U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------
FORM 10-QSB
------------------------------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to ___________
Commission file number : _________
A1 INTERNET.COM, INC.
---------------------------------------------------------------
(Exact name of Small Business Issuer as Specified in Its Charter)
NEVADA 03-7392107
------------------------------ --------------
(State Of Other Jurisdiction Of) (I.R.S. Employer
Incorporation Or Organization) Identification No.)
15825 SHADY GROVE ROAD, ROCKVILLE, MARYLAND 20850
--------------------------------------
(Address Of Principal Executive Offices)
(301) 947-0100
----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registration pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value OTC Bulletin Board
(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
State the number of share outstanding of each of the issuer's classes of
common equity, as of the latest Practicable date: 10,582,000 .
------------
Transitional Small Business Disclosure Format:
Yes No X
----- -----
<PAGE>
A1 INTERNET.COM, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED September 30, 2000
TABLE OF CONTENTS
PART I
Item 1. Financial Statements and Supplementary Data 3
Item 2. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations.
PART II
Item 3. Legal Proceedings 22
Item 4. Changes in Securities and Use of Proceeds 22
Item 5. Defaults upon Senior Securities 22
Item 6. Submission of Matter to a Vote of Security Holders 22
Item 7. Other information 22
Item 8. Exhibits and Reports on Form 8-K 22
2
<PAGE>
Part I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(Formally Halo Holdings of Nevada, Inc.,)
(Unaudited)
Balance Sheets
Sept. 30, Sept. 30,
ASSETS 2000 1999
------ ------------ ------------
CURRENT ASSETS:
Cash $ 119,116 $ 2,077,813
Receivables:
Trade, net 1,856,708 813,383
Note receivable, current portion 33,333
Related parties (see Note 3) 82,731 49,100
Other 70,966 28,300
Prepaid expenses 237,621 167,184
Inventory 30,049
Net assets of discontinued operations (Note 9) 70,990 0
Other current assets 0 27,664
------------ ------------
$ 2,468,181 $ 3,196,777
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Aircraft 1,008,256
Computers, software and equipment 2,702,955 1,819,371
Less: accumulated depreciation (845,528) (533,704)
------------ ------------
$ 1,857,427 $ 2,293,923
------------ ------------
OTHER ASSETS:
Investments 1,800,000 0
Goodwill, net of amortization (Note 2) 9,010,544 9,254,066
Contracts (Note 6) 1,297,000 1,498,000
Note receivable (Note 3) 224,660 46,987
Other 74,142 54,222
------------ ------------
12,406,346 10,853,275
------------ ------------
TOTAL ASSETS $ 16,731,954 $ 16,343,975
============ ============
See accompanying notes to financial statements
3
<PAGE>
<TABLE>
<CAPTION>
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(Formally Halo Holdings of Nevada, Inc.,)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Sept. 30, Sept. 30,
2000 1999
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,959,356 $ 606,769
Loans payable-shareholders (Note 4) 349,520 422,749
Notes payable 0 992,108
Other 78,937 58,624
------------ ------------
TOTAL CURRENT LIABILITIES $ 2,387,813 $ 2,080,250
------------ ------------
LONG TERM LIABILITIES:
Notes Payable $ 98,750 $ 0
------------ ------------
TOTAL LONG TERM LIABILITIES $ 98,750 $ 0
------------ ------------
TOTAL LIABILITIES $ 2,486,563 $ 2,080,250
------------ ------------
SHAREHOLDERS' EQUITY (NOTE 5):
Common stock, $.001 par value, 20,000,000 shares authorized,
10,582,000 shares issued and outstanding 10,971 9,739
Preferred stock, $.001 par value, 5,000,000 shares authorized,
1,115,556 and shares issued and outstanding 1,116 849
Additional paid-in capital 21,585,009 17,889,628
Notes receivable-common stock (360,000) (440,000)
Accumulated other comprehensive income 1,775,758 0
Retained earnings (deficit) (8,767,463) (3,196,491)
------------ ------------
14,245,391 14,263,725
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,731,954 $ 16,343,975
============ ============
See accompanying notes to financial statements
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(Formally Halo Holdings of Nevada, Inc.,)
(Unaudited)
Statements of Operations
Three Months Ended: Nine Months Ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 2,775,060 $ 1,093,647 $ 8,238,388 $ 1,867,789
COST OF SALES 1,618,745 523,798 6,177,051 773,857
------------ ------------ ------------ ------------
GROSS PROFIT $ 1,156,315 $ 569,849 $ 2,061,337 $ 1,093,932
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries and related expenses 709,807 399,552 1,460,509 825,868
Travel and Entertainment 51,967 26,992 100,803 92,374
Bad debt expense 15,012 0 27,695 40,318
