UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
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)
(818) 380-8180
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of March 31, 2002 - 98,624,892 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
SITESTAR CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 2002 2-3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Change in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Part III. EXHIBITS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 309,074
Accounts receivable, net of allowance of $465,545 406,938
Inventory 112,277
Other current assets 114,252
-------------
Total current assets 942,541
PROPERTY AND EQUIPMENT, net 404,379
CUSTOMER LIST, net 953,535
GOODWILL 2,472,719
INVESTMENTS 95,000
-------------
TOTAL ASSETS $ 4,868,174
=============
See the accompanying notes to the consolidated financial statements
2
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, CONTINUED
MARCH 31, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 474,256
Deferred revenue 158,572
Convertible debenture 151,612
Line of credit 78,672
Note payable - stockholders, current portion 123,078
Notes payable, current portion 190,489
Capital lease obligations, current portion 13,740
-------------
Total current liabilities 1,190,419
NOTES PAYABLE - STOCKHOLDERS, less current portion 443,957
NOTES PAYABLE, less current portion 165,939
CAPITAL LEASE OBLIGATIONS, less current portion 8,083
-------------
TOTAL LIABILITIES 1,808,398
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding -
Common Stock, $.001 par value, 300,000,000 shares
authorized, 98,624,892 shares issued and outstanding 98,625
Additional paid-in capital 13,608,541
Accumulated deficit (10,647,390)
--------------
Total stockholders' equity 3,059,776
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,868,174
=============
See the accompanying notes to the consolidated financial statements
3
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ -------------
REVENUE $ 1,135,232 $ 912,174
COST OF REVENUE 528,165 327,980
------------ -------------
GROSS PROFIT 607,067 584,194
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 636,453 732,145
------------ -------------
LOSS FROM OPERATIONS (29,386) (147,951)
OTHER INCOME (EXPENSES)
Other income - 83,204
Increase in market value of marketable
securities - 41,242
Interest expense (54,473) (102,773)
------------- -------------
LOSS BEFORE INCOME TAXES (83,859) (126,278)
INCOME TAXES - -
------------ -------------
NET LOSS $ (83,859) $ (126,278)
============ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ (0.00)
============ =============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 98,116,426 62,554,634
============ =============
See the accompanying notes to the consolidated financial statements
4
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (83,859) $ (126,278)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization expense 187,246 281,502
Amortization of debt financing costs - 61,218
Increase in market value of marketable
securities - (41,242)
Stock issued in lieu of compensation
and professional fees 125,000 42,582
Value of common shares cancelled - (83,204)
Net purchases of marketable securities - (71,959)
(Increase) decrease in:
Accounts receivable 16,757 (19,976)
Inventory (22,277) 11,633
Other assets (22,888) 39,998
Increase (decrease) in:
Accounts payable and accrued expenses 108,528 (112,106)
Deferred revenue (4,022) (22,559)
---------- ------------
Net cash provided by (used in) operating activities 304,485 (40,391)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (999)
---------- ------------
Net cash provided by (used in) investing activities - (999)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit (1,137) -
Repayment of notes payable (54,004) (12,360)
Repayment of convertible debenture (325,000) -
Repayment of notes payable - stockholders (10,473) (10,478)
Payment on capital lease obligation (10,752) (7,848)
---------- ------------
Net cash provided by (used in) financing activities (401,366) (30,686)
---------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (96,881) (72,076)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 405,955 289,294
---------- ------------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 309,074 $ 217,218
========== ============
See the accompanying notes to the consolidated financial statements
5
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the three months ended March 31, 2002 and 2001, the Company paid no
income taxes and interest of approximately $ 54,000 and $ 25,000, respectively.
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the three months ended March 31, 2002, the Company issued 3,720,238
shares of common stock for executive compensation of $125,000 and issued
2,000,000 shares of common stock to the original Sitestar.net shareholders that
represented the contingent shares to be issued if no additional liabilities
arose during the first two years after the acquisition. The value of these
shares issued was $60,000 which is recorded as additional goodwill.
During the three months ended March 31, 2001, the Company converted $192,443 of
the convertible debenture into 4,581,984 shares of common stock, issue 875,098
shares of common stock for professional services valued at $42,582 and canceled
1,457,562 shares of common stock valued at $83,204.
See the accompanying notes to the consolidated financial statements
6
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been prepared by
Sitestar Corporation (the "Company" or "Sitestar"), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2001 included in the
Company's Annual Report on Form 10-KSB. The results of the three months ended
March 31, 2002 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2002.
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. As of March 31, 2002 the Company has outstanding
500,000 warrants to purchase shares of common stock at $0.77.
NOTE 3 - CONVERTIBLE DEBENTURE
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. 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.
As of March 31, 2002, 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. Also as of March 31, 2002,
the Company has repaid $335,000 of this debenture in cash.
