UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ________ TO __________.
COMMISSION FILE NUMBER _____________
A1 INTERNET.COM, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 03-7392107
---------------------- ---------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
15825 SHADY GROVE ROAD, ROCKVILLE, MARYLAND 20850
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(301) 947-0100
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registration pursuant to Section
12(g) of the Act:
Common Stock, $0.001 Par Value OTC Bulletin Board
--------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's Common Stock,
$.0.001, as of the latest practicable date: 10,582,000 as of June 30, 2000
<PAGE>
A1 INTERNET.COM, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED June 30, 2000
TABLE OF CONTENTS
PART I
Page
----
Item 1. Financial Statements and Supplementary Information .......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 16
PART II
Item 1. Legal Proceedings ........................................... 23
Item 2. Changes in Securities and Use of Proceeds ................... 23
Item 3. Defaults upon Senior Securities ............................. 23
Item 4. Submission of Matter to a Vote of Security Holders .......... 23
Item 5. Other information ........................................... 23
Item 6. Exhibits and Reports on Form 8-K ............................ 23
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
A1 Internet.com, Inc., and Subsidiaries
(formerly Halo Holdings of Nevada, Inc.,)
Consolidated Balance Sheet
30, June 2000 31, December 1999
Unaudited Audited
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 428,478.00 $ 619,391.00
Receivables:
Trade, net $ 1,220,962.00 $ 320,718.00
Notes Receivable, current portion $ -- $ 33,333.00
Related Parties (see note 3) $ 84,969.00 $ 97,750.00
Other $ 83,615.00 $ 57,826.00
Prepaid Expenses $ 250,700.00 $ 232,432.00
Net Assets of discontinued
operations (Note 8) $ 100,876.00 $ 253,918.00
Other current assets $ 29,350.00 $ 23,136.00
----------------- --------------
$ 2,198,950.00 $ 1,638,504.00
----------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Aircraft $ --
Computers & Equipment $ 2,629,745.00 $ 2,468,809.00
Less: accumulated depreciation $ (769,629.00) $ (601,231.00)
----------------- -----------------
$ 1,860,116.00 $ 1,867,578.00
----------------- -----------------
OTHER ASSETS:
Investments $ 1,822,260.00 $ 1,899,330.00
Goodwill, net of amortization(Note 2) $ 9,944,007.00 $ 8,262,490.00
Contracts, net of amortization $ 1,039,998.00 $ 1,248,000.00
Note receivable $ -- $ 46,987.00
Other $ 121,242.00 $ 160,073.00
----------------- -----------------
$ 12,927,507.00 $ 11,616,880.00
----------------- -----------------
Total Assets $ 16,986,573.00 $ 15,122,962.00
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 1,663,655.00 $ 686,418.00
Loans Payable: Shareholders (Note 4) $ 274,090.00 $ 361,674.00
Notes Payable $ -- $ --
Other $ 20,485.00 $ 96,034.00
----------------- -----------------
$ 1,958,230.00 $ 1,144,126.00
----------------- -----------------
SHAREHOLDERS' EQUITY (Note 5)
Common Stock, $.001 par value,
20,000,000 shares authorized,
10,582,000 shares issued and outstanding $ 10,582.00 $ 9,422.00
Preferred Stock, $.001 par value,
5,000,000 shares authorized
1,115,556 shares issued and outstanding $ 1,115.00 $ 1,115.00
Additional paid-in capital $ 21,585,399.00 $ 18,966,558.00
Notes receivable-common stock $ (360,000.00) $ (940,000.00)
Accumulated other comprehensive income $ 1,716,428.00 $ 1,793,497.00
Retained earnings (deficit) $ (7,925,181.00) $ (5,851,756.00)
----------------- -----------------
$ 15,028,343.00 $ 13,978,836.00