Legal and professional 60,231 134,044 203,949 199,192
Occupancy costs 132,617 50,746 360,344 112,769
Advertising 5,626 0 15,185 0
General and administrative 236,460 69,598 427,892 318,823
Consulting 317 57,500 144,788 244,155
Depreciation and amortization 810,027 244,420 2,203,841 556,947
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES $ 2,022,064 $ 982,852 $ 4,945,006 $ 2,390,446
============ ============ ============ ============
OTHER INCOME (EXPENSE):
Consulting fees and special compensation 50,000 (649,000) (1,100,000)
Other income 146 0 4,222
Interest Income 19,106 16,131 19,106
Interest expense (26,679) (26,084) (52,391) (76,214)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE 23,467 (655,978) (32,038) (1,157,108)
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS ($ 842,282) ($ 1,068,981) ($ 2,915,707) ($ 2,453,622)
============ ============ ============ ============
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT 0 0 90,000
------------ ------------ ------------ ------------
NET LOSS ($ 842,282) ($ 1,068,981) ($ 2,915,707) ($ 2,363,622)
============ ============ ============ ============
BASIC AND UNDILUTED NET LOSS PER COMMON
SHARE BEFORE EXTRAORDINARY ITEM: ($ 0.08) ($ 0.11) ($ 0.30) (0.31)
------------ ------------ ------------ ------------
BASIC AND DILUTED NET LOSS PER
COMMON SHARE ($ 0.08) ($ 0.11) ($ 0.30) (0.30)
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,582,000 9,672,333 9,797,458 7,910,739
============ ============ ============ ============
See accompanying notes to financial statements
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A1 INTERNET.COM, INC., AND SUBSIDIARIES
(Formally Halo Holdings of Nevada, Inc.,)
(Unaudited)
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Three Months Ended: Nine Months Ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss ($ 842,282) ($1,068,981) ($2,915,707) (2,363,622)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 810,027 244,420 2,203,841 556,947
Bad debt expense 15,012 0 27,695 40,318
Forgiveness of debt 0 0 (90,000)
Issuance of common stock for services 0 719,000 50,000 1,170,000
Decrease (increase) in trade receivables (635,746) (24,299) (1,535,990) (352,424)
Increase in inventory (2,067) 13,346 (30,049) 0
Decrease (increase) in other receivables and other assets (198,086) (18,305) 200,912 (28,795)
Decrease (increase) in prepaid expenses 13,079 (28,454) (5,189) (144,796)
Increase in accounts payable and accrued expenses 270,101 (7,371) 960,605 109,475
Gain on disposal of subsidiary 0 (4,011)
----------- ----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ($ 569,962) ($ 170,644) ($1,043,882) ($1,102,897)
=========== =========== =========== ===========
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from note receivable 0 0 450,000 100,000
Payments on note and other receivables (9,846) 0 (238,215)
Acquisition of contracts 0 (168,000)
Acquisition of NetWorld Ohio, Inc.,
net of cash acquired 0 (89,136)
Acquisition of Commonwealth Telecommunications
of North America Inc., net of cash acquired (80,816)
Purchases of property and equipment (3,031) (867,383) (98,866) (981,634)
Proceeds from sale of capital assets 710,366
NET CASH USED IN INVESTING ACTIVITIES ($ 3,031) ($ 877,229) $ 980,684 ($1,376,985)
=========== =========== =========== ===========
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (payments on) related party loans, net 281,832 281,832
Proceeds from (payments on) shareholder loans, net (116,951) 194,055 (204,535) 266,125
Proceeds from notes payable 98,750 103,500 98,750 1,003,500
Payments on notes payable (96,997) (613,124) (307,339)
Issuance of common stock, net 0 0 792,500
Issuance of preferred stock, net 2,792,704 0 2,792,704
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 263,631 $ 2,993,262 ($ 437,077) $ 4,547,490
=========== =========== =========== ===========
NET INCREASE IN CASH ($ 309,362) $ 1,945,389 ($ 500,275) $ 2,067,608
CASH, beginning of period 428,478 132,424 619,391 10,205
----------- ----------- ----------- -----------
CASH, end of period $ 119,116 $ 2,077,813 $ 119,116 $ 2,077,813
=========== =========== =========== ===========
See accompanying notes to financial statements
6
</TABLE>
<PAGE>
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., Virtual Information Express, Inc., World Link Online.com, Inc., and
Commonwealth Telecommunications of North America, Inc., The results of
operations of businesses acquired that have been accounted for under the
purchase method of accounting are included in operations from the date of
acquisition. All significant inter-company balances and transactions have been
eliminated in consolidation. Gravity Pilot Air, Inc., is presented as a
discontinued subsidiary in the accompanying financial statements.
