<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER
A1 INTERNET.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 03-7392107
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
15825 SHADY GROVE ROAD, ROCKVILLE, MARYLAND 20850
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(301) 947-0100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
Securities registration pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value OTC Bulletin Board
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE> 2
A1 INTERNET.COM, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PART II
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
ITEM 6. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.,)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
31, DECEMBER 1998 30, SEPTEMBER 1999
AUDITED UNAUDITED
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 10,205.00 $ 2,077,813.00
Receivables: $ -
Trade, net (Note 1) $ - $ 813,383.00
Notes Receivable, current portion (Note 3) $ - $ 33,333.00
Related Parties $ - $ 49,100.00
Other $ - $ 28,300.00
Prepaid Expenses $ 22,388.00 $ 167,184.00
Other current assets $ - $ 27,664.00
-------------- --------------
$ 32,593.00 $ 3,196,777.00
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST: (NOTE 1)
Aircraft $ 1,008,256.00 $ 1,008,256.00
Computers & Equipment $ 9,159.00 $ 1,819,371.00
Furniture & Fixtures
Less: accumulated depreciation $ (170,654.00) $ (533,704.00)
-------------- --------------
$ 846,761.00 $ 2,293,923.00
-------------- --------------
OTHER ASSETS:
Goodwill, net of amortization (Note 2) $ 278,861.00 $ 9,254,066.00
Contracts (Notes 1 and 6) $ - $ 1,498,000.00
Note receivable (Note 3) $ - $ 46,987.00
Other $ - $ 54,222.00
-------------- --------------
$ 278,861.00 $10,853,275.00
-------------- --------------
TOTAL ASSETS $ 1,158,215.00 $16,343,975.00
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 37,313.00 $ 606,769.00
Loans Payable: Shareholders (Note 4) $ 189,261.00 $ 422,749.00
Notes Payable (Note 5) $ 659,510.00 $ 992,108.00
Other $ - $ 58,624.00
-------------- --------------
$ 886,084.00 $ 2,080,250.00
-------------- --------------
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
SHAREHOLDERS' EQUITY (NOTE 6)
Common Stock, $.001 par value,
20,000,000 shares authorized,
9,739,500 shares issued and outstanding $ 4,300.00 $ 9,739.00
Preferred Stock, $.001 par value,
5,000,000 shares authorized
848,889 shares issued and outstanding $ - $ 849.00
Additional paid-in capital $ 1,100,700.00 $17,889,628.00
Notes receivable-common stock $ - $ (440,000.00)
Retained earnings (deficit) $ (832,869.00) $(3,196,491.00)
-------------- --------------
$ 272,131.00 $14,263,725.00
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 1,158,215.00 $16,343,975.00
-------------- --------------
</TABLE>
<PAGE> 5
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.,)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES $ 1,093,647.00 $ 32,653.00 $ 1,867,789.00 $ 76,203.00
COST OF SALES $ (523,798.00) $ - $ (773,857.00) $ (8,626.00)
---------------- ---------------- ---------------- ----------------
GROSS PROFIT $ 569,849.00 $ 32,653.00 $ 1,093,932.00 $ 67,577.00
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Salaries and related expenses $ 399,552.00 $ 37,500.00 $ 825,868.00 $ 112,500.00
Travel & Entertainment $ 26,992.00 $ - $ 92,374.00 $ -
Bad Debt Expense $ - $ - $ 40,318.00 $ -
Legal & Professional $ 134,044.00 $ 7,595.00 $ 199,192.00 $ 41,000.00
Occupancy Costs $ 50,746.00 $ - $ 112,769.00 $ 10,218.00
General and administrative $ 69,598.00 $ 13,983.00 $ 318,823.00 $ 23,146.00
Consulting $ 57,500.00 $ 5,000.00 $ 244,155.00 $ 34,505.00
Depreciation and amortization $ 244,420.00 $ 28,820.00 $ 556,947.00 $ 98,210.00
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES $ 982,852.00 $ 92,898.00 $ 2,390,446.00 $ 319,579.00
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Consulting fees $ (649,000.00) $ - $ (1,100,000.00) $ -
Interest Income $ 19,106.00 $ - $ 19,106.00 $ -
Interest expense $ (26,084.00) $ (24,801.00) $ (76,214.00) $ (76,203.00)
---------------- ---------------- ---------------- ----------------
TOTAL OTHER EXPENSE $ (655,978.00) $ (24,801.00) $ (1,157,108.00) $ (76,203.00)
---------------- ---------------- ---------------- ----------------
NET LOSS BEFORE EXTRAORDINARY ITEM $ (1,068,981.00) $ (85,046.00) $ (2,453,622.00) $ (328,205.00)
EXTRAORDINARY ITEM-FORGIVENESS
OF DEBT $ - $ - $ 90,000.00 $ -