----------------- -----------------
Total Liabilities and shareholders equity $ 16,986,573.00 $ 15,122,962.00
----------------- -----------------
<PAGE>
A1 Internet.com, Inc., and Subsidiaries
(formerly Halo Holdings of Nevada, Inc.,)
Consolidated Statement of Operations
(Unaudited)
Three Months Ending Six Months Ending
June 30, June 30,
2000 1999 2000 1999
NET SALES $ 1,644,766.00 $ 680,381.00 $ 5,501,328.00 $ 680,381.00
COST OF SALES $ (1,266,692.00) $ (241,255.00) $ (4,596,306.00) $ (241,255.00)
---------------- ---------------- ---------------- ----------------
GROSS PROFIT $ 378,074.00 $ 439,126.00 $ 905,022.00 $ 439,126.00
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Salaries and related expenses $ 394,842.00 $ 406,970.00 $ 750,702.00 $ 426,316.00
Travel & Entertainment $ 13,158.00 $ 60,629.00 $ 48,836.00 $ 65,382.00
Bad Debt Expense $ 11,325.00 $ 40,318.00 $ 12,683.00 $ 40,318.00
Legal & Professional $ 67,261.00 $ 33,520.00 $ 137,800.00 $ 65,148.00
Occupancy Costs $ 144,014.00 $ 61,419.00 $ 226,291.00 $ 62,023.00
General and administrative $ 88,591.00 $ 226,091.00 $ 200,594.00 $ 249,225.00
Consulting $ 25,723.00 $ 40,827.00 $ 144,471.00 $ 186,655.00
Depreciation and amortization $ 726,484.00 $ 252,098.00 $ 1,388,402.00 $ 262,115.00
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES $ 1,471,398.00 $ 1,121,872.00 $ 2,909,779.00 $ 1,357,182.00
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Consulting fees $ (50,000.00) $ 149,000.00 $ (50,000.00) $ (451,000.00)
Other Income $ 13,397.00 $ -- $ 16,196.00 $ --
Interest expense $ (4,994.00) $ -- $ (8,799.00) $ (204.00)
---------------- ---------------- ---------------- ----------------
TOTAL OTHER EXPENSE $ (41,597.00) $ 149,000.00 $ (42,603.00) $ (451,204.00)
---------------- ----------------- ---------------- -----------------
NET LOSS FROM CONTINUING OPERATIONS $ (1,134,921.00) $ (533,746.00) $ (2,047,360.00) $ (1,369,260.00)
DISCONTINUED OPERATIONS (Note 8)
Loss from operations of discontinued susidiary $ 2,596.00 $ 48,041.00 $ (30,076.00) $ (15,381.00)
Gain on Disposal of Subsidiary $ -- $ -- $ 4,011.00 $ --
---------------- ---------------- ---------------- ----------------
TOTAL LOSS FROM DISCONTINUED
OPERATIONS $ 2,596.00 $ 48,041.00 $ (26,065.00) $ (15,381.00)
---------------- ---------------- ---------------- ----------------
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT $ 90,000.00 $ 90,000.00
---------------- ----------------
NET LOSS $ (1,132,325.00) $ (395,705.00) $ (2,073,425.00) $ (1,294,641.00)
---------------- ---------------- ---------------- ----------------
BASIC AND DILUTED NET LOSS PER
COMMON SHARE BEFORE
DISCONTINUED OPERATIONS $ (0.12) $ (0.06) $ (0.22) $ (0.18)
---------------- ---------------- ---------------- ----------------
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.12) $ (0.04) $ (0.22) $ (0.17)
---------------- ---------------- ---------------- ----------------
WEIGHTED AVERAGE SHARES
OUTSTANDING 9,408,374.00 9,387,166.00 9,405,187.00 7,511,958.00
---------------- ---------------- ---------------- ----------------
<PAGE>
A1 Internet.com, Inc., and Subsidiaries
(formerly Halo Holdings of Nevada, Inc.,)
Consolidated Statements of Cash Flows
(unaudited)
Three months ended Six Months ended
June 30, June 30,
2000 1999 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,132,325.00) $ (395,705.00) $ (2,073,425.00) $ (1,294,641.00)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization $ 729,190.00 $ 277,304.00 $ 1,393,814.00 $ 312,527.00
Bad debt expense $ 11,325.00 $ 40,318.00 $ 12,683.00 $ 40,318.00
Forgiveness of debt $ -- $ (90,000.00) $ -- $ (90,000.00)
Issuance of common stock for services $ 50,000.00 $ (149,000.00) $ 50,000.00 $ 451,000.00
