service Offerings
------------------------------------------
The markets in which our operating divisions operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our operating divisions are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
21
condition and operating results will be adversely affected. To be successful,
our operating divisions 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 divisions' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our operating divisions will also need to
respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
Government Regulations and Legal Uncertainties May Place Financial
------------------------------------------------------------------
Burdens On Our Business and the Businesses and the Businesses Of Our Operating
--------------------------------------------------------------------------------
Divisions
---------
As of December 31, 2001, 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 divisions and
place additional financial burdens on our business and the businesses of our
operating divisions.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our operating divisions, they
add to the legal and regulatory burden faced by e-commerce divisions.
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.
22
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 seen significant declines from their historical highs within past several
months. The stocks of these companies have been highly volatile. We cannot
assure you that our common stock will sustain its current market prices.
The following factors will add to our common stock price's volatility:
o actual or anticipated variations in our quarterly operating results
and those of our operating divisions; o new sales formats or new
products or services offered by us, our operating divisions and their
competitors; o changes in our financial estimates and those of our
operating divisions by securities analysts;
o conditions or trends in the Internet industry in general and the
e-commerce industry in particular;
o announcements by our operating divisions and their competitors of
technological innovations;
o announcements by us or our operating divisions or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
o changes in the market valuations of our operating divisions and other
Internet companies;
o our capital commitments;
o additions or departures of our key personnel and key personnel of our
operating divisions; and
o 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.
EMPLOYEES
As of March 31, 2002, we employed 35 full time individuals. We have 7 in
management, 3 in sales and marketing and 25 in administration. Our employees are
not unionized, and we consider our relations with our employees to be favorable.
23
ITEM 2. DESCRIPTION OF PROPERTY
We lease our principal executive offices, as well as our administrative
offices, which are located in a 2,064 square feet office facility in Sherman
Oaks, California at an annual rent of approximately $62,500. This lease will
expire in June 2006.
We own a 12,000 square feet office building in Martinsville, Virginia,
which serves as Sitestar.net'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.
We also lease a 7,200 square feet office facility in Lynchburg, Virginia
which serves as FRE Enterprises and Computers By Design's executive offices.
This facility houses Lynchburg.net's customer service, administrative and
corporate functions at an annual rent of $46,200.
We also lease a 2,500 square feet office facility in Mt. Airy, North
Carolina which serves as Advanced Internet's executive offices. This facility
houses Advance Internet's customer service, administrative and corporate
functions at an annual rent of $6,000.
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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
24
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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. From
December 16, 1999 to April 16, 2000, our common Stock was traded
over-the-counter and was quoted on the National Quotations Board's Electronic
Quotation Service "Pink Sheets." On April 16, 2000, we resumed trading on the
NASD OTC Bulletin Board. On July 14, 1999 we effected a 3-for-1 stock split. All
prices listed below reflect this split.
Set forth below are the high and low closing bid prices for our common
stock for each quarterly period commencing January 1, 2000:
High Low
---- ---
2000
For the quarter ended March 31, 2000 $1.25 $0.85
For the quarter ended June 30, 2000 $2.00 $0.56
For the quarter ended September 30, 2000 $0.91 $0.16
For the quarter ended December 31, 2000 $0.34 $0.08
2001
For the quarter ended March 31, 2001 $0.19 $0.06
For the quarter ended June 30, 2001 $0.07 $0.04
For the quarter ended September 30, 2001 $0.05 $0.02
For the quarter ended December 31, 2001 $0.05 $0.02
Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
RECORD HOLDERS
The closing bid price for our common stock was $0.04 on March 31, 2002. As
of March 31, 2002 we had 120 shareholders of record. Additional holders of our
Common Stock hold such stock in street name with various brokerage firms.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all available funds for use in our business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination relating to dividend policy will be made at the
discretion of our Board of Directors and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects and such other factors as the Board of Directors may deem
relevant.
25
ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the our consolidated financial statements and related footnotes for the year
ended December 31, 2001 included in this Annual Report on Form 10-KSB. The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the future.
OVERVIEW
We are a technology holding company with a broad strategy of acquiring and
investing in technology related enterprises. Our primary strategy is acquiring
and operating small independent Internet Service Providers in the rural areas of
the mid-Atlantic region. Our specific mission is to develop our operating ISP
subsidiaries and future ISP acquisitions into a successful collaborative ISP
network. We intend to achieve this success by harnessing the synergistic
potentials that exists among these acquisitions by consolidating all the
administrative functions and streamlining the corporate functions that may exist
with each acquisition.
In July 1999, we began to implement our broader strategy of acquiring and
investing in emerging technology-based enterprises to create a broad and diverse
set of core electronic businesses that deliver a variety of online solutions. In
addition to developing and integrating technology-based technologies, our
broader objective is to create a mix of Internet operating companies and
technology-related portfolio investments that will enhance the value of our core
holdings.
Our Internet operating subsidiaries provide Internet services to our customers
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:
o Internet access services;
o Web design services;
o Web hosting services;
o End to end e-commerce solutions;
o Online marketing consulting; and
o Management of mission critical Internet applications.
Our Internet service provider operating subsidiaries derive their income from
the excess of the Internet service prices we charge our customers over the cost
26
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
also generate income from the development of computer software for companies
principally in the manufacturing industries and from sales from our retail
computer store in Lynchburg, Virginia and Mt. Airy, North Carolina.
On July 1, 2001, we acquired 100% of the equity and voting interest of Advanced
Internet Services, Inc., a North Carolina corporation which is a successor in
interest to two sole proprietorships one having the same name as the corporation
and the other with the name Professional Data Systems (collectively "ADVI").
ADVI is an Internet service provider located in Mt. Airy, North Carolina. The
purchase price was $965,980, which consisted of $150,000 in cash, 6,021,818 of
our common shares valued at $301,091 a non-interest bearing promissory note for
$1,199,990 payable in 24 quarterly installments of $49,995 and transaction costs
of $30,000. However, due to the non-interest bearing nature of the note, we
imputed a discount rate of 36% to calculate the present value of the note. This
discount rate is an estimate of our current cost of capital. Based on this
calculation, the present value of the non-interest promissory note is $484,889.
We believe the acquisition of ADVI, with about 3,000 subscribers, enhanced ours
primary strategy of consolidating small Internet service providers in the rural
markets of the mid-Atlantic region by enlarging our service footprint. We also
believe this transaction opened other acquisition opportunities for us to
further increase our presence in the northern areas of North Carolina. This
recent acquisition increases our Internet access customer base to over 15,000
subscribers. This acquisition included goodwill of $702,642 that is the premium
we paid to have the opportunity to generate revenues and earnings in this
market. Furthermore, this acquisition generated us cost savings with the
integration and consolidation of ADVI's corporate and administrative functions
with our existing infrastructure. This estimated cost savings, along with the
accretive nature of the transaction from an operating cash flow perspective,
will further allow us to enhance our revenue streams and increase our operating
cash flow.
In July 2001, we successfully spun off the content services division of our
wholly owned subsidiary, Sitestar.net, Inc. into TriVantage Group, Inc., a
separate public company exclusively focused in content development services. We
owned 90% of TriVantage. On December 28, 2001, we contributed the assets of the
content service division back to Sitestar.net and sold the TriVantage public
shell. We recognized an actual cash gain on the sale of TriVantage of $188,158.
Since we owned the content service division for the entire year either directly
or indirectly through TriVantage, the operations of this division have been
consolidated with our operations for the entire year
RESULTS OF OPERATIONS
The following tables show financial data for the years ended December
31, 2001 and 2000. Operating results for any period are not necessarily
indicative of results for any future period.