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, web hosting and e-commerce. The Company also
offers, through one of its subsidiaries long distance phone service through two
providers. The Company's ability to offer end-user access to an internet and
long distance network is dependent upon the Company's contractual relationships
with these 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, 2000 and 1999 amounts included herein are unaudited. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly, the financial position, results of
operations, cash flows and changes in shareholders' equity have been made.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
----------------
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
-----------------------------------
Financial instruments, including cash, receivables and other current assets, are
carried at amounts that approximate fair value. Accounts payable, loans and
notes payable and other liabilities are carried at amounts that approximate fair
value.
7
<PAGE>
Accounts Receivable
-------------------
The Company performs on-going credit evaluations of its customers. The Company
has established an allowance for doubtful accounts at September 30, 2000 and
1999 of $50,803 and $ 0 respectively.
Property and Equipment
----------------------
The Company provides for depreciation of equipment using accelerated and
straight-line methods based on estimated useful lives of three to seven years.
Depreciation of aircraft is computed using the straight-line method based on an
estimated useful life of ten years.
Investments
-----------
The Company has classified its equity securities as available-for-sale.
Available-for-sale securities are carried at fair market value, with unrealized
gains and losses reported as a separate component of shareholders' equity. These
available-for-sale securities subject the Company's financial position to market
risk. The Company may experience losses if the market values of these securities
decline subsequent to Sept. 30, 2000. At Sept. 30, 2000, the Company had
available-for-sale equity investments in public companies with a fair market
value of $ 1,800,000 and a cost basis of $ 105,832, resulting in a net
unrealized gain of $ 1,694,168.
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 two
years.
Goodwill
--------
Goodwill is amortized 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.
8
<PAGE>
Revenue Recognition
-------------------
The Company recognizes revenue from connectivity, long distance phone service
and web hosting 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 are 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.
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.
9
<PAGE>
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 $105,000,
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 $371,135.
On March 30, 1999, Skydive USA, a wholly owned subsidiary of the Company, was
sold to major shareholders of the Company. These two individuals tendered a
total of 400,000 shares valued at $2.00 per share of the Company's common stock
to the Company as consideration for the sale. The difference between the value
of the common stock ($800,000) returned and the net assets relating to Skydive
USA of $285,617, resulted in a net gain of $514,383. However, because the
transaction was among significant related parties and was determined to not be
at arms length, the gain was recorded as an increase to additional paid-in
capital. As a result, the net effect of the transaction was a net charge to
shareholders' equity of $285,617.
Commonwealth Telecommunications of North America, Inc., ("CTNA") was
incorporated on January 20, 2000 and is engaged in the business of providing
long distance pre-paid and post-paid telephone service through its nationwide
network of resellers. The company acquired CTNA in June 2000. The acquisition
consisted of 1,200,000 shares of common stock at $2.25 per share in exchange for
100% of the shares issued and outstanding in CTNA. This transaction was
accounted for using the purchase method of accounting. At the time of the
purchase, assets and liabilities of CTNA were $474,609 and $474,088
respectively. The excess of the cost of the acquisition over the fair value of
the net assets acquired was recorded as goodwill of $2,699,479.
NOTE 3 - NOTES RECEIVABLE-SHAREHOLDERS
In March 2000, a former officer and shareholder signed a 6-month balloon note
with no interest secured on company stock. This note was due in full on August
31, 2000; however, it was still outstanding on September 30, 2000.