---------------- ---------------- ---------------- ----------------
NET LOSS $ (1,068,981.00) $ (85,046.00) $ (2,363,622.00) $ (328,205.00)
---------------- ---------------- ---------------- ----------------
BASIC AND UNDILUTED NET LOSS PER
COMMON SHARE BEFORE
EXTRAORDINARY ITEM (NOTE 1) $ (0.11) $ (0.02) $ (0.31) $ (0.08)
---------------- ---------------- ---------------- ----------------
BASIC AND DILUTED NET LOSS PER
COMMON SHARE (NOTE 1) $ (0.11) $ (0.02) $ (0.30) $ (0.08)
---------------- ---------------- ---------------- ----------------
WEIGHTED AVERAGE SHARES
OUTSTANDING (NOTE 1) $ 9,672,333.00 $ 3,974,359.00 $ 7,910,739.00 $ 3,974,359.00
---------------- ---------------- ---------------- ----------------
</TABLE>
<PAGE> 6
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.,)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net Loss $(1,068,981.00) $ (85,046.00) $(2,363,622.00) $(328,204.00)
Adjustment to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization $ 244,420.00 $28,820.00 $ 556,947.00 $ 98,210.00
Bad debt expense $ - $ - $ 40,318.00 $ -
Forgiveness of debt $ - $ - $ (90,000.00) $ -
Issuance of common stock for services $ 719,000.00 $ - $ 1,170,000.00 $ -
Increase in trade receivables $ (24,299.00) $ - $ (352,424.00) $ -
Decrease in Inventory 13,346.00
Increase in other assets $ (18,305.00) $ - $ (28,795.00) $ -
Increase in prepaid expenses $ (28,454.00) $ (2,256.00) $ (144,796.00) $ (6,769.00)
Increase in accounts payable and accrued expenses $ (7,371.00) $3,838.00 $ $109,475.00 $ 8,347.00
--------------- ------------- --------------- -------------
NET CASH USED IN OPERATING ACTIVITIES $ (170,644.00) $ (54,644.00) $(1,102,897.00) $(228,416.00)
--------------- ------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable $ - $ - $ 100,000.00 $ -
Payments on note and other receivables (9,846.00) $ - $ (238,215.00) $ -
Acquisition of contracts $ - $ - $ (168,000.00) $ -
Acquisition of Virtual Information Express, Inc.,
net of cash acquired $ - $ - $ 2.00 $ -
Acquisition of Computer Ease LLC,
net of cash acquired $ - $ - $ - $ -
Acquisition of NetWorld Ohio, Inc.,
net of cash acquired $ - $ - $ (89,138.00) $ -
Purchases of property and equipment $ (867,383.00) $ - $ (981,634.00) $ -
--------------- ------------- --------------- -------------
NET CASH USED IN INVESTING ACTIVITIES $ (877,229.00) $ - $(1,376,985.00) $ -
--------------- ------------- --------------- -------------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) related party loans, net $ - $ 120,000.00 $ - $ -
Proceeds from (payments on) shareholder loans, net $ 194,055.00 $ (27,767.00) $ 266,125.00 $(167,215.00)
Proceeds from notes payable $ 103,500.00 $ - $ 1,003,500.00 $ -
Payments on notes payable $ (96,997.00) $ (30,099.00) $ (307,339.00) $ (90,296.00)
Issuance of common stock,net $ - $ - $ 792,500.00 $ 500,000.00
Issuance of preferred stock, net $ 2,792,704.00 $ - $ 2,792,704.00 $ -
--------------- ------------- --------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,993,262.00 $ 62,134.00 $ 4,547,490.00 $ 242,489.00
--------------- ------------- --------------- -------------
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE IN CASH) $ 1,945,389.00 $ 7,490.00 $ 2,067,608.00 $ 14,073.00
CASH, BEGINNING OF PERIOD $ 132,424.00 $ 8,402.00 $ 10,205.00 $ 1,819.00
--------------- ------------- --------------- -------------
CASH, END OF PERIOD $ 2,077,813.00 $ 15,892.00 $ 2,077,813.00 $ 15,892.00
--------------- ------------- --------------- -------------
</TABLE>
<PAGE> 8
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
The consolidated financial statements include A1 Internet.com, Inc. (formerly
Halo Holdings of Nevada, Inc.) and its wholly owned subsidiaries, A1 Internet
Services, Inc. (formerly Computer Ease, LLC), Gravity Pilot Air, Inc., Networld
Ohio, Inc., and Virtual Information Express, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company, through its subsidiaries, provides internet connectivity through
two networks throughout the United States and Canada and related products and
services, including Web design. The Company's ability to offer end-user access
to an internet network is dependent upon the Company's contractual relationships
with both providers. Should these contracts be terminated or terms amended, the
Company might be required to enter into other arrangements with others on less
favorable terms. In addition, the Company relies on outside parties to market
their products and services to end users.
