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As filed with the Securities and Exchange Commission on July 20, 1998.
Registration No. 333-52731
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
PRE-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ROCKY MOUNTAIN INTERNET, INC.
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(Exact name of registrant as specified in charter)
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DELAWARE 7375 84-1322326
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1099 18TH STREET, SUITE 3000, DENVER, COLORADO 80202 (303) 672-0700
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
THE PRENTICE HALL CORPORATION SYSTEM, INC., 1013 CENTRE ROAD,
WILMINGTON, DELAWARE 19805 (800) 927-9800
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(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
Peter J. Kushar Jeffrey Bartholomew
Rocky Mountain Internet, Inc. Hall & Evans LLC
1099 Eighteenth Street 1200 Seventeenth Street
30th Floor Suite 1700
Denver, CO 80202 Denver, CO 80202
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. __X__
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ----
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ----
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ----
The Exhibit Index begins on page ___ of the sequentially numbered copy.
___ total pages.
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities to be Amount to be Offering Price Aggregate Offering Registration
Registered Registered(1) per Unit(2) Price(2) Fee(1)
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Common Stock $0.001 par value (3) 2,000,000 $9.9375 $19,875,000 $5,863.13
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Common Stock $0.001 par value (4) 1,365,000 9.9375 13,564,687.50 4,001.58
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Common Stock $0.001 par value (5) 111,500 9.9375 1,108,031.25 326.87
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Common Stock Purchase Warrants (6) 111,500 -- -- -0-
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Common Stock $0.001 par value (7) 111,500 9.9375 1,285,465.31 379.21
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Common Stock $0.001 par value (8) 621,000 9.9375 6,171,187.50 1,820.50
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Common Stock $0.001 par value (9) 310,500 9.9375 3,085,593.75 910.25
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(Continued on following page
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Common Stock $0.001 par value (10) 62,100 9.9375 617,118.75 182.05
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Common Stock $0.001 par value (11) 31,050 9.9375 308,559.38 91.03
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Common Stock $0.001 par value (12) 2,162,289 9.9375 21,487,746.94 6,338.89
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Common Stock Purchase Warrants (13) 3,950,000 -- -- -0-
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Common Stock $0.001 par value (14) 3,950,000 9.9375 39,253,125.00 11,579.67
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Common Stock, $0.001 par value(15) 189,548 14.219 2,695,183.01 795.08
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Total Registration Fee:(16) 109,451,698.40 32,288.26
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(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended,
this Registration Statement covers such additional indeterminate number of
shares of Common Stock as may be issued by reason of adjustments in the number
of shares of Common Stock pursuant to anti-dilution provisions contained in
various Common Stock Purchase Warrants. Because such additional shares of Common
Stock will, if issued, be issued for no additional consideration, no
registration fee is required.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee on the basis of the average of the high and low
prices reported on the Nasdaq on May 13, 1998 or, with respect to the
shares of Common Stock described in note 15 below, on July 14, 1998.
(3) May be offered and issued by the issuer from time to time in
connection with one or more mergers with or acquisitions by the Company of other
businesses or assets.
(4) To be offered and sold by certain of the Selling Securityholders.
Shares of Common Stock underlying the Common Stock Purchase Warrants that were
the subject of a registration statement filed by the registrant, Registration
Number 333-05040C, which was declared effective on September 5, 1996.
(5) To be offered and sold by certain of the Selling
Securityholders.
(6) To be offered and sold by certain of the Selling
Securityholders. Pursuant to Rule 457(g), no separate registration fee for
such securities is required because such securities are being registered for
distribution in the same registration as the securities being offered
pursuant thereto.
(7) To be offered and sold by certain of the Selling Securityholders.
Shares of Common Stock underlying the Common Stock Purchase Warrants identified
in footnote 6, above. These securities were previously the subject of a
registration statement filed by the registrant, Registration Number 333-05040C,
which was declared effective on September 5, 1996. Pursuant to Rule 429, such
securities are being carried forward and included in this registration
statement, and the registration fee associated with such securities was
previously paid.
(8) To be offered and sold by certain of the Selling Securityholders.
(9) To be offered and sold by certain of the Selling Securityholders.
(10) To be offered and sold by certain of the Selling Securityholders.
(11) To be offered and sold by certain of the Selling Securityholders.
(12) To be offered and sold by certain of the Selling Securityholders.
(13) To be offered and sold by one of the Selling Securityholders.
Pursuant to Rule 457(g), no separate registration fee for such securities is
required because such securities are being registered for distribution in the
same registration as the securities being offered pursuant thereto.
(14) To be offered and sold by one of the Selling Securityholders.
(15) To be offered and sold by certain of the Selling Securityholders.
(16) An aggregate of $31,493.18 of the filing fee was paid at the
time of the filing of this Registration Statement on May 15, 1998. The
remaining $795.08 of the filing fee is included herewith.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH DATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED July __, 1998
ROCKY MOUNTAIN INTERNET, INC.
4,061,500 COMMON STOCK PURCHASE WARRANTS
10,907,900 SHARES OF COMMON STOCK
This Prospectus relates to up to 2,000,000 shares (the "Acquisition
Shares") of common stock, $0.001 par value (the "Common Stock"), that may be
offered and issued by Rocky Mountain Internet, Inc., a Delaware corporation
(the "Company"), from time to time in connection with the merger with or
acquisition by the Company of other businesses or assets. The Company
anticipates that the terms of mergers, acquisitions, or business
combinations, if any, involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired
by the Company, and that the shares of Common Stock issued will be valued at
prices reasonably related to market prices current either at the time that a
merger or acquisition are agreed upon or at or about the time of delivery of
shares. No underwriting discounts or commissions will be paid, although
finder's fees may be paid from time to time with respect to specific mergers
or acquisitions. Any person receiving any such fees may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). There can be no assurance that the Company will, in fact,
consummate a business combination or asset acquisition on terms that are
favorable to the Company.
This Prospectus also relates to 8,907,900 shares of Common Stock
(the "Selling Securityholder Shares"), of which approximately 2,966,250
shares are currently issued and outstanding and of which approximately
5,941,650 shares may be issued upon the exercise of currently outstanding
warrants to purchase shares of Common Stock. This Prospectus also relates to
such additional shares of Common Stock that may be issued pursuant the
anti-dilution provisions of such outstanding warrants. See "DESCRIPTION OF
CAPITAL STOCK." The Selling Securityholder Shares will be offered and sold from
time to time by certain persons identified below under the caption "SELLING
SECURITYHOLDERS" (the "Selling Securityholders"), and the Company will
receive none of the proceeds of any such sales.
This Prospectus also relates to 4,061,500 outstanding warrants to purchase
shares of Common Stock (the "Warrants"). The Warrants may be offered and sold
from time to time by certain of the Selling Securityholders, and the Company
will receive none of the proceeds of any such sales. However, the Company
will receive proceeds from the exercise of Warrants if any Warrants are
exercised. The shares of Common Stock that may be issued upon the exercise of
the Warrants are included in the 8,907,900 shares identified above as being
offered by the Selling Securityholders. This Prospectus also relates to the
sale and issuance by the Company of shares of Common Stock to holders of the
Warrants upon the exercise of those Warrants.
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The Company will pay substantially all of the expenses with respect
to the offering and the sale of the Acquisition Shares, the Selling
Securityholder Shares, and the Warrants (sometimes referred to herein
collectively as the "Securities") to the public, including the costs
associated with registering the Securities under the Securities Act and
preparing and printing this Prospectus. Normal underwriting commissions and
broker fees, however, as well as any applicable transfer taxes, are payable
individually by the Selling Securityholders. See "USE OF PROCEEDS," "RECENT
DEVELOPMENTS--CHANGE IN CONTROL," "SELLING SECURITYHOLDERS," and "DESCRIPTION
OF CAPITAL STOCK."
On July 14, 1998 the closing sale price of the Common Stock on the
NASDAQ SmallCap-TM- Market ("Nasdaq") was $14.219 per share.
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS _______________, 1998.
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So long as the Registration Statement of which this Prospectus forms
a part is effective and the disclosure set forth herein is current, the
Selling Securityholders may sell the Selling Securityholder Shares and the
Warrants publicly and the Company may issue and sell shares of Common Stock
upon exercise of the Warrants. The Selling Securityholder Shares and the
Warrants offered by this Prospectus may be sold from time to time by the
Selling Securityholders. The distribution of the Selling Securityholder
Shares and the Warrants by the Selling Securityholders may be effected in one
or more transactions that may take place on the Nasdaq, including ordinary
broker's transactions, privately negotiated transactions, or through sales to
one or more dealers for resale of such securities as principals at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specially
negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with sales of such Selling Securityholder
Shares.
The Selling Securityholders and intermediaries through whom the
Securities are sold may be deemed to be "underwriters" within the meaning of
the Securities Act with respect to the Securities offered, and any profits
realized or commission received may be deemed underwriting compensation. The
Company has agreed to indemnify certain of the Selling Securityholders against
certain liabilities, including liabilities under the Securities Act.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "PROSPECTUS
SUMMARY", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS" IN ADDITION TO CERTAIN STATEMENTS
CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
AND ARE THUS PROSPECTIVE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS,
UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK
FACTORS," BEGINNING ON PAGE 17 OF THIS PROSPECTUS AND PROSPECTIVE INVESTORS
ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information
(the "1934 Act Filings") with the Securities and Exchange Commission (the
"SEC" or the "Commission"). The Company has filed with the Commission a
Registration Statement on Form S-1 of which this Prospectus forms a part
(together with any amendments thereto, the "Registration Statement") under
the Securities Act with respect to the Securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits, and undertakings contained in the
Registration Statement. Statements contained in this Prospectus concerning
the provisions of documents are necessarily summaries of such documents and
each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the Commission. For further information
regarding the Company and the Securities offered hereby, reference is hereby
made to the Registration Statement and the exhibits and schedules thereto.
Copies of the Registration Statement, including the exhibits thereto and the
1934 Act Filings, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
at 500 West Madison Street, Room 1400, Chicago, Illinois 60606, and at 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a web site on the World Wide Web that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission, including the
Company, and the address is http://www.sec.gov.
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PROSPECTUS SUMMARY
THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS QUALIFY
THE FOLLOWING SUMMARY IN ITS ENTIRETY, AND PROSPECTIVE PURCHASERS OF ANY OF
THE SECURITIES OFFERED HEREBY SHOULD READ SUCH MORE DETAILED INFORMATION IN
CONJUNCTION WITH THE FOLLOWING SUMMARY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
ISSUER'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION OF THIS PROSPECTUS
UNDER THE CAPTION "RISK FACTORS." THE ISSUER OBTAINED CERTAIN INDUSTRY
DATA USED IN THIS PROSPECTUS FROM INDUSTRY AND GOVERNMENT SOURCES, AND THE
ISSUER HAS NOT INDEPENDENTLY VERIFIED SUCH DATA. CERTAIN TERMS USED
HEREIN ARE DEFINED IN THE GLOSSARY ATTACHED HERETO AS ANNEX A. THIS
PROSPECTUS MAKES REFERENCE TO TRADEMARKS OF OTHER COMPANIES, WHICH MARKS ARE
THE PROPERTY OF SUCH COMPANIES.
ON JUNE 5, 1998, THE ISSUER ENTERED INTO A DEFINITIVE AGREEMENT
AND PLAN OF MERGER (THE "ICC MERGER AGREEMENT") WITH INTERNET COMMUNICATIONS
CORPORATION, A COLORADO CORPORATION HEADQUARTERED IN GREENWOOD VILLAGE,
COLORADO ("ICC"), AND INTERNET ACQUISITION CORPORATION, A COLORADO
CORPORATION WHOLLY-OWNED BY THE ISSUER, PROVIDING FOR THE MERGER OF INTERNET
ACQUISITION CORPORATION WITH AND INTO ICC (THE "ICC ACQUISITION"). UPON
CONSUMMATION OF THE ICC ACQUISITION, ICC WOULD BECOME A WHOLLY-OWNED
SUBSIDIARY OF THE ISSUER. SEE "--RECENT DEVELOPMENTS" and "RECENT
DEVELOPMENTS." UNLESS THE CONTEXT OTHERWISE INDICATES, THE DISCUSSION HEREIN
ASSUMES THE CONSUMMATION OF THE ICC ACQUISITION AND THE PRIVATE PLACEMENT
OFFERING (AS DEFINED BELOW) AND REFERENCES TO (i) THE "REGISTRANT" OR
"ISSUER" SHALL MEAN ROCKY MOUNTAIN INTERNET, INC., A DELAWARE CORPORATION AND
THE ISSUER OF THE SECURITIES, (ii) THE "COMPANY" SHALL MEAN ROCKY MOUNTAIN
INTERNET, INC., A DELAWARE CORPORATION (WHICH WILL CONDUCT BUSINESS FOLLOWING
THE ICC ACQUISITION AS INTERNET COMMUNICATIONS COMPANY) AND ITS CONSOLIDATED
SUBSIDIARIES ON A PRO FORMA COMBINED BASIS AND GIVING EFFECT TO THE
ACQUISITIONS OF INFOHIWAY, INC., A COLORADO CORPORATION ("INFOHIWAY"), AND
APPLICATION METHODS, INCORPORATED, A WASHINGTON CORPORATION ("APPLICATION
METHODS"), AND THE CONSUMMATION OF THE ICC ACQUISITION, (iii) "RMI" SHALL
MEAN ROCKY MOUNTAIN INTERNET, INC., A DELAWARE CORPORATION AND ITS
CONSOLIDATED SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE ACQUISITIONS OF
INFOHIWAY AND APPLICATION METHODS AND THE ICC ACQUISITION, AND (iv) "ICC"
SHALL MEAN INTERNET COMMUNICATIONS CORPORATION, A COLORADO CORPORATION, AND
ITS CONSOLIDATED SUBSIDIARIES PRIOR TO THE ICC ACQUISITION. THE ISSUER
CURRENTLY INTENDS, SUBJECT TO MARKET AND OTHER CONDITIONS, INCLUDING THE
PRIOR CONSUMMATION OF THE ICC ACQUISITION, TO RAISE APPROXIMATELY $150
MILLION IN A PRIVATE PLACEMENT OF HIGH YIELD SECURITIES PURSUANT TO RULE 144A
(THE "PRIVATE PLACEMENT OFFERING"). THE SECURITIES TO BE OFFERED IN THE
PRIVATE PLACEMENT OFFERING WILL CONSIST OF SENIOR NOTES (AND MAY INCLUDE
OTHER SECURITIES) AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933
OR APPLICABLE STATE SECURITIES LAWS. THE PRIVATE PLACEMENT OFFERING WILL BE
MADE ONLY BY MEANS OF AN OFFERING MEMORANDUM.
THE COMPANY
The Company is a full service communications solutions provider of
switched and Internet Protocol ("IP")-based communications products and
services for small- and medium-sized business enterprises, as well as dial-up
residential customers. The Company operates a 22,000 mile network with points
of presence ("POPs") in 35 cities nationwide. Through its own network and
agreements with third-party providers, the Company provides Internet access
in 90 of the 100 largest metropolitan statistical areas in the United States.
The Company monitors and controls its network through its Network Operations
Center ("NOC") located in Denver, Colorado. The Company utilizes its network
to provide to its customers comprehensive communications services, including
dedicated Internet access, dial-up Internet access, IP telephony ("IP
Telephony"), point-to-point private line, frame relay and local and long
distance telephone service. In addition, the Company offers its customers
value-added web services, including web hosting, web site production and
marketing, electronic commerce ("e-commerce") and web training. The Company
believes it is essential to offer to its customers one point-of-contact for
maintaining mission-critical communications networks and accomplishes this by
also providing network integration services, including the design,
installation, management and maintenance of business communications systems
and enterprise data networks. The Company had combined pro forma revenues for
the year ended December 31, 1997 of $40,255,000 and provided communications
services to over 2,000 business customers and 14,000 dial-up customers as of
June 30, 1998.
INDUSTRY BACKGROUND. The Company enables its customers to take
advantage of emerging Internet technology. The emergence of the Internet, IP
Telephony and the widespread adoption of IP as a data transmission standard
in the 1990's are rapidly accelerating the standardization of networking
protocols. This standardization has revolutionized business-to-business
transactions and e-commerce for consumer shopping. Moreover, business
enterprise networks are rapidly adopting data communications network plans
incorporating IP-based technologies and migration paths to utilize the
Internet as much as possible.
Internet access and IP-based services represent two of the fastest
growing segments of the over $200 billion telecommunications services
marketplace according to International Data Corporation ("IDC"). IDC estimates
that the number of Internet users in the United States who access the World Wide
Web reached approximately 29.2 million in 1997 and is forecasted to grow to
approximately 72.1 million by the year 2000. In addition, total Internet Service
Provider ("ISP") revenues in the United States are projected to grow from $4.6
billion in 1997 to over $18 billion in 2000. In the past, much of the growth in
ISP revenues has been
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driven by the dial-up or retail sector of the Internet. However, today
businesses represent the largest and fastest growing segment of the Internet
market. IDC predicts that U.S. corporate Internet access revenues will grow
from approximately $1.9 billion in 1996 to over $6.6 billion in 2000 and that
revenues from enhanced Internet services, such as web hosting, security,
e-commerce, virtual private networks and advanced Internet applications, will
grow from approximately $352 million in 1997 to over $7 billion in 2000.
The rapidly growing need for Internet access and technology has
resulted in a highly fragmented industry with the proliferation of over 4,000
ISPs operating within the United States, according to industry estimates.
These ISPs are primarily made up of a few large national providers focused on
high bandwidth access and a large number of smaller providers with limited
resources focused on serving local or regional markets. The Company believes
that the solutions offered by these companies often fail to address certain
elements required to ensure that customers' mission-critical Internet
operations are reliable, scalable and high-performing and that these
companies fail to provide a broad array of efficient and low-cost
communications products and services.
POSITIONING THE COMPANY. With the acquisition of ICC by RMI, the
Company is positioned to become a leading national communications solutions
provider. The Company offers a broad array of communications products and
services tailored to meet customer needs and provides premier customer
support. The Company delivers its products and services through three
interconnected divisions: Communications Services, Web Services and
Integration Services. The Company believes that, based upon its experience, a
growing number of businesses will demand one point of contact for
communications solutions for the following reasons: (i) to ensure proper
system/network integration; (ii) to obtain a single point of responsibility
for products and services that might have numerous providers; and (iii) to
continue to take advantage of evolving communications technologies. The
Company intends to increase the breadth of its products and services
delivered to its customers by adopting new technology, acquiring
complementary businesses and capitalizing on strategic relationships.
DIVISIONS AND SERVICES
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Divisions Services Description
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COMMUNICATION SERVICES Internet Access
CO-LOCATION T-1 or greater Internet access provided to
customer's server located at the
Company's POP
DEDICATED ACCESS Fractional T-1, T-1 or greater Internet
access provided to a customer's office
DIAL-UP SERVICE Nationwide Internet access for consumer
and small business customers using
modems to dial into the Company's
network
WIRELESS ACCESS Evolving technology allowing up to
750 kbps wireless Internet access
currently available in the Denver
metro area
Telephony Services
e-PHONE Long distance calling using IP Telephony
LONG DISTANCE Traditional long distance services
LOCAL (C-LEC) Traditional local exchange telephone
service on a resale or facilities-owned
basis throughout Colorado
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Divisions Services Description
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CARRIER SERVICES Transporting traffic for "wholesale"
customers (other traditional carriers and
ISPs)
WEB SERVICES Web Site Hosting
A customer's web site is "hosted" on the
Company's servers and connected to the
Internet via a high-speed connection
Web Site Production
Design, development and
implementation of customer web sites
Web Site Marketing
TRAFFIC BUILDER PLUS Unique web site marketing program
whereby customer web sites are
marketed exclusively to Internet users
INFOHIWAY Search engine that contains a large and
rapidly growing database of reference
information on the World Wide Web
Electronic Commerce
e-SELL Turnkey solution for setting up an
Internet store
Web Training
Various levels of Internet training for
customers from basic access training to
HTML programming
INTEGRATION SERVICES Enterprise Networks
Plan, design, implement and maintain
business communication systems and
networks
Network Management Services
INTERALERT 24 hour network monitoring and problem
resolution
INTERCEDE Maximizes network up-time
INTERCHANGE Optimizes network performance
Network Maintenance
INTERCARE Standard maintenance service plan
INTERCARE GOLD Premium maintenance service plan
Network Consulting
Network system engineering,
performance analysis, design and
engineering
Network Security
Analysis of security needs,
implementation of firewalls and secure
Internet connections
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BUSINESS STRATEGY
The Company's objective is to become a leading national provider
of a broad array of communications services, distinguished by a
state-of-the-art network and high quality customer service and support. Key
elements to the Company's business strategy include the following.
PROVIDE A BROAD ARRAY OF COMMUNICATION SOLUTIONS TO ITS
CUSTOMERS. The Company has a portfolio of products, services and skill
sets to develop and deliver comprehensive internetworking communications
solutions to both business and residential customers. These products and
services are organized under three interconnected divisions including
Communication Services, Web Services and
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Integration Services. The Company plans to continue to add products and
services to its portfolio and believes that a growing number of businesses
and consumers will demand that one company provide all of their
communications needs. The Company believes that this one point-of-contact
service delivery model ensures: (i) high-performance, cost-effective network
planning, design and implementation; (ii) maintenance of a single point of
responsibility; and (iii) an ongoing customer relationship as a technology
partner for communications applications.
PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. The
Company believes that highly differentiated customer service and technical
support is a key competitive asset in the communications industry, and the
ISP sector in particular. Because the Internet is an evolving and complex
medium, customers require significant technical support. Consequently, the
Company has developed a comprehensive strategy to attain maximum customer
satisfaction. This strategy consists of the following elements: (i)
maintaining a sufficient number of qualified service and technical support
personnel through proactive recruitment, retention and training programs;
(ii) utilizing the Company's extranet to provide real-time, interactive
customer service; (iii) developing an on-line billing system enabling
customer-controlled account customization and analysis; and (iv) further
deploying and maintaining the Company's service delivery standards and
guarantees. The Company continually monitors its customer service strategy
through customer satisfaction surveys which are monitored by a third-party
consulting firm. As a result, the Company experiences low turnover rates and
achieves subscriber growth from customer referrals.
CAPITALIZE ON BRAND RECOGNITION AND COMPANY REPUTATION. The
Company believes that as a result of the ICC Acquisition, the Company will
possess two strong and distinctive brand names in the Mountain States region.
ICC has a long-standing reputation in the business community as a voice and
data communications provider and RMI has established itself as a leading-edge
Internet access provider for residences and small- to medium-sized businesses.
To capitalize on these assets, the Company will adopt a dual nationwide
branding strategy. Products and services targeted to the business segment will
be branded as "Internet Communications Company," and products and services
targeted to the consumer segment will be branded as "Rocky Mountain Internet."
This dual branding strategy will enable the Company to implement marketing
efforts that have distinctive customer focus, as well as themes and messages
that speak to the different audiences while maintaining the ability to cross
sell and build national brands.
MAXIMIZE NETWORK UTILIZATION. The Company operates a 22,000
mile network with POPs in 35 cities nationwide. Through its network and
agreements with third-party providers, the Company provides Internet access
in 90 of the 100 largest metropolitan statistical areas in the United States.
The Company plans to continue to selectively add POPs where it can add value
to its customers. The Company believes that the ISP industry has historically
been divided between ISPs focused on business customers and ISPs focused on
residential dial-up customers. The Company's business strategy is to maximize
network utilization 24 hours a day by targeting both daytime business and
evening-intensive consumer users.
SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. The
Company plans to expand its sales efforts nationally by focusing on targeted
areas where there is a large concentration of businesses and favorable
demographics. The Company will initially target markets where it has existing
facilities. In these locations the Company will actively pursue both business
and residential customers. In markets where the Company is using third-party
provider networks, the Company will initially target dial-up customers
through advertising, promotions, public relations, telemarketing and customer
referrals. Once the Company attains critical mass in these locations, it will
establish its own POPs and begin targeting business and residential customers
with its broad array of communications products and services.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. The
Company believes that the Internet industry is undergoing structural changes
with an increasing use of the Internet for mission-critical applications,
which is creating demand for high quality network operations, customer
service and technical support. The Company also believes that there is a
market opportunity to consolidate ISPs, Internet-based service companies and
Internet technologies. Evidence of this strategy includes the Company's recent
acquisitions of Infohiway and Application Methods. Infohiway is a company
that has developed a search engine that gives the Company on-line advertising
opportunities for its customers. Application Methods' e-commerce
-7-
<PAGE>
solution, e-SELL, enables the Company to provide business customers with
browser-based software to conduct business over the Internet. The Company
believes these acquisitions enhance the Company's position as a full-service
provider of communications solutions. The Company will continue to evaluate
opportunities to acquire companies that it believes will enhance its product
and service offerings. In addition, the Company intends to supplement its
organic national growth efforts by acquiring local ISPs in strategic
locations to maximize economies of scale.
RECENT DEVELOPMENTS
As mentioned above, RMI entered into an Agreement and Plan of
Merger dated as of June 5, 1998 by and among RMI, ICC and Internet
Acquisition Corporation, a Colorado corporation and a wholly-owned subsidiary
of RMI (the "ICC Merger Agreement") pursuant to which RMI will, subject to
the conditions set forth therein, acquire ICC. RMI has also recently acquired
Infohiway and Application Methods. ICC is a Denver-based telecommunications
company that designs, implements, maintains and manages communications
systems and networks. Consummation of the ICC Acquisition is subject to the
satisfaction of various closing conditions, including approval of the merger
by ICC's shareholders at the shareholders meeting scheduled for August 10,
1998, and is expected to close shortly thereafter. The Issuer currently
intends, subject to market and other conditions, including the prior
consummation of the ICC Acquisition, to complete the Private Placement
Offering to raise approximately $150.0 million in a private placement of high
yield securities pursuant to Rule 144A. The securities to be offered in the
Private Placement Offering will consist of senior notes (and may include
other securities) and will not be registered under the Securities Act of 1933
or applicable state securities laws. The Private Placement Offering will be
made only by means of an offering memorandum. The Issuer has obtained a
bridge loan commitment from lenders to fund the ICC Acquisition if the
Private Placement Offering is not completed. See "RECENT DEVELOPMENTS -- ICC
ACQUISITION," and "--OTHER ACQUISITIONS," "RISK FACTORS," "BUSINESS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
On June 5, 1998, RMI acquired Infohiway, a Colorado-based company
that developed a search engine that the Company believes has unique data
searching features. RMI also acquired Seattle-based Application Methods on
June 30, 1998. Application Methods has developed a proprietary e-commerce
software package, e-SELL. Additionally, RMI recently entered into a
non-binding memorandum of understanding regarding the possible acquisition of
Internet Now, Inc. ("Internet Now"), an ISP located in Phoenix, Arizona for
approximately $1.5 million. While the Company believes these current and
proposed acquisitions will accelerate its existing growth plans, there can be
no assurance that the Company will be able to integrate these companies
successfully. See "RECENT DEVELOPMENTS -- ICC ACQUISITION," and "--OTHER
ACQUISITIONS," "RISK FACTORS," "BUSINESS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
At the 1998 Annual Meeting of Stockholders held on March 12, 1998
(the "RMI Annual Meeting"), RMI's stockholders approved an amendment to RMI's
Certificate of Incorporation that authorized (i) an increase in the number of
shares of Common Stock that may be issued by RMI from 10,000,000 to
25,000,000 and (ii) a decrease in the number of votes required for
stockholder actions from a majority of the shares of Common Stock outstanding
to a majority of the shares present in person or represented by proxy at a
meeting and entitled to vote thereon. Also at the RMI Annual Meeting, the
stockholders of RMI authorized RMI's board of directors to declare, in its
discretion, until March 12, 1999, a reverse stock split of Common Stock, with
the exact size of the stock split to be determined by the board of directors
up to a maximum ratio of one-for-ten.
RMI, a Delaware corporation, was incorporated in October 1995 and
acquired the assets of Rocky Mountain Internet, Inc., a Colorado corporation
incorporated in 1994 which began doing business in 1993. RMI completed an
initial public offering (the "IPO") of 1,365,000 units of securities (the
"IPO Securities") on September 5, 1996. Each IPO Security consisted of one
share of Common Stock and one IPO Warrant (as defined below) to purchase a
share of Common Stock at a price of $4.375. On September 14, 1997, RMI
completed a private placement of units consisting of two shares of Common
Stock and a warrant to purchase a share of Common Stock. The per unit price
was $4.00 and was allocated $1.90 to each share of Common Stock and $0.20 to
the warrant to purchase a share of Common Stock. The warrants entitled the
holder thereof to purchase a share of Common Stock for $3.00 and expire on
June 13, 2000. Effective October 1, 1997, RMI issued and sold to Mr. Hanson
1,225,000 shares of Common Stock for a purchase price of $2,450,000, or $2.00
per
-8-
<PAGE>
share, as more fully described in "CERTAIN TRANSACTIONS -- CHANGE IN
CONTROL." Mr. Hanson also became RMI's President, Chief Executive Officer and
Chairman of the board of directors of the Company. As a result of these
related transactions, Mr. Hanson obtained effective control of RMI and, as of
July 8, 1998, had the authority to vote 53.9% of RMI's Common Stock. The
Common Stock and the IPO Warrants are quoted on Nasdaq under the symbols
"RMII" and "RMIIW," respectively.
RMI's principal executive offices are located at: 1099 18th
Street, Suite 3000, Denver, Colorado 80202, telephone (303) 672-0700,
www.rmi.net.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company 2,000,000 shares (1)
Selling Securityholders 8,907,900 shares (2)
Common Stock Purchase Warrants
("Warrants") offered by
Selling Securityholders 4,061,500 Warrants (3)
Common Stock Outstanding Prior to this Private
Placement Offering 7,805,636 shares
Common Stock Outstanding After this Private
Placement Offering 15,747,286 shares (4)
Nasdaq Trading Symbols Common Stock: RMII
Common Stock Purchase Warrants: RMIIW
</TABLE>
(1) Such shares may be offered and issued from time to time in
connection with future acquisitions by the Company.
(2) Approximately 2,966,250 of such shares are currently issued and
outstanding and may be offered and sold from time to time by the Selling
Securityholders. The remaining approximately 5,941,650 shares may be
purchased upon the exercise of the Warrants and thereafter offered and sold
by the holders thereof pursuant to this Prospectus. Does not include shares
of Common Stock that may be issued pursuant to anti-dilution provisions of
various outstanding warrants, including the Warrants to be
-9-
<PAGE>
offered and sold by certain Selling Securityholders. See "SELLING
SECURITYHOLDERS" and "DESCRIPTION OF CAPITAL STOCK."
(3) Includes 111,500 Warrants issued to the representative of the
underwriters of the Company's IPO in 1996 and 3,950,000 Warrants owned by
Douglas H. Hanson, President, Chairman, and Chief Executive Officer of the
Company (the "Hanson Warrants"). The Warrants owned by Mr. Hanson may be
exercised until September 22, 1999 for a purchase price of $1.90 per share of
Common Stock purchased. The shares of Common Stock issuable upon exercise of
these Warrants are included in the 8,907,900 shares of Common Stock offered
by the Selling Securityholders. See "CERTAIN TRANSACTIONS--CHANGE IN CONTROL"
and "DESCRIPTION OF CAPITAL STOCK."
(4) Assumes: (i) the issuance of all 2,000,000 of the Acquisition
Shares in one or more mergers with or acquisitions by the Company of other
businesses or assets; and (ii) the exercise of all of the Warrants, including
all of the Hanson Warrants. Does not give effect to the exercise of
outstanding options granted to employees or non-employee directors of the
Company pursuant to various stock option plans or shares of Common Stock that
can be issued pursuant to anti-dilution provisions of the Warrants and other
derivative securities. See "RISK FACTORS--SHARES ELIGIBLE FOR RESALE,"
"SELLING SECURITYHOLDERS," "CERTAIN TRANSACTIONS--CHANGE IN CONTROL," and
"DESCRIPTION OF CAPITAL STOCK."
RISK FACTORS
The Company and its business are subject to varying risks, and the
securities offered hereby are speculative, involve a high degree of risk, and
should not be purchased by persons who cannot afford the loss of their
investment. See "RISK FACTORS."
-10-
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA OF THE COMPANY
The following summary unaudited pro forma condensed combined financial
information presented below has been derived from the unaudited and audited
historical financial statements of RMI, ICC, Infohiway and Application
Methods, included elsewhere in this Prospectus, and reflect management's
present estimate of pro forma adjustments, including a preliminary estimate
of purchase price allocations, which ultimately may be different. The pro
forma financial data gives effect to the ICC Acquisition, and the
acquisitions of Infohiway and Application Methods, as well as the financing
(from the Private Placement Offering or the Bridge Loan Commitment (as
defined below) if the Private Placement Offering is not completed) necessary
to complete the ICC Acquisition (the "Acquisition Financing").
The acquisitions are being accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed are recorded at
their estimated fair values, which are subject to further adjustment based upon
appraisals and other analyses, with appropriate recognition given to the effect
of RMI's borrowing rates and income tax rates.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1997 gives effect to the acquisitions as if they had
been consummated at the beginning of such year. This pro forma statement of
operations combines the historical consolidated statement of operations for the
year ended December 31, 1997 for RMI, the historical consolidated statement of
operations for the eleven months ended December 31, 1997 for ICC, the historical
combined statement of operations for the year ended December 31, 1997 for
Application Methods and the historical statement of operations for the year
ended December 31, 1997 for Infohiway.
The unaudited pro forma condensed combined statement of operations for the
three months ended March 31, 1998 gives effect to the acquisitions as if they
had been consummated at the beginning of such period. This pro forma statement
of operations combines the historical operations for RMI, ICC, Application
Methods and Infohiway for the three month period ended March 31, 1998.
The unaudited pro forma condensed combined balance sheet as of March 31,
1998 gives effect to the acquisitions as if they had been consummated on that
date. This pro forma balance sheet combines the historical consolidated balance
sheet at that date for RMI and the historical balance sheets at such date for
ICC, Application Methods and Infohiway.
RMI has contractual rights under the ICC Merger Agreement to effect the
ICC Acquisition and expects to complete the transaction as soon as possible
after the August 10, 1998 ICC shareholders' meeting. However, there can be no
assurance that RMI will be able to complete the ICC Acquisition at the time
or in accordance with the terms and conditions that it currently contemplates.
The unaudited pro forma condensed combined financial statements may not
be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future. The actual
purchase accounting adjustments may be revised upon completion of the ICC
Acquisition. The unaudited pro forma condensed combined financial data
presented below should be read in conjunction with the audited and unaudited
historical financial statements and related notes thereto of RMI, ICC,
Application Methods and Infohiway and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of RMI and ICC, included
elsewhere in this Prospectus.
-11-
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
<S> <C> <C>
Statement of Operations Data(1):
Revenue........................................................................... $ 40,255 $ 10,350
Cost of sales..................................................................... 25,766 6,649
------------ -------------
Gross Margin...................................................................... 14,489 3,701
Operating Expenses................................................................ 26,215 9,138
Other Expenses.................................................................... 5,207 1,306
------------ -------------
Loss from continuing operations................................................... $ (16,933) $ (6,743)
------------ -------------
------------ -------------
Basic and Diluted loss per share from continuing operations....................... $ (2.96) $ (0.94)
------------ -------------
------------ -------------
Average number of common shares outstanding....................................... 5,724 7,147
------------ -------------
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998
----------
<S> <C>
Balance Sheet Data(1):
Cash and cash equivalents........................................................................... $ 1,167
Working capital (deficit)........................................................................... $ (6,214)
Goodwill............................................................................................ $ 46,246
Total Assets........................................................................................ $ 69,348
Acquisition Financing, Long Term Debt and Capital Lease Obligations, net of current portion......... $ 43,213
Total Stockholders' Equity.......................................................................... $ 6,199
</TABLE>
(1) This summary information should be read in conjunction with the Selected
Unaudited Proforma Condensed Combined Financial Data and the related
Balance Sheet, Statements of Operations and Notes included elsewhere
herein.
-12-
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA--RMI
The following table sets forth selected historical financial and other
data of RMI. RMI was formed in October 1993 and has generated operating
losses since inception as well as negative cash flow in 1996 and 1997. The
selected data set forth below as of December 31, 1994 (not included in this
filing) and 1995 and for the periods then ended have been derived from the
financial statements of RMI which have been audited by McGladrey & Pullen,
LLP, independent auditors. The selected consolidated statements of operations
and the balance sheet data set forth below as of December 31, 1996 and 1997
and for the periods then ended have been derived from the financial
statements of RMI which have been audited by Baird, Kurtz & Dobson,
independent auditors. The selected financial data for the three month periods
ended March 31, 1998 and 1997 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which RMI considers necessary for a
fair presentation of the financial position and results of operations for
these periods. The operating results for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for any
future period.
The summary historical financial data should be read in conjunction with the
Consolidated Financial Statements of RMI and related Notes thereto and the
information included under "SELECTED HISTORICAL FINANCIAL DATA--RMI" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--RMI" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
-------------------------------------------- --------------------
1994(1) 1995 1996 1997 1997 1998
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 254 $ 1,179 $ 3,282 $ 6,127 $ 1,397 $ 1,779
Cost of revenues earned................................. 84 320 1,104 2,060 501 652
Gross profit............................................ 170 859 2,178 4,067 896 1,127
General, selling and administrative expenses............ 211 968 4,459 7,868 1,708 2,379
Operating (loss) income................................. (41) (109) (2,281) (3,801) (812) (1,252)
Net (loss) income....................................... (44) (129) (2,343) (4,153) (890) (1,314)
Net (loss) income per share (2)......................... $ (0.02) $ (0.07) $ (1.03) $ (0.79) $ (0.20) $ (0.20)
OTHER DATA:
EBITDA (3).............................................. (7) (9) (1,956) (2,918) (642) (1,012)
Deficiency of earnings to cover fixed charges (4)....... (44) (129) (2,343) (4,153) (890) (1,314)
Net cash provided-(used) by: operating activities....... 155 165 (1,512) (3,297) (815) (107)
investing activities....... (114) (238) (2,344) 921 473 (132)
financing activities....... (7) 311 3,930 3,080 519 338
BALANCE SHEET DATA:
Cash and Cash Equivalents............................... $ 36 $ 275 $ 349 $ 1,053 $ 526 $ 1,152
Investments............................................. 0 0 1,357 0 577 0
Working Capital (Deficit)............................... (184) (187) 371 (209) (804) (722)
Total Assets............................................ 250 925 5,540 5,082 5,474 5,152
Long Term Debt and Capital Lease Obligations, net of
current portion....................................... 52 524 1,134 905 1,077 784
Total Stockholders' (deficit) equity.................... (43) (169) 2,317 2,083 1,709 1,656
</TABLE>
- --------------------------
(1) The inception of RMI was in October 1993, therefore no financial statement
information is presented for the period from inception to December 31, 1993.
(2) Loss per share is computed based on 1,868,000 shares outstanding for 1994
and 1995, 2,295,000 shares outstanding for 1996 and 5,288,000 shares
outstanding for 1997, and 4,634,000 and 6,711,000 shares outstanding for the
three months ended March 31, 1997 and 1998, respectively. This represents
the weighted average of common shares outstanding for both basic and diluted
earnings per share for each period. See Note 1 to the RMI's financial
statements included elsewhere in this Prospectus.
(3) EBITDA is earnings before interest, taxes, depreciation and amortization.
EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability
to service its debt. However, EBITDA does not represent cash flow from
operations; as defined by generally accepted accounting principles
("GAAP"). EBITDA should not be considered as a substitute for net income
or net loss as an indicator of RMI's operating performance or cash flow
as a measure of liquidity and should be examined in conjunction with the
Consolidated Financial Statements of RMI and the related Notes thereto
included elsewhere in this Prospectus. EBITDA as defined by the Company
may be different from EBITDA as defined by other companies.
(4) Ratio of earnings to fixed charges is defined as earnings divided by fixed
charges. Earnings represent pre-tax loss from continuing operations plus
fixed charges. Fixed charges represent interest paid or accrued on
indebtedness of RMI and amortization of deferred loan charges. In
all applicable periods, RMI had a deficiency in earnings to fixed
charges.
-13-
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA--ICC
The following table sets forth selected historical financial and other data
of ICC. The related financial data for the eleven months ended December 31, 1997
have been derived from the financial statements of ICC which have been audited
by KPMG Peat Marwick LLP, independent accountants. The selected financial data
for the fiscal years ended January 31, 1997 and 1996 have been derived from the
financial statements of ICC which have been audited by Hein + Associates LLP,
independent accountants. The selected financial data for the three month period
ended March 31, 1998 and three month period ended April 30, 1997 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which ICC considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
any future period.
The summary historical financial data should be read in conjunction with the
Consolidated Financial Statements of ICC and related Notes thereto and the
information included under "SELECTED HISTORICAL FINANCIAL DATA--ICC" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ICC" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE THREE
ELEVEN MONTHS MONTHS MONTHS
ENDED DECEMBER ENDED APRIL ENDED MARCH
YEAR ENDED JANUARY 31, 31, 30, 31,
------------------------------------------ --------------- ----------- -----------
1994 1995 1996 1997 1997(1) 1997 1998
--------- --------- --------- --------- --------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 15,890 $ 16,350 $ 18,528 $ 26,505 $ 33,113 $ 8,689 $ 8,234
Cost of Sales......................... 11,273 11,996 13,502 18,815 23,693 6,022 5,993
Gross margin.......................... 4,617 4,354 5,026 7,690 9,420 2,667 2,241
Selling, general and administrative
expenses............................ 4,147 6,321 6,131 8,624 12,770 3,120 5,351(5)
Operating (loss) income............... 470 (1,967) (1,105) (934) (3,350) (453) (3,110)
Net (loss) income..................... 300 (1,830) (977) (1,125) (4,575) (643) (3,553)
Net (loss) income per share(2)........ $ 0.14 $ (0.78) $ (0.41) $ (0.33) $ (0.88) $ (0.14) $ (0.66)
OTHER DATA:
EBITDA(3)............................. 991 (1,371) (404) 313 (1,481) 48 (2,636)
Deficiency of earnings to cover fixed
charges............................. -- (1,967) (1,105) (1,125) (3,350) (453) (3,110)
Net cash provided-(used) by:
operating activities................ 150 295 (66) (3,143) 732 1,183 (2,372)
investing activities................ (1,487) (1,563) (724) (604) (995) (166) (53)
financing activities................ 1,270 1,125 691 2,590 1,873 (108) 2,184
BALANCE SHEET DATA:
Cash and Cash Equivalents............. $ 715 $ 572 $ 473 $ 643 $ 0 $ 978 $ 0
Investments........................... 189 157 0 0 0 0 0
Working Capital (Deficit)............. 2,732 2,052 892 5,990 (1,488) 5,977 (3,697)
Total Assets.......................... 6,582 7,064 7,450 18,372 18,113 19,045 18,078
Long Term Debt and Capital Lease
Obligations, net of current
portion............................. 0 0 0 5,587 209 2,714 429
Total Stockholders' equity............ 4,873 3,853 2,917 7,405 5,984 9,612 2,431
</TABLE>
- ------------------------------
(1) ICC elected to change its fiscal year from January 31 to December 31
effective February 1, 1997.
(2) Loss per share is computed based on 2,183,000; 2,352,000; 2,397,000;
3,371,000; 5,216,000; 4,756,000 and 5,398,000 shares outstanding for 1994,
1995, 1996, 1997, eleven months ended December 31, 1997, and three months
ended April 30, 1997 and March 31, 1998, respectively. This represents the
weighted average common shares outstanding for both basic and diluted
earnings per share for each period.
(3) EBITDA is earnings from continuing operations before interest, taxes,
depreciation and amortization. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring a
company's ability to service its debt. However, EBITDA does not represent
cash flow from operations, as defined by GAAP. EBITDA should not be
considered as a substitute for net income or net loss as an indicator of
ICC's operating performance or cash flow as a measure of liquidity and
should be examined in conjunction with the Consolidated Financial Statements
of ICC and the related Notes thereto included elsewhere in this Prospectus.
EBITDA, as defined by the Company may be different from EBITDA as defined
other companies.
(4) Ratio of earnings to fixed charges is defined as earnings divided by fixed
charges. Earnings represent pre-tax loss from continuing operations plus
fixed charges. Fixed charges represent interest paid or accrued on
indebtedness of the ICC and amortization of deferred loan charges. In
all applicable periods, the ICC had a deficiency in earnings to fixed
charges.
(5) Selling, general and administrative expenses for the three months ended
March 31, 1998 includes $1,608,000 of restructuring costs (see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ICC," included elsewhere herein).
-14-
<PAGE>
RECENT DEVELOPMENTS
ICC ACQUISITION
On June 5, 1998, RMI entered into the ICC Merger Agreement
providing for the merger of Internet Acquisition Corporation, a wholly-owned
subsidiary of RMI with and into ICC. Upon consummation of the ICC
Acquisition, ICC will become a wholly-owned subsidiary of RMI and the
shareholders of ICC will receive $6.764 per share of common stock of ICC, for
a total consideration of approximately $39.4 million. Additionally, in
connection with the merger, RMI will repay certain of ICC indebtedness. The
acquisition is subject to the approval of ICC's shareholders and other
customary conditions. Interwest Group Inc. ("Interwest Group"), an affiliate
of Anschutz Company, holds approximately 52% of the outstanding shares of
common stock of ICC and has agreed to vote in favor of the transaction
pursuant to a Voting Agreement dated June 5, 1998 between Interwest Group and
RMI. The ICC shareholders' meeting will be held on August 10, 1998 and the
ICC Acquisition is expected to be completed shortly thereafter.
RMI has received a bridge loan commitment (the "Bridge Loan
Commitment") from lenders in the aggregate amount of $42 million to fund the
ICC Acquisition if the Private Placement Offering is not completed. The
Bridge Loan Commitment would be secured by all of the tangible and intangible
assets of RMI and contains certain conditions precedent to the lenders'
obligation to fund, including the obligation of Mr. Hanson to exercise the
remaining Hanson Warrants which would provide RMI proceeds of approximately
$7.5 million. The Bridge Loan Commitment also requires RMI to pay certain
commitment fees of approximately $1,050,000 plus costs and expenses, and to
issue warrants to acquire shares of RMI's Common Stock if RMI draws on the
Bridge Loan Commitment. Additionally, upon acceptance of the Bridge Loan
Commitment, RMI agreed to issue warrants to the lenders (and the arranger) to
acquire 560,000 shares of Common Stock.
