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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 6
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
A1 INTERNET.COM, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 03-7392107
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15825 Shady Grove Road, Rockville, Maryland 20850 20850
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(Address of Principal Executive Offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 947-0100
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 Par Value OTC Bulletin Board
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(TITLE OF CLASS)
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(TITLE OF CLASS)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
Information Regarding Forward Looking Statements: The statements contained in
this Form 10-SB that are not historical fact are "forward-looking statements".
These statements can often be identified by the use of forward-looking
terminology such as "estimates," "projects," "believes," "expects," "may,"
"will," "should," "intends," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. We wish to caution the reader that these
forward-looking statements, such as the timing, costs and scope of acquisition
of, or investments in, existing businesses, the revenue and profitability levels
of such businesses, and other matters contained above and herein in this Form
10-SB regarding matters that are not historical facts, are only predictions. No
assurance can be given that the future results indicated, whether expressed or
implied, will be achieved. While sometimes presented with numerical specificity,
these projections and other forward-looking statements are based upon a variety
of assumptions relating to our business which, although we consider reasonable,
may not be realized. Because of the number and range of the assumptions
underlying our projections and forward-looking statements, many of which are
subject to significant uncertainties and contingencies that are beyond our
reasonable control, some of the assumptions inevitably will not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
Form 10-SB. These forward-looking statements are based on our current
expectations, and we assume no obligation to update this information. Therefore,
our actual experience and results achieved during the period covered by any
particular projections or forward-looking statements may differ substantially
from those projected. Consequently, the inclusion of projections and other
forward-looking statements should not be regarded as a representation by us or
any other person that these estimates and projections will be realized, and
actual results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
TABLE OF CONTENTS
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ITEM 1. Description of Business................ 2 ITEM 2. Management's Discussion and Analysis of
Corporate History............................... 2 Financial Condition and Results of
Overview........................................ 3 Operations.................................. 17
Industry Background............................. 4 ITEM 3. Description of Properties................ 21
Our Business Strategy........................... 5 ITEM 4. Security Ownership of Certain
Markets......................................... 5 Beneficial Owners and Management............ 22
Sales........................................... 5 ITEM 5. Directors and Executive Officers......... 22
Products and Services........................... 5 ITEM 6. Executive Compensation................... 24
Customers....................................... 8 ITEM 7. Certain Relationships and Related
Capacity........................................ 8 Transactions................................ 25
Competition..................................... 9 ITEM 8. Description of Securities................ 26
Employees....................................... 10
Intellectual Property........................... 10 PART II
Regulation...................................... 10
Investments..................................... 10 ITEM 1. Market Price Of And Dividends On The
Risk Factors.................................... 10 Registrant's Common Equity And Related
Stockholder Matters.......................... 27
ITEM 2. Legal Proceedings........................ 27
ITEM 3. Changes And Disagreements With
Accountants On Accounting And Financial
Disclosure................................... 28
ITEM 4. Recent Sales Of Unregistered Securities.. 28
ITEM 5. Indemnification Of Directors And
Officers..................................... 29
PART III
ITEM 1. Index To Exhibits........................ 30
Financial Statements And Exhibits................. 30
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ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
A1 Internet.com, Inc. was incorporated under the laws of Nevada on
October 13, 1997, and was originally named Halo Holdings of Nevada, Inc. On July
9, 1999, we amended our articles of incorporation to adopt our current name,
which we believe more accurately reflects the business in which we are now
engaged.
From the date of our incorporation in 1997 until early 1999 our company
was engaged in skydiving and related business ventures. Between February and
April 1999 we sold our skydiving business and acquired three companies which are
providers of Internet connectivity and related products and services.
Specifically, in February 1999 we acquired Virtual Information Express, Inc. a
Maryland corporation which provides outsourced Internet services such as
e-commerce applications and collaborative technologies. In March 1999, we
acquired Computer Ease LLC, a Maryland limited liability company which provides
Web design and development services to corporate clients and associations.
Computer Ease has since been merged into our subsidiary A1 Internet Services,
Inc., a
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Delaware corporation. In April 1999 we acquired Networld Ohio, Inc., an Ohio
corporation, which is an Internet service provider ("ISP") based in Freemont,
Ohio. On March 30, 1999, we sold Skydive USA, our subsidiary engaged in the
skydiving business and leased the two aircraft used in that business to that
former subsidiary. In addition, in October 1999, we formed Worldlink On-Line,
Inc., a Delaware corporation that is an ISP based in Boston, Massachusetts of
which we own 80%. During 1999 we also acquired a 14% interest in EBonline.com,
Inc. As a result of these transactions, our principal business now is providing
Internet access and related products and services, and we derived approximately
91% of our revenues from this business in the first 9 months of 1999.
On August 30, 1999, we concluded an asset purchase agreement with Net
America, through which we acquired selected contracts to provide Internet
connectivity and, to a lesser extent, value added services to resellers of those
services. In November 1999, we terminated contracts with two ISPs which we had
acquired in the Net America transaction. The remaining contracts acquired in
that transaction do not yet account for a significant portion of our revenues.
We are filing this Form 10-SB voluntarily in order to register our common
stock under the Securities Exchange Act of 1934. This will permit our common
stock to be quoted on the OTC Bulletin Board.
Our principal offices are located at 15825 Shady Grove Road, Rockville,
MD 20850 (telephone number 301-947-0100).
Overview
Through our subsidiaries we provide associations and businesses with
opportunities to generate revenues by supplying those associations and
businesses with Internet technology solutions and services that they can reoffer
under their own names and brands. Our products and services enable associations
and businesses to offer their members, customers and others a variety of revenue
producing solutions and services without making large investments in technology,
infrastructure or staff. The principal products and services which we offer are:
- Web site creation and design;
- Web site hosting;
- Co-location;
- Local telephone call access to the AT&T and Megapop Internet
networks through the AT&T network's approximately 1200 points of
presence and the Megapop network's approximately 775 points of
presence located across the United States and in Canada;
- Complete electronic commerce services;
- E-mail and related services such as conference and bulletin board
facilities and mailing list management; and
- Webcentric applications such as calendar services, document
management and encryption.
We also sell educational courses developed by others to persons who receive
those courses over the Internet. In addition, we own one regional ISP located in
Canton, Ohio which had a total of 4,350 subscribers as of October, 1999.
Recently we have also begun Worldlink On-Line, Inc., a second ISP in Boston,
Massachusetts. Worldlink is a new operation which has not yet generated a
significant number of subscribers or material revenues.
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Industry Background
The Internet is a global network of multiple private and public networks
that use standardized communication protocols to communicate with each other.
The Internet has become an important communication and commercial medium and
presents a significant opportunity for associations and businesses to interact
in new and different ways with a larger number of members, customers, employees,
suppliers and partners. As use of the Internet grows, associations and
businesses are increasing the breadth and depth of their Internet product and
service offerings. Pioneering Internet-based organizations have developed
Internet products and services in areas such as finance, insurance, media,
tourism, retail and advertising. Other organizations have begun to use the
Internet for an expanding variety of applications, ranging from corporate or
association publicity and advertising, to sales, distribution, customer service,
employee training and communication with partners. Increasingly, Internet
operations are becoming mission-critical for many of these enterprises. To
ensure the reliability of their Internet operations, enterprises are requiring
that these operations have high performance standards, scalability and expert
management 24 hours a day, 7 days a week.
Enterprises generally utilize two types of Internet services:
connectivity and valued-added services. Connectivity services provide access to
the Internet, while value-added services consist of products such as Web design
and hosting, electronic commerce services, and communication services that
improve the internal and external operations of an enterprise. Internet
connectivity and value-added services represent two of the fastest growing
segments of the telecommunications services market. The availability of Internet
access, the advancements in technologies required to navigate the Internet and
the proliferation of content and applications available over the Internet have
attracted a growing number of Internet users.
The Internet service provider market is segmented into large national or
multinational providers with large high speed networks and regional or local
ISPs who enlist subscribers under their own names but typically rely upon the
larger providers for Internet access. The largest providers, like AT&T, have
what are referred to as "tier one" networks, which exchange Internet traffic
cost-free, at multiple public peering points, as well as through private peering
arrangements. As the number of ISPs has grown, the requirements to become a tier
one network have increased. It has therefore become more difficult to achieve
tier one provider status. Regional and local ISPs typically purchase access to
the Internet, and invest in
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equipment and personnel necessary to provide products and services and
customized hands-on support, and bear the cost of marketing. Since regional and
local ISPs often have limited financial resources, the range of products and
services which they offer is often limited.
As is typical in the case of a new and rapidly evolving industry the
Internet is characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions. Demand for
recently introduced products and services is subject to a level of uncertainty.
Despite growing interest in the many uses of the Internet some potential users
could be deterred from purchasing Internet access services because of a
perceived inconsistent quality of service, the need to deal with multiple and
frequently incompatible vendors, and perceived inadequate protection of the
confidentiality of stored data and information moving across the Internet. In
particular, a perceived lack of security of commercial data, such as credit card
numbers, could impede commercial exploitation of the Internet. There can be no
assurance that encryption or other technologies will satisfactorily address
these security concerns. The adoption of the Internet for commerce and
communications, particularly by those individuals and enterprises which have
historically relied upon alternative means of commerce and communication,
generally requires the understanding and acceptance of a new way of conducting
business.
Our Business Strategy
Our business strategy is to combine the global scale of tier one
providers with the local presence of regional and local ISPs. We provide
affordable connectivity on a global scale by contracting with AT&T and Megapop,
leading tier one providers, for access to their Internet network at a fixed
monthly fee per end-user. We enable associations, membership sales organizations
and other affinity groups to create non-dues revenue and sales programs by
offering their members high quality Internet products and services without the
investment in technology, equipment and personnel that would ordinarily be
required to establish an ISP. We enable existing regional and local ISPs to
reduce and control their costs, focus their energies on sales and enhance their
marketing by providing, at affordable rates, a variety of products and services
and high quality support services which those ISPs resell to their customers. In
effect, we enable associations, membership sales organizations and ISPs to
become virtual ISPs who market under their own name products and services which
they purchase from us.
We anticipate that a majority of the end-users of our services will be
derived from resellers of our products and services. Therefore, to a large
extent, our ability to grow depends upon the resources and dedication which
resellers are willing to commit to marketing our services. Our current business
strategy also depends upon being able to charge for connectivity to realize
recurring revenues. Recently various providers have begun offering free access
to the Internet. We believe that this practice will not become prevalent among
the customers we are targeting. If our belief is erroneous, we would be required
to develop a different approach to marketing our products and services. Much of
our anticipated growth will be derived from the sale of our electronic commerce
related products. Our ability to grow also depends upon the increasing
acceptance of electronic commerce and the reliability of the inventory, billing
and delivery systems utilized by electronic commerce vendors.
Markets
We focus on three market segments: associations; membership marketing
companies which have an existing customer base; and, regional and local ISPs.
Associations. There are numerous non-profit associations and a number of
other affinity groups in the United States. These organizations regularly
communicate with established memberships composed of persons with common
interests. We offer these organizations a means to communicate with their
members and to provide membership services. In addition, our connectivity
services generate subscription income and our electronic commerce products
provide organizations that are dependent upon membership dues for their
revenues with opportunities to realize non-dues revenue without large capital
investments.
Membership Marketing Companies. There are many large membership-marketing
businesses in the United States which have an established customer base. To
these businesses we offer sales programs with opportunities for recurring
profits, low barriers to entry and opportunities to build brand equity.
Regional and Local ISPs. There are more than 7,900 ISPs in the United
States, according to Thelist.com. We offer these ISPs the opportunity to control
their costs by purchasing connectivity and other products and services at a
fixed price for each end-user and reselling those products and services under
their own names or brands. This allows the ISPs to focus on marketing and
provides them with a broader range of products and services than they might
otherwise be able to offer.
Sales
Our direct sales force consists of two persons dedicated to association
and membership sales and three persons dedicated to the sale of Web site design,
Web site hosting, electronic mail services and other value added products. In
addition, we utilize indirect sales channels, principally the AT&T Internet
network sales force, trade associations and other affinity groups to supplement
our direct sales force.
Products and Services
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We offer a variety of Internet services including connectivity, electronic mail
services, electronic commerce services, Web hosting and Web site design. We
intend to develop a broader range of value added solutions and services
independently, through acquisitions and through strategic relationships with
providers. Following is a description of the products and services which we are
currently providing to our customers.
Connectivity
We offer a variety of Internet access solutions, providing basic
connectivity to the Internet, as well as value-added products and services such
as e-mail that enable our customers to expand their basic Internet connectivity
capability. We currently offer both analog and integrated services digital
network dial-up access at speeds up to 128 Kbps. We provide this access at local
telephone rates by means of approximately 1200 points of presence in the AT&T
Network and approximately 775 points of presence in the Megapop network which
are located throughout the United States and part of Canada. We also offer frame
relay dedicated connectivity at speeds up to 56 Kbps. Our Flex T-1(TM) Frame
Relay Account offers access to T-1 lines on an as needed basis and at bandwidths
ranging from 256 Kbps to in excess of 1024 Kbps. We also offer a Digital
Subscriber Line service that permits access to the Internet at up to 1.5 Mbps.
These services accommodate connectivity requirements of Internet users ranging
from the single user with a computer in his or her home to work groups and
businesses with multiple users.
Our connectivity service prices vary depending on whether the customer is
a retail or wholesale customer, although the services made available to both
customers are identical. Retail customers are end-users that purchase and
utilize our dial up connectivity services directly. Wholesale customers are
businesses and associations that resell our services to end-users. We currently
charge each retail customer a monthly fee ranging between $19.95, for our basic
analog service, and $39.95, for our premium integrated services digital network
access. As of December 9, 1999, we had 5,000 retail customers which accounted
for 55% of our connectivity customers. Our wholesale customers are charged a
monthly fee on a sliding scale based on the number of users utilizing our
connectivity services through that wholesale customer. At current usage levels,
we charge each wholesale customer $13 per user, per month. As the number of
subscribers brought to us by a wholesale customer increases beyond 50,000, the
monthly charge per user will decrease until it reaches $9 per month for 250,000
or more users. At December 9, 1999, we had 23 wholesale customers that resell
our services to approximately 4,000 end-users who represent 45% of our
connectivity customers.
Custom Site Design
Web site design is the development of the content that will be
displayed on the Web site when it is being viewed on the Internet. We design Web
sites that convey our customers' marketing messages. Our services range from the
development of a basic Web page to the development of a sophisticated e-commerce
Web site. In addition, we provide domain name registration, place Web site
information in search engines, issue electronic press releases and track the
detailed use of each site. We also offer co-linking of non-competing Web sites,
banner advertisements on Web sites and links to cyber malls, associations and
groups. Our prices for Web site design are based upon the time required and the
materials used to design the site.
Web Site Hosting
We offer our customers several options for hosting their Web sites. A
customer can share space on a server which also hosts the Web sites of other
customers. If a customer chooses, we provide a separate server dedicated to that
customer's Web site. A Web site provides a company with a tangible identity and
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interactive presence on the Internet. The site allows a company to post
information about itself that is easily accessible to all Internet users. Web
sites are also the basis for providing electronic commerce, where a company can
advertise and sell its products and services. We offer a comprehensive range of
basic Web site hosting products, as well as a growing suite of enhanced Web site
hosting products including electronic commerce solutions. Generally, our
customers elect to rely upon us to provide the hardware and software that is
necessary to host a Web site. We provide these services from a reliable data
center environment. We offer three basic Web site hosting plans, the largest of
which provides up to 5,000 megabytes of data transfer per month and up to 50
megabytes of disk storage on servers located at dedicated space in the Frontier
Global network operations center. The Frontier Global center is maintained and
serviced by on-sight technical personnel 7 days a week, 24 hours a day. Our
monthly fees for the three plans are $34.95, $59.95 and $79.95, respectively.
We also offer co-location to customers who have the resources to manage
their own servers and Web sites and who prefer not to share a server with
others. Co-location customers receive the benefits of having their servers
housed in the network operations center, uninterrupted power supply, daily tape
back-up and the availability of a catastrophic recovery process. We charge each
co-location customer an initial set up fee of $150. Thereafter, our monthly
charges vary between $495 (for our basic monthly service plan) and $645 (for our
premium monthly service plan).
Electronic Commerce
Electronic commerce is the execution of commercial transactions over the
Internet. Our electronic commerce services provide businesses the ability to
sell products and services on the Internet. We create links to our customers'
Web sites that bring purchasers into our customers' on-line stores. Our
e-commerce service displays products, takes purchase orders for specified
quantities of each product ordered, collects billing addresses, credit card
information and shipping information, chooses a shipping method, forwards this
data to the seller for completion of each order, and prepares a confirmation of
each order for the purchaser. Our servers deploy the latest encryption software
and digital signature solutions in order to protect the security of our
customers' electronic commerce transactions. Each secure Web Site has its own
Verisign Digital ID and dedicated payment system. We work directly with each
customer's bank to ensure secure, complete technology transfer while maintaining
secure data protection schemes. All customer information is housed on dedicated
machines and protected from unauthorized access by our Sun firewall. Our system
is flexible and permits sellers to add, delete or modify products, add pricing
variations, change product descriptions, update prices, and offer different
pricing levels or volume discounts. Our platform also enables clients to conduct
electronic auctions and to merchandise products in various other ways. Our
prices for providing electronic commerce services range from $99 to $249 per
month, depending on the complexity of the services desired by our customers.
We have also begun to utilize our electronic commerce platform to sell
products ourselves. We are currently offering a series of educational courses
delivered over the Internet and a range of high digital imaging equipment. We
are negotiating arrangements to obtain other products for sale.
Other Services
We offer a variety of other services, which enable communication
over the Internet. These include virtual hosting of electronic mail. This allows
users to maintain their own domains while housing their e-mail on our servers.
We also offer the filtering of unsolicited e-mail. Our ListServe Management
product enables the broadcast of e-mail to an established user group. Our
E-Share product provides centralized controlled communication among a specified
group of people. It is used to conduct training sessions electronically, thereby
eliminating the travel and related costs associated with live
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sessions. Our Web board product is used to post messages to members of a closed
group and allows recipients of messages to respond. We offer our customers
various combinations of these services which we call packages. We charge our
customers a monthly fee per user per package, which varies from $0.10 to $0.50
depending on the complexity of the package.
