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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 000-274243
A1 Internet.com, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 03-7392107
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(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
15825 Shady Grove Road, Rockville, Maryland 20850
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 947-0100
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
A1 Internet.com Inc.'s revenues for its most recent fiscal year ended
December 31, 1999 were $4,087,216.
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On March 24, 2000, the aggregate market value of the voting stock of A1
Internet.com, Inc. (consisting of common stock, $0.001 par value) held by
non-affiliates of the Registrant (approximately 6,341,165 shares) was
approximately $26,949,951 based on the closing price for such common stock
($4.25) on said date as reported by the OTC Bulletin Board.
As of March 24, 2000, there were 9,382,000 outstanding shares of A1
Internet.com, Inc. common stock.
Documents incorporated by reference: Portions of (a) the Registrant's
Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by
reference in Part III hereof.
Transitional Small Business Disclosure Format (Check one) Yes No X
The Index of Exhibits filed with this Report begins on page 28.
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A1 INTERNET.COM, INC.
FORM 10-KSB
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business........................... 3
Item 2. Description of Property........................... 18
Item 3. Legal Proceedings................................. 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 20
Item 6. Management's Discussion and Analysis or Plan of Operation 20
Item 7. Financial Statements.............................. 25
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............. 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act.................................... 27
Item 10. Executive Compensation............................ 27
Item 11. Security Ownership of Certain Beneficial Owners and
Management...................................... 27
Item 12. Certain Relationships and Related Transactions.... 27
Item 13. Exhibits and Reports on Form 8-K.................. 28
Signatures ............................................. 29
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
A1 Internet.com, Inc. was incorporated under the laws of Nevada on
October 13, 1997, and was originally named Halo Holdings of Nevada, Inc. On July
9, 1999, we amended our articles of incorporation to adopt our current name,
which we believe more accurately reflects the business in which we are now
engaged.
From the date of our incorporation in 1997 until early 1999 our company
was engaged in skydiving and related business ventures. Between February and
April 1999 we sold our skydiving business and acquired three companies which are
providers of Internet connectivity and related products and services.
Specifically, in February 1999 we acquired Virtual Information Express, Inc. a
Maryland corporation which provides outsourced Internet services such as
e-commerce applications and collaborative technologies. In March 1999, we
acquired Computer Ease LLC, a Maryland limited liability company which provides
Web design and development services to corporate clients and associations.
Computer Ease has since been merged into our subsidiary A1 Internet Services,
Inc., a
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Delaware corporation. In April 1999 we acquired Networld Ohio, Inc., an Ohio
corporation, which is an Internet service provider ("ISP") based in Freemont,
Ohio. On March 30, 1999, we sold Skydive USA, our subsidiary engaged in the
skydiving business and leased the two aircraft used in that business to that
former subsidiary. We sold one of the airplanes in the first quarter of 2000 and
we have not yet determined whether we will continue to lease or sell the second
aircraft. In addition, in October 1999, we formed Worldlink On-Line, Inc., a
Delaware corporation that is an ISP based in Boston, Massachusetts of which we
own 80%. During 1999 we also acquired a 9.6% interest in Moneyzone.com, Inc.
(formerly known as EBonline.com, Inc.). As a result of these transactions, our
principal business now is providing Internet access and related products and
services.
On August 30, 1999, we concluded an asset purchase agreement with Net
America, through which we acquired selected contracts to provide Internet
connectivity and, to a lesser extent, value added services to resellers of those
services. In November 1999, we terminated contracts with two ISPs which we had
acquired in the Net America transaction. The remaining contracts acquired in
that transaction do not yet account for a significant portion of our revenues.
Our principal offices are located at 15825 Shady Grove Road, Rockville,
MD 20850 (telephone number 301-947-0100).
Overview
Through our subsidiaries we provide associations and businesses with
opportunities to generate revenues by supplying those associations and
businesses with Internet technology solutions and services that they can reoffer
under their own names and brands. Our products and services enable associations
and businesses to offer their members, customers and others a variety of revenue
producing solutions and services without making large investments in technology,
infrastructure or staff. The principal products and services which we offer are:
- Web site creation and design;
- Web site hosting;
- Co-location;
- Local telephone call access to the AT&T and Megapop Internet
networks through the AT&T network's approximately 1200 points of
presence and the Megapop network's approximately 775 points of
presence located across the United States and in Canada;
- Complete electronic commerce services;
- E-mail and related services such as conference and bulletin board
facilities and mailing list management; and
- Webcentric applications such as calendar services, document
management and encryption.
We also sell educational courses developed by others to persons who receive
those courses over the Internet. In addition, we own one regional ISP located in
Canton, Ohio which had a total of 4,350 subscribers as of October, 1999.
Recently we have also begun Worldlink On-Line, Inc., a second ISP in Boston,
Massachusetts. Worldlink is a new operation which has not yet generated a
significant number of subscribers or material revenues.
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Industry Background
The Internet is a global network of multiple private and public networks
that use standardized communication protocols to communicate with each other.
The Internet has become an important communication and commercial medium and
presents a significant opportunity for associations and businesses to interact
in new and different ways with a larger number of members, customers, employees,
suppliers and partners. As use of the Internet grows, associations and
businesses are increasing the breadth and depth of their Internet product and
service offerings. Pioneering Internet-based organizations have developed
Internet products and services in areas such as finance, insurance, media,
tourism, retail and advertising. Other organizations have begun to use the
Internet for an expanding variety of applications, ranging from corporate or
association publicity and advertising, to sales, distribution, customer service,
employee training and communication with partners. Increasingly, Internet
operations are becoming mission-critical for many of these enterprises. To
ensure the reliability of their Internet operations, enterprises are requiring
that these operations have high performance standards, scalability and expert
management 24 hours a day, 7 days a week.
Enterprises generally utilize two types of Internet services:
connectivity and valued-added services. Connectivity services provide access to
the Internet, while value-added services consist of products such as Web design
and hosting, electronic commerce services, and communication services that
improve the internal and external operations of an enterprise. Internet
connectivity and value-added services represent two of the fastest growing
segments of the telecommunications services market. The availability of Internet
access, the advancements in technologies required to navigate the Internet and
the proliferation of content and applications available over the Internet have
attracted a growing number of Internet users.
The Internet service provider market is segmented into large national or
multinational providers with large high speed networks and regional or local
ISPs who enlist subscribers under their own names but typically rely upon the
larger providers for Internet access. The largest providers, like AT&T, have
what are referred to as "tier one" networks, which exchange Internet traffic
cost-free, at multiple public peering points, as well as through private peering
arrangements. As the number of ISPs has grown, the requirements to become a tier
one network have increased. It has therefore become more difficult to achieve
tier one provider status. Regional and local ISPs typically purchase access to
the Internet, and invest in
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equipment and personnel necessary to provide products and services and
customized hands-on support, and bear the cost of marketing. Since regional and
local ISPs often have limited financial resources, the range of products and
services which they offer is often limited.
As is typical in the case of a new and rapidly evolving industry the
Internet is characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions. Demand for
recently introduced products and services is subject to a level of uncertainty.
Despite growing interest in the many uses of the Internet some potential users
could be deterred from purchasing Internet access services because of a
perceived inconsistent quality of service, the need to deal with multiple and
frequently incompatible vendors, and perceived inadequate protection of the
confidentiality of stored data and information moving across the Internet. In
particular, a perceived lack of security of commercial data, such as credit card
numbers, could impede commercial exploitation of the Internet. There can be no
assurance that encryption or other technologies will satisfactorily address
these security concerns. The adoption of the Internet for commerce and
communications, particularly by those individuals and enterprises which have
historically relied upon alternative means of commerce and communication,
generally requires the understanding and acceptance of a new way of conducting
business.
Our Business Strategy
Our business strategy is to combine the global scale of tier one
providers with the local presence of regional and local ISPs. We provide
affordable connectivity on a global scale by contracting with AT&T and Megapop,
leading tier one providers, for access to their Internet network at a fixed
monthly fee per end-user. We enable associations, membership sales organizations
and other affinity groups to create non-dues revenue and sales programs by
offering their members high quality Internet products and services without the
investment in technology, equipment and personnel that would ordinarily be
required to establish an ISP. We enable existing regional and local ISPs to
reduce and control their costs, focus their energies on sales and enhance their
marketing by providing, at affordable rates, a variety of products and services
and high quality support services which those ISPs resell to their customers. In
effect, we enable associations, membership sales organizations and ISPs to
become virtual ISPs who market under their own name products and services which
they purchase from us.
We anticipate that a majority of the end-users of our services will be
derived from resellers of our products and services. Therefore, to a large
extent, our ability to grow depends upon the resources and dedication which
resellers are willing to commit to marketing our services. Our current business
strategy also depends upon being able to charge for connectivity to realize
recurring revenues. Recently various providers have begun offering free access
to the Internet. We believe that this practice will not become prevalent among
the customers we are targeting. If our belief is erroneous, we would be required
to develop a different approach to marketing our products and services. Much of
our anticipated growth will be derived from the sale of our electronic commerce
related products. Our ability to grow also depends upon the increasing
acceptance of electronic commerce and the reliability of the inventory, billing
and delivery systems utilized by electronic commerce vendors.
Markets
We focus on three market segments: associations; membership marketing
companies which have an existing customer base; and, regional and local ISPs.
Associations. There are numerous non-profit associations and a number of
other affinity groups in the United States. These organizations regularly
communicate with established memberships composed of persons with common
interests. We offer these organizations a means to communicate with their
members and to provide membership services. In addition, our connectivity
services generate subscription income and our electronic commerce products
provide organizations that are dependent upon membership dues for their
revenues with opportunities to realize non-dues revenue without large capital
investments.
Membership Marketing Companies. There are many large membership-marketing
businesses in the United States which have an established customer base. To
these businesses we offer sales programs with opportunities for recurring
profits, low barriers to entry and opportunities to build brand equity.
Regional and Local ISPs. There are more than 7,900 ISPs in the United
States, according to Thelist.com. We offer these ISPs the opportunity to control
their costs by purchasing connectivity and other products and services at a
fixed price for each end-user and reselling those products and services under
their own names or brands. This allows the ISPs to focus on marketing and
provides them with a broader range of products and services than they might
otherwise be able to offer.
Sales
Our direct sales force consists of two persons dedicated to association
and membership sales and three persons dedicated to the sale of Web site design,
Web site hosting, electronic mail services and other value added products. In
addition, we utilize indirect sales channels, principally the AT&T Internet
network sales force, trade associations and other affinity groups to supplement
our direct sales force.
Products and Services
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We offer a variety of Internet services including connectivity, electronic mail
services, electronic commerce services, Web hosting and Web site design. We
intend to develop a broader range of value added solutions and services
independently, through acquisitions and through strategic relationships with
providers. Following is a description of the products and services which we are
currently providing to our customers.
Connectivity
We offer a variety of Internet access solutions, providing basic
connectivity to the Internet, as well as value-added products and services such
as e-mail that enable our customers to expand their basic Internet connectivity
capability. We currently offer both analog and integrated services digital
network dial-up access at speeds up to 128 Kbps. We provide this access at local
telephone rates by means of approximately 1200 points of presence in the AT&T
Network and approximately 775 points of presence in the Megapop network which
are located throughout the United States and part of Canada. We also offer frame
relay dedicated connectivity at speeds up to 56 Kbps. Our Flex T-1(TM) Frame
Relay Account offers access to T-1 lines on an as needed basis and at bandwidths
ranging from 256 Kbps to in excess of 1024 Kbps. We also offer a Digital
Subscriber Line service that permits access to the Internet at up to 1.5 Mbps.