27
For the year ended December 31, 2001
---------------------------------------------------------------
Corporate Internet Development Retail Total
----------- ----------- ----------- --------- -----------
Revenue $ - $ 3,040,752 $ 276,210 $ 680,388 $ 3,997,350
Cost of revenue - 1,136,548 185,125 343,715 1,665,388
----------- ----------- ----------- --------- -----------
Gross profit - 1,904,204 91,085 336,673 2,331,962
Operating expenses 1,348,709 1,825,906 82,636 226,189 3,483,440
----------- ----------- ----------- --------- ----------
Income (loss) from operations (1,348,709) 78,298 8,449 110,484 (1,151,478)
Other income (expense) 22,649 (136,083) (8,170) 1,290 (120,314)
----------- ----------- ----------- --------- -----------
Net income (loss) $(1,326,060) $ (57,785) $ 279 $ 111,774 $(1,271,792)
=========== =========== ========== ========= ===========
EBITDA(1) $(1,142,892) $ 968,416 $ 20,427 $ 115,224 $ (38,825)
Corporate expenses paid
with common stock 863,506 - - - 863,506
Writedown of investment 160,000 - - - 160,000
----------- ----------- ----------- --------- -----------
Actual cash generated $ (119,386) $ 968,416 $ 20,427 $ 115,224 $ 984,681
=========== =========== ========== ========= ===========
For the year ended December 31, 2000
---------------------------------------------------------------
Corporate Internet Development Retail Total
----------- ----------- ----------- --------- -----------
Revenue $ - $ 1,603,204 $ 225,836 $ 105,597 $ 1,934,637
Cost of revenue - 671,421 238,176 45,995 955,592
----------- ----------- ----------- --------- -----------
Gross profit - 931,783 (12,340) 59,602 979,045
Operating expenses 1,635,933 4,008,963 67,103 60,256 5,772,255
----------- ----------- ----------- --------- -----------
Income (loss) from operations (1,635,933) (3,077,180) (79,443) (654) (4,793,210)
Other income (expense) (356,698) (88,018) (3,600) 39 (448,277)
----------- ----------- ----------- --------- -----------
Net income (loss) $(1,992,631) $(3,165,198) $ (83,043) $ (615) $(5,241,487)
=========== =========== ========== ========= ===========
EBITDA(1) $(1,180,755) $ 393,909 $ (76,049) $ (64) $ (862,959)
Corporate expenses paid
with common stock 1,214,423 - - - 1,214,423
----------- ----------- ----------- --------- -----------
Actual cash generated $ 33,668 $ 393,909 $ (76,049) $ (64) $ 351,464
=========== =========== ========== ========= ===========
28
-------------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less cost of revenue and operating expense. EBITDA is
provided because it is a measure commonly used by investors to analyze and
compare companies on the basis of operating performance. EBITDA is presented to
enhance an understanding of our operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP for the
periods indicated. EBITDA is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures for other companies. See Liquidity and
Capital Resource section for further discussion of cash generated from
operations.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
REVENUE. Revenue for the year ended December 31, 2001 increased by $2,062,713 or
106.6% from $1,934,637 for the year ended December 31, 2000 to $3,997,350 for
the same period in 2001. The increase is attributed to the acquisitions of
Lynchburg.net in November 2000 and Advance Internet in July 2001. The Internet
revenue generated by these two acquisitions in 2001 was $1,276,061 and the
retail revenue generated by the Lynchburg.net acquisition in 2001 was $680,338.
Internet revenue for Sitestar.net increased by $288,412 or 19.5% in 2001
compared to 2000. We expect our Internet revenue to continue to grow through an
increase in our subscriber base and by future acquisitions.
COST OF REVENUE. Costs of revenue for the year ended December 31, 2001 increased
by $709,796 or 74.3% from $955,592 for the year ended December 31, 2000 to
$1,665,388 for the same period in 2001. As a percentage of revenue cost of
revenue has decreased from 49.4% to 41.7%. The decrease as a percentage of
revenue is principally due to us being able to decrease our cost of providing
Internet access to our customers by negotiating better agreements with our
suppliers made possible by the economies of scale gained from consolidating our
ISP acquisitions.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 2001
decreased by $2,288,815 or 39.7% from $5,772,255 for the year ended December 31,
2000 to $3,483,440 for the same period in 2001. The largest component of
operating expense is depreciation and amortization that amounted to $1,618,376
for the year ended December 31, 2000 and $909,540 for the same period in 2001.
The decrease in depreciation and amortization is due to the write down of
intangible assets at December 31, 2000 of $1,860,000 related to assets of
Sitestar.net resulting in a decrease in amortization going forward. Excluding
depreciation and amortization and the writedown of intangible assets in 2000,
operating expenses increased by $280,021 for the year ended December 31, 2001 as
compared to the same period in 2000. This increase is due to the operating
expenses associated with Lynchburg.net and Advanced Internet, officers' salaries
and professional fees.
GAIN ON DISPOSITION OF ASSETS. Gain on the disposition of assets for the year
ended December 31, 2001 decreased by $175,673 or 48.2% from $363,831 for the
year ended December 31, 2000 to $188,158 for the same period in 2000. During the
year ended December 31, 2000, we sold certain assets of our Holland American
International Specialties and Sitestar, Inc. divisions and recognized a gain on
29
such sales of $314,515 and $49,316, respectively. During 2001, we sold the
public shell, TriVantage Group, Inc. for a gain of $188,158. We originally
purchase TriVantage Group and contributed Sitestar.net's content development
division to this public company, but later in the year decided to contribute the
content development division back to Sitestar.net and sell the public shell for
a gain.
OTHER INCOME. During the year ended December 31, 2001, certain stockholders
surrendered a total of 1,741,418 shares of our common stock valued at $96,517.
We determined the value of the shares surrendered based on the market value of
the common stock on the date of surrender. The surrendered shares were
originally issued in connections with our acquisition of Sitestar, Inc. in July
1999. Also in 2001, we wrote off our investment in Qliq-on Corporation that was
previously valued at $160,000.
GAIN FROM MARKETABLE SECURITIES. During the year ended December 31, 2001, we
recognized $78,436 in gains on the sale of marketable securities. During the
year ended December 31, 2000 such gains were $45,811. We have classified the
marketable securities in our portfolio as trading securities.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2001
decreased by $534,494 from $857,919 for the year ended December 31, 2000 to
$323,425 for the same period in 2001. This decrease was a result of
significantly lower loan amortization charges related to the convertible
debenture we issued last year.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2001, we generated EBITDA at our operating
subsidiary level of $1,104,067. This amount was offset by EBITDA at the
corporate level of $(1,142,892). However, at the corporate level we paid for
certain professional fees and salaries of $152,767 and $710,739, respectively,
by issuing shares of our common stock rather than paying these expenses with
cash and had a write off of our investment in Qliq-on Corporation for $160,000.
After taking into account these non-cash expenses at the corporate level the
actual net cash spent at the corporate level was only $119,386. The following
table illustrates the actual cash flow generated in 2001:
EBITDA generated at the operating subsidiary level $ 1,104,067
EBITDA generated at the corporate level (1,142,892)
Corporate expenses paid with common stock 863,506
Write off of investment in Qliq-on 160,000
--------------
Actual cash generated in 2001 $ 984,681
==============
Also for the year ended December 31, 2001, we paid $180,000 (purchase price -
$150,000 and transactions fees -$30,000) in connection with the acquisition of
Advanced Internet and we paid $400,000 to repurchase 10,600,000 share of our
common stock from certain investors.
Our business plan has required, and is expected to continue to require,
substantial capital to fund the growth of our operations, capital expenditures,
and expansion of sales and marketing capabilities and acquisitions.
30
On May 11, 2000 we issued two convertible debentures aggregating $500,000. The
debentures bear interest at 12% per annum and are due on May 1, 2001. These
convertible debentures are currently callable at anytime since it is past its
maturity date. The debenture holders can call these debentures upon sufficient
written advance notice as agreed upon in the convertible debenture agreement.
The debentures are convertible into shares of our common stock at a rate equal
to the lowest of $.70 or 60% of the average of the three lowest closing bid
prices for our common stock during the 20 trading days immediately preceding the
conversion date. In addition, we also issued three-year warrants to purchase an
aggregate of 250,000 shares of our common stock at an initial exercise price of
$0.77 per share. Due to the preferential conversion feature of these debentures
we have recognized a financing charge of $242,857 (which represents the value of
additional shares issuable upon conversion at the $.70 conversion price versus
the number of shares issuable upon conversion at the market value at the date of
issuance). In addition, the warrants issued in connection with these debentures
have been valued at $121,543 using the Black-Scholes model and such expense will
be recognized as financing costs over the term of the debentures.