NOTE 4 - LOANS PAYABLE-SHAREHOLDERS AND NOTE PAYABLE-SHAREHOLDER
The loans payable to shareholders shown on the accompanying balance sheet
includes a $100,000 loan bearing interest at 15% and due on demand after
November 1, 2000. The remaining amounts are advances that are non-interest
bearing and have no due date.
NOTE 5 - SHAREHOLDERS' EQUITY
Common Stock
------------
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.
10
<PAGE>
In November 1998, 300,000 shares of the Company's preferred stock were converted
to common stock on a 1 for 1 basis.
During 1999, the Company authorized common shares in connection with business
acquisitions and disposals as described in Note 2.
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. In March 2000, 40,000 of these shares were redeemed by the
Company as payment in full of $ 80,000 of this debt.
In the six months ended June 30, 1999 our former Board of Directors authorized,
and we issued, 50,000 shares of our common stock valued at $100,000 as advance
payments for consulting services to be provided by certain individuals who had
experience in the sky-diving business. The issuance of these 50,000 shares was
authorized by our former Board of Directors at a time that we were about to
dispose of our skydiving business and become a provider of Internet-related
services. The Board also issued 250,000 shares to our former President and
director as executive compensation upon his becoming President. We have been
unable to determine the value of the services, if any, received in exchange for
the 50,000 shares. We have determined to seek recovery of these shares issued as
advance payments for consulting services, and we are attempting to determine
whether we have a legal basis to assert a claim for recovery of the remaining
shares.
During the period ended December 31, 1999, the Company issued 342,500 common
shares for services, of which 282,500 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.
In July 1999 the Company issued 100,000 shares of common stock at $2.00 per
share to a director of the Company for a note receivable. In December 1999, the
Company also issued 250,000 shares of common stock at $2.00 per share to a
shareholder, which was paid for in a settlement in June 2000.
The Company acquired certain contracts from an unrelated entity to provide
internet service for cash of $168,000 and 190,000 shares of common stock valued
at $7.00 per share.
Preferred Stock
---------------
In July 1999, the Company commenced a private placement offering of its Series A
preferred stock at $4.50 per share. This offering resulted in the issuance of
970,331 shares with proceeds to the Company of $3,602,560, net of offering
costs.
In addition, notes payable in the amount of $525,680, net of warrants, were
converted to 145,222 shares of Series A preferred stock pursuant to the note
payable agreements.
11
<PAGE>
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.
Stock Warrants
--------------
Common stock warrants have been issued in connection with certain private
offerings, business acquisitions and notes payable. At September 30, 2000,
warrants to purchase common stock at various prices were outstanding, which
expire as follows:
Number Outstanding
And Exercisable at
Expiration Date Sept. 30, 2000 Exercise Price
-------------------------------------------------------------------
June 1, 2004 500,000 $ .10
June, 1 2004 42,500 5.50
November, 2004 386,650 5.50
-------
929,150
-------
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
$127,820.
In connection with the July, 1999 preferred stock offering, the 386,650 warrants
shown above were issued to the placement agents. Also, the terms of the
preferred stock offering require additional warrants to be issued to the
placement agents and the investors if the gross sales of $13,000,000 are not
achieved at certain dates in fiscal 2000. For every $500,000 less of gross sales
from $ 13,000,000, the investors will receive 100,000 warrants and each
placement agent will receive 50,000 warrants. These warrants will have an
exercise price of $2.75 and a term of five years from the date of issuance.
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.
12
<PAGE>
NOTE 6 - INCOME TAXES
At December 31, 1999, A1 Internet.com, Inc. has an unused net operating loss
carryforward of approximately $5,025,000 for income tax purposes, of which
approximately $449,000 expires in 2012, $490,000 expires in 2018 and the
remainder in 2019. 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 carry forward may result in future income tax
benefits of approximately $1,708,500; 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 A1 Internet.com, Inc.'s deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax liabilities $ -- $ --
========== ==========
Deferred tax assets: 1,708,500 119,000
Net operating loss carry forwards 320,000 --
---------- ----------
Temporary differences 2,028,500 119,000
Total deferred tax assets (2,028,500) (119,000)
---------- ----------
Valuation allowance for deferred tax assets $ -- $ --
========== ==========
The valuation allowance for deferred tax assets was increased by $1,909,500 and
$119,000 during 1999 and 1998, respectively.