These services accommodate connectivity requirements of Internet users ranging
from the single user with a computer in his or her home to work groups and
businesses with multiple users.
Our connectivity service prices vary depending on whether the customer is
a retail or wholesale customer, although the services made available to both
customers are identical. Retail customers are end-users that purchase and
utilize our dial up connectivity services directly. Wholesale customers are
businesses and associations that resell our services to end-users. We currently
charge each retail customer a monthly fee ranging between $19.95, for our basic
analog service, and $39.95, for our premium integrated services digital network
access. As of December 31, 1999, we had 5,000 retail customers which accounted
for 55% of our connectivity customers. Our wholesale customers are charged a
monthly fee on a sliding scale based on the number of users utilizing our
connectivity services through that wholesale customer. At current usage levels,
we charge each wholesale customer $13 per user, per month. As the number of
subscribers brought to us by a wholesale customer increases beyond 50,000, the
monthly charge per user will decrease until it reaches $9 per month for 250,000
or more users. At December 9, 1999, we had 23 wholesale customers that resell
our services to approximately 4,000 end-users who represent 45% of our
connectivity customers.
Custom Site Design
Web site design is the development of the content that will be
displayed on the Web site when it is being viewed on the Internet. We design Web
sites that convey our customers' marketing messages. Our services range from the
development of a basic Web page to the development of a sophisticated e-commerce
Web site. In addition, we provide domain name registration, place Web site
information in search engines, issue electronic press releases and track the
detailed use of each site. We also offer co-linking of non-competing Web sites,
banner advertisements on Web sites and links to cyber malls, associations and
groups. Our prices for Web site design are based upon the time required and the
materials used to design the site.
Web Site Hosting
We offer our customers several options for hosting their Web sites. A
customer can share space on a server which also hosts the Web sites of other
customers. If a customer chooses, we provide a separate server dedicated to that
customer's Web site. A Web site provides a company with a tangible identity and
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interactive presence on the Internet. The site allows a company to post
information about itself that is easily accessible to all Internet users. Web
sites are also the basis for providing electronic commerce, where a company can
advertise and sell its products and services. We offer a comprehensive range of
basic Web site hosting products, as well as a growing suite of enhanced Web site
hosting products including electronic commerce solutions. Generally, our
customers elect to rely upon us to provide the hardware and software that is
necessary to host a Web site. We provide these services from a reliable data
center environment. We offer three basic Web site hosting plans, the largest of
which provides up to 5,000 megabytes of data transfer per month and up to 50
megabytes of disk storage on servers located at dedicated space in the Frontier
Global network operations center. The Frontier Global center is maintained and
serviced by on-sight technical personnel 7 days a week, 24 hours a day. Our
monthly fees for the three plans are $34.95, $59.95 and $79.95, respectively.
We also offer co-location to customers who have the resources to manage
their own servers and Web sites and who prefer not to share a server with
others. Co-location customers receive the benefits of having their servers
housed in the network operations center, uninterrupted power supply, daily tape
back-up and the availability of a catastrophic recovery process. We charge each
co-location customer an initial set up fee of $150. Thereafter, our monthly
charges vary between $495 (for our basic monthly service plan) and $645 (for our
premium monthly service plan).
Electronic Commerce
Electronic commerce is the execution of commercial transactions over the
Internet. Our electronic commerce services provide businesses the ability to
sell products and services on the Internet. We create links to our customers'
Web sites that bring purchasers into our customers' on-line stores. Our
e-commerce service displays products, takes purchase orders for specified
quantities of each product ordered, collects billing addresses, credit card
information and shipping information, chooses a shipping method, forwards this
data to the seller for completion of each order, and prepares a confirmation of
each order for the purchaser. Our servers deploy the latest encryption software
and digital signature solutions in order to protect the security of our
customers' electronic commerce transactions. Each secure Web Site has its own
Verisign Digital ID and dedicated payment system. We work directly with each
customer's bank to ensure secure, complete technology transfer while maintaining
secure data protection schemes. All customer information is housed on dedicated
machines and protected from unauthorized access by our Sun firewall. Our system
is flexible and permits sellers to add, delete or modify products, add pricing
variations, change product descriptions, update prices, and offer different
pricing levels or volume discounts. Our platform also enables clients to conduct
electronic auctions and to merchandise products in various other ways. Our
prices for providing electronic commerce services range from $99 to $249 per
month, depending on the complexity of the services desired by our customers.
We have also begun to utilize our electronic commerce platform to sell
products ourselves. We are currently offering a series of educational courses
delivered over the Internet and a range of high digital imaging equipment. We
are negotiating arrangements to obtain other products for sale.
Other Services
We offer a variety of other services, which enable communication
over the Internet. These include virtual hosting of electronic mail. This allows
users to maintain their own domains while housing their e-mail on our servers.
We also offer the filtering of unsolicited e-mail. Our ListServe Management
product enables the broadcast of e-mail to an established user group. Our
E-Share product provides centralized controlled communication among a specified
group of people. It is used to conduct training sessions electronically, thereby
eliminating the travel and related costs associated with live
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sessions. Our Web board product is used to post messages to members of a closed
group and allows recipients of messages to respond. We offer our customers
various combinations of these services which we call packages. We charge our
customers a monthly fee per user per package, which varies from $0.10 to $0.50
depending on the complexity of the package.
Customers
We provide value added services to Associations. Our association
customers include the National Franchise Association of Burger King, the
American Association and Society of Medical Executives, the Medical State
Society of New York, Meeting Planners International, the Aircraft Owner and
Pilot's Association, and the Association of American Railroads. Each of these
associations generate between $20,000 and $250,000 in revenues per year to us.
As a group, these associations account for approximately $750,000 of our annual
revenues.
At September 30, 1999 we had approximately 16,000 users of our
connectivity services. Approximately 7,000 of these were retail customers, and
approximately 9,000 were users who came to us through wholesale customers.
Retail customers are end-users that purchase and utilize our dial up
connectivity services directly, while wholesale customers are businesses and
associations that resell our services to end-users. In late November and early
December 1999 we terminated contracts with two wholesale customers, ISPs who
were resellers of our services. As a result we had approximately 9,000 users of
our connectivity services as of December 31, 1999. At present 55% of our
revenues are derived from retail customers and 45% from users who came to us
though our wholesale customers.
The following table sets forth certain information about the total number
of our end-users as of the dates shown:
<TABLE>
<CAPTION>
Total End-Users
Date (retail and wholesale combined)
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<S> <C>
6/30/99 1,300
9/30/99 16,000
12/31/99 9,000
3/24/00 9,000
</TABLE>
On July 23, 1999 we entered into an agreement with MundoNuevo.com to
provide Internet access and value added services which MundoNuevo.com would
reoffer to its customers. The agreement required MundoNuevo.com to make monthly
payments which reflected the minimum number of paid subscribers that
MundoNuevo.com believed it would sign up in the relevant period. MundoNuevo.com
was unable to sign up the minimum number of subscribers or to make the minimum
payments. Accordingly, the agreement with MundoNuevo.com was terminated by
mutual consent.
Capacity
We define "capacity" to mean the number of customers and the amount of
usage which our equipment and systems can service. As our business grows, we
attempt to assure that our servers and other equipment are adequate for a larger
customer base and for increased usage by each customer. The principal activity
for which we must monitor the capacity of our equipment is Web site hosting. Our
ability to provide hosting services is directly impacted by the capacity and the
number of servers available to us. At present, we have 30 servers, and estimate
that at peak usage our facilities are 25% utilized. Based on our customers'
historical average usage, our current capacity is sufficient to provide hosting
services to more than 100,000 subscribers. Due to our arrangement with Frontier
Global, a major provider of bandwidth, we have access to sufficient bandwidth to
meet our foreseeable needs.
Our future ability to service increasing numbers of customers depends in
part upon our ability to issue bills to, and collect payments from, large
numbers of customers. To that end, on September 3, 1999, we purchased a
permanent license Portal Software's Infranet management and billing software for
a price of $628,000. The license also requires us to make minimum annual
payments of $125,600 so long as we utilize the software. Our minimum annual
payments will increase if we exceed 200,000 subscribers. The software is
database driven and enables us to automatically bill end-users for Internet-
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related services that we provide. We expect the Portal software to significantly
enhance our efficiency as we build our customer base by reducing the amount of
time and manpower required to manage our customer billings.
Competition
The business of providing Internet connectivity services and solutions is
highly competitive and there are no substantial barriers to entry. We believe
that competition will intensify in the future and our ability to successfully
compete depends on a number of factors, including:
- the capacity, reliability and security of the network with which
we interconnect;
- the pricing structure of our services;
- expansion of the variety of products and services which we offer;
- our ability to adapt our products and services to new
technological developments;
- our ability to build and maintain a larger sales force which is
knowledgeable and effective;
- our ability to implement broad and effective distribution
channels; and
- principal market and economic trends.
Current and prospective competitors include:
- national, regional and local ISPs;
- long distance and local telecommunications providers;
- cable television companies; and
- Web site hosting providers.
Major long distance companies currently offer Internet access services
and major cable companies and companies using wireless terrestrial and
satellite-based technologies are expected to offer Internet connectivity and
related services in the near future. Such competitors have the ability to bundle
Internet connectivity with other services such as local and long distance
telecommunications. This bundling could adversely affect our ability to compete
and could result in a downward pressure on our prices that could adversely
affect our business, financial condition and results of operations.
More particularly, as providers of connectivity we compete with PSI,
MegaPop, UUNet and AT&T. We are also dependent upon AT&T and Megapop for access
to the Internet. Thus we are both a source of end-users and a competitor for
customers of these networks. Our current relationships with these networks have
allowed us to negotiate contracts that give us access to the networks at a cost
which permits us to price our products competitively. If these contracts were
to be terminated or substantially amended our ability to maintain competitive
prices to our customers could be materially and adversely affected. Please
refer to Risk Factors - We are Dependent on AT&T and Megapop for Access to the
Internet Network. In the area of Web site design we compete with USWeb. Big
Planet is a direct competitor in the business of providing packaged Internet
services to associations. Each of these competitors has significantly greater
market presence, established brand recognition, financial, technical and
personnel resources than we have.
We do not have available information which would permit us to accurately
measure our market share. However, several major ISPs have reported that they
have millions of end-users each, compared to the approximately 9,000 end-users
we have at present. In the area of Web site design, and the business of
providing packaged Internet services to associations, a number of our
competitors have significantly greater revenues than we have, and we believe
that we represent substantially less than 1% of these market sectors. We strive
to differentiate ourselves from our competitors:
- by offering lower prices made possible by our lower overhead;
- with our ability to quickly adapt to new developments in our
industry resulting from the small size of our organization; and
- by offering the high quality AT&T and Megapop network backbones
which many of our other competitors do not offer.
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Employees
As of December 31, 1999 we had 37 full time employees as follows:
- 7 full time employees in sales and marketing;
- 7 full time technical personnel;
- 10 full time employees in product development; and
- 13 full time in administration.