ICC is a multi-faceted telecommunications and data networking
company specializing in the design, implementation, maintenance and
management of communications systems and networks. ICC's gross revenues for
the eleven months ended December 31, 1997 were $33.1 million. ICC is capable
of providing a broad communications package addressed to its customers' total
communications needs for enterprise-wide data and voice networks.
To provide enterprise-wide voice and data communications networks,
ICC maintains distribution arrangements with manufacturers and suppliers,
including 3Com, Cisco, NEC America, Northern Telecom, ADC/Kentrox and Adtran.
To provide circuits, ICC has agreements with a number of carriers, including
Worldcom, ICG and U S WEST and operates, itself, as an interexchange carrier
("IXC") approved by the Federal Communications Commission (the "FCC"). To
provide value-added services, ICC employs a highly trained technical staff
and operates an advanced network control center which is located at ICC's
corporate headquarters in Greenwood Village, Colorado. The network control
center is capable of managing, monitoring and remotely diagnosing most data
communications devices as well as the circuits connecting customer locations.
ICC network and field engineers have a broad experience with data and voice
communications equipment and networks.
ICC also operates as an ISP, offering comprehensive Internet
access for business enterprises, including circuits, data communications
equipment, firewalls (hardware and software to enhance network security),
high-speed connection to the Internet, and services, like network management,
maintenance, hosting of the customer's web site and/or computers at ICC's
facilities and Internet consulting.
ICC has a network consulting division that offers analysis and
recommendations on a wide range of networking requirements, issues, problems
and concerns. ICC's network consultants perform network system engineering,
network performance analysis and Internet design and engineering. They
recommend and implement new network and system designs, migrations, upgrades,
optimization and multi-platform/application integration.
In March 1998, ICC divested non-core businesses and sales channels,
Omega Business Communications Services, Inc. ("Sound") and Interwest Cable
Network Systems, Inc. ("Cable"). In addition, ICC re-sized its operations to
concentrate on areas that it believes generate recurring revenues and profits.
As a result, 50 positions, or 21% of ICC's then-existing workforce (not
including Sound and Cable) were eliminated. The personnel reductions were
largely in the sales and administration departments. On June 30, 1998, ICC
employed 170 full-time employees including 4 executive officers, 43 in sales
and marketing, 96 in network operations and technical services and 27 in
accounting, administration and other support areas. In addition, during the
fourth quarter of the fiscal year ended December 31, 1997, ICC had launched an
entirely separate wholesale engineering services business, which ICC
discontinued as part
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of the restructuring. In conjunction with the restructuring, John M.
Couzens replaced Thomas C. Galley as President and Chief Executive Officer.
The restructuring actions described above resulted in ICC recognizing
a restructuring charge for the three months ended March 31, 1998 in the amount
of $1,608,000. This charge is comprised of several items, including employee
severance, reduction in manufacturers' product lines, closure of the wholesale
engineering services company and the consolidation of facilities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ICC."
Also in March 1998, ICC received $1.6 million from Anschutz Company,
a related party, in exchange for a convertible promissory note which, pursuant
to its amended terms, will be paid in full from proceeds of the Private
Placement Offering.
ICC's headquarters and principal offices are located at 7100 East
Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111. Its telephone
number is (303) 770-7600. ICC conducts business throughout Colorado and in
Minneapolis, Minnesota. ICC leases under multi-year agreements approximately
73,000 square feet of office and/or office/warehouse space at lease rates
ranging from $6.00 to $12.50 per square foot at locations in Greenwood Village,
Colorado Springs, Pueblo and Fort Collins, Colorado and Minneapolis, Minnesota.
OTHER ACQUISITIONS
On June 5, 1998, RMI acquired all of the outstanding common stock of
Infohiway pursuant to the terms of a Merger Agreement dated June 5, 1998 by and
among RMI, RMI Subsidiary, Inc., Infohiway and Kenneth Covell, John-Michael
Keyes and Jeremy J. Black, the shareholders of Infohiway (the "Infohiway Merger
Agreement"). Infohiway has developed a search engine which the Company believes
has unique data searching features. For the year ended December 31, 1997,
Infohiway had gross revenues of $31,000. The acquisition was effectuated by the
merger of RMI Subsidiary, Inc., a wholly-owned subsidiary of RMI, with and into
Infohiway. As a result of the merger, Infohiway became a wholly-owned subsidiary
of RMI. Pursuant to the Infohiway Merger Agreement, the shareholders of
Infohiway received an aggregate of 150,000 shares of RMI Common Stock.
On June 30, 1998, RMI acquired all of the outstanding common stock of
Application Methods. Based in Seattle, Washington, Application Methods develops
software and has recently developed an e-commerce product. For the year ended
December 31, 1997, Application Methods had gross revenues of $984,000. Pursuant
to the terms of a Merger Agreement by and among RMI, RMI Acquisition Subsidiary,
Inc. ("RMI Acquisition"), a Washington corporation and a wholly-owned subsidiary
of RMI, Application Methods and Ronald M. Stevenson, Gregory A. Brown and Ronald
Nicholl, the shareholders of Application Methods, Application Methods'
shareholders received an aggregate of 286,369 shares of RMI Common Stock as a
result of the merger of RMI Acquisition with and into Application Methods. The
Application Methods shareholders may receive additional shares of Common Stock,
not to exceed $2.5 million in value, based on the satisfaction of certain
post-merger performance targets over a three-year period.
Additionally, RMI recently entered into a non-binding memorandum of
understanding regarding the possible acquisition of Internet Now, an ISP located
in Phoenix, Arizona for approximately $1.5 million.
CHANGE IN CONTROL
Effective October 1, 1997, RMI issued and sold to Mr. Hanson
1,225,000 shares of Common Stock for a purchase price of $2,450,000, or $2.00
per share, as more fully described in "CERTAIN TRANSACTIONS -- CHANGE IN
CONTROL." Mr. Hanson also became RMI's President, Chief Executive Officer and
Chairman of the board of directors of the Company.
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RMI also entered into a warrant agreement with Mr. Hanson, dated
as of October 1, 1997, pursuant to which it agreed, subject to obtaining
approval of RMI's stockholders of an increase in the authorized capital stock
of RMI, to issue to Mr. Hanson warrants to purchase up to 4,000,000 shares of
Common Stock (the "Hanson Warrants")for an exercise price of $1.90 per share,
for a period of 18 months from the date of issuance of such warrants. As of
the date of the warrant agreement, RMI did not have a sufficient number of
shares of its Common Stock authorized or reserved for issuance upon the
exercise of the Hanson Warrants. At the RMI Annual Meeting, the stockholders
of RMI approved an amendment to RMI's Certificate of Incorporation to
increase the number of shares of Common Stock that RMI is authorized to issue
from 10,000,000 to 25,000,000. As a result of the approval, RMI issued all of
the Hanson Warrants to Mr. Hanson. On March 23, 1998, Mr. Hanson exercised
50,000 of these warrants for an aggregate exercise price of $95,000. On May 15,
1998, Mr. Hanson exercised a portion of the Hanson Warrants to purchase 421,053
shares of Common Stock for an aggregate exercise price of $800,000. It was
believed at that time that RMI needed such infusion of capital to remain in
compliance with the listing requirements of Nasdaq. RMI subsequently
determined that such investment by Mr. Hanson was not necessary for the
continued qualification of its Common Stock for trading on Nasdaq.
Accordingly, RMI and Mr. Hanson rescinded his exercise of these warrants. As
a result of the transactions described above, Mr. Hanson obtained effective
control of RMI and, as of July 8, 1998, had the authority to vote 53.9% of
RMI's Common Stock after giving effect to the exercise of the Hanson Warrants
and the Hanson Options. Some or all of the Hanson Warrants and shares of Common
Stock issuable upon the exercise thereof may be offered and sold by means of
this Prospectus.
RMI also granted Mr. Hanson incentive stock options to purchase
222,220 shares of Common Stock at an exercise price of $2.25 per share and
377,780 shares of Common Stock for an exercise price of $1.00 per share (the
"Hanson Options") pursuant to RMI's 1997 Stock Option Plan (the "1997 Plan"),
which plan was approved by RMI's stockholders at the RMI Annual Meeting. These
Hanson Options vest one year from the date of grant (subject to acceleration of
the vesting date by the board of directors or a committee thereof that
administers the 1997 Plan). On March 12, 1998 a committee of the board of
directors amended the 1997 Plan, retroactively to October 1, 1997, in accordance
with the requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), to provide that the number of incentive stock options was 191,385, the
exercise price of those options was $2.6125 and the number of non-qualified
stock options was 408,615 at an exercise price of $1.00. On March 12, 1998, Mr.
Hanson exercised all of the non-qualified stock options and purchased 408,615
shares of Common Stock pursuant to such exercise.
It is possible that prior to the completion of the Private
Placement Offering, RMI will need additional cash resources to meet its
obligations. Mr. Hanson has agreed to loan RMI up to $1.0 million if such need
arises. This agreement is not in writing and the terms have not been
negotiated. Consequently, there can be no assurance that, if such financing
need arises, a loan from Mr. Hanson will be available or that, if available,
such loan will be on terms acceptable to RMI.
RISK FACTORS
AN INVESTMENT IN THE SECURITIES BEING OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT. Following the
completion of the Private Placement Offering (or the Bridge Loan Commitment
in the absence of completing the Private Placement Offering), the Company
will be highly leveraged. At March 31, 1998, on a pro forma, consolidated
basis after giving effect to the Private Placement Offering, the ICC
Acquisition and the acquisitions of Infohiway and Application Methods, the
Company would have had approximately $150 million of Indebtedness
outstanding. The degree to which the Company is leveraged could have
important consequences to prospective purchasers of the Securities offered
hereby, including the following: (i) a substantial portion of the Company's
cash flow from operations will be dedicated to payment of the interest on its
indebtedness, thereby reducing funds available for
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other purposes; (ii) the Company's significant degree of leverage could
increase its vulnerability to changes in general economic conditions or in
the event of a downturn in its business; (iii) the Company's flexibility in
planning for or reacting to changes in market conditions may be limited; (iv)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes could be impaired; and (v) the Company may be more leveraged than
certain of its competitors, which may be a competitive disadvantage.
The ability of the Company to meet its debt service obligations
and satisfy its other liquidity needs will depend on the future operating
performance and financial results of the Company, which will be subject in
part to factors beyond the control of the Company. There can be no assurance
that the Company will generate sufficient cash flow to meet its debt service
requirements or otherwise satisfy its other liquidity needs. If the Company
is unable to generate cash flow in the future sufficient to cover its fixed
charges and is unable to borrow sufficient funds from other sources, it may
be required to refinance all or a portion of its existing debt or to sell all
or a portion of its assets. There can be no assurance that a refinancing
would be possible, nor can there be any assurance as to the practicality or
timing of any assets sales or the proceeds which the Company could realize
therefrom. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The
Company believes that its available cash resources combined with the net
proceeds from the Private Placement Offering will be sufficient to meet its
anticipated working capital needs for the next twelve months. The Company
also believes that, if the Private Placement Offering is not completed, its
available cash resources, when combined with the net proceeds from the Bridge
Loan Commitment and the proceeds from the exercise of certain warrants to
acquire shares of Common Stock subject to certain "call" provisions, will be
sufficient to meet its anticipated working capital needs for the next twelve
months. However, there can be no assurance the such warrants, if called,
would be exercised or that such resources will be sufficient for the Company's
anticipated working capital requirements. The Company may need to raise
additional funds through public or private debt or equity financings. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
are not available on acceptable terms, such unavailability would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES."
HISTORY OF LOSSES; NEGATIVE CASH FLOW FROM OPERATIONS; NO ASSURANCE
OF PROFITABILITY. RMI has incurred net losses since its inception and
management expects that the Company will incur significant additional losses.
Prospective investors have limited operating and financial data about the
Company upon which to base an evaluation of the Company's performance and an
investment in the Securities offered hereby. For the years ended December 31,
1995, 1996 and 1997, RMI had net losses of $129,000, $2,344,000 and
$4,153,000, respectively. At December 31, 1997, RMI had negative operating
cash flow of $3,297,000. In addition, ICC has incurred losses since its fiscal
year 1995 and had negative operating cash flow in the eleven months ended
December 31, 1997 before the effect of the elimination of net cash used in
operating activities of discontinued operations. There can be no assurance
that the Company will achieve or sustain positive operating cash flow or
generate net income in the future. To achieve profitability, the Company must,
among other things, increase its customer base and develop and market products
and services that are broadly accepted. There can be no assurance that the
Company will ever achieve broad commercial acceptance or profitability. See
"-- INCREASING COMPETITION," "-- DEPENDENCE ON THE INTERNET; UNCERTAIN
ADOPTION OF INTERNET AS A MEDIUM OF COMMERCE AND COMMUNICATIONS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES."
The Company believes that as a result of the expansion to be
undertaken after the completion of the Private Placement Offering, it will
incur further losses during the 1998 fiscal year due to the interest payments
due pursuant to the terms of the Private Placement Offering and the fact that
certain expenses (e.g., marketing) are incurred and recognized prior to the
earning and recognition of the revenue to which such expenses would relate.
However, there can be no assurance that after incurring such expenses, there
will be an increase in revenues or that the Company will attain profitability
in future operating periods or that it will have sufficient cash available to
meet continuing losses, necessary capital expenditures and/or the repayment
of the debt incurred in connection with the Private Placement Offering. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's
operating results may in the future vary, depending upon factors such as the
timing and installation of circuits ordered by the Company, which in the past
have been and in the future are expected to be, delayed from time to time by
delays in the installation of lines and equipment by the Company's
telecommunications suppliers. Additional factors contributing to variability
of operating results may include the pricing and mix of services and products
sold by the Company, terminations of service by subscribers, introductions of
new products and services by the Company and its competitors, market
acceptance of new and enhanced versions of the Company's services, changes in
pricing policies by its competitors, the timing of the expansion of the
Company's network infrastructure and entry into new businesses. In response
to competitive pressures, the Company may take certain pricing or marketing
actions that could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow. Variations in the
timing and amounts of revenues could have a material adverse effect on the
Company's operating results.
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INTEGRATION OF ICC ACQUISITION; AMORTIZATION OF GOODWILL. RMI and
ICC have entered into the ICC Merger Agreement with the expectation that the
ICC Acquisition will result in certain benefits of the combined company. See
"RECENT DEVELOPMENTS -- ICC ACQUISITION." Achieving the anticipated benefits
of the ICC Acquisition will depend in part upon whether the integration of
the two companies' businesses is achieved in an efficient and effective
manner and there can be no assurance that the companies' operations can be
successfully integrated or that any of the perceived benefits of the ICC
Acquisition will be realized. In addition, the ICC Acquisition may have
certain negative effects upon the business of the Company, such as the
potential loss of customers due to perceived conflicts, duplication of work
force and incompatibility of accounting and other systems. The integration of
ICC's business following the ICC Acquisition will pose unique challenges to
management of the Company and the Company intends to rely, to a large extent,
on ICC's management to effect such integration. The combination of the two
companies will require, among other things, coordination of the companies'
sales and marketing and information technology and development activities.
There can be no assurance that integration will be accomplished on a timely
basis, or at all. The integration of certain operations following the ICC
Acquisition will require the dedication of management resources which may
divert attention from the day-to-day business of the combined company.
Failure to effectively accomplish the integration of the two companies'
operations could have a material adverse effect on the Company's results of
operations and financial condition. The ICC Acquisition will be accounted for
under purchase accounting and it is expected that the Company will incur an
approximately $4.2 million annual expense as a result of the related
amortization of goodwill and other intangible assets.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. In addition,
as part of its long-term business strategy, the Company may pursue other
acquisitions of other companies. There can be no assurance that the Company
will be able to identify, acquire, or profitably manage additional businesses
or successfully integrate acquired businesses, if any, into the Company
without substantial costs, delays, or other operational or financial
problems. Further, acquisitions may involve a number of special risks,
including potentially dilutive issuances of equity securities, the incurrence
of additional debt, diversion of management's attention, failure to retain
key acquired personnel, risks associated with unanticipated events or
circumstances or legal liabilities and amortization of expenses related to
goodwill and other intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition,
results of operations and cash flow. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and
earnings. The potential inability of the Company to implement and manage its
acquisition strategy successfully may have an adverse effect on the future
prospects of the Company. See "BUSINESS -- BUSINESS STRATEGY." Finally,
certain agreements to which the Company is subject contain certain
restrictions on the ability of the Company to make acquisitions.
MANAGEMENT OF GROWTH; NEED FOR ADDITIONAL CAPITAL. The Company's
rapid growth has placed and in the future may continue to place, a
significant strain on the Company's administrative, operational and financial
resources and increased demands on its systems and controls. The Company
intends to expand its Internet network and telecommunications services
nationwide. The Company anticipates that its continued growth will require it
to recruit and hire new managerial, technical, sales, administrative and
marketing personnel. This problem may be exacerbated to the extent the
Company is able to acquire additional businesses, as each such business must
then be integrated into the Company's operations and systems. See "-- RISKS
RELATED TO THE COMPANY'S ACQUISITION STRATEGY." The inability to continue to
upgrade the networking systems or the operating and financial control
systems, the inability to recruit and hire necessary personnel, or the
emergence of unexpected expansion difficulties would adversely affect the
Company's business, results of operations, financial condition and cash flow.
Developments in the Company's business and possible expansion into
other markets could indicate that the Company should expand its business at a
faster rate than that currently planned for. Moreover, there can be no
assurance that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated, which would
require that the Company seek additional funds through equity, debt, or other
external financing. There can be no assurance that any additional capital
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resources that the Company may need will be available to the Company if and
when required, or on terms that will be acceptable to the Company. If
additional financing is required, or desired, the Company may be required to
forego a substantial interest in its future revenues or dilute the equity
interests of existing security holders and a change in control of the Company
may result.
DEPENDENCE UPON NETWORK INFRASTRUCTURE. The Company's success will
partially depend upon its ability to develop a reputation for reliability
over the long term and the security of its current and future network
connections. The Company must continue to expand and adapt its network
infrastructure as the number of users and the amount of information they wish
to transfer increases and as the requirements of its customers change. The
expansion of the Company's Internet network infrastructure will require
substantial financial, operational and management resources. There can be no
assurance that the Company will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing
requirements on a timely basis, at a commercially reasonable cost, or at all.
In addition, if demand for usage of the Company's network were to increase
faster than projected, the network could experience capacity constraints,
which would adversely affect the performance of the system. Any failure of
the Company to expand its network infrastructure on a timely basis or adapt
it to either changing customer requirements or evolving industry standards,
or capacity constraints experienced by the Company's network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A
MEDIUM OF COMMERCE AND COMMUNICATIONS. Many of the Company's existing and
proposed products and services are targeted toward users of the Internet. As
is typical in the case of a new and rapidly evolving industry characterized
by rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in
the business market targeted by the Company. Despite growing interest in the
many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of
cost-effective, high-speed options, a limited number of POPs for corporate
users, inability to integrate business applications on the Internet, the need
to deal with multiple and frequently incompatible vendors, inadequate
protection of the confidentiality of stored data and information moving
across the Internet and a lack of tools to simplify Internet access and use.
Published reports have indicated that a perceived lack of security of
commercial data, such as credit card numbers, has significantly impeded
commercial exploitation of the Internet to date and there can be no assurance
that encryption or other technologies will be developed that satisfactorily
address these security concerns. Published reports have also indicated that
capacity constraints caused by growth in the use of the Internet may, unless
resolved, impede further development of the Internet to the extent that users
experience delays, transmission errors and other difficulties. Further, the
adoption of the Internet for commerce and communications, particularly by
those individuals and enterprises that have historically relied upon
alternative means of commerce and communication, generally requires the
understanding and acceptance of a new way of conducting business and
exchanging information. In particular, enterprises that have already invested
substantial resources in other means of conducting commerce and exchanging
information may be particularly reluctant or slow to adopt a new strategy
that may make their existing personnel and infrastructure obsolete.
The Company is also at risk as a result of fundamental
technological changes in the way Internet solutions may be marketed and
delivered. Integrating technological advances may require substantial time
and expense and there can be no assurance that the Company will succeed in
adapting its network infrastructure. While the Company believes that its plan
of combining the scale and scope of a national operation with the local
presence of its ISP operations offers significant advantages for commerce and
communication over the Internet, there can be no assurance that commerce and
communication over the Internet will become widespread, or that the Company's
offered Internet access and communications services
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will become widely adopted for these purposes. The failure of the market for
business-related Internet solutions to continue to develop would adversely
impact the Company's business, financial condition, results of operations and
cash flow.
In addition, new technologies or industry standards have the
potential to replace or provide lower cost alternatives to the Company's
existing products and services. The adoption of such new technologies or
industry standards could render the Company's existing products and services
obsolete and unmarketable. For example, the Company's Internet connectivity
services rely on the continued widespread commercial use of Transmission
Control Protocol/Internet Protocol ("TCP/IP"). Alternative open and
proprietary protocol standards that compete with TCP/IP, including
proprietary protocols developed by IBM and Novell, Inc., have been or are
being developed. If the market for Internet access services fails to develop,
develops more slowly than expected, or becomes saturated with competitors, or
if the Internet access and services offered by the Company are not broadly
accepted, the Company's business, operating results, financial condition and
cash flow will be materially adversely affected. Although the Company intends
to support emerging standards in the market for Internet connectivity, there
can be no assurance that industry standards will emerge or if they become
established, that the Company will be able to conform to these new standards
in a timely fashion and maintain a competitive position in the market.
RISK OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS. To date
the Company has not been adversely affected by product or service obsolescence
because changes in the Internet service industry have been largely a matter of
improvements in hardware which have been readily available to the Company and
its competitors. The Company's future success depends, however, upon its ability
to develop new services that meet changing customer requirements. The market for
the Company's service is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new service introductions.
There can be no assurance that the Company can successfully identify new
opportunities and develop and bring new services to market in a timely manner or
that services or technologies developed by others will not render the Company's
services noncompetitive or obsolete. Also, there can be no assurance that the
Company will have the necessary resources to obtain advances in technology
necessary to remain competitive. The Company also faces the risk that
fundamental changes may occur in the delivery of Internet access services.
Currently, Internet services are accessed primarily by computers and are
delivered by telephone lines. If the Internet becomes accessible by screen-based
telephones, television, or other consumer electronic devices or becomes
deliverable through other means such as coaxial cable or wireless transmission,
the Company will have to develop new technology or modify its existing
technology to accommodate these developments. Required technological advances by
the Company as the industry evolves could include compression, full-motion video
and integration of video, voice, data and graphics. The Company's pursuit of
these technological advances, whether directly through internal development or
by third party license, may require substantial time and expense and there can
be no assurance that the Company will succeed in adapting its Internet service
business to alternate access devices and conduits or that new technologies will
be available to the Company at all.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standard in the market for Internet access, there
can be no assurance that industry standard will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
There can be no assurance that the announcement or introduction of new products
or services by the Company or its competitors or any change in industry
standards will not cause customers to defer or cancel purchases of existing
products or services, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The failure
of the Company to anticipate the prevailing standard, or the failure of a common
standard to emerge could have a material adverse effect
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on the Company's business and results of operations. In addition, there can
be assurance that services or technologies developed by others will render
the Company's services or technology uncompetitive or obsolete.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK.
The law relating to the liability of ISPs and on-line service companies for
information carried on or disseminated through their networks has not yet
been definitively established. Internet access and content providers face
potential liability of uncertain scope for the actions of subscribers and
others using their systems, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel and
criminal activity under the laws of the United States and foreign
jurisdictions.
The Company does not maintain errors and omissions insurance. Any
imposition of liability on the Company for alleged negligence, intentional
torts, or other liability could have a material adverse effect on the
Company. In addition, recent legislative enactments and pending legislative
proposals aimed at limiting the use of the Internet to transmit indecent or
pornographic materials could, depending upon their interpretation and
application, result in significant potential liability to Internet access and
service providers including the Company, as well as additional costs and
technological challenges in complying with any statutory or regulatory
requirements imposed by such legislation. For example, the Communications
Decency Act of 1996 (amending 47 U.S.C. Section 223), which is part of the
Telecommunications Act of 1996 (the "1996 Telecommunications Act"), became
effective on February 8, 1996. The 1996 Telecommunications Act would impose
criminal liability on persons sending or displaying in a manner available to
minors indecent material on an interactive computer service such as the
Internet and on an entity knowingly permitting facilities under its control
to be used for such activities. While the constitutionality of these
provisions has been successfully challenged in federal appellate court, the
U.S. Department of Justice has appealed to the U.S. Supreme Court and there
can be no assurance as to the final result regarding the constitutionality of
the 1996 Telecommunications Act, or as to the scope and content of any
substitute legislation or other legislation in the United States or foreign
jurisdictions restricting the type of content being provided over the
Internet. If these provisions or related legislation are upheld, the effect
on the Internet industry could have a material adverse effect on the
Company's business, financial condition, results of operation, or cash flow.
In addition, CompuServe, Corp. ("CompuServe") faced action by German
authorities in response to which CompuServe temporarily restricted the scope
of the Internet access it provides to all subscribers, both in the United
States and internationally. A number of countries are considering content
restrictions based on such factors as political or religious views expressed
and pornography or indecency.
INCREASING COMPETITION. The markets in which the Company operates
and intends to operate are extremely competitive and can be significantly
influenced by the marketing and pricing decisions of the larger industry
participants.
INTERNET ACCESS. The Company expects competition in these
markets to intensify in the future. There are no substantial barriers to
entry in the Internet access markets in which the Company competes. The
Company's current and prospective competitors in the Internet access market
include many large companies that have substantially greater market presence
and financial, technical, operational, marketing and other resources and
experience than the Company. The Company's Internet access business competes
or expects to compete directly or indirectly with the following categories of
companies: (i) other national and regional commercial ISPs, such as Verio
Inc. or one or more of its affiliates and PSINet, Inc. ("PSINet"); (ii)
established on-line services companies that currently offer Internet access,
such as America Online, Inc. ("AOL"), CompuServe and Prodigy Services
Company; (iii) computer hardware and software and other technology companies,
such as Microsoft Corporation ("Microsoft"); (iv) national long-distance
telecommunications carriers, such as AT&T (AT&T WorldNet), MCI (MCI Internet),
Sprint (SprintNet) and Qwest Communications International, Inc.; (v) regional
Bell operating companies ("RBOCs" or "I-LECs"); (vi) cable television system
operators, such as Comcast Corporation, Tele-Communications, Inc. ("TCI") and
Time Warner Inc.; (vii) nonprofit or educational ISPs; and (viii) newly-licensed
providers
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of spectrum-based wireless data services. Modems offered by cable television
companies can transmit information at speeds of up to 10 megabits per second,
as opposed to the Company's K56 Flex (enhanced speed modem) service, which
can transmit information at speed of up to only 56 kilobits per second. In
addition, TCI recently announced it had reached separate agreements with Sun
Microsystems, Inc. and Microsoft to produce the software necessary to permit
persons to access the Internet through television set-top boxes beginning in
1999.
TELECOMMUNICATION SERVICES. The Company's intention to
provide traditional long distance service will place it directly in
competition with IXCs, which engage in the provision of long-distance access
and other long-distance resellers and providers, including large carriers such
as AT&T, MCI, Sprint and WorldCom and new entrants to the long distance market
such as the RBOCs who have entered or have announced plans to enter the U.S.
intrastate and interstate long-distance market pursuant to recent legislation
authorizing such entry. See "REGULATION." On April 22, 1998, the Public
Utilities Commission of Colorado granted the request of Rocky Mountain
Broadband, Inc. ("RMB"), a wholly-owned subsidiary of RMI, to become a
competitive local exchange carrier ("C-LEC"). Likewise, the Company's
intention to provide IP Telephony services and C-LEC services will place it
directly in competition with other providers (either resellers or
facilities-based carriers) that provide the same services. Most of the
Company's competitors are significantly larger and have substantially greater
market presence as well as financial, technical, operational, marketing and
other resources and experience than the Company.
PRICING PRESSURES. The Company reduced the prices it charges its
Internet customers during 1995, 1997 and 1998 partly as a result of
competitive pricing pressures in the market for Internet services. The
Company expects that continued price pressures may cause the Company to
reduce prices further in order to remain competitive and the Company expects
that such further price reductions would adversely effect the Company's
results of operations and its ability to attain profitability, unless it can
lower its costs commensurate with such price decreases. The Company may also
face price pressures from its competitors in the telecommunications services
markets in which the Company intends to compete. There is no assurance that
the Company can attain profitability while pricing its services competitively.
SECURITY RISKS. A risk faced by all ISPs, including the Company,
is the risk that, despite the implementation of network security measures by
the Company, its infrastructure remains vulnerable to computer viruses,
sabotage, break-ins and similar disruptive problems caused by its subscribers
or other Internet users. Computer viruses, break-ins, or other problems
caused by third parties could lead to interruptions, delays, or a cessation
in service to the Company's subscribers. Furthermore, inappropriate use of
the Internet by third parties could potentially jeopardize the security of
confidential information stored in the computer systems of the Company's
customers, which may deter potential subscribers and may inhibit the growth
of the Internet service industry in general. Security problems continue to
plague public and private data networks. Recent break-ins reported in the
press and otherwise have reached computers connected to the Internet at major
corporations and Internet access providers and have involved the theft of
information, including incidents in which hackers bypassed fire walls by
posing as trusted computers. Alleviating or attempts to avoid problems caused
by computer viruses, break-ins, or other problems caused by third parties may
require significant expenditures of capital and resources by the Company,
which could have a material adverse effect on the Company's business, results
of operations, financial condition and cash flow. Until more comprehensive
security technologies are developed, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet
service industry in general and the Company's customer base and revenues in
particular. Moreover, if the Company experiences a breach of network security
or privacy, there can be no assurance that the Company's customers will not
assert or threaten claims against the Company based on or arising out of such
breach, or that any such claims will not be upheld, which could have a
material adverse effect on the Company's business, financial condition,
results of operations, or cash flow.
RISKS OF SYSTEM FAILURE. The Company's Internet operations are
dependent upon its ability to protect its network infrastructure against
damage from acts of nature, power failures, telecommunications failures
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and similar events. Physical protection of the Company's network
infrastructure is a primary responsibility of the Company. However, because
it leases its lines from long-distance telecommunications companies, RBOCs
and C-LECs, the Company is dependent upon these companies for physical repair
and maintenance of the leased lines. Despite precautions taken by the
Company, the occurrence of a natural disaster or other unanticipated problems
at the Company's NOC or any of its POPs may cause interruptions in the
services provided by the Company. In addition, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of a natural disaster, operational
disruption or for any other reason could cause interruptions in the services
provided by the Company. Any damage or failure that causes interruptions in
the Company's operations could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company has, from time to time, experienced failures relating to individual
POPs.
DEPENDENCE ON TELECOMMUNICATIONS ACCESS. All Internet and most
telecommunications service providers, including the Company, depend on other
companies to provide communications capacity via leased facilities. If one or
more of these companies is unable or unwilling to provide or expand its
current levels of service to the Company in the future, the Company's
operations could be materially and adversely affected. Although leased
facilities are available from several alternative suppliers, including AT&T,
MCI, Sprint and WorldCom, there can be no assurance that the Company could
obtain substitute services from other providers at reasonable or comparable
prices or in a timely fashion. In addition, the Company is dependent on local
telephone companies to provide local dial-up and leased, high-speed dedicated
access phone lines for access to each of the Company's POPs. The Company is
presently dependent on US West (an RBOC), ICG Communications, Inc. and
Teleport Communications Group, all of which are competitors of the Company,
to provide timely installation of new circuits and to maintain existing
circuits. The Company has experienced delays in the installation of circuits
and inconsistencies in maintenance service which have adversely affected the
Company's rate of growth.
DEPENDENCE UPON SUPPLIERS. In order to provide Internet access and
other on-line services to its customers, the Company leases long distance
fiber optic telecommunications lines from multiple national
telecommunications services provider. The Company is dependent upon these
providers of data communications facilities. In addition, the Company has a
wholesale usage agreement with PSINet, which allows the Company to provide
dial-up and "switched" network access to its customers through PSINet's 235
POPs throughout the United States and has other agreements with service
providers which the Company relies on to deliver its product and service
offerings. Certain of the Company's suppliers, including RBOCs and C-LECs,
currently are subject to various price constraints, including tariff
controls, which in the future may change. In addition, regulatory proposals
are pending that may affect the prices charged by the RBOCs and C-LECs to the
Company. Such regulatory changes could result in increased prices of products
and services, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company relies on other companies to supply certain components of
its computer inventory as well as its network infrastructure (including
telecommunications services and networking equipment) which, in the quantities
and quality required by the Company, is available only from sole or limited
sources. The Company has in the past and may from time to time, experience
delays in receiving telecommunications services and shipments of merchandise
purchased for resale. There can be no assurance that the Company will be able to
obtain such telecommunication services and shipments of merchandise on the scale
and at the times required by the Company at an affordable cost, or at all. There
also can be no assurance that the Company's suppliers will not enter into
exclusive arrangements with the Company's competitors to stop selling their
products or components to the Company at commercially reasonable prices, or at
all, or that such agreements will be terminated for other reasons. Any failure
of the Company's sole or limited-source suppliers to provide products or
components that comply with its standards could have a material adverse effect
on the Company's business, financial condition and results of operations.
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DIFFICULTIES IN IMPLEMENTING LOCAL EXCHANGE AND LONG DISTANCE
TELEPHONY SERVICES. The Company is a recent entrant into the newly created
competitive local telephony services industry. The local exchange telephony
services market in most states was only recently opened to competition due to
the passage of the 1996 Telecommunications Act and related regulatory
rulings. There are numerous operating complexities associated with providing
these services. The Company will be required to develop new products,
services and systems and will need to develop new marketing initiatives to
sell these services. The inability to overcome any of these operating
complexities could have a material adverse effect on the Company's results of
operations and financial condition. In addition, the Company's local exchange
telephony services may not be profitable due to, among other factors,
attempts by local governments to impose franchise fees on C-LECs, attempts by
property owners to obtain unreasonable access payments, lack of customer
demand, difficulties initiating service and competition and pricing pressure
from the I-LECs and other C-LECs. There can be no assurance that the Company
will be able to successfully implement its services strategy.
The Company intends to resell local telephony services provided by
I-LECs. Although the 1996 Telecommunications Act requires all I-LECs to
permit resale of their telephony services without unreasonable restrictions
or conditions and requires I-LECs to offer their retail telecommunications
services to other telecommunications carriers for resale at discounted rates,
based on the costs avoided by the I-LEC in such offering, there can be no
assurance that the Company will be able to initiate or provide service in a
timely manner or at competitive prices. The Company's ability to expand its
services to new markets will require the negotiation of additional resale
agreements with the I-LECs, which can require considerable time, effort and
expenses and are subject to federal, state and local regulation.
The Company also offers long distance services to its customers. The
long distance business is highly competitive and prices have declined
substantially in recent years and are expected to continue to decline. In
addition, the long distance industry has historically had a high average churn
rate and customers continue to change local distance providers frequently in
response to the offering of lower rate or promotional incentives by competitors.
The Company relies on other carriers to provide transmission and termination
services for all of its long distance traffic pursuant to resale agreements.
Such agreements typically provide for the resale of long distance services on a
per-minute basis. Negotiation of these agreements involves estimates of future
supply and demand for transmission capacity as well as estimates of the calling
pattern and traffic levels of the Company's future customers. In the event the
Company underestimates its need for transmission capacity, it may be required to
obtain capacity through more expensive means.
GOVERNMENT REGULATORY POLICY RISKS; POTENTIAL TAXES. The
telecommunications businesses in which the Company engages are subject to
extensive federal and state regulation. The provision of long distance telephone
service is subject to the provisions of the Communications Act of 1934, as
amended, including amendments effected by the 1996 Telecommunications Act and
the FCC regulations thereunder, as well as the applicable laws and regulations
of the various states, including regulation by Public Utility Commissions
("PUCs") and other state agencies. Federal laws and FCC regulations apply to
interstate telecommunications (including international telecommunications that
originate or terminate in the United States), while state regulatory authorities
have jurisdiction over telecommunications both originating and terminating
within a state.
Regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to the Company. There can
be no assurance that future regulatory, judicial, or legislative activities will
not have a material adverse effect on the Company, or that domestic or
international regulators or third parties will not raise material issues with
regard to the Company's compliance or noncompliance with applicable regulations.
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<PAGE>
A recent federal legislative change, the 1996 Telecommunications Act,
may have potentially significant effects on the operations of the Company. The
1996 Telecommunications Act, among other things, allows the RBOCs and other
companies to enter the long distance business and enables other entities,
including entities affiliated with power utilities and ventures between local
exchange carriers ("LECs") and cable television companies, to provide an
expanded range of telecommunications services. Entry of such companies into the
long distance business would result in substantial additional competition in one
of the markets into which the Company intends to expand and may have a material
adverse effect on the Company and its efforts to expand in this market.
On April 10, 1998, the FCC submitted a report to Congress in which
it stated that telephone-to-telephone IP Telephony bears the characteristics
of "telecommunications services" and that the providers of those services may
be "telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April 10,
1998 report states that, to the extent the FCC concludes that certain forms of
telephone-to-telephone IP Telephony service are "telecommunications
services," and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the
same burdens on the local exchange as do other IXCs, the FCC "may find it
reasonable that they" become subject to the same regulations, including the
requirement to pay access fees to LECs and to contribute to "universal
service" subsidies. See "BUSINESS -- BUSINESS STRATEGY" and "REGULATION." In
addition, a number of state and local government officials have asserted the
right or indicated a willingness to impose taxes on Internet-related services
and commerce, including sales, use and access taxes. Certain proposed federal
legislation is being considered that would, if enacted as currently proposed,
place a moratorium on the imposition by state and local governments of new
taxes on ISPs or other businesses involved in Internet-related commerce.
However, there can be no assurance that such legislation will be enacted or,
if enacted, that such legislation will embody the features referred to
herein. Furthermore, there can be no assurance that federal taxes will not be
imposed upon such services. The Company cannot predict whether the imposition
of any such additional taxes would have a material adverse effect on the
Company's business, financial condition or results of operations.
YEAR 2000 RISKS. Currently, many computer systems, hardware and
software products are coded to accept only two digit entries in the date code
field and, consequently, cannot distinguish 21st century dates from 20th
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. RMI and third parties with which RMI does business rely on
numerous computer programs in their day to day operations. RMI's board of
directors has appointed a committee which has begun the process of
identifying computer systems that could be affected by the Year 2000 issue,
but RMI has not yet estimated the costs of addressing the Year 2000 issue as
it relates to RMI's internal hardware and software, as well as third party
computer systems with which RMI interacts. In the event that RMI acquires
other assets or businesses, the software and hardware acquired by RMI in
connection with those business combinations may also be Year 2000
non-compliant. There can be no assurance that the Year 2000 issues will be
resolved in 1998 or 1999. RMI may incur significant costs in resolving its
Year 2000 issues. If not resolved, this issue would have a material adverse
impact on RMI's business, operating results, financial condition and cash
flow.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continued contributions of its senior operating
management, the loss of which services could have a detrimental effect on the
Company. The Company's employment agreements with senior operating management,
if any, do not significantly limit their ability to compete with the Company
following termination. The Company does not maintain key person life insurance
on any of its personnel. The Company's success will also depend on its ability
to attract and retain other qualified management, marketing, technical and sales
executives and personnel.
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VOLATILITY OF STOCK PRICES AND PENNY STOCK RULES. The Issuer's
Common Stock is qualified for trading on Nasdaq. The prices at which the
Issuer's Common Stock has been traded have varied considerably since the
Common Stock was qualified for trading on Nasdaq. There can be no assurance
that the Issuer will continue to be able to satisfy certain specified
financial tests and market related criteria required for continued listing on
the Nasdaq. If the Issuer's Common Stock were no longer qualified for
trading on Nasdaq, trading, if any, would thereafter be conducted in the
over-the-counter market, so called "pink sheets" or the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc. and
consequently, an investor could find it more difficult to dispose of, or to
obtain, accurate quotations as to the price of, the Issuer's Common
Stock. In addition, the Issuer could become subject to rules adopted by
the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on Nasdaq, provided that current
price and volume information with respect to transactions in such securities
is provided by the exchange or Nasdaq system). Unless an exemption from the
definition of a "penny stock" were available, any broker engaging in a
transaction in the Issuer's Common Stock would be required to provide any
customer with a risk disclosure document, disclosure of market conditions, if
any, disclosure of the compensation of the broker-dealer and its salesperson
in the transaction and monthly accounts showing the market values of the
Issuer's Common Stock held in the customer's account. The bid and offer
quotation and compensation information must be provided prior to effecting
the transaction and must be contained on the customer's confirmation. It may
be anticipated that many brokers will be unwilling to engage in transactions
in the Issuer's Common Stock because of the need to comply with the
"penny stock" rules, thereby making it more difficult for purchasers of
Common Stock to dispose of their shares or for the Company to raise
additional capital through equity financings.
LACK OF ESTABLISHED TRADING MARKET FOR COMMON STOCK AND IPO
WARRANTS. Trading in the Issuer's Common Stock and IPO Warrants had been
inactive until March 1998. There can be no assurance that an active market
can or will be maintained for the trading of the Issuer's Common Stock.
Purchasers of the Issuer's Common Stock may, therefore, find it difficult to
dispose of these securities.
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<PAGE>
CONTROL BY MANAGEMENT. As the result of a recent investment in RMI
by Mr. Hanson, RMI issued and sold to Mr. Hanson 1,225,000 shares of Common
Stock for a purchase price of $2,450,000, or $2.00 per share, as more fully
described in "CERTAIN TRANSACTIONS -- CHANGE IN CONTROL." Mr. Hanson also
became RMI's President, Chief Executive Officer and Chairman of the board of
directors of the Company. As a result of these related transactions, Mr.
Hanson obtained effective control of RMI and, as of July 8, 1998, had the
authority to vote 53.9% of RMI's Common Stock after giving effect to the
exercise of the Hanson Warrants and the Hanson Options. The officers and
directors of the Company as a group beneficially own as of July 8, 1998
approximately 58.6% of the Company's Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of capital
stock may also have the effect of delaying or preventing a change of control
of the Company.
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POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK OR COMMON
STOCK. The Issuer has 25,000,000 shares of Common Stock and 750,000 shares of
Preferred Stock authorized, of which 7,805,636 shares of Common Stock and no
shares of Preferred Stock were outstanding as of July 8, 1998. Another
855,364 shares of Common Stock were reserved for issuance pursuant to the
Issuer's stock option plans and other stock options granted and 6,569,568
have been reserved for issuance upon exercise of an aggregate of various
warrants, including the IPO Warrants and the Hanson Warrants and pursuant to
various anti-dilution provisions contained in the such warrants and the
options described above. In addition, there are approximately 151,515
(assuming a $16.50 per share price at the date of calculation) additional
shares of Common Stock that may be issued in connection with the acquisition
of Application Methods. Accordingly, there will be approximately 9,617,917
shares of Common Stock and 750,000 shares of Preferred Stock that may be
issued in the future at the discretion of the Issuer's board of directors.
The Preferred Stock may be directed to be issued by the board of directors in
its discretion without stockholder approval, with such designations,
preferences, dividend rates, conversion and other features as the board of
directors may determine. The rights of the holders of Common Stock will be
subject to and may be adversely affected by the terms of any additional
classes of Preferred Stock that the Issuer may issue in the future. The
issuance of such shares of undesignated Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
serving other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Issuer. The issuance of Preferred Stock also could decrease the amount of
earnings and assets available for distribution to the holders of Common
Stock. In addition, future issuances of shares of Common Stock could
materially and adversely affect the market price of the Common Stock, and
could materially impair the Issuer's future ability to raise capital through
an offering of equity securities. No predictions can be made as to the
effect, if any, that market sales of such shares or the availability of such
shares for future sale will have on the market price of the Common Stock
prevailing from time to time.
In addition, the stockholders of RMI approved, at the RMI Annual
Meeting, an amendment to RMI's Certificate of Incorporation to effect a reverse
exchange (a "Reverse Stock Split") of RMI's Common Stock. The Reverse Stock
Split would be in a ratio of up to one-for-ten and would be effected in the
event that the board of directors determines that such a Reverse Stock Split is
desirable at any time within one year from the date of the RMI Annual Meeting,
with the exact ratio of the Reverse Stock Split to be determined by the board of
directors in its discretion. Although the board of directors has no present
intention of doing so, the additional shares of authorized but unissued Common
Stock that may result from the proposed Reverse Stock Split could also be used
by the board of directors to defeat or delay a hostile takeover. Faced with an
actual or proposed hostile takeover, the directors could issue shares of Common
Stock, in a private transaction, to a friendly party that might align itself
with the board of directors in opposing a hostile takeover. Accordingly, the
Reverse Stock Split could be considered to have the effect of discouraging a
takeover of the Company. The directors are not aware, however, of any current
proposals by any party to acquire control of the Company and the Reverse Stock
Split is not intended to be an anti-takeover device.
SHARES ELIGIBLE FOR RESALE. As of July 8, 1998, there were
outstanding 2,149,646 shares of Common Stock that were issued in connection
with various transactions, all of which are deemed to be "restricted
securities," as defined in Rule 144 under the Securities Act. All but 246,821
of these restricted securities are currently eligible for resale by the
holders thereof in the public market pursuant to Rule 144. In general, under
Rule 144 as currently in effect, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned restricted
securities for at least one year is entitled to sell, within any three-month
period, a number of such shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is filed, provided certain
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requirements concerning availability of public information, manner of sale
and notice of sale are satisfied. In addition, affiliates of the Company must
comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities. Also, under Rule 144(k), a person who is
not an affiliate and has not been an affiliate for at least three months
prior to the sale and who has beneficially owned restricted securities for at
least two years may resell such securities without compliance with the
foregoing requirements. Sales of substantial amounts of the Common Stock in
the public market following the Private Placement Offering, or the perception
that such sales might occur, could adversely affect the then prevailing
market price for the Common Stock and could materially impair the Company's
future ability to raise capital through an offering of equity securities. No
predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for future sale will have on the
market price of the Common Stock prevailing from time to time.
NO DIVIDENDS. The Company has not paid any dividends and does not
intend to pay dividends on the Common Stock in the foreseeable future.
Additionally, the Company is restricted from declaring dividends under
certain agreements to which the Company is subject.