Customers
We provide value added services to Associations. Our association
customers include the National Franchise Association of Burger King, the
American Association and Society of Medical Executives, the Medical State
Society of New York, Meeting Planners International, the Aircraft Owner and
Pilot's Association, and the Association of American Railroads. Each of these
associations generate between $20,000 and $250,000 in revenues per year to us.
As a group, these associations account for approximately $750,000 of our annual
revenues.
At September 30, 1999 we had approximately 16,000 users of our
connectivity services. Approximately 7,000 of these were retail customers, and
approximately 9,000 were users who came to us through wholesale customers.
Retail customers are end-users that purchase and utilize our dial up
connectivity services directly, while wholesale customers are businesses and
associations that resell our services to end-users. In late November and early
December 1999 we terminated contracts with two wholesale customers, ISPs who
were resellers of our services. As a result we now have approximately 9,000
users of our connectivity services. At present 55% of our revenues are derived
from retail customers and 45% from users who came to us though our wholesale
customers.
The following table sets forth certain information about the total number
of our end-users as of the dates shown:
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Total End-Users
Date (retail and wholesale combined)
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6/30/99 1,300
9/30/99 16,000
11/30/99 9,000
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On July 23, 1999 we entered into an agreement with MundoNuevo.com to
provide Internet access and value added services which MundoNuevo.com would
reoffer to its customers. The agreement required MundoNuevo.com to make monthly
payments which reflected the minimum number of paid subscribers that
MundoNuevo.com believed it would sign up in the relevant period. MundoNuevo.com
was unable to sign up the minimum number of subscribers or to make the minimum
payments. Accordingly, the agreement with MundoNuevo.com was terminated by
mutual consent.
Capacity
We define "capacity" to mean the number of customers and the amount of
usage which our equipment and systems can service. As our business grows, we
attempt to assure that our servers and other equipment are adequate for a larger
customer base and for increased usage by each customer. The principal activity
for which we must monitor the capacity of our equipment is Web site hosting. Our
ability to provide hosting services is directly impacted by the capacity and the
number of servers available to us. At present, we have 30 servers, and estimate
that at peak usage our facilities are 25% utilized. Based on our customers'
historical average usage, our current capacity is sufficient to provide hosting
services to more than 100,000 subscribers. Due to our arrangement with Frontier
Global, a major provider of bandwidth, we have access to sufficient bandwidth to
meet our foreseeable needs.
Our future ability to service increasing numbers of customers depends in
part upon our ability to issue bills to, and collect payments from, large
numbers of customers. To that end, on September 3, 1999, we purchased a
permanent license Portal Software's Infranet management and billing software for
a price of $897,833. The license also requires us to make minimum annual
payments of $125,600 so long as we utilize the software. Our minimum annual
payments will increase if we exceed 200,000 subscribers. The software is
database driven and enables us to automatically bill end-users for Internet-
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related services that we provide. We expect the Portal software to significantly
enhance our efficiency as we build our customer base by reducing the amount of
time and manpower required to manage our customer billings.
Competition
The business of providing Internet connectivity services and solutions is
highly competitive and there are no substantial barriers to entry. We believe
that competition will intensify in the future and our ability to successfully
compete depends on a number of factors, including:
- the capacity, reliability and security of the network with which
we interconnect;
- the pricing structure of our services;
- expansion of the variety of products and services which we offer;
- our ability to adapt our products and services to new
technological developments;
- our ability to build and maintain a larger sales force which is
knowledgeable and effective;
- our ability to implement broad and effective distribution
channels; and
- principal market and economic trends.
Current and prospective competitors include:
- national, regional and local ISPs;
- long distance and local telecommunications providers;
- cable television companies; and
- Web site hosting providers.
Major long distance companies currently offer Internet access services
and major cable companies and companies using wireless terrestrial and
satellite-based technologies are expected to offer Internet connectivity and
related services in the near future. Such competitors have the ability to bundle
Internet connectivity with other services such as local and long distance
telecommunications. This bundling could adversely affect our ability to compete
and could result in a downward pressure on our prices that could adversely
affect our business, financial condition and results of operations.
More particularly, as providers of connectivity we compete with PSI,
MegaPop, UUNet and AT&T. We are also dependent upon AT&T and Megapop for access
to the Internet. Thus we are both a source of end-users and a competitor for
customers of these networks. Our current relationships with these networks have
allowed us to negotiate contracts that give us access to the networks at a cost
which permits us to price our products competitively. If these contracts were
to be terminated or substantially amended our ability to maintain competitive
prices to our customers could be materially and adversely affected. Please
refer to Risk Factors - We are Dependent on AT&T and Megapop for Access to the
Internet Network. In the area of Web site design we compete with USWeb. Big
Planet is a direct competitor in the business of providing packaged Internet
services to associations. Each of these competitors has significantly greater
market presence, established brand recognition, financial, technical and
personnel resources than we have.
We do not have available information which would permit us to accurately
measure our market share. However, several major ISPs have reported that they
have millions of end-users each, compared to the approximately 9,000 end-users
we have at present. In the area of Web site design, and the business of
providing packaged Internet services to associations, a number of our
competitors have significantly greater revenues than we have, and we believe
that we represent substantially less than 1% of these market sectors. We strive
to differentiate ourselves from our competitors:
- by offering lower prices made possible by our lower overhead;
- with our ability to quickly adapt to new developments in our
industry resulting from the small size of our organization; and
- by offering the high quality AT&T and Megapop network backbones
which many of our other competitors do not offer.
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Employees
As of September 30, 1999 we had 41 full time and 1 part time employees as
follows:
- 7 full time employees in sales and marketing;
- 8 full time technical personnel;
- 9 full time and 1 part time employees in product development; and
- 17 full time in administration.
There are no collective bargaining agreements in effect. We believe the
relations with our employees are good.
Intellectual Property
We have no patented technology that would preclude or inhibit competitors
from entering our market. We have applied for registration of the trademark A1
Internet.com, Inc. (SM). We have entered into confidentiality and invention
assignment agreements with our employees to limit access to and disclosure of
our proprietary information. We intend to apply for copyrights as we develop new
products and solutions. There can be no assurance that these measures will prove
sufficient to prevent misappropriation of our intellectual property or to deter
independent third-party development of similar products.
Regulation
Our operations are not currently subject to direct regulation by
governmental agencies other than regulations applicable to businesses generally.
As use of the Internet continues to grow, jurisdictions in which we operate may
adopt regulations relating to prices charged users, content, privacy,
intellectual property protection, libel or other matters. If adopted, such
regulations could significantly affect our results of operations
Investments
Gravity Pilot Air, Inc., one of our wholly-owned subsidiaries, owns two
airplanes which are leased to a skydiving company. Although we determined to
discontinue our participation in the extreme sports and skydiving business upon
entering the Internet services industry, we were unable to locate a buyer for
the airplanes. We leased the aircraft in order to make these assets productive
and to generate sufficient revenue to defray the cost of the financing on the
airplanes. The rental income from these aircraft accounted for approximately 8%
of our revenues in the first nine months of 1999. The lessee is 5 months in
arrears on its lease payments and, in December, it repudiated a prior agreement
to bring its lease payments current. We have instructed counsel to initiate
legal proceedings against the lessee and to pursue all available remedies
against the lessee, including retaking possession of the aircraft.
We also own 14% of Ebonlineinc.com Inc., a Nevada corporation
which maintains a mergers and acquisition Web site. We acquired our shares of
Ebonlineinc from Bruce Bertman, our Chief Executive Officer, President and
Treasurer, at par value for a total purchase price of $783.00. We are holding
the Ebonlineinc shares as an investment which, to date, has not generated any
dividend income. We have provided Internet-related services to Ebonlineinc for
which we were paid at the same rates we charge our other clients. Mr. Bertman is
also a Director of Ebonlineinc and was a director of that Company prior to the
time we acquired our Ebonlineinc shares. We are not otherwise involved in the
management or operations of Ebonlineinc.
Risk Factors
You should consider carefully the risks described below and other
information in this Form 10-SB. If any of the events identified in the following
risk factors actually occur, they could materially adversely affect our
business, financial condition and results of operations.
We Have a History of Losses and Cannot Be Certain We will Achieve Positive Cash
Flow
For the years ended December 31, 1997 and 1998, we had net losses and
negative cash flows. For the nine months ended September 30, 1999, we had a net
loss before extraordinary items of $2,453,622. In addition, we had an
accumulated deficit of $3,196,491 as of September 30, 1999. We are likely to
continue to incur significant additional losses in the intermediate term.
Even thereafter, we cannot be certain that we will achieve or sustain
positive cash flow or profitability from our operations. Our net losses and
negative cash flow from operating activities are likely to continue even longer
than we currently anticipate if:
- we do not establish and maintain a customer base that generates
sufficient revenue;
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<PAGE> 11
- prices for our products or services decline faster than we have
anticipated;
- we do not remain competitive in the innovation and quality of our
products;
- we do not attract and retain qualified personnel;
Our ability to achieve our objectives is subject to financial,
competitive, regulatory, legal, technical and other factors, many of which are
beyond our control.
Our Web Page May Have Contained Certain Misleading Statements
We maintain a Web Page which contains various information relating to our
company. At times that Web Page contained statements which projected millions of
dollars of highly profitable billings and accumulation of one million users of
our services by 2000. We did not have a factual basis for these statements and
have removed them from our Web Page.
The Web Page contained a statement to the effect that we are involved in
the profitable business of leasing airplanes. Our involvement in the leasing of
airplanes is limited to the leasing of aircraft which we own because of our
prior skydiving venture. It is not a significant focus of our business and
produced only 8% of our revenues in the first nine months of 1999. This
statement has been eliminated from our Web Page.
Our Web Page contained a statement which might be read to state that we
are involved in the mergers and acquisitions arena. In fact, we hold a 14%
minority interest in EBonlineinc which maintains a Web site relating to that
business. We are passive investors in EBonlineinc. This statement has been
eliminated from our Web Page.
Our Web Page contained a section entitled "Investor Center" which
referred to the "gold rush stock market" and "hyper-inflated prices", stated
that "no price appears too much to pay for a stake on the Internet", stated
that "the future is the Internet" and that the "future is A1 Internet.com." It
also referred to us as "already a leading global service provider", ...
forecasted to outperform even its own "stunning record of growth on the way to
becoming one of the largest Internet Service Providers in the world." We did
not have a factual basis for these statements. The price of our common stock
declined in 1999. See "Market Price and Dividends on the Registrant's Common
Equity and Related Stockholder Matters" on page 27. The number of users of our
connectivity services declined from approximately 10,000 at September 30, 1999
to approximately 9,000 in December 1999. This compared to major ISPs who
reportedly have millions of end-users each. These statements have been removed
from our Web Page.
Purchases and Sales of Our Stock are Subject to Penny Stock Regulations
Our stock has had a market price of less than $5.00 per share in recent
times. The SEC has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price less than $5.00 per share, subject to certain
exceptions. During periods when our common stock does not qualify for inclusion
on the Nasdaq SmallCap Market or is removed therefrom, the common stock may
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell our common stock in the public market.
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<PAGE> 12
Our Limited Operating History Makes it Difficult to Assess Our Past Performance
and Future Prospects
You have limited historical operating and financial information on which
to base your evaluation of our performance and our prospects. We have acquired
four companies since the beginning of 1999 and disposed of substantially, all of
the businesses in which we were engaged in prior years. This limits the
comparability of our operating and financial information from period to period.
You should consider our prospects in light of the substantial risks,
expenses, uncertainties and difficulties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. Such
risks include the possibility that:
- we will be unable to increase and sustain levels of interest in
our products and services by associations, membership marketing
companies and ISPs;
- we will fail to sell our products successfully through our direct
sales force;
- our competitors will develop services or products similar or
superior to our own;
- market prices for our products and services will fall as a result
of competition or other factors;
- we will be unable to identify, attract, motivate and retain
qualified personnel; and
- we will fail to fully integrate with our existing operations the
technology and operations of any of the businesses that we
acquire.
We cannot be sure that we will be successful in addressing such risks,
and the failure to do so could have a material adverse impact on our business,
financial condition and results of operation.
We are Dependent on AT&T and Megapop for Access to the Internet Network
Our ability to offer end-user access to a tier one Internet network on an
affordable basis is dependent upon our contractual relationship with AT&T and
Megapop which charge us a fixed monthly fee for each end-user. This enables us
to offer connectivity to tier one networks for which we pay only when end-users
subscribe for our services. If these contracts were to be terminated, or if the
terms were to be substantially amended, we might be required to enter into
arrangements for bandwidth with others on less favorable terms. There is no
assurance that we would be able to purchase connectivity on comparable terms and
there is no assurance that we would be able to pass on additional costs to our
customers. Our inability to obtain bandwidth on comparable terms could
materially and adversely affect our business, financial condition and results of
operations.
We Rely on Others to Market our Products and Services to End-Users
We believe that we will derive the majority of our recurring revenues
from subscription fees and fees for value added services paid by end-users of
our products and services. The amount of those revenues is dependent upon the
level of success achieved by associations, membership marketing companies and
ISPs in marketing our products and services to their members and customers. Most
of our contractual relationships with associations were formed recently and have
not yet generated substantial sales to end-users. Thus, we are not yet in a
position to assess whether our products and services will gain acceptance among
the members of these associations or whether these associations will invest the
resources necessary to market our products and services successfully. If sales
to end-users do not meet our expectations, our business would be adversely
affected and we would be required to develop alternate marketing and sales
strategies.
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<PAGE> 13
We Are Subject to Risks As We Make Acquisitions and Engage in Strategic
Alliances
As part of our business strategy, we may acquire, make investments in, or
enter into strategic alliances with companies in complementary businesses, so as
to optimize our market presence in the regions we presently serve and expand
into other regions. In particular, we intend to acquire local and regional ISPs
and e-commerce companies. Any such future acquisitions, investments or strategic
alliances would involve risks, such as
- incorrect assessment of the value, strengths and weaknesses of
acquisition and investment opportunities;
- underestimating the difficulty of integrating the operations and
personnel of newly acquired companies;
- the potential disruption of our ongoing business, including
possible diversions of resources and management time;
- the potential inability to maintain uniform standards,
control, procedures and policies;
- and the threat of impairing relationships with employees and
customers as a result of changes in management or ownership.
We cannot assure you that we will be successful in overcoming these
risks. Moreover, we cannot be certain that any desired acquisition, investment
or strategic alliance could be made in a timely manner or on terms and
conditions acceptable to us. Neither can we assure you that we will be
successful in identifying attractive acquisition candidates. We expect that
competition for such acquisitions may be significant. Competition for Internet
companies is based on a number of factors including price, terms and conditions,
size, access to capital, and ability to offer cash, stock or other forms of
consideration. We may compete with others who have similar acquisition
strategies, many of whom may be larger and have greater financial and other
resources than we have.
An additional risk associated with acquisitions is that many attractive
acquisition candidates do not have audited financial statements and have varying
degrees of internal controls. Although we may believe that the available
financial information for a particular business is reliable, we cannot guarantee
that a subsequent audit would not reveal matters of significance, including with
respect to liabilities, contingent or otherwise. We expect that, from time to
time in the future, we will enter into acquisition agreements, the pro forma
effect of which is not known and cannot be predicted.
We May Have Difficulty Managing Our Rapid Growth
Our growth strategy has placed and will continue to place a significant
strain on our customer support, sales and marketing, administrative resources,
our network and operations and our management and billing systems. Such a strain
on our administrative and operational capabilities could adversely affect the
quality of our services and our ability to collect revenues. To manage our
growth effectively, we will have to enhance the efficiency of our operational
support, other back office systems and financial systems and controls. We cannot
assure you that we will be able to maintain adequate internal operating,
administrative and financial systems, and procedures and controls.
Managing our growth will become even more challenging as we expand our
target markets and our product and service offerings. Promotion and enhancement
of our products and services will depend largely on our success in continuing to
provide high quality Internet communications services, solution and product
support. We cannot guarantee that we will be able to maintain those levels of
quality. If we
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<PAGE> 14
are unable to do so or otherwise fail to promote and maintain our products or
services, or if we incur excessive expenses in an attempt to improve our
services or promote and maintain our products, then our business, results of
operations and financial condition could be materially and adversely affected.
In addition, as we continue to grow we will have to expand and train our
employee base to handle the increased volume and complexities of our business.
We cannot assure you that we will be able to attract, train and manage
sufficient personnel to keep pace with our growth.
Sales of Shares by Our Shareholders Could Depress Our Stock Price
The market price of our common stock could drop as a result of sales of a
large number of our shares in the public market. The perception that such sales
may occur could have the same effect. As of January 31, 2000, our executive
officers and directors owned, directly or indirectly, approximately 36% of our
common stock.
We Are Subject to Security and Fraud Risks
Despite our efforts to implement network security measures, such as
limiting physical and network access to our computers, our Internet
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by customers, employees or other Internet users.
Computer viruses, break-ins or other disruptive or security problems could lead
to interruptions, delays or cessation in service to our Internet customers.
Further, such inappropriate or unauthorized use of the Internet could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers and other parties connected to the Internet,
which may deter potential customers and give rise to liability to users whose
security or privacy has been violated. The security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry in general and our customer base and revenues in particular. A
significant security breach could result in a loss of customers, damage to our
reputation, direct damages, costs of repair and detection and other expenses. In
addition, our revenues for any given period may be adversely affected by fraud
or debt collection problems that we experience. The occurrence of any of these
events could have a material adverse effect our business, results of operations
and financial condition.
We May Be Hurt By System Failures
Our success is largely dependent upon our ability to deliver high speed,
uninterrupted access to the Internet. Any system failure that causes
interruptions in our operations could have a material adverse effect on us. We
currently rely upon the AT&T Internet Network. Failures in this or any other
telecommunications network on which we rely would result in customers' receiving
no or diminished access to the Internet.
We Could Be Held Liable For Information Disseminated Over Our Network
The law relating to liability of ISPs for information and materials
carried on or disseminated through their networks is not completely settled. The
possibility that courts could impose liability for information or material
carried on or disseminated through our network could require us to take measures
to reduce our exposure to such liability. Such measures may require us to spend
substantial resources or to discontinue certain product or service offerings.
Any of these actions could have a material adverse effect on our business,
operating results and financial condition.
Due to the increasing use of the Internet, it is possible that additional
laws and regulations may be adopted with respect to the Internet covering issues
such as user privacy, pricing, taxes, defamation,
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<PAGE> 15
obscenity, intellectual property protection, consumer protection, technology
export and other controls. Changes in the regulatory environment relating to the
Internet services industry could have a material adverse effect on our business,
results of operation and financial condition.