Increase in trade receivables $ (306,364.00) $ (328,125.00) $ (629,214.00) $ (328,125.00)
Decrease (increase) in other
receivables and other assets $ 48,154.00 $ 107,664.00 $ 173,482.00 $ (23,836.00)
Decrease (Increase) in prepaid expenses $ (15,000.00) $ (106,600.00) $ (18,268.00) $ (116,342.00)
Increase in accounts payable
and accrued expenses $ 338,670.00 $ 90,518.00 $ 458,861.00 $ 116,846.00
Gain on disposal of subsidiary $ -- $ -- $ (4,011.00) $ --
---------------- -------------- ---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES $ (276,350.00) $ (553,626.00) $ (636,078.00) $ (932,253.00)
---------------- -------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable $ 450,000.00 $ 100,000.00 $ 450,000.00 $ 100,000.00
Payments on note and other
receivables $ (228,369.00) $ -- $ (228,369.00)
Acquisition of contracts $ (168,000.00) $ -- $ (168,000.00)
Acquisition of Virtual
Information Express, Inc.,
net of cash acquired $ -- $ -- $ 2.00
Acquisition of Computer Ease LLC,
net of cash acquired $ -- $ -- $ (24,221.00)
Acquisition of NetWorld Ohio, Inc.,
net of cash acquired $ (64,917.00) $ -- $ (64,917.00)
Acquisition of Commonwealth
Telecommunications
of North America Inc.,
net of cash acquired $ 81,342.00 $ 81,342.00
Purchases of property and equipment $ (63,605.00) $ (114,251.00) $ (95,835.00) $ (114,251.00)
Proceeds from sale of capital assets $ -- $ -- $ 710,366.00 $ --
---------------- -------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES $ 467,737.00 $ (475,537.00) $ 1,145,873.00 $ (499,756.00)
---------------- -------------- ---------------- ----------------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on)
related party loans, net $ -- $ --
Proceeds from (payments on)
shareholder loans, net $ (61,292.00) $ 84,000.00 $ (87,584.00) $ 72,070.00
Proceeds from notes payable $ -- $ 900,000.00 $ -- $ 900,000.00
Payments on notes payable $ (54,400.00) $ (174,468.00) $ (613,124.00) $ (210,342.00)
Issuance of common stock,net $ -- $ 50,000.00 $ -- $ 792,500.00
Issuance of preferred stock, net $ -- $ -- $ -- $ --
---------------- -------------- ---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ (115,692.00) $ 859,532.00 $ (700,708.00) $ 1,554,228.00
---------------- -------------- ---------------- ----------------
NET INCREASE (DECREASE IN CASH) $ 75,695.00 $ (169,631.00) $ (190,913.00) $ 122,219.00
CASH, BEGINNING OF PERIOD $ 352,783.00 $ 302,055.00 $ 619,391.00 $ 10,205.00
---------------- -------------- ---------------- ----------------
CASH, END OF PERIOD $ 428,478.00 $ 132,424.00 $ 428,478.00 $ 132,424.00
---------------- -------------- ---------------- ----------------
</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 the 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 on less favorable
terms. In addition, the Company relies on outside parties to market its products
and services to end-users.
The June 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.
<PAGE>
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.
Accounts Receivable
-------------------
The Company performs on-going credit evaluations of its customers. The Company
has established an allowance for doubtful accounts at June 30, 2000 of $
112,211.
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 owns equity securities of other issuers which appear on the
accompanying balance sheet as Investments. It has classified these 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 June 30,
2000. At June 30, 2000, the Company had available-for-sale equity investments in
public companies with a fair market value of $ 1,822,260 and a cost basis of $
105,832, resulting in a net unrealized gain of $ 1,716,428.