The September 30, 1999 and 1998 amounts included herein are unaudited. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly, the financial position, results of
operations, cash flows and changes in shareholders' equity have been made.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash, receivables and other current assets, are
carried at amounts that approximate fair value. Accounts payable, loans and
notes payable and other liabilities are carried at amounts that approximate fair
value.
<PAGE> 9
ACCOUNTS RECEIVABLE
The Company performs on-going credit evaluations of its customers. The Company
has established an allowance for doubtful accounts at September 30, 1999 of
$40,318.
PROPERTY AND EQUIPMENT
The Company provides for depreciation of equipment using accelerated and
straight-line methods based on estimated useful lives of five years.
Depreciation of aircraft is computed using the straight-line method based on an
estimated useful life of ten years.
CONTRACTS
Internet service contracts in the amount of $1,498,000 shown on the accompanying
balance sheet are being amortized over the life of the contracts, which is three
years.
GOODWILL
Goodwill is amortized over the lesser of the useful life of the related assets
or ten years.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the recoverability test is performed using undiscounted net cash flows estimated
to be generated by the asset.
REVENUE RECOGNITION
The Company recognizes revenue from connectivity, hosting and leasing of
airplanes over the period that the service is provided. Revenue from technical
support is recognized when the work is completed. Electronic commerce revenue is
recognized at the time of the sale. Web design revenue is recognized as such
revenues accrue under the terms of the related contract.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes, as prescribed by Statement of Financial Accounting Standards No. 109
(SFAS 109). Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply in the years in which these temporary
differences are expected to be recovered or settled. Changes in tax rates are
recognized in income in the period that includes the enactment date.
<PAGE> 10
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is based on the weighted average number of
shares of common stock outstanding. Common stock equivalents are not included in
the weighted average calculation since their effect would be anti-dilutive.
NOTE 2- BUSINESS COMBINATIONS
Computer Ease, LLC ("CE") was organized on May 17, 1993 as a limited liability
company. CE's activities include the buying and selling of computer equipment,
web design and providing internet access. In March 1999, the Company issued
4,000,000 shares of its common stock at $2.00 per share in exchange for all of
the outstanding units of membership of CE. This transaction was accounted for
using the purchase method of accounting. At the time of the purchase, assets and
liabilities of CE were $836,981 and $876,583, respectively. The excess of the
purchase price (including acquisition costs of $717,979, see Note 6) over the
fair value of the net assets acquired was recorded as goodwill of $8,757,581. In
May 1999, CE was then merged with A1 Internet Services, Inc., a wholly-owned
subsidiary of A1 Internet.com, Inc. A1 Internet Services, Inc. is the surviving
entity.
Virtual Information Express, Inc. ("VI") was incorporated on June 10, 1998. The
Company is engaged in the business of electronic commerce. In February 1999, the
Company acquired VI for 300,000 shares of its common stock at $2.00 per share in
exchange for all of the outstanding shares of VI. This transaction was accounted
for using the purchase method of accounting. At the time of the purchase, assets
and liabilities of VI were $49,002 and $50,000, respectively. The excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill of $600,998.