STATE LAW LIMITATIONS ON DIRECTOR LIABILITY FOR MONETARY DAMAGES.
The Issuer's Certificate of Incorporation, as amended, substantially
limits the liability of the Issuer's directors to its stockholders for
breach of fiduciary or other duties to the Issuer. See "MANAGEMENT --
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS."
DELAWARE ANTI-TAKEOVER PROVISIONS. Section 203 of the Delaware
General Corporation Law (the "DGCL") prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliate and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
"business combinations" (defined broadly to include mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of
10% of the consolidated assets of the corporation or the aggregate value of
all of the outstanding capital stock of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless (i) the business combination is
approved by the corporation's board of directors prior to the date the
interested stockholder acquired shares, (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the
transaction in which it became an interested stockholder or (iii) the
business combination is approved by a majority of the board of directors and
by the affirmative vote of two-thirds of the outstanding voting stock not
owned by the interested stockholder. The application of Section 203 of the
DGCL could have the effect of delaying or preventing a change of control of
the Issuer. See "DESCRIPTION OF CAPITAL STOCK -- CERTAIN ANTI-TAKEOVER
EFFECTS OF PROVISIONS OF DELAWARE LAW."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Prospectus
contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the
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Exchange Act and the Company intends that such forward-looking statements be
subject to the safe harbors for such statements under such sections. The
statements contained in this Prospectus that are not historical fact
are "forward-looking statements" (as such term is defined in the statutory
sections cited above), which can be identified by the use of forward-looking
terminology such as "believes," "expects," "intends," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The Company's forward-looking statements include the
plans and objectives of management for future operations, including plans and
objectives relating to its Internet connection services, plans and objectives
for other businesses that the Company may enter and future economic
performance of the Company. The forward-looking statements and associated
risks set forth in this Prospectus include or relate to: (i) ability
of the Company to attract and retain qualified technical, sales, marketing
and administrative personnel relating to the services it currently provides
and intends to provide, (ii) ability of the Company to market its services at
competitive prices, (iii) development of brand-name recognition and loyalty
for the Company's services, (iv) development of an effective sales staff, (v)
market acceptance of the Company's services, (vi) success of the Company's
market initiatives, (vii) expansion of sales in the industries to which the
Company provides its current and intended services, (viii) success of the
Company in forecasting demand for its current and intended services, (ix)
success of the Company in diversifying the Company's market to provide
services to large and small businesses, professionals and individuals, (x)
success of the Company in diversifying the types of services it offers to
customers, (xi) achievement of forecast operating margins dependent upon
price and efficient provision of services, (xii) availability of suitable
licenses or other intellectual property access and protection for the
Company's services, (xiii) the ability of the Company to implement its
acquisition strategy and the success of that strategy, if and to the extent
it is implemented and (xiv) success of the Company in achieving increases in
net sales to reduce the cost of services sold and decrease general,
administrative and development costs as a percentage of net sales.
The forward-looking statements are based on assumptions and judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the "Risk Factors" section of this
Prospectus, there are a number of other risks presented by the Company's
business and operations that could cause the Company's net revenues or net loss,
or growth in net revenues or net loss to vary markedly from prior results or the
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Company to alter its marketing, capital investment and other
expenditures, which may adversely affect the Company's results of operations and
cash flows. In light of significant uncertainties inherent in the
forward-looking information included in this Prospectus, the inclusion
of such information should not be regarded as a representation by the Company or
any other person that the Company's objectives or plans will be achieved.
-31-
<PAGE>
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock and the IPO Warrants are traded on the Nasdaq
under the symbols RMII and RMIIW, respectively. The table below sets forth
for the periods indicated the high and low closing sales prices for the
Company's Common Stock, as reported by the Nasdaq Stock Market, Inc.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ ------
<S> <C> <C>
September 30, 1996 $3.060 $2.690
December 31, 1996 2.750 1.375
March 31, 1997 2.750 1.125
June 30, 1997 3.750 1.875
September 30, 1997 2.625 2.000
December 31, 1997 3.125 2.375
March 31, 1998 5.188 1.875
June 30, 1998 11.750 5.313
</TABLE>
The Company has never paid a cash dividend to Common Stock stockholders,
and the current policy of the Company's board of directors is to retain the
earnings of the Company, if any, for use in the operation
-32-
<PAGE>
and development of its business. Therefore, the payment of cash dividends on
the Common Stock is unlikely in the foreseeable future. Any future
determination concerning the payment of dividends will depend upon the
Company's financial condition, the Company's results of operations, and any
other factors deemed relevant by the board of directors.
33
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the actual
capitalization of RMI, (ii) the pro forma capitalization of RMI adjusted for
the ICC Acquisition and the acquisitions of Infohiway and Application Methods
and (iii) the pro forma as adjusted capitalization of RMI also giving effect
to the Private Placement Offering and the application of the net proceeds
therefrom. This information is qualified by the more detailed information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 1,152 $ 1,167 $ 50,717
Restricted cash(1)....................................... -- -- 45,000
----------- ----------- -----------
----------- ----------- -----------
Current portion of debt and capital lease obligations.... 646 7,434 584
----------- ----------- -----------
----------- ----------- -----------
Debt (excluding current maturities)
Capital Lease Obligations.............................. 728 1,063 1,063
Notes Payable.......................................... 56 150 --
Notes (from Private Placement Offering)................ -- 42,000 150,000
----------- ----------- -----------
784 43,213 151,063
----------- ----------- -----------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, authorized
750,000 shares, no shares outstanding..................
Common stock, $.001 par value, authorized
25,000,000 shares, issued 7,286,275 shares, outstanding
7,218,281(2)........................................... 7 8 8
Additional paid-in capital(3)............................ 9,799 14,341 14,341
Treasury stock........................................... (89) (89) (89)
Accumulated deficit...................................... (8,061) (8,061) (8,061)
----------- ----------- -----------
Total Stockholders' Equity............................. 1,656 6,199 6,199
----------- ----------- -----------
Total Capitalization................................. $ 2,440 $ 49,412 $ 157,262
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) The pro forma as adjusted data includes estimated restricted cash of $45.0
million to be invested in U.S. Government Securities to be held in the
Interest Reserve Account.
(2) Does not include options and warrants to purchase approximately 6,846,638
shares of RMI Common Stock outstanding at March 31, 1998.
(3) Does not attribute any value to the warrants, if any, which may be issued
in connection with the Private Placement Offering or the Bridge Loan
Commitment.
-34-
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial information
presented below has been derived from the unaudited and audited historical
financial statements of RMI, ICC, Infohiway and Application Methods included
elsewhere in this Prospectus and reflect management's present estimate
of pro forma adjustments, including a preliminary estimate of purchase price
allocations, which ultimately may be different. The pro forma financial data
gives effect to the ICC Acquisition and the acquisitions of Infohiway and
Application Methods, as well as, the Acquisition Financing.
The acquisitions are being accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed are recorded at
their estimated fair values, which are subject to further adjustment based upon
appraisals and other analyses, with appropriate recognition given to the effect
of RMI's borrowing rates and income tax rates.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1997 gives effect to the acquisitions as if they had
been consummated at the beginning of such year. This pro forma statement of
operations combines the historical consolidated statement of operations for the
year ended December 31, 1997 for RMI, the historical consolidated statement of
operations for the eleven months ended December 31, 1997 for ICC, the historical
combined statement of operations for the year ended December 31, 1997 for
Application Methods and the historical statement of operations for the year
ended December 31, 1997 for Infohiway.
The unaudited pro forma condensed combined statement of operations for the
three months ended March 31, 1998 gives effect to the acquisitions as if they
had been consummated at the beginning of such period. This pro forma statement
of operations combines the historical operations for RMI, ICC, Application
Methods and Infohiway for the three month period ended March 31, 1998.
The unaudited pro forma condensed combined balance sheet as of March 31,
1998 gives effect to the acquisitions as if they had been consummated on that
date. This pro forma balance sheet combines the historical consolidated balance
sheet at that date for RMI and the historical balance sheets at such date for
ICC, Application Methods and Infohiway.
RMI has contractual rights under the ICC Merger Agreement to effect the
ICC Acquisition and expects to complete the transaction as soon as possible
after the August 10, 1998 ICC shareholders' meeting. However, there can be no
assurance that RMI will be able to complete the ICC Acquisition at the time
or in accordance with the terms and conditions that it currently contemplates.
The unaudited pro forma condensed combined financial statements may not
be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future. The actual
purchase accounting adjustments may be revised upon completion of the ICC
Acquisition. The unaudited pro forma condensed combined financial data
presented below should be read in conjunction with the audited and unaudited
historical financial statements and related notes thereto of RMI, ICC,
Application Methods and Infohiway and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of RMI and ICC, included
elsewhere in this Prospectus.
-35-
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------------------
ROCKY PRO FORMA
MOUNTAIN INTERNET APPLICATION -------------
INTERNET, COMMUNICATIONS INFOHIWAY, METHODS, PRO FORMA
INC. CORPORATION INC. INCORPORATED SUBTOTAL ADJUSTMENTS(B)
------------- ----------------- --------------- ----------------- ----------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents............ $ 1,152 -- 1 14 1,167 42,000(1)
(42,000)(1)
Trade receivables........ 617 6,320 -- 134 7,071
Inventory................ 67 3,301 -- -- 3,368 --
Costs and estimated
earnings in excess of
billings............... -- 1,291 -- -- 1,291 --
Other.................... 154 425 -- 62 641 --
------------- ------- -- --- ----------- -------------
TOTAL CURRENT ASSETS... 1,990 11,337 1 210 13,538 --
------------- ------- -- --- ----------- -------------
Property and equipment,
net...................... 2,641 1,805 9 7 4,462 --
Goodwill, net.............. -- 2,162 -- -- 2,162 44,084(4)
Customer lists, net........ 442 -- -- -- 442 --
Net assets of discontinued
operations............... -- 1,394 -- -- 1,394 --
Other assets, net.......... 79 1,380 1 -- 1,460 1,806(1)
------------- ------- -- --- ----------- -------------
TOTAL ASSETS........... $ 5,152 18,078 11 217 23,458 45,890
------------- ------- -- --- ----------- -------------
------------- ------- -- --- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable............ $ -- 6,639 9 140 6,788 --
Current maturities of
long-term debt and
capital lease
obligations............ 646 -- -- -- 646 --
Accounts payable and
accrued expenses....... 1,726 6,253 2 49 8,030 1,806(1)
Billings in excess of
costs and estimated
billings............... 340 1,150 -- -- 1,490 --
Unearned income and
deposits............... -- 992 -- -- 992 --
------------- ------- -- --- ----------- -------------
TOTAL CURRENT
LIABILITIES.......... 2,712 15,034 11 189 17,946 1,806
------------- ------- -- --- ----------- -------------
Long-term debt and capital
lease obligations........ 784 429 -- -- 1,213 --
Notes...................... -- -- -- -- -- 42,000(1)
Other long-term
obligations.............. -- 184 -- -- 184 --
Stockholders' Equity
Preferred stock.......... -- -- -- -- -- --
Common Stock and
additional paid in
capital................ 9,717 13,965 13 0 23,695 (13,978)(5)
4,574(4)
Accumulated deficit...... (8,061) (11,503) (13) 28 (19,549) 11,488(5)
Stockholders' notes...... -- (31) -- -- (31) --
------------- ------- -- --- ----------- -------------
TOTAL STOCKHOLDERS'
EQUITY............... 1,656 2,431 -- 28 4,115 2,084
------------- ------- -- --- ----------- -------------
Total Liabilities and
Stockholders' Equity..... $ 5,152 18,078 11 217 23,458 45,890
------------- ------- -- --- ----------- -------------
------------- ------- -- --- ----------- -------------
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Current assets:
Cash and cash
equivalents............ 1,167
Trade receivables........ 7,071
Inventory................ 3,368
Costs and estimated
earnings in excess of
billings............... 1,291
Other.................... 641
-----------
TOTAL CURRENT ASSETS... 13,538
-----------
Property and equipment,
net...................... 4,462
Goodwill, net.............. 46,246
Customer lists, net........ 442
Net assets of discontinued
operations............... 1,394
Other assets, net.......... 3,266
-----------
TOTAL ASSETS........... 69,348
-----------
-----------
Current Liabilities:
Notes payable............ 6,788
Current maturities of
long-term debt and
capital lease
obligations............ 646
Accounts payable and
accrued expenses....... 9,836
Billings in excess of
costs and estimated
billings............... 1,490
Unearned income and
deposits............... 992
-----------
TOTAL CURRENT
LIABILITIES.......... 19,752
-----------
Long-term debt and capital
lease obligations........ 1,213
Notes...................... 42,000
Other long-term
obligations.............. 184
Stockholders' Equity
Preferred stock.......... --
Common Stock and
additional paid in
capital................ 14,291
Accumulated deficit...... (8,061)
Stockholders' notes...... (31)
-----------
TOTAL STOCKHOLDERS'
EQUITY............... 6,199
-----------
Total Liabilities and
Stockholders' Equity..... 69,348
-----------
-----------
</TABLE>
-36-
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------
ROCKY
MOUNTAIN INTERNET APPLICATION
INTERNET, COMMUNICATIONS METHODS,
INC. CORPORATION INFOHIWAY, INC. INCORPORATED SUBTOTAL
------------- ----------------- --------------- --------------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet access and services............. $ 1,713 100 4 333 2,150
Network services......................... -- 3,622 -- -- 3,622
Network integration...................... 66 4,512 -- -- 4,578
------------- ------ -- --- -----------
Total sales............................ 1,779 8,234 4 333 10,350
Cost of sales.............................. 652 5,993 4 -- 6,649
------------- ------ -- --- -----------
Gross Margin......................... 1,127 2,241 -- 333 3,701
------------- ------ -- --- -----------
Operating expenses:
Selling, general and administrative...... 2,139 4,877 -- 313 7,329
Depreciation and amortization............ 240 352 1 -- 593
--
------------- ------ --- -----------
Total operating expenses............. 2,379 5,229 1 313 7,922
------------- ------ -- --- -----------
Other income (expense):
Interest expense, net.................... (62) (122) -- (4) (188)
Other income (expense), net.............. -- -- -- (3) (3)
------------- ------ -- --- -----------
(62) (122) -- (7) (191)
------------- ------ -- --- -----------
Income (loss) from continuing operations... (1,314) (3,110) (1) 13 (4,412)
------------- ------ -- --- -----------
------------- ------ -- --- -----------
Basic and Diluted loss per share from
continuing operations.................... $ (0.20)
-------------
-------------
Average number of common shares
outstanding.............................. 6,711
-------------
-------------
<CAPTION>
PRO FORMA
---------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS(B) COMBINED
-------------- -----------
<S> <C> <C>
Revenue:
Internet access and services............. -- 2,150
Network services......................... -- 3,622
Network integration...................... -- 4,578
------ -----------
Total sales............................ -- 10,350
Cost of sales.............................. -- 6,649
------ -----------
Gross Margin......................... -- 3,701
------ -----------
Operating expenses:
Selling, general and administrative...... -- 7,329
Depreciation and amortization............ 1,216(6) 1,809
------ -----------
Total operating expenses............. 1,216 9,138
------ -----------
Other income (expense):
Interest expense, net.................... (1,115)(2) (1,303)
Other income (expense), net.............. -- (3)
------ -----------
(1,115) (1,306)
------ -----------
Income (loss) from continuing operations... (2,331) (6,743)
------ -----------
------ -----------
Basic and Diluted loss per share from
continuing operations.................... $ (0.94)
-----------
-----------
Average number of common shares
outstanding.............................. 7,147
-----------
-----------
</TABLE>
-37-
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------------
ROCKY PRO FORMA
MOUNTAIN INTERNET APPLICATION --------------
INTERNET, COMMUNICATIONS INFOHIWAY, METHODS, PRO FORMA
INC. CORPORATION INC. INCORPORATED SUBTOTAL ADJUSTMENTS(B)
------------- ----------------- ----------- --------------- ----------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet access and services...... $ 5,740 305 31 984 7,060 --
Network services.................. -- 12,064 -- -- 12,064 --
Network integration............... 387 20,744 -- -- 21,131 --
------------- ------ ----- ----- ----------- ------
Total sales..................... 6,127 33,113 31 984 40,255 --
Cost of sales....................... 2,060 23,693 13 -- 25,766 --
------------- ------ ----- ----- ----------- ------
Gross Margin.................... 4,067 9,420 18 984 14,489 --
------------- ------ ----- ----- ----------- ------
Operating expenses:
Selling, general and
administrative.................. 6,981 10,901 16 1,084 18,982 --
Depreciation and amortization..... 887 1,469 6 5 2,367 4,866(6)
------------- ------ ----- ----- ----------- ------
Total operating expenses........ 7,868 12,370 22 1,089 21,349 4,866
------------- ------ ----- ----- ----------- ------
Other income (expense):
Interest expense, net............. (347) (400) -- (12) (759) (4,458)(2)
Other income (expense), net....... (5) -- -- 15 10 --
------------- ------ ----- ----- ----------- ------
(352) (400) -- 3 (749) (4,458)
------------- ------ ----- ----- ----------- ------
Income (loss) from continuing
operations........................ (4,153) (3,350) (4) (102) (7,609) (9,324)
------------- ------ ----- ----- ----------- ------
------------- ------ ----- ----- ----------- ------
Basic and Diluted loss per share
from continuing operations........ $ (1.08)
-------------
-------------
Average number of common shares
outstanding....................... 5,288
-------------
-------------
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenue:
Internet access and services...... 7,060
Network services.................. 12,064
Network integration............... 21,131
-----------
Total sales..................... 40,255
Cost of sales....................... 25,766
-----------
Gross Margin.................... 14,489
-----------
Operating expenses:
Selling, general and
administrative.................. 18,982
Depreciation and amortization..... 7,233
-----------
Total operating expenses........ 26,215
-----------
Other income (expense):
Interest expense, net............. (5,217)
Other income (expense), net....... 10
-----------
(5,207)
-----------
Income (loss) from continuing
operations........................ (16,933)
-----------
-----------
Basic and Diluted loss per share
from continuing operations........ $ (2.96)
-----------
-----------
Average number of common shares
outstanding....................... 5,724
-----------
-----------
</TABLE>
-38-
<PAGE>
NOTES TO THE PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
(A) BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet is
presented as of March 31, 1998. The accompanying unaudited pro forma condensed
combined statements of operations are presented for the three month period ended
March 31, 1998 and for the year ended December 31, 1997, except for ICC which
represents the eleven months ended December 31, 1997.
(B) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited
condensed combined balance sheet as of March 31, 1998 and the unaudited
condensed combined statements of operations for the period ended March 31, 1998
and December 31, 1997:
(1) To adjust for the effects of the issuance of the $42,000,000 of
Acquisition Financing, assuming a pro forma interest rate of 10%. The
final interest rate has not been negotiated at this date. The proforma
effects are as follows (in thousands):
<TABLE>
<S> <C>
CASH AND CASH EQUIVALENTS
- -------------------------------------------------------------------
Proceeds from interim acquisition financing........................ $ 42,000
---------
---------
OTHER ASSETS:
- -------------------------------------------------------------------
Deferred financing costs........................................... $ 1,806
---------
---------
DEBT:
- -------------------------------------------------------------------
Principal amount of acquisition financing.......................... $ 42,000
---------
---------
</TABLE>
(2) To increase interest expense to reflect the issuance of $42,000,000
of the Acquisition Financing and the amortization of the net debt issuance
costs estimated at $1,806,000 as if the transaction had been in effect for
the entire period, presented as follows (in thousands):
<TABLE>
<CAPTION>
12-31-97 3-31-98
----------- ---------
<S> <C> <C>
Record estimated interest expense on the Acquisition Financing............ $ 4,200 $ 1,050
Record amortization expense of new debt issuance costs.................... 258 65
----------- ---------
$ 4,458 $ 1,115
----------- ---------
----------- ---------
</TABLE>
(3) The warrants, if any, to be issued in connection with the Private
Placement Offering have an assumed zero value for purposes of these pro
formas. Prior to closing the transaction an independent valuation of any
warrants will be obtained. The fair market value of any warrants will be
recorded as an increase in stockholders equity and a reduction in the face
amount of the debt resulting from the Private Placement Offering.
(4) To reflect the $42,000,000 in cash to be paid as the $39,400,000 purchase
price plus $2,600,000 of estimated transaction costs for the ICC Acquisition
and 436,369 shares of RMI Common Stock valued at $4,574,000 which is the
approximate number of shares issued in connection with the acquisitions of
Application Methods and Infohiway and the allocation of these purchase
prices to goodwill in excess of existing goodwill, in the amount of
$44,084,000. Shares of Common Stock issued for acquisitions were recorded
at fair value as determined by RMI's board of directors and based on the
then current market price of RMI's
-38-A
<PAGE>
NOTES TO THE PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
(B) PRO FORMA ADJUSTMENTS (CONTINUED)
publicly traded stock. In the opinion of management, all other assets
acquired and liabilities assumed approximate fair value. The final
allocation of the purchase price will be made after the appropriate
appraisals or other analyses are performed and will likely result
in further adjustments.
Summary information regarding the acquisitions is as follows (in thousands):
<TABLE>
<CAPTION>
ENTITY DATE CLOSED CASH STOCK TOTAL
- -------------------------------------------- --------------- --------- --------- ---------
<S> <C> <C> <C> <C>
COMPLETED ACQUISITIONS:
Infohiway................................. June 5, 1998 $ 0 $ 1,335 $ 1,335
Application Methods....................... June 30, 1998 $ 0 $ 3,239 $ 3,239
ANTICIPATED ACQUISITION:
ICC....................................... ** $ 42,000 $ 0 $ 42,000
--------- --------- ---------
Total Consideration..................... $ 42,000 $ 4,574 $ 46,574
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
**This transaction is anticipated to close in the third quarter of 1998,
however no assurances can be given that it will close at that time, if at
all.
In addition to the consideration above, RMI has a commitment to pay
additional purchase consideration to the former shareholders of
Application Methods in the form of shares of Common Stock not to exceed
a market value of $2,500,000. This contingent consideration will be due
based on a formula applied to the future operating results of Application
Methods and will result in an increase in goodwill if paid.
(5) To eliminate the equity accounts of the acquisitions.
(6) To adjust amortization expense due to the increase in carrying value of
goodwill, using lives ranging from five to ten years, as if such
acquisitions had been completed as of January 1, 1997.
(7) Income tax expense or benefit has not been reflected in the pro forma
condensed combined financial statements due to consolidated net operating
losses for the periods ended March 31, 1998 and December 31, 1997.
(8) Upon acceptance of and in connection with the Bridge Loan Commitment,
RMI agreed to pay the lenders and the arranger an aggregate approximate
amount of $1,050,000 and agreed to issue warrants to the lenders and the
arranger to acquire a total of 560,000 shares of RMI Common Stock. These
stock warrants have an assumed zero value for purposes of these pro formas.
It is assumed they will be issued at market. Prior to recording the issuance
of these warrants an independent valuation will be obtained. To the extent
it is determined that the warrants are issued below market value additional
interest expense will be recorded over the term of the notes. The
origination fee of approximately $1,050,000 is being amortized as part of
deferred financing costs over the estimated period until permanent financing
is obtained. See "RECENT DEVELOPMENTS -- ICC ACQUISITION".
-38-B
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA--RMI
The following table sets forth selected historical financial and other
data of RMI. RMI was formed in October 1993 and has generated operating
losses since inception as well as negative cash flow in 1996 and 1997. The
selected data set forth below as of December 31, 1994 (not included herein)
and 1995 and for the periods then ended have been derived from the financial
statements of RMI which have been audited by McGladrey & Pullen, LLP,
independent auditors. The selected consolidated statements of operations and
the balance sheet data set forth below as of December 31, 1996 and 1997, for
the periods then ended have been derived from the financial statements of RMI
which have been audited by Baird, Kurtz & Dobson, independent auditors. The
selected financial data for the three month periods ended March 31, 1998 and
1997 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which RMI considers necessary for a fair presentation of the financial
position and results of operations for these periods. The operating results
for the three months ended March 31, 1998 are not necessarily indicative of
the results to be expected for any future period.
The selected historical financial data should be read in conjunction with
the Consolidated Financial Statements of RMI and related Notes thereto and the
information included under "SUMMARY HISTORICAL FINANCIAL DATA--RMI" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--RMI" included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
------------------------------------------ --------------------
1994(1) 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER INFORMATION)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 254 $ 1,179 $ 3,282 $ 6,127 $ 1,397 $ 1,779
Cost of revenues earned............................. 84 320 1,104 2,060 501 652
Gross profit........................................ 170 859 2,178 4,067 896 1,127
General, selling and administrative expense......... 211 968 4,459 7,868 1,708 2,379
Operating (loss) income............................. (41) (109) (2,281) (3,801) (812) (1,252)
Net (loss) income................................... (44) (129) (2,343) (4,153) (890) (1,314)
Net (loss) income per share(2)...................... $ (0.02) $ (0.07) $ (1.03) $ (0.79) $ (0.20) $ (0.20)
OTHER DATA:
EBITDA(3)........................................... (7) (9) (1,956) (2,918) (642) (1,012)
Deficiency of earnings to cover fixed charges(4).... (44) (129) (2,343) (4,153) (890) (1,314)
Net cash provided-(used) by:
operating activities.............................. 155 165 (1,512) (3,297) (815) (107)
investing activities.............................. (114) (238) (2,344) 921 473 (132)
financing activities.............................. (7) 311 3,930 3,080 519 338
BALANCE SHEET DATA:
Cash and Cash Equivalents........................... $ 36 $ 275 $ 349 $ 1,053 $ 526 $ 1,152
Investments......................................... 0 0 1,357 0 577 0
Working Capital (Deficit)........................... (184) (187) 371 (209) (804) (722)
Total Assets........................................ 250 925 5,540 5,082 5,474 5,152
Long Term Debt and Capital Lease Obligations, net of
current portion................................... 52 524 1,134 905 1,077 784
Total Stockholders' (deficit) equity................ (43) (169) 2,317 2,083 1,709 1,656
</TABLE>
- ------------------------
(1) The inception of RMI was in October 1993, therefore no financial statement
information is presented for the period from inception to December 31, 1993.
(2) Loss per share is computed based on 1,868,000 Shares outstanding for 1994
and 1995, 2,295,000 shares outstanding for 1996 and 5,288,000 shares
outstanding for 1997 and 4,634,000 and 6,711,000 shares
-39-
<PAGE>
outstanding for the three months ended March 31, 1997 and 1998,
respectively. This represents the weighted average common shares outstanding
for both basic and diluted earnings per share for each period. See Note 1 to
RMI's financial statements included elsewhere in this Prospectus.
(3) EBITDA is earnings before interest, taxes, depreciation and amortization.
EBITDA is included herein because management believes that certain investors
find it to be a useful tool for measuring a company's ability to service its
debt. However, EBITDA does not represent cash flow from operations, as
defined by generally accepted accounting principles ("GAAP"). EBITDA should
not be considered as a substitute for net income or net loss as an indicator
of RMI's operating performance or cash flow as a measure of liquidity and
should be examined in conjunction with the Consolidated Financial Statements
of RMI and the related Notes thereto included elsewhere in this Prospectus.
EBITDA as defined by the Company may be different from EBITDA as defined by
other companies.
(4) Ratio of earnings to fixed charges is defined as earnings divided by fixed
charges. Earnings represent pre-tax loss from continuing operations plus
fixed charges. Fixed charges represent interest paid or accrued on
indebtedness of RMI and amortization of deferred loan charges. In
all applicable periods, RMI had a deficiency in earnings to fixed
charges.
-40-
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA--ICC
The following table sets forth selected historical financial and other data
of ICC. The related financial data for the eleven months ended December 31, 1997
have been derived from the financial statements of ICC which have been audited
by KPMG Peat Marwick LLP, independent accountants. The selected financial data
for the fiscal years ended January 31, 1997 and 1996 have been derived from the
financial statements of ICC which have been audited by Hein + Associates LLP,
independent accountants. The selected financial data for the three month period
ended March 31, 1998 and three month period ended April 30, 1997 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which ICC considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
any future period.
The selected historical financial data should be read in conjunction with
the Consolidated Financial Statements of ICC and related Notes thereto and the
information included under "SUMMARY HISTORICAL FINANCIAL DATA--ICC" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ICC" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE THREE
ELEVEN MONTHS MONTHS MONTHS
ENDED DECEMBER ENDED APRIL ENDED MARCH
YEAR ENDED JANUARY 31, 31, 30, 31,
------------------------------------------ --------------- ----------- -----------
1994 1995 1996 1997 1997(1) 1997 1998
--------- --------- --------- --------- --------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 15,890 $ 16,350 $ 18,528 $ 26,505 $ 33,113 $ 8,689 $ 8,234
Cost of sales......................... 11,273 11,996 13,502 18,815 23,693 6,022 5,993
Gross margin.......................... 4,617 4,354 5,026 7,690 9,420 2,667 2,241
Selling, general and administrative
expenses............................ 4,147 6,321 6,131 8,624 12,770 3,120 5,351(5)
Operating (loss) income............... 470 (1,967) (1,105) (934) (3,350) (453) (3,110)
Net (loss) income..................... 300 (1,830) (977) (1,125) (4,575) (643) (3,553)
Net (loss) income per share(2)........ $ 0.14 $ (0.78) $ (0.41) $ (0.33) $ (0.88) $ (0.14) $ (0.66)
OTHER DATA:
EBITDA(3)............................. 991 (1,371) (404) 313 (1,481) 48 (2,636)
Deficiency of earnings to cover fixed
charges(4).......................... -- (1,967) (1,105) (1,125) (3,350) (453) (3,110)
Net cash provided-(used) by:
operating activities................ 150 295 (66) (3,143) 732 183 (2,372)
investing activities................ (1,487) (1,563) (724) (604) (995) (166) (53)
financing activities................ 1,270 1,125 691 2,590 1,873 (108) 2,184
BALANCE SHEET DATA:
Cash and Cash Equivalents............. $ 715 $ 572 $ 473 $ 643 $ 0 $ 978 $ 0
Investments........................... 189 157 0 0 0 0 0
Working Capital (Deficit)............. 2,732 2,052 892 5,990 (1,488) 5,977 (3,697)
Total Assets.......................... 6,582 7,064 7,450 18,372 18,113 19,045 18,078
Long Term Debt and Capital Lease
Obligations, net of current
portion............................. 0 0 0 5,587 209 2,714 429
Total Stockholders' equity............ 4,873 3,853 2,917 7,405 5,984 9,612 2,431
</TABLE>
- ------------------------------
(1) ICC elected to change its fiscal year from January 31 to December 31
effective February 1, 1997.
(2) Loss per share is computed based on 2,183,000, 2,352,000, 2,397,000,
3,371,000, 5,216,000, 4,756,000 and 5,398,000 shares outstanding for 1994,
1995, 1996, 1997, the eleven months ended December 31, 1997, and the three
months ended April 30, 1997 and March 31, 1998, respectively. This
represents the weighted average common shares outstanding for both basic
and diluted earnings per share for each period.
(3) EBITDA is earnings from continuing operations before interest, taxes,
depreciation and amortization. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring a
company's ability to service its debt. However, EBITDA does not represent
cash flow.
-41-
<PAGE>
from operations, as defined by GAAP. EBITDA should not be considered as a
substitute for net income or net loss as an indicator of ICC's operating
performance or cash flow as a measure of liquidity and should be examined in
conjunction with the Consolidated Financial Statements of ICC and the
related Notes thereto included elsewhere in this Prospectus. EBITDA, as
defined by the Company may be different from EBITDA as defined by other
companies.
(4) Ratio of earnings to fixed charges is defined as earnings divided by fixed
charges. Earnings represent pre-tax loss from continuing operations plus
fixed charges. Fixed charges represent interest paid or accrued on
indebtedness of the ICC and amortization of deferred loan charges. In
all applicable periods, the ICC had a deficiency in earnings to fixed
charges.
(5) Selling, general and administrative expenses for the three months ended
March 31, 1998 includes $1,608,000 of restructuring costs (see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
included elsewhere herein). In all applicable periods, the Company had a
deficiency in earnings to fixed charges.
-42-
<PAGE>
USE OF PROCEEDS
The 2,000,000 Acquisition Shares to be offered and issued by the
Company may be issued from time to time in full or part consideration in
connection with future acquisitions by the Company. The 4,061,500 Warrants
and approximately an additional 2,966,250 Selling Securityholder Shares
subject of this Prospectus have been previously issued to the Selling
Securityholders and are being offered for sale by the Selling
Securityholders, and approximately an additional 5,941,650 Selling
Securityholder Shares that may be issued upon exercise of Warrants are being
offered for sale by the Selling Securityholders. Consequently, the Company
will not receive any of the proceeds from the sales of such shares.
The Company will not receive the proceeds of sales of any Securities
offered hereby by the Selling Securityholders. However, if the Selling
Securityholders who hold Warrants determine to exercise their Warrants, the
Company will receive the proceeds of the exercise of those Warrants. The
1,365,000 IPO Warrants are redeemable by the Company at a cost of $0.25 per
Warrant.
The Company estimates that it would receive approximately $5,670,000
upon the exercise of all of the 1,365,000 IPO Warrants, net of commissions
due and payable to the representative of the underwriters for the Company's
IPO (but not net of the expenses of this offering). The Company is required
to pay to Neidiger, Tucker, Bruner, Inc. ("NTB"), the representative of the
underwriters of the Company's IPO, a commission equal to 5% of the exercise
price of the IPO Warrants under circumstances. See "PLAN OF DISTRIBUTION."
The Company plans to use any such net proceeds for general corporate purposes
and working capital. To the extent such proceeds are not utilized
immediately, they will be invested in instruments that, in the determination
of the Company, are low-risk investment vehicles. There can be no assurance
that any of the Warrants will be exercised.
-43-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS IS QUALIFIED IN ITS ENTIRETY BY,
AND SHOULD BE READ IN CONJUNCTION WITH, THE FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS MENTIONED ABOVE,
UNLESS THE CONTEXT OTHERWISE INDICATES, THE DISCUSSION HEREIN ASSUMES THE
CONSUMMATION OF THE ICC ACQUISITION AND THE PRIVATE PLACEMENT OFFERING AND
REFERENCES TO (i) THE "REGISTRANT" OR "ISSUER" SHALL MEAN ROCKY MOUNTAIN
INTERNET, INC., A DELAWARE CORPORATION AND THE ISSUER OF THE SECURITIES
OFFERED HEREBY, (ii) THE "COMPANY" SHALL MEAN ROCKY MOUNTAIN INTERNET, INC.,
A DELAWARE CORPORATION (WHICH WILL CONDUCT BUSINESS FOLLOWING THE ICC
ACQUISITION AS INTERNET COMMUNICATIONS COMPANY) AND ITS CONSOLIDATED
SUBSIDIARIES ON A PRO FORMA COMBINED BASIS AND GIVING EFFECT TO THE
ACQUISITIONS OF INFOHIWAY, AND APPLICATION METHODS, AND THE CONSUMMATION OF
THE ICC ACQUISITION, (iii) "RMI" SHALL MEAN ROCKY MOUNTAIN INTERNET, INC., A
DELAWARE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES PRIOR TO THE
CONSUMMATION OF THE ACQUISITIONS OF INFOHIWAY AND APPLICATION METHODS AND THE
ICC ACQUISITION, AND (iv) "ICC" SHALL MEAN INTERNET COMMUNICATIONS
CORPORATION, A COLORADO CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES PRIOR
TO THE ICC ACQUISITION.
OVERVIEW
RMI, a Delaware corporation incorporated in October 1995. It acquired the
assets of Rocky Mountain Internet, Inc., a Colorado corporation which was
incorporated in 1994 and began doing business in 1993 as an unincorporated
enterprise. RMI is an ISP providing a broad range of Internet-based services
to business and residential customers. RMI offers its services through its
own network in Colorado and through third-party providers nationwide. For the
year ended December 31, 1997 RMI had gross revenues of $6.1 million. RMI
entered into the ICC Merger Agreement dated as of June 5, 1998 to acquire all
of the outstanding stock of ICC. Consummation of the ICC Acquisition is
subject to the satisfaction of various closing conditions, including approval
of the merger by ICC's shareholders at a meeting of Shareholders scheduled
for August 10, 1998. The ICC Acquisition is expected to close soon after such
meeting. RMI currently intends, subject to market and other conditions, to
complete the Private Placement Offering which is conditioned upon the
consummation of the ICC Acquisition. RMI received the Bridge Loan Commitment
to fund the ICC Acquisition in the event the Private Placement Offering is
not compeleted. See "RECENT DEVELOPMENTS -- ICC ACQUISITION," and "-- OTHER
ACQUISITIONS," "RISK FACTORS" and "BUSINESS."
ICC is a multi-faceted telecommunications and data networking company
specializing in the design, implementation, maintenance and management of
communications systems and networks. ICC's gross revenues for the eleven
months ended December 31, 1997 were $33.1 million. ICC is capable of
providing a broad communications package addressed to its customers total
communications needs for enterprise-wide data and voice networks. See
"RECENT DEVELOPMENTS -- ICC ACQUISITION," and "-- OTHER ACQUISITIONS," "RISK
FACTORS" and "BUSINESS."
On June 5, 1998, RMI acquired Infohiway, a Colorado-based company which
developed a search engine which the Company believes has unique data searching
features. For the year ended December 31, 1997, Infohiway had gross revenues of
$31,000. RMI also acquired, on June 30, 1998, Application Methods, a
Seattle-based company that has developed a proprietary e-commerce software
package, e-SELL. For the year ended December 31, 1997, Application Methods had
gross revenues of $984,000. Additionally, RMI recently entered into a
non-binding memorandum of understanding regarding the possible acquisition of
Internet Now, an ISP located in Phoenix, Arizona, for approximately $1.5
million. While the Company believes these current and proposed acquisitions will
accelerate its existing growth plans, there can be no assurance that the Company
will be able to integrate these companies successfully. See "RECENT
DEVELOPMENTS--ICC ACQUISITION," and "--OTHER ACQUISITIONS," "RISK FACTORS" and
"BUSINESS." The financial data of Infohiway and Application Methods has not been
included in the following analysis and discussion but reference is made to the
Financial Statements, including the Notes thereto, of Infohiway and Application
Methods included elsewhere herein.
With the acquisition of ICC by RMI, the Company is positioned to become a
leading national solutions provider. The Company offers a broad array of
communications services tailored to meet customer needs and provides high
quality customer support. The Company delivers its products and services
through three interconnected divisions: Communications Services, Web Services
and Integration Services. The Company believes that, based upon its
experience, a growing number of businesses will demand one point of contact
for communications solutions for the following reasons: (i) to ensure proper
system/ network integration; (ii) to obtain a single point of responsibility
for products and services that might have numerous providers; and (iii) to
continue to take advantage of evolving communications technologies. The
Company will increase the breadth of its products and services delivered to
its customers by adopting new technology, acquiring complementary businesses
and capitalizing on strategic relationships.
-44-
<PAGE>
RMI
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS.
REVENUES. RMI experienced net losses of $914,637 and $1,314,350 for the
first quarters of 1997 and 1998, respectively, for an increase in the loss of
44%. The net losses and losses per share are presented in the following
schedule.
<TABLE>
<CAPTION>
FIRST QUARTER 1997 FIRST QUARTER 1998
---------------------------- ------------------------------
LOSS LOSS PER SHARE LOSS LOSS PER SHARE
----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
TYPE OF LOSS:
Net Loss............................................. $ (914,637) $ (0.19) $ (1,314,350) $ (0.19)
</TABLE>
Included in the net loss for the three months ended March 31, 1998 is a
non cash charge of approximately $383,000 related to option compensation
expense.
Effective January 16, 1997, RMI acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc. (O.N.E.), a Boulder, Colorado
based provider of Internet access and web services for consideration consisting
of $150,000 in cash and 116,932 shares of Common Stock.
RMI's revenues grew 27% from $1,397,283 to $1,779,285 for the three months
ended March 31, 1998 as compared to the comparable period in 1997. Listed below
is a breakdown of the revenue billing categories.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------
1997 1998 % CHANGE
------------ ------------ -----------
<S> <C> <C> <C>
REVENUE CATEGORY:
Dial-Up Service........................................................... $ 595,686 $ 565,263 (5%)
Dedicated Access Service.................................................. 347,592 798,394 130%
Web Services.............................................................. 216,798 314,341 45%
Equipment Sales........................................................... 83,244 65,969 (21%)
Other..................................................................... 153,963 35,318 (77%)
Total..................................................................... $ 1,397,283 $ 1,779,285 27%
</TABLE>
DIAL-UP SERVICE. Since November 4, 1997, RMI has offered flat rate pricing
for unlimited access service to the Denver and Boulder, Colorado markets. This
offering has become more economically attractive than in the past due to lower
costs for circuits and a lower cost per port for dial up access. The new
offering includes higher speed modem access using K56 Flex technology.
The table below shows the composite weighted average billing rates for full
service Internet access by quarter for 1995, 1996, 1997 and the first quarter of
1998. The reduction in the average rate for September 1997 is the result of a
change in the average rates resulting from the termination of dial-up service
contracts with third parties in Alamosa and Leadville, Colorado. RMI has
historically offered billing rates ranging from $8.95 to $29.95. The remaining
contracts with other third parties provide a higher percentage of lower rate
services. Effective with the December 1997 billings, most Denver and Boulder,
Colorado area customers who were on payment plans higher than $19.95 per month
were converted to a new $19.95 flat rate service, resulting in a lower average
billing rate. The full effect of the conversions occurred during the last
quarter of 1997 and the first quarter of 1998. In the first quarter of 1998,
dial-up service in Hayden, Colorado also was terminated. RMI expects the
average revenue per dial-up customer to stabilize contingent upon the current
pricing remaining in effect.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996 MAR 1997 JUN 1997 SEP 1997 DEC 1997
- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20.52 $ 20.42 $ 20.88 $ 21.02 $ 20.97 $ 20.33 $ 20.41 $ 20.50 $ 20.10 $ 20.04 $ 19.65 $ 18.62
<CAPTION>
MAR 1998
- ---------
<C>
$ 17.98
</TABLE>
-45-
<PAGE>
RMI experienced a 5% revenue reduction in dial-up service from the first
quarter of 1997 as compared to the first quarter of 1998, from $595,700 to
$565,300. The decrease is the result of a combination of the reduction in
average customer revenues resulting from the new flat rate pricing offered and a
reduction in revenues from business alliances as explained below.
Dial-up services have been approximately even between commercial and
residential customers throughout 1995, 1996, 1997 and the first quarter of 1998
based on customer count. Based on revenue, the split between commercial and
residential is 35% to 65%, respectively.
Through contracts with three locally-based unrelated parties, RMI has
provided Internet services in secondary markets in Colorado. The services are
provided under written contracts that provide for the locally-based party to
provide equipment and marketing services while RMI provides Internet access
and administrative services. Dial-up service revenues based on these
contracts generated $127,534 in revenues for the first quarter of 1997 and
$59,937 in revenues for the first quarter of 1998, for a decrease of 53%. The
POPs established pursuant to these contracts were commenced in the second
quarter of 1995 and grew to six locations by the end of 1995 and nine
locations by the end of 1996. Effective July 3, 1997, the contract with Zero
Error Networks ("ZEN") was terminated. Under the termination agreement, RMI
will operate the Pueblo, Colorado POP as an RMI-only location and ZEN will
operate the Alamosa, Leadville, and Hayden, Colorado locations. The revenues
from the Pueblo POP and its growth substantially offset the revenue loss from
the Alamosa, Leadville and Hayden POPs. A similar contract in Grand Junction,
Colorado was terminated by RMI effective April 30, 1997. The marketing
efforts by the locally-based third party in this location were minimal and
sales were less than $1,000 per month. RMI is operating this facility as an
RMI-only location at this time.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily provided
to commercial customers and include a wide range of connectivity options
tailored to the requirements of the customer. These services include private
port (dedicated modem), Integrated Services Digital Network ("ISDN")
connections, 56 Kbps frame relay connections, T-1 (1.54 Mbps) frame relay
connections, T-1 and fractional T-1 point-to-point connections, and T-3 (45
Mbps) or fractional T-3 connections. RMI also offers a co-location service in
which the customer's equipment is located in the RMI data center, thereby
providing access to the Internet directly through RMI's connection.
Dedicated access service business has grown based principally on ISDN and
high-speed circuits (56K, T-1 and T-3) growth. ISDN sales have grown from
$107,400 to $209,100 from first quarter 1997 to first quarter 1998, for an
increase of 95%, while sales of high-speed circuits services have increased
from $208,000 to $531,500 for the same periods for an increase of 156%.
The table below shows the quarterly customer count by each of the component
services offered for dedicated access service as of the dates indicated:
<TABLE>
<CAPTION>
SERVICE MAR 31 1995 JUN 30 1995 SEP 30 1995 DEC 31 1995 MAR 31 1996 JUN 30 1996
- ------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Private Port.............................. 29 30 36 35 42 47
56 Kbps................................... 18 27 27 34 47 69
ISDN...................................... 0 0 0 2 3 13
T-1 and T-3............................... 7 10 10 11 16 25
Co-location............................... 0 1 4 4 6 4
<CAPTION>
SERVICE SEP 30 1996 DEC 31 1996
- ------------------------------------------ ----------- -----------
<S> <C> <C>
Private Port.............................. 46 54
56 Kbps................................... 71 72
ISDN...................................... 46 80
T-1 and T-3............................... 29 30
Co-location............................... 5 6
</TABLE>
<TABLE>
<CAPTION>
SERVICE MAR 31 1997 JUN 30 1997 SEP 30 1997 DEC 31 1997
- --------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Private Port......................................................... 50 41 36 31
56 Kbps.............................................................. 78 72 65 60
ISDN................................................................. 168 193 211 233
T-1 and T-3.......................................................... 65 84 99 123
Co-location.......................................................... 11 12 11 21
<CAPTION>
SERVICE MAR 31 1998
- --------------------------------------------------------------------- -----------
<S> <C>
Private Port......................................................... 23
56 Kbps.............................................................. 57
ISDN................................................................. 256
T-1 and T-3.......................................................... 151
Co-location.......................................................... 30
</TABLE>
-46-
<PAGE>
WEB SERVICES. Web services revenues are primarily comprised of web site
hosting, web site production and web page marketing. Web site hosting
provides ongoing revenue from customers for whom RMI hosts a web site on web
servers in the RMI data center. All access made to these web sites by the
customer and the Internet community as a whole are processed on the RMI
servers. The advantage to customers is high-speed access to sites by their
targeted audiences. The following is a summary of the number of web site
hosting customers as of the dates indicated:
<TABLE>
<CAPTION>
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996 MAR 1997 JUN 1997 SEP 1997
----- ----- ----- ----- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341 418 424 417
DEC 1997 MAR 1998
--------- ---------
<C> <C>
428 448
</TABLE>
Web site hosting accounted for $104,000 of revenue in the first quarter of
1997 and $138,200 in the first quarter of 1998 for an increase of 32%.