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.
<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 5) 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.
<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 approximately 25 resellers. The company formed A1 Telecommunications,
Inc., a wholly owned subsidiary, incorporated in the State of Maryland, which
acquired CTNA in June 2000 effective May 31, 2000. Accordingly, the accompanying
Financial Statements reflect the results of operations beginning June 1, 2000.
The acquisition price consisted of 1,200,000 shares of A1 Internet.com, Inc.,
common stock at $2.25 per share in exchange for 100% of the issued and
outstanding shares of CTNA. This transaction was accounted for using the
purchase method of accounting. At the time of the purchase, assets and
liabilities of CTNA were $497,748 and $497,227 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.
<PAGE>
The following summarized, proforma results of operations of the Company assumes
that the Company acquired CTNA on CTNA's date of inception (January 20, 2000):
Three Months Six Months
Ending Ending
June 30, 2000 June 30, 2000
------------- -------------
Net sales $ 2,111,453 $ 6,087,855
Net loss from continuing operations (1,288,751) (2,331,690)
Net loss (1,286,155) (2,357,755)
Net loss per share (.12) (.22)
The weighted average shares outstanding calculation used above includes the
shares issued in connection with the acquisition of CTNA as if they had been
issued for all periods presented.
NOTE 3 - NOTES RECEIVABLE-SHAREHOLDERS
In March 2000, a former officer and shareholder signed a 6-month balloon note
with no interest secured by Company stock. This note is due in full on August
31, 2000.
NOTE 4 - LOANS PAYABLE-SHAREHOLDERS
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 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.
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 issuance and redemption of 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 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 the notes.
<PAGE>
During the period ended December 31, 1999, the Company issued 342,500 common
shares for services, of which 282,500 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. On March 4, 1999, the
Company issued 250,000 shares of common stock at $2.00 per share to a
shareholder for services to be rendered. The services were never rendered and
the Company sought either return of the stock or damages. The dispute was
resolved in June 2000 pursuant to a settlement in which the Company received
$450,000.
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.
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>
Stock Warrants
Common stock warrants have been issued in connection with certain private
offerings, business acquisitions and notes payable. At June 30, 2000, warrants
to purchase common stock at various prices were outstanding, which expire as
follows:
Number Outstanding
And Exercisable at
Expiration Date June 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 exercisable at 10(cent) per share 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 exercisable at $5.50 per share 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, 386,650 warrants
were issued to the placement agents. The terms of the preferred stock offering
require additional warrants to be issued to the placement agents and the
investors if the Company does not have gross sales of $13,000,000 at certain
dates in fiscal 2000. For every $500,000 by which gross sales are less than
$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.
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
<PAGE>
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. The portion of the net operating
losses which the Company can utilize in any one year to offset future taxable
income, if any, is limited by reason of 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
$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 carryforwards 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 June 30, 2000 and, 1999:
Revenues Long-Lived
Assets
2000 1999 2000 1999
---- ---- ---- ----
United States $ 5,501,328 $ 680,381 $15,055,560 $12,621,959
----------- ----------- ----------- -----------
Total $ 5,501,328 $ 680,381 $15,055,560 $12,621,959
=========== =========== =========== ===========
<PAGE>
The following table presents information about the Company's segment revenues
and expenses for the six months ended June 30, 2000 and 1999:
Revenue 2000 1999
------- ---- ----
- Internet 1,699,462 680,381
- Telecommunications 373,355 0
- E-Commerce 3,428,511 0
Cost of Sales
- Internet 854,287 241,255
- Telecommunications 323,814 0
- E-Commerce 3,418,205 0
For the period ending June 30, 2000 and 1999, the Company's only activity
outside of their normal operations was the leasing of their aircraft and
skydiving. The results of operations of this segment have been presented as
discontinued operations (see Note 8).