Networld Ohio, Inc. ("Networld") was incorporated on June 15, 1995 and is
engaged in the business of providing internet service. The Company acquired
Networld in April 1999. The acquisition consisted of a cash payment of $90,000,
37,000 shares of common stock at $2.00 per share, and a short-term non-interest
bearing promissory note of $180,000 maturing December 15, 1999. This transaction
was accounted for using the purchase method of accounting. At the time of the
purchase, assets and liabilities of Networld were $235,007 and $247,142,
respectively. The excess of the cost of the acquisition over the fair value of
the net assets acquired was recorded as goodwill of $356,135.
On March 30, 1999, Skydive USA, a wholly owned subsidiary of the Company, was
sold to major shareholders of the Company. These two individuals tendered a
total of 400,000 shares valued at $2.00 per share of the Company's common stock
to the Company as consideration for the sale. The difference between the value
of the common stock ($800,000) returned and the net assets relating to Skydive
USA of $285,617, resulted in a net gain of $514,383. However, because the
transaction was among significant related parties and was determined to not be
at arms length, the gain was recorded as an increase to additional paid-in
capital. As a result, the net effect of the transaction was a net charge
<PAGE> 11
to shareholders' equity of $285,617.
NOTE 3- NOTES RECEIVABLE
Notes receivable at September 30, 1999 consists of the following:
<TABLE>
<CAPTION>
Note receivable bearing interest at 6%, due April 1, 2002, payable in
monthly installments of $3,042:
<S> <C>
Current portion $ 33,333
Long-term portion $ 46,987
----------
$ 80,320
==========
</TABLE>
NOTE 4- LOANS PAYABLE-SHAREHOLDERS AND NOTE PAYABLE-SHAREHOLDER
The loans payable to shareholders shown on the accompanying balance sheet
includes a $96,000 loan bearing interest at 15% and due on demand after April 1,
2000. The remaining amounts are advances that are non-interest bearing and have
no due date.
NOTE 5- NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at September 30, 1999 consists of the following:
<S> <C>
14% note payable, due November 30, 1999, payable in monthly
installments of $16,296, secured by aircraft $ 558,333
* 8% note payable, (face amount $200,000) principal and interest due
October 10, 1999, convertible into preferred stock at $4.50 per share 169,978
* 8% note payable, (face amount $250,000) principal and interest due
September 2, 1999 convertible into preferred stock at $4.50 per share 219,897
Non-interest bearing note payable, due December 15, 1999, payable in
monthly installments of $20,000 43,900
---------
$ 992,108
</TABLE>
* In connection with the issuance of these notes payable, $60,125 has been
allocated to the detachable stock warrants (see Note 6).
<PAGE> 12
NOTE 6- SHAREHOLDERS' EQUITY
COMMON STOCK
On January 29, 1999 the Company authorized the issuance of its common shares
pursuant to a private placement offering of 500,000 common shares at $2.00 per
share. This offering resulted in the issuance of 500,000 shares with proceeds to
the Company of $710,000 and notes receivable from shareholders of $240,000, net
of offering costs.
During the period ended September 30, 1999, the Company issued 560,000 common
shares for services, of which 500,000 of these shares were issued to related
parties. In addition, 32,500 shares of common stock were sold for $1.00 per
share in a private sale to current shareholders. Also, 120,000 shares of common
stock were issued to an officer and stockholder as repayment of a $372,692 debt.
Another shareholder forgave debt totaling $177,331, which was credited to
paid-in capital.
The Company issued 100,000 shares of common stock at $2.00 per share to a
director of the Company for a note receivable.
The Company acquired certain contracts from an unrelated entity to provide
internet service for cash of $168,000 and 190,000 shares of common stock valued
at $7.00 per share.
PREFERRED STOCK
In July 1999, the Company commenced a private placement offering of its Series A
preferred stock at $4.50 per share. This offering resulted in the issuance of
725,889 shares with proceeds to the Company of $2,792,704, net of offering
costs.
In addition, notes payable in the amount of $490,675 were converted to 123,000
shares of Series A preferred stock pursuant to the note payable agreements.
Subject to certain adjustments, each share of Series A preferred stock is
convertible into one share of common stock. The Series A preferred stock is
convertible upon written request of the holder. The Series A preferred stock is
preferred as to both earnings and assets, and in the event of liquidation,
dissolution or winding up of the Company, holders of the Series A preferred
stock shall be entitled to be paid $4.50 per share before any assets of the
Company are distributed among or paid over to the holders of the common stock.