We Are Subject to Intellectual Property Risks
Legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries are
uncertain and still evolving, and we cannot be certain as to the future
viability or value of any of our intellectual property rights or those of other
companies within the IT industry. We cannot assure you that the steps we have
taken to protect our intellectual property rights will be adequate or that third
parties will not infringe or misappropriate our proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we cannot be certain that our business activities will not infringe
the proprietary rights of others or that such other parties will not assert
infringement claims against us. We anticipate that we may be subject to claims
in the ordinary course of our business, including claims of alleged infringement
of the trademarks and other intellectual property rights of third parties due to
the dissemination of our content or the provision of access by our online
services to content made available by third parties. Such claims and any
resultant litigation, should it occur, could subject us to significant liability
for damages and could result in invalidation of our property rights and, even if
not meritorious, could be time-consuming and expensive to defend, and could
result in the diversion of management time and attention, any of which could
have a material adverse effect on our business, results of operations and
financial condition.
We regard substantial elements of our products and services as
proprietary and we attempt to protect them by relying on trademark, service
mark, trade dress, copyright and trade secret laws and restrictions on
disclosure and transfer of title. We also enter into confidentiality agreements
with our employees, suppliers, distributors, consultants, vendors and customer
and license agreements with third parties and generally seek to control access
to and distribution of our technology, documentation and other proprietary
information. We are pursuing the registration of our service marks but we
currently have no patents or applications for patents pending for our products
or services. Effective service mark, copyright and trade secret protection may
not be available.
We Are Subject to the Risks Associated with Rapid Industry Changes
The Internet services industry in which we operate is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new service, software and other product innovations. We cannot
guarantee that we will be able to identify new service opportunities
successfully and develop and bring new products and services to market in a
timely and cost-effective manner, or that products, software and services or
technologies developed by others will not render our products and services
non-competitive or obsolete. In addition, we cannot provide any assurance that
our product or service developments or enhancements will achieve or sustain
market acceptance or be able to address effectively the compatibility and
interoperability issues raised by technological changes or new industry
standards.
We Are Subject to Certain Risks Associated with the 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,
15
<PAGE> 16
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 Year 2000 risk 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 Do Not Expect to Pay Dividends
The Company does not anticipate paying cash dividends in the foreseeable
future.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based on our audited Consolidated
Financial Statements for the years ended December 31, 1997 and 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.
The following table sets forth certain information about the source
of our revenues:
<TABLE>
<CAPTION>
SOURCE OF REVENUES PERCENTAGE OF TOTAL REVENUES
- --------------------------------------------------------------------------------------------------------
YEAR ENDING NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
1997 1998 1998 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONNECTIVITY - - - 38
HOSTING - - - 3
TECHNICAL SERVICE - - - 7
DESIGN FEES - - - 24
E-COMMERCE - - - 18
OTHER RECURRING - - - 0
INTERNET MARKET - - - 1
SKY DIVING 100 100 100 1
AIRPLANE LEASE - - - 8
OTHER INCOME - - - 6
DISCOUNTS - - - 0
TOTAL 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 18
The following table sets forth certain information about our cost of sales:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL COST OF SALES
- --------------------------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
1997 1998 1998 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COST OF SALES
CONNECTIVITY - - - 45
COMPUTER EQUIPMENT - - - 43
LABOR - - - 20
OTHER COST - - - 1
SKY DIVE COSTS 100 100 100 1
PURCHASE DISCOUNTS - - - (9)
TOTAL 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Results of Operations - Nine Months Ended September 30, 1999 Compared to Nine
Months Ended September 30, 1998
Revenues
Total revenues increased from $76,203 to $1,867,789. In the nine months
ended September 30, 1998, all of our revenues were derived from the skydiving
business. In the nine months ended September 30, 1999, our revenues were derived
from the following sources:
<TABLE>
<S> <C>
Internet related business (primarily in the
second and third quarters) $1,702,270
Lease of our airplanes to the purchasers
of our skydiving business $ 143,156
Skydiving business (in the first quarter) $ 22,363
</TABLE>
The principal components of our Internet related revenues were:
<TABLE>
<S> <C> <C>
Connectivity $700,937 41.1%
Design Fees $455,250 26.7%
Electronic Commerce $339,071 19.9%
Technical Services $135,533 7.9%
</TABLE>
Cost of Sales
Cost of sales increased from $8,626 in the nine months ended September
30, 1998 to $773,857 in the 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 nine months ended
September 30, 1999 our cost of sales consisted primarily of Internet related
costs as follows:
<TABLE>
<CAPTION>
Cost of Sales
-------------
<S> <C> <C>
Connectivity $334,308 45%
Design Fees 118,163 15%
Electronic Commerce 259,896 34%
Technical Services 35,097 5%
</TABLE>
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<PAGE> 19
Operating Expenses
The following table sets forth certain information regarding our
operating expenses:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
------------------------------------------------ ---------------------------------------------
30-SEP-99 1998 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Salaries and related expenses 825,868 34.5% 112,500 35.2% 0 0.0% 0 0.0%
Travel and entertainment 92,374 3.9% 0 0.0% 903 0.2% 1,729 0.5%
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% 82,692 17.8% 23,000 6.4%
Occupancy costs 112,769 4.7% 10,218 3.2% 0 0.0% 0 0.0%
General and administrative 318,823 13.3% 23,146 7.2% 62,555 13.5% 33,954 9.5%
Consulting 244,155 10.2% 34,505 10.8% 185,588 40.0% 296,373 83.4%
Depreciation and amortization 556,947 23.3% 98,210 30.7% 131,989 28.5% 826 0.2%
------------------------------------------------ ---------------------------------------------
TOTAL OPERATING EXPENSES 2,390,446 100.0% 319,579 100.0% 463,727 100.0% 357,882 100.0%
------------------------------------------------ ---------------------------------------------
</TABLE>
Operating expenses increased from $463,727 in the twelve months ended
September 30, 1998 to $2,390,446 in the nine months ended September 30, 1999.
All of the operating expenses for the 1998 period related to the skydiving
business. Operating expenses for the nine months ended September 30, 1999
principally included skydiving business expenses for the first quarter and
Internet business expenses for the second and third quarters. The shift of
businesses is the major reason for the period to period increase in operating
expenses. We do not believe that this increase indicates a trend and expect our
operating expenses to continue at current levels during the next twelve months.
Other Expenses
In the nine months ended September 30, 1999, our former Board of
Directors authorized, and we issued, 300,000 shares of our common stock valued
at $600,000 as advance payment for consulting services to be provided by certain
individuals who we understand had expertise in marketing outdoor sports or
extreme sports. No member of our current Board of Directors participated in this
action. No written consulting agreement defining the scope of services to be
performed was prepared. Our former Board of Directors authorized the issuance of
these shares at a time when we were about to dispose of our skydiving business
and become a provider of Internet-related services. When we disposed of our
skydiving business we no longer had a need for expertise in marketing outdoor
sports or extreme sports. No services are to be performed for our Internet
business. Whatever consulting services may have been performed would have been
performed in the first quarter of 1999, the period in which we still owned the
skydiving business. Accordingly, we recognized the entire expense related to
this consulting arrangement in the first quarter of 1999. We have determined to
seek recovery of these shares or to seek damages for their issuance.
In March 1999, our former Board of Directors authorized, and we issued,
250,000 shares valued at $500,000 to Leonard Tambasco our former President. None
of our current Directors participated in this action. The shares were issued at
a time when Mr. Tambasco had agreed to become our President for a period of
three years and no specific contingencies were agreed upon for payment of the
bonus. Mr. Tambasco resigned as President effective September 30, 1999. We are
attempting to determine whether we have a legal basis to assert a claim for
recovery of some or all of the shares issued to Mr. Tambasco because his three
year term as our President was not completed.
Results of Operations - Year Ended December 31, 1997 As Compared to Year Ended
December 31, 1998
Revenues
Total revenues in the year ended December 31, 1998 were $84,560 as
compared to $3,384 in the period from October 15, 1997 when we were formed, to
December 31, 1997. All of our 1997 and 1998 revenues were derived from the
skydiving business which we sold at the end of the first quarter of 1999.
Costs
Total cost increased from $357,882 in the year ended December 31, 1997 to
$463,727 in the year ended December 31, 1998. The largest components of these
costs were:
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<PAGE> 20
- consulting fees of $298,373 in 1997 and $185,588 in 1998 paid to
our former corporate executives and others;
- professional fees of $23,000 in 1997 and $82,692 in 1998;
- insurance of $18,771 in 1997 and $36,043 in 1998;
- and repair and maintenance of our airplanes of $8,849 in 1997 and
$9,769 in 1998.
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
There was no cash effect from investing activities for the years ended
December 31, 1997 and 1998 nor for the nine months ending September 30, 1998.
However, for the nine months ended September 30, 1999, net cash of $1,376,985
was used in investing activities. This was substantially due to our purchasing
$981,634 of property and equipment, primarily computer hardware and software.
Additionally, $168,000 was used to acquire contracts to service ISPs from Net
America and $238,215 was used to pay down certain notes receivable.
Investing activities used cash of $1,258,437 and $0 in the years ended
December 31, 1997 and 1998 and $0 and $1,376,985 in the nine months ended
September 30, 1998 and 1999.
Financing activities provided cash of $363,750 and $332,503 for the years
ending December 31, 1997 and 1998. In 1997 the increase was primarily the result
of our issuing 500,000 shares of common stock for cash of $500,000. This was
somewhat offset by payments against notes payable to banks. In 1998, we issued
an additional 500,000 shares of common stock for $500,000. A portion of these
proceeds was used to retire debt. Financing activities for the nine months
ending September 30, 1998 and 1999 provided cash of $242,489 (see above) and
$4,547,490. For that period of 1999, we obtained substantially all of our
financing from (1) issuance of 500,000 shares of common stock at $2.00 per
share, (2)issuance of 725,889 shares of preferred stock at $4.50 per share, and
(3)issuance of short-term notes payable for $1,003,500. These were offset by
payments on outstanding debt of $307,339.
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 and ($390,404) at December 31, 1997. The increase reflects
our stock offerings, issuance of debt and increased generation of revenues from
operations. As a result, our cash increased from $10,205 at December 31, 1998
to $2,077,813 at September 30, 1999. Trade and other receivables also increased
from $0 at December 31, 1998 to $924,116 at September 30, 1999. These current
assets were offset by increases in current liabilities from $806,084 to
$2,080,250.
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.
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
20
<PAGE> 21
- 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 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
service, 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. We have not developed technical or financial contingency plans
which would be put in place in the event any of these Year 2000 problem
actually occurs.
Our experience since January 1, 2000 has not disclosed any material
Year 2000 problems relating to either our internal computer systems or embedded
chips or to the computer systems and embedded chips of third parties. However,
it is possible that problems of the types discussed in the preceding paragraph
could arise in the course of our future operations causing the consequences
described.
ITEM 3. DESCRIPTION OF PROPERTIES
Our headquarters is located at 15825 Shady Grove Road, Suite 50,
Rockville, Maryland 20850, where we lease approximately 4527 square feet of
office space. The five-year term of the lease commenced on March 6,1996. The
current annual rent is $71,380.
We also lease approximately 450 square feet of office space in Sandusky,
Ohio at an annual rental of $3,750, and approximately 2800 square feet in
Fremont, Ohio at an annual rental of $16,800. The properties are the subject of
one-year leases expiring on July 31, 2000.
In Sharon, Massachusetts we lease 2785 square feet of office space at an
annual rent of $37,597.50. The lease is due to expire on August 1, 2000.
Our former executive offices were located in approximately 1150 square
feet of office space in Boca Raton, Florida. We are obligated for rental
payments on this property through September 29, 2001. The current annual rent is
$27,900. We moved our executive offices from Boca Raton, Florida to Rockville,
Maryland when we disposed of the skydiving business that is based in Florida and
acquired our principal Internet-related subsidiaries which are based in
Rockville, Maryland. We are attempting to sublet the space in Boca Raton but no
agreement for a sublease has been reached.
We lease approximately 400 square feet at Frontier's Global Center for
use as our data warehousing facility. The lease has a one-year renewable term
and we pay rent at the rate of $60,000 per year. The facility has more than one
gigabyte of Internet bandwidth available to us therefore allowing us to provide
T-1 hosting services on a pay as you go basis.
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<PAGE> 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of A1
Internet's common stock and Series A preferred stock as of January 31, 2000, by
each shareholder known by us to be the beneficial owner of more than 5% of A1
Internet's common stock or Series A preferred stock, each director and all
executive officers and directors as a group. Unless otherwise indicated by
footnote, each of the shareholders named in the table has sole voting and
investment power with respect to the shares of common stock beneficially owned.
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS Number of Shares(1) Owned % OF CLASS
-------------- ---------------- ----------
<S> <C> <C> <C>
Common Bruce Bertman 3,368,000(2) 36.25
19200 Autumn Maple Lane
Gaithersburg, MD 20879
Common Larry Kerschenbaum 600,000 6.45
255 Wychmer Terr.
Wellington, FL 33414
Common Noved Holdings Inc. 565,000 6.08
932 Burke Street
Winston Salem, NC 27101
Common Martin Sumichrast 100,000 1.08
6000 Fairview Rd.
Suite 1410
Charlotte, NC 28210
Common Donald Dea 40,000 0.43
12 Saint Ebbas Drive
Penfield, NY 14526
Preferred Richard Greene 70,000 6.27
15 Melville Lane
Great Neck, NY 11023
Preferred James Kotsopoulos 100,000 8.96
5662 Jerez Ct.
Fort Myers, FL 23914
Preferred Steven Etra 130,000(3) 11.65
Heather Hill Road
Brookville, NY 11545
Preferred Jay Raubvogel 222,222 19.92
5 Brook Lane
Brookville, NY 11545
Common All Executive officers and
directors as a group(4) 3,458,000 35.50
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
(a) Our current directors and executive officers, who will serve until
the next annual meeting, or until their successors are elected or
appointed and qualified, are as follows:
- -------------------------
(1) Represents the number of shares of common stock owned of record and
beneficially by each named person or group, expressed as a percentage of
9,739,500 shares of A1 Internet's common stock outstanding as of January 31,
2000 or 1,115,553 shares of A1 Internet's Series A preferred stock, outstanding
as of January 31, 2000.
(2) 200,000 of Mr. Bertman's shares are held by Cyberrealm, Inc. and 100,000
shares are held by Stock Maker, Inc., both of which are exclusively owned by
Mr. Bertman.
(3) Includes 65,000 shares owned by SRK Associates, LLC, of which Mr. Etra is
President.
(4) Includes: Bruce Bertman, Chief Executive Officer, President, Treasurer and
Director; Martin Sumichrast, Director; and Donald Dea, Director and Secretary.
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
<S> <C> <C>
Bruce Bertman 42 Director, President, Treasurer, and
Chairman of the Board of Directors
Martin A. Sumichrast 32 Director
Donald Dea 45 Director and Secretary
</TABLE>
Bruce Bertman - Mr. Bertman has served as a Director since March 5, 1999 and
serves as our Chairman of the Board, Chief Executive Officer, President, and
Treasurer. Mr. Bertman is our full-time employee. Mr. Bertman has more than 12
years of experience in the high technology industry. From 1988 to 1991, he
served as Regional Manager and Operating Officer of Inacomp Computer Centers, a
predecessor of Inacom. From 1991 to 1993, Mr. Bertman was Vice President of
Microware Distributors, a computer product distribution organization, in charge
of government reseller programs on a national basis. In 1993, Mr. Bertman
founded Computer Ease, LLC, where he served as its President until we acquired
that company in 1999. In 1998, Mr. Bertman founded Stockmaker.com, Inc. and
serves as President and Chairman of that company. Mr. Bertman also currently
serves as a director of several internet-related companies, including
EBOnline.com Inc., Cyber Realm Inc., and Computer Kids Network, Inc.
Martin A. Sumichrast - Mr. Sumichrast has been a Director since May 21, 1999.
Mr. Sumichrast has also served as a Director of Eastbrokers International
Incorporated since its inception in January 1993, and has served that company
as its Chairman of the Board, Chief Executive Officer and President since
December 1998, Vice Chairman from March 1997 through December 1998, Chief
Financial Officer from January, 1993 to August, 1996, and Secretary from 1993
to the present. Mr. Sumichrast also serves as Chairman of Eastbrokers North
America, Inc., a subsidiary of Eastbrokers International Incorporated.
Donald Dea - Mr. Dea has been a Director since October, 1999 and serves as our
Secretary. Mr. Dea has also been a co-founder and partner of Fusion
Productions, a meeting planning company, since 1995. Mr. Dea was Vice President
and co-founder of Alaris Inc., a developer of high performance systems,
motherboards and peripheral products for personal computers, from 1992 to 1995.
From 1984 to 1992, he worked for Xerox Corporation, servings as: General Manager
of U.S. Customer Operations, in charge of developing strategic partnerships;
General Manager of OEM/VAR Channel Operations; Manager of Marketing and Quality.
(b) There are no other officers or significant employees.
(c) No family relationships exist between the directors and the
officers.
(d) No legal proceedings have been instituted in the previous five
years against any of our directors or officers. We have no knowledge of any
legal proceedings against any predecessor director, officer, or promoter.
23
<PAGE> 24
ITEM 6. EXECUTIVE COMPENSATION
(a) GENERAL. No salary or regular compensation is paid to our directors.
Pursuant to our By-laws, directors are eligible to be reimbursed for their
actual out of pocket expenses incurred in attending Board of Directors meetings
and other director functions, as well as fixed fees and other compensation to be
determined by the Board of Directors. No such compensation or expense
reimbursements have been requested by the directors or paid to date. No formal
bonus, stock option plan, stock appreciation rights, stock incentive plan, or
other compensation or perquisites have been implemented. Salary amounts paid to
our executive officers are detailed in subsection (b) below.
(b) SUMMARY COMPENSATION TABLE. The following table sets forth certain
summary information concerning the compensation paid to the Chief Executive
Officer and certain executive officers for the fiscal year ended December 31,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL
NAME AND PRINCIPAL POSITION YEAR PAID SALARY BONUS OTHER COMPENSATION
<S> <C> <C> <C> <C>
Larry Kerschenbaum - Former CEO, Chairman of the Board* 1998 75,000 0 0
Thomas H. Keese - Former President** 1998 75,000 0 0
Leonard Tambasco - Former President and Secretary*** 1999 0 0 $ 500,000
</TABLE>
- ------------------------
*Mr. Kerschenbaum resigned as CEO and Chairman of the Board on March 5,
1999. Bruce Bertman was appointed CEO, President, and Treasurer in his place and
continues to serve in such offices.