The following customers each accounted for more than 10% of sales for the six
months ended June 30, 2000 and 1999:
% of Sales % of Receivables
---------- ----------------
Six Months Ended June 30, Six Months Ended June 30,
Customer 2000 1999 2000 1999
-------- ---- ---- ---- ----
A-United States 61.6 -- -- --
B-United States -- -- 34.4 --
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.
<PAGE>
Operating results of GP Air for the six months ending June 30, 2000 and 1999 are
as follows:
2000 1999
-------- ---------
Gross Revenue $ 0 $ 93,761
Net Loss (30,076) (15,381)
The assets net of liabilities of GP Air on June 30, 2000 have been reflected as
a net current asset of $ 100,876.
NOTE 9 - RELATED PARTY TRANSACTIONS
In March 2000, a 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.
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 June 30, 2000 are as follows:
Year Amount
---- ------
2001 $ 150,768
2002 $ 34,032
----------
$ 184,800
==========
Total rental expense for the six months ended June 30, 2000 and 1999 was
$226,291 and $ 62,023, 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.
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 year ended December 31, 1999 and our unaudited Consolidated
Financial Statements for the six months ended June 30, 2000 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
<PAGE>
internet access and related products. In particular, we target Associations,
Organizations, Societies, and other Internet Service Providers ("ISPs") that
will resell our services to end-users by allowing the resellers to "brand" our
products as their own. We offer branding of our Internet Access, Design,
Development, e-Commerce, and Hosting Services. We entered the internet business
by acquiring Virtual Information Express Inc., Computer Ease LLC., and NetWorld
of Ohio Inc., 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. During 1999 we received
rental income from leasing our airplanes to the purchasers of the skydiving
business. This activity was terminated in December 1999 and the results from
this operation are presented as discontinued operations in the accompanying
Financial Statements. In addition to our internet business we recently entered
the telecommunications industry by acquiring Commonwealth Telecommunications of
North America, Inc. in June 2000.
A1 Internet Services, Inc. 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 also focused from September 1999 to April 2000. 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. Our
results from operations during the second quarter 2000 show an increase of 258%
in connectivity revenue over the second quarter of 1999. During the second
quarter 2000 we suspended our e-commerce sales of computer hardware and
accessories due to the extremely low margins we experienced. This resulted in a
58% reduction in gross sales between the first and second quarters of 2000 but
an increase in gross profit from 13.6% in the quarter ended March 31, 2000 to
22.9% in the quarter ended June 30, 2000. We are exploring ways to resume this
business that will generate better margins.
We recently entered the telecommunications industry by acquiring Commonwealth
Telecommunications of North America, Inc. The Commonwealth acquisition provides
us with the opportunity to package internet connectivity and long distance
services into one program for our customers. Commonwealth is also planning to
add wireless handheld products and satellite TV to its service offerings.
Commonwealth is a switch-less reseller of long distance service. It has
approximately 25 agents nationwide that sell long distance services on a
commission basis. Commonwealth offers a flat-rate program. It does not have a
costly infrastructure. Commonwealth has relationships with the largest long
distance carriers in the world. Its billing system is totally web-based allowing
end-users to get up-to-date information on their usage and to avail themselves
of new service offerings with a simple click.
During the next eighteen months we intend to increase connectivity revenues by
focusing on increasing the number of end-users of our services. To that end we
have and will continue to intensify our sales efforts to wholesale customers who
resell our products and services to their own customers by offering branded
internet access along with high levels of customer service to businesses and
associations. We have also enlisted Commonwealth's agent program to sell our
package of internet and communication services throughout the United States. We
intend to establish a presence as a high bandwidth ISP, using wireless, cable
and DSL technologies, and increase our agent program to include international
territories. We also intend to increase the portion of our e-commerce revenues
that derive from sales of e-commerce solutions to others by creating a series of
on-line e-commerce infrastructure solutions that allow customers to enter the
internet economy with a minimum of effort. We offer each customer complete
control over the layout and functionality of its e-commerce site. To achieve
<PAGE>
this, we have expanded our staff of network engineers, programmers, customer
care and technical support specialists. We presently serve customers in all 50
states through more than 1500 Points of Presence (POPs). We offer distance based
education solutions in the United Kingdom and United States and plan to expand
to other localities and languages.