<PAGE> 13
STOCK WARRANTS
Common stock warrants have been issued in connection with certain private
offerings, business acquisitions and notes payable. At September 30, 1999,
warrants to purchase common stock at various prices were outstanding, which
expire as follows:
<TABLE>
<CAPTION>
Number Outstanding
And Exercisable at
Expiration Date September 30, 1999 Exercise Price
- --------------- ------------------ --------------
<S> <C> <C>
June 1, 2004 500,000 $ .10
June 1, 2004 42,500 4.50
---------
542,500
=========
</TABLE>
The 500,000 warrants shown above were issued in connection with the January 29,
1999 private placement and the acquisition of Computer Ease, LLC (see Note 2).
These warrants were valued at $767,979, of which $50,000 was for offering costs
and $717,979 was for costs incurred in connection with the acquisition.
The 42,500 warrants shown above are detachable stock warrants issued in
connection with various notes payable agreements. These warrants were valued at
$122,952. 22,500 of these warrants, valued at $62,827, were issued in connection
with notes payable that were converted to preferred stock.
The fair value of all of the above described warrants was estimated using the
Black-Scholes option pricing model, with the following assumptions: dividend
yield of 0%; expected volatility of 48%; risk free rate of 4.5%; and expected
life of five years.
NOTE 7- INCOME TAXES
A1 Internet.com, Inc. has an unused net operating loss carryforward of
approximately $830,000 for income tax purposes, of which approximately $350,000
expires in 2012 and the remainder in 2018. However, the ability to utilize such
losses to offset future taxable income is subject to various limitations imposed
by the rules and regulations of the Internal Revenue Service. A portion of the
net operating losses are limited each year to offset future taxable income, if
any, due to the change of ownership in A1 Internet.com, Inc.'s outstanding
shares of common stock. This net operating loss carryforward may result in
future income tax benefits of approximately $282,200; however, because
realization is uncertain at this time, a valuation reserve in the same amount
has been established. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
<PAGE> 14
Significant components of A1 Internet.com, Inc.'s deferred tax liabilities and
assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax liabilities $ --- $ ---
================ ================
Deferred tax assets:
Net operating loss carryforwards 282 200 119 000
Total deferred tax assets 282 200 119 000
Valuation allowance for
deferred tax assets (282 200) (119 000)
---------------- ----------------
$ --- $ ---
================ ================
</TABLE>
The valuation allowance for deferred tax assets was increased by $119,000 and
$173,200 during 1998 and 1997, respectively.
NOTE 8- BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The following table presents information by
geographic area as of and for the periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Revenues Long-Lived Assets
-------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 1 378 789 76,203 $13,264,619 $ 1,159,401
Netherlands 489 000 -- -- --
----------- ---------- ----------- ------------
$ 1,867,789 $ 76,203 $13,264,619 $ 1,159,401
=========== ========== =========== ============
</TABLE>
For the period ending September 30, 1999, the Company's only activity outside of
their normal operations was in the leasing of their aircraft and skydiving. This
segment accounted for $165,519 in revenue, $8,774 in cost of sales, a net loss
of $51,806 and assets of $761,983. The Company's sole business for the period
ending September 30, 1998 was skydiving, therefore all items presented in the
accompanying financial statements for that period relate to that business.
<PAGE> 15
The following customers each accounted for more than 10% of sales for the nine
months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
% of Sales % of Receivables
---------- ----------------
Nine Months Ended September 30, Nine Months Ended September 30,
Customer 1999 1998 1999 1998
- -------- ---- ---- ---- ----
<S> <C> <C>
A-Netherlands 26.2 -- 49.5 --
B-United States 12.2 -- 27.7 --
</TABLE>
NOTE 9- RELATED PARTY TRANSACTIONS
In connection with the resignation of the former Chief Executive Officer of the
Company, the former Chief Executive Officer was paid $35,000 in severance pay.
NOTE 10- COMMITMENTS AND CONTINGENCIES
The Company leases office space from a non-related party under an operating
lease. Future minimum lease payments under the non-cancelable lease as of
December 31, 1998 are 1999-$167,630, 2000-$114,422 and 2001-$33,013.
Total rental expense for the periods ended September 30, 1999 and 1998 was
$107,128 and $449, respectively.
The Company has deposits in banks in excess of the FDIC insured amount of
$100,000. The amounts in excess of $100,000 are subject to loss should the bank
cease business.