There are no collective bargaining agreements in effect. We believe the
relations with our employees are good.
Intellectual Property
We have no patented technology that would preclude or inhibit competitors
from entering our market. We have applied for registration of the trademark A1
Internet.com, Inc. (SM). We have entered into confidentiality and invention
assignment agreements with our employees to limit access to and disclosure of
our proprietary information. We intend to apply for copyrights as we develop new
products and solutions. There can be no assurance that these measures will prove
sufficient to prevent misappropriation of our intellectual property or to deter
independent third-party development of similar products.
Regulation
Our operations are not currently subject to direct regulation by
governmental agencies other than regulations applicable to businesses generally.
As use of the Internet continues to grow, jurisdictions in which we operate may
adopt regulations relating to prices charged users, content, privacy,
intellectual property protection, libel or other matters. If adopted, such
regulations could significantly affect our results of operations
Investments
Gravity Pilot Air, Inc., one of our wholly-owned subsidiaries, previously
owned two airplanes that it leased to a skydiving company. In December 1999, the
aircraft's lessee was 5 months in arrears on its lease payments. We engaged
counsel to pursue all available remedies against the lessee, including retaking
possession of the aircraft. On March 18, 2000, a shareholder of the lessee
agreed to participate in a settlement agreement whereby he paid us $300,000 to
bring current the past due lease payments and to settle various other matters.
In addition, the lessee relinquished possession of the airplanes. Following the
execution of the settlement agreement we sold one of the airplanes for
approximately $710,000. We have not determined whether we will lease or sell the
remaining aircraft.
We also own 9.6% of Moneyzone.com, Inc. (formerly EBonlineinc.com Inc.),
a Nevada corporation which maintains a mergers and acquisition Web site. We
acquired our shares of Moneyzone.com from Bruce Bertman, our Chief Executive
Officer, President and Treasurer, at par value for a total purchase price of
$783.00. We are holding the Moneyzone.com shares as an investment which, to
date, has not generated any dividend income. We have provided Internet-related
services to Moneyzone.com for which we were paid at the same rates we charge our
other clients. Mr. Bertman is also a Director of Moneyzone.com and was a
director of that Company prior to the time we acquired our Moneyzone.com shares.
We are not otherwise involved in the management or operations of Moneyzone.com.
Risk Factors
You should consider carefully the risks described below and other
information in this Form 10-KSB. If any of the events identified in the
following risk factors actually occur, they could materially adversely affect
our business, financial condition and results of operations.
We Have a History of Losses and Cannot Be Certain We will Achieve Positive Cash
Flow
For the years ended December 31, 1998 and 1999, we had net losses and
negative operating cash flows. For the year ended December 31, 1999, we had a
net loss before extraordinary items of $5,108,887. In addition, we had an
accumulated deficit of $5,851,756 as of December 31, 1999. We are likely to
continue to incur significant additional losses in the intermediate term.
Even thereafter, we cannot be certain that we will achieve or sustain
positive cash flow or profitability from our operations. Our net losses and
negative cash flow from operating activities are likely to continue even longer
than we currently anticipate if:
- we do not establish and maintain a customer base that generates
sufficient revenue;
<PAGE> 12
- prices for our products or services decline faster than we have
anticipated;
- we do not remain competitive in the innovation and quality of our
products;
- we do not attract and retain qualified personnel;
Our ability to achieve our objectives is subject to financial,
competitive, regulatory, legal, technical and other factors, many of which are
beyond our control.
Our Web Page May Have Contained Certain Misleading Statements
We maintain a Web Page which contains various information relating to our
company. At times that Web Page contained statements which projected millions of
dollars of highly profitable billings and accumulation of one million users of
our services by 2000. We did not have a factual basis for these statements and
have removed them from our Web Page.
The Web Page contained a statement to the effect that we are involved in
the profitable business of leasing airplanes. Our involvement in the leasing of
airplanes was limited to the leasing of aircraft which we inherited because of
our prior skydiving venture. We no longer lease airplanes, and this statement
has been eliminated from our Web Page.
Our Web Page contained a statement which might be read to state that we
are involved in the mergers and acquisitions arena. In fact, we hold a 9.6%
minority interest in Moneyzone.com which maintains a Web site relating to that
business. We are passive investors in Moneyzone.com. This statement has been
eliminated from our Web Page.
Our Web Page contained a section entitled "Investor Center" which
referred to the "gold rush stock market" and "hyper-inflated prices", stated
that "no price appears too much to pay for a stake on the Internet", stated
that "the future is the Internet" and that the "future is A1 Internet.com." It
also referred to us as "already a leading global service provider", ...
forecasted to outperform even its own "stunning record of growth on the way to
becoming one of the largest Internet Service Providers in the world." We did
not have a factual basis for these statements. The price of our common stock
declined in 1999. See "Market Price and Dividends on the Registrant's Common
Equity and Related Stockholder Matters" on page 27. The number of users of our
connectivity services declined from approximately 10,000 at September 30, 1999
to approximately 9,000 in December 1999. This compared to major ISPs who
reportedly have millions of end-users each. These statements have been removed
from our Web Page.
Purchases and Sales of Our Stock are Subject to Penny Stock Regulations
Our stock has had a market price of less than $5.00 per share in recent
times. The SEC has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price less than $5.00 per share, subject to certain
exceptions. During periods when our common stock does not qualify for inclusion
on the Nasdaq SmallCap Market or is removed therefrom, the common stock may
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell our common stock in the public market.
<PAGE> 13
Our Limited Operating History Makes it Difficult to Assess Our Past Performance
and Future Prospects
You have limited historical operating and financial information on which
to base your evaluation of our performance and our prospects. We have acquired
four companies since the beginning of 1999 and disposed of substantially, all of
the businesses in which we were engaged in prior years. This limits the
comparability of our operating and financial information from period to period.
You should consider our prospects in light of the substantial risks,
expenses, uncertainties and difficulties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. Such
risks include the possibility that:
- we will be unable to increase and sustain levels of interest in
our products and services by associations, membership marketing
companies and ISPs;
- we will fail to sell our products successfully through our direct
sales force;
- our competitors will develop services or products similar or
superior to our own;
- market prices for our products and services will fall as a result
of competition or other factors;
- we will be unable to identify, attract, motivate and retain
qualified personnel; and
- we will fail to fully integrate with our existing operations the
technology and operations of any of the businesses that we
acquire.
We cannot be sure that we will be successful in addressing such risks,
and the failure to do so could have a material adverse impact on our business,
financial condition and results of operation.
We are Dependent on AT&T and Megapop for Access to the Internet Network
Our ability to offer end-user access to a tier one Internet network on an
affordable basis is dependent upon our contractual relationship with AT&T and
Megapop which charge us a fixed monthly fee for each end-user. This enables us
to offer connectivity to tier one networks for which we pay only when end-users
subscribe for our services. If these contracts were to be terminated, or if the
terms were to be substantially amended, we might be required to enter into
arrangements for bandwidth with others on less favorable terms. There is no
assurance that we would be able to purchase connectivity on comparable terms and
there is no assurance that we would be able to pass on additional costs to our
customers. Our inability to obtain bandwidth on comparable terms could
materially and adversely affect our business, financial condition and results of
operations.
We Rely on Others to Market our Products and Services to End-Users
We believe that we will derive the majority of our recurring revenues
from subscription fees and fees for value added services paid by end-users of
our products and services. The amount of those revenues is dependent upon the
level of success achieved by associations, membership marketing companies and
ISPs in marketing our products and services to their members and customers. Most
of our contractual relationships with associations were formed recently and have
not yet generated substantial sales to end-users. Thus, we are not yet in a
position to assess whether our products and services will gain acceptance among
the members of these associations or whether these associations will invest the
resources necessary to market our products and services successfully. If sales
to end-users do not meet our expectations, our business would be adversely
affected and we would be required to develop alternate marketing and sales
strategies.
<PAGE> 14
We Are Subject to Risks As We Make Acquisitions and Engage in Strategic
Alliances
As part of our business strategy, we may acquire, make investments in, or
enter into strategic alliances with companies in complementary businesses, so as
to optimize our market presence in the regions we presently serve and expand
into other regions. In particular, we intend to acquire local and regional ISPs
and e-commerce companies. Any such future acquisitions, investments or strategic
alliances would involve risks, such as
- incorrect assessment of the value, strengths and weaknesses of
acquisition and investment opportunities;
- underestimating the difficulty of integrating the operations and
personnel of newly acquired companies;
- the potential disruption of our ongoing business, including
possible diversions of resources and management time;
- the potential inability to maintain uniform standards,
control, procedures and policies;
- and the threat of impairing relationships with employees and
customers as a result of changes in management or ownership.
We cannot assure you that we will be successful in overcoming these
risks. Moreover, we cannot be certain that any desired acquisition, investment
or strategic alliance could be made in a timely manner or on terms and
conditions acceptable to us. Neither can we assure you that we will be
successful in identifying attractive acquisition candidates. We expect that
competition for such acquisitions may be significant. Competition for Internet
companies is based on a number of factors including price, terms and conditions,
size, access to capital, and ability to offer cash, stock or other forms of
consideration. We may compete with others who have similar acquisition
strategies, many of whom may be larger and have greater financial and other
resources than we have.
An additional risk associated with acquisitions is that many attractive
acquisition candidates do not have audited financial statements and have varying
degrees of internal controls. Although we may believe that the available
financial information for a particular business is reliable, we cannot guarantee
that a subsequent audit would not reveal matters of significance, including with
respect to liabilities, contingent or otherwise. We expect that, from time to
time in the future, we will enter into acquisition agreements, the pro forma
effect of which is not known and cannot be predicted.
We May Have Difficulty Managing Our Rapid Growth
Our growth strategy has placed and will continue to place a significant
strain on our customer support, sales and marketing, administrative resources,
our network and operations and our management and billing systems. Such a strain
on our administrative and operational capabilities could adversely affect the
quality of our services and our ability to collect revenues. To manage our
growth effectively, we will have to enhance the efficiency of our operational
support, other back office systems and financial systems and controls. We cannot
assure you that we will be able to maintain adequate internal operating,
administrative and financial systems, and procedures and controls.
Managing our growth will become even more challenging as we expand our
target markets and our product and service offerings. Promotion and enhancement
of our products and services will depend largely on our success in continuing to
provide high quality Internet communications services, solution and product
support. We cannot guarantee that we will be able to maintain those levels of
quality. If we
<PAGE> 15
are unable to do so or otherwise fail to promote and maintain our products or
services, or if we incur excessive expenses in an attempt to improve our
services or promote and maintain our products, then our business, results of
operations and financial condition could be materially and adversely affected.
In addition, as we continue to grow we will have to expand and train our
employee base to handle the increased volume and complexities of our business.
We cannot assure you that we will be able to attract, train and manage
sufficient personnel to keep pace with our growth.
Sales of Shares by Our Shareholders Could Depress Our Stock Price
The market price of our common stock could drop as a result of sales of a
large number of our shares in the public market. The perception that such sales
may occur could have the same effect. As of January 31, 2000, our executive
officers and directors owned, directly or indirectly, approximately 36% of our
common stock.
We Are Subject to Security and Fraud Risks
Despite our efforts to implement network security measures, such as
limiting physical and network access to our computers, our Internet
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by customers, employees or other Internet users.