**Mr. Keese resigned as our President on March 5, 1999.
***Mr. Tambasco received 250,000 shares of common stock valued at $2.00
per share as executive compensation upon his becoming President of the company.
(c) OPTION/SAR GRANTS. We have not granted any options or stock
appreciation rights during the last fiscal year.
(d) AGGREGATE OPTION/SAR EXERCISES. No stock options or stock
appreciation rights have been exercised in the last fiscal year.
(e) LONG TERM INCENTIVE PLAN AWARDS. No long term incentive plans have
been awarded.
(f) COMPENSATION OF DIRECTORS. No salary or regular compensation is paid
to our directors. Our directors are entitled to reimbursement of out of pocket
expenses incurred in connection with their duties as directors. To date, no such
expenses have been requested or paid.
(g) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT. On March 5, 1999,
we entered into identical Employment Agreements with Bruce Bertman and Leonard
J. Tambasco, Jr. (collectively, the "Employment Agreements"). These Employment
Agreements were for a term of two years, commencing March 5, 1999. Unless we or
the employees provide notice of intent to terminate, the term of the Employment
Agreements is to automatically renew for additional one year periods. The
Employment Agreements provide for Mr. Bertman and Mr. Tambasco to receive a base
salary of $96,000 per year each, which amounts are to increase by 6% per year
beginning on the first anniversary of the term. In addition to the base salary,
the Employment Agreements call for the reimbursement of all ordinary business
expenses, as well as the payment of 80% of the cost of Family Health Insurance.
The Employment Agreements provide Mr. Bertman and Mr. Tambasco with a $650 per
month automobile allowance, and two weeks vacation per year, with additional
vacation to accrue at a rate of 1 week for
24
<PAGE> 25
each additional year of employment.
Mr. Tambasco, who lives in Florida, resigned as President when the Company moved
its offices to Maryland, where its Internet business is based. He subsequently
resigned as Secretary and is no longer an officer of the Company. Accordingly,
we are no longer making payments to Mr. Tambasco under the agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and Executive Compensation" on page 17.
(h) REPORT ON REPRICING OF OPTIONS/SARs. No options or stock appreciation
rights have been granted.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) The following transactions have been undertaken within the last two
years with related parties.
Larry Kerschenbaum and Thomas Keese
On March 30, 1999, our wholly-owned subsidiary, Skydive USA, was sold to
Larry Kerschenbaum and Thomas Keese, two of our founding shareholders, officers
and directors. In consideration for Skydive USA, Messrs. Kerschenbaum and Keese
returned to us a total of 400,000 shares of our outstanding common stock.
On March 31, 1999, our wholly-owned subsidiary, Gravity Pilot Air, Inc.,
agreed to lease its two airplanes to Skydive USA, a former subsidiary, for a
term of twelve months. The lease provides that Gravity Pilot Air, Inc. is to
receive base rent of $21,176 per month for the use of the airplanes, and an
additional $35 for each hour of flight of the leased aircraft. Please refer to
Investments.
In connection with the resignation of Larry Kerschenbaum, we paid him a
total of $35,000 as severance pay. This amount was paid in seven monthly
payments of $5,000 each.
During the first six months of 1999, We challenged claims for
reimbursement of alleged business expenses made by our former President Larry
Kerschenbaum and our former CEO Thomas Keese. These claims had previously been
carried on our books as liabilities totaling $177,331. Messrs. Kerschenbaum and
Keese did not provide documentation or other evidence substantiating these
claimed expenses and agreed to forgive the alleged indebtedness.
Bruce Bertman
On February 1, 1999, we entered into an Exchange Agreement with Bruce
Bertman, our present Chief Executive Officer, President, Treasurer and Chairman
of the Board, pursuant to the which we purchased 100% of the outstanding common
stock of Virtual Information Express from Mr. Bertman in exchange for 300,000
shares of our restricted common stock, valued at $2 per share. Our Board of
Directors valued our common stock at $2 per share based upon its determination
that the market would not support a higher valuation. Our common stock
was quoted on the OTC Bulletin Board at approximately $5.50 per share from
January to March, 1999. However, there was minimal trading volume during this
period. In addition, in December 1998 we undertook a private offering of our
common stock at $2 per share which was completed in April 1999. The Board
determined that the price of $2 per share used in the offering was an accurate
indicator of what investors were willing to pay for our common stock at the
time.
On March 24, 1999, we entered into an Exchange Agreement with the members
of Computer Ease, pursuant to which we purchased 100% of the membership units of
Computer Ease, in exchange for 4,000,000 shares of our restricted common stock
and our agreement to provide Computer Ease with $500,000 in working capital. At
the time of the transaction, Mr. Bertman was the majority owner of Computer
Ease. Computer Ease has since merged with our wholly-owned subsidiary, Al
Internet Services, Inc.(SM). Computer Ease's purchase price was determined by
using a multiple of 1 times Computer Ease's gross revenues. In connection with
this transaction, we valued our stock at $2 per share on the basis of an
analysis similar to that used in the Virtual Information Express transaction.
On April 20, 1999, we issued 120,000 shares of our common stock to Bruce
Bertman in full payment for the $372,692 owed to Mr. Bertman by Computer Ease
and Virtual Information Express.
During 1997 and 1998, Computer Ease borrowed various amounts from Bruce
Bertman and Mr. Bertman incurred $62,292 in reimbursable business expenses on
behalf of that company. Some of these amounts were repaid. Upon our acquisition
of Computer Ease, we became responsible for the balance owed to Mr. Bertman. As
of September 30, 1999, the outstanding balance was $370,649.
At the time of our acquisition of Computer Ease, it had accounts
receivable from two companies owned by Bruce Bertman, CyberRealm, Inc. and
Stockmaker.com, Inc. These accounts receivable represented amounts owed to
Computer Ease for goods and services purchased by CyberRealm, Inc. and
Stockmaker.com, Inc. at regular prices and services. Computer Ease, LLC also had
accounts payable to Stockmaker.com, Inc. as commissions for referrals provided
by Stockmaker.com, Inc.
When we acquired Computer Ease, we assumed the rights and obligations of
Computer Ease, LLC with regard to the accounts receivable and accounts payable.
On September 30, 1999, we purchased from Bruce Bertman computer hardware
and equipment valued at $558,020. In consideration for Mr. Bertman's
contribution of this hardware and equipment, we paid the purchase price by
offsetting accounts payable to Stockmaker.com, Inc. and Cyber Realm Inc., in
the amounts of $304,875 and $248,623, respectively. We also offset accounts
receivable from Stockmaker, Inc. in the amount of $29,650. The balance of
$34,172 was paid to Mr. Bertman in cash.
Before we acquired Computer Ease, it sold services to, and purchased
computer products and equipment from, Eurobridge D.C., Inc., a company
affiliated with Bruce Bertman. When we acquired Computer Ease, it had a net
payable to Eurobridge totaling $67,393, which amount we subsequently paid in
full.
Leonard J. Tambasco
On March 9, 1999, we issued 250,000 shares of our common stock to Leonard
J. Tambasco, Jr. in exchange for his agreement to serve as our President.
Please refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Other Expenses" and "Executive Compensation" which
appear in other parts of this Form 10-SB.
Martin Sumichrast
On July 1, 1999, we entered into a Placement Agreement with EBI
Securities Corporation, a subsidiary of Eastbrokers International Incorporated,
pursuant to which EBI Securities Corporation agreed to act as Placement Agent
for up to $10 million of our preferred stock. Our director, Martin Sumichrast,
serves as Chairman of the Board, Chief Executive Officer and President of
Eastbrokers International Incorporated. We own approximately 14% of
EBOnlineinc.com, a company of which Mr. Bertman owns approximately 7% and
Eastbrokers International Incorporated owns approximately 45%.
On April 5, 1999, Martin Sumichrast purchased 100,000 shares of our
restricted common stock at a price of $2 per share. Mr. Sumichrast executed a
non-negotiable term note for the principal balance of $200,000, due on December
31, 2004. The note from Mr. Sumichrast is payable in either cash or our common
stock. This transaction took place at or about the same time as our acquisition
of Virtual Information Express and Computer Ease, and the purchase price of the
stock purchased by Mr. Sumichrast was determined in a manner similar to the
price determinations in those transactions.
On February 2, 1999, we issued to EBI Securities Corporation a warrant
to purchase 500,000 shares of our common stock with an exercise price of $.10
per share as payment for professional services performed in the first quarter
of 1999.
25
<PAGE> 26
There have been no other related party transactions, or any other
transactions or relationships required to be disclosed pursuant to Item 404 of
Regulation S-B. There are no transactions between A1 Internet and other
companies for which our directors serve as directors or employees other than in
the normal course of business. With the exception of Fusion Productions, we
charge companies that share directors or officers with us at the same rate at
which we charge other, unrelated companies. Our director, Donald Dea, is a
co-founder of Fusion Productions. A part of the business of Fusion Productions
involves the sale of Web design and other value added services to its
customers. We provide those services to Fusion Productions at wholesale rates
so that they may be resold at competitive prices. Fusion Productions was a
client of Computer Ease for almost 6 years prior to the time we purchased
Computer Ease in March, 1999. We continue to charge Fusion Productions the same
or higher rate than the rates which we charged prior to Mr. Dea becoming one of
our directors.
ITEM 8. DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.001 per Share. As of December 15, 1999, 9,739,500 shares were
outstanding. The holders of Common Stock have one vote per share on all matters
(including election of directors) without provision for cumulative voting. The
Common Stock is not redeemable and has no conversion or preemptive rights. There
are no sinking fund provisions for any of the Company's securities. The Common
Stock currently outstanding is validly issued, fully paid and nonassessable. In
the event of liquidation of the Company, the holders of Common Stock will share
equally in any balance of the Company's assets available for distribution to
them after satisfaction of creditors and preferred shareholders. The Company may
pay dividends, in cash or in securities or other property, when and as declared
by the Board of Directors from funds legally available therefore, but has paid
no cash dividends on its Common Stock to date and does not anticipate paying
dividends in the foreseeable future.
26
<PAGE> 27
Preferred Stock
The Company is authorized to issue 5,000,000 Shares of Preferred Stock,
par value $.001 per Share. The Company has designated 2,000,000 Shares as Series
A Convertible Preferred Stock (the "Series A Preferred Stock") and had 1,115,553
of these shares outstanding as of December 15, 1999. Each share of Series A
Preferred Stock is entitled one vote per share of Common Stock into which it is
convertible and votes with the Common Stock as a single class, except in
certain limited circumstances.
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 the written request of a holder and is automatically converted
upon the effectiveness of a registration statement filed by us under the
Securities Act of 1933 which relates in whole or in part to registration of the
Common Stock into which the Series A Preferred Stock is convertible.
Holders of at least fifty-one percent (51%) of the Series A Preferred
Stock have this right to demand that we register the Common Stock into which the
Series A Preferred Stock is convertible under the Securities Act. In addition,
holders have the right to include the Common Stock into which their Series A
Preferred Stock is convertible in certain registration statements filed by us.
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.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
From May 24, 1999 to November 19, 1999, our common stock traded on
the OTC Bulletin Board under the symbol "AWON." In the period between October
10, 1998, when trading on the OTC Bulletin Board began, and May 24, 1999, our
common stock traded under the symbol "HALO."
On January 4, 1999, the SEC approved amendments to Rules of the
National Association of Securities Dealers that limit quotations on the OTC
Bulletin Board to the stock of companies that are registered with the SEC under
the Securities Exchange Act of 1934. The letter "E" is affixed to ticker symbols
of those companies that have not completed the registration process with the SEC
as of a certain date and indicates that the affected company will be removed
from the OTC Bulletin board within 30 days. On November 19, 1999, an "E" was
affixed to our OTC Bulletin Board trading symbol and our common stock began
trading under the symbol "AWONE." Our common stock was removed from the OTC
Bulletin Board on December 16,1999, because we had not then completed the
registration process. Our common stock is currently listed in the "Pink Sheets"
of the National Quotation Bureau, LLC. The closing price of our common stock on
the OTC Bulletin Board was 6-3/4 on December 15, 1999.
The following table sets forth for the periods indicated the high and low
bid prices for our common stock as reported each quarterly period in 1997, 1998
and 1999. The prices are inter-dealer prices, do not include retail mark ups,
mark downs or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
1998 ---- ---
----
<S> <C> <C>
Fourth Quarter (beginning October 10, 1998) 5 3-3/4
1999
----
First Quarter 7-1/2 1
Second Quarter 8 5.13
Third Quarter 7-3/4 5
Fourth Quarter (through December 15, 1999) 6-3/4 3 3/8
</TABLE>
ITEM 2. LEGAL PROCEEDINGS
We are not party to any legal proceeding which could have a material
effect upon our business, financial condition or results of operations.
27
<PAGE> 28
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
For the fiscal year ended December 31, 1999, we have retained Spicer,
Jeffries & Co. as our principal independent accountant to replace Cohen & Kameny
CPA's PLCC, our principal accountant for the fiscal years ended December 31,
1997 and 1998. Cohen & Kameny's report on our financial statements for the past
two fiscal years did not contain an adverse opinion or disclaimer of opinion and
was not modified as to uncertainty, audit scope, or accounting principals. The
decision to change accountants was approved by our Board of Directors. There
were no disagreements with our former accountant, whether or not resolved, on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which if not resolved would have caused our
former accountant to make reference to the subject matter of the disagreement(s)
in connection with its report.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
(a) We have made the following sales of unregistered common stock
since our organization on October 17, 1997. All sales listed below
which were made on or before April 26, 1999, were made by Halo
Holdings of Nevada, Inc. All sales since that date were made by A1
Internet.
<TABLE>
<CAPTION>
DATE
OF ISSUE TITLE PURCHASER SHARES SOLD CONSIDERATION EXEMPTION
---------- --------- ------------------- ------------- ----------------------------- ------------
<S> <C> <C> <C> <C> <C>
10/15/97 Common Larry W. Kerschenbaum 1,500,000 Founder Services of $1,500 Section 4(2)
10/15/97 Common Thomas H. Keesee 1,500,000 Founder Services of $1,500 Section 4(2)
1/15/98 Common E&L Investments, Inc. 250,000 $250,000 Regulation D
1/15/98 Common Sarah Kerschenbaum 25,000 $25,000 Regulation D
1/15/98 Common Dave Mazess 100,000 $100,000 Regulation D
1/15/98 Common Brian Campbell 45,000 $45,000 Regulation D
1/15/98 Common Estate of James Darby 55,000 $55,000 Regulation D
1/15/98 Common Elliott Broidy 250,000 $250,000 Regulation D
1/15/98 Common Cored Capital Corporation 250,000 $250,000 Regulation D
1/15/98 Common Atlantic Aero, Inc. 25,000 $25,000 Regulation D
12/21/98 Common Gravity Pilot Air, Inc. 300,000 Merger (exchange all Section 4(2)
outstanding stock)
1/27/99 Common Brian Campbell 25,000 $25,000 Receivable Regulation D
1/27/99 Common Clifford Morgan 27,500 Consulting services Section 4(2)
1/27/99 Common Eduardo Lautieri 7,500 $7,500 Receivable Regulation D
3/5/99 Common Lenny Tambasco 250,000 Executive compensation Section 4(2)
3/5/99 Common Eduardo Lautieri 250,000 Consulting services Section 4(2)
3/5/99 Common Moe Cohen 50,000 Consulting services Section 4(2)
3/25/99 Common South Florida Glazing 25,000 $50,000 Regulation D
3/25/99 Common Ben Beckes 53,000 $106,000 Regulation D
3/25/99 Common Larry Littlefield 5,000 $10,000 Regulation D
3/25/99 Common Bobby Nelson Bodiford 12,500 $25,000 Regulation D
3/25/99 Common Phyllis Lott 5,000 $10,000 Regulation D
3/25/99 Common Amerigo Investor Group 40,000 $80,000 Note Regulation D
3/25/99 Common Eduardo Lautieri 14,000 $28,000 Regulation D
3/25/99 Common Yucatan Holding Company 1,000 $2,000 Regulation D
3/25/99 Common Dorothy Littlefield 3,500 $7,000 Regulation D
3/25/99 Common Blue Sky Unlimited 80,000 $160,000 Note Regulation D
3/30/99 Common Bruce Bertman 3,400,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Mark Bertman 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Jeffrey Lieberman 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Dustin Cobb 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Bruce Bertman 29,750 Exchange for Virtual Section 4(2)
Information Express Inc.
3/30/99 Common Mark Bertman 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Jeffrey Lieberman 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Dustin Cobb 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Net World Ohio Inc. 37,000 Merger (exchange all Section 4(2)
outstanding stock)
4/6/99 Common Cimarron Capital Corporation 23,000 $46,000 Regulation D
4/6/99 Common Market Edge Inc. 15,000 $30,000 Regulation D
4/6/99 Common Arlan Akerlind 5,000 $10,000 Regulation D
4/6/99 Common George and Diane Morgan 10,000 $20,000 Regulation D
4/6/99 Common Keith Krupka 40,000 $80,000 Regulation D
4/6/99 Common Morton and Joyce Sosin 10,000 $20,000 Regulation D
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C> <C>
4/6/99 Common Therese Esposito 5,000 $10,000 Regulation D
4/6/99 Common Elliot Broidy 118,000 $236,000 Regulation D
4/6/99 Common Deborah Ann Ingraham 5,000 $10,000 Regulation D
4/6/99 Common John L. House 10,000 $20,000 Regulation D
4/6/99 Common Mark Bertman 10,000 $20,000 Regulation D
4/13/99 Common Bruce Bertman 120,000 Exchange for debt Section 4(2)
7/12/99 Common Bruce Bertman 265,000 Exchange for Virtual Section 4(2)
Information Express, Inc.