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based on our audited Consolidated Financial
Statements for the year ended December 31, 1998 and our unaudited Consolidated
Financial Statements for the nine months ended September 30, 1998 and 1999. The
reader should bear in mind that during the periods covered by these financial
statements we were engaged in different businesses. Our business now focuses on
providing Internet access and related products. We entered this business by
acquiring Virtual Information Express, Computer Ease, and NetWorld Ohio in the
first and second quarters of 1999. Before making those acquisitions, we were
engaged in the skydiving business. We sold the skydiving business as of the end
of the first quarter of 1999. We now receive rental income from leasing our
airplanes to the purchasers.
Much of our Internet related business is in an early stage of
development. For example, Computer Ease (now A1 Services.com) and Virtual
Information Express, which are providers of connectivity and value added
services, have only been generating revenues from that business since the second
quarter of 1998. Before that, their principal business was e-commerce sales of
computer hardware and accessories, a business on which we are now refocusing. We
anticipate that as the number of end-users of our services increases, a larger
percentage of our revenues will be derived from recurring charges for
connectivity, e-commerce and other value added services and a smaller percentage
of our revenues will be derived from Web site design and technical services.
However, we have not yet had sufficient experience in our current Internet
related business to define trends or to determine whether our expectations are
accurate.
During the next twelve months we intend to focus on increasing the
number of end-users of our services. To that end we will intensify our sales
efforts to wholesale customers who resell our products and services to their own
customers. We will also continue to review acquisition opportunities,
particularly acquisitions of ISPs. We believe that our current organization and
infrastructure enable us to rapidly assimilate such acquisitions and realize
savings on personnel and equipment. To meet our plan we anticipate adding up to
15 additional employees in computer programming, marketing, customer service and
sales during the next twelve months.
<PAGE> 17
The following table sets forth certain information about the source of
our revenues:
<TABLE>
<CAPTION>
SOURCE OF REVENUES PERCENTAGE OF TOTAL REVENUES
- ---------------------------------------- --------------------------------- ----------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30
------------- ------------
1998 1999 1998 1999
- ---------------------------------------- --------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
CONNECTIVITY - 44 - 38
HOSTING - 5 - 3
TECHNICAL SERVICE - 3 - 7
DESIGN FEES - 15 - 24
E-COMMERCE - 22 - 18
OTHER RECURRING - 0 - 0
INTERNET MARKET - 0 - 1
SKY DIVING 100 0 100 1
AIRPLANE LEASE - 8 - 8
OTHER INCOME - 3 - 6
DISCOUNTS - - - 0
TOTAL 100% 100% 100% 100%
- ---------------------------------------- --------------- ----------------- ------------------- --------------------
</TABLE>
The following table sets forth certain information about our cost of sales:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL COST OF SALES
- ---------------------------------------- --------------- ----------------- ------------------- --------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30
------------- ------------
1998 1999 1998 1999
- ---------------------------------------- --------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
COST OF SALES
CONNECTIVITY - 38 - 45
COMPUTER EQUIPMENT - 46 - 43
LABOR - 15 - 20
OTHER COST - 1 - 1
SKY DIVE COSTS 100 0 100 1
PURCHASE DISCOUNTS - 0 - (9)
TOTAL 100% 100% 100% 100%
- ---------------------------------------- --------------- ----------------- ------------------- --------------------
</TABLE>
<PAGE> 18
Results of Operations - Three Months and Nine Months Ended September 30, 1999
Compared to Three and Nine Months Ended September 30, 1998
REVENUES
Total revenues increased from $ 32,653 to $1,093,647 in the three
months, and $76,203 to $1,867,789 in the nine months ending September 30, 1999.