Computer viruses, break-ins or other disruptive or security problems could lead
to interruptions, delays or cessation in service to our Internet customers.
Further, such inappropriate or unauthorized use of the Internet could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers and other parties connected to the Internet,
which may deter potential customers and give rise to liability to users whose
security or privacy has been violated. The security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry in general and our customer base and revenues in particular. A
significant security breach could result in a loss of customers, damage to our
reputation, direct damages, costs of repair and detection and other expenses. In
addition, our revenues for any given period may be adversely affected by fraud
or debt collection problems that we experience. The occurrence of any of these
events could have a material adverse effect our business, results of operations
and financial condition.
We May Be Hurt By System Failures
Our success is largely dependent upon our ability to deliver high speed,
uninterrupted access to the Internet. Any system failure that causes
interruptions in our operations could have a material adverse effect on us. We
currently rely upon the AT&T Internet Network. Failures in this or any other
telecommunications network on which we rely would result in customers' receiving
no or diminished access to the Internet.
We Could Be Held Liable For Information Disseminated Over Our Network
The law relating to liability of ISPs for information and materials
carried on or disseminated through their networks is not completely settled. The
possibility that courts could impose liability for information or material
carried on or disseminated through our network could require us to take measures
to reduce our exposure to such liability. Such measures may require us to spend
substantial resources or to discontinue certain product or service offerings.
Any of these actions could have a material adverse effect on our business,
operating results and financial condition.
Due to the increasing use of the Internet, it is possible that additional
laws and regulations may be adopted with respect to the Internet covering issues
such as user privacy, pricing, taxes, defamation,
<PAGE> 16
obscenity, intellectual property protection, consumer protection, technology
export and other controls. Changes in the regulatory environment relating to the
Internet services industry could have a material adverse effect on our business,
results of operation and financial condition.
We Are Subject to Intellectual Property Risks
Legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries are
uncertain and still evolving, and we cannot be certain as to the future
viability or value of any of our intellectual property rights or those of other
companies within the IT industry. We cannot assure you that the steps we have
taken to protect our intellectual property rights will be adequate or that third
parties will not infringe or misappropriate our proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we cannot be certain that our business activities will not infringe
the proprietary rights of others or that such other parties will not assert
infringement claims against us. We anticipate that we may be subject to claims
in the ordinary course of our business, including claims of alleged infringement
of the trademarks and other intellectual property rights of third parties due to
the dissemination of our content or the provision of access by our online
services to content made available by third parties. Such claims and any
resultant litigation, should it occur, could subject us to significant liability
for damages and could result in invalidation of our property rights and, even if
not meritorious, could be time-consuming and expensive to defend, and could
result in the diversion of management time and attention, any of which could
have a material adverse effect on our business, results of operations and
financial condition.
We regard substantial elements of our products and services as
proprietary and we attempt to protect them by relying on trademark, service
mark, trade dress, copyright and trade secret laws and restrictions on
disclosure and transfer of title. We also enter into confidentiality agreements
with our employees, suppliers, distributors, consultants, vendors and customer
and license agreements with third parties and generally seek to control access
to and distribution of our technology, documentation and other proprietary
information. We are pursuing the registration of our service marks but we
currently have no patents or applications for patents pending for our products
or services. Effective service mark, copyright and trade secret protection may
not be available.
We Are Subject to the Risks Associated with Rapid Industry Changes
The Internet services industry in which we operate is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new service, software and other product innovations. We cannot
guarantee that we will be able to identify new service opportunities
successfully and develop and bring new products and services to market in a
timely and cost-effective manner, or that products, software and services or
technologies developed by others will not render our products and services
non-competitive or obsolete. In addition, we cannot provide any assurance that
our product or service developments or enhancements will achieve or sustain
market acceptance or be able to address effectively the compatibility and
interoperability issues raised by technological changes or new industry
standards.
<PAGE> 17
We Do Not Expect to Pay Dividends
The Company does not anticipate paying cash dividends in the foreseeable
future.
<PAGE> 18
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters is located at 15825 Shady Grove Road, Suite 50,
Rockville, Maryland 20850, where we lease approximately 4527 square feet of
office space. The five-year term of the lease commenced on March 6,1996. The
current annual rent is $71,380.
We also lease approximately 450 square feet of office space in Sandusky,
Ohio at an annual rental of $3,750, and approximately 2800 square feet in
Fremont, Ohio at an annual rental of $16,800. The properties are the subject of
one-year leases expiring on July 31, 2000.
In Sharon, Massachusetts we lease 2785 square feet of office space at an
annual rent of $37,597.50. The lease is due to expire on August 1, 2000. We are
attempting to sublet the space in Sharon but no agreement for a sublease has
been reached.
Our former executive offices were located in approximately 1150 square
feet of office space in Boca Raton, Florida. We are obligated for rental
payments on this property through September 29, 2001. The current annual rent is
$27,900. We moved our executive offices from Boca Raton, Florida to Rockville,
Maryland when we disposed of the skydiving business based in Florida and
acquired our principal Internet-related subsidiaries which are based in
Rockville, Maryland. We are attempting to sublet the space in Boca Raton but no
agreement for a sublease has been reached.
We lease approximately 400 square feet at Frontier's Global Center for
use as our data warehousing facility. The lease has a one-year renewable term
and we pay rent at the rate of $60,000 per year. The facility has more than one
gigabyte of Internet bandwidth available to us therefore allowing us to provide
T-1 hosting services on a pay as you go basis.
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
We are not party to any legal proceeding which could have a material
effect upon our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
<PAGE> 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From May 24, 1999 to November 19, 1999, our common stock traded on the
OTC Bulletin Board under the symbol "AWON." In the period between October 10,
1998, when trading on the OTC Bulletin Board began, and May 24, 1999, our common
stock traded under the symbol "HALO."
On January 4, 1999, the SEC approved amendments to Rules of the National
Association of Securities Dealers that limit quotations on the OTC Bulletin
Board to the stock of companies that are registered with the SEC under the
Securities Exchange Act of 1934. The letter "E" is affixed to ticker symbols of
those companies that have not completed the registration process with the SEC as
of a certain date and indicates that the affected company will be removed from
the OTC Bulletin board within 30 days. On November 19, 1999, an "E" was affixed
to our OTC Bulletin Board trading symbol and our common stock began trading
under the symbol "AWONE." Our common stock was removed from the OTC Bulletin
Board on December 16,1999, because we had not then completed the registration
process, and began trading on the "Pink Sheets" of the National Quotation
Bureau, LLC. The closing price of our common stock on the OTC Bulletin Board was
6-3/4 on December 15, 1999.
In March 2000 we completed our registration under the Securities Exchange
Act of 1934, as amended. On March 20, 2000, our common stock was once again
listed on the OTC Bulletin Board and began trading under the symbol "AWON." The
closing price of our common stock on the OTC Bulletin Board as of March 24, 2000
was $4.25.
The following table sets forth for the periods indicated the high and low
bid prices for our common stock as reported each quarterly period in 1998,
1999 and 2000. The prices are inter-dealer prices, do not include retail mark
ups, mark downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
1998 ---- ---
----
<S> <C> <C>
Fourth Quarter (beginning October 10, 1998) 5 3-3/4
1999
----
First Quarter 7-1/2 1
Second Quarter 8 5.13
Third Quarter 7-3/4 5
Fourth Quarter (through December 15, 1999) 6-3/4 3 3/8
2000
----
First Quarter (through March 24, 2000) 4-1/4 --
</TABLE>
We made the following sales of unregistered common stock during the year
ended December 31, 1999. All sales listed below which were made on or before
April 26, 1999, were made by Halo Holdings of Nevada, Inc. All sales since that
date were made by A1 Internet.
<TABLE>
<CAPTION>
DATE
OF ISSUE TITLE PURCHASER SHARES SOLD CONSIDERATION EXEMPTION
---------- --------- ------------------- ------------- ----------------------------- ------------
<S> <C> <C> <C> <C> <C>
1/27/99 Common Brian Campbell 25,000 $25,000 Receivable Regulation D
1/27/99 Common Clifford Morgan 27,500 Consulting services Section 4(2)
1/27/99 Common Eduardo Lautieri 7,500 $7,500 Receivable Regulation D
3/5/99 Common Lenny Tambasco 250,000 Executive compensation Section 4(2)
3/5/99 Common Eduardo Lautieri 250,000 Consulting services Section 4(2)
3/5/99 Common Moe Cohen 50,000 Consulting services Section 4(2)
3/25/99 Common South Florida Glazing 25,000 $50,000 Regulation D
3/25/99 Common Ben Beckes 53,000 $106,000 Regulation D
3/25/99 Common Larry Littlefield 5,000 $10,000 Regulation D
3/25/99 Common Bobby Nelson Bodiford 12,500 $25,000 Regulation D
3/25/99 Common Phyllis Lott 5,000 $10,000 Regulation D
3/25/99 Common Amerigo Investor Group 40,000 $80,000 Note Regulation D
3/25/99 Common Eduardo Lautieri 14,000 $28,000 Regulation D
3/25/99 Common Yucatan Holding Company 1,000 $2,000 Regulation D
3/25/99 Common Dorothy Littlefield 3,500 $7,000 Regulation D
3/25/99 Common Blue Sky Unlimited 80,000 $160,000 Note Regulation D
3/30/99 Common Bruce Bertman 3,400,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Mark Bertman 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Jeffrey Lieberman 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Dustin Cobb 200,000 Exchange for Computer Ease Section 4(2)
LLC
3/30/99 Common Bruce Bertman 29,750 Exchange for Virtual Section 4(2)
Information Express Inc.
3/30/99 Common Mark Bertman 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Jeffrey Lieberman 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Dustin Cobb 1,750 Exchange for Virtual Section 4(2)
Information Express, Inc.
3/30/99 Common Net World Ohio Inc. 37,000 Merger (exchange all Section 4(2)
outstanding stock)
4/6/99 Common Cimarron Capital Corporation 23,000 $46,000 Regulation D
4/6/99 Common Market Edge Inc. 15,000 $30,000 Regulation D
4/6/99 Common Arlan Akerlind 5,000 $10,000 Regulation D
4/6/99 Common George and Diane Morgan 10,000 $20,000 Regulation D
4/6/99 Common Keith Krupka 40,000 $80,000 Regulation D
4/6/99 Common Morton and Joyce Sosin 10,000 $20,000 Regulation D
4/6/99 Common Therese Esposito 5,000 $10,000 Regulation D
4/6/99 Common Elliot Broidy 118,000 $236,000 Regulation D
4/6/99 Common Deborah Ann Ingraham 5,000 $10,000 Regulation D
4/6/99 Common John L. House 10,000 $20,000 Regulation D
4/6/99 Common Mark Bertman 10,000 $20,000 Regulation D
4/13/99 Common Bruce Bertman 120,000 Exchange for debt Section 4(2)
7/12/99 Common Bruce Bertman 265,000 Exchange for Virtual Section 4(2)
Information Express, Inc.