7
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4 - COMMON STOCK
During the three months ended March 31, 2002, the Company issued 3,720,238
shares of common stock for executive compensation of $125,000 which were valued
at the market value at the date of issuance.
In addition, in January 2002 the Company issued 2,000,000 shares of common stock
to the original Sitestar.net shareholders that represented the contingent shares
to be issued if no additional liabilities arose during the first two years after
the acquisition. The value of these shares issued was $60,000 which is recorded
as additional goodwill in the accompanying financial statements. The value of
the shares issued was the market value of the shares at the date of issuance.
NOTE 5 - 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 three months ended March 31, 2002 and 2001:
March 31, 2002
--------------------------------------------------------------
Corporate Internet Development Retail Consolidated
---------- ---------- ----------- --------- ------------
Revenue $ - $ 866,466 $ 81,914 $ 186,852 $ 1,135,232
Operating income (loss) $ (207,302) $ 129,469 $ 1,062 $ 47,385 $ (29,386)
Depreciation and
amortization $ 1,320 $ 173,194 $ 11,832 $ 900 $ 187,246
Interest expense $ (7,012) $ (47,322) $ (180) $ 41 $ (54,473)
Goodwill $ - $3,588,700 $ - $ - $ 3,588,700
Identifiable assets $ 301,366 $4,164,758 $ 28,880 $ 373,170 $ 4,868,174
8
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5 - SEGMENT INFORMATION (Continued)
March 31, 2001
--------------------------------------------------------------
Corporate Internet Development Retail Consolidated
---------- ---------- ----------- --------- ------------
Revenue $ - $ 666,646 $ 50,579 $ 194,949 $ 912,174
Operating loss $ (217,638) $ 78,205 $ (36,965) $ 28,447 $ (147,951)
Depreciation and
amortization $ 825 $ 278,029 $ 1,748 $ 900 $ 281,502
Interest expense $ 82,627 $ 20,836 $ - $ (690) $ 102,773
NOTE 6 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
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 (which amounted
to approximately $119,000 per quarter in the past), including goodwill recorded
in past business combinations, will cease upon adoption of this statement. The
Company adopted SFAS No. 142 on January 1, 2002 and as a result will not
amortize goodwill after December 31, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable and is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. SFAS 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of (by sales, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disclosed are reported at the lower of
the carrying amount or fair value less costs to sell. The Company has adopted
SFAS 144 on January 1, 2002. The provisions of this statement for assets held
for sale or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities and, therefore,
will depend on future actions initiated by management. As a result, we cannot
determine the potential effects that adoption of SFAS 144 will have on our
consolidated financial statements with respect to future disposal decisions, if
any.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
The following discussion and analysis should be read in conjunction with the our
consolidated financial statements and related footnotes for the year ended
December 31, 2001 included in our 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.
10
Our Internet service provider operating subsidiaries derive their income from
the excess of the Internet service prices we charge our customers over the cost
of service we pay our suppliers. Additionally, our retail customers pay for
services by cash or credit card while we pay our suppliers on extended terms. As
a result, we are able to increase our working capital between the time we
receive payment for services and the time we are required to pay suppliers. We
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.
RESULTS OF OPERATIONS
The following tables show financial data for the three months ended
March 31, 2002 and 2001. Operating results for any period are not necessarily
indicative of results for any future period.
11
FOR THE THREE MONTHS ENDED MARCH 31, 2002
CORPORATE INTERNET DEVELOPMENT RETAIL TOTAL
--------- --------- ----------- --------- -----------
Revenue $ - $ 866,466 $ 81,914 $ 186,852 $ 1,135,232
Cost of revenue - 383,236 37,313 107,616 528,165
--------- --------- ----------- --------- -----------
Gross profit - 483,230 44,601 79,236 607,067
Operating expenses 207,302 353,761 43,539 31,851 636,453
--------- --------- ----------- --------- -----------
Income (loss) from operations (207,302) 129,469 1,062 47,385 (29,386)
Other income (expense) ( 7,012) (47,322) (180) 41 (54,473)
--------- --------- ----------- --------- -----------
Net income (loss) $(214,314) $ 82,147 $ 882 $ 47,426 $ (83,859)
========= ========= =========== ========= ============
EBITDA $(205,982) $ 302,663 $ 12,894 $ 48,285 $ 157,860
Corporate expenses paid
with common stock 125,000 - - - 125,000
--------- --------- ----------- --------- -----------
Adjusted EBITDA $ (80,982) $ 302,663 $ 12,894 $ 48,285 $ 282,860
========= ========= =========== ========= ============
FOR THE THREE MONTHS ENDED MARCH 31, 2001
CORPORATE INTERNET DEVELOPMENT RETAIL TOTAL
--------- --------- ----------- --------- -----------
Revenue $ - $ 666,646 $ 50,579 $ 194,949 $ 912,174
Cost of revenue - 190,374 50,224 87,382 327,980
--------- --------- ----------- --------- -----------
Gross profit - 476,272 355 107,567 584,194
Operating expenses 217,638 398,067 37,320 79,120 732,145
--------- --------- ----------- --------- -----------
Income (loss) from operations (217,638) 78,205 (36,965) 28,447 (147,951)
Other income (expense) 41,819 (20,836) - 690 21,673
--------- --------- ----------- --------- -----------
Net income (loss) $(175,819) 57,369 (36,965) 29,137 $ (126,278)
========= ========= =========== ========= ===========
EBITDA $ (92,367) 357,982 (36,965) 29,347 257,997
Corporate expenses paid
with common stock 42,542 - - - 42,542
--------- --------- ----------- --------- -----------
Adjusted EBITDA $ (49,825) $ 357,982 $ (36,965) $ 29,347 $ 300,539
========= ========= =========== ========= ===========
12
-------------------
(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.