In the nine months ended September 30, 1998, all of our revenues were derived
from the skydiving business. In the three and nine months ended September 30,
1999, our revenues were derived from the following sources:
<TABLE>
<CAPTION>
Three Months Nine Months
<S> <C> <C>
Internet related business (primarily in the
second and third quarters) $1,021,889 $1,702,270
Lease of our airplanes to the purchasers
of our skydiving business $ 71,758 $ 143,156
Skydiving business (in the first quarter) $ 0 $ 22,363
</TABLE>
The principal components of our Internet related revenues were:
<TABLE>
<CAPTION>
Months Ended September 30, 1999
Three Months Nine Months
<S> <C> <C>
Connectivity $449,631 44% $700,937 41 %
Design Fees $153,283 15% $455,250 26 %
Electronic Commerce $224,816 22% $339,071 19 %
Technical Services $ 30,657 3% $135,533 7 %
</TABLE>
Cost of Sales
Cost of sales increased from $ 0 and $8,626 in the three and nine months ended
September 30, 1998 to $523,798 and $773,857 in the three and nine months ended
September 30, 1999. In the nine months ended September 30, 1998, our cost of
sales related wholly to the skydiving business and consisted of pilot fees. In
the three and nine months ended September 30, 1999 our cost of sales consisted
primarily of Internet related costs as follows:
<TABLE>
<CAPTION>
Months Ended September 30, 1999
Three Months Nine Months
<S> <C> <C>
Connectivity $199,043 38% $334,308 45%
Design Fees $ 65,475 12% $118,163 15%
Electronic Commerce $242,830 46% $259,896 34%
Technical Services $ 13,095 3% $ 35,097 5%
</TABLE>
<PAGE> 19
Operating Expenses
The following table sets forth certain information regarding our
operating expenses:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ---------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Salaries and related expenses 825,868 34.5% 112,500 35.2% 399552 40.7% 37,500 40.4%
Travel and entertainment 92,374 3.9% 0 0.0% 26992 2.7% 0 0.0%
Bad debt expense 40,318 1.7% 0 0.0% 0 0.0% 0 0.0%
Legal and professional 199,192 8.3% 41,000 12.8% 134,044 13.5% 7,595 8.2%
Occupancy costs 112,769 4.7% 10,218 3.2% 50,746 5.2% 0 0.0%
General and administrative 318,823 13.3% 23,146 7.2% 69,598 7.1% 13,983 15.0%
Consulting 244,155 10.2% 34,505 10.8% 57,500 5.9% 5,000 5.4%
Depreciation and amortization 556,947 23.3% 98,210 30.7% 244,420 24.9% 28,820 31.0%
----------- --------- -------- --------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 2,390,446 100.0% 319,579 100.0% 982,852 100.0% 92,898 100.0%
----------- --------- -------- --------- --------- --------- --------- ---------
</TABLE>
OTHER EXPENSES
In the nine months ended September 30, 1999 our former Board of
Directors authorized, and we issued, 550,000 shares of our common stock valued
at $1,100,000. 300,000 of these shares were issued as advance payments for
consulting services to be provided by certain individuals who we understand had
expertise in marketing outdoor sports or extreme sports. The issuance of these
300,000 shares was authorized by our former Board of Directors at a time that we
were about to dispose of our skydiving business and become a provider of
Internet-related services. The remaining 250,000 shares were issued to our
former President and director as executive compensation upon his becoming
President. We have been unable to determine the value of the services, if any,
received in exchange for these 550,000 shares. We have determined to seek
recovery of the 300,000 shares issued as advance payments for consulting
services, and we are attempting to determine whether we have a legal basis to
assert a claim for recovery of the remaining shares.
<PAGE> 20
LIQUIDITY AND CAPITAL RESERVES
Since our inception we have financed our operations primarily from the
private sales of debt securities. Total net proceeds from the sale of equity
securities in the period between our formation and September 30, 1999 amounted
to approximately $4,585,000.
CASH FLOW
Operating activities used cash of $54,644 and $170,644 in the three
months ended September 30, 1998 and 1999 and $228,416 and $1,102,897 in the nine
months ended September 30, 1998 and 1999.
Investing activities used cash of $0 and $ 877,229 in the three months
ended September 30, 1998 and 1999 and $0 and $1,376,985 in the nine months ended
September 30, 1998 and 1999.
Net Cash provided by financing activities was $ 62,134 and $ 2,993,262
in the three month ended September 30, 1998 and 1999 and $242,489 and $4,547,490
in the nine months ended September 30, 1998 and 1999.
WORKING CAPITAL
Our working capital, defined as the excess of our current assets over
our current liabilities, was $1,116,527 at September 30, 1999 compared to
($795,879) at December 31, 1998.
As of September 30, 1999 we had no borrowing facility established with
a financial institution. We anticipate that our working capital together with
the net proceeds of a private offering of equity securities which we completed
in November 1999, in the amount of $5,020,000, will be sufficient to fund our
cash flow deficit through March 31, 2000 when we expect to be in a positive cash
flow position.
