UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-13347
ARINCO COMPUTER SYSTEMS INC.
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(Name of small business issuer in its charter)
New Mexico 85-0272154
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification no.)
20 Dayton Avenue, Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip Code)
(203)661-6942
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Issuer's telephone number, including area code
Not applicable
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(Former names, former address and former fiscal year,
if changed since last report)
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 [ ].
The number of shares of the issuer's common stock outstanding at August 4, 2000
was approximately 44,958,000.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ARINCO COMPUTER SYSTEMS INC.
BALANCE SHEET
JUNE 30, 2000
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,325,000
Prepaid expenses 105,000
------------
Total current assets 34,430,000
EQUITY INVESTMENT 6,500,000
------------
$ 40,930,000
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,156,000
PREFERRED STOCK
Series B - convertible into common,
as defined; $.10 par value; authorized
4,000,000 shares; issued and outstanding,
3,000,000 shares 10,000
SHAREHOLDERS' EQUITY
Preferred stock
Series A - $.06 per share cumulative,
convertible share-for-share into common
stock - $.10 par value; authorized,
500,000 shares; issued and outstanding,
3,000 shares -
Common stock - $.01 par value; authorized,
45,000,000 shares; issued and outstanding,
44,958,000 shares 449,000
Additional paid-in capital 43,890,000
Accumulated deficit (4,575,000)
------------
39,764,000
------------
$ 40,930,000
============
See accompanying notes.
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<PAGE>
ARINCO COMPUTER SYSTEMS INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
(unaudited)
2000 1999
------------ ---------
Operating expenses - general
and administrative $ 471,000 $ 4,000
------------ ---------
Operating loss (471,000) (4,000)
Other (income) expense
Interest income (454,000) (1,000)
Realized gain on trading securities - (1,000)
Unrealized loss on trading securities - 9,000
------------ ---------
(454,000) 7,000
------------ ---------
NET LOSS $ (17,000) $ (11,000)
============ =========
Net loss applicable to common shares
Net loss $ (17,000) $ (11,000)
Preferred stock dividend requirement - (6,000)
------------ ---------
Net loss applicable to common shares $ (17,000) $ (17,000)
============ =========
Basic and diluted net loss per common share $ - $ -
============ =========
Weighted average of common shares
outstanding, basic and diluted 44,958,000 4,541,000
============ =========
See accompanying notes.
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<PAGE>
ARINCO COMPUTER SYSTEMS INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
(unaudited)
2000 1999
------------ ---------
Operating expenses - general
and administrative $ 475,000 $ 7,000
------------ ---------
Operating loss (475,000) (7,000)
Other (income) expense
Interest income (454,000) (3,000)
Realized gain on trading securities - (1,000)
Unrealized gain on trading securities - (36,000)
------------ ---------
(454,000) (40,000)
------------ ---------
NET EARNINGS (LOSS) $ (21,000) $ 33,000
============ =========
Net earnings (loss) applicable to common shares
Net earnings (loss) $ (21,000) $ 33,000
Preferred stock dividend requirement - (12,000)
Preferred stock discount recognition (10,010,000) -
------------ ---------
Net earnings (loss) applicable to
common shares $(10,031,000) $ 21,000
============ =========
Basic and diluted net earnings (loss)
per common share $ (.39) $ -
============ =========
Weighted average of common shares
outstanding, basic and diluted 25,837,000 4,541,000
============ =========
See accompanying notes.