On August 14, 2000, we issued another two convertible debenture for an aggregate
of $500,000 to the holders of the above-mentioned debentures for the same terms
described above. The debenture bears interest at 12% per annum and is due on
August 14, 2001. These convertible debentures are currently callable at anytime
since it is past its maturity date. The debenture holders can call these
debentures upon sufficient written advance notice as agreed upon in the
convertible debenture agreement. In connections with this debenture we have
recognized a financing cost in connection with the preferential conversion
feature of $333,333 and valued the 250,000 warrants issued in connection with
this debenture at $13,332 using the Black-Scholes model. The expense related to
the warrants will be recognized as financing costs over the term of the
debenture.
As of December 31, 2001, the holder of the debentures converted $513,388 in
principal and $90,822 of accrued interest into 13,100,906 and 5,176,365,
respectively, shares of the Company's common stock.
We believe that our existing cash and cash equivalents, and short-term
investments and cash flow from operations, will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. Additional financing may not be available when needed or, if available,
such financing may not be on terms favorable to our shareholders or us. If such
sources of financing are insufficient or unavailable, or if we experience
shortfalls in anticipated revenue or increases in anticipated expenses, we may
need to slow down or stop the expansion of our Internet Service Providers and
reduce our marketing and development efforts. Any of these events could harm our
business, financial condition or results of operations.
Forward looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, our ability to expand our customer base, make strategic
acquisitions, general market conditions, and competition and pricing. Although
we believe the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.
31
Item 7. Financial Statements
INDEX
Page
----
INDEPENDENT AUDITORS' REPORT
Report on audited consolidated financial statements 33
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 2001 34
Consolidated Statements of Operations for the Years
Ended December 31, 2001 and 2000 36
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2001 and 2000 37
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001 and 2000 38
Notes to Consolidated Financial Statements 40
32
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SITESTAR CORPORATION
We have audited the accompanying consolidated balance sheet of Sitestar
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sitestar Corporation and subsidiaries as of December 31, 2001, and the results
of their consolidated operations and their consolidated cash flows for each of
the two years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Stonefield Josephson, Inc.
------------------------------
STONEFIELD JOSEPHSON, INC.
Certified Public Accountants
Santa Monica, California
March 27, 2002
33
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 378,707
Marketable securities 27,248
Accounts receivable, less allowance for
doubtful accounts of $465,545 423,695
Inventory 90,000
Other current assets 91,364
---------------
Total current assets 1,011,014
PROPERTY AND EQUIPMENT, net 434,102
CUSTOMER LIST, net of accumulated amortization
of $1,246,767 1,111,233
GOODWILL, net of accumulated amortization
of $1,115,981 2,412,719
OTHER ASSETS 95,000
---------------
TOTAL ASSETS $ 5,064,068
===============
The accompanying notes are an integral part of these consolidated financial
statements
34
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
DECEMBER 31, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 365,903
Deferred revenue 162,594
Line of credit 79,809
Convertible debentures 476,612
Note payable - stockholders, current portion 123,078
Notes payable, current portion 187,489
Capital lease obligations, current portion 23,492
---------------
Total current liabilities 1,418,977
NOTES PAYABLE - STOCKHOLDERS, less current portion 454,430
NOTES PAYABLE, less current portion 222,943
CAPITAL LEASE OBLIGATIONS, less current portion 9,083
---------------
TOTAL LIABILITIES 2,105,433
---------------
COMMITMENTS AND CONTINGENCIES (Note 10) -
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding -
Common Stock, $0.001 par value, 300,000,000 shares
authorized, 92,904,654 shares issued and outstanding 92,905
Additional paid-in capital 13,429,261
Accumulated deficit (10,563,531)
---------------
Total stockholders' equity 2,958,635
---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,064,068
===============
The accompanying notes are an integral part of these consolidated financial
statements
35
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
REVENUE $ 3,997,350 $ 1,934,637
COST OF REVENUE 1,665,388 955,592
------------ ------------
GROSS PROFIT 2,331,962 979,045
------------ ------------
OPERATING EXPENSES:
Selling general and administrative expenses 3,483,440 3,870,022
Write down of intangible assets - 1,860,000
Loss from operations of business transferred
under contractual obligations - 42,233
------------ ------------
TOTAL OPERATING EXPENSES 3,483,440 5,772,255
------------ ------------
LOSS FROM OPERATIONS (1,151,478) (4,793,210)
------------ ------------
OTHER INCOME (EXPENSES)
Gain on disposition of assets 188,158 363,831
Other income (expenses) (63,483) -
Gain from marketable securities 78,436 45,811
Interest expense (323,425) (857,919)
------------- -------------
TOTAL OTHER INCOME (EXPENSES) (120,314) (448,277)
------------- ------------
LOSS BEFORE INCOME TAXES (1,271,792) (5,241,487)
INCOME TAXES - -
------------ ------------
NET LOSS $ (1,271,792) $ (5,241,487)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.20)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 75,688,286 26,526,529
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
36
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Note
----------------------- Paid-in Receivable Accumulated
Shares Amount Capital Stockholder Deficit Total
---------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 1999 24,159,826 24,160 8,347,174 (69,017) (4,050,252) 4,252,065
Common stock issued for professional services 10,049,400 10,049 758,538 768,587
Common stock issued for debt and interest 7,477,685 7,479 638,011 645,490
Common stock issued for executive salaries 8,950,742 8,951 436,885 445,836
Common stock issued in connection with
acquisition of FRE Enterprises, Inc. 12,437,985 12,437 2,475,160 2,487,597
Cancellation of common stock outstanding -
in lieu of assumption of debt (900,000) (900) (899,100) (900,000)
Repayment of note receivable 69,017 69,017
Financing costs associated with debentures 711,065 711,065
Net loss (5,241,487) (5,241,487)
---------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 2000 62,175,638 62,176 12,467,733 - (9,291,739) 3,238,170
Common stock issued for professional services 4,098,682 4,099 148,668 152,767
Common stock issued for debt and interest 15,281,984 15,282 308,895 324,177
Common stock issued for executive salaries 17,667,950 17,668 693,071 710,739
Common stock issued in connection with
acquisition of Advanced Internet
Services, Inc. 6,021,818 6,022 295,069 301,091
Cancellation of common stock outstanding -
regarding legal settlement (1,741,418) (1,742) (94,775) (96,517)
Repurchase of shares (10,600,000) (10,600) (389,400) (400,000)
Net loss (1,271,792) (1,271,792)
---------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 2001 92,904,654 92,905 13,429,261 - (10,563,531) 2,958,635
========== ======== =========== ========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
37
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,271,792) $(5,241,487)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization expense 909,540 1,618,376
Write down of intangible assets - 1,860,000
Loss from operations of business transferred under
contractual arrangements - 42,233
Common stock issued for services rendered 152,767 768,587
Common stock issued for executive salaries 710,739 445,836
Common stock issued for interest expense 54,289 39,931
Gain on disposition of assets (188,158) (363,831)
Write off of investment 160,000 -
Common shares canceled (96,517) -
Gain recognized on marketable securities (78,436) (45,811)
Purchase of marketable securities (279,200) (820,000)
Proceeds from sale of marketable securities 894,199 302,000
Charge taken for loan financing costs 107,315 713,750
(Increase) decrease in:
Accounts receivable (207,340) (15,254)
Inventory 24,863 11,793
Other current assets (47,347) (4,613)
Increase (decrease) in:
Accounts payable and accrued expenses (144,519) (38,635)
Deferred revenue (71,780) 8,305
Advances from stockholder - 24,450
------------ -----------
Net cash provided by (used in) operating activities 628,623 (694,370)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,623) (61,666)
Purchase of investment (45,000) (50,000)
Purchase of subsidiaries, net of cash acquired (131,607) 253,385
Proceeds from sale of assets 245,000 34,703
------------ -----------
Net cash provided by (used in) investing activities $ 52,770 $ 176,422
------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements
38
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures $ - $ 1,000,000
Payment of debenture acquisition costs - (110,000)
Net proceeds from line of credit 11,300 -
Repayment of convertible debenture (10,000) -
Repayment of notes payable (66,388) (63,772)
Repayment of notes payable - stockholders (95,563) (19,206)
Payment on capital lease obligation (31,329) (45,108)
Repurchase of common stock (400,000) -
------------ -----------
Net cash provided by (used in) financing activities (591,980) 761,914
------------ -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 89,413 243,966
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 289,294 45,328
----------- -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 378,707 $ 289,294
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 2001 and 2000, the Company paid no income
taxes and interest of approximately $151,000 and $82,000, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
During the year ended December 31, 2001 the Company (1) issued 4,098,682 shares
of common stock for professional services valued at $152,767; (2) issued
15,281,984 shares of common stock in exchange for $269,888 of convertible
debentures and $54,289 for interest expense; (3) issued 17,667,950 shares of
common stock for executive salaries of $710,739; (4) issued 6,021,818 shares of
common stock for the acquisition of Advanced Internet Services, Inc. valued at
$301,091; (5) canceled 1,741,418 shares of common stock valued at $96,517 and
(6) entered into capital lease obligations of $12,253.