NOTE 7 - 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, 2000 and, 1999:
Revenues Long-Lived Assets
-------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
United States $ 8,238,388 $1,867,789 $14,263,773 $13,147,198
----------- ---------- ----------- -----------
Total $ 8,238,388 $1,867,789 $14,263,773 $13,147,198
============ ========== =========== ===========
--------------------------------------------------------------------------------
13
<PAGE>
The following table presents information about the Company's segment revenues
and expenses for the nine months ended September 30, 2000 and 1999:
3 months 6 months
Revenue 2000 2000 1999
------- ---------- ---------- ---------
- Internet 973,567 2,635,029 1,702,270
- Telecommunications 1,633,247 2,006,602 0
- E-Commerce (206) 3,428,305 0
- Other Income 168,452 168,452 0
Cost of Sales
- Internet 414,338 43% 1,223,929 46% 747,464 43%
- Telecommunications 1,261,609 77% 1,585,423 49% 0
- E-Commerce (51,202) 3,367,699 98% 0
For the period ending September 30, 2000 and 1999, the Company's only activity
outside of their normal operations was in the leasing of their aircraft and
skydiving. The results of operations of this segment have been presented as
discontinued operations (see Note 8).
NOTE 8 - DISCONTINUED OPERATIONS
In December 1999, the Company adopted a plan to discontinue operations of
Gravity Pilot Air, Inc., ("GP Air"). The Company plans to sell the airplanes and
dissolve the subsidiary. Accordingly, the operating results of the GP Air
operations have been segregated from continuing operations and reported as a
separate line item on the statement of operations. As of June 30, 2000 the
Company recorded an additional gain of $ 4,011 to adjust the gains previously
recorded on its December 31, 1999 statements.
Operating results of GP Air for the nine months ending September 30, 2000 and
1999 are as follows:
2000 1999
-----------------------------
Gross Revenue $ 0 $ 93,761
Net Loss (28,757) (15,381)
The assets net of liabilities of GP Air on September 30, 2000 have been
reflected as a net current asset of $ 98,170.
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Subsequent to September 30, 2000, the company sold the operations of
Commonwealth Telecommunications of North America (CTNA) back to the original
owners. Originally issued A1 stock is being exchanged for the sale of CTNA. A1
retains the marketing and distribution channels of the long distance services.
The company recognizes a gain from discontinued operations of $48,715.
NOTE 9 - RELATED PARTY TRANSACTIONS
The former President of the Company returned 40,000 shares of Common stock to
the Company to satisfy an $ 80,000 note owed to the Company for the
aforementioned stock.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment from a non-related party under
operating leases. Future minimum lease payments under the non-cancelable lease
as of Sept. 30, 2000 are as follows:
Year Amount
---- ------
2001 $ 150,768
2002 $ 34,032
---------
$ 184,800
=========
Total rental expense for the nine months ended September 30, 2000 and 1999 was
$360,344 and $ 112,769, 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.
Note 11 - Cash Flow and Working Capital
Cash Flow
Operating activities used cash of $ 569,962 and $ 170,644 in the three months
and $1,043,882 and $ 1,102,897 in the nine months ended Sept. 30, 2000 and 1999.
Investing activities provided and (used) cash of $ (3,031) and ($ 877,229) in
the three months and $ 980,684 and ($ 1,376,985) in the nine months ended Sept.
30, 2000 and 1999.
Net Cash (used) and provided by financing activities was $263,631 and $2,993,262
in the three months and ($ 437,077) and $4,547,490 in the nine months ended
Sept. 30, 2000 and 1999.
Our cash position was $119,116 and $2,077,813 for the periods ended September
30, 2000 and 1999, respectively.
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<PAGE>
Working Capital
Our working capital, defined as the excess of our current assets over our
current liabilities, was $ 80,368 at Sept. 30, 2000 compared to $ 494,379 at
December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to expected capital
expenditures, capital contributions to joint ventures by joint venture partners,
and expected trends in operating losses and cash flows associated with
investments in new markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 10-K.