7/12/99 Common Martin Sumichrast 100,000 $200,000 Note Section 4(2)
8/19/99 Common NetAmerica 190,000 $1,330,000 in assets Section 4(2)
8/30/99 Common Quanta Corporation 5,000 Consulting services Section 4(2)
8/30/99 Common Mike Strauss 5,000 Consulting services Section 4(2)
9/22/99 Preferred* Frank Huang 11,111 $50,000 Regulation D
9/23/99 Preferred* Matt Goud 10,000 $45,000 Regulation D
8/24/99 Preferred* Steven and Irene DeCosta 20,000 $90,000 Regulation D
8/30/99 Preferred* Michael Cohen 44,444 $200,000 Regulation D
8/24/99 Preferred* Roderick O'Shea 10,000 $45,000 Regulation D
8/16/99 Preferred* Northridge Development Corp. 40,000 $180,000 Regulation D
8/11/99 Preferred* David Tevet 15,000 $67,500 Regulation D
8/16/99 Preferred* Richard Carter 15,000 $67,500 Regulation D
8/05/99 Preferred* Jesse Goldstein 5,000 $22,500 Regulation D
9/30/99 Preferred* HBC Investment Group, Inc. 50,000 $225,000 Regulation D
9/12/99 Preferred* Galt Asset Management, LLC 20,000 $90,000 Regulation D
8/30/99 Preferred* Kandel & Son Profit Sharing Plan 6,000 $27,000 Regulation D
8/30/99 Preferred* Richard Kandel 16,000 $72,000 Regulation D
8/30/99 Preferred* Richard Greene 70,000 $315,000 Regulation D
9/15/99 Preferred* Dr. Steven Kobren 22,222 $100,000 Regulation D
8/27/99 Preferred* Steven Etra 65,000 $292,500 Regulation D
9/21/99 Preferred* Jay Raubvogel 222,222 $1,000,000 Regulation D
8/27/99 Preferred* Blanche Etra 22,000 $99,000 Regulation D
9/10/99 Preferred* SRK Associates, LLC 65,000 $292,500 Regulation D
9/07/99 Preferred* Jean Etra 18,000 $81,000 Regulation D
9/30/99 Preferred Ferro Pasquale 23,000 Exchange for Debt Section 4(2)
9/30/99 Preferred Alan Lisenby 55,555 Exchange for Debt Section 4(2)
9/30/99 Preferred Outerbanks Limited 44,444 $200,000 Section 4(2)
10/10/99 Preferred* Lenord and Rosemarie Imperio 10,000 $45,000 Regulation D
10/04/99 Preferred* Matt Bencriscutto 20,000 $90,000 Regulation D
10/10/99 Preferred* Jerry Poole 33,333 $150,000 Regulation D
10/10/99 Preferred* Galt IT 30,000 $135,000 Regulation D
10/10/99 Preferred* James Kotsopoulos 100,000 $450,000 Regulation D
10/10/99 Preferred* Polymer Applications 30,000 $135,000 Regulation D
10/15/99 Preferred Calvin Caldwell 22,222 Exchange for Debt Section 4(2)
</TABLE>
*The principal underwriters for this transaction were EBI Securities Corporation
and J.B. Sutton Group, LLC. Both EBI and JB Sutton received a warrant to
purchase 500,000 shares of common stock exercisable at $5.50 per share and which
expires 5 years from the date of issuance. In addition, each of EBI and JB
Sutton were given the right to receive warrants to purchase 50,000 shares of
common stock at an exercise price of $2.75 per share for each $500,000 increment
that A1 Internet's gross sales falls below $13,000,000 on each of February 28,
2000 and August 31, 2000.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company intends to maintain insurance against all liability incurred
by its officers and directors in defense of any actions to which they may be
made parties by reason of their positions as officers and directors and is in
the process of obtaining this insurance.
Nevada law authorizes a Nevada corporation to indemnify its officers and
directors against claims or liabilities arising out of such person's conduct as
officers or directors if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
Company. The Articles of Incorporation provide for indemnification of the
directors and officers of the Company. In addition, the Bylaws of the Company
provide for indemnification of the directors, officers, employees, or agents of
the Company. In general, these provisions provide for indemnification in
instances when such persons acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the Company.
29
<PAGE> 30
PART III
ITEM 1. INDEX TO EXHIBITS
FINANCIAL STATEMENTS AND EXHIBITS
The following documents are attached hereto and incorporated herein by
reference.
<TABLE>
<S> <C> <C>
A. FINANCIAL STATEMENTS
F-1 Audited Financial Statements of Halo Holdings of Nevada
as of December 31, 1998 and 1997, including audited balance
sheet, and audited statements of income, cash flows, and
changes in stockholders' equity.
F-2 Audited Financial Statements of ComputerEase, LLC as of
December 31, 1998 and 1997, including audited balance sheet,
and related statements of income and cash flows.
F-3 Unaudited Financial Statements of ComputerEase, LLC as of March
31, 1999, including balance sheets and related statements of
operations and cash flow.
F-4 Audited Financial Statements of Virtual Information Express,
Inc. from June 10, 1998 to December 31, 1998, including related
statements of operations, shareholders' equity and cash flows.
F-5 Audited Financial Statements of Networld Ohio, Inc.
as of May 31, 1998, including related statements of operations,
shareholders' equity and cash flows.
F-6 Unaudited Financial Statements of Networld Ohio, Inc. for the
nine months ended February 28, 1998 and 1999, including balance
sheets and related statements of operations and cash flows.
F-7 Unaudited Financial Statements of A1 Internet.com, Inc. and
Subsidiaries for the nine months ended September 30, 1998 and
1999, including related balance sheet, statements of operation,
shareholders' equity and cash flows.
F-8 Pro Forma Combined Financial Statements of A1 Internet.com, Inc.
and Subsidiaries.
B. EXHIBIT
*2.1 Acquisition Agreement dated October 17, 1997, between
Halo Holdings of Nevada, Inc., Tom Keesee and Larry
Kerschenbaum, regarding the acquisition of Gravity
Pilot Air, Inc. (filed as Exhibit 2.1 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of December 13,
1999, No. 000-27243, and incorporated herein by reference).
*2.2 Stock Purchase Agreement dated February 1, 1999,
between Halo Holdings of Nevada, Inc. and Bruce
Bertman, regarding the acquisition of Virtual
Information Express, Inc. (filed as Exhibit 2.2 to A1
Internet's Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated herein
by reference).
*2.3 Stock Purchase Agreement dated February 1, 1999,
between Halo Holdings of Nevada, Inc. and Bruce
Bertman, regarding the acquisition of ComputerEase,
LLC (filed as Exhibit 2.3 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of December 13,
1999, No. 000-27243, and incorporated herein by reference).
*2.4 Stock Purchase Agreement dated March 31, 1999,
between Larry W. Kerschenbaum and Halo Holdings of
Nevada, Inc., regarding the sale of Skydive USA (filed as
Exhibit 2.4 to A1 Internet's Second Amendment to Form
10-SB12G filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
*2.5 Stock Purchase Agreement dated April 19, 1999,
between Halo Holdings of Nevada, Inc. and the
Shareholders of Networld of Ohio, Inc., regarding the
acquisition of Networld of Ohio, Inc. (The following
attachments are not included but are incorporated
herein by reference and will be provided to the SEC
upon request: Schedule 2(d) Leased Property; Schedule
5.14 Disclosed Liabilities; Schedule 5.15 Material
Terms; Schedule 5.16(a) Tangible Property; Schedule
5.16(b) Real Property; Schedule 5.16(c) Other Assets;
Schedule 5.19 Affiliated Transactions; Schedule 5.20
Bank Accounts; Schedule 5.21 Environmental Compliance;
Schedule A Common Stock).
*2.6 Purchase and Sale Agreement dated August 19, 1999,
between A1 Internet Services, Inc., NetAmerica, Inc.,
William Fritts and Bruce Bertman, regarding A1
Internet's acquisition of contracts from NetAmerica
(The following attachments are not included but are
incorporated herein by reference and will be provided
to the SEC upon request: Exhibit A List of Intangible
Assets; Exhibit B Bill of Sale; Exhibit C Promissory
Note and Security Agreement; and Exhibit D Stock
Pledge).
*3.1 Articles of Incorporation of A1 Internet.com, Inc.
(filed as Exhibit 3.I.A to A1 Internet's First
Amendment to Form 10-SB12G filed as of November 17,
1999, No. 000-27243, and incorporated herein by
reference).
*3.2 Certificate of Amendment of Articles of Incorporation
(filed as Exhibit 3.B to A1 Internet's First
Amendment to Form 10-SB12G filed as of November 17,
1999, No. 000-27243, and incorporated herein by
reference).
*3.3 Bylaws of Halo Holdings of Nevada, Inc. (filed as
Exhibit 3.II to A1 Internet's First Amendment to Form
10-SB filed as of November 17, 1999, No. 000-27243,
and incorporated herein by reference).
*4.1 Certificate of Designation for A1 Internet's Series A
Convertible Preferred Stock (filed as Exhibit 2.C to
A1 Internet's Form 10-SB12G filed as of September 3,
1999, No. 000-27243, and incorporated herein by
reference).
*4.2 Agreement to Lock Up dated May 19, 1999, between
Jerry Lee Poole, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Mr. Poole
(filed as Exhibit 4.2 to A1 Internet's Second Amendment
to Form 10-SB12G filed as of December 13, 1999, No.
000-27243, and incorporated herein by reference).
*4.3 Agreement to Lock Up dated May 19, 1999, between
Bruce Bertman, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Bruce
Bertman (filed as Exhibit 4.3 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
*4.4 Agreement to Lock Up dated May 19, 1999, between
Noved Holdings, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Noved
Holdings (filed as Exhibit 4.4 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
*4.5 Agreement to Lock Up dated May 19, 1999, between
Leonard Tambasco, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Leonard
Tambasco (filed as Exhibit 4.5 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
*4.6 Agreement to Lock Up dated May 19, 1999, between
Larry Kerschenbaum, EBI Securities and the J.B.
Sutton Group, Inc., regarding the transfer
restrictions on certain A1 Internet common stock
owned by Larry Kerschenbaum (filed as Exhibit 4.6
to A1 Internet's Second Amendment to Form 10-SB12G
filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
*10.D.1 Aircraft Lease dated March 31, 1999, between Gravity
Pilot Air, Inc. and Skydive USA, regarding the lease
of aircraft to Skydive USA (filed as Exhibit 10.D.1
to A1 Internet's Second Amendment to Form 10-SB12G
filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
*16.1 Letter on Change in Certifying Accountant from Cohen
Kameny CPA's PLLC, dated November 12, 1999 (filed as
Exhibit 16 to A1 Internet's First Amendment to Form
10-SB filed as of November 17, 1999, No. 000-27243,
and incorporated herein by reference).
*21.1 List of all Subsidiaries of A1 Internet and the State
or other jurisdiction of incorporation or
organization of each.
*27.1 Financial Data Schedule (filed herewith).
</TABLE>
* Previously filed.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
A1 INTERNET.COM, INC.,
A Nevada Corporation
Date February 24, 2000 By: /s/ Bruce Bertman
---------------------------- ---------------------------
Bruce Bertman,
President
30
<PAGE> 31
F-1
HALO HOLDINGS OF NEVADA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 32
[COHEN & KAMENY LETTERHEAD]
Independent Auditors' Report
To The Board of Directors
Halo Holdings of Nevada, Inc.
We have audited the accompanying consolidated balance sheets of Halo Holdings of
Nevada, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income and retained earnings, cash flows, and changes in
Shareholders equity for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Halo Holdings of
Nevada, Inc. as of December 31, 1998 and 1997, and the results of operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ COHEN & KAMENY
--------------------------
COHEN & KAMENY CPA'S PLLC
Riverdale, New York
March 23, 1999
<PAGE> 33
HALO HOLDINGS OF NEVADA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(See Independent Auditors' Report)
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 10,205. $ 1,819.
FIXED ASSETS: (Notes 2a and 5)
Aircraft 1,008,256. 1,008,256.
Equipment 9,159. 9,159.
Less: accumulated depreciation 170,654. 69,649.
------------ -------------
NET FIXED ASSETS 846,761. 947,766.
------------ -------------
OTHER ASSETS:
Prepaid expenses (Notes 6) 22,388. 7,340.
Goodwill-net of amortization (Note 2c) 278,861. 309,845.
------------ -------------
TOTAL OTHER ASSETS 301,249. 317,185.
------------ -------------
TOTAL ASSETS $ 1,158,215. $ 1,266,770.
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 37,313. -- .
Loan payable-bank 18,059. -- .
Loans payable - shareholders (Note 4) 109,261. 196,670.
Note payable - current portion (Note 5) 641,451. 195,553.
------------ -------------
TOTAL CURRENT LIABILITIES: 806,084. 392,223.
------------ -------------
LONG TERM LIABILITIES:
Note payable (Note 5) -- . 544,045.
Loan payable 80,000. 80,000.
------------ -------------
TOTAL LONG TERM LIABILITIES: 80,000. 624,045.
------------ -------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 20,000,000 shares authorized, 4,300. 3,500.
4,300,000 and 3,500,000 issued and outstanding
for 1998 and 1997 respectivly (Note 3)
Preferred stock 300,000 shares $.25 par value issued and -- . 75,000.
outstanding for 1997 (Note 3)
Additional paid in capital 1,100,700. 526,500.
Retained earnings (Notes 1 and 3) (832,869). (354,498).
------------ -------------
TOTAL STOCKHOLDERS' EQUITY: 272,131. 250,502.
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,158,215. $ 1,266,770.
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 34
HALO HOLDINGS OF NEVADA, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
(DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(See Independents Auditors' Report)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 84,560. $ 3,384.
OPERATING EXPENSES (Schedule 1) 463,727. 357,882.
------------ ------------
NET (LOSS) FROM OPERATIONS (379,167). (354,498).
OTHER INCOME (EXPENSE):
Interest Expense (99,204). -- .
------------ ------------
NET LOSS (478,371). (354,498).
RETAINED EARNINGS (DEFICIT)-BEGINNING OF YEAR (354,498). -- .
------------ ------------
RETAINED EARNINGS (DEFICIT)-END OF YEAR $(832,869). $(354,498).
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 35
HALO HOLDINGS OF NEVADA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(See Independent Auditors' Report)
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
CASH FLOWS USED FROM OPERATING ACTIVITIES:
Net (loss) $ (478,371). $ (354,498).
Depreciation and amortization 131,989. 826.
(Increase) in prepaid expenses (15,048). -
Increase in accounts payable and accrued expenses 37,313. -
------------- --------------
NET CASH (USED) BY OPERATING ACTIVITIES (324,117). (353,672).
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Goodwill - -
Net investment equipment - (8,259).
------------- --------------
NET CASH (USED BY INVESTING ACTIVITIES - (8,259).
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in note payable (98,147). -
Increase in loan payable-bank 18,059. -
(Decrease) Increase in loans payable-shareholders (87,409). 180,118.
Increase in loans payable - -
Increase from common stock issued 800. 3,500.
Increase in additional paid in capital 574,200. 526,500.
(Decrease) in loan payable - (346,368).
(Decrease) increase in preferred stock (75,000). -
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 332,503. 363,750.
------------- --------------
NET INCREASE IN CASH 8,386. 1,819.
Cash at beginning of year 1,819. -
CASH - AT END OF YEAR $ 10,205. 1,819.
============= ==============
SUPPLEMENTAL DISCLOUSRES
Schedule on Noncash Investing and Financing Transactions
The company acquired the assets of Gravity Pilot Air, Inc.
for convertible preferred stock. In connection with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired 1,125,597.
Preferred stock issued (75,000).
--------------
Liabilities assumed 1,050,597.
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 36
HALO HOLDINGS OF NEVADA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(See Independents Auditors' Report)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Opening Balances - $ - - $ - $ - $ -
Acquisition of- 3,500,000 3,500 - - 526,500 -
Halo Holdings, Inc.
Acquisition of- - - 300,000 75,000 - -
Gravity Pilot Air, Inc.
Net loss - year ended December 31, 1997 - - - - - (354,498)
------------- ----------- ------------ ----------- ------------- --------------
Balances at December 31, 1997 3,500,000 3,500 300,000 75,000 526,500 (354,498)
Conversion of preferred stock 300,000 300 (300,000) (75,000) 74,700 -
Shares issued in private sale 500,000 500 - - 499,500 -
Net loss - year ended December 31, 1998 - - - - - (478,371)
------------- ----------- ------------ ----------- ------------- --------------
Balances at December 31, 1998 4,300,000 $ 4,300 $ - $ - $1,100,700 $ (832,869)
============= =========== ============ =========== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 37
HALO HOLDINGS OF NEVADA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - DESCRIPTION OF THE COMPANY'S BUSINESS:
HALO Holdings of Nevada, Inc. (the Company) was incorporated in
October 1997 in the state of Nevada. Subsequent to it's
incorporation the Company acquired HALO Holdings, Inc. (a
Delaware Corporation) in November 1997 in a transaction, which
was treated as pooling of interests. The combined entity was
formed to pursue various business opportunities in the fragmented
and growing area of extreme sports, skydiving, and aviation and
extreme sports entertainment industries. In furtherance of its
goals, the Company acquired Gravity Pilot Air, Inc. (a Delaware
Corporation) which had been engaged in various business
operations related to skydiving and extreme sports. The
acquisition of Gravity Pilot Air, Inc. was treated as a purchase
and is presented in these financial statements on a consolidated
basis.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles, and require management
to make certain estimates and assumptions based on these
principles. Outlined below are those policies considered
particularly significant.
(a) DEPRECIATION:
Fixed assets are reflected at cost. Depreciation is provided
using the straight-line method as follows:
Machinery & equipment 5 years
Aircraft 10 years
(b) STATEMENT OF CASH FLOWS:
For purposes of the statement of cash flows, the company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(c) GOODWILL:
Goodwill is amortized over the lesser of the useful life of the
related assets or 10 years.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 38
HALO HOLDINGS OF NEVADA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998
NOTE 3 - CAPITAL STOCK
Pursuant to the incorporation of the Company it has authorized
20,000,000 shares of it's common stock at a par value of $.001.
Upon the completion of the acquisition of HALO Holdings, Inc. the
Company issued 3,500,000 shares of its common stock in exchange
for all of the outstanding shares of HALO Holdings, Inc. on a 1
to 1 basis. This transaction was accounted for as a pooling of
interests.
On October 17, 1997 the Company authorized the acquisition of
Gravity Pilot Air, Inc. in exchange for 300,000 of it's newly
authorized convertible preferred stock with a par value of $.25
per share. The conversion feature stipulated that the preferred
shares could be converted to the Company's common shares on a 1
for 1 basis if the price of the common shares reached $5.00 per
share bid price on a public market. These shares were
subsequently converted in November 1998 when the bid price for
the common shares reached $5.00 per share.