During the year ended December 31, 2000 the Company (1) issued 10,049,400 shares
of common stock for professional services valued at $768,588; (2) issued
7,477,685 shares of common stock in exchange for $605,559 in debt and
liabilities and $39,931 for interest expense; (3) issued 8,950,742 shares of
common stock for executive salaries of $445,836; (4) issued 12,437,985 shares of
common stock for the acquisition of FRE Enterprises, Inc. valued at $2,487,597;
and (5) canceled 900,000 shares of common stock which were previously issued in
connection with the acquisition of Sitestar.net valued at $900,000.
The accompanying notes are an integral part of these consolidated financial
statements
39
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Sitestar Corporation (formerly Interfoods Consolidated, Inc. and prior
to that was formerly known as Holland American International
Specialties ("HAIS")), (the "Company"), began operations on June 1,
1997, under a partnership agreement, and was incorporated in California
on November 4, 1997. On July 26, 1999, the Company restated its
Articles of Incorporation to change the name of the Company to
"Sitestar Corporation." The Company was in the international specialty
foods distribution business. In 1999, through the acquisition of two
Internet Service Providers, the Company changed its focus from a food
distribution company to an Internet holding company. The operations of
the Company's Internet subsidiaries are located in the Mid-Atlantic
region of the United States. The Company's corporate office is located
in Sherman Oaks, 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
goodwill 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.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Sitestar,
Inc. to the date of disposition, and Neocom Microspecialists, Inc.
(subsequently renamed Sitestar.net, Inc.), FRE Enterprises, Inc. and
Advanced Internet Services, Inc from their respective dates of
acquisition. All intercompany accounts and transactions have been
eliminated.
40
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - 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. At December 31, 2001, the
Company used estimates in determining the realization of its customer
list and excess cost over fair value of assets acquired. The Company
estimates the recoverability of these assets by using undiscounted cash
flows based on future operating activities. Actual results could differ
from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, none of which are
held for trading, including cash, accounts receivable, accounts payable
and accrued expenses and deferred revenue, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for convertible debentures, capital lease obligations 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 operations of the Company's Internet subsidiaries are located in
the Mid-Atlantic region of the United States. The Company extends
credit based on an evaluation of the customer's financial condition,
generally without collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, if required.
41
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Marketable Securities
---------------------
The Company currently classifies all its marketable securities as
trading, which are presented as current assets in the accompanying
consolidated balance sheet. Securities accounted for as trading include
investments in common stock of publicly traded companies and are
reported at fair value, adjusted for changes in market value. Realized
gains and losses and unrealized holding gains and losses, net of tax,
on trading securities are included in the accompanying consolidated
statements of operations. Realized gains or losses on the sale of
securities are determined using the specific-identification method.
During the years ended December 31, 2001 and 2000, the Company
recognized $78,436 and $57,520 in realized gains on the sale of
marketable securities, respectively. At December 31, 2000, the Company
had recognized an unrealized loss of $11,709 related to marketable
securities held.
Inventory
---------
Inventory consists principally of products purchased for resale and are
stated at the lower of cost (determined by the first-in, first-out
method) or market.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful lives from 3
to 7 years and 39 years for the building. Expenditures for maintenance
and repairs are charged to operations as incurred while renewals and
betterments are capitalized. Gains and losses on disposals are included
in the results of operations.
Impairment of Long-Lived Assets
-------------------------------
In accordance with 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 to be held and
used are analyzed for impairment whenever events or changes in
circumstances indicate that the related carrying amounts may not be
recoverable. The Company evaluates at each balance sheet date whether
events and circumstances have occurred that indicate possible
impairment. If there are indications of impairment, the Company uses
future undiscounted cash flows of the related asset or asset grouping
over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written
down to their estimated fair value. Long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value of asset
less cost to sell.
42
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Intangible Assets
-----------------
The Company continually monitors its intangible assets to determine
whether any impairment has occurred. In making such determination with
respect to these assets, the Company evaluates the performance on an
undiscounted cash flow basis, of the intangible assets or group of
assets, which gave rise to an assets carrying amount. Should impairment
be identified, a loss would be reported to the extent that the carrying
value of the related intangible asset exceeds the fair value of that
intangible asset using the discounted cash flow method. The Company's
intangible assets which consists of customer lists and goodwill are
being amortized over three and five years, respectively. Amortization
expense for the customer list and goodwill was $303,297 and $475,380,
respectively, for the year ended December 31, 2001 and $907,053 and
$617,239, respectively, for the year ended December 31, 2000. During
the year ended December 31, 2000, the Company also wrote down $1,080,00
and $780,000 of the value of its customer list and goodwill,
respectively, related to its Internet operations. The write down
resulted from the decrease in value of the subscriber base due to
competition and other sources available to customers to access the
Internet. Amortization of customer list for the years ended December
31, 2002, 2003 and 2004 is expected to be $587,795, $426,547 and
$96,891, respectively. In accordance with SFAS No. 142, amortization of
goodwill will cease effective January 1, 2002.
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.
43
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - 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") Statement of Position No. 97-2,
"Software Revenue Recognition." Product revenue is recognized when the
Company delivers the product to the customer and the Company believes
that collectibility is probable. The Company usually has agreements
with its customers to deliver the requested product for a fixed price.
Any insignificant post-contract support obligations are accrued for at
the time of the sale. Post-contract customer support ("PCS") that is
bundled with an initial licensing fee and is for one year or less is
recognized at the time of the initial licensing, if collectability of
the resulting receivables is probable. The estimated cost to the
Company to provide such services is minimal and historically, the
enhancements offered during the PCS period have been minimal. The
Company sells PCS under a separate agreement. The agreements are for
one to two years with a fixed number of hours of service for each month
of the contract. The contract stipulates a fixed monthly payment,
nonrefundable, due each month and any service hours incurred above the
contractual amount is billed as incurred. Revenue is recognized under
these agreements ratably over the term of the agreement. Revenue for
services rendered in excess of the fixed monthly hours contained in the
contracts are recognized as revenue as incurred.
The Company sells ISP services under annual and monthly contracts.
Under the annual contracts, the subscriber pays a one-time fee, which
is recognized as revenue ratably over the life of the contract. Under
the monthly contracts, the subscriber is billed monthly and revenue is
recognized ratably over the month.
Sales of computer hardware are recognized as revenue upon delivery and
acceptance of the product by the customer. Sales are adjusted for any
future returns or allowances.
Advertising and Marketing Costs
-------------------------------
The Company expenses costs of advertising and marketing as they are
incurred. Advertising and marketing expense for the years ended
December 31, 2001 and 2000 was approximately $92,000 and $19,800,
respectively.
44
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes are provided on the
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Loss Per Share
--------------
In accordance with SFAS No. 128, "Earnings Per Share", the basic loss
per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similar to basic
loss per common share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. The Company has no potentially
dilutive securities.