GENERAL
A1 Internet.com Incorporated (the "Company" or "A1") is a diverse holding
company whose wholly owned subsidiaries collectively provide a single-source
facilities-based bundled long distance, Internet access, and web based services
throughout the United States. We provide a broad range of e-Business and
information technology ("IT") professional services, including programming,
applications development, consulting services, and Web site hosting. Principally
our revenues are derived from fees earned in connection with the performance of
professional work and bundled communication services. The Company is currently
delivering its Internet connectivity products through wholesale infrastructure
agreements with the largest providers in the world. Additionally the Company is
a leading Internet Service Provider in the Central Ohio market where it owns a
regional ISP. A1 offers individual or bundled service options, superior customer
service, integrated billing option, competitive prices and branded affinity
marketing options. The Company has constructed its own state of the art hosting
network with excess capacity in order to accommodate expanded services in the
future. The Company intends to expand the services provided to its customers
through strategic alliances and opportunistic development of complementary
products. The Company uses its excess capacity in its hosting center to provide
services to commercial and wholesale customers located throughout North America.
A1's Network is directly connected to the Global Crossing World Wide Network,
which offers a unique broadband fiber-optic platform capable of offering a full
suite of communications services including fully featured voice, video and
high-speed Internet.
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<PAGE>
The Company expects that the operating losses in the past will continue to
diminish as it has focused on expense reduction and has expanded and developed
its network and customer base to sufficient levels.
The operating losses in the past have resulted primarily from expenditures
associated with the development of the Company's operational infrastructure,
costs incurred as it expanded in new markets, and marketing expenses. The
Company expects to improve with positive operating income while it continues to
invest in its network and sales channels. The Company expects to increase its
positive operating margins over time by (a) increasing the number of customers
it serves, (b) increasing the number of connections per customer through cross
marketing of its other services therefore increasing the revenue per customer,
(c) keeping the costs associated with new subscriber acquisition low and (d)
reducing the cost of providing services by capitalizing on economies of scale.
The Company expects its operating revenues will increase in future periods
through internal growth of its current customer base, increases in bundled
services and services per customer, and through acquisitions.
When the Company makes its initial investment in a new market, there are
normally operating losses as the network and marketing of the new products are
expanded to facilitate growth. The Company's ability to generate positive cash
flow in the future will depend on the extent of capital expenditures in current
and additional markets, the ability of the Company to generate revenues and cash
flow, competition in the Company's markets and any potential adverse regulatory
developments. The Company will be dependent on various financing sources to fund
its growth. There can be no assurance that such funding will be available, or
available on terms acceptable to the Company. See - "Liquidity and Capital
Resources."
--------------------------------------------------------------------------------
Revenues
Voice sales consist primarily of local toll; special features and long-distance
telephone service fees based on minutes of traffic and or contracted fees. Voice
sales include both resold services and traffic over contracted switches.
Data sales represent Internet access fees billed at contracted rates, plus
related revenues including web hosting and design services. The Company offers
both dial-up and high-speed services. The company provides dedicated and virtual
web server hosting solutions including e-commerce applications and customer
service programs.
Total sales year to date increased $6,370,599, or 441%, to $8,238,388 for the
quarter ended September 30, 2000 from $1,867,789 for the quarter ended September
30, 1999. The increase primarily resulted from average service connections,
which increased due to the acquisition of Commonwealth Telecommunications and
the Company's ability to bundle in Long Distance Services.
17
<PAGE>
Three Months Ended September 30, 2000 compared to Three Months Ended September
30, 1999:
Results of Operations
For the quarter ended September 30, 2000, sales increased 154% to $2,775,060
from $1,093,647 for the same period in 1999. Operating income before non-cash
stock based compensation of $0, depreciation and amortization was $(55,722) as
compared to $(25,406) for the same period in 1999.
Costs and expenses, excluding depreciation and amortization
Costs and expenses, excluding depreciation and amortization, are comprised of
direct costs, and operating, selling and general and administrative expenses.
Direct expenses include direct costs of providing services, primarily voice
services, and network access fees.
Direct expenses increased $1,094,947, or 209%, to $1,618,745 for the quarter
ended September 30, 2000 from $523,798 for the quarter ended September 30, 1999.
The increase was principally the result of higher sales, a lower margin on data
sales due principally to higher customer service and backbone costs offset by a
higher margin on voice sales and the reduction of focus on e-commerce
transactions.