7/12/99 Common Martin Sumichrast 100,000 $200,000 Note Section 4(2)
8/19/99 Common NetAmerica 190,000 $1,330,000 in assets Section 4(2)
8/30/99 Common Quanta Corporation 5,000 Consulting services Section 4(2)
8/30/99 Common Mike Strauss 5,000 Consulting services Section 4(2)
9/22/99 Preferred* Frank Huang 11,111 $50,000 Regulation D
9/23/99 Preferred* Matt Goud 10,000 $45,000 Regulation D
8/24/99 Preferred* Steven and Irene DeCosta 20,000 $90,000 Regulation D
8/30/99 Preferred* Michael Cohen 44,444 $200,000 Regulation D
8/24/99 Preferred* Roderick O'Shea 10,000 $45,000 Regulation D
8/16/99 Preferred* Northridge Development Corp. 40,000 $180,000 Regulation D
8/11/99 Preferred* David Tevet 15,000 $67,500 Regulation D
8/16/99 Preferred* Richard Carter 15,000 $67,500 Regulation D
8/05/99 Preferred* Jesse Goldstein 5,000 $22,500 Regulation D
9/30/99 Preferred* HBC Investment Group, Inc. 50,000 $225,000 Regulation D
9/12/99 Preferred* Galt Asset Management, LLC 20,000 $90,000 Regulation D
8/30/99 Preferred* Kandel & Son Profit Sharing Plan 6,000 $27,000 Regulation D
8/30/99 Preferred* Richard Kandel 16,000 $72,000 Regulation D
8/30/99 Preferred* Richard Greene 70,000 $315,000 Regulation D
9/15/99 Preferred* Dr. Steven Kobren 22,222 $100,000 Regulation D
8/27/99 Preferred* Steven Etra 65,000 $292,500 Regulation D
9/21/99 Preferred* Jay Raubvogel 222,222 $1,000,000 Regulation D
8/27/99 Preferred* Blanche Etra 22,000 $99,000 Regulation D
9/10/99 Preferred* SRK Associates, LLC 65,000 $292,500 Regulation D
9/07/99 Preferred* Jean Etra 18,000 $81,000 Regulation D
9/30/99 Preferred Ferro Pasquale 23,000 Exchange for Debt Section 4(2)
9/30/99 Preferred Alan Lisenby 55,555 Exchange for Debt Section 4(2)
9/30/99 Preferred Outerbanks Limited 44,444 $200,000 Section 4(2)
10/10/99 Preferred* Lenord and Rosemarie Imperio 10,000 $45,000 Regulation D
10/04/99 Preferred* Matt Bencriscutto 20,000 $90,000 Regulation D
10/10/99 Preferred* Jerry Poole 33,333 $150,000 Regulation D
10/10/99 Preferred* Galt IT 30,000 $135,000 Regulation D
10/10/99 Preferred* James Kotsopoulos 100,000 $450,000 Regulation D
10/10/99 Preferred* Polymer Applications 30,000 $135,000 Regulation D
10/15/99 Preferred Calvin Caldwell 22,222 Exchange for Debt Section 4(2)
</TABLE>
* These shares of preferred stock were issued pursuant to our preferred stock
offering which began in July 1999. The placement agents for this offering were
EBI Securities Corporation and J.B. Sutton Group, LLC. In connection with this
offering, we are obligated to issue warrants to the investors and the placement
agents if gross sales of $13,000,000 are not achieved as of February 28, 2000 or
August 31, 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.
In addition, we have issued and outstanding warrants to purchase 500,000
shares of our common stock at an exercise price of $.10 per share and warrants
to purchase 386,650 shares of common stock exercisable at $5.50 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is based on the audited consolidated financial
statements for the years ended December 31, 1999 and 1998. Readers should note
that during the periods covered by these financial statements we were engaged in
a variety of businesses. Prior to engaging in the business of providing Internet
access and related services we operated a skydiving business. We sold our
skydiving business in the first quarter of 1999. We continued to receive rental
income by leasing our airplanes to the purchasers of the skydiving business
through the fourth quarter of 1999. We suspended our airplane leasing activities
as of December 31, 1999 and we are reporting these activities as discontinued in
our audited financial statements to this form 10KSB. In the first quarter of
2000 we sold one of our airplanes. We are attempting to sell the remaining
aircraft. The following discussion includes our airplane leasing activities for
comparative purposes since these activities accounted for all of our revenues in
1998.
We first began providing Internet access and related services by
acquiring Virtual Information Express, Inc, Computer Ease, LLC, and NetWorld
Ohio, Inc. in the first and second quarters of 1999. Much of our
Internet-related business is in the development stage. Computer Ease (now A1
Internet Services.com) and Virtual Information Express began generating revenues
from connectivity and value-added services in the third quarter of 1998. Prior
to that time, our Internet-related business activities focused on the sale of
computer hardware and accessories over the internet. We are currently increasing
our online sales of computer hardware and accessories. We anticipate that as the
number of our end-users increases, a larger percentage of our revenues will be
derived from recurring charges for connectivity, e-commerce and other
value-added services, and that a smaller percentage of our revenues will be
derived from Web site design and technical services.
During the next twelve months we will focus on increasing the number of
end-users utilizing our services. In particular, we intend to intensify sales
efforts directed at businesses and associations that resell our services to
end-users. We are also refocusing our online sales to include more sales of
computer hardware and accessories. We continue to review opportunities to
acquire ISPs that will increase our end-user base and enhance our
Internet-related service capabilities. We believe that our current organization
and infrastructure will enable us to rapidly assimilate viable acquisition
targets and take advantage of related cost savings.
To meet our growth expectations, we anticipate that we will need to add
up to 5 additional employees in the areas of computer programming, marketing,
customer service and sales over the next twelve months. We will also need to
invest approximately $400,000 in capital assets to maintain and upgrade our
network.
<PAGE> 21
The following table sets forth certain information about the source of
our revenues:
<TABLE>
<CAPTION>
SOURCES OF REVENUES PERCENTAGE OF TOTAL SALES
- -------------------------------------------------------------------------------
Twelve Months Ended
December 31
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
CONNECTIVITY & HOSTING - 26
NON RECURRING INTERNET - 2
DESIGN FEES - 9
E-COMMERCE - 58
SKY DIVING 100 1
AIRPLANE LEASE - 4
TOTAL 100% 100%
- -------------------------------------------------------------------------------
</TABLE>
The following table sets forth certain information about our cost of
sales:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL COST OF SALES
- -------------------------------------------------------------------------------
Twelve Months Ended
December 31,
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
COST OF SALES
CONNECTIVITY - 18
COMPUTER EQUIPMENT - 73
LABOR - 8
OTHER COST - 1
SKY DIVE COSTS 100 0
TOTAL 100% 100%
- -------------------------------------------------------------------------------
</TABLE>
Results of Operations - Twelve Months Ended December 31, 1999 Compared to Twelve
Months Ended December 31, 1998
REVENUES
Total revenues increased from $ 84,560 to $4,301,253 in the twelve months
ended December 31, 1999. In the twelve months ended December 31, 1998, all of
our revenues were derived from the skydiving business. In the twelve months
ended December 31, 1999, revenues were derived from the following sources:
<TABLE>
<S> <C>
Twelve Months Ended
December 31, 1999
Internet related businesses (primarily in the
second, third and fourth quarters) $4,087,216
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
Lease of our airplanes to the purchasers
of our skydiving business $ 190,584
Skydiving business (in the first quarter) $ 23,453
</TABLE>
Discontinued operations accounted for $ 214,037 of our revenues during
1999. The principal components of our revenues from our Internet-related
businesses were:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1999
<S> <C> <C>
Connectivity & Hosting $ 1,108,252 28%
Non-Recurring Internet $ 99,779 2%
Design Fees $ 382,375 9%
Electronic Commerce $ 2,496,810 61%
</TABLE>
COST OF SALES
Cost of sales increased from $0 in the twelve months ended December 31,
1998 to $3,359,943 in the twelve months ended December 31, 1999. In the twelve
months ended December 31, 1999, the cost of sales consisted primarily of
Internet-related costs as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1999
<S> <C> <C>
Connectivity $ 634,045 13%
Design Fees $ 253,151 8%
Electronic Commerce $ 2,437,162 72%
Other Internet Cost $ 22,562 7%
</TABLE>
Cost of Sales for discontinued operations was $13,023 during the twelve months
ended December 31, 1999.
OPERATING EXPENSES
The following table sets forth certain information regarding operating
expenses:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------------------
OPERATING EXPENSES 1999 1998
Advertising
<S> <C> <C> <C> <C>
Expenses 145,972 2.9% 137 0.0%
Salaries and related expenses 1,151,560 22.6% 150,000 32.3%
Travel and entertainment 131,550 2.6% 0 0.0%
Bad debt expense 265,256 5.2% 0 0.0%
Legal and professional 428,732 8.4% 82,692 17.8%
Occupancy costs 194,457 3.8% 0 0.0%
General and administrative 429,796 8.4% 63,458 13.7%
</TABLE>
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C>
Consulting 261,849 5.1% 35,588 7.7%
Depreciation and amortization 2,092,507 41.0% 131,989 28.5%
----------------------------------------------
TOTAL OPERATING EXPENSES 5,101,679 100.0 463,727 100.0%
------------------------------------------------
</TABLE>
Operating expenses from discontinued operations during 1999 consisted
of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1999
<S> <C> <C>
Depreciation 100,826 2.0%
Bad Debt Expense 61,448 1.2%
General & Administrative 32,041 0.6%
Total 194,315 3.8%
</TABLE>
OTHER EXPENSES
In the twelve months ended December 31, 1999 our former Board of
Directors authorized, and we issued, 300,000 shares of common stock valued at
$600,000 as advance payment for consulting services to be provided by certain
individuals who we understand had expertise in marketing outdoor sports or
extreme sports. Our former Board of Directors authorized the issuance of these
shares at a time when we were about to dispose of our skydiving business and
become a provider of Internet-related services. When we disposed of our
skydiving business we no longer had a need for expertise in marketing outdoor
sports or extreme sports. No services are to be performed for our Internet
business. Whatever consulting services may have been performed would have been
performed in the first quarter of 1999, the period in which we still owned the
skydiving business. Accordingly, we recognized the entire expense related to
this consulting arrangement in the first quarter of 1999. We obtained payment of
$500,000 for 250,000 of these shares in the form of a promissory note from one
of the individuals. We have determined to seek recovery of the remaining 50,000
shares or to seek damages for their issuance.
In March 1999, our former Board of Directors authorized, and we issued,
250,000 shares valued at $500,000 to Leonard Tambasco our former President. The
shares were issued at a time when Mr. Tambasco had agreed to become our
President for a period of three years and no specific contingencies were agreed
upon for payment of the bonus. Mr. Tambasco resigned as President effective
September 30, 1999. We are attempting to determine whether we have a legal basis
to assert a claim for recovery of some or all of the shares issued to Mr.
Tambasco because his three year term as our President was not completed.
In August 1999, one of our former officers caused the issuance of 32,500
shares valued at $227,500. The shares were issued in exchange for unknown
services. We have engaged counsel to seek recovery of the 32,500 shares or to
seek damages for their issuance.
<PAGE> 24
For the twelve months ended December 31, 1999 we also recognized from
discontinued operations other expenses of $90,891 (as interest expense) and
other income of $42,864.
LIQUIDITY AND CAPITAL RESERVES
Since our inception we have financed our operations primarily through
private sales of our stock. Total net proceeds from the sale of equity
securities in the period between the company's formation and December 31, 1999
amounted to approximately $4,845,000.