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<PAGE>
ARINCO COMPUTER SYSTEMS INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(unaudited)
2000 1999
------------ ------------
Cash flows from operating activities
Net earnings (loss) $ (21,000) $ 33,000
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities
Decrease in trading securities
(including unrealized appreciation
of $36,000 and $1,000 of realized
gains in 1999) 112,000 1,000
Changes in operating assets and
liabilities
Accounts receivable 1,000 -
Prepaid expenses (105,000) -
Accounts payable and accrued
liabilities 605,000 1,000
------------ ------------
Net cash provided by
operating activities 592,000 35,000
Cash flows from investing activities
Purchase of equity investment (6,500,000) -
Advances on related party note receivable - (20,000)
Receipts on related party note receivable - 36,000
------------ ------------
Net cash provided by (used in)
investing activities (6,500,000) 16,000
Cash flows from financing activities
Bank overdraft - (2,000)
Issuance of Series B preferred stock 40,000,000 -
Issuance of common stock warrants 100,000 -
------------ ------------
Net cash provided by (used in)
financing activities 40,100,000 (2,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,192,000 49,000
Cash and cash equivalents at beginning
of period 133,000 173,000
------------ ------------
Cash and cash equivalents at end of period $ 34,325,000 $ 222,000
============ ============
See accompanying notes.
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ARINCO COMPUTER SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet as of June 30, 2000, and the statements of operations and cash
flows for the periods ended June 30, 2000 and 1999 have been prepared by Arinco
Computer Systems Inc. (the "Company") without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the periods ended June 30, 2000 and 1999 are not necessarily
indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's annual report on Form 10-KSB for the
year ended December 31, 1999.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share has been computed using the weighted average
number of common shares outstanding during each period after deduction of
preferred stock dividends and discount recognition, as applicable. Basic and
diluted earnings (loss) per share are the same because the effect of convertible
preferred stock and warrants would be antidilutive.
ISSUANCE OF CERTAIN PREFERRED STOCK AND COMMON STOCK WARRANTS
On March 28, 2000, the Company closed the transactions contemplated by a
Securities Purchase Agreement (the "Agreement") with Pangea Internet Advisors
LLL ("Pangea") which was signed on March 9, 2000. Pursuant to the Agreement,
principals of Pangea and other investors identified by Pangea invested
$40,000,000 in 4,000,000 shares of newly-issued Series B convertible preferred
stock ("Series B Stock"). Generally each share of Series B Stock is convertible
in 40 common shares, votes on an as-converted basis, and in total represents
approximately 77% of the common stock of the Company on an as-converted,
fully-diluted basis. The issuance price was $.25 per share of common stock
calculated on an as-converted basis. The Series B Stock is only convertible to
the extent of unissued authorized common stock. If the Company's authorized
common stock is not increased to sufficient numbers to provide for conversion by
December 31, 2000, holders of 50% of the Series B Stock can require the Company
to redeem all such stock. Because increasing the authorized common stock to
sufficient numbers will require shareholder approval the possible redemption of
Series B Stock is considered outside the control of the Company; therefore, any
amount allocated to Series B Stock will be classified as temporary equity until
such shareholder approval has been obtained. In addition, certain investors
purchased five-year warrants ("Warrants") to purchase 41,250,000 shares of
common stock representing 20% of the Company's common stock on a fully-diluted
basis for a total of $100,000. Of these Warrants, 20% have an exercise price of
$.25 per share, 30% have an exercise price of $.50 per share, 30% have an
exercise price of $.75 per share and 25% have an exercise price of $1.00 per
share.
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Proceeds of $39,550,000, net of offering costs of $550,000, have been allocated
between the Series B Stock and the Warrants based on their relative fair values,
resulting in $31,244,000 initially allocated to Series B Stock and $8,306,000
allocated to the Warrants. At the date the Agreement was signed, the Series B
Stock effectively had an embedded beneficial conversion feature. As a result,
the difference (limited to the net proceeds allocated to the Series B Stock)
between the conversion price and the quoted market price of the Company's common
stock was allocated to the conversion feature and recorded in additional paid-in
capital, resulting in a 100% discount on the Series B Stock. Such discount is
being recognized as a return to the Series B stockholders as such stock becomes
convertible. The only limitation on conversion relates to insufficient
authorized common stock; consequently, discount of $10,010,000 relating to
1,010,000 shares of Series B Stock was recognized at closing. The remaining
discount will be recognized when sufficient authorized common stock is approved
by the stockholders.