Investment
----------
In December 1999, the Company purchased a 9% equity interest in Qliq-on
Corporation for 160,000 shares of the Company's common stock valued at
$160,000. This investment was written off during the year ended
December 31, 2001 in other income (expense). In September 2000, the
Company purchased a 4.74% interest in a limited liability company for
$50,000. This investment is being accounted for using the equity
method. In addition, in June 2001, the Company purchased a 4.54%
interest in a partnership for $45,000. This investment is being
accounted for using the equity method.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 2000 and
1999, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the consolidated financial statements.
45
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Goodwill
and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect
that their values have been diminished or impaired, these assets must
be tested for impairment, and writedowns may be necessary. The Company
adopted SFAS No. 141 on July 1, 2001 and has accounting for its
acquisition of Advanced Internet Services, Inc. using the purchase
method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The Company
is required to implement SFAS No. 142 on January 1, 2002 and as a
result will not amortize its goodwill. The Company did not amortize the
goodwill established as a result of the acquisition of Advanced
Internet Services, Inc. on July 1, 2001. In 2001, the Company amortized
$475,380 of goodwill related to acquisition in prior years that will
not be amortized after January 1, 2002.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair
value of a liability for asset retirement obligations in the period in
which they are incurred. The statement applies to a company's legal
obligations associated with the retirement of a tangible long-lived
asset that results from the acquisition, construction, and development
or through the normal operation of a long-lived asset. When a liability
is initially recorded, the company would capitalize the cost, thereby
increasing the carrying amount of the related asset. The capitalized
asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon
settlement of the liability, the obligation is settled at its recorded
amount or the company incurs a gain or loss. The statement is effective
for fiscal years beginning after June 30, 2002. The Company does not
expect the adoption to have a material impact to the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses
the accounting and reporting for the impairment or disposal of
long-lived assets. The statement provides a single accounting model for
long-lived assets to be disposed of. New criteria must be met to
classify the asset as an asset held-for-sale. This statement also
focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption to have a
material impact to the Company's financial position or results of
operations.
46
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 2 - ACQUISITIONS
Lynchburg.net
-------------
On November 22, 2000, the Company acquired FRE Enterprises, Inc. and
FRE Communications, Inc., both Virginia corporations (collectively
doing business as "Lynchburg.net") in exchange for 16,583,980 shares of
our common stock for 100% of the outstanding shares of Lynchburg.net.
Effective upon the closing of the acquisition, the Company issued
12,437,985 shares of common stock and has reserved 4,145,995 shares of
common stock that the Company has agreed to issue on the third
anniversary of the acquisition based on certain contingencies. The
certain contingencies are related to potential unrecorded and unknown
liabilities. The Company used the market price of its common stock at
the acquisition date to determine the acquisition price of $2,487,597.
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 was first
attributed to the customer list, which is being amortized over its
three-year life, and then to goodwill which is amortized over five
years. The customer list has been determined by multiplying the current
market value per customer times the number of customers purchased at
the time of the acquisition.
The fair value of assets acquired and liabilities assumed is summarized
as follows:
Cash $ 253,385
Other current assets 147,561
Equipment 98,710
Customer list 595,000
Goodwill 1,703,741
Current liabilities (310,800)
-------------
Purchase price $ 2,487,597
==============
47
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 2 - ACQUISITIONS, continued
Advanced Internet Services, Inc.
--------------------------------
On July 1, 2001, the Company acquired 100% of the equity and voting
interest of Advanced Internet Services, Inc., a North Carolina
corporation which is a successor in interest to two sole
proprietorships one having the same name as the corporation and the
other with the name Professional Data Systems (collectively "ADVI").
ADVI is an Internet service provider located in Mt. Airy, North
Carolina. The purchase price was $965,980, which consisted of $150,000
in cash, 6,021,818 of the Company's common shares valued at $301,091 a
non-interest bearing promissory note for $1,199,990 payable in 24
quarterly installments of $49,995 and transaction costs of $30,000.
However, due to the non-interest bearing nature of the note, we imputed
a discount rate of 36% to calculate the present value of the note. This
discount rate is an estimate of the company's current cost of capital.
Based on this calculation, the present value of the non-interest
promissory note is $484,889.
The Company believes the acquisition of ADVI, with about 3,000
subscribers, will enhance its primary strategy of consolidating small
Internet service providers in the rural markets of the mid-Atlantic
region by enlarging our service footprint. The Company also believes
this transaction will open other acquisition opportunities for it to
further increase its presence in the northern areas of North Carolina.
This recent acquisition increases its Internet access customer base to
over 15,000 subscribers. This acquisition includes goodwill of $702,642
that is the premium the Company paid to have the opportunity to
generate revenues and earnings in this market. Furthermore, this
acquisition will generate the Company cost savings with the integration
and consolidation of ADVI's corporate and administrative functions with
our existing infrastructure. This estimated cost savings, along with
the accretive nature of the transaction from an operating cash flow
perspective, will further allow the Company to enhance its revenue
streams and increase its operating cash flow.
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 was first
attributed to the customer list, which is being amortized over its
three-year life, and then to goodwill which is deductible for income
tax purposes. The customer list has been determined by multiplying the
current market value per customer times the number of customers
purchased at the time of the acquisition.
48
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 2 - ACQUISITIONS, continued
Advanced Internet Services, Inc., continued
-------------------------------------------
The fair value of assets acquired and liabilities assumed is summarized
as follows:
Cash $ 48,393
Other current assets 54,500
Equipment 29,080
Customer list 221,000
Goodwill 702,642
Other current liabilities (21,126)
Line of credit (68,509)
--------------
Purchase price $ 965,980
==============
The following table presents the unaudited pro forma condensed
statement of operations for the years ended December 31, 2001 and 2000
and reflects the results of operations of the Company as if the
acquisitions of Lynchburg.net and ADVI had been effective January 1,
2000. The pro forma amounts are not necessarily indicative of the
combined results of operations had the acquisition been effective as of
that date, or of the anticipated results of operations, due to cost
reductions and operating efficiencies that are expected as a result of
the acquisition.
2001 2000
------------ ------------
Net sales $ 4,386,606 $ 4,485,993
Gross profit $ 2,575,819 $ 2,752,770
Selling, general, and administrative
expenses $ 3,963,322 $ 8,023,212
Net loss $ (1,427,219) $ (5,728,006)
Basic loss per share $ (0.02) $ (0.14)
49
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 3 - SALE OF ASSETS
In January 2000, the Company sold certain assets and liabilities of
Sitestar, Inc. for $34,703 in cash, a note receivable in the amount of
$10,000 plus an intercompany relief of $25,000 for a total purchase
price of $69,703. The Company recognized a gain on sale of these
certain assets of $49,316. The Company retained the "Sitestar"
trademark and "Sitestar.com" URL. Also in 2000, the Company completed
the sale of its international food distribution business, also known as
Holland American International Specialties. The Company recognized a
gain on sale of these certain assets of $314,515.
On July 16, 2001 the Company successfully spun off the content services
division of its wholly owned subsidiary, Sitestar.net, Inc. into a
separate publicly-traded company, PageActive Holdings Inc. The purpose
of the spin-off was to have a separate public company exclusively
focused in content development. Page Active changed its name to
TriVantage Group, Inc. ("TVGE") after the spin-off. On December 28,
2001, the Company contributed the assets of the content service
division back to Sitestar.net and sold the TVGE public shell. The
Company recognized an actual cash gain on the sale of TVGE of $188,158.
Since the Company owned the content service division for the entire
year either directly or indirectly through TVGE, the operations of this
division have been consolidated with the Company's operations for the
entire year.
NOTE 4 - PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 2001 consisted of
the following:
Land $ 10,000
Building 213,366
Automobile 3,000
Computer equipment 305,272
Furniture and fixtures 145,153
------------
676,791
Less accumulated depreciation (242,689)
------------
$ 434,102
============
Depreciation expense was $130,863 and $94,084 for the years ended
December 31, 2001 and 2000, respectively.