On January 15, 1998 the Company authorized the issuance of its
common shares pursuant to a private placement offering of 500,000
common shares at $1.00 per share. This offering resulted in the
issuance of 500,000 shares with proceeds to the Company of
$500,000.
NOTE 4 - LOANS PAYABLE SHAREHOLDERS:
During the years ended December 31, 1998 and 1997 various
shareholders of the Company made loans to the Company or made
payments on behalf of the Company to third parties in settlement
of certain debts the Company had incurred. These loans are
payable upon demand and bear no interest.
NOTE 5 - NOTE PAYABLE:
In connection with the acquisition of it's aircraft, the Company
financed this transaction through a note payable in which the
note holder has a secured interest in the aircraft to the extent
of the outstanding balance on the note. This note bears interest
at a rate of 14% per annum and is payable in monthly installments
consisting of principal and interest. The terms of the note
stipulate that a final payment of the outstanding balance is due
on November 4, 1999.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 39
HALO HOLDINGS OF NEVADA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 6 - PREPAID EXPENSES:
As part of the note payable agreement (Note 5) the Company also
agreed to maintain a separate reserve account with the note
holder corresponding to the engine utilization of the aircraft.
The amount required to be reserved is based upon the number of
hours the aircraft has been in flight. The amounts reserved
are intended to defray maintenance costs associated with the
aircraft.
As of December 31, 1998 and 1997 the balance in this account was
$22,388 and $7,340 respectively.
NOTE 7 - PROVISIONS FOR INCOME TAXES:
Due to net operating losses, which can be carried forward, the
Company has not had to make any provision for income taxes.
NOTE 8 - SUBSEQUENT EVENTS
On January 29, 1999 in a continuing effort to raise capital for
it's continued growth, the Company made a private offering of
500,000 shares of it's common stock at a price of $2.00 per
share.
Since the date of these financial statements the Company has
signed letters of intent with three companies with the express
intent of acquiring these companies. As intended, the acquisition
of these companies will consist of an exchange of 100% of the
common stock of the companies to be acquired for newly issued
common stock of the Company. Two of the companies mentioned above
are in the business of providing internet services and access.
The third company to be acquired is an extreme sports adventure
internet web site.
COHEN AND KAMENY CPA'S PLLC
<PAGE> 40
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ComputerEase, LLC
We have audited the accompanying balance sheets of ComputerEase, LLC as of
December 31, 1998 and 1997, and the related statements of operations, changes in
members' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ComputerEase, LLC as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 5 to the financial statements, in March 1999 the Company
was acquired by A1 Internet.com, Inc.
/s/ Spicer, Jeffries & Co.
Spicer, Jeffries & Co.
Denver, Colorado
July 23, 1999
<PAGE> 41
COMPUTEREASE, LLC
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
------------------------------
<TABLE>
<CAPTION>
ASSETS
------
1998 1997
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Receivables
Trade $ 136,570 $ 121,002
Other - 2,885
Inventory, at cost 11,244 9,094
--------------- ---------------
TOTAL CURRENT ASSETS 147,814 132,981
--------------- ---------------
PROPERTY AND EQUIPMENT,
AT COST (NOTES 1 AND 3) 414,995 401,958
Less accumulated depreciation (250,215) (145,585)
--------------- ---------------
164,780 256,373
--------------- ---------------
$ 312,594 $ 389,354
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank overdraft $ 10,180 $ 49,585
Accounts payable 193,357 148,480
Due to members (Note 2) 306,102 183,809
Due to related parties (Note 2) 107,661 280,004
Other 61,487 859
--------------- ---------------
TOTAL CURRENT LIABILITIES 678,787 662,737
NOTE PAYABLE-RELATED PARTY (NOTE 2) 100,000 100,000
--------------- ---------------
TOTAL LIABILITIES 778,787 762,737
COMMITMENTS (NOTE 4)
MEMBERS' EQUITY (466,193) (373,383)
--------------- ---------------
$ 312,594 $ 389,354
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 42
COMPUTEREASE, LLC
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
NET SALES $ 8,257,678 $ 8,382,314
COST OF SALES (6,809,861) (7,480,671)
--------------- ---------------
GROSS PROFIT 1,447,817 901,643
--------------- ---------------
OPERATING EXPENSES:
Salaries and related expenses 650,808 477,434
Travel and entertainment 139,387 40,993
Marketing, advertising and promotion 132,675 84,439
Bad debt expense 236,691 49,021
General and administrative 165,242 63,179
Occupancy costs 157,616 181,371
Communications 58,208 120,743
--------------- ---------------
TOTAL OPERATING EXPENSES 1,540,627 1,017,180
--------------- ---------------
NET LOSS $ (92,810) $ (115,537)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 43
COMPUTEREASE, LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1996 $ (257,846)
Net loss (115,537)
-------------------
BALANCE, DECEMBER 31, 1997 (373,383)
Net loss (92,810)
-------------------
BALANCE, DECEMBER 31, 1998 $ (466,193)
===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 44
COMPUTEREASE, LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (92,810) $ (115,537)
Adjustments to reconcile net loss to cash flows provided
by (used in) operating activities:
Depreciation 104,630 105,189
Bad debt expense 236,691 49,021
Increase in trade receivables (252,259) (107,826)
Increase (decrease) in other receivables 2,885 (2,685)
Increase in inventory (2,150) (7,595)
Decrease in other assets - 23,880
(Decrease) increase in bank overdraft (39,405) 49,585
Increase (decrease) in accounts payable 44,877 (90,899)
Increase (decrease) in other liabilities 60,628 (67,005)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 63,087 (163,872)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (13,037) (212,831)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related parties - 100,000
Proceeds from (payments on) member loans 122,293 (7,451)
Proceeds from (payments on) related party loans (172,343) 280,004
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (50,050) 372,553
--------------- ---------------
NET DECREASE IN CASH - (4,150)
CASH, BEGINNING OF YEAR - 4,150
--------------- ---------------
CASH, END OF YEAR $ - $ -
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 12,717 $ 14,950
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 45
COMPUTEREASE, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Computer Ease, LLC (the Company) was organized under the laws of the State of
Maryland on May 17, 1993. The limited liability company will continue until
January 1, 2000, unless terminated sooner as provided for in the Operating
Agreement (see Note 5). The Company's activites include the buying and selling
of computer equipment, web design and providing internet access. The Company has
both domestic and international customers.
The Company consists of four members. The Company has only one class of units of
membership interest. The operating agreement provides that each member share in
net income based on their respective proportion of units of interest, and net
losses based on their respective capital contributions. The agreement also
provides that no member will be personally liable for any debt, obligation or
liability of the Company.
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
The Company considers investments with an original maturity of three months or
less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and receivables, are carried
at amounts which approximate fair value. Payables and other liabilities are
carried at amounts which approximate fair value.
INVENTORY
Inventory consists of computer equipment and is carried at the lower of cost or
market. Cost is determined on a specific identification basis.
PROPERTY AND EQUIPMENT
The Company provides for depreciation of property and equipment using
accelerated methods based on estimated useful lives of five 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.
<PAGE> 46
COMPUTEREASE, LLC
NOTES TO FINANCIAL STATEMENTS
---------------------------------------
(CONTINUED)
NOTE 1- ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (continued)
INCOME TAXES
As a limited liability company, the Company is not a tax paying entity for
federal income tax purposes. Accordingly, no income tax provision (benefit) is
reported in these financial statements. The distributive share of net income or
loss is reportable by the members in their respective tax returns.
NOTE 2- NOTE PAYABLE - RELATED PARTY, DUE TO RELATED PARTIES AND DUE TO MEMBERS
Note payable-related party consists of a $100,000 note payable to the father of
a member, at 15% interest. The note requires monthly interest payments and
matures on November 1, 2000. Interest expense on the note payable amounted to
$12,500 and $14,950 in 1998 and 1997, respectively.
The due to related parties and members shown on the accompanying balance sheet
are advances that are non-interest bearing and have no due date.
NOTE 3- MAJOR CUSTOMERS
The following customers each accounted for more than 10% of sales in 1998 and
1997:
<TABLE>
<CAPTION>
% of Sales
-------------------------
Customer 1998 1997
--------------------- ------------------- -----------
<S> <C> <C>
A - Netherlands 20.3 -
B - France 31.1 -
C - United Kingdom - 13.1
D - United States - 13.4
E - United States - 21.1
</TABLE>
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 years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Revenues Long-Lived Assets
-------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 2,473,921 $ 5,100,978 $ 164,780 $ 256,373
Belgium 751,745 -- -- --
Denmark -- 688,000 -- --
France 4,246,818 240,500 -- --
Netherlands 511,800 535,075 -- --
Luxembourg 253,000 -- -- --
United Kingdom -- 1,772,322 -- --
Other Foreign Countries 20,394 45,439 -- --
------------- ------------ ------------ -----------
$ 8,257,678 $ 8,382,314 $ 164,780 $ 256,373
============= ============ ============ ===========
</TABLE>
NOTE 4- COMMITMENTS
The Company leases office space from a non-related party under an operating
lease. Future minimum lease payments under the non-cancellable lease as of
December 31, 1998 are 1999-$71,000, 2000-$73,500 and 2001-$12,000.
Total rental expense amounted to $76,183 and $64,303 in 1998 and 1997,
respectively.
NOTE 5- SUBSEQUENT EVENTS
In March 1999, A1 Internet.com, Inc., issued 4,000,000 shares of its common
stock in exchange for all of the outstanding units of membership of the Company.
A1 Internet.com, Inc. is an internet service provider. In May 1999, the Company
was then merged with A1 Internet Services, Inc., a wholly-owned subsidiary of A1
Internet.com, Inc.
<PAGE> 47
F-3
COMPUTER EASE, LLC
BALANCE SHEET
<TABLE>
<CAPTION>
31, MARCH 1999 31, MARCH 1998
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ (24,222.00) $ (10,390.00)
Receivables:
Trade, net $ 479,578.00 $ 289,566.00
Notes Receivable, current portion $ 6,000.00 $ --
Inventory (see note 1) $ 2,648.00 $ 39,958.00
------------ ------------
$ 464,004.00 $ 319,134.00
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Computers & Equipment (see note 1) $ 597,651.00 $ 367,567.00
Furniture & Fixtures $ 34,391.00 $ 34,391.00
Less: accumulated depreciation $(259,065.00) $(171,743.00)
------------ ------------
$ 372,977.00 $ 230,215.00
------------ ------------
TOTAL ASSETS $ 836,981.00 $ 549,349.00
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $106,539.00 $159,867.00
Due to members (see note 2) $457,386.00 $222,650.00
Due to related parties (see note 2) $165,043.00 $204,478.00
Other $ 47,615.00 $ 875.00
----------- -----------
$776,583.00 $587,870.00
----------- -----------
LONG TERM LIABILITIES:
Notes Payable (see note 2) $100,000.00 $100,000.00
----------- -----------
$100,000.00 $100,000.00
----------- -----------
SHAREHOLDERS' EQUITY
Members Equity $(39,602.00) $(138,521.00)
----------- -----------
$(39,602.00) $(138,521.00)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $836,981.00 $549,349.00
----------- -----------
</TABLE>
<PAGE> 48
COMPUTER EASE, LLC
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
31, MARCH 1999 31, MARCH 1998
<S> <C> <C>
NET SALES (see note 3) $ 819,804.00 $ 3,946,933.00
COST OF SALES $ (136,189.00) $(3,306,036.00)
------------- --------------
GROSS PROFIT $ 683,615.00 $ 640,897.00
------------- --------------
OPERATING EXPENSES:
Salaries and related expenses $ 157,518.00 $ 117,036.00
Travel & Entertainment $ 7,254.00 $ 51,830.00
Bad Debt Expense $ -- $ 167,367.00
Legal & Professional $ 10,537.00 $ 6,700.00
Occupancy Costs (see note 4) $ 20,455.00 $ 16,979.00
General and administrative $ 50,402.00 $ 16,215.00
Depreciation and amortization $ 8,850.00 $ 26,158.00
------------- --------------
TOTAL OPERATING EXPENSES $ 255,016.00 $ 402,285.00
------------- --------------
OTHER INCOME (EXPENSE):
Interest expense $ (2,008.00) $ (3,750.00)
------------- --------------
TOTAL OTHER EXPENSE $ (2,008.00) $ (3,750.00)
------------- --------------
NET INCOME $ 426,591.00 $ 234,862.00
------------- --------------
</TABLE>
<PAGE> 49
COMPUTER EASE, LLC
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
31, MARCH 1999 31, MARCH 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $426,591.00 $234,862.00
Adjustment to reconcile net income to cash (used in) provided by
operating activities:
Depreciation and amortization $ 8,850.00 $ 26,158.00
Bad debt expense $ -- $167,367.00
Forgiveness of debt $ -- $ --
Issuance of common stock for services $ -- $ --
Increase in trade receivables $(343,008.00) $(335,931.00)
(Increase) Decrease in Inventory $ 8,596.00 $(30,864.00)
(Increase) Decrease in other current assets $ (6,000.00) $ 2,885.00
(Decrease) Increase in other payables $(13,872.00) $ 16.00
(Decrease) Increase in accounts payable and accrued expenses $(86,818.00) $ 11,387.00
----------- -----------
NET CASH USED IN AND PROVIDED BY OPERATING ACTIVITIES $ (5,661.00) $ 75,880.00
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $(217,047.00) $ --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $(217,047.00) $ --
----------- -----------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) related party loans, net $ 57,382.00 $(75,526.00)
Proceeds from (payments on) shareholder loans, net $151,284.00 $ 38,841.00
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $208,666.00 $(36,685.00)
----------- -----------
NET INCREASE (DECREASE) IN CASH $(14,042.00) $ 39,195.00
CASH, BEGINNING OF PERIOD $(10,180.00) $(49,585.00)
----------- -----------
CASH, END OF PERIOD $(24,222.00) $(10,390.00)
----------- -----------
</TABLE>
<PAGE> 50
COMPUTER EASE, LLC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Computer Ease LLC, (the Company) was organized under the laws of the State of
Maryland on May 17, 1993. The Limited Liability Company will continue until
January 1, 2000, unless terminated sooner, as provided for in the operating
agreement (see note 5). The Company's activities include the buying and selling
of computer equipment, web design and providing internet access. The Company has
both domestic and international customers.
The Company consists of four members. The Company has only one class of units of
membership interest. The operating agreement provides that each member share in
net income based on their respective proportion of units of interest, and net
loses based on their respective capital contributions. The agreement also
provides that no member will be personally liable for any debt, obligation or
liability of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimated 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, which approximate fair value. Accounts payable, shareholder
advances and other liabilities are carried at amounts, which approximate fair
value.
PROPERTY AND EQUIPMENT
The Company provides for depreciation of equipment using accelerated and
straight-line methods based on the estimated useful lives of five years.
REVENUE RECOGNITION
The Company recognized revenue from hardware and software sales at the time of
the sale. All other revenue is recognized over the period that the service is
provided.
<PAGE> 51
COMPUTER EASE, LLC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORY
Inventory consists of computer equipment and is carried at the lower of cost or
market. Cost is determined on specific identification basis.
INCOME TAXES
As a limited liability company, the Company is not a tax paying entity for
federal income tax purposes. Accordingly, no income tax provision (benefit) is
recorded in these financial statements. The distributive share of net income or
loss is reportable by the members in their respective tax returns.
NOTE 2 - NOTE PAYABLE - RELATED PARTY, DUE TO RELATED PARTIES AND DUE TO
MEMBERS.
Note payable-related party consists of a $100,000 note payable to a father of a
member, at 15% interest. The note requires monthly interest payments, and
matures November 1, 2000. Interest expense on the note payable amounted to $
2,008 and $ 3,750 in the three months ended March 31, 1999 and 1998
respectively.
The due to related parties and members shown on the accompanying balance sheet
are advances that are non-interest bearing and have no due date.
NOTE 3 - MAJOR CUSTOMERS.
The following customers each accounted for more than 10% of sales in the first
three months of 1999 and 1998, respectively:
% Of Sales
Customer 1999 1998
------------------------------------------------
A 36.9
B 32.4
C 46.2
<PAGE> 52
COMPUTER EASE, LLC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company leases its space from a non-related party under an operating lease.
Future minimum lease payments under this noncancellable lease are as followed:
Year Ending
31, March Amount
2000 $ 71,628
2001 67,125
- -------- ---------
$ 138,753
Total rental expense for the three months ending March 31, 1999 and 1998 $20,455
and $16,979, respectively.
NOTE 5 - SUBSEQUENT EVENT
On March 30, 1999 A1 Internet.com, Inc., issued 4,000,000 shares in exchange for
all of the outstanding units of membership of the Company. A1 Internet.com,
Inc., is an internet service provider. In May 1999 the Company was then merged
with A1 Internet Services, Inc., a wholly owned subsidiary of A1 Internet.com,
Inc.,
<PAGE> 53
\ F-4
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION
(JUNE 10, 1998) THROUGH
DECEMBER 31, 1998
<PAGE> 54
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 49
Balance Sheet 50
Statement of Operations 51
Statement of Changes in Shareholder's Deficit 52
Statement of Cash Flows 53
Notes to Financial Statements 54
</TABLE>
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Virtual Information Express, Inc.
(A Company in the Development Stage)
We have audited the accompanying balance sheet of Virtual Information Express,
Inc. (a Company in the Development Stage) as of December 31, 1998, and the
related statements of operations, changes in shareholder's deficit, and cash
flows for the period from inception (June 10, 1998) through December 31, 1998.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virtual Information Express,
Inc. (a Company in the Development Stage) as of December 31, 1998, and the
results of its operations and its cash flows for the period from inception (June
10, 1998) through December 31, 1998 in conformity with generally accepted
accounting principles.
SPICER, JEFFRIES & CO.
/s/ SPICER, JEFFRIES & CO.