Adjusted EBITDA represents earnings/(loss) before depreciation and amortization,
interest income and expense, income tax expense (benefit), equity in
profit/(loss) of unconsolidated affiliates, impairment in value of goodwill,
stock based compensation, gain/(loss) on assets and other extraordinary items.
Adjusted EBITDA is presented because the Company believes it is an acceptable
financial indicator of the Company's ability to meet future debt service,
capital expenditure and working capital requirements. Adjusted EBITDA is not
determined in accordance with generally accepted accounting principles. It
should not be considered in isolation or as an alternative to net income as an
indicator of operating performance or as an alternative to cash flow as a
measure of liquidity. In addition, the Company's adjusted EBITDA is not
comparable to those of other companies, which may determine adjusted EBITDA
differently.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001
REVENUE. Revenue for the three months ended March 31, 2002 increased by $223,058
or 24.5% from $912,174 for the three months ended March 31, 2001 to $1,135,232
for the same period in 2002. The increase is attributed to the acquisition of
Advance Internet in July 2001. The Internet revenue generated by this
acquisitions in the 1st quarter of 2002 was $279,547. 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 three months ended March 31, 2002
increased by $200,185 or 61.0% from $327,980 for the three months ended March
31, 2001 to $528,165 for the same period in 2002. As a percentage of revenue
cost of revenue has increased from 35.9% to 46.5%. The increase as a percentage
of revenue is principally due some rebates we received from our major supplier
of Internet services during the 1st quarter of 2001.
OPERATING EXPENSES. Operating expenses for the three months ended March 31, 2002
decreased by $95,692 or 13.1% from $732,145 for the three months ended March 31,
2001 to $636,453 for the same period in 2002. The largest component of operating
expense is depreciation and amortization that amounted to $281,502 for the three
months ended March 31, 2001 and $187,246 for the same period in 2002. The
decrease in depreciation and amortization is due to the adoption of SFAS No. 142
on January 1, 2002 which no longer requires us to amortize our goodwill balance.
13
OTHER INCOME. During the three months ended March 31, 2001, certain stockholders
surrendered a total of 1,457,562 shares of common stock valued at $83,204. 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. .
GAIN FROM MARKETABLE SECURITIES. During the three months ended March 31, 2001,
we recognized $41,242 in gains on the sale of marketable securities. During the
three months ended March 31, 2002 we recognized no such gains. We have
classified the marketable securities in our portfolio as trading securities.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2002
decreased by $48,300 from $102,773 for the three months ended March 31, 2001 to
$54,473 for the same period in 2002. This decrease was a result of no loan
amortization charges related to the convertible debenture during the three
months ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2002, we generated EBITDA at our operating
subsidiary level of $363,842. This amount was offset by EBITDA at the corporate
level of $(205,982). However, at the corporate level we paid for certain
salaries of $125,000 by issuing shares of our common stock rather than paying
these expenses with cash. After taking into account these non-cash expenses at
the corporate level the actual net cash spent at the corporate level was only
$80,982. The following table illustrates the actual cash flow generated during
the three months ended March 31, 2002:
EBITDA generated at the operating subsidiary level $ 363,842
EBITDA generated at the corporate level (205,982)
Corporate expenses paid with common stock 125,000
---------------
ADJUSTED EBITDA $ 282,860
===============
During the three months ended March 31, 2002, we paid down our convertible
debenture by $325,000. We also repaid notes payable and notes payable -
stockholders of approximately $54,000 and $10,000 respectively.
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.
On May 11, 2000 we issued two convertible debentures aggregating $500,000. The
debentures bear interest at 12% per annum and were due on May 1, 2001. 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 were 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.
14
As of March 31, 2002, 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. Also as of March 31, 2002,
the Company has repaid $335,000 of this debenture in cash.
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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
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Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, 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
Date: May 20, 2002
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