Web site production increased from $112,800 for the first quarter of 1997
to $144,600 for the first quarter of 1998 for an increase of 27%.
RMI added a new service, web site marketing, to customers in late 1997.
For the first quarter of 1998, revenues of $22,000 were recognized for this
service. Web site marketing offers the customer a service wherein RMI
optimizes the position in web search engines for a customer's site based on
queries using selected key words. This service results in a significant
increase in the level of traffic for a web site.
EQUIPMENT SALES. RMI sells hardware to its customers as an accommodation
and to provide a "one stop shop" for Internet services. Equipment sales can vary
from a single router for an ISDN connection to providing servers and Internet
grade routers for co-locations. Sales decreased from $83,200 in the first
quarter of 1997 to $66,000 in the first quarter of 1998, or by 21%. RMI has
established wholesale purchasing relationships with national and regional
vendors in order to provide an attractively priced total Internet solution to
its commercial customers.
OTHER REVENUE. Other revenue decreased from the first quarter of 1997 as
compared to the first quarter of 1998. Training revenue decreased from $7,800
to $4,600, consulting revenue decreased from $109,300 to $4,000 and sales
revenue from the Information Exchange, L.L.C. ("IE"), a voice messaging
subsidiary of RMI, decreased from $36,900 to $26,700, respectively, from the
first quarter of 1997 as compared to the first quarter of 1998. The reduction
in consulting revenue occurred primarily due to a large consulting contract
in the first quarter of 1997, which was concluded and no similar consulting
arrangement occurred in the first quarter of 1998. The reduction in IE
revenues is due to equipment problems (which have been corrected) that
resulted in a loss of customers.
GROSS PROFIT. Gross profit consists of total revenues less the cost of
delivering services and equipment. The gross profit from Internet access and
services was 67% of revenues from that segment for the three months ended
March 31, 1997 and 65% for the same period in 1998. The reduction in gross
profit is principally the result of offering a flat rate dial-up product
which required a decrease in customers to modem ratios, resulting in higher
circuit and equipment costs. Gross profits on equipment sales were
approximately equal at 23% for both comparative periods. Sales of equipment
are provided as an accommodation to RMI's customers and gross profit margin
may vary considerably based on the mix of products sold.
GENERAL, SELLING, AND ADMINISTRATIVE EXPENSES. General, selling and
administrative expenses increased from approximately $1,708,300 in the first
quarter of 1997 to approximately $2,379,300 in the first quarter of 1998 or
39%. Exclusive of option compensation expense, discussed in the following
paragraph, general, selling and administrative expenses increased 11% from
the first quarter of 1997 to the first quarter of 1998.
Payroll costs increased 53% from $957,900 to $1,465,800 for the periods
ended March 31, 1997 and 1998, respectively. Payroll costs included a
non-cash charge to compensation for the first quarter
-47-
<PAGE>
of 1998 in the amount of $390,500 for the exercise of employee stock options.
Exclusive of this amount payroll costs and related benefits increased 12%.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders' fees, increased from
$47,700 for three months ended March 31, 1997 to $49,300 for the same period
in 1998, for an increase of 3.4%.
Facilities rent expense increased by 3% from $109,500 to $112,900 for the
first quarter of 1997 to the first quarter of 1998. RMI has headquarters in
downtown Denver, Colorado with additional office facilities in Colorado Springs,
Colorado.
RMI experienced a decrease in communications expense from $74,200 for the
quarter ended March 31, 1997 to $61,200 for the quarter ended March 31, 1998,
a decrease of or 18%. These expenses included local telephone service,
cellular phones and pager costs and long distance telephone expenses. RMI
uses multiple "800" phone numbers to provide technical support, customer
support, and sales order processing to its growing base of customers.
Legal and accounting expenses increased from $68,600 in the first quarter of
1997 to $216,800 in the first quarter of 1998 or an increase of 216%. This
increase primarily resulted from legal and accounting work required in
connection with preparation of proxy materials for the annual meeting in 1998, a
registration statement relating to certain registration rights agreements
(relating to public and private financings by RMI) and work performed in
connection with acquisitions.
Outside services, which includes temporary-to-hire staff and professional
services, decreased 11% from $98,500 to $88,100 from the first quarter of 1997
to the same period of 1998. RMI hires many of its technical support call center
staff and the web production staff on a "temp-to-hire" program wherein the new
employee remains on the temporary employment agency's payroll for approximately
ninety days. This allows the staff to be fully evaluated prior to becoming a
full time RMI employee.
During the first quarter of 1998, RMI realized a gain of $75,000 relating
to the decision by the former President and Chief Executive Officer and
another former officer to forego the remainder of severance payments in
exchange for a release from non-compete agreements. The non-compete
agreements were released effective March 6, 1998.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
RESULTS OF OPERATIONS.
REVENUES. Revenues were generated by a variety of Internet-related
activities that included dial-up access services, dedicated access services
primarily for business customers, frame relay services, and web hosting and
production. Other sources of revenue include equipment sales related to
dedicated access accounts, educational courses, and setup charges associated
with RMI's various services.
-48-
<PAGE>
In 1997, RMI's revenues grew 87% compared to the year ended December
31, 1996. The total number of customers grew from 9,800 at year end 1996 to
13,000 at year end 1997, representing an increase of 29%. Revenues exclusive
of equipment sales grew by 108%. Revenues grew at a faster rate than customer
count due to RMI's continuing focus on commercial customers with higher
monthly billing rates and due to increases in web production and hosting.
Customer count was also adversely affected by approximately 1,050 resulting
from the termination of the contract with ZEN. An additional 390 customers
from the Hayden, Colorado POP were transferred to ZEN effective January 1,
1998. The following table provides information regarding amounts of revenues
by category for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 % CHANGE
------------ ------------ -------------
<S> <C> <C> <C>
REVENUE CATEGORY:
Dial-Up Service....................................... $ 1,465,269 $ 2,359,482 61%
Dedicated Access Service.............................. 689,311 2,047,852 197%
Web Services.......................................... 413,592 1,051,114 154%
Equipment Sales....................................... 519,551 389,304 (25)%
Other................................................. 193,856 279,359 45%
------------ ------------ ---
Total............................................. $ 3,281,579 $ 6,127,111 87%
</TABLE>
DIAL-UP SERVICE. RMI's dial-up service strategy is to provide high quality
service with few busy signals. In the past, RMI was not prepared to offer flat
rate pricing for unlimited access service. However, on November 4, 1997, RMI
introduced a flat rate price offering to the Denver and Boulder, Colorado
markets. Subsequently, RMI added flat rate service in Colorado Springs and
Pueblo, Colorado. This offering has become more economically attractive than in
the past due to lower costs for circuits and a lower cost per port for dial-up
access. The new offering includes higher speed modem access using K56 Flex
technology.
The table below shows the composite weighted average billing rate for full
service Internet access by quarter for 1995, 1996, and 1997. The reduction in
the average rate for September 1997 is the result of a change in the average
rates resulting from the termination of dial-up service contracts with third
parties in Alamosa and Leadville, Colorado. RMI has historically offered billing
rates ranging from $8.95 to $29.95. The remaining contracts with other third
parties provide a higher percentage of lower rate services. Effective with the
December 1997 billings, most Denver and Boulder, Colorado area customers who
were on payment plans higher than $19.95 per month were converted to a new
$19.95 flat rate service, resulting in a lower average billing rate.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996 MAR 1997 JUN 1997 SEP 1997 DEC 1997
- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$20.52 $ 20.42 $ 20.88 $ 21.02 $ 20.97 $ 20.33 $ 20.41 $ 20.50 $ 20.10 $ 20.04 $ 19.65 $ 18.62
</TABLE>
The 61% revenue growth in dial-up service from 1996 to 1997 is
attributable to customer growth. Dial-up service has been approximately even
between commercial and residential customers throughout 1995, 1996 and 1997
based on customer count. Based on revenues, the split between commercial and
residential is 35% to 65%, respectively. Dial-up service revenues increased
from $1,465,300 to $2,359,500 or 61% for the year ended December 31, 1996 as
compared to the year ended December 31, 1997.
Through business alliances with three locally-based unrelated parties RMI
provides Internet services in secondary markets in the State of Colorado. The
services are provided under written contracts that provide for the locally-based
party to provide equipment and marketing services while RMI provides Internet
access and administrative services. Dial-up service revenues based on these
contracts generated
-49-
<PAGE>
$354,100 in revenues in 1996 and $467,700 in revenues in 1997 for an increase
of 32%. RMI expects total revenues from these third party relationships to
decrease in the future as explained further in this paragraph. The POPs
established pursuant to these contracts were commenced in the second quarter
of 1995 and grew to six locations by the end of 1995 and nine locations by
the end of 1996. Effective July 3, 1997, the contract with ZEN was
terminated. Under the termination agreement, RMI will operate the Pueblo,
Colorado POP as an RMI-only location and ZEN will operate the Alamosa,
Leadville, and Hayden, Colorado locations. These three POPs were transitioned
to ZEN beginning in July 1997 and concluding in December 1997 as ZEN was able
to implement facilities. The Pueblo, Colorado POP transitioned 100% to RMI in
July 1997. Due to the timing of the changes there was minimal impact on total
RMI revenues. A similar contract in Grand Junction, Colorado was terminated
by RMI effective April 30, 1997. The marketing efforts by the locally-based
third party in this location were minimal and sales were less than $1,000 per
month. RMI is pursuing options to operate this facility and add dedicated as
well as dial-up customers.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily provided
to commercial customers and include a wide range of connectivity options
tailored to the requirements of the customer. These services include private
port (dedicated modem), ISDN connections, 56 Kbps frame relay connections, T-1
(1.54 Mbps) frame relay connections, T-1 and fractional T-1 point-to-point
connections and T-3 (45 Mbps) or fractional T-3 connections. RMI also offers a
co-location service in which the customer's equipment is located in the RMI data
center, thereby providing access to the Internet directly through RMI's
connection.
Dedicated business has grown based principally on ISDN and high-
speed circuits (56K, T-1, and T-3) growth. ISDN sales have grown from
approximately $93,000 to $632,000, for an increase of 580% from 1996 to 1997.
Dedicated high-speed circuits and co-location customer billings have increased
from approximately $455,000 to $1,175,000 or 158% from 1996 to 1997. These
increases are the result of a full time sales staff focused on this product line
and the continuing growth in demand for Internet connectivity.
The table below shows the quarterly customer count by each of the component
services offered for dedicated access as of the dates indicated:
<TABLE>
<CAPTION>
SERVICE MAR 31 1995 JUN 30 1995 SEP 30 1995 DEC 31 1995 MAR 31 1996 JUN 30 1996 SEP 30 1996 DEC 31 1996
- ---------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Private Port.......... 29 30 36 35 42 47 46 54
56 Kbps............... 18 27 27 34 47 69 71 72
ISDN.................. 0 0 0 2 3 13 46 80
T-1 and T-3........... 7 10 10 11 16 25 29 30
Co-location........... 0 1 4 4 6 4 5 6
</TABLE>
<TABLE>
<CAPTION>
SERVICE MAR 31 1997 JUN 30 1997 SEP 30 1997 DEC 31 1997
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Private Port.............................................. 50 41 36 31
56 Kbps................................................... 78 72 65 60
ISDN...................................................... 168 193 211 233
T-1 and T-3............................................... 65 84 99 123
Co-location............................................... 11 12 11 21
</TABLE>
WEB SERVICES. Web services revenues are primarily comprised of web site
hosting and web site production. Web site hosting provides ongoing revenue from
customers for whom RMI hosts a web site on web servers in the RMI data center.
All access made to these web sites by the customer and the Internet community as
a whole are processed on the RMI servers. The advantage to customers is
high-speed access
-50-
<PAGE>
to sites by their targeted audiences. The following is a summary of the number
of web hosting customers as of the dates indicated:
<TABLE>
<CAPTION>
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996 MAR 1997 JUN 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341 418 424
SEP 1997 DEC 1997
----- -----
<C> <C>
417 428
</TABLE>
Web site hosting accounted for revenues of $239,700 in 1996 and $478,500 in
1997 for an increase of 100%. The increase resulted primarily from activity by
the direct sales force, increased server capacities and speed, and the
increasing popularity of the web as a business tool.
Web site production revenues increased from $173,800 for 1996 to $563,500
for 1997 for an increase of 224%. The increase in 1997 resulted primarily
from an increase in the size of the web site production department and the
purchase by customers of more complex applications. In addition, RMI's direct
sales force focused in 1997 on selling web production sites with higher
average billings.
EQUIPMENT SALES. RMI sells hardware to its customers as an accommodation
and to provide a "one stop shop" for Internet services. Equipment sales can
vary from a single router for an ISDN connection to providing servers and
Internet grade routers for co-locations. Sales decreased from $519,600 in 1996
to $389,300 in 1997 or a 25% reduction. The equipment sales for 1996 included
some large dollar sales to key customers and sales to third party business
alliances for POP equipment with very low margin. 1997 did not have similar
large-scale sales. Margins on equipment sales increased from 11% in 1996 to 23%
in 1997. RMI has established wholesale purchasing relationships with national
and regional vendors in order to provide an attractively priced total Internet
solution to its commercial customers.
GROSS PROFIT. Gross profit on Internet services (exclusive of equipment) as
a percentage of sales was 77% for 1996 and 69% for 1997. In December 1996, RMI
installed a T-3 network connecting Boulder, Colorado Springs and Denver,
Colorado locations utilizing Cascade switches. This is a large capacity network
providing reliable high-speed connections for a wide range of customer needs,
which in 1997 was underutilized. As the network becomes fully utilized, RMI
anticipates that it will realize significant economies of scale resulting in
increased margins.
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES. General, selling and
administrative expenses increased from approximately $3,682,660 in 1996 to
approximately $6,611,000 in 1997, or 81%. General, selling and administrative
costs consist of personnel (excluding sales and marketing personnel), physical
facilities, depreciation, amortization, professional services and other related
administrative expenses. Significant items are discussed below.
Payroll costs increased 41% from $2,138,000 for 1996 to $3,024,000 for 1997
(not including sales and marketing personnel compensation discussed below). RMI
had 55 employees at the end of 1996 and 67 employees at the end of 1997 in all
areas of RMI including administration, technical support, development, and
senior management (excluding sales and marketing). The 1997 total expense
includes $127,700 of compensation expense in connection with options granted to
Mr. Douglas H. Hanson as discussed elsewhere in this Prospectus.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders' fees, increased from
$211,500 in 1996 to $286,300 in 1997 or 35%. RMI hired a full time direct
sales staff beginning in December 1995. Compensation for sales and marketing
personnel was approximately $565,000 for 1996 and $969,000 in 1997, for an
increase of 71%, with 16 employees at the end of 1996 and 17 employees at the
end of 1997. The increase resulted primarily from having a fully staffed
sales department throughout 1997 while the department was partially staffed
in 1996.
Facilities rent expense was $172,400 in 1996 and increased 156% to $441,400
in 1997. This increase was principally the result of a move in late 1996 to new
corporate headquarters consisting of leased office space
-51-
<PAGE>
of approximately 19,500 square feet space including a data center comprised of
1,200 square feet. RMI continues to occupy offices in Colorado Springs, Colorado
for staff performing dial-in technical support, customer service, and sales
functions. RMI's former offices in Denver, Colorado at 1800 Glenarm have been
subleased effective March 1, 1997 for the remainder of the lease term. A
one-time charge of approximately $58,000 has been recorded in 1996 for
commission expense on the transaction as well as the difference between the
sublease rate and the existing lease rate.
RMI experienced an increase in communications expense from $196,800 for the
year ended 1996 to $260,500 for the year ended 1997, or 32%. These expenses
included local telephone service, cellular phones and pager costs and long
distance telephone expenses. RMI uses multiple "800" phone numbers to provide
technical support, customer support, and sales order processing to its growing
base of customers.
Legal and accounting expenses increased from $77,400 in 1996 to $218,100 in
1997, or an increase of 182%. This increase resulted from the first full year of
filing SEC quarterly and annual reports, due diligence work performed in
connection with the investments in RMI made by Mr. Hanson in 1997 (discussed
elsewhere herein), negotiations in connection with the termination of employees
and preparation of a proxy statement.
Outside services expense, which includes temporary to hire staff and
professional services, increased 191% from $150,100 to $437,700 from 1996 to
1997. RMI hires many of the technical support call center staff and the web
production staff on a "temp-to-hire" program wherein the new employee remains on
the temporary employment agency's payroll for approximately ninety days. This
allows the staff to be fully evaluated prior to becoming a full-time employee.
During 1997, RMI incurred one time expenses for a write-off of costs
incurred in Grand Junction and Burlington, Colorado for development of
third-party marketing agreements in the amount of $45,100, a write down of
inventory for sale in the amount of $23,000, an expense of $318,000 relating to
termination of employees and $107,200 of legal expenses primarily relating to
the terminations.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
RESULTS OF OPERATIONS.
REVENUES. Revenues were generated by a variety of Internet-related
activities that included dial-up services, dedicated access services
primarily for business customers, frame services, and web site hosting and
production. Other sources of revenue included equipment sales related to
dedicated access accounts, educational courses, and setup charges associated
with RMI's various services.
RMI's revenues grew 178% from the year ended December 31, 1995 as compared
to the year ended December 31, 1996. The total number of customers grew from
4,000 to 9,800 during the same periods, representing an increase of 145%.
Revenues exclusive of equipment sales grew by 167%. Revenues grew at a faster
rate than customer count due to a focus on commercial customers with higher
monthly billing rates and from increases in web production and hosting and
equipment sales. The following table provides
-52-
<PAGE>
information regarding amounts of revenues by category for the years ended
December 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 % CHANGE
------------ ------------ -----------
<S> <C> <C> <C>
REVENUE CATEGORY:
Dial-Up Service....................................... 621,475 $ 1,465,269 135%
Dedicated Access Service.............................. 262,267 689,311 163%
Web Services.......................................... 29,110 413,592 1321%
Equipment Sales....................................... 144,551 519,551 259%
Other................................................. 121,922 193,856 59%
------------ ------------ -----------
Total............................................... $ 1,179,325 $ 3,281,579 178%
</TABLE>
DIAL-UP SERVICE. RMI's dial-up service strategy is to provide high
quality service with few busy signals. In order to assure this service level,
RMI does not provide any unlimited access service price plans during the
business day, as these plans have a tendency to congest the network. RMI does
provide a range of service offerings based on a set number of hours for a set
rate with additional hours billed as overage. The table below shows the
composite weighted average billing rate for full service Internet access by
quarter for 1995 and 1996.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
- --------------------------------------------------------------------------------------
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996
- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 20.52 $ 20.42 $ 20.88 $ 21.02 $ 20.97 $ 20.33 $ 20.41 $ 20.50
</TABLE>
The 135% revenue growth in dial-up service in 1996 over 1995 is
attributable to a growth in customers while average billing rates remained
stable year over year. Dial-up service has been approximately even between
commercial and residential customers throughout 1995 and 1996, based on
customer count.
RMI has established business alliances through contracts with five
unrelated parties for the purpose of providing Internet services in secondary
markets in Colorado. These contracts provide for the local party to provide
equipment and marketing services while RMI provides Internet access and
administrative services. Dial-up service revenues based on these contracts
generated $67,500 in revenues in 1995 and $354,100 in 1996 for an increase of
425%. The POPs established pursuant to these contracts were commenced in the
second quarter of 1995 and grew to six locations by the end of 1995 and eight
locations by the end of 1996.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily provided
to commercial customers and include a wide range of connectivity options
tailored to the requirements of the customer. These services include private
port (dedicated modem), ISDN connections, 56 Kbps frame relay connections, T-1
(1.54 Mbps) frame relay connections, T-1 or fractional T-1 point-to-point
connections, and T-3 (45 Mbps) or fractional T-3 connections. RMI also offers a
co-location service in which the customer's equipment is located in the RMI data
center, thereby providing access to the Internet directly through RMI's
connection.
-53-
<PAGE>
The table below shows the quarterly customer count by each of the component
services offered for dedicated access as of the dates indicated:
<TABLE>
<CAPTION>
SERVICE MAR 31 1995 JUN 30 1995 SEP 30 1995 DEC 31 1995 MAR 31 1996 JUN 30 1996
- ------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Private Port.............................. 29 30 36 35 42 47
56 Kbps................................... 18 27 27 34 47 69
ISDN...................................... 0 0 0 2 3 13
T-1 and T-3............................... 7 10 10 11 16 25
Co-location............................... 0 1 4 4 6 4
<CAPTION>
SERVICE SEP 30 1996 DEC 31 1996
- ------------------------------------------ ----------- -----------
<S> <C> <C>
Private Port.............................. 46 54
56 Kbps................................... 71 72
ISDN...................................... 46 80
T-1 and T-3............................... 29 30
Co-location............................... 5 6
</TABLE>
WEB SERVICES. Web services revenues are primarily composed of web page
hosting and web page production. Web site hosting provides ongoing revenue
from customers for whom RMI hosts a web site on web servers in the RMI data
center. All access made to these web sites by the customer and the Internet
community as a whole are processed on the RMI servers. The advantage to
customers is high-speed access to sites by their targeted audiences. The
following is a summary of the number of web site hosting customers as of the
dates indicated:
<TABLE>
<CAPTION>
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341
</TABLE>
Web site hosting accounted for $26,200 of revenue in 1995 and $239,700 of
1996 revenue, for an increase of 815%. The increase resulted from increases in
the direct sales force, increased server capacities and speed, and the
increasing popularity of the web as a business tool.
Web site production increased from $3,800 for 1995 to $173,800 for 1996,
for an increase of 4,510%. RMI increased the size of the web site production
department and as provided customers more complex applications. The growth in
the web site hosting business as well as the efforts of RMI's direct sales
force helped to drive this part of the business. RMI did not have a direct
sales force until December 1995.
EQUIPMENT SALES. RMI sells hardware to its customers as an accommodation
and to provide a "one stop shop" for Internet services. Equipment sales can vary
from a single router for an ISDN connection to providing servers and Internet
grade routers for co-locations. Sales grew from $144,600 in 1995 to $519,600 in
1996, or 259%. The equipment sales for 1996 included some large dollar sales to
key customers and sales to third party business alliances for POP equipment with
low margins. Equipment sales are typically low margin transactions and can
fluctuate dramatically depending on large server orders. RMI has established
wholesale purchasing relationships with national and regional vendors in an
effort to provide an attractively priced total Internet solution to its
commercial customers.
GROSS PROFIT. Gross profit consists of total revenue less the direct costs
of delivering services and the cost of equipment. Gross profit on Internet
services (exclusive of equipment) as a percentage of sales is 81% for 1995 and
77% for 1996. The reduction in gross profit percentage is principally the result
of increasing capacity for Internet access, ISDN facilities, and dial-up
facilities.
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES. General, selling and
administrative expenses increased from $875,200 in 1995 to $3,682,600 in
1996, or 323%. General, selling and administrative costs consist of personnel
(excluding sales and marketing personnel), physical facilities, depreciation,
amortization, professional services and other related administrative
expenses. Significant items are discussed below.
Payroll costs increased from $459,600 for the year ended December 31,
1995 to $2,178,500 for the year ended December 31, 1996, or 374%. RMI had 29
employees at the end of 1995 and increased staff to 67 at the end of 1996 in
all areas of RMI including administration, technical support, development and
senior management (excluding sales and marketing).
-54-
<PAGE>
Sales and marketing expenses increased from $92,300 in 1995 to
$776,500 in 1996, or 193% inclusive of personnel costs. RMI hired a full time
direct sales staff beginning in December 1995. Of the total 1996 sales and
marketing expense, approximately $565,000 related to personnel expenses. RMI
had 6 employees at the end of 1995 and 16 employees at the end of 1996 in
sales and marketing. Extensive efforts were made in 1996 to identify, hire
and train sales personnel with expertise in Internet access and in web
applications. Approximately $211,500 for 1996 was spent on advertising,
developing and printing marketing and sales support materials, and trade show
attendance.
Facilities rent expense for 1995 was $82,300 and increased to $172,400 in
1996, or 193%. In late 1995, RMI opened offices on one floor in Denver at
1800 Glenarm. At mid-year, RMI acquired an additional floor at the same
location. In late 1996, RMI moved its corporate headquarters and leased
office space of approximately 19,500 square feet (including a data center
comprised of 1,200 square feet). RMI continues to occupy offices in Colorado
Springs, Colorado for staff performing dial-in technical support, customer
service and sales functions. Additionally, RMI leased two POPs which contain
routers, servers, and modems to provide Internet access for its customers.
RMI's former offices in Denver, Colorado at 1800 Glenarm were sub-leased
effective March 1, 1997 for the remainder of the lease term. A one-time
charge of approximately $58,000 was recorded in 1996 for commission expense
on the transaction as well as the difference between the sublease rate and
the existing lease rate.
RMI experienced an increase in communications expense from $58,400 for
the year ended 1995 to $196,800 for the year ended 1996, or 137%. These
expenses included local telephone service, cellular phones and pager costs
and long distance telephone expenses. RMI uses multiple "800" phone numbers
to provide technical support, customer support, and sales order processing to
its growing base of customers.
ICC
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
CHANGE IN FISCAL YEAR END. ICC elected to change its fiscal year end to
December 31 from January 31, effective February 1, 1997. References to the first
quarter of 1997 relate to the three month period ended April 30, 1997.
RESULTS OF OPERATIONS. For the quarter ended March 31, 1998, ICC
experienced a loss from continuing operations of $3,110,000, which included a
restructuring provision of $1,608,000, compared to a loss from continuing
operations of $453,000 for the quarter ended April 30, 1997. In addition, ICC
experienced a loss from discontinued operations of $206,000 and an estimated
loss on the disposal of the discontinued operations of $237,000 during the
quarter ended March 31, 1998. The discontinued operations had a loss of
$190,000 for the quarter ended April 30, 1997.
RESTRUCTURING. In March 1998, ICC announced a restructuring plan
designed to enhance its strategic focus on the data communications network
service market. Management determined that ICC had over-extended resources in
the Rocky Mountain region and had evolved into an overly complex
organization. Accordingly, the number of departments was reduced and 50
employees were separated from ICC, representing 21% of ICC's workforce
(excluding discontinued operations). The personnel reductions were largely in
the sales and administration departments. In addition, during the fourth
quarter of the fiscal year ended December 31, 1997, ICC had launched an
entirely separate wholesale engineering services business. The closure of
this entity was integral to the restructuring.
These restructuring actions resulted in ICC recognizing an expense for the
three months ended March 31, 1998 in the amount of $1,608,000. The restructuring
expense is comprised of several items,
-55-
<PAGE>
including employee severance, reduction in manufacturers' product lines, closure
of the wholesale engineering services company and consolidation of facilities.
The restructuring expenses are detailed in the following table:
<TABLE>
<CAPTION>
RESTRUCTURING EXPENSES AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Employee Severance.............................................................. $ 653,000
Product Line Reduction.......................................................... 409,000
Closure of Wholesale Engineering Company........................................ 274,000
Facilities Consolidation........................................................ 229,000
Other........................................................................... 43,000
------------
TOTAL......................................................................... $ 1,608,000
</TABLE>
DISCONTINUED OPERATIONS. Pursuant to a plan adopted in March 1998, ICC
executed two separate divestiture agreements on April 30, 1998 for its
non-strategic subsidiaries, Sound and Cable. These divestitures have been
accounted for as discontinued operations in accordance with APB 30 for the
three-month periods ended March 31, 1998 and April 30, 1997. The remaining
assets and liabilities of the divested operations at March 31, 1998 primarily
consisted of accounts receivable and accounts payable.
Summarized results of operations of Sound and Cable for the quarters ended
March 31, 1998 and April 30, 1997 are as follows:
<TABLE>
<CAPTION>
SOUND CABLE
-------------------- ----------------------
1997 1998 1997 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Loss from operations........................... $ 20,000 $ 77,000 $ 170,000 $ 129,000
</TABLE>
In addition, based upon management's revised estimates, ICC also recorded
charges of $237,000 during the quarter ended March 31, 1998 to provide for
estimated losses on the discontinuation of Sound and Cable which includes
anticipated operating results to the date of disposal, as well as, a revised
estimate of losses expected upon disposition.
ICC sold its 80% ownership of the common stock of Sound to Sound's vice
president and sole minority shareholder. The consideration for this sale was
$209,000. Likewise, on April 30, 1998 ICC transferred the business activities of
its wholly-owned subsidiary, Cable, to a newly formed corporation ("Newco")
owned and operated by the principal managers of Cable. The divestiture agreement
specifies that Newco shall satisfactorily complete the Cable contracts existing
at April 30, 1998, and by July 1, 1998 employ the majority of the remaining
Cable employees. Cable is required to pay Newco compensation for the completion
and final customer acceptance of Cable contracts.
CONTINUING OPERATIONS. For the three months ended March 31, 1998, sales
decreased by $455,000 or 5% as compared to the three months ended April 30,
1997. This decrease is due in part to the completion of a significant fiber
infrastructure construction contract in the 1997 period which was outside the
normal scope of ICC's business, representing $512,000 of sales. The increase in
services revenue for the first quarter of 1998 over the three month period ended
April 30, 1997 is a result of ICC's strategy to cross-sell services to its
customers.
Gross margin for the three months ended March 31, 1998 was 27.2% of sales
versus 30.7% for the comparable period in the prior year. The higher margin in
1997 is related to, in part, the contract discussed above. Additionally, during
the quarter ending March 31, 1998, the engineering services and operations
department increased management positions and incurred higher training expenses
compared with the prior year period.
Selling expenses increased by $190,000 or 12.5%, for the three months ended
March 31, 1998 over the three month period ended April 30, 1997. Selling
expenses as a percentage of revenues were higher in the
-56-
<PAGE>
current period (20.8%) as compared to the prior year period (17.5%). The higher
selling expenses are due to an increase in the sales force as of January 1,
1998, which was subsequently eliminated in the restructuring in March 1998.
For the three months ended March 31, 1998, general and administrative costs
increased by $454,000 or 31.2% over the prior year period. This increase is
primarily due to increased payroll, related benefits and training of $206,000,
increased allowances for bad debt and inventory obsolescence of $93,000, and
expenses related to the settlement of certain disputes of $132,000.
ELEVEN MONTHS ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1997
CHANGE IN FISCAL YEAR END. ICC elected to change its fiscal year end to
December 31 from January 31, effective February 1, 1997. References to fiscal
1996 relate to the fiscal year ended January 31, 1997. References to fiscal
1997 relate to the eleven months ended December 31, 1997.
RESULTS FROM OPERATIONS. As noted above, ICC changed its fiscal year end
to December 31, and as a result, the current year activity includes 11 months
of operating results as compared to 12 months in the previous year.
Additionally, on September 1, 1996, ICC acquired Interwest Communications
C.S. Corporation, a Colorado corporation ("Interwest Communications") and its
subsidiaries and the fiscal 1996 operating results include only 5 months of
Interwest Communications activity.
In March 1998, ICC adopted a formal plan to sell its non-core business
segments, consisting of Sound and Cable, as a part of ICC's strategic focus on
providing integrated and high-end network systems. The segments have been
presented as discontinued operations for the eleven months ended December 31,
1997 and the year ended January 31, 1997.
During fiscal 1997, ICC experienced a net loss of $4,575,000, including a
$1,225,000 loss from discontinued operations, goodwill impairment of $259,000,
and a loss from the sale of a subsidiary in the amount of $152,000. The loss
from continuing operations before the goodwill impairment and loss from the sale
of a subsidiary was $2,870,000. This compares to an overall net loss in the
prior year of $1,125,000 and a loss from continuing operations of $934,000.
Net sales increased by $6,608,000 or 25% as compared to the prior fiscal
year. The acquisition of Interwest Communications accounted for $8,503,000 of
the increase while ICC's net sales (on a stand-alone basis) decreased by
$1,895,000, or 11%. The primary cause for the decrease in ICC's (on a
stand-alone basis) sales was the reduction in equipment sales from fiscal
1996 to fiscal 1997 (a $1,863,000 decrease). A number of factors contributed
to this decrease. The prior year results included $989,000 of equipment sales
from ICC's "Indirect Sales Department," which was eliminated in early 1996.
Also, ICC (on a stand-alone basis) had been reducing its emphasis on
equipment sales which do not include any recurring services. There was an
intentional effort to sell "total network systems" as opposed to equipment
only, which must usually be sold at lower margins because of increasing price
competition. Although the conversion to this type of sale by ICC (on a
stand-alone basis) began in fiscal 1996, this approach was expanded during
fiscal 1997 and resulted in the decrease in equipment sales.
Cost of goods sold as a percentage of sales and the resulting gross margin
percentages were not significantly different from the percentages in the prior
year. The consistent gross margins from year to year is mostly attributable to
the consistency of equipment and services revenue mix from fiscal 1996 (50%
equipment sales as percentage of total sales) as compared to fiscal 1997 (51%).
Selling expenses were considerably higher in fiscal 1997 as compared to
the prior fiscal year. As a percentage of revenue, selling expenses increased
from 15% to 17%. Both Interwest Communications and ICC (on a stand-alone
basis) contributed to higher selling expenses due to the increase in sales
staff and higher fixed costs for increased salaries.
General and administrative expenses have increased in actual dollars
($2,397,000) and as a percentage of revenue (from 16% in fiscal 1996 to 20%
in fiscal 1997). ICC realized impairment of goodwill in the amount of
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$259,000 in the current year. The impairment was determined based on a
comparison of the realizable value of the goodwill to its book basis. Another
contributing factor to the increase was a goodwill and intangible amortization
expense primarily due to the acquisition of Interwest Communications which
increased from $98,000 in fiscal 1996 to $406,000 in fiscal 1997.
General and administrative expenses also include a loss on the sale of
its interest in a subsidiary, Work Telcom Services, Inc. ("WTS"), in the
amount of $152,000. ICC's basis in the shares of WTS was $309,000 and the
shares were sold for $157,000. ICC received half of the sales price in cash
and the other half in a note, secured by the shares sold, payable over five
years. WTS contributed $28,000 towards ICC's loss in fiscal 1997 and was
considered to be non-core in its future operations.
For most of fiscal 1997, ICC did not realize the benefits of combining
the two companies which was expected to occur after the acquisition of
Interwest Communications.
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1996
RESULTS FROM OPERATIONS. Revenues for ICC and Interwest Communications
increased by 45% to $26,505,000 for the fiscal year ended January 31, 1997,
from $18,528,000 for the prior fiscal year. ICC's revenues (on a stand-alone
basis) decreased by $2,393,000, while the acquisition of Interwest
Communications added revenues of $8,804,000 for the five months of September
1, 1996 to January 31, 1997. During fiscal 1996, ICC management decided to
eliminate its "Indirect Sales Department" which had generated $3,033,000 in
revenues in the prior fiscal year. Revenues from this area in fiscal 1996
were $989,000 with a loss on that activity of $42,000. This sales department
sold equipment to value-added resellers at declining gross margins. Due to
increased competition and escalating costs in this area, management decided
to devote those resources to other areas which it believed would generate
higher gross margins in the coming years. Important customer relationships
were transferred to ICC's Tele-Selling Department.
During the fiscal year ended January 31, 1997, ICC undertook a number of
programs to increase revenues from the services segments of its business and to
lessen its dependency on equipment sales. The table below shows the composition
of revenue:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JANUARY 31, JANUARY 31,
REVENUE CATEGORY 1996 1997
- ----------------------------------------------------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Equipment/Materials(1)..................................... $ 9,899 $ 13,657
Data Circuits.............................................. 5,585 6,288
Installation(1)............................................ 578 3,782
Equipment Maintenance(1)................................... 1,513 2,144
Service Requests(1)........................................ 0 695
Network Management......................................... 630 691
Consulting/Training........................................ 138 440
Internet Services.......................................... 0 174
Software and Other(1)...................................... 185 130
Less Discontinued Operations............................... -- (1,496)
------- -------
TOTAL.................................................... $ 18,528 $ 26,505
</TABLE>
- ------------------------
(1) Includes revenues from Interwest Communications.
During the fiscal year 1996, in addition to new revenue sources from
Interwest Communications, ICC introduced new products in the areas of local area
network consulting/training, Internet services, and software sales. These new
product introductions generated $532,000 in revenues for the fiscal 1996.
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During fiscal 1996, gross margins increased to 29.1% from 27.1% for the
prior fiscal year. ICC (on a stand-alone basis) recorded gross margins of
27.5%, while Interwest Communications (on a stand-alone basis) recorded gross
margins of 31.8%. The positive growth in gross margin percentage for ICC (on
a stand-alone basis) was attributable to the closing of the "Indirect Sales
Department" and the shift to services revenues which yield a higher gross
margin.
Selling and marketing expenses increased during fiscal 1996 to $3,995,000
as compared to $2,172,000 for the prior fiscal year. This increase was
attributable to selling and marketing expenses of $1,184,000 for Interwest
Communications (on a stand-alone basis) and an increase in ICC (on a
stand-alone basis) selling and marketing expense of $639,000. This increase
resulted from increased staffing of sales positions to facilitate new product
introductions, the addition of a senior sales executive, and the initiation
of marketing activities for both existing and new products.
General and administrative expenses increased during fiscal 1996 due to
the addition of Interwest Communications with general and administrative
expenses of $1,446,000 and a decrease in these expenses for ICC of
$218,000. The decrease in ICC's general and administrative expenses resulted
from cost savings programs and a net reduction of headcount in administrative
areas. On an overall basis, general and administrative expenses represented
16.0% of revenues as compared to 16.3% for the prior fiscal year.
During fiscal 1996, ICC completed the shut down of its software
development operations, incurring expenses of $63,000. In the prior fiscal
year, ICC incurred expenses of $832,000 of software development and
maintenance expenses. ICC had determined that there was no market for the
product developed over the prior three fiscal years.
Net interest expense for fiscal 1996 was $315,000 as compared to $43,000
for the prior fiscal year. The increase in interest expense was due to
increased use of lines of credit to fund day-to-day operations, loans for
equipment of Interwest Communications, and short-term loans related to the
acquisition of Interwest Communications.
For the fiscal year ended January 31, 1997, ICC had a net loss of
$1,125,000 or $.33 per common share as compared to a net loss of $977,000 or
$.41 per common share for fiscal. The net loss for the fiscal year 1996 was
substantially incurred in the fourth quarter as ICC began implementing its
plan for combining the resources of both ICC and Interwest Communications.
ICC attempted to gain synergies from the two entities by cross training sales
and other personnel, eliminating duplicate overhead and combining operations.
Initially this resulted in increased costs and distraction from sales
generation. Thus expenses were higher than planned, while revenues were
lower. The net loss per share declined even though the net loss increased due
to the increased number of shares outstanding as a result of the acquisition
of Interwest Communications by ICC.
LIQUIDITY AND CAPITAL RESOURCES OF RMI, ICC AND THE COMPANY
RMI
RMI has incurred losses since its inception in October 1993. RMI's
operations used net cash of approximately $3.3 million for the year ended
December 31, 1997. RMI has operated with a negative cash flow from operations
during 1996 and 1997. The cash used by operating activities is primarily
attributable to RMI's continued expansion of its facilities and employee base in
anticipation of continued growth in revenues.
RMI has relied on a series of private and public financings to provide the
funds necessary to finance its operations. These financings have included (a) a
convertible debenture offering in late 1995 and early
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1996 that generated $490,000 (the debentures were converted into shares of
Common Stock in October 1996), (b) a preferred stock offering in mid-1996
that generated $406,000, (c) an initial public offering in September 1996,
with proceeds of $3,777,000 and (d) a private placement of equity from June
to September 1997 which raised $1,117,920. During 1997, RMI substantially
drew down a line of credit for $500,000 for working capital purposes. This
credit line was secured by a pledge of a $300,000 treasury bill repurchase
agreement and by RMI's accounts receivable. In October 1997, RMI repaid the
line of credit and transferred the funds from the treasury bill to cash. The
line of credit has been discontinued and the secured position of the bank on
the accounts receivable has ceased. RMI's office lease is also secured by a
pledge of a money market fund of $250,000. On October 1, 1997, Mr. Hanson
invested $2,398,600 by purchasing shares of RMI Common Stock and invested an
additional $503,600 in March 1998 by exercising warrants and options that
were granted at the time of his initial investment in October 1997. The March
1998 investment by Mr. Hanson was made in order to permit RMI to maintain its
qualification for listing on Nasdaq. It is possible that prior to the
completion of the Private Placement Offering (or drawing on the Bridge Loan
Commitment if the Private Placement Offering is not completed), RMI will need
additional cash resources to meet its obligations. Mr. Hanson has agreed to
loan RMI up to $1.0 million if such need arises. However, this agreement is
not in writing and the terms have not been negotiated. Consequently, there
can be no assurance that, if such financing need arises, a loan from Mr.
Hanson will be available or that, if available, such loan will be on terms
which are acceptable to RMI or its board of directors or that such loan will
be sufficient to meet RMI's need for additional short-term cash resources.
RMI does not currently have access to bank financing and therefore additional
financing would have to result from additional issuances of equity or debt
securities such as the Private Placement Offering or from sale of assets.
Net cash used by RMI for investing activities in 1996 was $1,511,500. Net
cash used for investing activities in 1996 was primarily due to purchases of
property and equipment, the purchase of investments needed to secure financing
and payment for acquisitions. Net cash provided by investing activities in
1997 and the first quarter of 1998 was $921,000 and $132,000, respectively
(primarily due to proceeds of $1,356,600 from the release and sale of such
investments which were no longer needed to secure such financing which was
offset by purchase of equipment and the acquisition of O.N.E. customers.)
Upon the effectiveness of the Registration Statement, of which this
Prospectus forms a part, RMI has the right to call certain warrants to
purchase 1,365,000 shares of Common Stock (the "IPO Warrants") for $0.25
each, and each warrantholder has, upon such call, a thirty-day period to
exercise such warrant at an exercise price of $3.14 per underlying share.
Such IPO Warrants are exercisable for the purchase of 1,900,566 shares of
Common Stock. If all of the shares underlying these warrants are exercised,
RMI would realize proceeds of approximately $5,670,000. RMI has not announced
plans to call these warrants, but may elect to do so following the
effectiveness of the Registration Statement.
ICC has incurred losses since its fiscal year 1995 and had negative
operating cash flow in the eleven months ended December 31, 1997 before the
effect of the elimination of net cash used in operating activities of
discontinued operations.
ICC also has had a series of financings in recent periods in order to
fund its operations. In April 1997, ICC received net proceeds of $2,973,000
in a private placement transaction with a related party. In exchange, ICC
issued 631,579 shares of common stock and 63,158 warrants to purchase common
stock at $5.70 per share exercisable for a period of 5 years. The price of
the shares and warrants was based on market value of the shares at the time
of the transaction. The shares and warrants were issued to Interwest Group
and represent an additional investment in ICC by Interwest Group. The total
investments of Interwest Group then represented 52.3% of outstanding shares
and 52.9% upon the exercise of the warrants. The proceeds of the private
placement were used for general corporate activities.
During the first quarter of 1998 ICC experienced a deterioration of its
liquidity position. ICC's liquidity problem was due to a significant increase
in accounts receivable and an increase in inventory, resulting in ICC
extending the time in which it paid its vendors. A number of factors
contributed to the liquidity problems, including ICC's high cost structure, a
management information system conversion undertaken by ICC in January 1998
and inventory procurement issues. The high cost structure of ICC was
addressed in March 1998 when ICC announced a restructuring which included
divesting of non-core
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businesses and sales channels and re-sizing its operations to concentrate on
areas which generate recurring revenue and profits. The conversion of the
primary management information system in January 1998 created problems in order
entry, materials management, contracts management, labor utilization, customer
invoicing and receivable collections. The inability to invoice customers on a
timely basis added to ICC's liquidity problem. ICC is addressing these
conversion issues including those related to invoicing and collection. The
increase in inventory was due in part to a lack of effective policies and
procedures for the procurement of materials in one of the purchasing
organizations of ICC. Since the restructuring, the separate purchasing
organizations have been combined into one department and have adopted consistent
policies and procedures for materials procurement so as to avoid this problem in
the future.
The liquidity problem was partially alleviated by the receipt of $1.6
million cash in March 1998 from the issuance to a related party of a
convertible promissory note due March 1999. The note bears interest at 10%
and interest payments are due quarterly. Proceeds were used for working
capital. The proceeds from the Private Placement Offering will be used in
part to repay this borrowing.
ICC also has a borrowing agreement with a lending institution which
provides for a $5.0 million credit facility. At March 31, 1998, December 31,
1997 and January 31, 1997, ICC had outstanding borrowings under the facility
of $5.0 million, $4,390,000 and $5,322,000, respectively. Although ICC was in
default of financial performance covenants as of December 31, 1997, the
lending institution waived the violations that existed as of that date. ICC
entered into the multi-year credit facility during the fiscal year ended
January 31, 1997. Under the agreement, borrowings are collateralized by ICC
assets and are limited to an agreed-to percentage of accounts receivable and
inventory. ICC borrowed under this line of credit to fund operations and to
pay-off approximately $900,000 of debt as required by the Interwest
Communications acquisition agreement. On April 23, 1997, ICC and its lending
institution agreed to revise the borrowing agreement which included lowering
the credit availability from $6.0 million to $5.0 million and setting new
financial performance covenants that existed as of January 31, 1997. ICC used
$2,850,000 of the proceeds from an equity investment to pay down this line of
credit and to lower interest expenses. The facility expires in September 1998
but all borrowings thereunder are to be prepaid with proceeds of the Private
Placement Offering.