We will also continue to review acquisition opportunities, particularly
acquisitions of related technology based companies, located in smaller
metropolitan markets and rural communities. We believe that our current
organization and infrastructure will enable us to rapidly assimilate such
acquisitions and realize savings on personnel and equipment in smaller markets
that, in our opinion, have traditionally been under-served by other ISPs.
Until April 2000, the majority of our e-commerce revenues were derived from
sales of computer hardware and accessories over the Internet and revenues from
such sales are included in the category of electronic commerce or e-commerce in
the revenue tables which follow.
The following table sets forth certain information about the source of our
revenues:
Percentage of Revenues
--------------------------------------------------------------------------------
Source of Revenues Three Months Ended Six Months Ended
------------------- ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
--------------------------------------------------------------------------------
Connectivity & Hosting 39% 37% 20% 37%
Non Recurring Revenue 1 0 1 0
Design Fees 10 60 10 60
E-Commerce 26 3 62 3
Telecommunications 23 0 7 0
Total --------------------------------------------------
100% 100% 100% 100%
--------------------------------------------------------------------------------
<PAGE>
The following table sets forth certain information about the sources of our
direct costs:
Percentage of Cost of Sales
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
Cost of Sales June 30, June 30,
-------- --------
2000 1999 2000 1999
--------------------------------------------------------------------------------
CONNECTIVITY 29% 56% 13% 56%
COMPUTER EQUIPMENT 33 7 74 7
LABOR 8 31 4 31
OTHER COST 2 6 1 6
TELECOMMUNICATION 28 0 8 0
-------------------------------------------------
TOTAL 100% 100% 100% 100%
--------------------------------------------------------------------------------
Results of Operations - Three Months and Six Months Ended June 30, 2000 Compared
to Three Months and Six Months Ended June 30, 1999.
Revenues
Total revenues increased from $ 680,381 to $1,644,766 in the three months and $
680,381 to $ 5,501,328 in the six months ending June 30, 2000. Revenues for the
six months ended June 30, 1999 reflect no revenues in the first three months of
1999. During that period we were engaged in the skydiving business and the
results of that business are reflected under Discontinued Operations. In the
three months and six months ended June 30, 2000 and 1999, our revenues were
derived from the following sources:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Internet related business- connectivity
Hosting, design & E-commerce $1,271,411 $ 680,381 $5,127,973 $ 680,381
Telecommunications- Pre-paid
Long Distance Service $ 373,355 $ 0 $ 373,355 $ 0
<PAGE>
The principal components of our Internet related revenues were:
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
2000 1999 2000 1999
-------------------------------------------------------------------------
Connectivity $ 648,327 $ 251,306 $1,100,911 $ 251,306
Design Fees $ 168,326 $ 406,843 $ 568,308 $ 406,843
Electronic Commerce $ 433,690 $ 22,232 $3,428,511 $ 22,232
Non Recurring Internet $ 21,068 $ 0 $ 30,243 $ 0
Cost of Sales
Cost of sales increased from $ 241,255 and $ 241,255 in the three and six months
ended June 30, 1999 to $1,266,692 and $4,596,306 in the three and six months
ended June 30, 2000. The Cost of Sales for the six months ended June 30, 1999
reflects no costs incurred in the first three months of 1999. During that period
we were engaged in the skydiving business and the results of that business are
reflected under Discontinued Operations. In the three and six months ended June
30, 2000 our cost of sales consisted of the following:
Three months ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
----------------------------------------------------------------------------
Connectivity $ 375,617 $ 135,265 $ 619,721 $ 135,265
Design Fees $ 94,511 $ 74,690 $ 195,999 $ 74,690
Electronic Commerce $ 443,582 $ 17,066 $3,418,974 $ 17,066