Denver, Colorado
February 21, 2000
<PAGE> 56
<TABLE>
<CAPTION>
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<S> <C>
WEB SITE $ 49 002
-----------------
TOTAL ASSETS $ 49 002
=================
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITY
Shareholder advance $ 50 000
------------------
SHAREHOLDER'S DEFICIT
Common Stock, par value $1.00, 1000 shares authorized,
35 shares issued and outstanding 35
Additional paid-in capital 65
Deficit accumulated during the development stage (1 098)
------------------
(998)
------------------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT $ 49 002
==================
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 57
<TABLE>
<CAPTION>
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (JUNE 10, 1998) THROUGH DECEMBER 31, 1998
<S> <C>
SALES $ -
--------------------
EXPENSES:
Travel 986
Other 112
NET LOSS $ (1 098)
=====================
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 1) $ (31.37)
=====================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1) 35
=====================
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 58
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
PERIOD FROM INCEPTION (JUNE 10, 1998) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
-----------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JUNE 10, 1998 $ -- $ -- $ -- $ --
Issuance of shares
for cash on June 10, 1998 35 65 0 100
Net loss -- -- (1098) (1098)
---- ---- ------ -----
BALANCES, DECEMBER 31, 1998 $ 35 $ 65 $(1098) $(998)
==== ==== ====== =====
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 59
<TABLE>
<CAPTION>
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (JUNE 10, 1998) THROUGH DECEMBER 31, 1998
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (1 098)
----------------
NET CASH USED IN OPERATING ACTIVITIES (1 098)
----------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of web site (49 002)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advance from shareholder 50 000
Issuance of common stock 100
----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 50 100
----------------
NET CHANGE IN CASH -
CASH, BEGINNING OF PERIOD -
----------------
CASH, END OF PERIOD $ -
================
</TABLE>
<PAGE> 60
VIRTUAL INFORMATION EXPRESS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Virtual Information Express, Inc. ("the Company") was incorporated in the state
of Maryland on June 10, 1998 and had no previous operations. Activities through
December 31, 1998 include organization of the Company, the raising of equity
capital and the acquisition of a web site.
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.
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 during the period.
NOTE 2 - SHAREHOLDERS' EQUITY
The Company has the authority to issue 1000 shares of common stock $1.00 par
value. The Company issued 35 shares of common stock to one founder for $100 in
June, 1998.
NOTE 3 - RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company has a $50,000 non-interest bearing advance
that is payable on demand to its original shareholder. The Company acquired its
web site from a company controlled by the founding shareholder.
NOTE 4 - SUBSEQUENT EVENT
The Company was acquired by A1 Internet.com, Inc. in February, 1999. The
acquisition consisted of 300,000 shares of A1 Internet.com's common stock valued
at $2.00 per share.
<PAGE> 61
F-5
NETWORLD OHIO, INC.
FINANCIAL STATEMENTS
YEAR ENDED MAY 31, 1998
<PAGE> 62
NETWORLD OHIO, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 57
Balance Sheet 58
Statement of Operations 59
Statement of Changes in Shareholders' Equity (Deficit) 60
Statement of Cash Flows 61
Notes to Financial Statements 62
</TABLE>
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Networld Ohio, Inc.
We have audited the accompanying balance sheet of Networld Ohio, Inc.
("Company") as of May 31, 1998, and the related statements of operations,
changes in shareholders' equity (deficit) and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management , as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Networld Ohio, Inc. as of May
31, 1998, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
SPICER, JEFFRIES & CO.
/s/ SPICER, JEFFRIES & CO.
Denver, Colorado
February 21, 2000
<PAGE> 64
NETWORLD OHIO, INC.
BALANCE SHEET
MAY 31, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
- --------------
Cash $ 660
Accounts Receivable 10 178
Other 2 117
--------------
TOTAL CURRENT ASSETS 12 955
--------------
FIXED ASSETS 224 074
Property and equipment, at cost (66 267)
--------------
Accumulated depreciation 157 807
--------------
TOTAL ASSETS $ 170 762
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
- -------------------
Accounts payable $ 166 176
Accrued expenses 26 165
Advances from shareholder 65 115
--------------
TOTAL CURRENT LIABILITIES 257 456
--------------
SHAREHOLDERS' DEFICIT
- ---------------------
Common stock, no par value, 500 shares
authorized, 400 shares issued and outstanding 500
Deficit (87 194)
(86 694)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 170 762
==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 65
NETWORLD OHIO, INC.
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C>
REVENUES
- --------
Hardware and software sales
Dial up service
Direct connect sales $ 65 753
Web service 301 569
Other 33 430
19 041
TOTAL REVENUES 29 921
--------------
COST OF SALES 449 714
- ------------- --------------
Equipment purchases
Telco circuits
Labor 62 102
Other 172 956
64 940
TOTAL COST OF SALES 5 112
--------------
GROSS PROFIT 305 110
--------------
OTHER EXPENSES 144 604
- --------------
General and administrative
Depreciation and amortization 194 228
Interest 46 408
TOTAL OTHER EXPENSES 8 436
--------------
NET LOSS 249 072
--------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 1)
$ (104 468)
==============
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1)
$ (261.17)
==============
400
==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 66
NETWORLD OHIO, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
Retained
Common Earnings
Stock (Deficit)
------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, MAY 31, 1997 $ 500 $ 17 274
Net loss (104 468)
---------------- ----------------
BALANCE, MAY 31, 1998 $ 500 $ (87 194)
================ ================
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 67
NET WORLD OHIO, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (104 468)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 46 408
Decrease in accounts receivable 21 327
Decrease in other current assets 351
Increase in accounts payable 159 390
Increase in accrued expenses 26 043
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 149 051
CASH FLOWS USED IN INVESTING ACTIVITIES
- ---------------------------------------
Purchase of fixed assets (178 989)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Advances from shareholder 20 016
-------------
NET DECREASE IN CASH (9 922)
CASH, at beginning of year 10 582
-------------
CASH, at end of year $ 660
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2 920
=============
Cash paid for income taxes $ 1 900
=============
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 68
NETWORLD OHIO, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MAY 31, 1998
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Networld Ohio, Inc. ("Company") was incorporated in June 1995 as an Ohio
corporation in Fremont, Ohio. The Company provides internet access and other
web services to its customers, primarily in Ohio.
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 which approximate fair value. Accounts payable,
shareholder advances and other liabilities are carried at amounts which
approximate fair value.
PROPERTY AND EQUIPMENT
The Company provides for depreciation of equipment using accelerated and
straight-line methods based on estimated useful lives of five to seven years.
Software is being amortized over three years.
REVENUE RECOGNITION
The Company recognizes revenue from hardware and software sales at the time of
sale. All other revenue is recognized over the period that the service is
provided.
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> 69
NETWORLD OHIO, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MAY 31, 1998
(continued)
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 - ADVANCES FROM SHAREHOLDER
Advances from shareholder totaling $65,115 bear interest at 11% and are payable
on demand. The advances were paid in full in April 1999.
NOTE 3- INCOME TAXES
The Company has an unused net operating loss carryforward of approximately
$83,500 for income tax purposes, all of which expires 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. This net operating loss carryforward may result in future
income tax benefits of approximately $28,400; 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.
Significant components of the Company's deferred tax liabilities and assets as
of May 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities $ --
==========
Deferred tax assets:
Net operating loss carry forwards $ 28 400
----------
Total deferred tax assets 28 400
Valuation allowance for deferred tax assets (28 400)
----------
$ -
==========
</TABLE>
The valuation allowance for deferred tax assets was increased by $28,400 during
1998.
<PAGE> 70
NETWORLD OHIO, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MAY 31, 1998
(continued)
NOTE 4- COMMITMENTS AND CONTINGENCIES
The Company leases its space from a related party under an operating lease
which was renewed in August 1998 for five years. Future minimum lease payments
under this noncancellable lease are as follows:
<TABLE>
<CAPTION>
Year
Ending
May 31, Amount
------- ------
<S> <C>
1999 $ 8,550
2000 8,400
2001 8,400
2002 8,400
2003 8,400
Thereafter 2,100
--------
$ 44,250
========
</TABLE>
Total rental expense for the year ended May 31, 1998 was $8,640.
NOTE 5- SUBSEQUENT EVENT
The Company was acquired by A1 Internet.com, Inc. in April 1999. The
acquisition consisted of a cash payment of $90,000, 37,000 shares of A1
Internet.com's common stock valued at $2.00 per share, and a short term
non-interest bearing promissory note for $180,000 maturing December 15, 1999.
<PAGE> 71
F-6
NETWORLD OHIO, INC.,
BALANCE SHEET
<TABLE>
<CAPTION>
28, FEBRUARY 1999 28, FEBRUARY 1998
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 12,904.00 $ 10,243.00
Receivables: $ 34,586.00 $ 6,061.00
Related Parties $ 1,034.00 $ 2,015.00
Prepaid Expenses $ 1,900.00 $ 1,400.00
Inventory $ 17,078.00 $ 884.00
-------------- --------------
$ 67,502.00 $ 20,603.00
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Computers & Equipment (note 1) $ 235,314.00 $ 201,506.00
Less: accumulated depreciation $ (61,373.00) $ (17,280.00)
-------------- --------------
$ 173,941.00 $ 184,226.00
-------------- --------------
OTHER ASSETS:
Software (note 1) $ 12,801.00 $ 8,163.00
Accumulated Amortization $ (4,894.00) $ (2,579.00)
-------------- --------------
$ 7,907.00 $ 5,584.00
-------------- --------------
TOTAL ASSETS $ 249,350.00 $ 210,413.00
-------------- --------------
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 195,548.00 $ 198,783.00
Loans Payable: Shareholders (note 2) $ 67,250.00 $ 60,839.00
Other Payables $ 2,914.00 $ 1,606.00
-------------- --------------
$ 265,712.00 $ 261,228.00
-------------- --------------
SHAREHOLDERS' EQUITY
Common Stock, no par value
500 Shares issued & outstanding $ 625.00 $ 500.00
Retained earnings (deficit) $ (16,987.00) $ (51,315.00)
-------------- --------------
$ (16,362.00) $ (50,815.00)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 249,350.00 $ 210,413.00
-------------- --------------
</TABLE>
<PAGE> 72
NETWORLD OHIO, INC.,
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES $ 215,854.00 $ 118,065.00 $ 527,795.00 $ 313,993.00
COST OF SALES $ (87,319.00) $ (70,653.00) $ (194,956.00) $ (194,554.00)
-------------- -------------- -------------- --------------
GROSS PROFIT $ 128,535.00 $ 47,412.00 $ 332,839.00 $ 119,439.00
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Salaries and related expenses $ 56,186.00 $ 38,655.00 $ 160,910.00 $ 117,637.00
Advertising $ 8,354.00 $ 4,259.00 $ 19,366.00 $ 6,651.00
Telephone $ 15,110.00 $ 8,060.00 $ 25,335.00 $ 19,026.00
Occupancy Costs (note 4) $ 2,630.00 $ 2,250.00 $ 7,730.00 $ 6,150.00
4)
General and administrative $ 13,427.00 $ 14,832.00 $ 37,458.00 $ 32,575.00
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES $ 95,707.00 $ 68,056.00 $ 250,799.00 $ 182,039.00
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest Income $ -- $ 75.00 $ -- $ --
Interest expense $ (2,144.00) $ (1,544.00) $ (11,833.00) $ (2,023.00)
-------------- -------------- -------------- --------------
TOTAL OTHER EXPENSE $ (2,144.00) $ (1,469.00) $ (11,833.00) $ (2,023.00)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 30,684.00 $ (22,113.00) $ 70,207.00 $ (64,623.00)
-------------- -------------- -------------- --------------
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE (NOTE 1) $ 61.37 $ (55.28) $ 140.41 $ (161.56)
-------------- -------------- -------------- --------------
WEIGHTED AVERAGE SHARES
OUTSTANDING 500 400 500 400
-------------- -------------- -------------- --------------
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
NETWORLD OHIO, INC.,
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 30,684.00 $ (22,113.00) $ 70,207.00 $ (64,623.00)
Adjustment to reconcile net loss to net cash used in
operating activities:
(Increase) Decrease in accounts receivable $ (23,930.00) $ 12,428.00 $ (24,408.00) $ 25,443.00
Increase in Inventory $ (13,490.00) $ (1,149.00) $ (16,861.00) $ (1,149.00)
Increase in Prepaid Expenses $ -- $ (1,400.00) $ (1,400.00)
(Increase) Decrease in other receivables $ 200.00 $ 350.00 $ (1,034.00) $ (2,015.00)
Increase in other payables $ 1,334.00 $ 1,259.00 $ 1,534.00 $ 1,485.00
Increase in accounts payable & accrued expenses $ 25,167.00 $ 23,243.00 $ 4,588.00 $ 192,020.00
------------- ------------- ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES $ 19,965.00 $ 12,618.00 $ 34,026.00 $ 149,761.00
------------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $ (15,511.00) $ (35,479.00) $ (24,041.00) $ (164,584.00)
------------- ------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES $ (15,511.00) $ (35,479.00) $ (24,041.00) $ (164,584.00)
------------- ------------- ------------ -------------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) shareholder loans, $ (467.00) $ 14,506.00 $ 2,134.00 $ 14,506.00
net
Issuance of common stock, net $ 125.00 $ -- $ 125.00 $ --
------------- ------------- ------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ (342.00) $ 14,506.00 $ 2,259.00 $ 14,506.00
------------- ------------- ------------ -------------
NET INCREASE (DECREASE IN CASH) $ 4,112.00 $ (8,355.00) $ 12,244.00 $ (317.00)
CASH, BEGINNING OF PERIOD $ 8,792.00 $ 18,598.00 $ 660.00 $ 10,560.00
------------- ------------- ------------ -------------
CASH, END OF PERIOD $ 12,904.00 $ 10,243.00 $ 12,904.00 $ 10,243.00
------------- ------------- ------------ -------------
</TABLE>
<PAGE> 74
NETWORLD OHIO, INC.,
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1999
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Networld Ohio, Inc., ("Company") was incorporated in June 1995 as an Ohio
corporation in Fremont, Ohio. The Company provides internet access and other web
services to its customers, primarily in Ohio.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimated 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, which approximate fair value. Accounts payable, shareholder
advances and other liabilities are carried at amounts, which approximate fair
value.
PROPERTY AND EQUIPMENT
The Company provides for depreciation of equipment using accelerated and
straight-line methods based on the estimated useful lives of five to seven
years. Software is being amortized over three years.
REVENUE RECOGNITION
The Company recognized revenue from hardware and software sales at the time of
the sale. All other revenue is recognized over the period that the service is
provided.
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 those temporary
differences are expected to be recovered or settled. Changes in tax rates are
recognized in income in the period that includes the enacted date.
<PAGE> 75
NETWORLD OHIO, INC.,
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1999
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (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
anti-dilutive.
NOTE 2 - ADVANCES FROM SHAREHOLDER
Advances from shareholder totaling $67,250 bear interest at 11% and are payable
on demand. The advances were paid in full in April 1999.
NOTE 3 - INCOME TAXES
The Company has an unused net operating loss carry forward of approximately $
83,500 for income tax purposes, all of which expires 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. This net operating loss carry forward may result in future income tax
benefits of approximately $5,776; however, because realization is uncertain at
this time, a valuation reserve in the same amount has been established. Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of February 28, 1999 are as follows:
Deferred tax liabilities $ -
---------
Deferred tax assets:
Net operating loss carry forwards $ 5,776
-------
Total deferred tax assets 5,776
Valuation allowance for deferred tax assets (5,776)
$ -
---------
The valuation allowance for deferred tax assets was decreased by $22,624 during
the nine months ended February 28, 1999.
<PAGE> 76
NETWORLD OHIO, INC.,
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1999
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company leases its space from a related party under an operating lease,
which was renewed in August 1998 for five years. Future minimum lease payments
under this noncancellable lease are as followed:
Year Ending
28, February Amount
2000 $ 8,400
2001 8,400
2002 8,400
2003 8,400
2004 2,100
---- --------
$ 35,700
Total rental expense for the nine months ending February 28, 1999 were $ 7,730.
NOTE 5 - SUBSEQUENT EVENT
The Company was acquired by A1 Internet.com, Inc., in April 1999. The
acquisition consisted of a cash payment of $90,000, 37,000 shares of A1
Internet.com's common stock valued at $2.00 per share, and a short-term
non-interest bearing promissory note for $180,000 maturing December 15, 1999.
<PAGE> 77
F-7
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(formerly Halo Holdings of Nevada, Inc.)
Consolidated Balance Sheet
September 30, 1999
==================
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 2,077,813
Receivables:
Trade, net (Note 1) 813,383
Note receivable, current portion (Note 3) 33,333
Related parties 49,100
Other 28,300
Prepaid expenses 167,184
Other current assets 27,664
------------
3,196,777
------------
PROPERTY AND EQUIPMENT, AT COST (NOTE 1):
Aircraft 1,008,256
Computers and equipment 1,819,371
Less: accumulated depreciation (533,704)
------------
2,293,923
------------
OTHER ASSETS:
Goodwill, net of amortization (Note 2) 8,257,526
Contracts (Notes 1 and 6) 1,498,000
Note receivable (Note 3) 46,987
Other 54,222
------------
9,856,735
------------
$15,347,435
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 606,769
Loans payable-shareholders (Note 4) 422,749
Notes payable (Note 5) 992,108
Other 58,624
------------
2,080,250
------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY (NOTE 6):
Common stock, $.001 par value, 20,000,000 shares authorized,
9,739,500 shares issued and outstanding 9,739
Preferred stock, $.001 par value, 5,000,000 shares authorized,
848,889 shares issued and outstanding 849
Additional paid-in capital 17,889,628
Notes receivable-common stock (440,000)
Retained earnings (deficit) (4,193,031)
------------
13,267,185
------------
$15,347,435
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 78
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(formerly Halo Holdings of Nevada, Inc.)
Consolidated Statements of Operations
Nine Months Ended September 30, 1999 and 1998
=============================================
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
NET SALES $ 1,867,789 $ 76,203
COST OF SALES (773,857) (8,626)
------------ -----------
GROSS PROFIT 1,093,932 67,577
------------ -----------
OPERATING EXPENSES:
Salaries and related expenses 1,325,868 112,500
Travel and entertainment 92,374 -
Bad debt expense 40,318 -
Legal and professional 199,192 41,000
Occupancy costs 112,769 10,218
General and administrative 318,823 23,146
Consulting 844,155 34,505
Depreciation and amortization 1,553,487 98,210
------------ -----------
TOTAL OPERATING EXPENSES 4,486,986 319,579
------------ -----------
OTHER INCOME (EXPENSE):
Interest income 19,106 -
Interest expense (76,214) (76,203)
------------ -----------
TOTAL OTHER EXPENSE (57,108) (76,203)
------------ -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (3,450,162) (328,205)
EXTRAORDINARY ITEM-FORGIVENESS OF DEBT 90,000 -
------------ -----------
NET LOSS $(3,360,162) $ (328,205)
============ ===========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE BEFORE EXTRAORDINARY ITEM (NOTE 1) $ (0.44) $ (0.08)
============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 1) (0.42) (0.08)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1) 7,910,739 3,974,359
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 79
A1 Internet.Com and Subsidiaries
(Formerly Halo Holdings of Nevada, Inc.)