ICC incurred capital expenditures for equipment in support of its
technical operations of $53,000, $995,000 and $603,000 during the quarter
ended March 31, 1998, the eleven months ended December 31, 1997 and the
fiscal year ended January 31, 1997, respectively. The acquisition of
Interwest Communications during the fiscal year ended January 31, 1997
increased equipment balances by $837,000. There are currently no material
commitments for capital expenditures and ICC has tightened control over its
capital purchases. ICC's cash position decreased from $571,000 at January 31,
1997 to $0 at December 31, 1997. ICC's current ratio decreased from 2.19 as
of January 31, 1997, to .87 as of December 31, 1997. The most significant
reason for the decrease in the current ratio was the reclassification of a
bank note payable from a long-term liability at January 31, 1997 to a current
liability at December 31, 1997 which was required because the note expires in
September 1998. ICC's intention is to renew the line of credit with the bank,
however, there is no assurance that ICC will be successful. The balance of
goodwill as of December 31, 1997 was $2,198,000. Goodwill represents the
balance paid for an acquired entity in excess of the net assets of the
acquired company prior to the acquisition. The goodwill included in the
balance sheet relates principally to the acquisition of Interwest
Communications by ICC and is being amortized over a period of 5 to 20 years.
In March 1998, ICC made significant reductions to its cost structure by
reducing its employee headcount by more than 20%. In addition, ICC divested
itself of two of its subsidiaries (Sound and Cable) in April 1998. It is
expected that ICC will reduce its level of negative net cash flow used in
funding the losses of these two companies from its consolidated operating
results.
The Company's business strategy depends in large part on a growth
strategy, including expanding a strong network infrastructure, hiring high
quality sales, technical, and administrative personnel and providing premier
customer service, maintenance and support.
The Company expects to produce negative cash flow through 1999 due to
aggressive geographic expansion activities associated with the development of
the Company's Internet network and telecommunications services nationwide.
There can be no assurance the Company will attain break-even cash flow in
subsequent periods. Until sufficient cash flow is generated, the Company will
be required to utilize the proceeds of the Private Placement Offering to meet
its cash flow requirements and may be required to issue additional debt
and/or equity securities in the future.
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Pursuant to the terms of the ICC Merger Agreement, RMI has agreed to
purchase ICC. The Company expects to fund the ICC Acquisition with a portion
of the proceeds from the Private Placement Offering ($42.0 million). In the
event the Private Placement Offering is not completed, the Company will
utilize the proceeds from the Bridge Loan Commitment. See "RECENT
DEVELOPMENTS".
In addition, the Company expects to use other proceeds of the Private
Placement Offering to effect additional acquisitions in order to pursue its
growth strategy. There can be no assurance that the Company will be able to
identify, acquire, or profitably manage additional businesses or successfully
integrate acquired businesses, if any, into the Company without substantial
costs, delays, or other operational or financial problems. Further,
acquisitions may involve a number of special risks, including potentially
dilutive issuances of equity securities, the incurrence of additional debt,
diversion of management's attention, failure to retain key acquired
personnel, risks associated with unanticipated events or circumstances or
legal liabilities and amortization of expenses related to goodwill and other
intangible assets, some or all of which could have a material adverse effect
on the Company's business, financial condition, results of operations and
cash flow. In addition, there can be no assurance that acquired businesses,
if any, will achieve anticipated revenues and earnings. The inability of the
Company to implement and manage its acquisition strategy successfully may
have an adverse effect on the future prospects of the Company.
The Company intends to make capital expenditures during the next 12
months for expansion of its network, including for future POPs and, the
upgrade of the NOC, as well as computers and financial and management
information systems. The Company expects to finance such capital expenditures
primarily through the proceeds of the Private Placement Offering and
secondarily through capital lease financings.
The Company expects its available cash, including the proceeds from the
Private Placement Offering, will be sufficient to fund its capital plan,
acquisition plan and operations through 1999. If the Company's expansion
occurs more rapidly than currently anticipated or if the Company's available
cash resources are not sufficient to fund all of the Company's operating
expenses and capital expenditures, the Company will require additional
capital before that time. In addition, depending on market conditions, the
Company may determine to raise additional capital before such time. The
Company may obtain additional funding through the call of the IPO Warrants,
sale of public or private debt and/or equity securities, bank financings,
lease financings, strategic relationships or other arrangements. There can be
no assurance as to the availability or the terms upon which such financing
might be available. See "RISK FACTORS -- FUTURE CAPITAL NEEDS; UNCERTAINTY OF
ADDITIONAL FINANCING."
YEAR 2000 ISSUES
Currently, many computer systems, hardware, and software products are coded
to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. RMI and ICC and third
parties with which RMI and ICC does business rely on numerous computer programs
in their day to day operations. RMI and ICC's board of directors has appointed a
committee which has begun the process of identifying computer systems that could
be affected by the Year 2000 issue, but RMI and ICC has not yet estimated the
costs of addressing the Year 2000 issue as it relates to the Company's internal
hardware and software, as well as third party computer systems with which the
Company interacts. ICC has a Year 2000 readiness plan and has begun the
process of identifying computer systems with which ICC interacts which as
well as, third party vendors and business partners could be affected by the
Year 2000 issue.
In the event that the Company acquires other assets or businesses, the
software and hardware acquired by the Company in connection with those
business combinations may also be Year 2000 non-compliant. There can be no
assurance that the Year 2000 issues will be resolved in 1998 or 1999. The
Company may incur significant costs in resolving its Year 2000 issues. If not
resolved, this issue would have a material adverse impact on the Company's
business, operating results, financial condition, and cash flow.
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BUSINESS
OVERVIEW
The Company is a full service communications solutions provider of switched
and IP-based communications products and services for small- and medium-sized
business enterprises, as well as dial-up residential customers. The Company
operates a 22,000 mile network with POPs in 35 cities nationwide. Through its
network and agreements with third-party providers, the Company provides
Internet access in 90 of the 100 largest metropolitan statistical areas in the
United States. The Company monitors and controls its network through its NOC
located in Denver, Colorado. The Company utilizes its network to provide to
its customers comprehensive communications services, including dedicated
Internet access, dial-up Internet access, IP Telephony, point-to-point private
line, frame relay and local and long distance telephone service. In addition,
the Company offers its customers value-added web services, including web
hosting, web site production and marketing, e-commerce and web training. The
Company believes it is essential to offer to its customers one
point-of-contact for maintaining mission-critical communications networks and
accomplishes this by also providing network integration services, including
the design, installation, management and maintenance of business
communications systems and enterprise data networks. The Company had combined
pro forma revenues for the year ended December 31, 1997 of $40,255,000 and
provided communications services to over 2,000 business customers and 14,000
dial-up customers as of June 30, 1998.
INDUSTRY BACKGROUND
OVERVIEW. The telecommunications industry is rapidly transforming itself
from a segmented multi-technology marketplace to an industry that is
characterized by the convergence of technologies and companies capable of
providing a full array of communication services. Three of the main factors
driving this significant transformation of the industry include; (i) the
convergence of voice and data transmission, (ii) the need for broadband
transmission technologies and infrastructure, and (iii) the convergence of
technologies and companies providing what were formerly independent products
and services into one industry. As data and voice transmission converges,
operators continually need higher bandwidth capacity networks. Today the
communications services market can be divided into two basic categories: (i)
traditional, circuit switched and dedicated voice oriented services; and (ii)
packet switched services compatible with Internet standards. Traditional,
circuit switched and dedicated voice oriented services in the United States
can be further divided into long distance services and local exchange services.
TRADITIONAL TELECOMMUNICATIONS SERVICE MARKET. The present structure
of the U.S. telecommunications market resulted largely from the divestiture
of the "Bell System" in 1984 (the "Divestiture"). As a result of the
Divestiture, seven RBOCs were created to offer services in geographically
defined areas called local access transport areas ("LATA's"). The RBOC's
were separated from the long distance provider, AT&T, resulting in the
creation of two distinct industries--local phone service and long distance
(also known as interexchange) phone services. The Divestiture, in and of
itself, did not result in competition in the local exchange market, but it
did provide for direct open competition for long distance. Since the
Divestiture, several factors have served to promote competition in the local
exchange market, including: (i) customer desire for an alternative to the
RBOCs (also referred to as the I-LECs); (ii) technological advances in the
transmission of data and video requiring greater capacity and reliability
than I-LEC networks were able to accommodate; (iii) a monopoly position and
regulated pricing structure, which provided little incentive for the I-LEC to
reduce prices, improve service or upgrade their networks; and (iv) the
significant fees, called "access charges," long distance carriers were
required to pay to the I-LEC to access the I-LEC's networks.
The first competitors in the local exchange market, designated as
"competitive access providers" or "CAPs" by the FCC, were established in
the mid-1980s. Most of the early CAPs were entrepreneurial enterprises that
operated limited networks in the central business districts of major cities
in the United
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States where the highest concentration of voice and data traffic is found.
Since most states prohibited competition for local switched services, early
CAP services primarily consisted of providing dedicated, unswitched
connections to long distance carriers and large businesses. These connections
allowed high-volume users to avoid the relatively high prices charged by I-LECs
for dedicated, unswitched connections or for switched access.
As CAPs proliferated during the latter part of the 1980s, certain
regulators issued rulings that favored competition and promised to open local
markets to new entrants. These rulings allowed CAPs to offer a number of new
services, including, in certain states, a broad range of local exchange
services, including switched services. Companies providing a combination of
CAP and switched local services are sometimes referred to as C-LECs. This
pro-competitive trend continued with the passage of the Telecommunications
Act of 1996, which provided a legal framework for introducing competition to
local telecommunications services throughout the United States. As a result
the RBOCs, which previously had an oligopoly in the $92 billion (1997
estimate) local service market, are now facing increased competition from
C-LECs. Conversely, local carriers are being allowed to compete in the $104
billion long distance market (1997 estimate) only after they have "opened"
their local markets to competition.
Over the last three years, several significant transactions have been
announced representing consolidation of the U.S. telecom industry driven by
both competitive pressures and the convergence of voice and data networks.
Among the I-LECs, Bell Atlantic Corporation and NYNEX Corporation merged in
August of 1997 and Pacific Telesis Group and SBC Communications Inc.
merged in April 1997. Major long distance providers have sought to enhance
their positions in local markets, through transactions such as AT&T's
acquisition of Teleport Communications Group and WorldCom's mergers with MFS
and Brooks Fiber Properties and to otherwise improve their competitive
positions, through transactions such as WorldCom's planned merger with MCI.
In addition AT&T, in order to capitalize on the trends of convergence and
consolidation and gain access to the local markets, has announced plans to
merge with the cable company, Tele-Communications, Inc.
THE INTERNET SERVICES MARKET. The Internet is a global collection of
interconnected computer networks that allows commercial organizations,
educational institutions, government agencies and individuals to communicate
electronically, access and share information and conduct business. The
Internet originated with the ARPAnet, a restricted network that was created
in 1969 by the United States Department of Defense Advanced Research Projects
Agency ("DARPA") to provide efficient and reliable long distance and data
communications among the disparate computer systems used by government-funded
researchers and academic organizations. The networks that comprise the
Internet are connected in a variety of ways, including by public switched
telephone network and by high-speed, dedicated leased lines. Communications
on the Internet are enabled by IP, an inter-networking standard that enables
communication across the Internet regardless of the hardware and software
used.
Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an ISP became more prevalent. ISPs offer access,
e-mail, customized content and other specialized services and products aimed
at allowing both commercial and residential customers to obtain information
from, transmit information to and utilize resources available on the Internet.
ISPs generally operate networks composed of dedicated lines leased from
Internet backbone providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
ISP's POP by facilities obtained by the customer or the ISP from either I-LECs
or C-LECs through a dedicated access line or the placement of a
circuit-switched local telephone to call the ISP. The rapidly growing need
for Internet access and technology has resulted in a highly fragmented
industry with the proliferation of over 4,000 ISPs operating within the
United States. These ISPs are
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primarily made up of a few large national providers focused on high bandwidth
access and a large number of small providers with limited resources focused on
serving local markets. Often the solutions offered by these companies fail to
address certain elements required to ensure that customers' mission-critical
Internet operations are reliable, scalable and high-performing and that these
companies fail to provide a broad array of efficient, low-cost communications
products and services. The Company believes that customer service has emerged
as an increasingly important element of providing Internet services and that
often the large, national ISPs do not offer individual customers the level of
support desired and that many of the small, regional ISPs do not have the
resources necessary to offer adequate customer support.
According to industry estimates, the number of Internet users in the
United States who access the World Wide Web reached approximately 29.2
million in 1997 and is forecasted to grow to approximately 72.1 million by
the year 2000. In addition, total ISP revenues in the United States are
projected to grow from $4.6 billion in 1997 to over $18 billion in 2000. In
the past much of the growth in ISP revenues has been driven by the dial-up or
retail sector of the Internet. However, businesses today represent the
largest and fastest growing segment of the Internet market. IDC predicts that
U.S. corporate Internet access revenues will grow from approximately $1.9
billion in 1996 to over $6.6 billion in 2000. In addition, IDC predicts that
enhanced Internet services, such as web hosting, security e-commerce, virtual
private networks and advanced Internet applications are expected to grow from
approximately $352 million in 1997 to over $7 billion in 2000. Internet
access and enhanced Internet services represent two of the fastest growing
segments of the telecommunications services marketplace.
IP COMMUNICATIONS TECHNOLOGY. The most significant trend in the
Internet and indeed in the broader telecommunications industry, is the
convergence of voice and data communications to a singular mode of
transmission. From the turn of the century, when Alexander Graham Bell made
his historic first telephone call, traditional copper phone wires carried
only voice information. Typically, circuit-switch based communications
systems establish a dedicated channel for each communication (such as a
telephone call for voice and fax), maintain the channel for the duration of
the call and disconnect the channel at the conclusion of the call. With the
inception of faxes and computer data in the late seventies and early
eighties, the resources of such circuit-switch based networks became
taxed. Various technologies have come to exist to address the need for
greater bandwidth. Today there is a convergence of both voice, data and video
transmission to one high-speed data packaging network. The most widely used
solution has been the advent and rapid adoption of TCP/IP data transmission
standard. Originally constructed as a network of computer networks, the
Internet revolves around the TCP/IP, which moves data in a series of packets.
These packets are disassembled at the point of transmission and routed over
the Internet backbone in the most efficient manner and reassembled at the
point of receipt. The disadvantage of these packets is that they are
cumbersome and occupy large amounts of space on telephone wires and as a
result data is slow to arrive at its destination. Various solutions have been
created to address this problem, yet to date the most common and effective is
to access a high bandwidth network for transmission.
Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communication sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for
superior network utilization and efficiency, resulting in more information
being transmitted through a given communication channel. There are, however,
certain disadvantages to packet-switch based systems as currently
implemented. Rapidly increasing demands for data, in part driven by Internet
traffic volumes, are straining capacity and contributing to latency (delays)
and interruptions in communications transmissions. In addition, there are
concerns about the adequacy of the security and reliability of packet-switch
based systems as currently implemented.
Many initiatives are under way to develop technology to address these
disadvantages of packet-switched based systems. The Company believes that the
IP standard, which is an "open networking standard" broadly adopted in the
Internet and elsewhere, should remain a primary focus of these development
efforts. The Company expects the benefits of these efforts to be improved
communications
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throughout, reduced latency and declining networking hardware costs. As IP
technology improves, the Company believes that such packet-switch based
networks will become the standard for providing telecommunication services.
Already, IP Telephony, or transmission of voice calls from a telephone to a
telephone, using the Internet Backbone to haul the data, are being offered to
consumers.
POSITIONING OF THE COMPANY
With the acquisition of ICC, the Company is positioned to become a leading
national communications solutions provider. The Company offers a broad array
of communications products and services tailored to meet customer needs and
provides high quality customer support. The Company delivers its products and
services through three interconnected divisions: Communications Services, Web
Services and Integration Services. The Company believes that, based upon its
experience, a growing number of businesses will demand one point-of-contact
for communications solutions for the following reasons: (i) to ensure
proper system/network integration; (ii) to obtain a single point of
responsibility for products and services that might have numerous providers;
and (iii) to continue to take advantage of evolving communications
technologies. The Company intends to increase the breadth of its products and
services delivered to its customers by adopting new technology, acquiring
complementary businesses and capitalizing on strategic relationships.
BUSINESS STRATEGY
The Company's objective is to become a leading national provider of a broad
array of communications services distinguished by a state-of-the-art network
and high quality customer service and support. Key elements to the Company's
business strategy include the following.
PROVIDE A BROAD ARRAY OF COMMUNICATIONS SOLUTIONS TO ITS CUSTOMERS.
The Company has built a portfolio of products, services and skill sets to
develop and deliver comprehensive internetworking communications solutions to
both business and residential customers. These products and services are
organized under three interconnected divisions including Communication
Services, Web Services and Integration Services. The Company plans to
continue to add products and services to its portfolio and believes that a
growing number of businesses and consumers will demand that one company
provide all of their communications needs. The Company believes that this one
point-of-contact service delivery model ensures: (i) high-performance,
cost-effective network planning, design and implementation; (ii)
maintenance of a single point of responsibility; and (iii) an ongoing
customer relationship as a technology partner for communications applications.
PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. The Company
believes that highly differentiated customer service and technical support is
a key competitive asset in the communications industry, and the ISP sector in
particular. Because the Internet is an evolving and complex medium, customers
require significant technical support. Consequently, the Company has
developed a comprehensive strategy to attain maximum customer satisfaction.
This strategy consists of the following elements: (i) maintaining a
sufficient number of qualified service and technical support personnel
through proactive recruitment, retention and training programs; (ii)
utilizing the Company's extranet to provide real-time, interactive customer
service; (iii) developing an on-line billing system enabling
customer-controlled account customization and analysis; and (iv) further
deploying and maintaining the Company's service delivery standards and
guarantees. The Company continually monitors its customer service strategy
through customer satisfaction surveys, which are monitored by a third-party
consulting firm. As a result, the Company experiences low turnover rates and
achieves subscriber growth from customer referrals.
CAPITALIZE ON BRAND RECOGNITION AND COMPANY REPUTATION. The Company
believes that as a result of the ICC Acquisition, the Company will possess
two strong and distinctive brand names in the Mountain States region. ICC has
a long standing reputation in the business community as a voice and data
communications provider, and RMI has established itself as a leading-edge
Internet access provider for
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residence and small- to medium-sized businesses. To capitalize on these
assets, the Company will adopt a dual nationwide branding strategy. Products
and services targeted to the business segment will be marketed under the name
"Internet Communications Company," and products and services targeted to the
consumer segment will be branded as "Rocky Mountain Internet." This
dual branding strategy will enable the Company to implement marketing efforts
that have distinctive customer focus, themes and messages that speak to the
different audiences while maintaining the ability to cross sell and build
national brands.
MAXIMIZE NETWORK UTILIZATION. The Company operates a 22,000 mile
network with POPs in 35 cities nationwide. Through its network and agreements
with third-party providers, the Company provides Internet access in 90 of the
100 largest metropolitan statistical areas in the United States. The Company
plans to continue to selectively add POPs where it can add value to its
customers. The Company believes that the ISP industry has historically been
divided between ISPs focused on business customers and ISPs focused on
residential dial-up customers. The Company's business strategy is to maximize
network utilization 24 hours a day by targeting both daytime business and
evening-intensive consumer users.
SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. The Company plans
to expand its sales efforts nationally by focusing on targeted areas where
there is a large concentration of businesses and favorable demographics. The
Company will initially target markets where it has existing facilities. In
these locations the Company will actively pursue both business and
residential customers. In markets where the Company is using third-party
provider networks, the Company will initially target dial-up customers
through advertising, promotions, public relations, telemarketing and customer
referrals. Once the Company attains critical mass in these locations, it will
establish its own POPs and begin targeting business and residential customers
with its broad array of communications products and services.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. The Company
believes that the Internet industry is undergoing structural changes with an
increasing use of the Internet for mission-critical applications, which is
creating demand for high quality network operations, customer service and
technical support. The Company also believes that there is a market
opportunity to consolidate ISPs, Internet-based service companies and
Internet technologies. Evidence of this strategy includes the Company's
recent acquisitions of Infohiway and Application Methods. Infohiway is a
company that developed a search engine that gives the Company on-line
advertising opportunities for its customers. Application Methods' e-commerce
solution, e-SELL, enables the Company to provide business customers with
browser-based software to conduct business over the Internet. The Company
believes these acquisitions enhance the Company's position as a full service
provider of communications solutions. The Company will continue to evaluate
opportunities to acquire companies that it believes will enhance its product
or service offerings. In addition, the Company intends to supplement its
organic national growth efforts by acquiring local ISPs in strategic
locations to maximize economies of scale.
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DIVISIONS AND SERVICES
<TABLE>
<CAPTION>
DIVISIONS SERVICES DESCRIPTION
- ---------------------- -------- -----------
<S> <C> <C>
COMMUNICATION SERVICES Internet Access
CO-LOCATION T-1 or greater Internet access
provided to customer's server
located at the Company's POP
DEDICATED ACCESS Fractional T-1, T-1 or greater
Internet access provided to a
customer's office
DIAL-UP SERVICE Nationwide Internet access for
consumer and small business
customers using modems to dial
into the Company's network
WIRELESS ACCESS Evolving technology allowing up
to 750 kbps wireless Internet
access currently available in
the Denver metro area
Telephony Services
E-PHONE Long distance calling using IP Telephony
LONG DISTANCE Traditional long distance
services
LOCAL (C-LEC) Traditional local exchange
telephone service on a resale
or facilities-owned basis
throughout Colorado
CARRIER SERVICES Transporting traffic for
"wholesale" customers (other
traditional carriers and ISPs)
WEB SERVICES Web Hosting A customer's web site is
"hosted" on the Company's
servers and connected to the
Internet via a high-speed
connection
Web Site Production Design, development and
implementation of customer web
sites
Web Site Marketing
TRAFFIC BUILDER
PLUS Unique web site marketing
program whereby customer web
sites are marketed exclusively
to Internet users
INFOHIWAY Search engine that contains a
large and rapidly growing
database of reference
information on the World Wide
Web
</TABLE>
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<TABLE>
<CAPTION>
DIVISIONS SERVICES DESCRIPTION
- ---------------------- -------- -----------
<S> <C> <C>
Electronic Commerce
E-SELL Turnkey solution for setting
up an Internet store
Web Training Various levels of Internet
training for customers from
basic access training to HTML
programming
INTEGRATION SERVICES Enterprise Networks Plan, design, implement and
maintain business communication
systems and networks
Network Management
Services
INTERALERT 24 hour network monitoring and
problem resolution
INTERCEDE Maximizes network up-time
INTERCHANGE Optimizes network performance
Network Maintenance
INTERCARE Standard maintenance service plan
INTERCARE GOLD Premium maintenance service plan
Network Consulting Network system engineering,
performance analysis, design
and engineering
Network Security Analysis of security needs,
implementation of firewalls and
secure Internet connections
</TABLE>
COMMUNICATION SERVICES
INTERNET SERVICES
CO-LOCATION. As more people use the Internet to shop for products and
services, the demands on shared server resources are increasing. The Company
offers businesses the alternative of co-locating their servers in the
Company's data center, thereby taking cost-effective advantage of the
Company's centralized Internet resources. For example, a web developer who
co-locates a server at the Company can save up to 40% to 60% of the monthly
cost of maintaining that server in-house.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily
provided to commercial customers and include a wide range of connectivity
options tailored to the requirements of the customer. These services include
private port (dedicated modem), ISDN connections, 56 Kbps frame relay
connections, T-1 (1.54 Mbps) frame relay connections, point-to-point
connections and T-3 (45 Mbps) or fractional T-3 connections. This type of
connectivity is generally used to connect local area networks, wide area
networks or server applications to the Internet, ensuring a dedicated
connection. This connection requires a dedicated telco facility, ranging from
an analog phone line, ISDN, frame relay, leased line T-1 or leased line T-3
and a router and a device to convert digital signal to serial interface,
usually referred to as a CSU/DSU. Dedicated services range in price from $199
per month to over $15,000 per month depending on the connection type.
Installation fees generally range from $300 to $5,000.
DIAL-UP SERVICE. Nationwide dial-up service for unlimited usage which
is available for $19.95 per month plus a one-time $15 set-up fee. This
offering includes high-speed modem access using K56 Flex technology and a
high quality connection due to the redundancy that has been built into the
network.
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Through its arrangement with PSINet, the Company is able to provide
dial-up access to customers in over 230 locations nationwide.
WIRELESS SERVICE. The Company has recently signed an agreement with
American Telecasting, Inc., to offer high-speed megabit Internet access
technology to 80% of the homes and businesses in the Denver metro area. The
service includes download speeds of about 750 kbps, a microwave receiver, an
external modem, a cable modem and an Ethernet card. Costs include an
installation fee and an approximate $50 per month service charge. The Company
intends to enter into similar agreements with other providers as the Company
expands its geographic presence.
TELEPHONY SERVICES
IP TELEPHONY. IP Telephony is new technology that enables long distance
calling using Internet technology. Rather than using traditional switched
voice technology the caller dials into a server that converts the voice
signal into IP packets and routes the call to a long distance carrier. This
technology enables the caller to bypass the LEC, thereby removing the local
exchange fees at this time. The Company is now able to deliver "toll
quality" long distance calls anywhere in the contiguous United States using
IP Telephony originating in Colorado. IP Telephony service is priced at $.07
per minute anywhere in the contiguous United States, 24 hours per day.
TRADITIONAL LONG DISTANCE SERVICE. The Company's agreement with
Frontier Communications allows the Company to offer a full line of
traditional long distance services. The Company will be offering the
following services:
- 1+ long distance dialing
- Dedicated long distance
- 1-800 service
- Calling card
- Conference calling
LOCAL (C-LEC). The Company resells local exchange telephone services in
Colorado.
CARRIER SERVICES. A subsidiary of the Company is a FCC-approved
interstate carrier and a PUC-approved intrastate carrier. The Company
operates extensive dedicated and frame relay networks to carry voice and data
traffic across the country and across town. In addition, the Company has
established itself as a provider's provider for Internet transport services.
The Company facilitates and enables businesses that want to provide Internet
transportation services, such as Hypertext Transfer Protocol (HTTP) for web,
Simple Mail Transfer Protocol (SMTP) for mail, Network News Transfer Protocol
(NNTP) for news, File Transfer Protocol (FTP) for file transfer and Internet
Group Multicast Protocol (IGMP) for multimedia.
WEB SERVICES
WEB SITE HOSTING. Web site hosting provides ongoing revenue from
customers for whom the Company hosts a web site on web servers located in the
Company's data center. All access made to these web sites by the customer and
the Internet community as a whole is processed on the Company's servers. The
advantage to customers is high-speed access to sites by their targeted
audiences. Prices for web site hosting generally consist of $100 per month for
virtual hosting service and $75 per month for static hosting services. There
is also a one-time set-up fee of approximately $100.
WEB SITE PRODUCTION. Web site production encompasses the design,
development and implementation of customer web sites. These sites may be
public domain sites or private sites (extranets or intranets). The
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functionality of these sites will continue to evolve and require a great deal
of graphic design talent as well as high end programming skills.
WEB SITE MARKETING
TRAFFIC BUILDER PLUS. This is a web site marketing program whereby
customer web sites are marketed exclusively to Internet users. This service
includes sophisticated search engine submission and management techniques,
cross-linking related web sites, posting to relevant newsgroups and
customizing banner ad campaigns. The pricing for this service varies
dramatically based on a customer's budget and desired results.
INFOHIWAY. This is a search engine that contains a large and rapidly
growing database of reference information on the World Wide Web. The search
engine also contains certain features, including; PREVIEW buttons,
which permit users to see a site's content without waiting for a full
download of all the site's graphics; FUZZY LINKS, which provide visitors
with a handy way to search for related but perhaps not specifically targeted
information; and SITE MAPPING, which provides a simple and visual way to see
a site's structure. The site also contains banner advertisements, which the
Company may sell to its customers as part of a web marketing package.
ELECTRONIC COMMERCE
e-SELL. The Company provides small- to medium-sized businesses with
turnkey software package solutions for e-commerce that they can use
themselves. Rather than simply offering a web site, it acts as a true
Internet store, enabling a dynamic, interactive shopping experience for the
customer, secure credit card transactions and "behind the scenes"
functionality, like inventory management and custom reporting. Through
e-SELL, the Company will be able to offer a low-cost, fast implementation of
a true, database-driven Internet store. Competing packages require the
involvement of technical experts, consultants or developers to set up and
configure a store. Because of these extra "soft costs", implementation
costs usually reach several times the basic cost of the package and
implementation time can be weeks or months. By contrast, an e-SELL store can
be up and running in hours. e-SELL is scalable and extensible as a business
grows, because it is based on an open architecture--Microsoft Windows NT and
BackOffice. While competing packages often utilize proprietary programming
languages or tools (and many started out as Macintosh or Unix products)
e-SELL is an extension to the industry-standard BackOffice platform, enabling
easy customization. In addition, any industry-standard database can be
connected, furthering the ease of integration with merchants' existing
information systems.
WEB TRAINING. The Company's headquarters include a training center
with multiple workstations. Customers can schedule their employees for
various levels of Internet training, ranging from basic access training to
HTML programming. Customized, one-on-one training is also available, either
at the Company's headquarters, or at the customer's site.
INTEGRATION SERVICES
The Company plans, designs, implements and maintains enterprise-wide
business communications systems and networks. The Company maintains
distribution arrangements with manufacturers, including 3Com, Cisco, NEC
America, Northern Telecom, ADC/Kentrox and Adtran. The enterprise networks
that the Company designs for its customers makes use of its network backbone,
supplemented where appropriate and cost effective, with facilities provided by
its carrier partners.
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NETWORK MANAGEMENT SERVICES. To provide value-added services, the
Company employs a highly trained technical staff and operates an advanced
NOC. The NOC is capable of monitoring and remotely diagnosing most data
communication devices as well as the circuits connecting customer locations.
Network management is a particularly valuable service the Company provides to
its enterprise network customers. With this service, the Company proactively
monitors all systems and network facilities comprising a customer's
enterprise network and problems or interruptions are quickly captured,
diagnosed and resolved. In addition, performance data is collected and
analyzed to identify performance trends. Such analysis permits the Company to
take preventative measures before the network experiences serious problems or
down time. The Company's network and field engineers have a broad knowledge
of data and voice communications equipment and networks, built on a
foundation of experience and training. Their knowledge extends to multiple
vendors and they are experts at designing and installing integrated networks
and resolving problems arising in those networks.
INTERALERT. Fault Management Service provides round-the-clock,
state-of-the-art network monitoring and problem resolution. The Company NOC
is capable of monitoring and remotely diagnosing contracted communications
device, including routers, hubs, switches and CPE devices as well as leased
lines and Frame Relay circuits. Specific elements of InterAlert
service include:
Network Monitoring: Problem Resolution:
- - Fault Detection - Dispatch/Vendor Notification
- - Fault Diagnosis - Repair coordination
- - Fault Reporting - Escalation
- - Trouble Ticketing - Fault Correction and Customer Notification
- - World Wide Web Trouble
Ticket Access
INTERCEDE. The object of InterCede service is to maximize network
up-time. Problem resolution of network failures is a critical function, but
equally important is the effort to prevent failures from occurring. By
combining the collection and reporting of information about network
performance trends with expert analysis of that information by NOC technical
experts, potential problems are identified before they generate failures.
Every averted failure represents an improvement in network up-time. Specific
elements of InterCede service include:
Network Performance Reporting: Network Performance Analysis:
- - Performance Data Collection/Translation - Designated NOC Network Analyst
- - Creation of Standard Performance Reports - Establishment of Baselines
- - On-Line (WWW) Report Access - Printed Reports
- Analysis of Exception Situations
- Above-Threshold Modeling
- Monthly Network Health Summary
- Preventive Maintenance
Recommendations
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INTERCHANGE. The object of InterChange service is to optimize
network performance. That optimization is carried out within parameters and
constraints set by the customer. To achieve network optimization, the
specific elements of InterChange service are:
Network Price/Performance Analysis: Network Reconfiguration:
- - Designated System Design Engineer - Preventive Maintenance Implementation
- - Needs Analysis - Implementation of Optimization
- - Service and Price Performance Analysis Recommendations
- - Modeling
- - Optimization Recommendations
NETWORK MAINTENANCE. In addition to Network Management Services, the
Company also provides several different maintenance service plans for its
customers' networks.
INTERCARE. The Company's on-site equipment maintenance service.
Specific elements of this standard service plan include:
- 24-hour telephone support
- Contracted response times
- On-site trouble-shooting
- Parts replacement
- Verification testing and customer notification
INTERCARE GOLD. The Company's premium maintenance service.
Specific elements of this premium service plan include:
- 24-hour telephone support
- On-site trouble shooting
- Parts replacement
- Verification testing & customer notification
- World wide web trouble ticket access
- Accelerated response times. (2-hour on-site response for locations
within 50 miles of a Company service center)
- Software protection. (All manufacturer software revisions and
enhancements will be delivered to you within 2 weeks of release.)
NETWORK CONSULTING. The Company has a network consulting division
offering analysis and recommendations on a wide range of networking
requirements, issues, problems or concerns. The Company's network consultants
perform network system engineering, network performance analysis and Internet
design and engineering. They recommend and implement new network and system
designs, migrations, upgrades, optimization and multi-platform/application
integration.
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NETWORK SECURITY. With the popularization of the Internet, network
security has become a key issue in the minds of network administrators. The
Company's consultants have a wealth of experience analyzing security needs
and in implementing firewalls and secure Internet connections.
The Company's security consulting services include:
- Design, configuration and implementation of Firewalls, ranging from
simple appliances and proxy servers to full security systems
- Ongoing firewall maintenance, upgrading and administration
- VPNs, to enable secure connections across the Internet
The Company, through a partnership with Secure Computing, offers a
comprehensive suite of network security consulting services.
These services include:
- External Intrusion Testing and Analysis
- Internal Intrusion Testing and Analysis
- Site Security Assessment
- Security Policy Development
- Firewall Evaluation and Configuration
NETWORK OPERATIONS
The Company operates a 22,000 mile network with POPs in 35 cities
nationwide. Through its own network and agreements with third-party providers,
the Company provides Internet access in 90 of the 100 largest metropolitan
statistical areas in the United States. The Company's network consists of 12
owned POPs and 23 leased POPs. The POPs employ state-of-the-art Cascade
switching technology and over 220 interconnecting T-1s and T-3s, creating a
high-speed and redundant backbone network of over 22,000 miles. The Company
maintains redundant backbone feeds into the Internet with DS-3 connections to
third-party providers.
NETWORK OPERATIONS CENTER (NOC)
Designed to monitor and manage the integrity and quality of customer
networks, the Company's NOC is staffed on a 7 days 24-hour basis with
technical personnel capable of monitoring network traffic, service quality,
security and equipment performance to ensure reliable performance. Located in
Denver, Colorado the NOC uses a Solaris operating system and state-of-the-art
monitoring software. The NOC is capable of monitoring and remotely diagnosing
most data communication devices as well as the circuits connecting customer
locations. Problems or interruptions are quickly captured, diagnosed and
resolved.
The Company's Points of Presence
PHYSICAL POINTS OF PRESENCE (POPS):
Los Angeles, CA Pueblo, CO
Denver, CO Burlington, CO
Boulder, CO Montrose, CO
Colorado Springs, CO Durango, CO
Greenwood Village, CO Minneapolis, MN
Loveland, CO Omaha, NE
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LEASED POINTS OF PRESENCE (POPS):
Albuquerque, NM Eau Claire, WS Portland, OR
Atlanta, GA Great Falls, MT Salt Lake City, UT
Billings, MT Houston, TX San Francisco, CA
Boise, ID Kansas City, MO Seattle, WA
Casper, WY Las Vegas, NV Washington, DC
Charlotte, NC New York, NY
Cheyenne, WY Oklahoma City, OK
Chicago, IL Orlando, FL
Dallas, TX Phoenix, AZ
TECHNICAL AND CUSTOMER SUPPORT
The Company's customer service philosophy will be to thoroughly
understand the customer's needs so that it may deliver a very high level of
value-added services and after-sales support. The Company believes that highly
differentiated customer support is a key competitive asset in the
communications industry, and the ISP sector in particular. Because the
Internet is an evolving and complex medium, customers require significant
technical support. Consequently, the Company has developed a comprehensive
strategy to attain maximum customer satisfaction. As a result, the Company
experiences low turnover rates and achieves subscriber growth from customer
referrals. This strategy consists of the following elements: (i) maintaining a
sufficient number of qualified service and technical support personnel through
practice, recruitment, retention and training programs; (ii) utilizing the
Company's extranet for customer service; (iii) developing a browser-based,
on-line billing system enabling account customization and (iv) promoting the
Company's service delivery standards and guarantees. The Company continually
monitors its customer satisfaction indices, which are monitored by a
third-party consulting firm. Over 75 employees, consisting of engineers,
technicians, project managers, account managers and customer service
representatives are directly responsible for supporting the Company's
customers.
COMMERCIAL. An account manager is assigned to each commercial customer,
serving as the single point-of-contact for any pre and post-sale related
issues. Managers are responsible for directing account teams consisting of
sales executives, technicians, engineers and project managers to insure the
customer's expectations are met, in addition to providing feedback to the team
for improving delivery and performance of the Company's products and services.
In addition, the Company employs a state-of-the-art extranet allowing
customers and customer care specialists to monitor the progress of each job
as it is measured against pre-established goals for time-to-completion and
rework. In addition, customers will be able to monitor their account at all
times, receive real-time updates on the performance of the network and their
bandwidth, receive updates on new product and service offerings and to voice
ideas and concerns about the Company. Information received from the use of
the extranet will be used by internal quality improvement teams to identify
improvement opportunities and to develop implementation plans to facilitate
those improvements.
CONSUMER TECHNICAL SUPPORT. The Company maintains a 24 hour, 7 day
call center located in Colorado Springs, Colorado. The call center is staffed
by over 20 technicians experienced in Windows and Macintosh operating systems
as well as customer maintenance techniques.
MANAGEMENT INFORMATION SYSTEMS. The Company is focusing on management
information systems to achieve a competitive advantage in the marketplace
through the implementation of enabling technologies to deliver and support IP
based services.
Currently, the Company's administrative office functions are standardized
on Microsoft Office products operating on Microsoft NT Server Networks.
Finance and accounting utilize Great Plains accounting software products for
general ledger, payables processing and receivables collection and
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management. Billing and customer management software products are a
combination of custom written software and third party products. The billing
systems are currently under review to determine the optimal billing platform
to handle new product offerings and support expansion.
One goal of implementing automated systems is to move customer support
functions to a web interface which would allow customers to change service
types, review invoicing details, troubleshoot through on-line information and
communicate with the Company's technical support staff. These systems are
expected to provide enhanced customer support and reduce the cost of the
technical support function on a per customer basis. Enhanced billing systems
are expected to permit the Company to offer promotions and marketing programs
to attract new customers. The new billing systems are expected to provide
greater flexibility in offering discounts for selecting a wide range of the
product offerings.
Another targeted area is the development of the Knowledge Management
Systems for supporting the technical staff as well as providing direct access
to customers. These systems are used to build a database on the problems and
solutions experienced in the operation of the network and for specific
customer problems. Knowledge Management Systems will enable the Company to
share solutions across the entire base of technical staff and customers,
thereby reducing duplicative efforts. The Company is in the process of
implementing a project management system called Field Pro. This system tracks
project implementation, job costs and trouble ticketing.
SALES AND MARKETING
COMMERCIAL. The Company's ability to deliver an Internet solution, coupled
with an excellent technical knowledge base and an attention to providing
superior service will be the Company's key selling point. The Company will be
capable of designing, implementing and maintaining a complete enterprise
network solution encompassing integrated voice, data, video and Internet
services addressing all facets of internal and external communications for a
business. A number of providers represent themselves as "one-stop shops" or
"turnkey providers" of these services, but rarely do they have the ability
to deliver, manage and support all services "in-house." Therefore, the
Company believes its competitive advantage will be its ability to effectively
package, price, brand and then implement its wide range of communication
services. This competitive advantage is expected to cultivate financial
growth as the Company focuses its sales and marketing efforts on expanding
nationally, focusing on the small- to medium-sized business market and
efficiently delivering a comprehensive set of products and services.
The Company's sales and marketing efforts focuses on the direct sales
approach of its thirty-three field sales representatives as of June 30,
1998. Although each representative will have a specific product or service
focus, they will be assigned to an account team headed up by an account
manager. The Company believes that this account team approach will allow the
Company to effectively cross-sell, package and blend all of the Company's
products and services to best meet the needs of the customers. Marketing
elements that will be used to support the sales team include, strategic
direct mail campaigns, public relations efforts and targeted industry
advertising. Each marketing activity will be designed to generate Company and
brand recognition, provide product/service information and stimulate referral
business from a consumer as well as a commercial standpoint.
CONSUMER. The Company believes that its commercial competitive
advantage of packaging, pricing, branding and promoting its wide range of
communication services will also serve as a competitive advantage in the
consumer marketplace as the Company extends its sales and marketing reach
across the nation. The Company's sales efforts will focus on its
"outbound/inbound" telemarketing unit, currently consisting of ten sales
representatives. In addition, the Company plans to build an extensive vendor
network capable of distributing all of its communication services to the
public through co-branding programs, affinity marketing agreements and
cause-related marketing initiatives. The Company also plans to employ
extensive radio and print advertising campaigns, event marketing
opportunities, in-market retail
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promotions and a nation-wide public relations effort. As of June 30, 1998, the
Company had 10 sales representatives targeting dial-up customers.
CUSTOMERS
DEDICATED COMMUNICATIONS SERVICE CUSTOMERS. The Company's primary
commercial target market is small to medium-sized business with 25-5000
work-stations, multiple office locations, a dependence on communications
technology and headquartered in tier one or tier two cities ranked in the top
thirty high-tech BPI index. The secondary target markets will be small and
medium sized-sized businesses with 25-5000 work-stations, multiple office
locations, dependent on communications technology and headquartered in tier
two and three cities that are close to the Company's headquarters, or in the
top thirty high-tech BPI index. The Company has sold products and services to
over 5,000 business customers, of which over 2,000 currently receive
dedicated communications services.
DIAL-UP INTERNET ACCESS CUSTOMERS. The Company's dial-up customer base
consists mainly of residential consumers and small businesses throughout
Colorado. Through the use of demographic market research data, the Company is
targeting its marketing and sales efforts towards new and current Internet
households and small businesses nationwide. Because the Company has
experienced a significant amount of dial-up sales through word-of-mouth
advertising, the Company operates an in-bound calling center and an
out-bound telemarketing sales unit. As of January 30, 1998 the Company
served over 14,000 dial-up customers which include consumers and small
businesses.
COMPETITION
The markets in which the Company operates and intends to operate are
extremely competitive and can be significantly influenced by marketing and
pricing decisions of the larger industry principals. The Company believes
that competition will intensify in the future and its ability to successfully
compete depends on a number of factors including market presence, the
capacity, reliability and security of its network infrastructure, its
packaging and pricing of products and services compared to its competitors,
the timing of new product and service roll-outs, the Company's ability to
react to changes in the market and industry and economic trends.
INTERNET ACCESS. The Company expects competition in these markets to
intensify in the future. There are no substantial barriers to entry in the
Internet access markets in which the Company competes. The Company's current
and prospective competitors in the Internet access market include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects to
compete directly or indirectly with the following categories of companies:
(i) other national and regional commercial ISPs, such as Verio Inc. or one
or more of its affiliates and PSINet; (ii) established on-line services
companies that currently offer Internet access, such as AOL, CompuServe and
Prodigy Services Company; (iii) computer hardware and software and other
technology companies, such as Microsoft; (iv) national long-distance
telecommunications carriers, such as AT&T (with AT&T WorldNet), MCI (MCI
Internet), Sprint (SprintNet) and Qwest Communications International,
Inc.; (v) RBOCs; (vi) cable television system operators, such as
Comcast Corporation, TCI and Time Warner Inc.; (vii) nonprofit or
educational ISPs; and (viii) newly-licensed providers of spectrum-based
wireless data services. Modems offered by cable television companies can
transmit information at speeds of up to 10 megabits per second, as opposed to
the Company's K56 Flex (enhanced speed modem) service, which can transmit
information at speed of up to only 56 kilobits per second. In addition, TCI
recently announced it had reached separate agreements with Sun
Microsystems, Inc. and Microsoft to produce the software necessary to
permit persons to access the Internet through television set-top boxes
beginning in 1999.
TELECOMMUNICATION SERVICES. The Company's intention to provide
traditional long distance service will place it directly in competition with
IXCs, which engage in the provision of long-distance access and
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other long-distance resellers and providers, including large carriers such as
AT&T, MCI, Sprint and WorldCom and new entrants to the long distance market
such as the RBOCs who have entered or have announced plans to enter the U.S.
intrastate and interstate long-distance market pursuant to recent legislation
authorizing such entry. See "REGULATION." On April 22, 1998, the Public
Utilities Commission of Colorado granted the request of RMB, a wholly-owned
subsidiary of RMI, to become a C-LEC. Likewise, the Company's intention to
provide IP Telephony services and C-LEC services will place it directly in
competition with other providers (either resellers or facilities-based
carriers) that provide the same services. Most of the Company's competitors
are significantly larger and have substantially greater market presence as
well as financial, technical, operational, marketing and other resources and
experience than the Company.
REGULATION
GENERAL REGULATORY ENVIRONMENT
The telecommunications businesses in which the Company operates or intends
to operate, namely, providing traditional long distance service, providing long
distance service by means of IP Telephony and activities as a C-LEC, are
subject to extensive federal and state regulation. In particular, these services
are subject to the provisions of the Communications Act of 1934, as amended,
including amendments effected by the 1996 Telecommunications Act and the FCC
regulations thereunder, as well as the applicable laws and regulations of the
various states, including regulation by PUCs and other state agencies. Federal
laws and FCC regulations apply to the facilities of and services offered by,
telecommunications common carriers including regulating the prices charged, to
the extent that those facilities are used to provide, originate, or
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terminate interstate communications. State regulatory authorities retain
jurisdiction over telecommunications both originating and terminating within
the state. The regulation of the telecommunications industry is changing
rapidly and the regulatory environment varies substantially from state to
state. Moreover, as deregulation at the federal level occurs, some states are
reassessing the level and scope of regulation that may be applicable to the
Company. All of the Company's operations are also subject to a variety of
environmental, safety, health and other governmental regulations. There can
be no assurance that future regulatory, judicial, or legislative activities
will not have a material adverse effect on the Company, or that regulators,
competitors, or third parties will not raise material issues with regard to
the Company's compliance or noncompliance with applicable regulations.