50
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 5 - NOTE RECEIVABLE - STOCKHOLDER
In 1997, the Company purchased for $2,800 the trade name "Wrap-It Up"
and operated the business through April 1998. In April 1998, the
Company sold the business to a stockholder of the Company for $71,657,
which was equal to the amount of the Company's investment (which was
the cost of inventories used in the operations) at the time of sale.
The sales price was consummated by the stockholder's issuance, to the
Company, of a promissory note for the full sales price. The note
receivable is due on demand, and secured by common stock of the
Company, owned by the stockholder. During 1999, this note was reduced
to $69,017 and in 2000, the note was repaid in connection with the sale
of HAIS. The note receivable is presented as a reduction to
stockholders' equity in the accompanying consolidated financial
statements.
NOTE 6 - CONVERTIBLE DEBENTURES
On May 11, 2000, the Company issued two convertible debentures
aggregating $500,000. The debentures bear interest at 12% per annum and
were due on May 1, 2001. The debenture holders voluntarily decided to
hold on to the debentures. The debentures are convertible into shares
of the Company's common stock at a rate equal to the lowest of $.70 or
60% of the average of the three lowest closing bid prices for the
Company's common stock during the 20 trading days immediately preceding
the conversion date. In addition, the Company also issued three-year
warrants to purchase an aggregate of 250,000 shares of common stock at
an initial exercise price of $0.77 per share. Due to the preferential
conversion feature of these debentures the Company has recognized a
financing charge of $242,857 (which represents the value of additional
shares issuable upon conversion at the $.70 conversion price versus the
number of shares issuable upon conversion at the market value at the
date of issuance). In addition, the warrants issued in connection with
these debentures have been valued at $121,543 using the Black-Scholes
model. Since these debentures were convertible on issuance the
preferential conversion costs were expensed immediately and the value
of the warrant is being recognized as financing costs over the term of
the debentures.
On August 14, 2000, the Company issued another two convertible
debenture aggregating $500,000 to the holders of the above-mentioned
debentures for the same terms described above, except for the due date
of August 14, 2001. In connections with these debentures the Company
has recognized a financing charge in connection with the preferential
conversion feature of $333,333 and valued the 250,000 warrants issued
in connection with these debentures at $13,332 using the Black-Scholes
model. Since these debentures were convertible on issuance the
preferential conversion costs were expensed immediately and the value
of the options is being recognized as financing costs over the term of
the debentures.
51
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 6 - CONVERTIBLE DEBENTURES, Continued
During the year ended December 31, 2001, the holder of the debentures
converted $269,888 in principal and $54,289 of accrued interest into
10,757,982 and 4,524,002, respectively, shares of the Company's common
stock. In addition, during the year ended December 31, 2001, the
Company repaid $10,000 of these debentures in cash. During the year
ended December 31, 2000, the holder of the debentures converted
$243,500 in principal and $36,533 of accrued interest into 2,342,924
and 652,363, respectively, shares of the Company's common stock.
NOTE 7 - NOTES PAYABLE
The Company assumed a line of credit in connection with its acquisition
of ADVI. The line of credit is for $100,000 and bears interest at prime
plus 0.5%. The line of credit is due on May 29, 2002 and is
collateralized by the inventory, equipment and accounts receivable of
ADVI.
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 2001 consist of the following:
Prime plus 4.5% - Bank note payable in monthly interest
and principal payments of $1,784 and balance due December
2002. The note is guaranteed by a stockholders of the
Company and secured by a deed of trust against personal
residences of three stockholders and the Company's
building. Also, the bank has a blanket lien against all
other current and future assets of Sitestar.net. $ 138,102
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 residences of three stockholders and the
Company's building. Also, the bank has a blanket lien
against all other current and future assets of Sitestar.net. 272,330
----------
Total 410,432
Less current portion 187,489
----------
Long-term portion $ 222,943
==========
The future principal maturities of these notes are as follows:
Year ending December 31,
2002 $ 187,489
2003 222,943
----------
Total $ 410,432
==========
52
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 9 - NOTES PAYABLE - STOCKHOLDERS
Notes payable - stockholders at December 31, 2001 consist of the
following:
Note payable to stockholder assumed in connection
with the acquisition of Sitestar.net. The note is payable
upon demand and bears interest at 9.0% per annum. $ 65,961
Note payable to stockholder assumed in connection with the
acquisition of Sitestar.net. The note is payable in monthly
installments of $2,431 and bears interest at 8.13% per annum.
Any unpaid principal and interest is due on May 28, 2004 47,357
Note payable to stockholder issued as part of the purchase
price for Advanced Internet Services, Inc. The note is to
be repaid in 24 quarterly installments of $49,995 and is
non-interest bearing. The imputed interest rate for this
note is 36% 464,190
----------
Total 577,508
Less current portion 123,078
Long-term portion $ 454,430
==========
The future principal maturities of these notes are as follows:
Year ending December 31,
2002 $ 123,078
2003 72,513
2004 82,318
2005 105,190
2006 148,545
2007 45,864
----------
Total $ 577,508
==========
53
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for its corporate offices and
retail store under non-cancelable operating leases. Total rent expense
for the years ended December 31, 2001 and 2000 was $75,875 and $35,253,
respectively. The Company also leases certain equipment under capital
lease 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:
Capital Operating
Leases Leases
----------- -----------
Year ending December 31,
2002 $ 27,218 $ 62,502
2003 8,027 66,252
2004 2,013 70,227
2005 - 74,441
2006 - 38,305
----------- -----------
Net Minimum Lease Payments 37,258 $ 311,727
===========
Less: Amounts Representing Interest 4,683
----------
Present Value of Net Minimum
Lease Payments 32,575
Less: Current Portion 23,492
----------
Long-Term Portion $ 9,083
==========
Included in property and equipment is capitalized lease equipment of
$164,375 with accumulated amortization of $83,762 at December 31, 2001.
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.
Sitestar.net Acquisition
------------------------
In connection with the Sitestar.net acquisition, the Company is
required to issue an additional 2,000,000 shares of its common stock on
the second anniversary of the acquisition date, if no unforeseen
contingencies arise. These 2,000,000 shares were issued in January
2002.
54
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 10 - COMMITMENTS AND CONTINGENCIES, continued
Lynchburg.net Acquisition
-------------------------
In connection with the Lynchburg.net acquisition, the Company is
required to issue an additional 4,145,995 shares of its common stock on
the third anniversary of the acquisition date, if no unforeseen
contingencies arise.
NOTE 11 - STOCKHOLDERS' EQUITY
Classes of Shares
-----------------
On July 6, 1999, the Company's Articles of Incorporation authorize the
issues of up to 85,000,000 shares, consisting of 10,000,000 shares of
Preferred Stock, which have a par value of $0.001 per share and
75,000,000 shares of common stock, which have a par value of $0.001. In
2001, the Company's Articles of Incorporation were amended to authorize
300,000,000 shares of common stock.
Preferred Stock
---------------
Preferred Stock, any series, shall have the powers, preferences,
rights, qualifications, limitations and restrictions as fixed by the
Company's Board of Directors in its sole discretion. As of December 31,
2001, the Company's Board of Directors has not issued any Preferred
Stock.
Common Stock
------------
On January 18, 2000 the Company canceled 900,000 shares of common stock
issued in connection with the acquisition of Sitestar.net valued at
$900,000. These shares were canceled because the Company and the
Sitestar.net stockholders amended the original purchase agreement
whereby the Company agreed to assume the approximately $900,000 of
notes payable that was originally to be assumed by the Sitestar.net
stockholders in exchange for the 900,000 shares of the Company's common
stock originally issued to the Sitestar.net shareholders who were to
assume this debt. The stockholders conveyed their shares to the Company
in exchange for the assumption of their indebtedness.
During the year ended December 31, 2000 the Company issued 10,049,400
shares of common stock for professional services valued at $768,588,
which was the fair market value (discounted for tradability
restrictions) of the share issue based on the closing price of the
Company's common stock on the date of issuance, and issued 7,477,685
shares of common stock in exchange for $605,559 in debt and liabilities
and $39,931 for interest expense.