Consolidated Statement of Shareholders' Equity
Nine Months Ending September 30, 1999
=====================================
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Paid in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 4,300,000 $ 4,300 - $ - $ 1,100,700
Issuance of common stock for cash
and notes receivable, less offering
costs of $50,000 500,000 500 - - 949,500
Issuance of warrants for offering costs of
$50,000 and acquisition costs of $717,979 - - - - 767,979
Business acquisitions:
Virtual Information Express, Inc. 300,000 300 - - 599,700
Computer Ease LLC 4,000,000 4,000 - - 7,996,000
NetWorld Ohio, Inc. 37,000 37 - - 73,963
Shares issued for services 560,000 560 - - 1,169,440
Shares issued in private sale 32,500 32 - - 32,468
Reacquired shares through disposition
of Skydive USA (400,000) (400) - - (799,600)
Gain on sale of Skydive USA to shareholder - - - - 514,383
Conversion of shareholder loan 120,000 120 - - 322,572
Conversion of shareholder loan - - - - 227,331
Issuance of warrants in connection with notes payable - - - - 122,952
Conversion of notes payable to stock, net of warrants - - 123,000 124 490,551
Issuance of preferred stock, net of offering
costs of $473,795 - - 725,889 725 2,791,979
Shares issued in private sale 100,000 100 - - 199,900
Shares issued in connection with acquisition
of contracts 190,000 190 - - 1,329,810
Net loss - - - - -
----------- -------- --------- ------ ------------
BALANCES, SEPTEMBER 30, 1999 9,739,500 $ 9,739 848,889 $ 849 $17,889,628
=========== ======== ========= ====== ============
<CAPTION>
Notes
Receivable (Deficit)
---------- ---------
<S> <C> <C>
BALANCES, DECEMBER 31, 1998 $ - $ (832,869)
Issuance of common stock for cash
and notes receivable, less offering
costs of $50,000 (240,000) -
Issuance of warrants for offering costs of
$50,000 and acquisition costs of $717,979 - -
Business acquisitions:
Virtual Information Express, Inc. - -
Computer Ease LLC - -
NetWorld Ohio, Inc. - -
Shares issued for services - -
Shares issued in private sale - -
Reacquired shares through disposition
of Skydive USA - -
Gain on sale of Skydive USA to shareholder - -
Conversion of shareholder loan - -
Conversion of shareholder loan - -
Issuance of warrants in connection with notes payable - -
Conversion of notes payable to stock net of warrants - -
Issuance of preferred stock, net of offering
costs of $473,795 - -
Shares issued in private sale (200,000) -
Shares issued in connection with acquisition
of contracts - -
Net loss - (3,360,162)
----------- -------------
BALANCES, SEPTEMBER 30, 1999 $(440,000) $(4,193,031)
=========== =============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 80
A1 Internet.Com, Inc.
(Formerly Halo Holdings of Nevada, Inc.)
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
---------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,360,162) $ (328,204)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,553,487 98,210
Bad debt expense 40,318 -
Forgiveness of debt (90,000) -
Issuance of common stock for services 1,170,000 -
Increase in trade receivables (352,424) -
Increase in other assets (28,795) -
Increase in prepaid expenses (144,796) (6,769)
Increase in accounts payable and accrued expenses 109,475 8,347
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,102,897) (228,416)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 100,000 -
Payments on note and other receivables (238,215) -
Acquisition of contracts (168,000) -
Acquisition of Virtual Information Express, Inc., net of cash acquired 2 -
Acquisition of Computer Ease, LLC, net of cash acquired - -
Acquisition of NetWorld Ohio, Inc., net of cash acquired (89,138) -
Purchases of property and equipment (981,634) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,376,985) -
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) related party loans, net - (167,215)
Proceeds from (payments on) shareholder loans, net 266,125 (90,296)
Proceeds from notes payable 1,003,500 -
Payments on notes payable (307,339) -
Issuance of common stock, net 792,500 500,000
Issuance of preferred stock, net 2,792,704 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,547,490 242,489
------------ ------------
NET INCREASE IN CASH 2,067,608 14,073
CASH, BEGINNING OF PERIOD 10,205 1,819
------------ ------------
CASH, END OF PERIOD $ 2,077,813 $ 15,892
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 76,214 $ 76,203
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of loans payable to capital $ 550,023 $ -
============ ============
Issuance of common stock for notes receivable $ 440,000 $ -
============ ============
Retirement of common stock from disposition of subsidiary $ 800,000 $ -
============ ============
Issuance of warrants in connection with notes payable $ 122,952 $ -
============ ============
Conversion of notes payable to preferred stock $ 490,675 $ -
============ ============
Issuance of common stock for contracts $ 1,330,000 $ -
============ ============
The Company purchased all of the capital stock of Virtual Information
Express, Inc., Computer Ease, LLC and Networld Ohio, Inc. for cash, notes
payable and common stock. In connection with the acquisitions, liabilities
were assumed as follows:
Fair value of assets acquired $ 10,857,170
Cash paid (89,136)
Notes payable issued (180,000)
Common stock issued (8,674,000)
Common stock warrants issued (717,979)
------------
Liabilities assumed $ 1,196,055
============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 81
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 which approximate fair value. Accounts payable, loans and
notes payable and other liabilities are carried at amounts which approximate
fair value.
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.
<PAGE> 82
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The company amortizes goodwill on a straight line basis over a period of five
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. Revenue from
installation and start-up charges is recognized over the expected benefit
period.
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.
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.
<PAGE> 83
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following summarized, proforma results of operations of the Company assumes
that the Company acquired VI, CE and Networld as of January 1, 1998:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Gross revenue $ 2,918,234 $ 8,388,574
Net loss before extraordinary item (3,007,215) (1,767,461)
Net loss (2,917,215) (1,767,461)
Net loss per common share
before extraordinary item (.32) (.21)
Net loss per common share (.31) (.21)
</TABLE>
The weighted average calculation used above includes the shares issued in
connection with the acquisitions as if they had been issued for all periods
presented.
<PAGE> 84
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
Notes payable at September 30, 1999 consists of the following:
<TABLE>
<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>
<PAGE> 85
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
* In connection with the issuance of these notes payable, $60,125 has been
allocated to the detachable stock warrants (see Note 6).
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. As of September 30, 1999, this offering has
resulted in the issuance of 725,889 shares with proceeds to the Company of
$2,792,704, net of offering costs. In connection with this offering, warrants to
purchase 500,000 shares of the Company's common stock at $5.50 per share, will
be issued to the underwriter at the closing of the offering. These warrants will
expire 5 years from the date of issuance.
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> 86
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5.50
---------
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> 87
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $11,085,153 $ 1,159,401
Netherlands 489 000 -- -- --
----------- ----------- ----------- -----------
$ 1,867,789 $ 76,203 $11,085,153 $ 1,159,401
=========== =========== =========== ===========
</TABLE>
The following table represents the income, profit or loss, and total assets of
each of the Company's reportable segments.
<TABLE>
<CAPTION>
Normal Airplane Total
<S> <C> <C> <C>
Revenue 1,702,270 165,519 1,867,789
Profit(Loss) (3,308,356) (51,806) (3,360,162)
Assets 14,585,452 761,983 15,347,435
</TABLE>
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.
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> <C> <C>
A-Netherlands 26.2 -- 49.5 --
B-United States 12.2 -- 27.7 --
</TABLE>
<PAGE> 88
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-$205,000, 2000-$136,000 and 2001-$33,000.
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> 89
F-8
A1 INTERNET.COM, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations reflects the
acquisitions of Computer Ease, LLC, Virtual Information Express, Inc. and
Networld Ohio, Inc. by A1 Internet.com, Inc. as if they had occurred on January
1, 1998.
The acquisition of Computer Ease, LLC consisted of the issuance of 4,000,000
shares of common stock at $2.00 per share.
The acquisition of Virtual Information Express, Inc. consisted of the issuance
of 300,000 shares of common stock at $2.00 per share.
The acquisition of Networld Ohio, Inc. consisted of a cash payment of $90,000,
37,000 shares of common stock at $2.00 per share and a short-term promissory
note of $180,000.
The acquisitions were accounted for using the purchase method of accounting.
Under the purchase method of accounting, assets acquired and liabilities assumed
are recorded at their fair values. No adjustments have been made in the pro
forma balance sheet to the carrying values of the assets acquired and
liabilities assumed since management believes that their carrying values
approximate fair value.
<PAGE> 90
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
A1 INTERNET.COM, INC. VIRTUAL
AND COMPUTER INFORMATION
SUBSIDIARIES EASE, LLC EXPRESS, INC.
--------------------- ---------- -------------
<S> <C> <C> <C>
NET SALES $1,036,384 $914,398 $245,500
COST OF SALES (256,496) (109,736) (243,520)
------------- ---------- ----------
GROSS PROFIT 779,888 804,662 1,980
------------- ---------- ----------
OPERATING EXPENSES:
Salaries and related expenses 1,119,117 273,772 -
Travel and entertainment 86,001 10,998 -
Bad debt expense 40,318 - -
Legal and professional 196,306 12,101 350
Occupancy costs 86,998 38,179 -
General and administrative 232,194 57,404 337
Consulting 812,231 - 31,924
Depreciation and amortization 93,327 11,800 -
------------- ---------- ----------
TOTAL OPERATING EXPENSES 2,666,492 404,254 32,611
------------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 19,058 - -
Interest expense (75,057) (2,008) -
------------- ---------- ----------
TOTAL OTHER EXPENSE (55,999) (2,008) -
------------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEM (1,942,603) 398,400 (30,631)
EXTRAORDINARY ITEM-FORGIVENESS OF DEBT 90,000 - -
------------- ---------- ----------
NET LOSS $(1,852,603) $398,400 $(30,631)
============= ========== ==========
NET LOSS PER SHARE OF
COMMON STOCK (0.37)
=============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,968,746
=============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
NETWORLD PRO FORMA AFTER
OHIO, INC. ADJUSTMENTS ACQUISITIONS
------------ ----------- ------------
<S> <C> <C> <C>
NET SALES $ 721,952 $- 2,918,234
COST OF SALES (341,594) - (951,346)
--------- ---------- ------------
GROSS PROFIT 380,358 - 1,966,888
--------- ---------- ------------
OPERATING EXPENSES:
Salaries and related expenses 211,026 - 1,603,915
Travel and entertainment 5,753 - 102,752
Bad debt expense - - 40,318
Legal and professional 2,003 - 210,760
Occupancy costs 12,120 - 137,297
General and administrative 121,827 - 411,762
Consulting - - 844,155
Depreciation and amortization - 1,457,210 (a) 1,562,337
--------- ---------- ------------
TOTAL OPERATING EXPENSES 352,729 1,457,210 4,913,296
--------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest income 48 - 19,106
Interest expense (2,848) - (79,913)
--------- ---------- ------------
TOTAL OTHER EXPENSE (2,800) - (60,807)
--------- ---------- ------------
NET LOSS BEFORE EXTRAORDINARY ITEM 24,829 (1,457,210) (3,007,215)
EXTRAORDINARY ITEM-FORGIVENESS OF DEBT - - 90,000
--------- ---------- ------------
NET LOSS $ 24,829 $(1,457,210) (2,917,215)
========= ========== ============
NET LOSS PER SHARE OF
COMMON STOCK (0.31)
============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 9,305,746 (b)
============
</TABLE>
See Notes to Combined Consolidated Statement of Operations.
<PAGE> 91
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VIRTUAL
A1 INTERNET.COM, INC. COMPUTER INFORMATION
AND SUBSIDIARIES EASE, LLC EXPRESS, INC.
---------------------- ---------- -------------
<S> <C> <C> <C>
NET SALES $ 76,203 $7,895,478 $-
COST OF SALES (8,626) (6,812,065) -
------------- ---------- -----------
GROSS PROFIT 67,577 1,083,413 -
------------- ---------- -----------
OPERATING EXPENSES:
Salaries and related expenses 112,500 483,600 -
Travel and entertainment - 120,768 -
Bad debt expense - 156,000 -
Legal and professional 41,000 9,127 -
Occupancy costs 10,218 61,491 -
General and administrative 23,146 153,525 -
Consulting 34,505 - -
Depreciation and amortization 98,210 62,155 -
------------- ---------- -----------
TOTAL OPERATING EXPENSES 319,579 1,046,666 -
------------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income - - -
Interest expense (76,203) (10,217) -
------------- ---------- -----------
TOTAL OTHER EXPENSE (76,203) (10,217) -
------------- ---------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (328,205) 26,530 -
EXTRAORDINARY ITEM-FORGIVENESS OF DEBT - - -
------------- ---------- -----------
NET LOSS $(328,205) $26,530 $-
============= ========== ===========
NET LOSS PER SHARE OF
COMMON STOCK (0.08)
=============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 3,974,359
=============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
NETWORLD PRO FORMA AFTER
OHIO, INC. ADJUSTMENTS ACQUISITIONS
------------ ----------- ------------
<S> <C> <C> <C>
NET SALES $ 416,893 $- $ 8,388,574
COST OF SALES (158,900) - (6,979,591)
---------- ---------- -----------
GROSS PROFIT 257,993 - 1,408,983
---------- ---------- -----------
OPERATING EXPENSES:
Salaries and related expenses 139,274 - 735,374
Travel and entertainment 5,938 - 126,706
Bad debt expense 2,621 - 158,621
Legal and professional 5,089 - 55,216
Occupancy costs 7,470 - 79,179
General and administrative 52,081 - 228,752
Consulting - - 34,505
Depreciation and amortization 46,408 1,457,210 (a) 1,663,983
---------- ---------- -----------
TOTAL OPERATING EXPENSES 258,881 1,457,210 3,082,336
---------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income - - -
Interest expense (7,688) - (94,108)
---------- ---------- -----------
TOTAL OTHER EXPENSE (7,688) - (94,108)
---------- ---------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (8,576) (1,457,210) (1,767,461)
EXTRAORDINARY ITEM-FORGIVENESS OF DEBT - - -
---------- ---------- -----------
NET LOSS $ (8,576) $(1,457,210) $ (1,767,461)
========== ========== ===========
NET LOSS PER SHARE OF
COMMON STOCK (0.21)
===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 8,311,359 (b)
===========
</TABLE>
See Notes to Combined Consolidated Statement of Operations.
<PAGE> 92
A1 INTERNET.COM, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Adjustment to record the amortization of goodwill of $9,714,736 over 60
months.
(b) The weighted average shares outstanding after the acquisition represents
the issuance of 37,000 shares of common stock of A1 Internet.com, Inc. to
the shareholders of Networld Ohio, Inc, the issuance of 4,000,000 shares
of common stock of A1 Internet.com, Inc. to the members of Computer Ease,
LLC and the issuance of 300,000 shares of common stock of A1 Internet.com,
Inc. to the shareholder of Virtual Information Express, Inc. The weighted
average shares outstanding was computed as if the shares issued in
connection with these acquisitions had been outstanding for the entire
period.
<PAGE> 93
A1 INTERNET.COM, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations reflects the
acquisitions of Computer Ease, LLC, Virtual Information Express, Inc. and
Networld Ohio, Inc. by A1 Internet.com, Inc. as if they had occurred on January
1, 1998.
The acquisition of Computer Ease, LLC consisted of the issuance of 4,000,000
shares of common stock at $2.00 per share.
The acquisition of Virtual Information Express, Inc. consisted of the issuance
of 300,000 shares of common stock at $2.00 per share.
The acquisition of Networld Ohio, Inc. consisted of a cash payment of $90,000,
37,000 shares of common stock at $2.00 per share and a short-term promissory
note of $180,000.
The acquisitions were accounted for using the purchase method of accounting.
Under the purchase method of accounting, assets acquired and liabilities assumed
are recorded at their fair values. No adjustments have been made in the pro
forma balance sheet to the carrying values of the assets acquired and
liabilities assumed since management believes that their carrying values
approximate fair value.
<PAGE> 94
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIRTUAL PRO FORMA
COMPUTER INFORMATION NETWORLD PRO FORMA AFTER
A1 INTERNET.COM, INC. EASE, LLC EXPRESS, INC. OHIO, INC. ADJUSTMENTS ACQUISITIONS
--------------------- --------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 84,560 $8,257,678 $- $ 598,106 $- $ 8,940,344
COST OF SALES - (6,809,861) - (216,202) - $(7,026,063)
------------- ---------- ---------- ---------- ----------- -------------
GROSS PROFIT 84,560 1,447,817 - 381,904 - 1,914,281
------------- ---------- ---------- ---------- ----------- -------------
OPERATING EXPENSES:
Salaries and related expenses - 650,808 - 148,144 - 798,952
Bad debt expense - 236,691 - - - 236,691
General and administrative 331,738 535,779 1,098 156,878 - 1,025,493
Depreciation 101,005 104,632 - 46,408 - 252,045
Amortization 30,984 - - - 1,942,947 (a) 1,973,931
------------- ---------- ---------- ---------- ----------- -------------
TOTAL OPERATING EXPENSES 463,727 1,527,910 1,098 351,430 1,942,947 4,287,112
------------- ---------- ---------- ---------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense (99,204) (12,717) - (11,587) - (123,508)
------------- ---------- ---------- ---------- ----------- -------------
NET INCOME (LOSS) $(478,371) $(92,810) $ (1,098) $ 18,887 $(1,942,947) $(2,496,339)
============= ========== ========== ========== =========== =============
NET LOSS PER SHARE OF
COMMON STOCK (0.12) (0.30)
============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,030,959 8,367,959 (b)
============= =============
</TABLE>
See Notes to Combined Consolidated Statement of Operations.
<PAGE> 95
A1 INTERNET.COM, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Adjustment to record the amortization of goodwill of $9,714,736 over 60
months.
(b) The weighted average shares outstanding after the acquisition represents
the issuance of 37,000 shares of common stock of A1 Internet.com, Inc. to
the shareholders of Networld Ohio, Inc, the issuance of 4,000,000 shares
of common stock of A1 Internet.com, Inc. to the members of Computer Ease,
LLC and the issuance of 300,000 shares of common stock of A1 Internet.com,
Inc. to the shareholder of Virtual Information Express, Inc. The weighted
average shares outstanding was computed as if the shares issued in
connection with these acquisitions had been outstanding for the entire
period.