The 1996 Telecommunications Act effected plenary changes in regulation at
both the federal and state levels that affect virtually every segment of the
communications industry. The stated purpose of the 1996 Telecommunications Act
is to promote competition in all areas of communications and to reduce
unnecessary regulation to the greatest extent possible. While it will take years
for the industry to feel the full impact of the 1996 Telecommunications Act, it
is already clear the legislation provides the Company with both opportunities
and challenges. The 1996 Telecommunications Act, among other things, allows the
RBOCs to enter the long distance business and enables other entities, including
entities affiliated with power utilities and ventures between LECs and cable
television companies, to provide an expanded range of telecommunications
services. Entry of such companies into the long distance business would result
in substantial competition to the Company's intended telecommunications services
(i.e., traditional long distance, IP Telephony and LEC services) and may have a
material adverse effect on the Company's business, financial condition and
results of operations and cash flow.
Under the 1996 Telecommunications Act, the RBOCs may immediately provide
long distance service outside those states in which they provide local exchange
service ("out-of-region" service) and long distance service within the regions
in which they provide local exchange service ("in-region" service) upon meeting
certain conditions. The 1996 Telecommunications Act does, however, impose
certain restrictions on, among others, the RBOCs in connection with their
provision of long distance services. Out-of-region services by RBOCs are subject
to receipt of any necessary state and/or federal regulatory approvals that are
otherwise applicable to the provision of intrastate and/or interstate long
distance service. In-region services by RBOCs are subject to specific FCC
approval and satisfaction of other conditions, including a checklist of
pro-competitive requirements. The RBOCs may provide in-region long distance
services only through separate subsidiaries with separate books and records,
financing, management and employees and all affiliate transactions must be
conducted on an arm's length and nondiscriminatory basis. The RBOCs are also
prohibited from jointly marketing local and long distance services, equipment
and certain information services unless competitors are permitted to offer
similar packages of local and long distance services in their market. Further,
the RBOCs must obtain in-region long distance authority before jointly marketing
local and long distance services in a particular state. Additionally, AT&T and
other major carriers serving more than 5% of presubscribed long distance access
lines in the United States are also restricted from packaging other long
distance services and local services provided over RBOC facilities.
FEDERAL REGULATION
The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic common carrier service providers, only GTE,
the RBOCs and other I-LECs are classified as dominant carriers and all other
providers of domestic common carrier services, including the Company, are
classified as non-dominant carriers. The 1996 Telecommunications Act provides
the FCC with the authority to forebear from imposing any regulations it deems
unnecessary, including requiring non-dominant carriers to file tariffs. On
November 1, 1996, in its first major exercise of regulatory forbearance
authority granted by the 1996 Telecommunications Act, the FCC issued an order
detariffing domestic interexchange services. The order required mandatory
detariffing and gave carriers nine months to withdraw federal tariffs and move
to contractual relationships with their customers. This order subsequently was
stayed by a federal appeals court.
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Although the FCC does not directly regulate local exchange
service, which is within the jurisdiction of state regulatory authorities,
its actions may impact directly on such service. The 1996 Telecommunications
Act greatly expands the FCC's interconnection requirements on the I-LEC. The
1996 Telecommunications Act requires the I-LEC to: (i) provide physical
co-location, which would allow RMB and other interconnectors to install and
maintain their own network termination equipment in I-LEC central offices,
i.e., offices of US West and virtual co-location only if requested or if
physical co-location is demonstrated to be technically unfeasible, (ii)
unbundle components of their local service networks so other providers of
local service can compete for a wider range of local services customers,
(iii) establish "wholesale" rates for their services to promote resale by
C-LECs and other competitors, (iv) establish number portability, which will
allow a customer to retain its existing phone number if it switches from the
I-LEC to a competitive local service provider, (v) establish dialing parity,
which ensures customers will not detect a quality difference in dialing
telephone numbers or accessing operators or emergency services and (vi)
provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way. In addition, the 1996 Telecommunications Act requires I-LECs to
compensate competitive carriers for traffic originated by the I-LEC and
terminated on the competitive carrier's networks. The FCC is charged with
establishing national guidelines to implement the 1996 Telecommunications
Act. The FCC issued its Interconnection Order on August 8, 1996, which
established detailed rules regarding rates, terms and conditions for
interconnection between C-LECs and I-LECs. The Interconnection Order was
appealed to the U.S. Court of Appeals for the Eighth Circuit. On July 18,
1997, the Court issued a final decision vacating the interconnection pricing
rules and "most favored nation" rules as well as certain other
interconnection rules. The FCC's and other parties' petitions to the Supreme
Court requesting review of these decisions have been granted. It is not
possible at this time to determine how the Supreme Court will respond to
these appeals.
On April 18, 1997, the FCC ordered that the RBOCs and independent
LECs offering domestic interstate inter-LATA services, in-region or
out-of-region, be regulated as non-dominant carriers. However, such services
offered in-region must be offered in compliance with the structural
separation requirements mentioned above. AT&T was classified as a dominant
carrier, but AT&T successfully petitioned the FCC for non-dominant status in
the domestic interstate interexchange market in October 1995 and in the
international market in May 1996. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated. A number of parties have,
however, sought the FCC's reconsideration of AT&T's status. The Company is
unable to predict the outcome of these proceedings on its operations.
On May 8, 1997, the FCC released an order intended to reform its
system of interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act.
Access service is the use of local exchange facilities for the origination
and termination of interexchange communications. The FCC's historic access
charge rules were formulated largely in anticipation of the 1984 divestiture
of AT&T and the emergence of long distance competition and were designated to
replace piecemeal arrangements for compensating LECs for use of their
networks for access, to ensure that all long distance companies would be able
to originate and terminate long distance traffic at just, reasonable and
non-discriminatory rates and to ensure that access charge revenues would be
sufficient to provide certain levels of subsidy to local exchange service.
While there has been pressure on the FCC historically to revisit its access
pricing rules, the 1996 Telecommunications Act has made access reform timely.
The FCC's recent access reform order adopts various changes to its rules and
policies governing interstate access service pricing designed to move access
charges, over time, to more economically efficient levels and rate
structures. Among other things, the FCC modified rate structures for certain
non-traffic sensitive access rate elements, moving some costs from a
per-minute-of-use basis to flat-rate recovery, including one new flat rate
element; changed its structure for interstate transport services; and
affirmed that ISPs may not be assessed interstate access charges. In response
to claims that existing access charge levels are excessive, the FCC stated
that it would rely on market forces first to drive prices for interstate
access to levels that would be achieved through competition but that a
"prescriptive" approach, specifying the nature and timing of changes to
existing access rate levels, might be adopted in the absence of competition.
The FCC intends to address these and other related matters in subsequent
proceedings.
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Though the Company believes that access reform through lowering and/or
eliminating excessive access service charges will have a positive effect on
its service offerings and operations, it cannot predict how or when such
benefits may present themselves, or the outcome of any possible judicial
appeal or petition for FCC reconsideration.
The FCC also released a companion order on universal service
reform on May 8, 1997. The universal availability of basic telecommunications
service at affordable prices has been a fundamental element of U.S.
telecommunications policy since enactment of the Communications Act of 1934.
The current system of universal service is based on the indirect
subsidization of LEC pricing, funded as part of a system of direct charges on
some LEC customers, including IXCs and above-cost charges for certain LEC
services such as local business rates and access charges. In accordance with
the 1996 Telecommunications Act, the FCC adopted plans to implement the
recommendations of a Federal-State Joint Board to preserve universal service,
including a definition of services to be supported and defining carriers
eligible for contributing to and receiving from universal service subsidies.
The FCC ruled, among other things, that: contributions to universal service
funding be based on all IXCs' gross revenues from both interstate and
international telecommunications services; only common carriers providing a
full complement of defined local services be eligible for support; and up to
$2.25 billion in new annual subsidies for discounted telecommunications
services used by schools, libraries and rural health care providers be funded
by an assessment on total interstate and intrastate revenues of all IXCs. The
FCC stated that it intends to study the mechanism for continued support of
universal service in high cost areas in a subsequent proceeding. The Company
is unable to predict the outcome of these proceedings or of any judicial
appeal or petition for FCC reconsideration on its operations.
On April 10, 1998, the FCC submitted a report to Congress in which
it stated that telephone-to-telephone IP Telephony bears the characteristics
of "telecommunications services" and that the providers of those services may
be "telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April
10, 1998 report states that, to the extent the FCC concludes that certain
forms of telephone-to-telephone IP Telephony service are "telecommunications
services," and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the
same burdens on the local exchange as do other IXCs, the FCC "may find it
reasonable that they" become subject to the same regulations, including the
requirement to pay access fees to LECs and to contribute to universal service
subsidies.
STATE REGULATION
Companies conducting intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in
many jurisdictions, certification and tariff filing requirements. Generally,
these providers must obtain and maintain certificates of authority from
regulatory bodies in most states in which it offers intrastate services. In
April 1998, RMB obtained a certificate of authority from the Colorado PUC to
provide local exchange services as a C-LEC. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations.
Those states that permit the offering of intrastate/intra-LATA
service by IXCs generally require that end users desiring to use such
services dial special access codes. This may put the Company at a competitive
disadvantage compared with LECs whose customers can make
intrastate/intra-LATA calls simply by dialing 1 plus the desired number. If a
long distance carrier's customer attempts to make an intra-LATA call by
simply dialing 1 plus the desired number, the call will be routed to and
completed by the LEC. Regulatory agencies in a number of states have issued
decisions that would permit IXCs to provide intra-LATA calling on a 1 +
basis. Further, the 1996 Telecommunications Act requires in most cases that
the RBOCs provide
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such dialing parity coincident to their providing in-region inter-LATA
services. The Company expects to benefit from the ability to offer 1 +
intra-LATA services in states that allow this type of dialing parity.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings which the Company
believes would, if adversely determined, have a material adverse effect upon
its business, financial condition or results of operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Issuer as of the date
hereof are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
- ---------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Douglas H. Hanson(2)................................ 53 President, Chief Executive Officer and Chairman of the
Board of Directors
D. D. Hock.......................................... 63 Director
Robert W. Grabowski................................. 57 Director
Lewis H. Silverberg................................. 63 Director
Mary Beth Vitale.................................... 44 Director
Jeremy J. Black..................................... 46 Vice President--Infohiway/Web Services
Ronald M. Stevenson................................. Vice President--Application Methods
Peter J. Kushar(3).................................. 43 Chief Financial Officer, Secretary and Treasurer
Kevin R. Loud....................................... 45 Vice President--Network Planning and Operations
Michael R. Mara..................................... 37 Vice President--Internet Services
Michael D. Schaefer................................. 31 Vice President--Marketing
D. Kirk Roberts..................................... 48 Vice President--Management Information Systems and
Administration
</TABLE>
- ------------------------
(1) Upon consummation of the ICC Acquisition, it is expected that the following
ICC personnel will serve in the capacities of the Company so indicated: John
M. Couzens, age 37, President, Chief Operating Officer and director; Mary
Beth Loesch, age 37, Vice President--Business Development; T. Timothy
Kershisnik, age 40, Vice President--Finance and Treasurer; Timothy Griffin,
age 49, Vice President--Integration Services; and William A. Jacobson, age
46, Vice President--Product Management.
(2) Upon consummation of the ICC Acquisition, John M. Couzens, ICC's Chief
Executive Officer and President, is expected to become President, Chief
Operating Officer and a director of the Company and Mr. Hanson will remain
the Company's Chairman of the board of directors.
(3) Upon consummation of the ICC Acquisition, Mr. Kushar is expected to become
Vice President--Strategic Planning of the Company.
DOUGLAS H. HANSON has been the President, Chief Executive Officer and
Chairman of the board of directors of the Issuer since October 1, 1997.
See "CERTAIN TRANSACTIONS--CHANGE IN CONTROL." Prior to assuming his
positions with the Issuer, Mr. Hanson was the President and Chief
Executive Officer and a director of Qwest Communications, Inc., a
Colorado-based telecommunications company as well as the founder of Qwest's
predecessor, SP Telecom. Mr. Hanson formed SP Telecom in 1987 as a subsidiary
of SP Railroad to install fiber optic cable along the railroad's
right-of-way. Before founding SP Telecom, Mr. Hanson was vice president of
FiberTrak, a telecommunications joint venture among Santa Fe, Norfolk and SP
railroads. He also held various positions at Southern Pacific Transportation
Co. Mr. Hanson currently sits on the board of directors of the Competitive
Telecommunications Association and on The Metropolitan State College
Foundation Board and is engaged in other civic activities.
JOHN M. COUZENS was, prior to consummation of the ICC Acquisition, President
and Chief Executive Officer of ICC and a member of ICC's board of directors. Mr.
Couzens joined ICC upon its acquisition of Interwest Communications where he was
President and Chief Executive Officer and a member of the
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board of directors of Interwest Communication's parent company, Interwest Group.
Prior to joining Interwest Group in 1994, Mr. Couzens was employed by The
Northern Trust Company, a leading international provider of financial services
from 1986 until 1994. Mr. Couzens was a Certified Public Accountant with Price
Waterhouse from 1983 until 1986. Mr. Couzens received his Masters of Business
Administration from the University of Chicago.
D. D. HOCK has been a director of the Registrant since October 1, 1997.
See "CERTAIN TRANSACTIONS-- CHANGE IN CONTROL." Prior to becoming a director
of the Issuer, Mr. Hock was the President, Chief Executive Officer and
Chairman of the board of directors (from February 1989 to July 1994; Chairman
and Chief Executive Officer from July 1994 to January 1996; Chairman from
January 1996 to February 1997, when he retired) of Public Service Company of
Colorado.
ROBERT W. GRABOWSKI has been a director of the Issuer since January 10,
1998. He has been the Vice President, Finance and Administration, Sunny Side,
Inc./Temp Side, a private employment service, since 1988. He has been a
certified public accountant since 1968 and holds a Bachelor of Science degree
from De Paul University.
LEWIS H. SILVERBERG has been a director of the Issuer since January
10, 1998. Mr. Silverberg has been a business consultant since January 1994,
advising privately held businesses on their formation, sale and financing. In
September 1990, Mr. Silverberg joined Liquor Barn, Inc., which operated a
chain of retail stores and was in a bankruptcy reorganization proceeding at
that time. Mr. Silverberg was the Executive Vice President and a director of
Liquor Barn, Inc. until December 1993. The business was liquidated after Mr.
Silverberg's departure in 1993. Mr. Silverberg is an attorney and has been a
member of the California bar since 1959.
MARY BETH VITALE has been a director of the Issuer since January 10,
1998. From 1994 to October 1997, she was an executive of AT&T Corporation
(Vice President of In-State Services from 1994 to 1996; Vice President and
Corporate Officer, Local Service Organization, Western Region, from 1994 to
1996; and President--Western States from January to October 1997) in Denver,
Colorado. Prior to joining AT&T, Ms. Vitale was Vice President of Marketing
for US WEST Communications, Inc. (1994), Region Executive Director for US
West Cellular (1991 to 1993) and Region General Manager for US WEST Cellular
(1989 to 1991). She holds a Bachelor of Arts degree from Hillsdale College, a
Master of Science degree from the University of Colorado and an Advanced
Management degree from the Wharton School of Business.
JEREMY J. BLACK is Vice President--Infohiway. Mr. Black was the Chief
Executive Officer of Infohiway from 1996 until joining the Company upon its
acquisition of Infohiway. Prior to joining Infohiway, Mr. Black was the
Executive Vice President of Wilson Associates International. From 1986 to
1992, Mr. Black was the President of Advanced Investment Software, where he
developed the design for RAMCAP software (Risk program). Mr. Black is an
adjunct professor for the College of Financial Planning and a national
professor in investment risk management and asset allocation.
RONALD M. STEVENSON is Vice President--Application Methods. Mr. Stevenson
founded Application Methods and was its President and founder from 1986 until
1997. In 1997, Mr. Stevenson became President of e-Sell Consumer Systems and
held that position until joining the Company upon its acquisition by RMI.
During 1988-1989, Mr. Stevenson was product manager for Software Products
International and prior to that he acted as a consultant to IBM.
PETER J. KUSHAR has served as Chief Financial Officer, Secretary and
Treasurer since joining the Issuer in April 1998. From June 1997 to April
1998 he operated his own consulting practice advising customers in specialized
economic and telecommunication requirements such as C-LEC network economics
and operation. Prior to consulting, Mr. Kushar spent 14 years with US WEST
Communications (Executive Director--Carrier Division from 1993 to 1997;
Executive Director--Network Operations from 1991 to 1993; Chief Financial
Officer--Federal Services from 1988 to 1991; Manager, Director and Chief
Financial Officer for US WEST Information Systems from
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1983 to 1988. Prior to US WEST, Mr. Kushar was a system planner, market analyst
and account executive for Southern New England Telephone from 1979 to 1983. Mr.
Kushar received his Bachelor of Science Degree in 1977 and Masters of Business
Administration Degree in 1979 from the University of Montana.
MARY BETH LOESCH is Vice President--Business Development of the Company. Ms.
Loesch joined ICC in January 1998 as President, Technologies Group. From
September 1996 until January 1998, Ms. Loesch was the Director managing the
Denver telecommunications consulting practice for KPMG Peat Marwick. From
January 1995 until April 1996, she was Senior Vice President of Marketing and
Print Services for CSG Systems, Inc., a Denver-based customer management
solutions provider for converging communications including cable, DBS, telecom
and on-line services. From July 1982 through January 1995, Ms. Loesch held a
variety of offices at US WEST including senior level strategic and operating
positions. The last position she held was Executive Director of Marketing
Strategy for the US WEST Communications division. Ms. Loesch holds a Bachelor
of Science in Business Administration degree and a Masters in Business
Administration from Creighton University.
T. TIMOTHY KERSHISNIK is Vice President--Finance and Treasurer of the
Company. Mr. Kershisnik joined ICC in April 1998 as its Vice President, Chief
Financial Officer, Treasurer and Corporate Secretary. From 1992 through March
1998, Mr. Kershisnik was Vice President, Controller, Treasurer and Corporate
Secretary of Grease Monkey International, Inc., a public company that
franchises quick lube service stations in the United States and Mexico. From
1980 to 1992, Mr. Kershisnik was employed by KPMG Peat Marwick providing
audit services to public and private companies and partnerships in the oil
and gas, airlines and manufacturing industries. The last position Mr.
Kershisnik held was as Senior Manager. Mr, Kershisnik is a Certified Public
Account.
KEVIN R. LOUD is Vice President--Network Planning and Operations of the
Registrant. Before joining the Issuer in July 1995, he served as Vice
President of Marketing for SP Telecom, a national long distance company from
1994 to 1995. In 1992, he formed Loud & Associates, where he consulted with
regional and national communication organizations on market development and
operations efficiencies until 1994. While operating Loud & Associates, Mr.
Loud undertook a year-long project for Automated Communications, Inc., during
which he was treated as a statutory employee. From 1984 until 1992, he was
employed by Houston Network, Inc. and held positions ranging from Director of
Finance, Vice President of Operations and Carrier Sales, Vice President Sales
and President. The primary business of that organization was switched long
distance communication Services. Mr. Loud holds a Masters of Business
Administration degree from William and Mary and a Bachelors of Arts in
Economics from UCLA.
MICHAEL R. MARA is Vice President--Internet Services of the Registrant.
Prior to joining the Issuer in November 1995, Mr. Mara was employed by
ITC, a privately held international audio and video conferencing service
provider, from June 1992 until October 1995.
TIMOTHY GRIFFIN is the Company's Vice President--Integration Services.
Mr. Griffin joined ICC in October 1996 as its Vice President Sales & Marketing.
From June 1995 until September 1996, Mr. Griffin was Vice Chancellor of
Corporate and Public Affairs for the Oregon State System of Higher Education
(OSSHE). From May 1993 until April 1995, Mr. Griffin was Vice President and
General Manager of US West's Federal Services Division. During his 12 years with
US West, he also served as Vice President of Marketing for the Business &
Government Services Division.
MICHAEL D. SCHAEFER is Vice President--Marketing of the Registrant. Prior
to joining the Issuer in April 1998, Mr. Schaefer had been working as an
event producer/promoter in the Denver area for the prior 10 years. Major
events to his credit include: The Denver Museum of Natural History's Imperial
Tombs of China, The Denver International Airshow, World Youth Day and the
Denver Grand Prix. Mr. Schaefer holds a Bachelor of Science in Business
Administration from the University of Denver and a Masters of
Business Administration degree from Regis University.
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D. KIRK ROBERTS has served as Vice President--Management Information
Systems and Administration of the Issuer since April 1995. From June 1997
to April 1998 he served as Vice-President--Finance and Management Information
Systems. He also served as Chief Financial Officer of the Issuer from
January 1995 until June of 1997. He was an accountant employed by Potter,
Littlewood, & Petty, PC, an accounting firm in Houston, Texas from 1991 to
1994. From 1989 to 1990, he worked for a national computer retailer as
National Product Manager--Accounting Solutions. He has a Bachelor of Business
Administration degree from the University of Houston and is a certified
public accountant.
WILLIAM A. JACOBSON is Vice President - Product Management of ICC. Mr.
Jacobson joined the Company in April 1997. From 1996 until April 1997, he was
president of Tele/Concepts, a marketing consulting firm. From 1985 until
1996, Mr. Jacobson held several positions with US West including
Director--Proposal & Program Management; Director--Product Marketing;
Director Business Operations and Vice President for US West Information
Systems, Inc. From 1982 until 1985, he was Vice President Marketing for
Executone, Inc., a telecommunications supplier, where he was in charge
business planning, product programs and sales support. Mr. Jacobson holds a
Masters Certificate in Project Management from George Washington University;
a Masters of Business Adminsitration from Baruch School of Business, New York
and a Business Administration degree from Hamilton College, Clinton, NY. In
addition, Mr. Jacobson is a Certified Project Management Professional (PMP).
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. In November 1997, the Issuer's board of directors
formed an Audit Committee composed of three directors, a majority of whom
were outside directors. The members of the initial Audit Committee were
Douglas H. Hanson, D. D. Hock and Reynaldo U. Ortiz until the resignation of
Mr. Ortiz as a director effective December 1, 1997. Mr. Robert W. Grabowski,
an outside director, now serves on the Audit Committee with Messrs. Hanson
and Hock. Mr. Hanson is also the President, Chief Executive Officer and the
Chairman of the board of directors of the Issuer. Members of the Audit
Committee are appointed annually by the full board of directors. The
functions of the Audit Committee are to review the Issuer's internal
controls, accounting policies and financial reporting practices; to review
the financial statements, the arrangements for and scope of the independent
audit, as well as the results of the audit engagement; and to review the
services and fees of the independent auditors, their independence and
recommend to the board of directors for its approval and for ratification by
the stockholders the engagement of the independent auditors to serve the
following year in examining the accounts of the Issuer.
COMPENSATION COMMITTEE. On March 12, 1998, the Issuer's board of
directors formed the Compensation Committee of the board of directors. This
committee is responsible for reviewing the salaries, benefits and other
compensation of the officers of the Issuer and will make recommendations
to the board of directors based on its review. The members of the
Compensation Committee are D. D. Hock, Mary Beth Vitale and Douglas H.
Hanson. Mr. Hanson is also the President, Chief Executive Officer and the
Chairman of the board of directors of the Issuer. Mr. Hanson, as a
director, will not vote on any matters affecting his personal compensation.
Mr. Hanson will be responsible for reviewing and establishing salaries,
benefits and other compensation for all other employees.
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<PAGE>
From January 1 through December 31, 1997 the board of directors held no
regular meetings and 13 special meetings. During such fiscal year, each
director attended at least 75% of the aggregate of the meetings of the board
of directors. In addition, the board of directors acted by unanimous written
consents pursuant to Delaware law and the Registrant's By-laws. The Audit
Committee was formed in November 1997 and has not met. The Compensation
Committee was formed in March 1998 and met on March 12, 1998 and June 2, 1998.
16b COMMITTEE. In March 1998, the Issuer's board of directors formed
the 16b Committee comprised of two outside directors. The members of the 16b
Committee are D. D. Hock and Mary Beth Vitale. The Rule 16b Committee is
responsible for the review of management's recommendations regarding various
compensation issues, including the issuance of stock options to officers and
directors who are subject to the Section 16 reporting requirements under the
Exchange Act.
COMPENSATION OF DIRECTORS
The Issuer pays cash compensation to each of its non-employee
directors of $12,000 per year for his or her services as a director. The
compensation is to be paid at the end of each year and will be prorated on a
monthly basis for each month (or majority of each month, if the director
serves only a partial month) during which the director served as such. There
are no additional amounts payable to any director for committee participation
or special assignments.
Directors are also eligible to participate in the Issuer's 1996
Non-Employee Directors' Stock Option Plan (the "1996 Directors' Plan"). Under
the 1996 Directors' Plan, each director who is not an employee of the
Issuer receives a grant, upon his or her appointment or election to the
board of directors, of an option to purchase 1,500 shares of Common Stock.
Thereafter, on each of the first, second and third anniversary dates of the
date of election or appointment, the director is granted an additional option
to purchase an additional 1,500 shares of Common Stock, up to a maximum of
6,000 shares. The exercise price of the options granted under the 1996
Directors' Plan is the fair market value (as defined in the 1996 Directors'
Plan) on the date that the option is granted. All such options are
exercisable beginning six months after the date of grant. To date, options
under the 1996 Directors' Plan have been issued to the following persons in
the following amounts:
D.D. Hock 1,500
Robert Grabowski 1,500
Lewis Silverberg 1,500
Mary Beth Vitale 1,500
-----
Total 6,000
At the RMI Annual Meeting, the stockholders of the Issuer approved
the adoption of the Rocky Mountain Internet, Inc. 1998 Non-Employee
Directors' Stock Option Plan (the "1998 Directors' Plan"), to be effective
January 22, 1998. A total of 68,000 shares of Common Stock have been reserved
for issuance over the three-year term of the 1998 Directors' Plan.
The option exercise price of any option granted under the 1998 Directors'
Plan may not be less than the fair market value of the Common Stock on the
date of grant of the option. Upon the effective date of the 1998 Directors'
Plan, each non-employee director of the Issuer was granted options to
purchase 8,500 shares of Common Stock, subject to certain adjustments. If an
eligible director has continued to serve as a director of the Issuer from
the effective date until December 31, 1998, options to purchase 1,500 shares
of Common Stock will vest; if he or she continues to serve as a director for
the entire calendar year ending December 31, 1999, options to purchase 3,500
shares of Common Stock will vest; and if he or she continues to serve as a
director for the entire calendar year ending December 31, 2000, options to
purchase 3,500 shares of Common Stock will vest. Notwithstanding the
foregoing, in the event of a change in control of the Issuer (as defined
in the 1998 Directors' Plan), each outstanding option under the 1998
Directors' Plan vests
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<PAGE>
immediately. In addition, in the event of a change in control of the
Issuer, the Administrative Committee (or the board of directors in the
absence of such a committee) may: (i) grant a cash bonus award to any
optionee in an amount equal to the exercise price of all or any portion of
the options then held by the optionee; (ii) pay cash to any or all optionees
in exchange for the cancellation of their outstanding options in an amount
equal to the difference between the exercise price and the greater of the
tender offer price for the Common Stock underlying such options (in the event
of a tender offer for the securities of the Issuer) or the fair market
value of the stock on the date of cancellation; and (iii) make any other
adjustments or amendments to the outstanding options. On January 22, 1998,
the effective date of the 1998 Directors' Plan, the closing price of the
Common Stock was $2.625 and on July 8, 1998 the closing price was $16.875 per
share, according to data obtained from the Nasdaq Stock Market, Inc.
Each option granted under the 1998 Directors' Plan shall expire not more
than five years from the date of grant. The 1998 Directors' Plan terminates
on December 31, 2000, unless earlier terminated in the discretion of the
Administrative Committee (or the board of directors in the absence of such a
committee).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires directors, executive officers
and persons who own more than ten percent of the outstanding Common Stock to
file with the Commission an Initial Statement of Beneficial Ownership of
Securities (Form 3) and Statements of Changes of Beneficial Ownership of
Securities (Form 4). Directors, executive officers and greater than ten
percent stockholders are required by Commission regulation to furnish the
Issuer with copies of all Section 16(a) forms they file.
To the Issuer's knowledge, based on a review of the copies of such
reports furnished to the Issuer or representations that no other reports
were required, the Issuer believes that, during the fiscal year ended
December 31, 1997, all filing requirements applicable to its directors,
executive officers and greater-than-10% beneficial owners were complied with,
except that the Initial Statement of Beneficial Ownership of Securities (Form
3) were filed late for Messrs. Reynaldo U. Ortiz, Richard K. Dingess, Michael
R. Mara and David L. Evans (the then-Chief Financial Officer and Executive
Vice President of the Registrant) and Statements of Changes of Beneficial
Ownership of Securities (Form 4) were filed late for Messrs. Roy J. Dimoff,
Kevin R. Loud, Christopher K. Phillips and D. Kirk Roberts. Since December
31, 1997, the Initial Statements of Beneficial Ownership of Securities were
filed late for Messrs. Peter Kushar and Michael Schaefer and the Statement of
Changes of Beneficial Ownership of Securities was filed late for Mr. Hanson.
EXECUTIVE COMPENSATION
Following is information concerning compensation paid to all persons who
served as the Issuer's Chief Executive Officer during the 1997 fiscal
year and all others who were serving as executive officers during the 1997
fiscal year and whose annual compensation (salary and bonus) was greater than
$100,000 (the "Named Executive Officers"). The Registrant's fiscal year ends
December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H) (I)
SECURITIES
OTHER UNDERLYING ALL OTHER
NAME AND PRINCIPAL BONUS ($) ANNUAL RESTRICTED OPTIONS / LTIP COMPENSATION
POSITION YEAR SALARY /OPTIONS COMPENSATION STOCK AWARDS SAR (#) PAYOUTS ($))(4)
- ------------------------- ---- -------- --------- ------------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas H. Hanson 1997 $ 30,000 600,000
President, CEO and
Chairman (1)
Roy J. Dimoff, 1997 $ 86,150 $25,500(3)
CEO and President (2) 1996 $101,407 $20,250(4)
1995 $ 23,322
Kevin R. Loud, 1997 $ 92,300
Vice President - 1996 $ 83,967(4) $16,200
Network Planning 1995 $ 17,822
and Operations
</TABLE>
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<PAGE>
- ----------------------------------------
(1) Mr. Hanson was elected President, Chief Executive Officer and Chairman of
the board of directors of the Issuer as of October 1, 1997. For a
description of securities underlying his options see "CERTAIN TRANSACTIONS
--CHANGE IN CONTROL," above and the table set forth below.
(2) Mr. Dimoff joined the Issuer in July 1995. Mr. Dimoff resigned as the
President and Chief Executive Officer of the Issuer as of October 1,
1997.
(3) In connection with the resignation by Mr. Dimoff effective October 1, 1997,
the Issuer and Mr. Dimoff entered into a Waiver and Release
pursuant to which, among other matters, (i) the Issuer agreed to
pay Mr. Dimoff $102,000 (less all federal and state withholdings on
wages) in respect of the severance of his prior employment relationship
with the Issuer and to reimburse Mr. Dimoff for his attorney's fees
(up to a maximum of $2,000) for the negotiation of the Waiver and
Release. One quarter of the severance amount ($25,500) was payable and
was paid, upon execution of the Waiver and Release and the remainder is
payable in nine equal monthly installments on the first day of each
month commencing on January 1, 1998; (ii) Mr. Dimoff agreed not to make
use of or to divulge to any other person any confidential information
(as defined in the Waiver and Release) relating to the Issuer; and
(iii) Mr. Dimoff agreed to not compete with the Issuer, directly or
indirectly, in certain geographic areas specified in the Waiver and
Release until October 1, 1998, except that, at any time after December
2, 1997, Mr. Dimoff may elect to terminate the agreement to not compete
by giving 30 days' prior written notice to the Issuer of this
election. In the event that Mr. Dimoff terminates his covenant not to
compete, the Issuer will have no further obligation to make any
remaining severance payments to Mr. Dimoff. On March 6, 1998, Mr.
Dimoff gave notice to the Issuer that he elected to terminate the
covenant not to compete. As a result, the Issuer has avoided the
requirement to pay the remaining $58,000 to Mr. Dimoff under the Waiver
and Release.
(4) This bonus was earned in 1996 and paid in 1997. The bonus was based on
achieving 81% of the Issuer's revenue plan. Mr. Dimoff elected to
receive $3,000 of the bonus in the form of a stock option to acquire
3,000 shares of Common Stock exercisable in September 1997. Mr. Loud
elected to receive $8,100 of the bonus in the form of a stock option to
acquire 8,100 shares of Common Stock exercisable in September 1997. All
employees who received 1996 bonuses had the same choice of receiving
their bonus in cash or stock options. The options were granted pursuant
to the Issuer's 1997 Non-Qualified Stock Option Plan (the "Bonus
Plan"). The Bonus Plan authorizes the Issuer to issue options to
purchase an aggregate of 50,000 shares of Common Stock, subject to
adjustment in the event of stock splits, stock dividends and similar
extraordinary events. The options were exercisable immediately upon the
grant thereof (September 26, 1997) and can be exercised for a period of
five years thereafter in lots of 100 shares or multiples thereof. The
exercise price is $1.00 per share of Common Stock purchased. The
options may not be transferred by the optionholder otherwise than by
will or pursuant to the laws of descent and distribution. The options
may be exercised during the optionholder's lifetime only by the
optionholder or, in the event of his disability or incapacity, by his
guardian or legal representative. The options become void immediately
in the event that the optionholder's employment with the Issuer is
terminated for cause but may be exercised for a period of three months
following termination other than for cause.
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<PAGE>
The Issuer currently has an employment agreement with Mr. Loud. The
employment agreement provides for a salary of $84,000 per year and is
terminable for cause. The Issuer may also terminate the agreement without
cause subject to the obligation to pay Mr. Loud a severance equal to five to
eight months' salary based on length of service.
The agreement terminates in December 1999. The employment agreement does
not restrict Mr. Loud's ability to compete with the Issuer following any
termination.
The Issuer currently has an employment agreement with Mr. Roberts. The
employment agreement provides for a salary of $66,000 per year and is
terminable for cause. The Issuer may also terminate the agreement without
cause subject to the obligation to pay Mr. Roberts a severance equal to five
to eight months' salary based on length of service. The agreement terminates
in December 1999. The employment agreement does not restrict Mr. Roberts'
ability to compete with the Issuer following any termination.
In connection with the ICC Acquisition, Mr. Couzens will be employed as the
Registrant's President and Chief Operating Officer. Mr. Couzens will receive an
annual salary of $150,000 and options to purchase 200,000 shares of Common
Stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
% OF TOTAL
OPTIONS/ SARS
NUMBER OF SECURITIES GRANTED TO MARKET PRICE ON
UNDERLYING OPTIONS/ EMPLOYEES IN EXERCISE OR BASE DATE OF GRANT
NAME SARS GRANTED (#) FISCAL YEAR PRICE ($/SH) ($/SH) EXPIRATION DATE
- ------------------------------ -------------------- -------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Douglas H. Hanson 191,385 21.7% $2.6125 $2.375 October 1, 2002
Douglas H. Hanson 408,615 46.2% $ 1.00 $2.375 October 1, 2002
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FY- IN-THE-MONEY OPTIONS/
SHARES ACQUIRED ON END (#) EXERCISABLE SARS AT FY-END ($)
NAME EXERCISE (#) VALUE REALIZED /UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ------------------ -------------- -------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Douglas H. Hanson -0- -0- -0-/600,000 -0-/$891,392(1)
</TABLE>
- ------------------------
(1) Determined, in accordance with Commission rules, by the difference between
the fair market value of the Common Stock on December 31, 1997 ($3.00) and
the exercise price of the options.
401(K) PLAN
In January 1998, the Issuer implemented an employee savings and
retirement plan (the "401(k) Plan") covering certain of its employees.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 15% of such compensation or the
statutorily prescribed annual limit ($10,000 in 1998) and have the amount of
such reduction contributed to the 401(k) Plan. The Issuer will make
contributions to the 401(k) Plan on behalf of eligible employees in an amount
equal to one-half of the employee's contribution, up to a maximum of 3% of
the employee's salary. The Issuer's contribution to the 401(k) Plan is in
the form of the Issuer's Common Stock. The 401(k) Plan is intended to
qualify under Section 401 of the Code, so that contributions by employees or
by the Issuer to the 401(k) Plan and income earned on the 401(k) Plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan and so that contributions by the Registrant, if any, will be deductible
by the Issuer when made.
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<PAGE>
CHANGES IN CONTROL
There are no arrangements or agreements known to the Company that may
result in a change in control of the Company. See "CERTAIN
TRANSACTIONS--CHANGE IN CONTROL."
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Issuer's By-laws provide, in general, that the Issuer shall, to the
fullest extent permitted by the DGCL, as now or hereafter in effect,
indemnify any person who was or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether
criminal, civil, administrative, or investigative (a "Proceeding"), by reason
of the fact that he is or was a director or officer of the Issuer, or, by
reason of the fact that such officer or director is or was serving at the
request of the Issuer as a director, office, employee, or agent of another
corporation, partnership, joint venture, trust, association, or other
enterprise, against all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement reasonably incurred by him in connection with such
Proceeding, including any Proceeding by or on behalf of the Issuer and will
advance all reasonable expenses incurred by or on behalf of any such person
in connection with any Proceeding, whether prior to or after final
disposition of such Proceeding. The By-laws also provide that the Issuer may
also indemnify and advance expenses to employees or agents who are not
officers or directors of the Issuer.
Article 8 of the Issuer's Certificate of Incorporation, as amended,
provide that "No director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except as to liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for violations of Section 174
of the Delaware General Corporation Law or (iv) for any transaction from
which the director derived any improper personal benefit. If the Delaware
General Corporation Law hereafter is amended to eliminate or limit further
the liability of a director, then, in addition to the elimination and
limitation of liability provided by the preceding sentence, the liability of
each director shall be eliminated or limited to the fullest extent provided
or permitted by the amended Delaware General Corporation Law. Any repeal or
modification of this Article 8 shall not adversely affect any right or
protection of a director under this Article 8 as in effect immediately prior
to such repeal or modification with respect to any liability that would have
accrued, but for this Article 8, prior to such repeal or modification."
The Issuer entered into an underwriting agreement with NTB, for
itself and on behalf of all of the underwriters of the IPO, that provides for
indemnification by the underwriters under certain circumstances of directors,
officers and controlling persons of the Issuer against certain
liabilities, including liabilities under the Securities Act. The Issuer
has entered into similar agreements with certain security holders of the
Issuer, including Mr. Hanson.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Issuer pursuant to the provisions contained in the Certificate of
Incorporation and By-laws of the Issuer, the DGCL, an underwriting
agreement, other agreements that provide for such indemnification, or
otherwise, the Issuer has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Issuer maintains a directors' and officers' liability insurance
policy that provides, within stated limits, reimbursement either to a
director or officer whose actions in his capacity as such result in
liability, or to the Issuer in the event it has indemnified the director
or officer.
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<PAGE>
CERTAIN TRANSACTIONS
CHANGE IN CONTROL
As of October 1, 1997, Mr. Douglas H. Hanson obtained effective control
of RMI by entering into a series of agreements, described below, pursuant to
which, among other things: (1) RMI issued and sold to Mr. Hanson 1,225,000
shares of Common Stock for a purchase price of $2,450,000, or $2.00 per
share; (2) Mr. Hanson purchased 275,000 shares of Common Stock from four of
RMI's stockholders, namely, Messrs. Roy J. Dimoff, Christopher K. Phillips,
Jim D. Welch and Kevin R. Loud, for an aggregate purchase price of $550,000,
or $2.00 per share; (3) contemporaneously with the transactions described in
(1) and (2), RMI agreed to issue to Mr. Hanson the Hanson Warrants, which
authorized the holder thereof to purchase 4,000,000 shares of Common Stock
for an exercise price of $1.90 per share, subject to adjustment as described
below; (4) RMI granted Mr. Hanson incentive stock options (to purchase
222,220 shares of Common Stock for an exercise price of $2.25 per share and
non-qualified stock options to purchase 377,780 shares of Common Stock for an
exercise price of $1.00 per share pursuant to the 1997 Plan, which Hanson
Options vest one year from the date of grant (subject to acceleration of the
vesting date by the board of directors or a committee thereof that
administers the 1997 Plan) and on March 12, 1998 a committee of the board of
directors amended the 1997 Plan, retroactively to October 1, 1997, in
accordance with the requirements of the Code, to provide that the number of
incentive stock options was 191,385, the exercise price of those options was
$2.6125 and the number of non-qualified stock options was 408,615, on which
date Mr. Hanson exercised all of the non-qualified stock options and
purchased 408,615 shares of Common Stock pursuant to such exercise; (5) Mr.
Hanson obtained proxies from ten stockholders of RMI to vote their shares of
Common Stock held by such stockholders; and (6) Mr. Hanson was elected as a
director and was elected the President, Chief Executive Officer and Chairman
of the board of directors of RMI. As a result of the purchase by Mr. Hanson
of the shares of Common Stock described herein and the proxies described
herein obtained by Mr. Hanson, the election of all nominees to the board of
directors and the approval by RMI's stockholders of the proposals at the RMI
Annual Meeting was assured. See "PRINCIPAL STOCKHOLDERS."
The ten stockholders from whom Mr. Hanson obtained proxies are Messrs. Roy
J. Dimoff, Christopher K. Phillips, Jim D. Welch, Kevin R. Loud, Brian Dimoff,
Paul B. Davis, Michael R. Mara, Monty Reagan, Tim Scanlon and Owen Scanlon. Mr.
Phillips was, at the time of such transactions, a director of RMI, Mr. Loud is
the Vice President--Operations of RMI and Mr. Roy J. Dimoff was the President,
Chief Executive Officer and a director of RMI. Mr. Mara is the Vice
President--Sales and Marketing of RMI and Mr. Brian Dimoff was the Vice
President -Customer Support Operations of RMI.
The Nasdaq Stock Market, Inc. adopted changes to the requirements applicable
to corporations qualifying its common stock for trading on Nasdaq. Among
other changes, the required minimum net tangible assets of such corporations was
increased to $2.0 million. These changes were effective February 23, 1998. At
December 31, 1997, RMI did not meet these increased requirements. On March 12,
1998, a committee of RMI's board of directors accelerated the vesting period of
the Hanson Options to permit the immediate exercise thereof and Mr. Hanson
exercised all of the 408,615 non-qualified options that were exercisable for a
price of $1.00 per share. On March 23, 1998, Mr. Hanson exercised a portion of
the Hanson Warrants and acquired 50,000 shares of Common Stock. The result and
purpose of the exercise of these options and warrants was to increase RMI's net
tangible assets to satisfy the Nasdaq Stock Market, Inc.'s new requirements.
It is possible that prior to the completion of the Private Placement
Offering, or drawing on the Bridge Loan Commitment, RMI will need additional
cash resources to meet its obligations. Mr. Hanson has agreed to loan RMI up
to $1.0 million if such need arises. This agreement is not in writing and the
terms have not been negotiated. Consequently, there can be no assurance that,
if such financing need arises, a loan from Mr. Hanson will be available or
that, if available, such loan will be on terms which are acceptable to RMI.
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<PAGE>
Other than as described above, there is no agreement, arrangement, or
understanding between Mr. Hanson and the Company that requires Mr. Hanson to
exercise any Hanson Options or Hanson Warrants or to otherwise make any
capital contributions to the Company.
SUMMARY OF TRANSACTIONS. Following is a summary and description of certain
provisions of the Stock Purchase Agreement between Douglas H. Hanson and RMI,
dated as of October 1, 1997; the Stock Purchase Agreement between Douglas H.
Hanson and Roy J. Dimoff, dated as of October 1, 1997; the Stock Purchase
Agreement among Douglas H. Hanson, Christopher K. Phillips, Jim D. Welch and
Kevin R. Loud, dated as of October 1, 1997; the Warrant Agreement between Rocky
Mountain Internet, Inc. and Douglas H. Hanson, dated as of October 1, 1997; the
Registration Agreement between RMI and Douglas H. Hanson, dated as of October 1,
1997; the Shareholders' Voting Agreement and Irrevocable Proxy among Douglas H.
Hanson, Christopher K. Phillips, Jim D. Welch and Kevin R. Loud, dated as of
October 1, 1997; and the Shareholders' Voting Agreement and Irrevocable Proxy
among Douglas H. Hanson, Brian Dimoff, Paul B. Davis, Michael R. Mara, Monty
Reagan, Roy J. Dimoff, Tim Scanlon and Owen Scanlon, dated as of October 1,
1997, pursuant to which Mr. Hanson obtained effective control of RMI. The
following summaries do not purport to be complete and are qualified in their
entireties by the full text of the respective agreements, copies of which are on
file with the Commission.
STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND RMI. Pursuant to a
Stock Purchase Agreement between Mr. Hanson and RMI, dated as of October 1,
1997, RMI issued and sold to Mr. Hanson 1,225,000 shares of Common Stock for a
purchase price of $2,450,000, or $2.00 per share. In connection with the
execution of this Stock Purchase Agreement, Roy J. Dimoff resigned as the
President, Chief Executive Officer and a director of RMI and Gerald Van Eeckhout
resigned as the Chairman of the board of directors but remained as a director of
RMI until November 19, 1997. Contemporaneously, the then-existing board of
directors of RMI, in accordance with RMI's By-laws, filled three vacancies on
the board by electing Mr. Hanson, Mr. Reynaldo Ortiz and Mr. D. D. Hock to be
directors of RMI. Mr. Hanson was elected as RMI's President, Chief Executive
Officer and Chairman of the board of directors. Messrs. Ortiz and Hock were
selected by Mr. Hanson, in accordance with the terms of this Stock Purchase
Agreement, to be elected as directors of RMI. Mr. Ortiz resigned as a director
effective December 1, 1997. On January 10, 1998, Ms. Mary Beth Vitale and
Messrs. Robert W. Grabowski and Lewis H. Silverberg were appointed as directors
of RMI.
STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND ROY J. DIMOFF.
Pursuant to a Stock Purchase Agreement between Mr. Hanson and Roy J. Dimoff,
dated as of October 1, 1997, Mr. Dimoff sold to Mr. Hanson 150,000 shares of
Common Stock for a purchase price of $300,000, or $2.00 per share.
Contemporaneously with this purchase and sale, Mr. Dimoff resigned as a
director and as President and Chief Executive Officer of RMI. In addition, as
discussed below, Mr. Hanson entered into a Shareholders' Voting Agreement and
Irrevocable Proxy with Mr. Dimoff and six other stockholders pursuant to
which Mr. Hanson obtained the right to vote certain shares of Common Stock
beneficially owned by Mr. Dimoff and such other stockholders.