55
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 11 - STOCKHOLDERS' EQUITY, continued
Common Stock, continued
-----------------------
On November 22, 2000, the Company issued 12,437,985 shares of common
stock for the acquisition of FRE Enterprises, Inc. valued at
$2,487,597.
On December 27, 2000 the Company issued 8,950,742 shares of common
stock for executive salaries of $445,836, which was the fair market
value (discounted for tradability restrictions) of the share issue
based on the closing price of the Company's common stock on the date of
issuance.
During the year ended December 31, 2001, certain stockholders
surrendered a total of 1,741,418 shares of common stock that were
cancelled by the Company, valued at $96,517. The Company determined the
value of the shares surrendered based on the market value of the common
stock on the date of surrender. The surrendered shares were originally
issued in connections with our acquisition of Sitestar, Inc. in July
1999.
During the year ended December 31, 2001 the Company issued 4,098,682
shares of common stock for professional services valued at $152,767,
which was the fair market value (discounted for tradability
restrictions) of the share issue based on the closing price of the
Company's common stock on the date of issuance, and issued 15,281,984
shares of common stock in exchange for $269,888 of convertible
debentures and $54,289 for interest expense.
On July 1, 2001, the Company issued 6,021,818 shares of common stock
for the acquisition of Advanced Internet Services, Inc. valued at
$301,091.
During the year ended December 31, 2001 the Company issued 17,667,950
shares of common stock for executive salaries of $710,739.
Also, during the year ended December 31, 2001, the Company repurchased
10,600,000 shares of common stock from certain shareholders for
$400,000.
56
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 12 - INCOME TAXES
The reconciliation of the effective income tax rate to the federal
statutory rate as of December 31, 2001 and 2000 is as follows:
2001 2000
----------- ----------
Federal income tax rate 34.0% 34.0%
Effect of net operating loss (34.0)% (34.0)%
----------- ----------
Effective income tax rate 0.0% 0.0%
=========== ==========
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 at December 31, 2001 are as follows:
Loss carry forwards $ 3,757,200
Less valuation allowance (3,757,200)
-------------
$ -
=============
At December 31, 2001, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to
determine that the realization of that asset is more likely than not.
The net change in the valuation allowance for the years ended December
31, 2001 and 2000, was an increase of $409,200 and $2,040,000,
respectively. Net operating loss carry forwards of approximately
$10,100,000 expire starting in 2012.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company leases its office building in Lynchburg, Virginia from a
stockholder of the Company on a month-to-month basis. For the years
ended December 31, 2001 and 2000, the Company paid this stockholder
$36,000 and $7,700 for rent on this office building.
57
SITESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NOTE 14 - SEGMENT INFORMATION
The Company has four business units that have separate management and
reporting infrastructures that offer different products and services.
The business units have been aggregated into four reportable segments:
Corporate, Internet, Development and Retail. The Corporate group is the
holding company and oversees the operating of the other business units.
The Corporate group also arranges financing for the entire
organization. The Internet group provides Internet access to customers
in the Martinsville and Lynchburg, Virginia and Mt. Airy, North
Carolina areas. The Development group provides customer software
programming to companies, principally in the manufacturing industries.
The Retail group operates a retail computer store in Lynchburg,
Virginia as well as providing computer training to customers.
The Company evaluates the performance of its operating segments based
on income from operations, before income taxes, accounting changes,
non-recurring items, and interest income and expense.
Summarized financial information concerning the Company's reportable
segments is shown in the following table for the years ended December
31, 2001 and 2000:
December 31, 2001
-------------------------------------------------------------------
Corporate Internet Development Retail Consolidated
----------- ------------ ------------ --------- -------------
Revenue $ - $ 3,040,752 $ 276,210 $ 680,388 $ 3,997,350
Operating income (loss) $(1,348,709) $ 78,298 $ 8,449 $ 110,484 $ (1,151,478)
Depreciation and
amortization $ 2,706 $ 890,117 $ 11,977 $ 4,740 $ 909,540
Interest expense $ 180,462 $ 136,083 $ 8,170 $ (1,290) $ 323,425
Goodwill $ - $ 2,412,719 $ - $ - $ 2,412,719
Identifiable assets $ 519,161 $ 4,407,047 $ 30,880 $ 106,980 $ 5,064,068
December 31, 2000
-------------------------------------------------------------------
Corporate Internet Development Retail Consolidated
----------- ------------ ------------ --------- -------------
Revenue $ - $ 1,603,204 $ 225,836 $ 105,597 $ 1,934,637
Operating loss $(1,635,933) $ (3,077,180) $ (79,443) $ (654) $ (4,793,210)
Depreciation and
amortization $ 3,303 $ 1,607,489 $ 6,994 $ 590 $ 1,618,376
Interest expense $ 766,340 $ 91,618 $ - $ (39) $ 857,919
58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the fiscal years ended December 31, 1999 and 1998 and the interim
period subsequent to December 31, 1999, the firm of Merdinger, Fruchter, Rosen &
Corso, P.C. ("MFRC") served as our auditors. Effective February 13, 2001, our
Board of Directors approved the change of accountants. On February 13, 2001, our
management dismissed MFRC and engaged Stonefield Josephson, Inc. of Santa
Monica, California, as our independent public accountants to audit our financial
statements for the fiscal year ended December 31, 2000.
During the period of engagement of MFRC there were no disagreements between us
and MFRC on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements (if
not resolved to the satisfaction of MRFC) would have caused MFRC to make
reference in connection with their report to the subject matter of the
disagreements. The accountants' report on our financial statements for the
fiscal years ended December 31, 1999 and 1998 did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty or audit scope or accounting principles, except to express doubt as
to our ability to continue as a going concern.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the name, age and position with the Company
of each officer and director as of the date of this Report.
Our current directors, executive officers and key employees are as follows:
Name Age Position
---- --- --------
Frederick T. Manlunas 33 Executive Chairman and Director
Clinton J. Sallee 29 President, Chief Executive Officer and
Director
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
59
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.
None of our directors, executive officers or key employees is related to
any other of our directors, executive officers or key employees.
Pursuant to Section 16 (a) of the Securities Exchange Act of 1934, and the
rules issued thereunder, our directors and executive officers are required to
file with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. reports of ownership and changes in ownership of common
stock and other equity securities of the Company. Copies of such reports are
required to be furnished to us. Based solely on a review of the copies of such
reports furnished to us, or written representations that no other reports were
required, we believe that, during our fiscal year ended December 31, 2001, all
of our executive officers and directors complied with the requirements of
Section 16 (a).
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to our
executive officers for the three fiscal years ended December 31st.
Other Long-term
Name and Annual Compensation
Principal Position Year Salary ($) Bonus ($) Compensation($) Awards
------------------ ---- ---------- --------- ------------ ------------
Frederick T. 2001 - - 239,370 -
Manlunas (1) 2000 - - 268,068 -
Chairman of the 1999 - - - -
Board
Clinton J. 2001 - - 239,370 -
Sallee (2) 2000 - - 311,268 -
President & Chief 1999 - - - -
Executive Officer
-------------
(1) Mr. Manlunas received 7,124,094 shares of our common stock with a value of
$239,370 in lieu of salary for 2001.
In 2000, Mr. Manlunas was given 5,584,746 shares of our common stock valued
at $268,068 as payment for his 2000 salary and bonus and for unpaid 1999
and 1998 salaries.
(2) Mr. Sallee received 7,124,094 shares of our common stock stock with a value
of $239,370 in lieu of salary for 2001.
In 2000, Mr. Sallee was given 6,584,746 shares of our common stock valued
at $311,268 as payment for his 2000 salary and bonus.