On March 28, 2000, 1,000,000 shares of Series B Stock were converted into
40,000,000 shares of common stock.
EQUITY INVESTMENT
In June 2000, the Company invested $6,500,000 in Broadstream.com, Inc.
("Broadstream"). It received 7,626,165 shares of Series A Preferred stock
representing an approximate 30% equity interest (calculated on a fully-diluted
basis) and an approximate 47% voting interest. Broadstream is a leading
streaming media management services company that delivers high quality, fault
tolerant distribution services for streaming media content and date. The Company
was one of six investors that invested in the aggregate approximately
$9,500,000.
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CHANGES IN EQUITY
The following table represents changes to the Company's equity accounts for the
six months ended June 30, 2000.
Series B Series A Common
preferred preferred stock
------------ ------------ ------------
Balance at January 1, 2000 $ - $ - $ 49,000
Recognition of discount
on preferred stock
immediately convertible 10,010,000 - -
Conversion of 1,000,000
series B preferred shares
to 40,000,000 common
shares (10,000,000) - 400,000
------------ ------------ ------------
Balance at June 30, 2000 $ 10,000 $ - $ 449,000
============ ============ ============
Additional
paid-in Accumulated
capital deficit
------------ ------------
Balance at January 1, 2000 $ 2,559,000 $ (2,363,000)
Allocation of net proceeds
of Series B preferred
stock and common stock
warrants 39,550,000 -
Recognition of discount
on preferred stock
immediately convertible (7,819,000) (2,191,000)
Conversion of 1,000,000
series B preferred shares
to 40,000,000 common
shares 9,600,000 -
Net loss - (21,000)
------------ ------------
Balance at June 30, 2000 $ 43,890,000 $ (4,575,000)
============ ============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS:
As the Company has not had revenues from operations in the fiscal year ended
December 31, 1999 and the six months ended June 30, 2000, the following
represents management's plans of operations.
The Company is presently without revenues or cash flows from operations. The
Company plans to commence engaging in its primary activity, which will the
acquisition and operation of enterprises that are, or propose to be, engaged in
businesses relating primarily to the Internet, e-commerce and related
technologies. The Company intends to begin acquiring controlling interests in
and actively managing companies that offer significant potential for growth,
profitability and value creation.
Management believes that cash and cash equivalents on hand of approximately
$34,325,000 is sufficient to meet the Company's cash requirements for the next
twelve months, which are expected to consist of (1) payments to management and
consultants under employment and operating agreements, (2) investment in target
companies and related expenses and (3) general administrative expenses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal claims from time to time and is involved
in litigation that has arisen in the ordinary course of its business. It is the
Company's opinion that it either has adequate legal defenses to such claims or
that any liability that might be incurred due to such claims will not, in the
aggregate, exceed the limits of the Company's insurance policies or otherwise
result in any material adverse effect on the Company's operations or financial
position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 28, 2000, the Company sold (the "Offering") an aggregate of 4,000,000
shares of the Company's Series B Convertible Preferred Stock, par value $.10 per
share (the "Series B Preferred Stock"), and warrants (the "Warrants") to acquire
an aggregate of 41,250,000 shares of the Company's common stock, par value $.01
per share (the "Common Stock"), to principals of Pangea Internet Advisors LLC
("Pangea Advisors") and other investors (collectively with Pangea Advisors, the
"Investors") for an aggregate offering price of $40,100,000. The Company claimed
an exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), for the Offering pursuant to Regulation D promulgated under
the Securities Act. Each share of Series B Preferred Stock is convertible into
Common Stock by the holder thereof at any time at a rate equal to $10.00 divided
by the conversion price in effect from time to time (the "Conversion Price").
The Conversion Price is initially $0.25 (resulting in an initial conversion rate
of 40 shares of Common Stock for each share of Series B Preferred Stock). The
Conversion Price is subject to adjustment in the event of stock dividends, stock
splits, or a reorganization, reclassification, consolidation or merger.