Operating, selling, general and administrative expenses primarily include
advertising, sales, marketing, order processing, network maintenance and repair
("technical expenses") general and administrative expenses, installation and
provisioning expenses, and other corporate overhead.
Operating, selling, general and administrative costs increased $473,605, or 64%,
to $1,212,037 for the quarter ended September 30, 2000 from $738,432 for the
quarter ended September 30, 1999.
Technical expense, including installation and provisioning, increased
approximately $108,754, or 931%, for the quarter ended September 30, 2000 as
compared to the quarter ended September 30, 1999.
Sales and marketing costs increased approximately $148,479., or 276%, for the
quarter ended September 30, 2000 as compared to the quarter ended September 30,
1999. The increase resulted principally from additional staff and related
commissions and benefits. Additionally, event marketing activity has increased
to promote the Company's brand awareness, community involvement and new
products.
Advertising costs increased approximately $5,626, or 100%, for the quarter ended
September 30, 2000 as compared to the quarter ended September 30, 1999. The
increase is primarily timing related as the Company reviewed its advertising
campaign during the third quarter of 2000 and intends to start a more aggressive
campaign during the balance 2000.
General and administrative expenses increased approximately $166,862, or 240%,
for the quarter ended September 30, 2000 as compared to the quarter ended
September 30, 1999. The Company is in the process of developing information
18
<PAGE>
technology systems, which will provide a sophisticated customer care
infrastructure along with other billing and administrative support systems. Such
systems include a tracking and billing system to support the Companies bundled
service packages. These multiple systems are in various stages of development
and implementation. The expense increases represent staff additions to both
support this effort, and maintain the systems as well as consulting expenses
associated with the planning, analysis, data conversion and training phases of
these projects. The Company expects that such charges may increase in future
periods.
Depreciation and amortization
Depreciation and amortization was $810,027 for the quarter ended September 30,
2000 and $244,420 for the quarter ended September 30, 1999. The increase of
$565,607, or 231%, was the result of a higher depreciable basis resulting
primarily from amortization of intangible assets arising from the acquisitions
of Networld of Ohio in the middle of 1999 and Commonwealth Telecommunications in
May of 2000.
The basis of intangible assets was $9,010,544 for the quarter ended September
30, 2000 and $9,254,066 at September 30, 1999. Amortization expense as a
percentage of average intangible assets was 2.5% and 2.5% for the quarter ended
September 30, 2000 and 1999, respectively.
The Company expects that depreciation expense will increase in future periods
due to the expansion of the Company's advanced fiber optic network and
acquisition strategy.
Interest expense
For the quarter ended September 30, 2000, interest expense was $26,679 as
compared to $26,084 for the quarter ended September 30, 1999.
Income tax
The Company's effective income tax rate was a benefit of 0.4% and 2.3% for the
quarter ended September 30, 2000 and September 30, 1999, respectively. The
Company's cumulative losses have exceeded the tax effect of accelerated
deductions, primarily depreciation, which the Company has taken for federal
income tax purposes. As a result, generally accepted accounting principles do
not permit the recognition of such excess losses in the financial statements.
This accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999:
Results of Operations
For the nine months ended September 30, 2000, sales increased 341% to $8,238,388
from $1,867,789 for the same period in 1999. Operating losses before non-cash
stock based compensation of $342,500, depreciation, amortization was $(337,328)
as compared to $(360,433) for the same period in 1999.
19
<PAGE>
Sales
-----
Total sales increased $6,370,599, or 341% to $8,238,388 for the nine months
ended September 30, 2000 from $1,867,789 for the nine months ended September 30,
1999. The increase was fueled by higher service connections and the availability
of newly offered bundled services. The increase in service connections resulted
principally from growth in the Company's branded VISP program, the addition of
long distance services, and an increase in web service revenues.
Voice sales increased $2,006,602 or 100%, to $2,006,602 for the nine months
ended September 30, 2000 from $0 for the nine months ended September 30, 1999.
Data sales increased $3,089,234, or 911% to $3,428,305 for the nine months ended
September 30, 2000 from $339,071 for the nine months ended September 30, 1999.
Costs and expenses, excluding depreciation and amortization
-----------------------------------------------------------
Direct expenses increased $5,403,194 or 698%, to $6,177,051 for the nine months
ended September 30, 2000 from $773,857 for the nine months ended September 30,
1999. The increase was principally the result of higher sales, a lower margin on
data sales due principally to higher customer service and backbone costs offset
by a higher margin on voice sales and the reduction of focus on e-commerce
transactions.