CASH FLOW
Operating activities used cash of $324,117 and $2,090,748 in the twelve
months ended December 31, 1998 and 1999, respectively. Operating activities for
Discontinued operations generated $5,701 in the twelve months ended December 31,
1999.
Investing activities used cash of $0 and $2,152,826 in the twelve months
ended December 31, 1998 and 1999, respectively. Investing activities for
discontinued operations used cash of $16,555 during the twelve months ended
December 31, 1999.
Net cash generated by financing activities was $332,503 and $4,852,760
in the twelve months ended December 31, 1998 and 1999, respectively. Financing
activities for discontinued operations generated $12,139 in the twelve months
ended December 31, 1999.
WORKING CAPITAL
Working capital, defined as the excess of the company's current assets
over its current liabilities, was $494,378 at December 31, 1999 compared to a
deficit of $875,879 at December 31, 1998.
As of December 31, 1999 the company had no borrowing facility established
with a financial institution. We expect that we will need approximately $900,000
to fund our operations through the next twelve months. We intend to fund our
operations through the next twelve months through working capital, together with
any proceeds from the sale of our remaining airplane and the liquidation of
certain investment holdings.
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is contained in the consolidated
financial statements beginning on page F-1 of this Report. Such information is
incorporated herein by reference.
<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the fiscal year ended December 31, 1999, we have retained Spicer,
Jeffries & Co. as our principal independent accountant to replace Cohen & Kameny
CPA's PLCC, our principal accountant for the fiscal years ended December 31,
1997 and 1998. Cohen & Kameny's report on our financial statements for the past
two fiscal years did not contain an adverse opinion or disclaimer of opinion and
was not modified as to uncertainty, audit scope, or accounting principals. The
decision to change accountants was approved by our Board of Directors. There
were no disagreements with our former accountant, whether or not resolved, on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which if not resolved would have caused our
former accountant to make reference to the subject matter of the disagreement(s)
in connection with its report.
<PAGE> 27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, Executive Officers, Promoters and Control Persons
The following table sets forth information regarding the executive officers
and directors of the Company.
Name Age Position Since
---------------------- --- ------------------- -----------
Bruce Bertman 42 President, Treasurer March 1999
and Chairman of the
Board of Directors
Martin A. Sumichrast 32 Director May 1999
Donald Dea 45 Secretary and Director October 1999
Bruce Bertman - Mr. Bertman serves as our President, Treasurer and Chairman of
the Board of Directors. Mr. Bertman has more than 12 years of experience in the
high technology industry. From 1988 to 1991, he served as Regional Manager and
Operating Officer of Inacomp Computer Centers, a predecessor of Inacom. From
1991 to 1993, Mr. Bertman was Vice President of Microware Distributors, a
computer product distribution organization, in charge of government reseller
programs on a national basis. In 1993, Mr. Bertman founded Computer Ease, LLC,
where he served as its President until we acquired that company in 1999. In
1998, Mr. Bertman founded Stockmaker.com, Inc. and serves as President and
Chairman of that company. Mr. Bertman also currently serves as a director of
several internet-related companies, including Moneyzone.com Inc., Cyber Realm
Inc., and Computer Kids Network, Inc.
Martin A. Sumichrast - Mr. Sumichrast serves as our Director. Mr. Sumichrast has
also served as a Director of Eastbrokers International Incorporated since its
inception in January 1993, and has served that company as its Chairman of the
Board, Chief Executive Officer and President since December 1998, Vice Chairman
from March 1997 through December 1998, Chief Financial Officer from January,
1993 to August, 1996, and Secretary from 1993 to the present. Mr. Sumichrast
also serves as Chairman of Eastbrokers North America, Inc., a subsidiary of
Eastbrokers International Incorporated.
Donald Dea - Mr. Dea serves as our Secretary and Director. Mr. Dea has also
been a co-founder and partner of Fusion Productions, a meeting planning company,
since 1995. Mr. Dea was Vice President and co-founder of Alaris Inc., a
developer of high performance systems, motherboards and peripheral products for
personal computers, from 1992 to 1995. From 1984 to 1992, he worked for Xerox
Corporation, servings as: General Manager of U.S. Customer Operations, in charge
of developing strategic partnerships; General Manager of OEM/VAR Channel
Operations; Manager of Marketing and Quality.
(b) There are no other officers or significant employees.
(c) No family relationships exist between the directors and the
officers.
(d) No legal proceedings have been instituted in the previous five
years against any of our directors or officers. We have no knowledge of any
legal proceedings against any predecessor director, officer, or promoter.
Compliance With Section 16(a) Of The Securities Exchange Act Of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that our
officers and directors, and persons who own more than ten percent (10%) of a
registered class of our equity securities file reports of ownership and changes
in ownership with the Securities and Exchange Commission ("SEC") and with the
exchange on which our securities are traded. Such reporting persons are required
by SEC regulation to furnish us with copies of all Section 16(a) forms so filed.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to us pursuant to Rule 16a-3(e) promulgated under the Securities
Exchange Act of 1934, or upon written representations received by us, we are
not aware of any failure by an officer, director or beneficial owner of more
than 10% of the our common stock to file timely with the Securities and Exchange
Commission any Forms 3, 4 or 5 relating to the fiscal year ended December 31,
1999.
ITEM 10. EXECUTIVE COMPENSATION
Information under the caption "Executive Compensation", which will be
contained in our Definitive Proxy Statement for our 2000 Annual Meeting of
Shareholders, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information under the caption "Executive Compensation - Security
Ownership of Management", which will be contained in our Definitive Proxy
Statement for our 2000 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the caption "Certain Transactions", which will be
contained in our Definitive Proxy Statement for our 2000 Annual Meeting of
Shareholders, is incorporated herein by reference.
<PAGE> 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601
<TABLE>
<S> <C>
EXHIBIT
2.1 Acquisition Agreement dated October 17, 1997, between
Halo Holdings of Nevada, Inc., Tom Keesee and Larry
Kerschenbaum, regarding the acquisition of Gravity
Pilot Air, Inc. (filed as Exhibit 2.1 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of December 13,
1999, No. 000-27243, and incorporated herein by reference).
2.2 Stock Purchase Agreement dated February 1, 1999,
between Halo Holdings of Nevada, Inc. and Bruce
Bertman, regarding the acquisition of Virtual
Information Express, Inc. (filed as Exhibit 2.2 to A1
Internet's Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated herein
by reference).
2.3 Stock Purchase Agreement dated February 1, 1999,
between Halo Holdings of Nevada, Inc. and Bruce
Bertman, regarding the acquisition of ComputerEase,
LLC (filed as Exhibit 2.3 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of December 13,
1999, No. 000-27243, and incorporated herein by reference).
2.4 Stock Purchase Agreement dated March 31, 1999,
between Larry W. Kerschenbaum and Halo Holdings of
Nevada, Inc., regarding the sale of Skydive USA (filed as
Exhibit 2.4 to A1 Internet's Second Amendment to Form
10-SB12G filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
2.5 Stock Purchase Agreement dated April 19, 1999,
between Halo Holdings of Nevada, Inc. and the
Shareholders of Networld of Ohio, Inc., regarding the
acquisition of Networld of Ohio, Inc. (The following
attachments are not included but are incorporated
herein by reference and will be provided to the SEC
upon request: Schedule 2(d) Leased Property; Schedule
5.14 Disclosed Liabilities; Schedule 5.15 Material
Terms; Schedule 5.16(a) Tangible Property; Schedule
5.16(b) Real Property; Schedule 5.16(c) Other Assets;
Schedule 5.19 Affiliated Transactions; Schedule 5.20
Bank Accounts; Schedule 5.21 Environmental Compliance;
Schedule A Common Stock).
2.6 Purchase and Sale Agreement dated August 19, 1999,
between A1 Internet Services, Inc., NetAmerica, Inc.,
William Fritts and Bruce Bertman, regarding A1
Internet's acquisition of contracts from NetAmerica
(The following attachments are not included but are
incorporated herein by reference and will be provided
to the SEC upon request: Exhibit A List of Intangible
Assets; Exhibit B Bill of Sale; Exhibit C Promissory
Note and Security Agreement; and Exhibit D Stock
Pledge).
3.1 Articles of Incorporation of A1 Internet.com, Inc.
(filed as Exhibit 3.I.A to A1 Internet's First
Amendment to Form 10-SB12G filed as of November 17,
1999, No. 000-27243, and incorporated herein by
reference).
3.2 Certificate of Amendment of Articles of Incorporation
(filed as Exhibit 3.B to A1 Internet's First
Amendment to Form 10-SB12G filed as of November 17,
1999, No. 000-27243, and incorporated herein by
reference).
3.3 Bylaws of Halo Holdings of Nevada, Inc. (filed as
Exhibit 3.II to A1 Internet's First Amendment to Form
10-SB filed as of November 17, 1999, No. 000-27243,
and incorporated herein by reference).
4.1 Certificate of Designation for A1 Internet's Series A
Convertible Preferred Stock (filed as Exhibit 2.C to
A1 Internet's Form 10-SB12G filed as of September 3,
1999, No. 000-27243, and incorporated herein by
reference).
4.2 Agreement to Lock Up dated May 19, 1999, between
Jerry Lee Poole, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Mr. Poole
(filed as Exhibit 4.2 to A1 Internet's Second Amendment
to Form 10-SB12G filed as of December 13, 1999, No.
000-27243, and incorporated herein by reference).
4.3 Agreement to Lock Up dated May 19, 1999, between
Bruce Bertman, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Bruce
Bertman (filed as Exhibit 4.3 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
4.4 Agreement to Lock Up dated May 19, 1999, between
Noved Holdings, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Noved
Holdings (filed as Exhibit 4.4 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
4.5 Agreement to Lock Up dated May 19, 1999, between
Leonard Tambasco, EBI Securities and the J.B. Sutton
Group, Inc., regarding the transfer restrictions on
certain A1 Internet common stock owned by Leonard
Tambasco (filed as Exhibit 4.5 to A1 Internet's
Second Amendment to Form 10-SB12G filed as of
December 13, 1999, No. 000-27243, and incorporated
herein by reference).
4.6 Agreement to Lock Up dated May 19, 1999, between
Larry Kerschenbaum, EBI Securities and the J.B.
Sutton Group, Inc., regarding the transfer
restrictions on certain A1 Internet common stock
owned by Larry Kerschenbaum (filed as Exhibit 4.6
to A1 Internet's Second Amendment to Form 10-SB12G
filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
10.D.1 Aircraft Lease dated March 31, 1999, between Gravity
Pilot Air, Inc. and Skydive USA, regarding the lease
of aircraft to Skydive USA (filed as Exhibit 10.D.1
to A1 Internet's Second Amendment to Form 10-SB12G
filed as of December 13, 1999, No. 000-27243, and
incorporated herein by reference).
16.1 Letter on Change in Certifying Accountant from Cohen
Kameny CPA's PLLC, dated November 12, 1999 (filed as
Exhibit 16 to A1 Internet's First Amendment to Form
10-SB filed as of November 17, 1999, No. 000-27243,
and incorporated herein by reference).