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<PAGE>
The Series B Preferred Stock will be automatically converted into Common Stock
at the then prevailing Conversion Price upon the occurrence of either (x) the
consummation of a public offering by the Company of its Common Stock resulting
in proceeds to the Company of at least $10,000,000 and where the per share
offering price is at least four times the then prevailing conversion price and
(y) the conversion into Common Stock of at least 60% of the number of shares of
Series B Preferred Stock originally issued. The Warrants expire in five years
and 20% of the Warrants have an exercise price of $.25 per share, 30% of the
Warrants have an exercise price of $.50 per share, 30% of the Warrants have an
exercise price of $.50 per share and 20% of the Warrants have an exercise price
of $1.00 per share.
In the event of a liquidation, dissolution or winding up of the Company, each
share of Series B Preferred Stock will be entitled to receive the greater of (i)
the sum of $10.00 plus any declared but unpaid dividends and (ii) the amount
such share would be entitled to receive on an "as converted" basis. After this
preferential distribution has been made, all remaining assets shall be
distributed to the holders of shares of Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OLDERS
None
ITEM 5. OTHER INFORMATION
On June 29, 2000 Gary C. Wendt was elected to the Company's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 ** Certificate of Designations of Series B Convertible
Preferred Stock of Arinco Computer Systems Inc.
4.2 ** Amendment to Certificate of Designations of Series A
Convertible Preferred Stock of Arinco Computer Systems Inc.
10.1 ** Securities Purchase Agreement, dated March 9, 2000, by and
between Arinco Computer Systems, Inc., Pangea Internet Advisors
LLC and the purchasers listed on Schedule I attached thereto.
10.2 ** Registration Rights Agreement by and among Arinco Computer
Systems Inc., Pangea Internet Advisors LLC and the persons
party to the Securities Purchase Agreement, dated as of March
28, 2000.
10.3 ** Business Opportunity Allocation and Miscellaneous Services
Agreement by and among Arinco Computer Systems Inc. and
Pangea Internet Advisors LLC, dated as of March 28, 2000.
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<PAGE>
10.4 ** Employment Agreements entered into by and between Arinco
Computer Systems Inc. and each of Cary S. Fitchey, William
Avery, David M. Roberts, William P. O'Donnell and Frederick
G. Noell.
10.5 ** Warrants for William Avery, Cary S. Fitchey, The Roberts
Family Revocable Trust U/D/T dated as of December 15, 1997,
David M. Roberts and Gail M. Simpson, Trustees, Roberts
Children Irrevocable Trust U/D/T dated October 21, 1996,
Stephen H. Roberts, Trustee and Turtle Holdings LLC.
10.6 *** Stock Purchase Agreement, dated June 29, 2000, by and
between Arinco Computer Systems Inc., Broadstream.com, Inc.
and the purchasers listed on Schedule I attached thereto.
10.7 Employment Agreement entered into by and between Arinco
Computer Systems Inc. and Frank Gallagi dated as of June 12,
2000.
27.1 Financial Data Schedule (for SEC use only).
* Filed as an exhibit to the Registrant's Form 10 Registration Statement dated
March 25, 1985 and is incorporated herein by reference.
** Filed as an exhibit to the Registrant's Form 8-K dated March 28, 2000, and is
incorporated herein by reference.
*** Filed as an exhibit to the Registrant's Form 8-K dated June 29, 2000, and is
incorporated herein by reference.
(b) Reports on Form 8-K:
The Registrant filed Form 8-K dated June 29, 2000 during the quarter
ended June 30, 2000 reporting matters under Item 5, Other Events.
There are no other exhibits specified in Item 601 of Regulation S-B to be
included with this filing.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARINCO COMPUTER SYSTEMS INC.
Dated: August 9, 2000 By: /s/ Cary S. Fitchey
--------------------------------
Cary S. Fitchey, President and
Chief Executive Officer
By: /s/ Frank Gallagi
--------------------------------
Frank Gallagi, Managing Director
and Chief Financial Officer
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