STOCK PURCHASE AGREEMENT AMONG DOUGLAS H. HANSON, CHRISTOPHER K. PHILLIPS,
JIM D. WELCH AND KEVIN R. LOUD. Pursuant to a Stock Purchase Agreement among
Douglas H. Hanson, Christopher K. Phillips, Jim D. Welch and Kevin R. Loud,
dated as of October 1, 1997, Mr. Hanson purchased 50,000 shares, 50,000 shares
and 25,000 shares of Common Stock from Messrs. Phillips, Welch and Loud,
respectively, for an aggregate purchase price of $250,000, in each case for
$2.00 per share. In addition, as discussed below, Mr. Hanson entered into a
Shareholders' Voting Agreement and Irrevocable Proxy with Messrs. Phillips,
Welch and Loud pursuant to which Mr. Hanson obtained the right to vote certain
shares of Common Stock beneficially owned by them.
The source of all of the consideration for the purchase by Mr. Hanson of
the shares of Common Stock and the Hanson Warrants purchased from the Company
and the shares of Common Stock purchased from Messrs. Dimoff, Phillips, Welch
and Loud was a loan made in the ordinary course of business by a
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<PAGE>
bank. The loan bears interest at the rate of 192 basis points (i.e., 1.92%)
above the London InterBank Offered Rate and has a term of two years. One-half
of the outstanding principal and accrued interest thereon, was paid in
January 1998 in accordance with its terms and the remainder of the
outstanding principal amount and accrued interest thereon, is payable in
January 1999. The loan is secured by a pledge of all of the shares of Common
Stock that Mr. Hanson purchased from RMI and from Messrs. Dimoff, Phillips,
Welch and Loud and of income anticipated to be received by Mr. Hanson.
REGISTRATION AGREEMENT. Contemporaneously with the execution of the
agreements described above, RMI entered into an agreement with Mr. Hanson to
register all of the shares of Common Stock (and other securities) purchased
in the above-described transactions, i.e., those shares purchased from RMI
and those purchased from Messrs. Dimoff, Phillips, Welch and Loud, the Hanson
Warrants and the shares of Common Stock that may be issued pursuant to the
exercise of the Hanson Warrants. RMI also agreed, not later than thirty days
after the closing of the transactions described above, to use its
commercially reasonable best efforts to file a registration statement with
the Commission for the registration of the shares of Common Stock purchased
by Mr. Hanson (including those shares purchased from RMI and from the
individuals identified above), the Hanson Warrants and the shares of Common
Stock issuable upon exercise of the Hanson Warrants and to maintain the
effectiveness of such registration statement for a period of one year. The
Company believes that, during the period of effectiveness of such
registration statement, Mr. Hanson may sell all or any of the shares of
Common Stock or the Hanson Warrants without restriction.
WARRANT AGREEMENT. RMI entered into a Warrant Agreement with Mr. Hanson,
dated as of October 1, 1997, pursuant to which it agreed, subject to obtaining
the approval of RMI's stockholders of an increase in the authorized capital of
RMI, to issue to Mr. Hanson the Hanson Warrants, which entitle the holder
thereof to purchase up to 4,000,000 shares of Common Stock for an exercise
price of $1.90 per share, for a period of eighteen months from the date of
issuance of such warrants. As of the date of the Warrant Agreement, RMI did
not have a sufficient number of shares of its Common Stock authorized or
reserved for issuance upon exercise of the Hanson Warrants. At the RMI Annual
Meeting, the stockholders of RMI approved an amendment to the RMI's
Certificate of Incorporation to increase the number of shares of Common Stock
that RMI is authorized to issue from 10,000,000 to 25,000,000. As a result of
the approval of such amendment by RMI's stockholders at the RMI Annual
Meeting, RMI issued the Hanson Warrants to Mr. Hanson effective as of March
23, 1998.
The Hanson Warrants are subject to standard anti-dilution provisions and
adjustments in the number of shares of Common Stock that can be issued (and
the exercise price for which they can be issued) in the event of the payment
by RMI of cash or non-cash dividends, reorganizations and other extraordinary
events. See "DESCRIPTION OF CAPITAL STOCK."
SHAREHOLDERS' VOTING AGREEMENTS AND IRREVOCABLE PROXIES. Contemporaneously
with the agreements described above, Mr. Hanson entered into a Shareholders'
Voting Agreement and Irrevocable Proxy with Messrs. Phillips, Welch and Loud
pursuant to which Messrs. Phillips, Welch and Loud granted to Mr. Hanson their
proxies to vote certain shares of Common Stock owned by them as of the date of
the agreement and acquired subsequent thereto (including shares of Common
Stock of which Messrs. Phillips, Welch and Loud have the right to acquire
beneficial ownership through the exercise of warrants, options and other
rights). The proxies terminate on the earlier of (i) three years from the date
of execution; or (ii) the date upon which any shares of Common Stock owned by
the grantor of a proxy are sold, transferred, assigned, or otherwise disposed
of (except by a pledge thereof) by such stockholder to a person other than:
(A) a member of such stockholder's "immediate family," as such term is defined
in Rule 16a-1(e) promulgated pursuant to the Exchange Act, 17 C.F.R. Section
240.16a-1(e), or (B) a trust for the benefit of any member of such
stockholder's immediate family; provided, however, that the termination
applies only to such shares of Common Stock as are sold, transferred,
assigned, or otherwise disposed of to persons other than members of the
stockholder's "immediate family."
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<PAGE>
Mr. Hanson also entered into a Shareholders' Voting Agreement and
Irrevocable Proxy with Mr. Brian Dimoff, Mr. Paul B. Davis, Mr. Michael R. Mara,
Mr. Monty Reagan, Mr. Roy J. Dimoff, Mr. Tim Scanlon and Mr. Owen Scanlon. The
terms of such agreement were similar to those of the agreement with Messrs.
Phillips, Welch and Loud, except that the proxies granted pursuant to the
agreement with these seven stockholders expired by their terms immediately after
the RMI Annual Meeting.
PURPOSE OF THE TRANSACTIONS. Mr. Hanson's purpose in entering into the
agreements described above and acquiring the shares of Common Stock and the
Hanson Warrants was to acquire a significant equity position in RMI and to
control the management, policies and activities of RMI. In connection with
such purchases, three of Mr. Hanson's nominees, including Mr. Hanson, were
elected to the five-member board of directors of RMI as contemplated by the
Stock Purchase Agreement between Mr. Hanson and RMI. One of Mr. Hanson's
nominees, Mr. Reynaldo U. Ortiz, resigned from the board of directors in
December 1997. See "--STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND
RMI."
RELATED PARTY TRANSACTIONS
In February 1997, the Issuer entered into a negotiated agreement with
Jim D. Welch, an officer and a stockholder of the Issuer, wherein the Issuer
agreed to purchase 90,000 shares of the Issuer's Common Stock from him for
$119,000. The stock will be purchased over an eighteen month period. As part
of the agreement, Mr. Welch separated from employment with the Issuer. Mr.
Welch discontinued selling shares of the Issuer's Common Stock after March 1,
1998, at which time the Issuer had purchased 72,660 shares.
Robert W. Grabowski, an Issuer director, has an economic interest in
and is Vice President, Finance and Administration, of Sunny Side, Inc./Temp
Side ("Sunny Side"), a private employment service business. The Issuer
has engaged Sunny Side to provide various services and has created a web site
for Sunny Side. These arrangements were on commercially reasonable terms.
TRANSACTIONS WITH PROMOTERS
NTB was the principal underwriter of the Issuer's IPO of the IPO
Securities, each IPO Unit consisting of one share of Common Stock and one IPO
Warrant to purchase a share of Common Stock at a price of $4.375 (the "IPO
Warrant Exercise Price"), subject to adjustment, after October 5, 1997 and
prior to September 5, 1999. RMI sold to NTB at the closing of the IPO, for
$100, warrants (the "NTB Warrants") to purchase 136,500 units (the "NTB
Securities"), consisted of one share of Common Stock and one warrant (the
"Underlying NTB Warrants") to purchase a share of Common Stock. The NTB
Securities have an exercise price of $4.20 per unit (120% of the unit
offering price to the public in the IPO) and the underlying warrants included
in the NTB Securities have an exercise price of $6.5625 per share (150% of
the IPO Warrant Exercise Price) (which price has been decreased by certain
anti-dilution adjustments) and are exercisable until September 5, 2001. The
NTB Warrants may be exercised in a cashless transaction whereby the NTB
Warrants, at the holder's option, may be used, in whole or in part, as a
portion of the purchase price for the underlying Common Stock and NTB
Warrants. In addition, the Underlying NTB Warrants included in the NTB
Securities may be exercised in a cashless transaction. See "DESCRIPTION OF
CAPITAL STOCK."
NTB was the Issuer's placement agent in connection with the private
offering in 1997 of units of the Issuer's securities, each unit
consisting of two shares of the Issuer's Common Stock and a warrant to
purchase one share of Common Stock, for $4.00 per unit. In connection with
that offering, the Issuer agreed to issue to NTB warrants (the "Private
Offering Unit Warrants") to purchase 31,050 units of securities, each unit
consisting of two shares of Common Stock and a warrant (collectively, the
"Private Offering NTB Warrants") to purchase one share of Common Stock. The
Private Offering Unit Warrants have an exercise price of $4.00 each and may
be exercised any time prior to June 13, 2002. The Private Offering NTB
Warrants have an exercise price of $3.00 each and may be exercised at any
time prior to June 13, 2002.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
ownership of Common Stock as of July 8, 1998 by (i) each stockholder of the
Issuer known by the Issuer to be the beneficial owner of more than 5%
of its outstanding shares of Common Stock, (ii) each current member of the
board of directors of the Issuer, (iii) each executive officer of the
Issuer named in the Summary Compensation Table appearing under the caption
"Executive Compensation," and (iv) all current directors and executive officers
of the Issuer as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)(2)
---------------------------------
NAME AND ADDRESS NUMBER PERCENTAGE OF
OF BENEFICIAL OWNER OF SHARES SHARES OUTSTANDING
- ------------------------------------------------------------------------------ ---------- ---------------------
<S> <C> <C>
Current Directors
Douglas H. Hanson........................................................... 6,826,700(3) 53.9%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
D. D. Hock.................................................................. 1,500(4) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Robert W. Grabowski......................................................... 6,300(5) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Lewis H. Silverberg......................................................... 6,500(6) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Mary Beth Vitale............................................................ 1,500(7) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Named Executive Officers Who Are Not Directors
Kevin R. Loud (8)........................................................... 378,800 5.2%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
All Directors and named Executive Officers as a Group (6 persons)........... 7,205,500 56.8%
Over 5% Stockholders and Members of a "group" Who Are Not Directors or
Executive Officers(1) (2)
Christoper K. Phillips (1)(9)............................................... 170,000 2.2%
4580 Star Ridge Drive
Colorado Springs, CO 80916
Jim D. Welch (1)(10)........................................................ 186,000 2.38%
1326 Sorrento Road
Colorado Springs, CO 80910
Kennedy Capital Management, Inc. (11)....................................... 375,000 4.8%
10829 Olive Boulevard
St. Louis, MO 63141
</TABLE>
- ------------------------
* Less than 1%
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<PAGE>
(1) As set forth above under the caption "Certain Transactions--Change in
Control," Mr. Hanson entered into a Shareholders' Voting Agreement and
Irrevocable Proxy with Christopher K. Phillips, Jim D. Welch and Kevin R.
Loud, dated as of October 1, 1997 and a separate Shareholders' Voting
Agreement and Irrevocable Proxy with Brian Dimoff, Paul B. Davis, Michael
R. Mara, Monty Reagan, Roy J. Dimoff, Tim Scanlon and Owen Scanlon, dated
as of October 1, 1997. The proxies granted to Mr. Hanson by Messrs. Brian
Dimoff, Paul B. Davis, Michael R. Mara, Monty Reagan, Roy J. Dimoff, Tim
Scanlon and Owen Scanlon expired immediately following the adjournment of
the RMI Annual Meeting. Accordingly, Mr. Hanson and Messrs. Christopher
K. Phillips, Jim D. Welch and Kevin R. Loud may be deemed to be members
of a "group" for reporting beneficial ownership of shares of Common Stock
in the table. Unless otherwise noted, each person has sole voting and
dispositive power over the shares listed opposite his name. For the
purposes of the table, shares of other members of the group have not been
attributed to each member.
(2) Shares of Common Stock that can be acquired by any person pursuant to any
option, warrant, or other right within the next 60 days following the dates
set forth in the paragraph appearing immediately prior to the table are
deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by such person. A person is also
deemed to be the beneficial owner of any shares as to which he has the
power to vote, or to direct the voting of, such shares. Such shares,
however, are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
All options and warrants described below have vested, except as described
in footnote 3. As of July 8, 1998, there were 7,805,636 shares of Common
Stock outstanding.
(3) Includes 1,958,615 shares beneficially owned directly by Mr. Hanson,
3,950,000 shares issuable upon exercise of the Hanson Warrants, 191,385
shares issuable upon exercise of incentive stock options and 734,800 shares
owned by Messrs. Phillips Welch and Loud as to which Mr. Hanson obtained
the rights to vote pursuant to the remaining Shareholders' Voting Agreement
and Irrevocable Proxy described above in footnote (1) and under the caption
"CERTAIN TRANSACTIONS--CHANGE IN CONTROL."
(4) Includes options to acquire 1,500 shares of Common Stock.
(5) Includes 4,800 shares of Common Stock and options to acquire 1,500 shares
of Common Stock.
(6) Includes 5,000 shares of Common Stock and options to acquire 1,500 shares
of Common Stock.
(7) Includes options to acquire 1,500 shares of Common Stock.
(8) Includes 370,700 shares owned directly by Mr. Loud and options to acquire
8,100 additional shares. Mr. Loud has granted to Mr. Hanson an irrevocable
proxy to vote all shares currently owned by him or that may be acquired by
him pursuant to and in accordance with the terms, provisions and
limitations set forth in, a Shareholders' Voting Agreement and Irrevocable
Proxy described above in footnote (1) and under the caption "CERTAIN
TRANSACTIONS--CHANGE IN CONTROL."
(9) All shares are owned directly by Mr. Phillips.
(10) All shares are owned directly by Mr. Welch.
(11) According to a filing made with the Commission on February 10, 1998,
Kennedy Capital Management, Inc. is an investment advisor and had
acquired, as of December 31, 1997, the shares of Common Stock indicated.
SELLING SECURITYHOLDERS
The following table assumes that each Selling Securityholder is
offering for sale securities previously issued or issuable by the Company.
The Company has agreed to pay all expenses in connection therewith (other
than brokerage commissions and fees and expenses of their respective
counsel). None of the Selling Securityholders has ever held any position with
the Company or had any other material relationship with the Company except
that Douglas H. Hanson is the President, Chief Executive Officer, and
Chairman of the board of directors of the Company.
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<PAGE>
The following table sets forth the beneficial ownership of the
Selling Securityholder Shares by each person who is a Selling Securityholder.
The Company will not receive any proceeds from the sale of such Securities by
the Selling Securityholders.
<TABLE>
<CAPTION>
Shares of Common Stock Percentage of Common Stock
Name of or Warrants Beneficially Owned
Beneficial Owner Being Offered (1) Before Offering After Offering
- ---------------- ----------------- ----------------------------------
<S> <C> <C> <C>
Douglas H. Hanson 5,500,000 Shares; 53.9% 46.1%
Douglas H. Hanson 3,950,000 Warrants
Neidiger/Tucker/Bruner, Inc. 4,000 Warrants
Neidiger/Tucker/Bruner, Inc. 8,000 Shares * *
Eugene L. Neidiger 12,700 Warrants
Eugene L. Neidiger 38,075 Shares * *
Anthony B. Petrelli 12,300 Warrants
Anthony B. Petrelli 37,050 Shares * *
Charles C. Bruner 11,800 Warrants
Charles C. Bruner 36,050 Shares * *
Robert L. Parrish 6,400 Warrants
Robert L. Parrish 17,300 Shares * *
J. Henry Morgan 7,200 Warrants
J. Henry Morgan 18,900 Shares * *
John J. Turk, Jr. 1,500 Warrants
John J. Turk, Jr. 3,000 Shares * *
Regina L. Neidiger 2,100 Warrants
Regina L. Neidiger 4,200 Shares * *
Carl A. Militello, Jr. 53,500 Warrants
Carl A. Militello, Jr. 107,000 Shares 1.5% *
James E. Tarrillion 37,500 Shares * *
Jeff Kavy 150,000 Shares 2.1% *
John E. Tarrillion 37,500 Shares * *
Jim Clausius 48,750 Shares * *
Roger Marino 75,000 Shares * *
Michael Carney 57,600 Shares * *
David Leider 99,000 Shares 1.4% *
Robert and Patricia Werts 15,000 Shares * *
Paul Davis 112,500 Shares 1.5% *
Burton Levy 82,500 Shares 1.1% *
MBM Young 37,500 Shares * *
Stephen Vento 15,000 Shares * *
Roswell and W. Monroe 15,000 Shares * *
Mark Buntzman 18,750 Shares * *
Kent Searl 7,500 Shares * *
Steven D. Brown 18,750 Shares * *
Elen Brown 9,375 Shares * *
Sarah Brown 9,375 Shares * *
Applied Telecommunications
Technologies, Inc. 67,500 Shares * *
William Preston 18,750 Shares * *
Stanley Oskwarek 5,025 Shares * *
Michael Sanchez 25,125 Shares * *
Gerry and Carolyn Van Eeckhout 10,000 Shares * *
Ronald J. Bach 7,537 Shares * *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Percentage of Common Stock
Name of or Warrants Beneficially Owned
Beneficial Owner Being Offered (1) Before Offering After Offering
- ---------------- ----------------- ----------------------------------
<S> <C> <C> <C>
James F. Seifert & Nancy L. Seifert 7,537 Shares * *
ACT Teleconferencing, Inc. 25,000 Shares * *
Kent Hultquist 12,562 Shares * *
Roswell Monroe & Wanda Monroe 10,050 Shares * *
Kent E. Searl 5,025 Shares * *
Stephen Vento Sr. & Stephen
F. Vento 10,050 Shares * *
Robert C Werts & Patricia
Schultze-Werts 10,050 Shares * *
Susan Weinkranz 10,000 Shares * *
Donald McElvaney & Migon
McElvaney 12,500 Shares * *
Frank Visciano & Lorraine Visciano 12,500 Shares * *
Cambridge Holdings 6,250 Shares * *
Gregory Pusey Investments 6,250 Shares * *
Schield Management Company 12,500 Shares * *
Caribou Bridge Fund LLC 17,500 Shares * *
Stuart Fullinwider 25,000 Shares * *
Jeremy J. Black 45,000 Shares * *
Kenneth Covell 15,000 Shares * *
John-Michael Keyes 15,000 Shares * *
Ronald Stevenson 95,075 Shares 1.3 *
Gregory A. Brown 2,291 Shares * *
Ronald Nicholl 17,182 Shares * *
</TABLE>
Assumes: (i) the issuance of all 2,000,000 of the Acquisition Shares
in one or more mergers with or acquisitions by the Company of other
businesses or assets; and (ii) the exercise of all of the Warrants. Does not
give effect to the exercise of outstanding options granted to employees or
non-employee directors of the Company pursuant to various stock option plans
or shares of Common Stock that can be issued pursuant to anti-dilution
provisions of the Warrants and other derivative securities.
Mr. Douglas H. Hanson is the President, Chief Executive Officer, and
Chairman of the Board of Directors of the Company. NTB, and Chatfield Dean &
Co., Inc. acted as underwriters in connection with the Company's IPO in 1996,
and a private placement in 1997, and Eugene L. Neidiger, Anthony B. Petrelli,
Charles C. Bruner, Robert L. Parrish, J. Henry Morgan, John L. Turk, Jr.,
Regina L. Neidiger, Carl A. Militello, Jr., Kenneth L. Greenberg, Sanford D.
Greenberg, Russell Greenberg, and Paul Davis are affiliates of, and/or
employed by, NTB or Chatfield Dean & Co., Inc. None of the other Selling
Securityholders has a position, office, or other material relationship with
the Company, except that Ronald M. Stevenson and Jeremy J. Black are the
shareholders of 237,687 and 90,000 shares of Company stock respectively, and
Advanced Telecommunications Technologies, Inc. is the lessor of certain
switches and other equipment leased by the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Issuer consists of
25,000,000 shares of Common Stock, $0.001 par value and 750,000 shares of
Preferred Stock, $0.001 par value. The following summary of certain
provisions of the Common Stock and Preferred Stock does not purport to be
complete and is subject to and qualified in its entirety by, the provisions
of the Issuer's Certificate of Incorporation, as amended.
PREFERRED STOCK
Pursuant to the Issuer's Certificate of Incorporation, as amended,
the board of directors has the authority, without further action by the
stockholders, to issue up to 750,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any
or all of which may be greater than the rights of the Common Stock. The board
of directors, without stockholder approval, can issue Preferred Stock with
voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of the Common Stock. Preferred Stock
could thus be issued quickly with terms calculated to delay or prevent a
change in control of the Issuer or make removal of management more difficult.
At present, there are no shares of Preferred Stock outstanding and the Issuer
has no plans to issue any of the Preferred Stock.
COMMON STOCK
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<PAGE>
As of July 8, 1998, there were 7,805,636 shares of Common Stock
outstanding. Another 855,364 shares of Common Stock were reserved for
issuance pursuant to the Issuer's stock option plans and other stock
options granted, 6,569,568 have been reserved for issuance upon exercise of
an aggregate of various warrants, including the IPO Warrants and the Hanson
Warrants and pursuant to various anti-dilution provisions contained in the
such warrants and the options described above. In addition, there are 151,515
shares (assuming a $16.50 per share price at the date of calculation) that may
be issued based on performance incentive in the acquisition of Application
Methods. Accordingly, there are 9,617,617 shares of Common Stock and 750,000
shares of Preferred Stock that may be issued in the future at the discretion
of the Issuer's board of directors.
The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Holders of Common Stock may not cumulate votes in elections of Directors.
Subject to preferences that may be applicable to any outstanding shares of
preferred stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for the payment of dividends. In the event of a
liquidation, dissolution, or winding up of the Issuer, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares
of preferred stock. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of common stock are
fully paid and non-assessable. There are no preemptive, subscription,
conversion, or redemption rights applicable to the Common Stock.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW
The Issuer is subject to Section 203 of the DGCL ("Section
203") which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the date that such stockholder became an
interested stock, unless: (i) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder of the corporation becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders and not by written consent, by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
Section 203 defines business combination to include (i) any merger
or consolidation involving the corporation and the interested stockholder;
(ii) any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder;
or (v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
WARRANTS
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<PAGE>
IPO WARRANTS. The IPO Warrants were issued as a component of the
units of securities offered and sold in connection with the Issuer's IPO
in 1996. Each IPO Warrant entitles the holder thereof to purchase one share
of Common Stock at a purchase price of $4.375 per share, subject to
adjustment in the event that, at any time after the date of the issuance of
the IPO Warrants, the Issuer (i) sells shares of Common Stock for a
consideration per share less than the exercise price in effect immediately
prior to such issuance (or sells options, rights, or warrants to subscribe
for shares of Common Stock or issues any securities convertible into or
exchangeable for shares of Common Stock at such lower price); or (ii) issues
Common Stock as a dividend to the holders of Common Stock; or (iii)
subdivides or combines the outstanding Common Stock into a greater or lesser
number of shares.
IPO WARRANTS ISSUED TO REPRESENTATIVE OF UNDERWRITERS. In
connection with the Issuer's IPO, the Issuer issued to NTB certain Warrants
to purchase units of the Issuer's securities, each unit consisting of one
share of Common Stock and one additional warrant. The terms and conditions of
these issuances are described above under the caption "CERTAIN TRANSACTIONS
- -- TRANSACTIONS WITH PROMOTERS."
HANSON WARRANTS. The Issuer issued warrants to Mr. Hanson
entitling him to purchase 4,000,000 shares of Common Stock. The terms and
conditions of these warrants are described above under the caption "CERTAIN
TRANSACTIONS -- CHANGE IN CONTROL."
PRIVATE OFFERING WARRANTS ISSUED TO SALES AGENT. As described
above under the caption "CERTAIN TRANSACTIONS -- TRANSACTIONS WITH
PROMOTERS," the Issuer conducted a private offering of units of securities in
1997. In connection with that offering, the Issuer issued warrants to
purchase units to NTB.
BRIDGE LOAN WARRANTS. In connection with the Bridge Loan
Commitment, the Issuer agreed to issue warrants to the lenders
to acquire a total of 560,000 shares of Common Stock. See "RECENT
DEVELOPMENTS--ICC ACQUISITION."
The transfer agent and registrar for the Common Stock and warrant
agent for the IPO Warrants is American Securities Transfer, Inc., 1825
Lawrence Street, Suite 444, Denver, Colorado 80202-1817.
PLAN OF DISTRIBUTION
The Selling Securityholder Shares and Warrants subject hereto are
being offered for sale by the Selling Securityholders. Consequently, the
Selling Securityholders will receive the proceeds from the sale of such
Securities by the Selling Securityholders pursuant to this Prospectus. In
addition, the shares of Common Stock that can be issued upon exercise of the
Warrants are being offered for sale hereby to the holders of the Warrants.
The Selling Securityholder Shares and Warrants may be sold to purchasers from
time to time in privately negotiated transactions directly by and subject to
the discretion of the Selling Securityholders. The Selling Securityholders
may from time to time offer their respective securities for sale through
underwriters, dealers, or agents, who may receive compensation in the form of
underwriting discounts, concessions, or commissions from the Selling
Securityholders and/or the purchasers of such securities for whom they may
act as agents. The Selling Securityholders and any underwriter, dealer, or
agent who participates in the distribution of such Selling Securityholders'
Securities may be deemed to be "underwriters" under the Securities Act and
any profit on the sale of such securities by any of them and any discounts,
commissions, or concessions received by any such underwriters, dealers, or
agents may be deemed to be underwriting compensation under the Securities
Act. Selling Securityholders may also sell the Securities owned by them
pursuant to Rule 144 under the Securities Act, if such rule is available for
such resales.
At the time a particular offer of the Selling Securityholder Shares
and Warrants is made by or on the behalf of a Selling Securityholder, a
Prospectus and a Prospectus Supplement, to the extent required, will be
distributed which will set forth the number of securities being offered and
the terms of the offering, including the name or names of any underwriters,
dealers, or agents, the purchase price paid by any underwriter for such
securities purchased from the Selling Securityholders, any discounts,
commissions, and other items constituting compensation from the Selling
Securityholders, any discounts, commissions, or concessions allowed,
reallowed or paid to dealers, and the proposed selling price to the public.
-101-
<PAGE>
In connection with its IPO, the Company agreed with NTB, the
representative of the underwriters for the IPO, that it would pay to NTB a
commission equal to 5% of the gross proceeds of any of the IPO Warrants that
are exercised under certain conditions. See "DESCRIPTION OF CAPITAL STOCK." The
purpose of such call is to encourage the holders of the IPO Warrants to
exercise their IPO Warrants and purchase shares of Common Stock. The Company
also agreed with NTB that it would pay to NTB a commission equal to 5% of the
gross proceeds of any exercise of the Warrants that were issued in the
Company's private offering of units in 1997.
The Selling Securityholder Shares and Warrants may be sold from time
to time in one or more transactions: (i) at an offering price which is fixed
or which may vary from transaction to transaction depending upon the time of
sale, or (ii) at prices otherwise negotiated at the time of sale. Such prices
will be determined by the Selling Securityholders or by agreement between the
Selling Securityholders and their underwriter.
In order to comply with the applicable securities laws, if any, of
certain states, the Securities may be offered or sold in such states through
registered or licensed brokers or dealers in those states. In addition, in
certain states, such securities may not be offered or sold unless they have
been registered or qualified for sale in such states or an exemption from
such registration or qualification requirement is available and is complied
with.
Under applicable rules and regulations promulgated under the
Exchange Act, any person engaged in a distribution of securities may not
simultaneously bid for or purchase securities of the same class for a period
of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation Rules 10b-5 and
Regulation M, in connection with transactions in the Selling Securityholder
Shares and Warrants during effectiveness of the registration statement of
which this Prospectus is a part. All of the foregoing may affect the
marketability of such Securities.
The Company has agreed to pay all of the expenses incident to the
registration of the foregoing securities (including registration pursuant to
the securities laws of certain states) other than: (i) any fees or expenses
of any counsel retained by any Selling Securityholder and any out-of-pocket
expenses incurred by any Selling Securityholder or any person retained by any
Selling Securityholder in connection with registration of the Selling
Securityholder Shares and Warrants and (ii) commissions, expenses,
reimbursements, and discounts of underwriters, dealers, or agents, if any.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 21, 1997, the board of directors of RMI resolved to
engage the accounting firm of Baird, Kurtz and Dobson as the Company's
independent accountant for its fiscal year ending December 31, 1996.
Effectively, the Company's former independent accountant, McGladrey & Pullen,
LLP, simultaneously resigned as of January 20, 1997. The Denver office of
McGladrey & Pullen, LLP was acquired by Baird, Kurtz and Dobson on June 17,
1996. Certain former audit engagement members are now with Baird, Kurtz and
Dobson, and will continue to be involved with the Company's audit.
During the two most recent fiscal years and prior to December 31,
1995, there have been no disagreements with McGladrey & Pullen, LLP on
matters of accounting principles or practices, financial statement
disclosure, auditing scope or procedure, or any reportable events. There have
been no
-102-
<PAGE>
disagreements with Baird, Kurtz and Dobson on matters of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure, or any reportable events.
McGladrey & Pullen, LLP has furnished the Company with a copy of its
letter addressed to the Commission stating that it agrees with the above
statements.
LEGAL MATTERS
Certain legal matters regarding this offering will be passed upon
for the Company by Hall & Evans, L.L.C., Denver, Colorado, special counsel to
the Company.
EXPERTS
The consolidated financial statements of Rocky Mountain Internet,
Inc. as of December 31, 1997 and 1996 and the year then ended, have been
included herein and in the registration statement in reliance upon the report
of Baird, Kurtz & Dobson, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated statements of operations, stockholder's equity
(deficit) and cash flows of Rocky Mountain Internet, Inc. for the year ended
December 31, 1995, have been included herein and in the registration statement
in reliance upon the report of McGladrey & Pullen, LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of Internet Communications
Corporation and Subsidiaries as of December 31, 1997, and the eleven month
period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Internet Communications
Corporation and Subsidiaries as of January 31, 1997, and the years ended
January 31, 1997 and 1996, have been included herein and in the registration
statement in reliance upon the report of HEIN + ASSOCIATES LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The combined financial statements of Applications Methods, Inc. and
e-SELL Commerce Systems, Inc. as of December 31, 1997 and the year then
ended, have been included herein and in the registration statement in
reliance upon the report of PETERSON SULLIVAN PLLC, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Application Methods, Inc. as of December
31, 1996 and the year then ended, have been included herein and in the
registration statement in reliance upon the report of PETERSON SULLIVAN PLLC,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Infohiway, Inc. as of December 31, 1997
and the year then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
-103-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ROCKY MOUNTAIN INTERNET, INC.--CONSOLIDATED FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Independent Accountants' Reports:
Baird, Kurtz & Dobson.................................................................................. F-3
McGladrey & Pullen, LLP................................................................................ F-4
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited).............. F-5
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 and for the
Three Months Ended March 31, 1997 (unaudited) and March 31, 1998 (unaudited)........................... F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1996 and
1997 and for the Three Months Ended March 31, 1998 (unaudited)......................................... F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for the
Three Months Ended March 31, 1997 (unaudited) and March 31, 1998 (unaudited)........................... F-9
Notes to Consolidated Financial Statements............................................................... F-10
INTERNET COMMUNICATIONS CORPORATION--CONSOLIDATED FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Reports:
KPMG Peat Marwick LLP.................................................................................. F-23
Hein + Associates LLP.................................................................................. F-24
Consolidated Balance Sheets as of December 31, 1997 and January 31, 1997................................. F-25
Consolidated Statements of Operations for the Eleven Months Ended December 31, 1997 and the Twelve Months
Ended January 31, 1997 and 1996........................................................................ F-26
Consolidated Statements of Stockholders' Equity for the Eleven Months Ended December 31, 1997 and the
Twelve Months Ended January 31, 1997 and 1996.......................................................... F-27
Consolidated Statements of Cash Flows for the Eleven Months Ended December 31, 1997 and the Twelve Months
Ended January 31, 1997 and 1996........................................................................ F-28
Notes to Consolidated Financial Statements............................................................... F-29
UNAUDITED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet as of March 31, 1998................................................ F-40
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and the Three Months Ended April 30, 1997......................................... F-41
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and the Three Months Ended April 30, 1997......................................... F-42
Notes to Condensed Consolidated Financial Statements..................................................... F-43
APPLICATION METHODS, INC./ E-SELL COMMERCE SYSTEMS, INC.--COMBINED FINANCIAL REPORT:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--Peterson Sullivan PLLC..................................................... F-45
Combined Balance Sheet as of December 31, 1997........................................................... F-46
Combined Statement of Operations and Retained Earnings
for the Year Ended December 31, 1997................................................................... F-47
Combined Statement of Cash Flows for the Year Ended December 31, 1997.................................... F-48
Notes to Combined Financial Statements................................................................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED FINANCIAL STATEMENTS:
Combined Balance Sheet as of March 31, 1998.............................................................. F-51
Combined Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1998......... F-52
Combined Statement of Cash Flows for the Three Months Ended March 31, 1998............................... F-53
Notes to Combined Financial Statements................................................................... F-54
APPLICATION METHODS, INC.--FINANCIAL REPORT:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--Peterson Sullivan PLLC..................................................... F-56
Balance Sheet as of December 31, 1996.................................................................... F-57
Statement of Operations and Retained Earnings for the Year Ended December 31, 1996....................... F-58
Statement of Cash Flows for the Year Ended December 31, 1996............................................. F-59
Notes to Financial Statements............................................................................ F-60
UNAUDITED FINANCIAL STATEMENTS:
Balance Sheet as of March 31, 1997....................................................................... F-62
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1997.................. F-63
Statement of Cash Flows for the Three Months Ended March 31, 1997........................................ F-64
Notes to Financial Statements............................................................................ F-65
INFOHIWAY, INC--FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--KPMG Peat Marwick LLP ..................................................... F-67
Balance Sheet as of December 31, 1997.................................................................... F-68
Statement of Operations for the Year Ended December 31, 1997............................................. F-69
Statement of Stockholders' Equity for the Year Ended December 31, 1997................................... F-70
Statement of Cash Flows for the Year Ended December 31, 1997............................................. F-71
Notes to Financial Statements............................................................................ F-72
</TABLE>
F-2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 27, 1998
F-3
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and cash flows of ROCKY MOUNTAIN INTERNET, INC.
for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of ROCKY MOUNTAIN INTERNET, INC. for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ MCGLADREY & PULLEN, LLP
Denver, Colorado
February 23, 1996
F-4
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................. $ 348,978 $ 1,053,189 $ 1,152,420
Investments........................................................... 1,356,629 -- --
Trade receivables, less allowance for doubtful accounts;
1996--$115,000, 1997--$176,000, 1998--$226,857...................... 518,827 672,094 616,814
Inventories........................................................... 91,047 46,945 67,019
Other................................................................. 143,753 112,891 153,436
------------ ------------ ------------
Total Current Assets.............................................. 2,459,234 1,885,119 1,989,689
------------ ------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Equipment............................................................. 2,513,944 2,927,016 3,114,444
Computer software..................................................... 202,501 218,801 221,319
Leasehold improvements................................................ 127,877 190,235 190,235
Furniture, fixtures, and office equipment............................. 413,678 431,814 444,575
------------ ------------ ------------
3,258,000 3,767,866 3,970,573
Less accumulated depreciation and amortization........................ 403,023 1,118,217 1,329,005
------------ ------------ ------------
2,854,977 2,649,649 2,641,568
------------ ------------ ------------
OTHER ASSETS
Customer lists, at amortized cost, less accumulated amortization;
1996--$2,094, 1997--$108,689, 1998--$137,873........................ 145,444 471,096 441,912
Deposits and other.................................................... 80,512 76,255 79,255
------------ ------------ ------------
225,956 547,351 521,167
------------ ------------ ------------
$ 5,540,167 $ 5,082,119 $ 5,152,424
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable......................................................... $ 4,250 $ -- $ --
Current maturities of long-term debt and capital lease obligations.... 451,823 609,390 646,148
Accounts payable...................................................... 425,160 581,366 1,288,372
Deferred revenue...................................................... 218,121 345,857 340,149
Accrued payroll and related taxes..................................... 528,160 182,569 193,162
Accrued rent.......................................................... 44,659 136,182 139,572
Accrued severance expenses............................................ -- 138,472 8,347
Accrued bonus......................................................... 157,642 -- --
Other accrued expenses................................................ 258,535 100,286 95,769
------------ ------------ ------------
Total Current Liabilities......................................... 2,088,350 2,094,122 2,711,519
------------ ------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS............................ 1,134,380 904,627 784,451
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized 1996--1,000,000,
1997--790,000 shares, 1998--750,000 shares; issued and outstanding
1996--250,000 shares, 1997--40,000 shares, 1998--0 shares........... 250 40 --
Common stock, $.001 par value; authorized 1996 and 1997--10,000,000
shares, 1998 25,000,000 shares; issued 1996--4,540,723 shares,
1997--6,736,889 shares, 1998--7,286,275 shares; outstanding
1996--4,540,723 shares, 1997--6,677,846 shares, 1998--7,218,281
shares.............................................................. 4,541 6,737 7,286
Additional paid-in capital............................................ 4,879,968 9,284,720 9,799,717
Accumulated deficit................................................... (2,567,322) (6,747,050) (8,061,400)
Unearned compensation................................................. -- (383,077) --
------------ ------------ ------------
2,317,437 2,161,370 1,745,603
Treasury stock, at cost
Common; 1996--0 shares, 1997--59,043 shares, 1998,--67,474 shares..... -- (78,000) (89,149)
------------ ------------ ------------
2,317,437 2,083,370 1,656,454
------------ ------------ ------------
$ 5,540,167 $ 5,082,119 $ 5,152,424
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Internet access and
services.................... $1,034,774 $2,762,028 $5,740,044 $1,314,039 $1,713,316
Equipment sales............... 144,551 519,551 387,067 83,244 65,969
--------- ---------- ---------- --------- ----------
1,179,325 3,281,579 6,127,111 1,397,283 1,779,285
--------- ---------- ---------- --------- ----------
COST OF REVENUE EARNED
Internet access and
services.................... 193,875 640,880 1,760,262 437,111 601,130
Equipment sales............... 126,494 462,787 300,053 63,865 50,956
--------- ---------- ---------- --------- ----------
320,369 1,103,667 2,060,315 500,976 652,086
--------- ---------- ---------- --------- ----------
GROSS PROFIT.................... 858,956 2,177,912 4,066,796 896,307 1,127,199
GENERAL, SELLING, AND
ADMINISTRATIVE EXPENSES....... 967,478 4,459,106 7,867,502 1,708,306 2,379,343
--------- ---------- ---------- --------- ----------
OPERATING LOSS.................. (108,522) (2,281,194) (3,800,706) (811,999) (1,252,144)
--------- ---------- ---------- --------- ----------
OTHER INCOME (EXPENSE)
Interest expense.............. (31,818) (157,042) (402,086) (85,002) (80,826)
Interest income............... 2,397 44,322 54,461 12,849 18,620
Other income (expense), net... 9,149 51,343 (4,522) (5,485) --
--------- ---------- ---------- --------- ----------
(20,272) (61,377) (352,147) (77,638) (62,206)
--------- ---------- ---------- --------- ----------
LOSS BEFORE INCOME TAXES........ (128,794) (2,342,571) (4,152,853) (889,637) (1,314,350)
INCOME TAX EXPENSE.............. -- -- -- -- --
--------- ---------- ---------- --------- ----------
NET LOSS........................ (128,794) (2,342,571) (4,152,853) (889,637) (1,314,350)
PREFERRED STOCK DIVIDENDS....... -- 25,000 26,875 25,000 --
--------- ---------- ---------- --------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS.................. $(128,794) $(2,367,571) $(4,179,728) $(914,637) $(1,314,350)
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
BASIC AND DILUTED LOSS PER SHARE
Net loss per share............ $ (.07) $ (1.13) $ (1.03) $ (.19) $ (.20)
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ----------------- PAID-IN ACCUMULATED UNEARNED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCK TOTAL
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994...................... -- $-- 1,188,000 $1,188 $ 26,626 $ (70,957 ) $ -- $ -- $ (43,143)
Purchase of common stock for
redemption................ -- -- (180,000) (180 ) (18,570 ) -- -- -- (18,750)
Issuance of common stock.... -- -- 860,000 860 1,008 -- -- -- 1,868
Capital contribution........ -- -- -- -- 19,783 -- -- -- 19,783
Net loss.................... -- -- -- -- -- (128,794 ) -- -- (128,794)
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1995.... -- -- 1,868,000 1,868 28,847 (199,751 ) -- -- (169,036)
Issuance of preferred
stock..................... 250,000 250 -- -- 405,750 -- -- -- 406,000
Issuance of common stock.... -- -- 1,365,000 1,365 3,775,887 -- -- -- 3,777,252
Stock option compensation... -- -- -- -- 52,807 -- -- -- 52,807
Issuance of underwriters'
warrants.................. -- -- -- -- 100 -- -- -- 100
Conversion of debentures
into common stock......... -- -- 1,225,000 1,225 488,775 -- -- -- 490,000
Dividends on preferred
stock..................... -- -- -- -- -- (25,000 ) -- -- (25,000)
Issuance of common stock for
the acquisition of
CompuNerd, Inc............ -- -- 30,000 30 67,470 -- -- -- 67,500
Issuance of common stock for
the acquisition of the
Information Exchange...... -- -- 52,723 53 60,332 -- -- -- 60,385
Net loss.................... -- -- -- -- -- (2,342,571 ) -- -- (2,342,571)
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1996.... 250,000 250 4,540,723 4,541 4,879,968 (2,567,322 ) -- -- 2,317,437
Conversion of preferred to
common stock.............. (210,000) (210) 210,136 210 -- -- -- -- --
Issuance of common stock in
private placement......... -- -- 621,000 621 1,117,299 -- -- -- 1,117,920
Stock option compensation... -- -- -- -- 551,194 -- (383,077) -- 168,117
Issuance of common stock in
stock purchase
agreement................. -- -- 1,225,000 1,225 2,397,352 -- -- -- 2,398,577
Dividends on preferred
stock..................... -- -- -- -- -- (26,875 ) -- -- (26,875)
Issuance of common stock for
the acquisition of Online
Network Enterprises,
Inc....................... -- -- 116,930 117 306,830 -- -- -- 306,947
Purchase of treasury stock.. -- -- -- -- -- -- -- (78,000 ) (78,000)
Stock options exercised..... -- -- 23,100 23 32,077 -- -- -- 32,100
Net loss.................... -- -- -- -- -- (4,152,853 ) -- -- (4,152,853)
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1997.... 40,000 40 6,736,889 6,737 9,284,720 (6,747,050 ) (383,077) (78,000 ) 2,083,370
Conversion of preferred to
common stock
(unaudited)............... (40,000) (40) 40,150 40 -- -- -- -- --
Stock option compensation
(unaudited)............... -- -- -- -- -- -- 383,077 -- 383,077
Stock options and warrants
exercised (unaudited)..... -- -- 509,236 509 510,606 -- -- -- 511,115
Purchase of treasury stock
(unaudited)............... -- -- -- -- -- -- -- (18,000 ) (18,000)
Common stock contributed to
pension plan
(unaudited)............... -- -- -- -- 4,391 -- -- 6,851 11,242
Net loss (unaudited)........ -- -- -- -- -- (1,314,350 ) -- -- (1,314,350)
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
BALANCE, MARCH 31, 1998
(Unaudited)................. -- $-- 7,286,275 $7,286 $9,799,717 $(8,061,400) $ -- $(89,149) $ 1,656,454
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
-------- ------ --------- ------ ---------- ----------- ------------ -------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(128,794) $(2,342,571) $(4,152,853) $(889,637) $(1,314,350)
Items not requiring (providing) cash:
Depreciation...................................... 51,395 88,162 196,491 39,312 51,988
Amortization...................................... 39,030 186,044 690,794 135,699 187,984
Loss on disposal of fixed assets.................. -- -- 13,128 -- --
Stock option compensation......................... -- 52,807 168,117 -- 383,077
Common stock contributed to pension plan.......... -- -- -- -- 17,664
Provision for doubtful accounts................... (17,369) (112,458) (188,452) -- (50,856)
Changes in:
Trade receivables................................. (42,252) (305,541) 48,385 (102,740) 106,137
Inventories....................................... (12,185) (78,862) 44,102 (25,861) (20,074)
Other current assets.............................. (5,153) (138,066) 30,862 101,005 (41,965)
Accounts payable.................................. 89,395 224,618 156,206 433,195 707,006
Deferred revenue.................................. 77,084 41,268 127,736 38,938 (5,708)
Accrued payroll and related taxes................. 83,528 443,208 (345,591) (335,304) 10,593
Accrued expenses.................................. 30,550 429,886 (85,896) (209,822) (138,095)
--------- ---------- ---------- --------- ----------
Net cash provided by (used in) operating
activities.................................... 165,229 (1,511,505) (3,296,971) (815,215) (106,599)
--------- ---------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (177,771) (900,235) (287,931) (166,461) (129,268)
Purchase of investments............................. -- (1,756,629) -- -- (3,000)
Proceeds from investments........................... -- 400,000 1,356,629 779,711 --
Payment for purchase of acquisitions................ -- (70,478) (150,000) (125,300) --
(Increase) decrease in deposits..................... (60,635) (16,675) 2,257 (14,490) --
--------- ---------- ---------- --------- ----------
Net cash (used in) provided by investing
activities.................................... (238,406) (2,344,017) 920,955 473,460 (132,268)
--------- ---------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and warrants..... 1,868 3,777,252 3,535,397 -- 511,115
Proceeds from sale of preferred stock............... -- 406,000 -- -- --
Proceeds from notes payable......................... 18,000 6,689 500,000 495,000 --
Proceeds from long-term debt........................ 373,000 135,404 200,000 248,300 --
Sale of stock warrants.............................. -- 100 -- -- --
Payment of preferred stock dividend................. -- (25,000) (26,875) (12,500) --
Purchase of common/treasury stock................... (18,750) -- (78,000) (12,000) (18,000)
Payments on notes payable........................... (8,217) (26,108) (504,250) -- --
Payments on long-term debt and capital lease
obligations....................................... (54,533) (344,498) (546,045) (199,733) (155,017)
--------- ---------- ---------- --------- ----------
Net cash provided by financing activities....... 311,368 3,929,839 3,080,227 519,067 338,098
--------- ---------- ---------- --------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS................. 238,191 74,317 704,211 177,312 99,231
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 36,470 274,661 348,978 348,978 1,053,189
--------- ---------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 274,661 $ 348,978 $1,053,189 $ 526,290 $1,152,420
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-9
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Rocky Mountain Internet, Inc. (the Company) is a provider of Internet access
services and Web services to businesses, professionals, and individuals in the
state of Colorado. The Company facilitates access to the Internet by means of a
regional telecommunications network comprised of a backbone of leased,
high-speed dedicated phone lines, computer hardware and software, and local
access points known as points of presence. The Company's high-speed, digital
telecommunications network provides subscribers with direct access to the full
range of Internet applications and resources.