<PAGE> 21
YEAR 2000
The Year 2000 problem results from the fact that many existing computer
programs and systems have used only two digits to identify the year in the date
field. These programs were designed and developed without considering the impact
of a change in the century designation. If not corrected, computer applications
that use a two-digit format could fail or create erroneous results in any
computer calculation or other process involving the Year 2000 or a later date.
We have identified two main areas of risk related to the Year 2000
problem for our IT systems:
- Our internal computer systems or embedded chips could be
disrupted or fail, causing an interruption or decrease in
productivity in our operations; and
- Computer systems or embedded chips of third parties including
(without limitation) financial institutions, suppliers, vendors,
landlords, customers, suppliers of communications services and
others could be disrupted or fail, causing an interruption or
decrease in our ability to continue our operations.
We have evaluated our state of readiness for the Year 2000 issue. With
regard to our internal IT systems, we have concluded that substantially all of
those systems are Year 2000 compliant. Our personnel have tested and analyzed
our systems in the course of regular quality control and research and
development. We did not spend significant capital on this evaluation. To date,
the only costs in connection with our Year 2000 evaluation have been limited to
internal staff costs, which have been expensed as incurred. The financial
information contained in this Form 10-SB includes such costs, which are not
material. Based on our experience to date, we do not anticipate that we will be
required to incur significant additional operating expenses or to invest
material amounts to obtain Year 2000 compliance.
We have been assured by all major suppliers, vendors and customers that
the existing IT and other systems, upon which we rely for products and services
and for internal operations, are Year 2000 compliant. Based on those assurances,
we believe that the IT systems utilized in our principal network, backbone and
internal operations will
<PAGE> 22
meet Year 2000 requirements. We do not anticipate significant interruptions of
billings or service to customers or disruptions of internal operations
attributable to the Year 2000 problem. However, failure of any one provider may
have a material impact on our operations. We are heavily dependent upon the
veracity of their testing and statements of compliance as we cannot replicate
and independently test the services supplied to us. At this time we cannot
estimate the effect, if any, that non-compliant systems supplied by these
entities could have on us. It is possible that the impact on us could be
material if one or more of these systems are not Year 2000 compliant by the end
of the year. If any of our material third party suppliers or vendors are not
Year 2000 ready and their non-compliance causes a material disruption to any of
their respective businesses or services, our business, operations and/or
services could be materially and adversely affected. The most significant risks
that the Year 2000 issues could present to us include, without limitation,
disruption, delay or cessation of operations. For example, in the event of a
widespread telecommunications failure (which we believe is our most reasonably
likely worst case Year 2000 scenario), the entire Internet performance could
potentially be affected due to its very nature as a collection of interconnected
networks. A number of individual customers may suffer from complete outages of
services, though we believe that most Internet services would likely continue to
operate, although possibly at a reduced performance level. Other potential
adverse Year 2000 scenarios include the failure or impairment of software that
is provided by a third party and incorporated in one of our service platforms as
a result of a Year 2000 problem. In that case, the particular service that the
software supports could likewise become inoperable or perform incorrectly.
Further, in the event that third-party-supplied equipment (including customer
premise equipment) contains non-Year 2000-compliant technology, the systems,
operations or services supported by that equipment also could fail or be
interrupted.
<PAGE> 23
PART II
ITEM 3. LEGAL PROCCEDINGS.
No legal proceedings were ongoing or planned during the period.
ITEM 4. CHANGES IN SECURITIES & USE OF PROCEEDS.
The Company closed on a private placement of Series A preferred stock
on November 24th 1999 1,115,556 shares were issued at $ 4.50 per share resulting
in total proceeds of $ 5,020,000. After commissions of $ 650,378 were paid to
the underwriters EBI Securities Corporation and J.B. Sutton, the remaining $
4,369,622 was used either as working capital or invested in short term
investment instruments.
ITEM 5. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 7. EXIBITS & REPORT ON FORM 8-K
Not filed during reporting period.
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
A1 Internet.com, Inc.
Date
---------------------------- ----------------------------
Bruce Bertmam, CEO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 2077813
<SECURITIES> 783
<RECEIVABLES> 813383
<ALLOWANCES> 40318
<INVENTORY> 0
<CURRENT-ASSETS> 3196777
<PP&E> 2827627
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<BONDS> 0
0
849
<COMMON> 9739
<OTHER-SE> 17449628
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<CGS> 523798
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1068981)
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