Operating, selling, general and administrative expenses primarily include
advertising, sales, marketing, order processing, network maintenance and repair
("technical expenses") general and administrative expenses, installation and
provisioning expenses, and other corporate overhead.
Operating, selling, general and administrative costs increased $907,666, or
507%, to $741,165 for the nine months ended September 30, 2000 from $1,833,499
for the quarter ended September 30, 1999.
Technical expense, including installation and provisioning, increased
approximately $65,406, or 148%, for the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999.
Sales and marketing costs increased approximately $121,108 or 36%, for the nine
months ended September 30, 2000 as compared to the nine months ended September
30, 1999. The increase resulted principally from additional staff and related
commissions and benefits. Additionally, event marketing activity has increased
to promote the Company's brand awareness, community involvement and new
products.
Advertising costs increased approximately $15,185, or 100%, for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999. The increase is primarily timing related as the Company reviewed its
advertising campaign during the third quarter of 2000 and intends to start a
more aggressive campaign during the balance 2000.
General and administrative expenses increased approximately $109,069, or 34%,
for the nine months ended September 30, 2000 as compared to the nine months
ended September 30, 1999. The Company is in the process of developing
information technology systems, which will provide a sophisticated customer care
infrastructure along with other billing and administrative support systems. Such
20
<PAGE>
systems include a tracking and billing system to support the Companies bundled
service packages. These multiple systems are in various stages of development
and implementation. The expense increases represent staff additions to both
support this effort and maintain the systems as well as consulting expenses
associated with the planning, analysis, data conversion and training phases of
these projects. The Company expects that such charges may increase in future
periods.
Depreciation and amortization
-----------------------------
Depreciation and amortization was $2,203,841 for the nine months ended September
30, 2000 and $556,947 for the nine months ended September 30, 1999. The increase
of $1,646,894, or296%, was the result of a higher depreciable basis resulting
primarily from amortization of intangible assets arising from the acquisitions
of Networld of Ohio in the middle of 1999 and Commonwealth Telecommunications in
May of 2000.
The basis of intangible assets was $9,010,544 for the nine months ended
September 30, 2000 and $9,254,066 at September 30, 1999. Amortization expense as
a percentage of average intangible assets was 7.5% and 7.5% for the nine months
ended September 30, 2000 and 1999, respectively.
The Company expects that depreciation expense will increase in future periods
due to the expansion of the Company's advanced fiber optic network and
acquisition strategy.
Interest expense
----------------
For the nine months ended September 30, 2000, interest expense was $52,391 as
compared to $76,214 for the nine months ended September 30, 1999.
Income tax
----------
The Company's effective income tax rate was a benefit of 0.4% and 2.3% for the
nine months ended September 30, 2000 and September 30, 1999, respectively. The
Company's cumulative losses have exceeded the tax effect of accelerated
deductions, primarily depreciation, which the Company has taken for federal
income tax purposes. As a result, generally accepted accounting principles do
not permit the recognition of such excess losses in the financial statements.
This accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers.
Working Capital
--------------------
As of Sept. 30, 2000 we had no borrowing facility established with a financial
institution. We anticipate that our working capital together with the proceeds
of our unrealized investments will fund our operating cash flow shortfall
through December 31, 2000. We do not anticipate any need for significant
investment in our infrastructure for the next six months, and anticipate that
during the fourth quarter 2000 we will be in a positive cash flow position for
our operating needs and by the first quarter 2001 have sufficient operating cash
flow to fund our investment cash flow requirements.
21
<PAGE>
Part II
ITEM 3. LEGAL PROCCEDINGS.
No legal proceedings were ongoing or planned during the period.
ITEM 4. CHANGES IN SECURITIES & USE OF PROCEEDS.
None
ITEM 5. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 7. OTHER INFROMATION
None
ITEM 8. EXIBITS & REPORT ON FORM 8-K
1. Sale of Commonwealth Telecommunications of North America, Inc.,
22
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
A1 Internet.com, Inc.
--------------------
Date_________________ By: /s/ Bruce Bertman
------------------------------
Bruce Bertman, CEO
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