21.1 List of all Subsidiaries of A1 Internet and the State
or other jurisdiction of incorporation or
organization of each (filed as Exhibit 21.1 to A1
Internet's Fourth Amendment to Form 10-SB12G filed as
of January 20, 2000, No. 000-27243, and incorporated
herein by reference).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
(b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1999.
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
A1 INTERNET.COM, INC.
Date: March 30, 2000 By: /s/ Bruce Bertman
BRUCE BERTMAN, PRESIDENT
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ Bruce Bertman President, Treasurer and March 30, 2000
Bruce Bertman Chairman of the Board of Directors
/s/ Martin A. Sumichrast Director March 30, 2000
Martin A. Sumichrast
/s/ Donald Dea Secretary and Director March 30, 2000
Donald Dea
</TABLE>
<PAGE> 30
A1 INTERNET.COM, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
FINANCIAL STATEMENTS:
<S> <C>
F-2.1 - 2.2 Independent Auditors' Reports
F-3 Audited Consolidated Financial Statements of A1 Internet.com, Inc. and
Subsidiaries for the years ended December 31, 1998 and 1999, including
related balance sheets, and statements of operations, comprehensive
income, changes in shareholders' equity and cash flows.
F-11 Notes to Consolidated Financial Statements of A1 Internet.com, Inc.
and Subsidiaries.
</TABLE>
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
A1 Internet.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of A1 Internet.com,
Inc. and Subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are fee of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of A1 Internet.com,
Inc. and Subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ SPICER, JEFFRIES & CO.
Denver, Colorado
March 3, 2000
F-2.1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
HALO HOLDINGS OF NEVADA, INC.
We have audited the accompanying consolidated balance sheet of Halo Holdings of
Nevada, Inc. as of December 31, 1998 and the related consolidated statements of
income and retained earnings, cash flows, and changes in shareholders' equity
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Halo Holdings of
Nevada, Inc. as of December 31, 1998 and the results of operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ COHEN & KAMENY CPA'S PLLC
------------------------------
COHEN & KAMENY CPA'S PLLC
Riverdale, New York
March 23, 1999
F-2.2
<PAGE> 33
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 619 391 $ 10 205
Receivables: -
Trade, net 320 718 -
Note receivable, current portion (Note 3) 33 333 -
Related parties 97 750 -
Other 57 826 -
Prepaid expenses 232 432 -
Net assets of discontinued operations (Note 9) 253 918 -
Other current assets 23 136 -
-------------- ------------
TOTAL CURRENT ASSETS 1 638 504 10 205
-------------- ------------
PROPERTY AND EQUIPMENT, AT COST (Note 10):
Aircraft - 1 008 256
Computers, software and equipment 2 468 809 9 159
Less: accumulated depreciation (601 231) (170 654)
-------------- ------------
1 867 578 846 761
-------------- ------------
OTHER ASSETS:
Investments 1 899 330 -
Goodwill, net of amortization (Note 2) 8 262 490 278 861
Contracts (Note 6) 1 248 000 -
Note receivable (Note 3) 46 987 -
Other 160 073 22 388
-------------- ------------
11 616 880 301 249
-------------- ------------
$ 15 122 962 $ 1 158 215
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 686 418 $ 37 313
Loans payable-shareholders (Note 4) 361 674 109 261
Note payable (Note 5) - 641 451
Other 96 034 98 059
-------------- ------------
TOTAL CURRENT LIABILITIES 1 144 126 886 084
-------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY (NOTE 6):
Common stock, $.001 par value, 20,000,000 shares authorized,
9,422,000 and 4,300,000 shares issued and outstanding, respectively 9 422 4 300
Preferred stock, $.001 par value, 5,000,000 shares authorized,
1,115,553 and 0 shares issued and outstanding, respectively 1 115 -
Additional paid-in capital 18 966 558 1 100 700
Notes receivable-common stock (940 000) -
Accumulated other comprehensive income 1 793 497
Deficit (5 851 756) (832 869)
-------------- ------------
13 978 836 272 131
-------------- ------------
$ 15 122 962 $ 1 158 215
-------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 34
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
NET SALES $ 4 087 216 $ -
COST OF SALES 3 346 920 -
------------- ------------
GROSS PROFIT 740 296 -
------------- ------------
OPERATING EXPENSES:
Salaries and related expenses 1 151 560 -
Travel 131 550 -
Bad debt expense 203 808 -
Legal and professional 428 732 -
Occupancy costs 194 457 -
Advertising 145 972 -
General and administrative 397 755 -
Consulting 261 849 -
Depreciation and amortization 1 991 681 -
------------- ------------
TOTAL OPERATING EXPENSES 4 907 364 -
------------- ------------
OTHER INCOME (EXPENSE):
Consulting fees and special compensation (897 500) -
Other income 32 577 -
Interest expense (34 793) -
------------- ------------
TOTAL OTHER EXPENSE (899 716) -
------------- ------------
NET LOSS FROM CONTINUING OPERATIONS (5 066 784) -
------------- ------------
DISCONTINUED OPERATIONS (NOTE 9):
Loss from operations of discontinued subsidiary (84 967) (478 371)
Gain on disposal of subsidiary 42 864 -
------------- ------------
TOTAL LOSS FROM DISCONTINUED OPERATIONS (42 103) (478 371)
------------- ------------
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT 90 000 -
------------- ------------
NET LOSS $ (5 018 887) $ (478 371)
------------- ------------
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Net loss from continuing operations $ (.61) $ ( -)
------------- ------------
Discontinued operations $ (.01) $ (.12)
------------- ------------
Extraordinary item $ .01 $ -
------------- ------------
Net loss $ (.61) $ (.12)
------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8 276 805 3 989 863
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 35
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
===============================================
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
NET LOSS $ (5 018 887) $ (478 371)
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains 1 793 497 -
------------- -----------
COMPREHENSIVE LOSS $ (3 225 390) $ (478 371)
------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 36
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================
<TABLE>
<CAPTION>
Common Stock Preferred Stock Paid-in
Shares Par Value Shares Par Value Capital
----------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1997 3 500 000 $ 3,500 300 000 $ 300 $ 601 200
Issuance of common stock 500 000 500 - - 499 500
Conversion of preferred stock to common
stock 300 000 300 (300 000) (300) -
Net loss - - - - -
--------- ------- -------- ------ -----------
BALANCES, December 31, 1998 4 300 000 4 300 - - 1 100 700
Issuance of common stock for cash
and notes receivable, less offering
costs of $50,000 500 000 500 - - 949 500
Issuance of warrants for offering
costs of $50,000 and acquisition
costs of $717,979 - - - - 767 979
Business acquisitions:
Virtual Information Express, Inc. 300 000 300 - - 599 700
Computer Ease, LLC 4 000 000 4 000 - - 7 996 000
Networld Ohio, Inc. 37 000 37 - - 73 963
Reacquired shares through disposition
of Skydive USA (400 000) (400) - - (799 600)
Gain on sale of Skydive USA
to shareholders - - - - 514 383
Shares issued for services 342 500 343 - - 897 157
<CAPTION>
Accumulated
Other
Notes Comprehensive
Receivable Income Deficit
-------------- -------------- ----------
<S> <C> <C> <C>
BALANCES, December 31, 1997 $ - $ - $ (354 498)
Issuance of common stock - - -
Conversion of preferred stock to common
stock - - -
Net loss - - (478 371)
------------ ------ ----------
BALANCES, December 31, 1998 - - (832 869)
Issuance of common stock for cash
and notes receivable, less offering
costs of $50,000 (240 000) - -
Issuance of warrants for offering
costs of $50,000 and acquisition
costs of $717,979 - - -
Business acquisitions:
Virtual Information Express, Inc. - - -
Computer Ease, LLC - - -
Networld Ohio, Inc. - - -
Reacquired shares through disposition
of Skydive USA - - -
Gain on sale of Skydive USA
to shareholders - - -
Shares issued for services - - -
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 37
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================
(continued)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Paid-in
Shares Par Value Shares Par Value Capital
----------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Shares issued in private sale 32 500 $ 32 - $ - $ 32 468
Conversion of shareholder loan 120 000 120 - - 372 572
Conversion of shareholder loan - - - - 177 331
Issuance of warrants in connection
with notes payable - - - - 127 820
Conversion of notes payable to preferred
stock, net of warrants issued - - 145 222 145 525 535
Issuance of preferred stock, net of
offering costs of $763,940 - - 970 331 970 3 601 590
Shares issued in private sale to
board member 100 000 100 - - 199 900
Shares issued in connection with
acquisition of contracts to provide
internet service 190 000 190 - - 1 329 810
Shares issued for note receivable 250 000 250 - - 499 750
Return of common stock to the Company (350 000) (350) - - -
Net loss - - - - -
Other comprehensive income - - - - -
---------- ------- --------- -------- ----------
BALANCES, DECEMBER 31, 1999 9 422 000 $ 9 422 1 115 553 $ 1 115 $18 966 558
---------- ------- --------- -------- ----------
<CAPTION>
Accumulated
Other
Notes Comprehensive
Receivable Income Deficit
-------------- -------------- --------------
<S> <C> <C> <C>
Shares issued in private sale $ - $ - $ -
Conversion of shareholder loan - - -
Conversion of shareholder loan - - -
Issuance of warrants in connection
with notes payable - - -
Conversion of notes payable to preferred
stock, net of warrants issued - - -
Issuance of preferred stock, net of
offering costs of $763,940 - - -
Shares issued in private sale to
board member (200 000) - -
Shares issued in connection with
acquisition of contracts to provide
internet service - - -
Shares issued for note receivable (500 000) - -
Return of common stock to the Company - - -
Net loss - - (5 018 887)
Other comprehensive income - 1 793 497 -
------------ ------------ ---------------
BALANCES, DECEMBER 31, 1999 $ (940 000) $ 1 793 497 $ (5 851 756)
------------ ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 38
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5 018 887) $ (478 371)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2 092 507 131 989
Bad debt expense 265 256 -
Forgiveness of debt (90 000) -
Gain on disposal of subsidiary (42 864) -
Issuance of common stock for services 897 500 -
Increase in trade receivables (34 697) -
Increase in other receivables and other assets (143 923) (15 048)
Increase in prepaid expenses (242 174) -
Increase in accounts payable and accrued expenses 226 534 37 313
--------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (2 090 748) (324 117)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in related party receivables (124 930) -
Issuance of note receivable (100 000) -
Payments on note receivables 19 680 -
Purchase of investments (105 833) -
Acquisition of contracts (168 000) -
Acquisition of subsidiaries, net of cash acquired (97 354) -
Purchases of property and equipment (1 576 389) -
--------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (2 152 826) -
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans 888 773 -
Payments on shareholder loans (683 723) (87 409)
Proceeds from notes payable 1 003 500 -
Payments on notes payable (700 850) (80 088)
Issuance of common stock, net 742 500 500 000
Issuance of preferred stock, net 3 602 560 -
--------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4 852 760 332 503
--------------- ------------
NET INCREASE IN CASH 609 186 8 386
CASH, beginning of period 10 205 1 819
--------------- ------------
CASH, end of period $ 619 391 $ 10 205
--------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 39
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
INCREASE (DECREASE) IN CASH
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 125 684 $ 99 204
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of loans payable to capital $ 550 023 $ -
------------ ----------
Issuance of common stock for notes receivable $ 940 000 $ -
------------ ----------
Retirement of common stock from disposition of subsidiary $ 800 000 $ -
------------ ----------
Issuance of warrants in connection with notes payable $ 127 820 $ -
------------ ----------
Conversion of notes payable to preferred stock $ 525 680 $ -
------------ ----------
Issuance of common stock for acquisition of contracts $ 1 330 000 $ -
------------ ----------
Issuance of warrants for offering costs and acquisition costs $ 767 979 $ -
------------ ----------
The Company purchased all of the capital stock of Virtual Information Express,
Inc., Computer Ease, LLC and Networld Ohio, Inc. for cash, notes payable and
common stock. In connection with the acquisitions, liabilities were assumed as
follows:
Fair value $ 10 867 279
Cash paid, net of cash acquired (97 354)
Notes payable issued (180 000)
Common stock issued (8 674 000)
Common stock warrants issued (717 979)
-------------
Liabilities assumed $ 1 197 946
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE> 40
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
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 and World Link Online.com, 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 (see Note 2). All significant intercompany balances and transactions
have been eliminated in consolidation. As discussed in Note 9, 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. The Company's ability to offer end-user access
to an internet network is dependent upon the Company's contractual relationships
with both providers. Should these contracts be terminated or terms amended, the
Company might be required to enter into other arrangements with others on less
favorable terms. In addition, the Company relies on outside parties to market
their products and services to end users.