Telecommunications $ 323,814 $ 0 $ 323,814 $ 0
Other $ 29,168 $ 14,234 $ 37,798 $ 14,234
<PAGE>
Operating Expenses
The following table sets forth certain information regarding our operating expenses:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------- --------------------------------------
2000 1999 2000 1999
OPERATING EXPENSES
Salaries and related expenses 394,842 26.8% 406,970 36.3% 750,702 25.8% 426,316 31.4%
Travel and entertainment 13,158 0.9% 60,629 5.4% 48,836 1.7% 65,382 4.8%
Bad debt expense 11,325 0.8% 40,318 3.6% 12,683 0.4% 40,318 3.0%
Legal and professional 67,261 4.6% 33,520 3.0% 137,800 4.7% 65,148 4.8%
Occupancy costs 144,014 9.8% 61,419 5.5% 226,291 7.8% 62,023 4.6%
General and administrative 88,591 6.0% 226,091 20.2% 200,594 6.9% 249,225 18.4%
Consulting 25,723 1.7% 40,827 3.6% 144,471 5.0% 186,655 13.8%
Depreciation and amortization 726,484 49.4% 252,098 22.5% 1,388,402 47.7% 262,115 19.3%
--------- -------- --------- ----- --------- ----- --------- -----
TOTAL OPERATING EXPENSES 1,471,398 100.0% 1,121,872 100.0% 2,909,779 100.0% 1,357,182 100.0%
--------- -------- --------- ----- --------- ----- --------- -----
</TABLE>
Amortization of the goodwill from the acquisitions of Virtual Information
Express, Inc., Computer Ease LLC, Networld Ohio, Inc., and Commonwealth
Telecommunications of North America Inc., total $ 1,216,265 in the six months
ended June 30, 2000. Our loss before interest, depreciation and amortization
(EBIDA) was $ 408,437 and $281,648 in the three months ended June 30, 2000 and
1999 and $658,958 and $1,107,145 in the six months ended June 30, 2000 and 1999.
Other Expenses
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. 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 or damages and we are attempting to determine whether we have a
legal basis to assert a claim. The Board also issued 250,000 shares to our
former President and director as executive compensation upon his becoming
President.
<PAGE>
Liquidity and Capital Reserves
Since our inception we have financed our operations primarily from the private
sales of equity securities. Total net proceeds from the sale of equity
securities in the period between our formation and June 30, 2000 amounted to
approximately $ 4,845,000
Cash Flow
Operating activities used cash of $ 276,350 and $ 553,626 in the three months
and $ 636,078 and $ 932,253 in the six months ended June 30, 2000 and 1999.
Investing activities provided and (used) cash of $ 467,737 and ($ 475,537) in
the three months and $ 1,145,873 and ($ 499,756) in the six months ended June
30, 2000 and 1999. Included in these amounts, discontinued activities provided
cash of $ 710,366 in the six months ended June 30, 2000, resulting from proceeds
from the sale of one of the Company's two airplanes.
Net Cash (used) and provided by financing activities was ($ 115,692) and $
859,532 in the three months and ($ 700,708) and $ 1,554,228 in the six months
ended June 30, 2000 and 1999. Included in these amounts, discontinued activities
used cash of $ 558,724 in the six months ended June 30, 2000 to pay off the
outstanding notes payable on the aircraft.
Working Capital
Our working capital, defined as the excess of our current assets over our
current liabilities, was $ 240,720 at June 30, 2000 compared to $ 494,379 at
December 31, 1999.
As of June 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 nine months, and anticipate that
during the third and 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.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Purchase Agreement, dated as of June 29, 2000, by and among
A1 Telecommunications, Inc., Commonwealth Telecommunications of
North America, Inc. and each of the shareholders of Commonwealth
Telecommunications of North America, Inc. (filed as Exhibit 2.1
to the Company's Report on Form 8-K filed August 7, 2000, and
incorporated herein by reference).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
for which their report on Form 10-QSB is being filed.
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: August 17, 2000 By: /s/ Bruce Bertmann
------------------------------
Bruce Bertmann, CEO