60
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 2002
regarding the record and beneficial ownership of our 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 us to be the beneficial owner
of more than five percent of the outstanding shares of our common stock; (ii)
each of our executive officers and directors; and (iii) our executive officers
and directors as a group.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class (2)
----------------- ---------------------- ------------
Frederick T. Manlunas 19,203,898 20.67%
15303 Ventura Blvd., Suite 1510
Sherman Oaks, CA 91403
Clinton J. Sallee 17,675,010 19.02%
15303 Ventura Blvd., Suite 1510
Sherman Oaks, CA 91403
Frank and Julie Erhartic 12,437,985 13.39%
7109 Timberlake Road
Lynchburg, VA 24502
All directors and officers 49,316,893 53.08%
as a group (3 persons)
------------
* Less than 1%
(1) Except as otherwise indicated, we believe that the beneficial owners of our
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable.
(2) Percent of class is based on 92,904,654 shares of common stock outstanding
as of January 31, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of September 30, 1999 we sold the non-Internet assets of
Holland American International Specialists to IFCO Group, LLC, whose members
consist of certain shareholders of the Company, including Frederick T. Manlunas,
our Chairman of the Board. We retained the assets consisting of the Internet web
site Holland-American.com. Holland American International Specialties will
continue to serve as Holland-American.com's exclusive fulfillment center. The
purchase consideration for the non-Internet assets of Holland American
International Specialties was $900,000 and was based upon a business appraisal
by an independent third party appraiser. The consideration included $200,000
which was to be offset against the Company's liability to Mr. Manlunas for
services rendered in connection to the acquisition of Sitestar, Inc., the
assumption of $654,000 of liabilities and a promissory note in the amount of
$46,000. The note bears interest at a rate of 8% per annum, and is payable in
annual installments of $15,333, and is due and payable on September 30, 2002.
The note is secured by HAIS' accounts receivable and inventory.
61
On September 30, 1999, we sold our minority equity interest in Sierra
Madre Foods to IFCO Group, LLC for $200,000. The consideration was paid in the
form of assumption of $160,000 of debt related to the investment and the balance
of$40,000 was paid by a promissory note payable in three annual installments of
$13,334 each. The note bears interest at a rate of 8% per annum. The purchase
consideration was equal to our original investment in January 1999.
On July 1999, a majority of our shareholders, including our Chairman,
Mr. Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc. ,
a Delaware corporation, in exchange for 3,491,428 shares of our common stock
owned by those shareholders. Simultaneous with the closing of this transaction,
those shareholders contributed the issued and outstanding shares of Sitestar,
Inc. to us as contributed capital. Sitestar, Inc. is a Web development, design
and hosting company formed in 1996 and is based in Annapolis, Maryland.
In August 1999, we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our common stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
managed by our Chairman Frederick Manlunas, has a 14.6% equity ownership in
Global Sourcing Group.
In January 1999, Mr. Manlunas, a major 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.
In October 2000, we issued 100,000 shares of our common stock to
Clinton J. Sallee, our president and chief executive officer, valued at $21,000
in lieu of back and accrued compensation. 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.
In December 2000, we issued 5,584,746 shares of our common stock to
Frederick Manlunas, our Executive Chairman, valued at $268,068 in lieu of back
and accrued compensation. 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.
In December 2000, we issued 6,484,746 shares of our common stock to
Clinton J. Sallee, our president and chief executive officer, valued at $311,268
in lieu of back and accrued compensation. 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.
In January 2002, we issued 7,124,094 shares of our common stock to
Frederick Manlunas, our Executive Chairman, valued at $239,370 in lieu of back
and accrued compensation. 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.
In January 2002, we issued 7,124,094 shares of our common stock to
Clinton J. Sallee, our president and chief executive officer, valued at $239,370
in lieu of back and accrued compensation. 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.
62
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(1) The following exhibits are filed as part of this Annual Report on Form
10-KSB or are incorporated herein by reference:
Exhibit Description Filed
------- ----------- -----
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) *
4.1 Lease for Corporate Office **
4.2 Convertible Debenture Purchase Agreement dated as of May 11, 2000 between the
investors named therein and the Registrant ***
4.3 12% Convertible Debenture due May 11, 2001 made by the Registrant in favor of New
Millenium Capital Partners II, L.L.C. ***
4.4 12% Convertible Debenture due May 11, 2001 made by the Registrant in favor of AJW
Partners, L.L.C. ***
4.5 Stock Purchase Warrant dated as of May 11, 2000 issued by Registrant to New
Millenium Capital Partners, L.L.C. ***
4.6 Stock Purchase Warrant dated as of May 11, 2000 issued by Registrant to AJW
Partners, L.L.C. ***
4.7 Registration Rights Agreement dated as of May 11, 2000 by and between the
Registrant and the investors named therein. ***
4.8 Security Agreement dated as of May 11, 2000 by and between the Registrant and the
investors named therein. ***
4.9 Stock Tender and Exchange Agreement, dated November 22, 2000, by and among
Sitestar Corporation and Frank and Julie Erhartic, the owners of FRE Enterprises,
Inc. ****
21.1 Subsidiaries of the Registrant F
23.1 Consent of Stonefield Josephson, Inc. F
99 Lease for Corporate Office *
63
------------------
* Filed as an exhibit to the Registrant's Form-10SB, as amended, initially filed
with the Securities and Exchange Commission on October 22, 1999 and incorporated
herein by reference.
** Filed as an exhibit to the Registrant's Form-10SB filed with the Securities
and Exchange Commission on January 7, 2000 and incorporated herein by reference.
*** Filed as an exhibit to the Registrant's SB-2 Registration Statement, File
No. 333-39660, filed on June 20, 2000 and incorporated herein by reference.
**** Filed as an exhibit to the Registrant's Form 8-K, filed on December 7, 2000
and incorporated herein by reference.
F Filed herewith
(2) Reports filed on Form 8-K
On a Current Report on Form 8-K filed on November 28, 2001, the Company reported
that it has repurchased approximately 10.6 million shares of its common stock
from various shareholders through privately negotiated transactions. The stock
repurchase was finalized at the end of business on November 19, 2001.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Action of 1934, as amended, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SITESTAR CORPORATION
By: /s/ FREDERICK T. MANLUNAS
-------------------------
Frederick T. Manlunas
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ FREDERICK T. MANLUNAS Chairman of the Board April 15, 2002
-------------------------
Frederick T. Manlunas
/s/ CLINTON J. SALLEE President and Chief Executive April 15, 2002
-------------------------- Officer
Clinton J. Sallee
65
EXHIBIT INDEX
Exhibit Description Filed
------- ----------- -----
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) *
4.1 Lease for Corporate Office **
4.2 Convertible Debenture Purchase Agreement dated as of May 11, 2000 between the
investors named therein and the Registrant ***
4.3 12% Convertible Debenture due May 11, 2001 made by the Registrant in favor of New
Millenium Capital Partners II, L.L.C. ***
4.4 12% Convertible Debenture due May 11, 2001 made by the Registrant in favor of AJW
Partners, L.L.C. ***
4.5 Stock Purchase Warrant dated as of May 11, 2000 issued by Registrant to New
Millenium Capital Partners, L.L.C. ***
4.6 Stock Purchase Warrant dated as of May 11, 2000 issued by Registrant to AJW
Partners, L.L.C. ***
4.7 Registration Rights Agreement dated as of May 11, 2000 by and between the
Registrant and the investors named therein. ***
4.8 Security Agreement dated as of May 11, 2000 by and between the Registrant and the
investors named therein. ***
4.9 Stock Tender and Exchange Agreement, dated November 22, 2000, by and among
Sitestar Corporation and Frank and Julie Erhartic, the owners of FRE Enterprises,
Inc. ****
21.1 Subsidiaries of the Registrant F
23.1 Consent of Stonefield Josephson, Inc. F
* Filed as an exhibit to the Registrant's Form-10SB, as amended, initially filed
with the Securities and Exchange Commission on October 22, 1999 and incorporated
herein by reference.
** Filed as an exhibit to the Registrant's Form-10SB filed with the Securities
and Exchange Commission on January 7, 2000 and incorporated herein by reference.
*** Filed as an exhibit to the Registrant's SB-2 Registration Statement, File
No. 333-39660, filed on June 20, 2000 and incorporated herein by reference.
**** Filed as an exhibit to the Registrant's Form 8-K, filed on December 7, 2000
and incorporated herein by reference.
F Filed herewith
66