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, investments and other
current assets, are carried at amounts which approximate fair value. Accounts
payable, loans and notes payable and other liabilities are carried at amounts
which approximate fair value.
ACCOUNTS RECEIVABLE
- -------------------
The Company performs on-going credit evaluations of its customers. The Company
has established an allowance for doubtful accounts at December 31, 1999 of
$214,756.
F-10
<PAGE> 41
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
- ----------------------
The Company provides for depreciation of computers and equipment using the
straight-line method based on estimated useful lives of three to seven years.
Software is amortized over three 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 December 31, 1999. At December 31, 1999, the Company had
available-for-sale equity investments in public companies with a fair market
value of $1,894,300 and a cost basis of $100,803, resulting in a net unrealized
gain of $1,793,497.
CONTRACTS
- ---------
The contracts shown on the accompanying balance sheet represent internet service
contracts and are 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.
REVENUE RECOGNITION
- -------------------
The Company recognizes revenue from connectivity 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 is
recognized over the expected benefit period. Revenue from skydiving and airplane
leasing was recognized over the period that the service was provided.
F-11
<PAGE> 42
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 $861,202 and $900,804, respectively. The excess of the
purchase price (including acquisition costs of $717,979, see Note 6) over the
fair value of the net assets acquired was recorded as goodwill of $8,757,581. In
May 1999, CE was then merged with A1 Internet Services, Inc., a wholly-owned
subsidiary of A1 Internet.com, Inc. A1 Internet Services, Inc. is the surviving
entity.
Virtual Information Express, Inc. ("VI") was incorporated on June 10, 1998. The
Company is engaged in the business of electronic commerce. In February 1999, the
Company acquired VI for 300,000 shares of its common stock at $2.00 per share in
exchange for all of the outstanding shares of VI. This transaction was accounted
for using the purchase method of accounting. At the time of the purchase, assets
and liabilities of VI were $49,002 and $50,000, respectively. The excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill of $600,998.
Networld Ohio, Inc. ("Networld") was incorporated on June 15, 1995 and is
engaged in the business of providing internet service. The Company acquired
Networld in April 1999. The acquisition consisted of a cash payment of $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, which matured on 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.
F-12
<PAGE> 43
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 2- BUSINESS COMBINATIONS (CONTINUED)
The following summarized, proforma results of operations of the Company assumes
that the Company acquired VI, CE and Networld as of January 1, 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Gross revenue $ 5 137 780 $ 8 940 344
Net loss from continuing operations (5 109 086) (2 496 339)
Net loss from discontinued operations (42 103) -
Income from extraordinary item 90 000 -
Net loss (5 061 189) (2 496 339)
Earnings per common share:
Net loss from continuing operations $ (.55) $ (.30)
Discontinued operations ( * ) -
Extraordinary item .01 -
Net loss (.54) (.30)
* less than .01 per share
</TABLE>
The weighted average calculation used above includes the shares issued in
connection with the acquisitions as if they had been issued for all periods
presented.
On March 30, 1999, Skydive USA, a wholly owned subsidiary of the Company, was
sold to major shareholders of the Company. These two individuals tendered a
total of 400,000 shares valued at $2.00 per share of the Company's common stock
to the Company as consideration for the sale. The difference between the value
of the common stock ($800,000) returned and the net assets relating to Skydive
USA of $285,617, resulted in a net gain of $514,383. However, because the
transaction was among significant related parties and was determined to not be
at arms length, the gain was recorded as an increase to additional paid-in
capital. As a result, the net effect of the transaction was a net charge to
shareholders' equity of $285,617.
NOTE 3- NOTE RECEIVABLE
Note receivable at December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
Note receivable bearing interest at 6%, due April 1, 2002,
payable in monthly installments of $3,042:
<S> <C>
Current portion $ 33,333
Long term portion 46,987
----------
$ 80,320
==========
</TABLE>
F-13
<PAGE> 44
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 4- LOANS PAYABLE-SHAREHOLDERS
The loans payable to shareholders shown on the accompanying balance sheet
includes a $100,000 loan requiring monthly payments of 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- NOTE PAYABLE
Note payable at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
14% note payable, due November 30, 1999,
payable in monthly installments of principal
and interest, secured by aircraft $ 641 451
==========
</TABLE>
NOTE 6- 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.
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 issued and reacquired 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.
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.
F-14
<PAGE> 45
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 6- SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
- -----------------------
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 August, 1999, the
Company also issued 250,000 shares of common stock at $2.00 per share to a
shareholder of the Company for a note receivable.
In August, 1999, 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.
STOCK WARRANTS
- --------------
Common stock warrants have been issued in connection with certain private
offerings, business acquisitions and notes payable. At December 31, 1999,
warrants to purchase common stock at various prices were outstanding, which
expire as follows:
<TABLE>
<CAPTION>
Number Outstanding
And Exercisable at
Expiration Date December 31, 1999 Exercise Price
--------------- ----------------- --------------
<S> <C> <C>
June, 2004 500 000 $ .10
June, 2004 42 500 5.50
November, 2004 386 650 5.50
-----------------
929 150
=================
</TABLE>
F-15
<PAGE> 46
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 6- SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS (CONTINUED)
- -------------------------
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 gross sales of $13,000,000 are not
achieved at certain dates in fiscal year 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.
There were no warrants outstanding as of December 31, 1998.
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 0 to 48%; risk free rate of 4.5%; and
expected life of five years.
NOTE 7- INCOME TAXES
At December 31, 1999, A1 Internet.com, Inc. had 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 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.
F-16
<PAGE> 47
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 7- INCOME TAXES (CONTINUED)
Significant components of A1 Internet.com, Inc.'s deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
$ - $ -
=============== ==============
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 $ - $ -
============== =============
</TABLE>
The valuation allowance for deferred tax assets was increased by $1,909,500 and
$119,000 during 1999 and 1998, respectively.
NOTE 8- BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The following table presents information by
geographic area as of and for the periods ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Revenues Long-Lived Assets
-------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 1 645 672 $ 84 560 $ 11 979 299 $ 1 296 276
Netherlands 2 441 544 - - -
----------- ------------- ------------ ------------
$ 4 087 216 $ 84 560 $ 11 979 299 $ 1 296 276
=========== ============= ============ ============
</TABLE>
The following table presents information about the Company's segment revenues
and expenses for the year ended December 31, 1999:
<TABLE>
<CAPTION>
E-commerce Internet Web Design Total
---------- -------- ---------- -----
<S> <C> <C> <C> <C>
Net sales $ 2 496 810 $ 1 208 031 $ 382 375 $ 4 087 216
Cost of sales (2 437 162) (656 607) (253 151) (3 346 920)
------------- ----------- ----------- --------------
Gross profit $ 59 648 $ 551 424 $ 129 224 $ 740 296
============= =========== =========== ==============
</TABLE>
F-17
<PAGE> 48
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 8- BUSINESS SEGMENTS (CONTINUED)
For the period ending December 31, 1999 the Company's only other activity was in
the leasing of their aircraft and skydiving. The results of operations of this
segment have been presented as discontinued operations (see Note 9).
The Company's sole business for the period ending December 31, 1998 was
skydiving, therefore all items presented in the accompanying financial
statements for that period relate to that business. Results of operations for
the year ended December 31, 1998 have been presented as discontinued operations
(see Note 9).
The following customers each accounted for more than 10% of sales as of and for
the year ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
% of Sales
----------
Year Ended December 31,
Customer 1999 1998
-------- ---- ----
<S> <C> <C>
A-Netherlands 60% --
</TABLE>
The Company did not have receivables from any one customer in excess of 10% of
total receivables as of December 31, 1999 and 1998.
NOTE 9- 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 December 31, 1999, the
Company recorded a gain on the disposition of GP Air of $42,864.
The Company has restated its prior financial statements to present the operating
results of GP Air as a discontinued operation. All operations for the year ended
December 31, 1998 related to skydiving. This segment of the business was sold in
March, 1999, as discussed in Note 2. Operating results of GP Air are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Gross revenue $ 214 037 $ 84 560
Net loss (84 967) (478 371)
</TABLE>
The assets ($812,642) and liabilities ($558,724) of GP Air at December 31, 1999
have been reflected as a net current asset.
F-18
<PAGE> 49
A1 INTERNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HALO HOLDINGS OF NEVADA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 10- RELATED PARTY TRANSACTIONS
In connection with the resignation of the former Chief Executive Officer of the
Company, the former Chief Executive Officer was paid $53,000 in severance pay.
During 1999, the Company purchased computer equipment from its President in the
amount of $713,020.
NOTE 11- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment from unrelated entities under
operating leases. Future minimum lease payments under the non-cancelable leases
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 $ 213 144
2001 116 177
2002 6 157
---------
$ 335 478
=========
</TABLE>
Total rental expense for the year ended December 31, 1999 was $194,457.
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.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 619,391
<SECURITIES> 0
<RECEIVABLES> 535,474
<ALLOWANCES> (214,756)
<INVENTORY> 0
<CURRENT-ASSETS> 1,638,504
<PP&E> 2,468,809
<DEPRECIATION> (601,231)
<TOTAL-ASSETS> 15,122,962
<CURRENT-LIABILITIES> 1,144,126
<BONDS> 0
0
1,115
<COMMON> 9,422
<OTHER-SE> 13,968,299
<TOTAL-LIABILITY-AND-EQUITY> 13,978,836
<SALES> 4,087,216
<TOTAL-REVENUES> 4,119,793
<CGS> (3,346,920)
<TOTAL-COSTS> (3,346,920)
<OTHER-EXPENSES> (5,804,864)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (34,793)
<INCOME-PRETAX> (5,066,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,066,784)
<DISCONTINUED> (42,103)
<EXTRAORDINARY> 90,000
<CHANGES> 0
<NET-INCOME> (5,018,887)
<EPS-BASIC> (.61)
<EPS-DILUTED> (.61)
</TABLE>