UNAUDITED INTERIM INFORMATION
Information with respect to March 31, 1998, and the periods ended March 31,
1998 and 1997, is unaudited and not covered by the independent auditors'
reports. In the opinion of management, the unaudited financial statements
reflect all adjustments, consisting only of normal adjustments, necessary to
present fairly the financial position of the Company at March 31, 1998, and the
results of operations and cash flows for the three months ended March 31, 1998
and 1997, in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiary, Rocky Mountain Internet Subsidiary (Colorado) Inc. The
operations of this subsidiary consist solely of the ownership of equipment,
which it leases to the Company. All significant intercompany accounts and
transactions have been eliminated.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 1996 and 1997, cash
equivalents consisted primarily of money market accounts.
COST OF REVENUE EARNED
Included in Internet access and services cost of revenue earned is primarily
the cost of high-speed data circuits and telephone lines that allow customers
access to the Company's service plus Internet access fees paid by the Company to
Internet backbone carriers.
F-10
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives of the assets, ranging
from five to seven years. Certain equipment obtained through capital lease
obligations are amortized over the life of the lease. Improvements to leased
property are amortized over the lesser of the life of the lease or life of the
improvements.
Major additions and improvements to property and equipment are capitalized,
whereas replacements, maintenance, and repairs which do not improve or extend
the lives of the respective assets, are expensed.
REVENUE RECOGNITION
The Company charges customers (subscribers) monthly access fees to the
Internet and recognizes the revenue in the month the access is provided. For
certain subscribers billed in advance, the Company recognizes the revenue over
the period the billing covers. Revenue for other services provided, including
set-up fees charged to customers when their accounts are activated, or equipment
sales, are recognized as the service is performed or the equipment is delivered
to the customer.
ADVERTISING
The Company expenses advertising costs as incurred. During the years ended
December 31, 1995, 1996, and 1997, the Company incurred $24,847, $167,565, and
$274,726, respectively, in advertising costs.
CUSTOMER LISTS
The excess of the purchase price over the fair value of net assets acquired
in business acquisitions is recorded as customer lists and is being amortized on
a straight-line basis over five years.
INVENTORIES
Inventories consist of Internet access equipment and are valued at the lower
of cost of market. Cost is determined using the first-in, first-out (FIFO)
method.
LOSS PER COMMON SHARE
For the years ended December 31, 1995, 1996, and 1997, loss per share is
computed based upon approximately 1,868,000, 2,295,000, and 5,288,000,
respectively, weighted average common shares outstanding for both basic and
diluted earnings per share. The net loss for the years ended December 31, 1996
and 1997 used in the calculation was increased by the preferred stock dividends
paid of $25,000 and $26,875, respectively. All stock options and warrants are
excluded from the computation of diluted earnings per share as they would have
an antidilutive effect on earnings per share during the years ended December 31,
1995, 1996 and 1997. During 1997 the Company adopted SFAS No. 128 "Earnings Per
Share." In accordance with that statement the loss per share for the years ended
December 31, 1995 and 1996 have been restated.
F-11
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
RENT EXPENSE
The Company recognizes rent expense on a straight-line basis over the lease
terms. Differences between expense recognized and payments made are recorded as
accrued expenses.
INVESTMENTS
Debt securities and marketable equity securities for which the Company has
no immediate plans to sell but which may be sold in the future are classified as
available-for-sale and carried at fair value. Any unrealized gains and losses
are recorded, net of related income tax effects, in stockholders' equity. At
December 31, 1996, the Company had one U.S. Treasury Note, and two repurchase
agreements with a bank classified as available-for-sale. The repurchase
agreements were secured by U.S. Treasury Notes. Fair value of the investments
approximated cost as of December 31, 1996, the investments matured in 1997.
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31, 1996 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Capital lease obligations payable to finance companies, due in monthly installments
aggregating $73,562 including interest ranging from 9.5% to 33% through December
2001, collateralized by equipment. An officer and shareholder of the Company has
guaranteed certain of the leases and one of the leases restricts the payment of
preferred stock dividends........................................................... $ 1,586,203 $ 1,375,123
Notes payable to bank, due in monthly installments of $5,555 plus interest at 2% over
the Bank's index rate (10.5% at December 31, 1997) collateralized by furniture and
fixtures............................................................................ -- 138,894
------------ ------------
1,586,203 1,514,017
Less current maturities............................................................... 451,823 609,390
------------ ------------
$ 1,134,380 $ 904,627
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Aggregate maturities required on long-term debt and obligations under
capital leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Years ending December 31:
1998.......................................................................... $ 609,390
1999.......................................................................... 722,287
2000.......................................................................... 142,138
2001.......................................................................... 40,202
------------
$ 1,514,017
------------
------------
</TABLE>
The following is a schedule by years of the future minimum lease payments
under the capital leases, together with the present value of the minimum lease
payments as of December 31, 1997:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Years ending December 31:
1998.......................................................................... $ 813,364
1999.......................................................................... 785,416
2000.......................................................................... 166,707
2001.......................................................................... 43,667
------------
Future minimum lease payments................................................. 1,809,154
Less amount representing interest............................................. (434,031)
------------
Present value of minimum lease payments....................................... $ 1,375,123
------------
------------
</TABLE>
Equipment acquired under capital lease obligations had a cost of $1,976,285
and $2,291,092 and accumulated depreciation of $186,011 and $681,597 at December
31, 1996 and 1997, respectively.
NOTE 3: COMMITMENTS
LEASE COMMITMENTS
The Company leases operating facilities, and equipment under operating lease
agreements expiring through May 2002. Certain of these lease agreements require
the Company to pay operating expenses and provide for escalation of annual
rentals if the lessor's operating costs increase.
F-13
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: COMMITMENTS (CONTINUED)
At December 31, 1997, the future minimum payments under these leases,
exclusive of sublease payments, are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Years ending December 31:
1998.......................................................................... $ 556,072
1999.......................................................................... 531,964
2000.......................................................................... 454,268
2001.......................................................................... 380,036
2002.......................................................................... 126,680
------------
$ 2,049,020
------------
------------
</TABLE>
In February 1997, the Company subleased one of its operating facilities. The
Company accrued a loss of $58,073 as of December 31, 1996, as a result of this
sublease. Minimum future rentals receivable under this noncancellable operating
sublease are $148,796, covering the period through January 2001, which have not
been deducted from in the above future minimum payments.
Rent expense was $82,269, $240,720, and $538,625 for 1995, 1996, and 1997,
respectively.
EMPLOYEE CONTRACTS
The Company currently has employment agreements with two of its officers
that provide for salaries ranging from $90,000 per year to $70,000 per year. The
Company may terminate the agreements for cause, or without cause subject to the
obligation to pay the terminated employee a severance payment ranging from five
to eight months salary based on length of service. The employment agreements
terminate in December 1999. The agreements do not significantly restrict such
employee's ability to compete with the Company following any termination.
LETTER OF CREDIT
At December 31, 1997, the Company had an outstanding letter of credit in the
amount of $150,000 to be used in case of default on its main operating
facilities lease. The letter of credit was secured by $170,000 currently
invested in a money market account.
REGISTRATION REQUIREMENTS
The Company has agreed to file a registration statement with the Securities
and Exchange Commission to register the shares issued in its 1997 private
placement and the shares issued/acquired pursuant to the stock purchase
agreement discussed in Note 8, including the shares issueable under the warrant
agreements.
NOTE 4: BUSINESS ALLIANCES
The Company has entered into various contracts with unrelated entities to
enable the Company to provide customers Internet service within certain areas of
Colorado. The unrelated entities own equipment in "points of presence" (POP)
sites which the Company utilizes to provide service to customers. The
F-14
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: BUSINESS ALLIANCES (CONTINUED)
Company pays a portion of the revenues (generally 50%) generated through the use
of unrelated parties' equipment. The contracts can be cancelled with notice and
if cancelled by the other party the Company has the right, but not the
obligation, to acquire the equipment owned by the unrelated parties. The
revenues to the Company related to these arrangements amounted to $67,452,
$354,565, and $480,951 for the years ended December 31, 1995, 1996, and 1997,
respectively, and are included in "Internet access and services" revenues in the
accompanying consolidated statements of operations. The payables to the
unrelated entities for their portion of the aforementioned revenues of $10,069
and $48,089 at December 31, 1996 and 1997, respectively, are included in accrued
expenses in the accompanying balance sheets.
NOTE 5: INCOME TAXES
Under the provisions of the Internal Revenue Code, the Company has available
for federal income tax purposes, a net operating loss carryforward of
approximately $6,212,000, which expires in the years 2010, 2011, and 2012. The
tax effects of this and other temporary differences related to deferred taxes
were:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss.............................................. $ 850,000 $ 2,317,000
Allowance for doubtful accounts................................. 44,000 66,000
Tax goodwill.................................................... 18,000 15,000
Accrued expenses................................................ 22,000 108,000
Amortization of customer lists.................................. -- 27,000
----------- -------------
934,000 2,533,000
Deferred tax liabilities:
Accumulated depreciation........................................ -- (101,000)
----------- -------------
Net deferred tax asset before valuation allowance................. 934,000 2,432,000
Valuation allowance............................................... (934,000) (2,432,000)
----------- -------------
Net deferred tax asset...................................... $ -- $ --
----------- -------------
----------- -------------
</TABLE>
The actual provisions (credits) for income taxes varied from the expected
provision (computed by applying the statutory U.S. federal income tax rates to
loss before taxes) because the tax benefits of the net operating losses for the
periods ended December 31, 1995, 1996, and 1997, are offset by the valuation
allowance.
NOTE 6: REORGANIZATION
The Company was originally formed as a sole proprietorship in October 1993,
and incorporated as a Colorado corporation in March 1994. A new Delaware
corporation was formed in October 1995. On October 31, 1995, the Delaware
corporation purchased all the assets relating to the Colorado corporation's
business, and assumed all of its liabilities, except for certain notes payable
to shareholders. Since both parties in the transaction were under common
control, the transaction has been accounted for similar to a pooling of
interests, and all assets purchased and liabilities assumed were recorded by the
Delaware
F-15
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: REORGANIZATION (CONTINUED)
corporation at the Colorado corporation's historical costs. These financial
statements reflect the operations of both entities during the years ended
December 31, 1995, 1996, and 1997. The stockholders' equity balances represent
shares outstanding as if the transaction had taken place January 1, 1995.
NOTE 7: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles requires disclosures of certain
significant estimates and current vulnerability due to certain concentrations.
Those matters include the following:
DEPENDENCE ON SUPPLIERS
The Company depends upon third-party suppliers for its access to the
Internet through leased telecommunications lines. Although this access is
available from several alternative suppliers, there can be no assurance that the
Company could obtain substitute services from other providers at reasonable or
comparable prices or in a timely manner. The Company is also dependent upon the
regional Bell operating company to provide installations of circuits and to
maintain those circuits.
YEAR 2000
The Company has begun the process of identifying computer systems that could
be affected by the "Year 2000" issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company has not estimated the cost of addressing the Year
2000 issue. The impact on the Company's operations of failing to make its
systems Year 2000 compliant in a timely manner cannot presently be determined.
NOTE 8: PREFERRED STOCK
On April 26, 1996, the Board of Directors designated 250,000 shares of
Preferred Stock as Series A Convertible Preferred Stock (Series A Stock) and set
the terms of the stock. The Series A Stock accrues cumulative dividends at the
rate of 10% per annum. The dividends are payable quarterly to the extent
permitted by applicable law. The Series A Preferred Stock may be converted into
shares of Common Stock at the option of the holder at any time after May 15,
1997. The rate of conversion is the Series A Stock's liquidation value divided
by the conversion price, currently set at $2.00 per share. The Series A Stock's
liquidation value is equal to the price paid for the Series A Stock plus any
cumulative dividends unpaid as of the conversion date. The conversion price is
subject to change due to certain anti-dilution adjustments.
The Company has the authority to issue up to an additional 750,000 shares of
Preferred Stock. The Board of Directors is authorized to determine terms and
preferences of the Preferred Stock prior to issuance.
NOTE 9: COMMON STOCK TRANSACTIONS
PUBLIC OFFERING
On September 5, 1996, the Company completed a public offering of 1,365,000
units at an offering price of $3.50 per unit. Each unit consisted of one share
of common stock and one warrant to purchase one share of common stock at $4.375
per share for a 23-month period commencing October 5, 1997, and prior to
September 5, 1999. Under certain circumstances, the Company may redeem the
warrants at $.25 per
F-16
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: COMMON STOCK TRANSACTIONS (CONTINUED)
warrant. Additionally, the Company sold the underwriter for $100 warrants to
purchase 125,000 units. These underwriter warrants to purchase units are
exercisable through September 5, 2000, at an exercise price of $4.20 per unit
(for which the accompanying warrant to purchase a share of common stock is
exercisable at $6.5625). Costs of the offering, including a 10% commission paid
to the underwriters, the underwriter's nonaccountable expense allowance, and
professional fees, amounted to $1,000,248, resulting in net proceeds from the
offering of $3,777,252.
PRIVATE PLACEMENT
On September 14, 1997, the Company completed a private placement of units
consisting of two shares of common stock and a warrant to purchase one share of
common stock. The per unit price was $4.00 and was allocated $1.90 to each share
of common stock and $0.20 to the warrant to purchase a share of common stock.
The warrants entitle the holder to purchase a share of common stock for $3.00
and expire on June 13, 2000. The net proceeds to the Company from the sale of
310,500 units amounted to $1,117,920 after deducting offering expenses of
$124,080. The terms of the offering requires the issuance of additional shares
of common stock in the event the Company sells common stock in the future at a
cash price, net of discounts and commissions of less than $1.80 per share,
exclusive of shares issued upon the exercise of employee stock options. The
number of shares issueable under this provision would equate to the number of
shares by which purchasers would have been diluted if shares are sold at net
price of less than $1.80.
In connection with that offering, the Company agreed to issue to the
placement agent, warrants ("Agent's Private Offering Warrants") to purchase
units of securities, each unit consisting of two shares of Common Stock and one
common stock purchase warrant. The Company anticipates that it will issue to the
placement agent, for nominal consideration, 31,050 Agent's Private Offering
Warrants. The Warrants will be exercisable for $4.00 per unit (consisting of two
shares of common stock and one warrant to purchase one share of common stock for
$3.00) and will be exercisable for five years.
STOCK PURCHASE AGREEMENT
On October 1, 1997, the Current President (Current President) of the Company
acquired directly from the Company 1,225,000 shares of the Company's Common
Stock and a warrant to purchase 4,000,000 shares of the Company's Common Stock
for $2,450,000. The warrant is exercisable, in whole or in part for an 18 month
period, at $1.90 per share. At December 31, 1997, the Company lacked sufficient
authorized shares to accommodate the issuance of all of the shares underlying
the warrant. The Company intends to amend its Certificate of Incorporation to
increase the authorized common shares from 10,000,000 to 25,000,000 shares.
In connection with the execution of this Stock Purchase Agreement, the
former president resigned as the President, Chief Executive Officer, and a
director of the Company. Contemporaneously, the Current President was elected as
the Company's President, Chief Executive Officer, and Chairman of the Board of
Directors.
The Current President also purchased 275,000 shares of Common Stock from the
former president and former members of the Board of Directors for $550,000, or
$2.00 per share.
F-17
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: BENEFIT PLANS
MANAGEMENT BONUS PLAN
The Company had a bonus plan during 1996 which entitled certain employees to
receive a cash bonus based upon achievement of specified levels of revenues by
the Company for the year ended December 31, 1996. The Company accrued $158,000
in bonuses under the plan in 1996. The Company gave employees the option of
receiving their bonuses in cash or stock options. As a result, 40,425 stock
options were issued in 1997 to employees at an exercise price of $1.00 per
share. The Company adopted a similar plan for 1997, however, no bonuses were
earned under the 1997 Plan.
STOCK OPTION PLANS
In July 1996, the Company adopted the 1996 Employee Stock Option Plan (the
Employee Plan) and the Non-Employee Directors' Stock Option Plan (the Directors'
Plan). The Employee Plan provides for an authorization of 471,300 shares of
Common Stock for issuance upon exercise of stock options granted under the Plan.
The Employee Plan is administered by the Board of Directors, which determines
the persons to whom options are granted, the type, number, vesting schedule,
exercise price, and term of options granted. Under this plan both incentive and
nonqualified options can be granted.
An aggregate of 18,000 shares of Common Stock are reserved for issuance
under the Directors' Plan. All nonemployee directors are automatically granted
nonqualified stock options to purchase 1,500 shares initially and additional
1,500 shares for each subsequent year that they serve up to a maximum of 6,000
shares per director.
In September 1997, the Company adopted the 1997 Stock Option Plan (1997
Plan). The 1997 Plan provides for an authorization of 50,000 shares of Common
Stock for issuance upon exercise of stock options granted under the Plan. The
1997 Plan was established to issue the stock options discussed under Management
Bonus Plan.
In October 1997, the Company granted the current president (see Note 8)
incentive stock options to purchase 191,385 shares of Common Stock at $2.6125
per share and nonqualified stock options to purchase 408,615 shares of Common
Stock at $1.00 per share, subject to approval by the stockholders. The options
vest one year from the date of grant. Compensation of $168,117 relating to the
nonqualified stock options was recorded to compensation expense during the year
ended December 31, 1997.
The Board of Directors has approved the 1998 Employees' Stock Option Plan,
subject to approval by the stockholders. This plan reserves 266,544 shares of
Common Stock for issuance over the ten-year term of the plan.
F-18
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: BENEFIT PLANS (CONTINUED)
The following is a summary of the status of the Company's stock option plans
at December 31, 1996 and 1997, and the changes during the years then ended:
<TABLE>
<CAPTION>
1996 1997
------------------------------------- ---------------------------------------
EMPLOYEES' PLANS DIRECTORS' PLAN EMPLOYEES' PLANS DIRECTORS' PLAN
----------------- ----------------- ------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year........................ -- $-- -- $-- 284,230 $1.68 1,500 $2.00
Options granted............... 284,230 1.68 1,500 2.00 896,400 1.68 4,500 2.42
Options expired............... -- -- -- -- (73,860) 1.81 -- --
Options exercised............. -- -- -- -- (23,100) 1.65 -- --
------- -------- ------- -------- --------- -------- ------ --------
Outstanding, end of year...... 284,230 $1.68 1,500 $2.00 1,083,670 $1.67 6,000 $2.31
------- -------- ------- -------- --------- -------- ------ --------
------- -------- ------- -------- --------- -------- ------ --------
Options exercisable, end of
year........................ 25,000 1,500 483,670 6,000
------- ------- --------- ------
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Sholes method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dividend per share....................................................... $ 0.00 $ 0.00
Risk-free interest rate.................................................. 6.16% 6.0%
Expected life of options................................................. 5 years 5 years
Weighted-average fair value of options granted........................... $ 1.90 $ 1.29
</TABLE>
The following table summarized information about stock options under the
plans outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- --------- ----------- ---------
$0.40............... 25,000 4 years $ 0.40 25,000 $ 0.40
$1.00............... 437,885 10 years $ 1.00 29,270 $ 1.00
$1.50............... 104,700 5 years $ 1.50 104,700 $ 1.50
$1.875.............. 38,200 5 years $1.875 38,200 $1.875
$2.00............... 160,500 4 years $ 2.00 160,500 $ 2.00
$2.25............... 3,000 5 years $ 2.25 3,000 $ 2.25
$2.50............... 127,500 5 years $ 2.50 127,500 $ 2.50
$2.61............... 191,385 5 years $ 2.61 -- $ 2.61
$2.75............... 1,500 5 years $ 2.75 1,500 $ 2.75
</TABLE>
One nonqualified stock option to purchase 25,000 shares at $.40 per share
was granted under the Employee Plan. This option vested immediately.
Compensation of $40,000 relating to this option was
F-19
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: BENEFIT PLANS (CONTINUED)
recorded to compensation expense. The remaining Employee Plan options above have
a five year term and vested fully during 1997 due to a change in control of the
Company (see Note 9).
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans, and $52,807 and $168,117 in compensation costs have been
recognized in December 31, 1996 and 1997, respectively. Had compensation cost
for the Plans been determined based on the fair value at the grant dates using
Statement of Financial Accounting Standards No. 123, the Company's net loss
would have increased by $74,258 and $768,647 in 1996 and 1997, respectively. In
addition, the Company's loss per share would have increased by $.02 and $.14 in
1996 and 1997, respectively.
401(K) PLAN
The Board of Directors has approved a 401(k) Savings and Retirement Plan
that will cover substantially all employees effective March 1, 1998. The
Company's contributions to the Plan will be determined annually by the Board of
Directors.
NOTE 11: ACQUISITIONS
On November 1, 1997, the Company acquired the customer base and selected
assets of CompuNerd, Inc. for $70,478 in cash and 30,000 shares of the Company's
common stock valued at $67,500. On December 1, 1996, the Company acquired the
Information Exchange, a related party through common ownership, in exchange for
52,723 shares of the Company's common stock valued at $60,385. On January 22,
1997, the Company acquired the dedicated high speed and dial-up subscribers from
Online Network Enterprises, Inc. (O.N.E). The O.N.E. acquisition netted the
Company approximately 50 dedicated and 725 dial-up subscribers and equipment
valued at approximately $24,700. The Company paid $150,000 cash and issued
116,930 shares of the Company's common stock valued at $306,947. The
acquisitions have been accounted for as purchases by recording the assets
acquired at their estimated market value at the acquisition date. The operations
of the Company include the operations of the acquirees from the acquisition
date. Consolidated operations would not have been significantly different for
the Company had the CompuNerd, Inc. and O.N.E. acquisitions been made at January
1, 1996. Unaudited proforma consolidated operations for the years ended December
31, 1995 and 1996, assuming the Information Exchange purchase was made at the
beginning of each year is shown below:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net sales......................................................... $ 1,200,645 $ 3,367,720
Net loss.......................................................... $ (214,042) $ (2,377,599)
Net loss per share................................................ $ (.06) $ (.65)
</TABLE>
The proforma results are not necessarily indicative of what would have
occurred had the acquisition been on these dates, nor are they necessarily
indicative of future operations.
F-20
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: ACQUISITIONS (CONTINUED)
The purchase price for the above acquisitions were allocated as follows:
<TABLE>
<CAPTION>
COMPUNERD, INFORMATION
INC. EXCHANGE O.N.E. TOTAL
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Equipment..................................................... $ 48,265 $ 2,560 $ 24,700 $ 75,525
Customer lists................................................ 89,713 57,825 432,247 579,785
------------ ----------- ---------- ----------
$ 137,978 $ 60,385 $ 456,947 $ 655,310
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
</TABLE>
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NONCASH INVESTING AND FINANCING ACTIVITIES 1995 1996 1997
- --------------------------------------------------------------------------- ---------- ------------ ----------
<S> <C> <C> <C>
Capital lease obligations incurred for equipment........................... $ 211,654 $ 1,672,244 $ 273,859
Capital contributed by reductions of notes payable......................... 19,783 -- --
Long-term debt converted to common stock................................... -- 490,000 --
Preferred stock converted to common stock.................................. -- -- 210
Acquisition of CompuNerd, Inc. through issuance of common stock............ -- 67,500 --
Acquisition of the Information Exchange through issuance of common stock... -- 60,385 --
Acquisition of the Online Network Exchange, Inc. through issuance of common
stock.................................................................... -- -- 306,947
Other...................................................................... -- -- 32,100
ADDITIONAL CASH PAYMENTS INFORMATION
- ---------------------------------------------------------------------------
Interest paid.............................................................. $ 22,043 $ 159,007 $ 396,731
</TABLE>
NOTE 13: CONTINUED OPERATIONS
During the years ended December 31, 1996 and 1997, the Company incurred net
losses of $2,342,571 and $4,152,853, respectively, used $1,511,505 and
$3,296,971, respectively, of net cash from operating activities. The Company's
President has plans to contribute approximately $500,000 in additional capital
in 1998. In addition, the Company's management currently has plans it believes
will increase revenues in order to become profitable and generate positive cash
flows from operations. However, there are no assurances that the Company's plans
for revenue growth and improved operating cash flows will be successful. It
could be necessary to raise additional capital or reduce operating costs to meet
liquidity requirements. Reducing operating costs could inhibit the Company's
planned rate of revenue growth.
NOTE 14: RESTATEMENT
The 1996 financial statements have been restated to correct the recording of
a nonqualified stock option. The effect of this change was to increase
additional paid-in capital, accumulated deficit and net loss by $40,000 and to
increase basic and diluted loss per share by $.01.
F-21
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: FUTURE CHANGES IN ACCOUNTING PRINCIPLE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to
owners. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes that the adoption of this
Statement will not have a material effect on the Company's consolidated results
of operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards for
reporting information about operating segments in annual financial statements of
public business enterprises and requires disclosure of selected information
about operating segments in interim financial reports. The Statement is
effective for financial statements for periods beginning after December 15,
1997. Management believes that the adoption of this Statement will not have a
material effect on the Company's consolidated results of operations or financial
position.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERNET COMMUNICATIONS CORPORATION:
We have audited the accompanying consolidated balance sheet of Internet
Communications Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the eleven-month period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the December 31, 1997 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Internet Communications Corporation and subsidiaries as of December
31, 1997, and the results of their operations and their cash flows for the
eleven-month period then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 20, 1998
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERNET COMMUNICATIONS CORPORATION
GREEWOOD VILLAGE, COLORADO
We have audited the accompanying consolidated balance sheet of Internet
Communications Corporation and Subsidiaries as of January 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended January 31, 1997 and 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Internet Communications Corporation and Subsidiaries as of January 31, 1997, and
the results of their operations and their cash flows for the years ended January
31, 1997 and 1996, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
May 2, 1997
Denver, Colorado
F-24
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $ -- 643
Trade receivables, net of $318 and $585 allowance for doubtful accounts and sales
returns as of December 31. 1997 and January 31, 1997, respectively................ 4,907 6,792
Inventory........................................................................... 3,255 2,220
Prepaid expenses and other.......................................................... 328 698
Costs and estimated earnings in excess of billings.................................. 1,825 711
------------ -----------
Total current assets............................................................ 10,315 11,064
Equipment, net........................................................................ 2,015 1,820
Goodwill, net......................................................................... 2,198 3,126
Spares inventory...................................................................... 507 412
Net assets of discontinued operations................................................. 2,078 1,050
Other assets, net..................................................................... 1,000 900
------------ -----------
Total assets.................................................................... $ 18,113 18,372
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................................... $ 4,435 197
Accounts payable and accrued expenses............................................... 4,706 3,940
Billings in excess of costs and estimated earnings.................................. 1,537 --
Unearned income and deposits........................................................ 1,125 937
------------ -----------
Total current liabilities....................................................... 11,803 5,074
------------ -----------
Notes payable......................................................................... 209 5,587
Deferred revenue...................................................................... 117 306
------------ -----------
Total liabilities............................................................... 12,129 10,967
Stockholders' equity:
Preferred stock $0.0001 par value, 100,000,000 shares authorized.................... -- --
Common stock, no par value, 20,000,000 shares authorized, 5,397,887 shares and
4,738,727 shares issued and outstanding as of December 31, 1997 and January 31,
1997, respectively................................................................ 13,965 10,811
Stockholders' notes................................................................. (31) (31)
Accumulated deficit................................................................. (7,950) (3,375)
------------ -----------
Total stockholders' equity...................................................... 5,984 7,405
Commitments and contingencies (note 6)
------------ -----------
Total liabilities and stockholders' equity...................................... $ 18,113 18,372
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31, JANUARY 31,
1997 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Sales:
Equipment.............................................................. $ 16,767 13,214 9,390
Installation........................................................... 3,977 1,550 509
Network services....................................................... 12,369 11,741 8,629
------------ ----------- -----------
Total sales........................................................ 33,113 26,505 18,528
Cost of sales............................................................ 23,693 18,815 13,502
------------ ----------- -----------
Gross margin....................................................... 9,420 7,690 5,026
------------ ----------- -----------
Operating expenses:
Selling................................................................ 5,722 3,995 2,172
General and administrative............................................. 6,648 4,251 3,023
Interest expense, net.................................................. 400 378 936
------------ ----------- -----------
Total expenses..................................................... 12,770 8,624 6,131
------------ ----------- -----------
Loss from continuing operations.......................................... (3,350) (934) (1,105)
Income tax benefit....................................................... -- -- 128
------------ ----------- -----------
Net loss from continuing operations...................................... (3,350) (934) (977)
Discontinued operations--loss from operations............................ (1,225) (191) --
------------ ----------- -----------
Net loss................................................................. $ (4,575) (1,125) (977)
------------ ----------- -----------
------------ ----------- -----------
Loss per share--basic and diluted:
Weighted average common shares outstanding............................. 5,216 3,371 2,397
Loss from continuing operations........................................ $ (0.64) (0.28) (0.41)
Loss from discontinued operations...................................... $ (0.24) (0.05) --
Net loss........................................................... $ (0.88) (0.33) (0.41)
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ --------------- STOCKHOLDERS' ACCUMULATED
SHARES AMOUNT SHARES AMOUNT NOTES DEFICIT TOTAL
--------- ------- ------- ------ -------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 31, 1995........................ 2,459,686 $ 5,474 69,000 (292) (56) (1,273) 3,853
Stock options exercised........................... 10,000 16 -- -- -- -- 16
Reduction of stockholders' notes.................. -- -- -- -- 25 -- 25
Retirement of treasury stock...................... (69,000) (292) (69,000) 292 -- -- --
Net loss.......................................... -- -- -- -- -- (977) (977)
--------- ------- ------- ------ ------- ----------- ------
BALANCES, JANUARY 31, 1996........................ 2,400,686 5,198 -- -- (31) (2,250) 2,917
Stock options exercised........................... 6,500 20 -- -- -- -- 20
Stock issued in connection with purchase of
Interwest....................................... 2,306,541 5,480 -- -- -- -- 5,480
Stock issued in connection with purchase of
Paragon......................................... 25,000 113 -- -- -- -- 113
Net loss.......................................... -- -- -- -- -- (1,125) (1,125)
--------- ------- ------- ------ ------- ----------- ------
BALANCES, JANUARY 31, 1997........................ 4,738,727 10,811 -- -- (31) (3,375) 7,405
Stock options exercised........................... 8,333 41 -- -- -- -- 41
Stock issued in connection with purchase of
Pueblo.......................................... 12,570 100 -- -- -- -- 100
Stock issued in connection with private placement,
net............................................. 631,579 2,973 -- -- -- -- 2,973
Stock issued to directors and advisors............ 6,678 40 -- -- -- -- 40
Net loss.......................................... -- -- -- -- -- (4,575) (4,575)
--------- ------- ------- ------ ------- ----------- ------
BALANCES, DECEMBER 31, 1997....................... 5,397,887 $13,965 -- -- (31) (7,950) 5,984
--------- ------- ------- ------ ------- ----------- ------
--------- ------- ------- ------ ------- ----------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31, JANUARY 31,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations.................................... $ (3,350) (934) (977)
Adjustments to reconcile income from continued operations to net cash
provided by (used in) operating activities:
Depreciation and amortization........................................ 1,469 932 658
Allowance for doubtful accounts and sales returns.................... 318 61 116
Goodwill impairment.................................................. 259 -- --
Write-down of software............................................... -- -- 137
Loss in joint venture................................................ -- -- 61
Changes in operating assets and liabilities, net of effect from
disposition of businesses:
Trade receivables.................................................... 1,567 (2,149) (62)
Inventory............................................................ (1,035) 942 (660)
Spares inventory..................................................... (95) (82) (269)
Prepaid expenses and other........................................... 270 127 258
Costs and estimated earnings in excess of billings................... (1,114) -- --
Accounts payable and accrued expenses................................ 762 (2,187) 547
Billings in excess of costs and estimated earnings................... 1,537 -- --
Deferred revenue and extended warranty............................... 144 147 125
------------ ------ ------
Net cash provided by (used in) operating activities of continued
operations....................................................... 732 (3,143) (66)
Net cash provided by (used in) operating activities of discontinued
operations....................................................... (2,181) 1,255 --
Cash flows from investing activities:
Capital expenditures................................................... (995) (682) (745)
Cash acquired through business acquisitions............................ -- 78 --
Other.................................................................. -- -- 21
------------ ------ ------
Net cash used in investing activities of continued operations...... (995) (604) (724)
Cash flows from financing activities:
Proceeds from debt..................................................... 11,766 6,567 2,965
Repayment of debt...................................................... (12,906) (2,561) (2,315)
Repayment of advances from related party............................... -- (1,436) --
Proceeds from notes receivable......................................... -- -- 25
Proceeds from sale of stock, net....................................... 3,013 20 16
------------ ------ ------
Net cash provided by financing activities of continued operations.. 1,873 2,590 691
------------ ------ ------
Increase (decrease) in cash and cash equivalents................... (571) 98 (99)
Cash and cash equivalents, at beginning of period........................ 571 473 572
------------ ------ ------
Cash and cash equivalents, at end of period.............................. $ -- 571 473
------------ ------ ------
------------ ------ ------
Supplemental disclosure of cash flow information--Cash paid during the
year for interest...................................................... 391 316 64
Supplemental disclosure of significant non-cash investing and financing
activities:
Issuance of stock to directors and advisors............................ 40 -- --
Issuance of stock for acquisitions..................................... 100 5,593 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JANUARY 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Internet
Communications Corporation (the Company). The Company acquired the outstanding
common stock of Interwest Communications C.S. Corporation, (Interwest) effective
September 1, 1996, as more fully described in note 2. After the acquisition of
Interwest, the Company became 46% controlled by Interwest Group. The Company is
a wide and local area integrator of data and tele-communications equipment
installation, services and carrier circuits.
In April 1997, the Company issued 631,579 shares of common stock for $3.0
million and 63,158 warrants to purchase common stock at $5.70 per share
exercisable for a period of 5 years to Interwest Group. After the purchase,
Interwest Group owns 52% of the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiary Interwest; its 97% subsidiary, Interwest Cable
Network Systems, Inc. (Cable); its 80% subsidiary, Omega Business Communications
Services, Inc. (Sound). The minority interests of the above subsidiaries are
owned by the respective managers of each company and one of the managers has the
option to acquire a stated number of additional shares at a specified price, but
that manager would still own less than 50% of his respective entity. No minority
interests in the losses of these subsidiaries has been recognized because the
related minority interest liabilities have been reduced to zero. All material
intercompany transactions and amounts have been eliminated in consolidation.
CHANGE IN FISCAL YEAR END
The Company has elected to change its fiscal year end to December 31 from
January 31, effective February 1, 1997. References to fiscal year 1996 relate to
the year ended January 31, 1997. References to fiscal year 1995 relate to the
year ended January 31, 1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
an original maturity of three months or less to be cash equivalents. The Company
may deposit funds in a financial institution in excess of amounts insured by the
Federal Deposit Insurance Corporation.
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
Substantially all of the Company's accounts receivable result from data and
telecommunications hardware sales and related services. Historically, credit
losses incurred by the Company have not been
F-29
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significant. The Company's activities are primarily located in the State of
Colorado, however, activities are conducted throughout the United States.
INVENTORY
Inventory, which consists of finished goods (communications equipment), is
stated at average cost. Spares inventory consists of finished parts used in
servicing customer maintenance contracts and is depreciated over a five-year
period. These amounts are stated at the lower of cost or market and a provision
is provided for expected obsolescence.
EQUIPMENT
Equipment is stated at cost, and depreciation is calculated on a
straight-line basis over the estimated useful lives of these assets generally
five to seven years. Leasehold improvements are amortized over the lesser of the
useful lives of the assets or the lease term. Expenditures for maintenance and
repairs are expensed as incurred. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the
respective accounts and any gain or loss on the disposition is reflected in
operations.
Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1997
------------ -----------
<S> <C> <C>
Telecommunications equipment...................................... $ 2,338 1,440
Office furniture and equipment.................................... 2,159 2,297
Transportation equipment.......................................... 60 77
Leasehold improvements............................................ 482 317
------------ -----------
5,039 4,131
Less accumulated depreciation and amortization.................... (3,024) (2,311)
------------ -----------
Total furniture and equipment................................. $ 2,015 1,820
------------ -----------
------------ -----------
</TABLE>
REVENUE RECOGNITION
Most of the Company's contracts are short-term. For contract revenue, the
Company utilizes the percentage-of-completion method under which revenues are
recognized by measuring the percentage of costs incurred to date to estimated
total costs for each contract.
Contract costs include direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, and
tools.
Operating costs are charged to expense as incurred. Provisions for estimated
losses on incomplete contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
Revenue on maintenance contracts is recognized over the term of the
agreement. Unearned income represents the current month's advance billings and
revenue received in advance for services under
F-30
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract. These amounts will be recognized as revenue when earned. Commissions
paid in advance are expensed over the term of the related noncancelable service
agreements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, whereby 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 to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
OTHER ASSETS
The excess of the purchase price over the net amounts acquired in the
acquisition of Interwest and any other acquisitions is recorded as goodwill.
Goodwill is being amortized on a straight-line basis over a period of 5 to 20
years. Accumulated amortization at December 31, 1997 and January 31, 1997 is
approximately $360,000 and $40,000, respectively.
Other assets is comprised primarily of noncompete agreements and purchased
customer lists which are being amortized on a straight-line basis over five
years. At December 31, 1997 and January 31, 1997, the related accumulated
amortization is approximately $292,000 and $51,000, respectively.
The amortization expense for the eleven months ended December 31, 1997 and
the years ended January 31, 1997 and 1996 for the above intangibles was
approximately $406,000, $98,000 and $42,000, respectively.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
The Company's consolidated financial statements are based on a number of
significant estimates, including the percentage of completion on projects in
progress at year-end which is the basis for the calculation of revenue earned
for these projects. The Company's estimates to complete are determined by
management for all projects in process at year-end and could change as future
information becomes available. Management believes it is reasonably possible
that there will be changes to total revenues and expenses on projects in process
at year-end through change orders that will affect these projects' ultimate
profitability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments under SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. At December 31,
1997 and January 31, 1997, the Company believes the carrying values of its
receivables, notes payables and accounts payable approximate their estimated
fair values.
F-31
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable, in accordance with Statement of Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF (SFAS 121). This review consists of a comparison of the carrying
value of the asset with the asset's expected future undiscounted cash flows
without interest costs. Estimates of expected future cash flows are to represent
management's best estimate based on reasonable and supportable assumptions and
projections. If the expected future cash flow exceeds the carrying value of the
asset, no impairment is recognized. If the carrying value of the asset exceeds
the expected future cash flows, an impairment exists and is measured by the
excess of the carrying value over the fair value of the asset. Any impairment
provisions recognized are permanent and may not be restored in the future.
STOCK-BASED COMPENSATION
In fiscal 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, (SFAS 123). SFAS 123 encourages, but does not require, companies
to recognize compensation expense for grants of stock, stock options and other
equity instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting a new
method in the notes to the financial statements. Transactions in equity
instruments with non-employees for goods or services must be accounted for on
the fair value method. The Company has elected not to adopt the fair value
accounting method prescribed by SFAS 123 for employee stock compensation, and is
subject only to the disclosure requirements prescribed by SFAS 123. Adoption of
SFAS 123 has no effect on the Company's consolidated financial statements.
LOSS PER SHARE
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE (SFAS 128), which is effective
for financial statements issued for periods ending after December 15, 1997.
Under SFAS 128, basic loss per share is computed on the basis of
weighted-average common shares outstanding. Diluted loss per share considers
potential common stock in the calculation, and is the same as basic loss per
share for the 11 months ended at December 31, 1997, the year ended January 31,
1997 and January 31, 1996, as all of the Company's potentially dilutive
securities were anti-dilutive during these periods.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1996 and fiscal 1995
financial statements to conform to the fiscal 1997 presentations. Such
reclassifications have no effect on net income.
(2) ACQUISITIONS
In September 1996, the Company acquired the outstanding common stock of
Interwest through the issuance of 2,306,541 shares of its common stock, which
was valued at approximately $5,480,000. This acquisition was accounted for under
the purchase method of accounting. The excess of the purchase price over the net
liabilities acquired of approximately $2,162,000 is being amortized over a
period not to exceed 20 years.
F-32
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
All other assets and liabilites were recorded at book value, which
approximated fair value. Unaudited pro-forma financial information is provided
below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1997 1996
------------- -------------
<S> <C> <C>
Net Revenues................................................... $ 40,003,000 $ 34,147,000
------------- -------------
------------- -------------
Net Loss....................................................... $ (2,033,000) $ (903,000)
------------- -------------
------------- -------------
Net Loss per Share............................................. $ (.43) $ (.19)
------------- -------------
------------- -------------
</TABLE>
The above pro-forma financial information assumes the acquisitions occurred
at the beginning of the period presented. This information is not necessarily
indicative of the financial results which would have resulted if the acquisition
had occurred at such earlier date nor of future financial operating results.
Additionally, in October 1996, the Company purchased the assets of another
entity for 25,000 shares of the Company's common stock and accounted for the
acquisition under the purchase method of accounting.
During 1997, the Company acquired its remaining interest in Interwest
Communications Pueblo Corporation for 12,500 shares of common stock, valued at
$100,000. Any pro-forma results of operations are immaterial to the consolidated
financial statements.
(3) CONTRACTS IN PROGRESS
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1997
------------- -------------
<S> <C> <C>
Costs incurred on uncompleted contracts........................... $ 5,879 3,680
Estimated earnings................................................ 1,790 527
------ -----
7,669 4,207
Less: Billings to date............................................ 7,381 3,496
------ -----
$ 288 711
------ -----
------ -----
Included in the accompanying balance sheet accounts under the
following captions:
Costs and estimated earnings in excess of billings.............. $ 1,825 711
Billings in excess of costs and estimated earnings.............. 1,537 --
------ -----
$ 288 711
------ -----
------ -----
</TABLE>
The Company has entered into various contracts for the installation of
wide-area and local-area voice and data networks. Progress billings are made to
customers upon contract acceptance and completion of certain milestones. The
Company expects to bill and collect all costs and estimated earnings in excess
of billings as of December 31, 1997 in 1998.
F-33
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) GOODWILL
In the fourth quarter of 1997, the Company recognized a goodwill impairment
of $746,000 which is directly associated with discontinued operations (note 10).
The goodwill is related to two of the Company's non-core business segments which
the Company's Board of Directors has adopted a plan to sell during 1998.
In addition, during the fourth quarter of 1997, the Company recognized a
goodwill impairment of $259,000, which is recorded in general and administrative
expenses. The goodwill relates to a 1996 purchase business combination and was
determined to have been impaired because the purchased business was generating
recurring operating losses and key employees were transferred to other operating
units of the Company.
(5) NOTES PAYABLE
In April 1997, the Company renegotiated its credit facility. The new
facility consists of a line-of-credit for $5.0 million with interest at prime
plus 1/2% (totaling 9% at December 31, 1997) and a $450,000 facility to support
a performance bond which will expire upon the release of the bond. As of
December 31, 1997, there was $4,390,000 outstanding under the line-of-credit and
there was no balance committed under the performance bond. The line-of-credit is
collateralized by accounts receivable and inventory and expires in September
1998, but may be extended for an additional year at sole discretion of the
financial institution. As of December 31, 1997, the Company was not in
compliance with certain covenants to its credit facility, however, such
covenants have been waived as of December 31, 1997 through the expiration date
of the credit facility. Pursuant to the waiver granted by the Company's lender,
the Company and its lender must agree to the terms of an amendment to the credit
facility to incorporate monthly cash flow covenants for the periods from May
1998 through August 1998, by April 15, 1998.
The Company also has various notes payable agreements with various
individuals totaling approximately $254,000 and $553,000 at December 31, 1997
and January 31, 1997, respectively. In general, these notes are unsecured,
however, a few are collateralized by certain equipment and vehicles of the
Company. Interest accrues on these notes at between approximately 7% and 14% per
annum.
Future debt maturities as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998.................................................................... $4,435
1999.................................................................... 126
2000.................................................................... 58
2001.................................................................... 25
------
$4,644
------
------
</TABLE>
As of January 31, 1997, the terms of the credit facility were substantially
the same except that the credit facility was $6.0 million with interest at prime
plus 1%. The outstanding balance under the credit facility was $5,322,000 at
January 31, 1997.
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and vehicles under noncancelable
operating leases. Total rental expense for the eleven months ended December 31,
1997 and the year ending January 31, 1997 and
F-34
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
1996 was $930,000, $688,000 and $298,000, respectively. The total minimum rental
commitments as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................... $ 876
1999.................................................................... 768
2000.................................................................... 711
2001.................................................................... 616
2002.................................................................... 338
Thereafter.............................................................. --
------
$3,309
------
------
</TABLE>
The Company also leases telecommunications circuits under noncancelable
leases. The Company subleases these circuits to its customers as part of its
normal operations. Minimum commitments under these agreements total
approximately $1,275,000 for fiscal 1998, $1.5 million for fiscal 1999 and 2000,
$1.1 million for fiscal 2001, and only minimal commitments thereafter.
The Company has an outstanding receivable of $620,000 at December 31, 1997,
related to a project for which the Company is a subcontractor. This receivable
relates to the cost of delays and inefficiencies, as a result of environmental
hazards at the worksite. The Company anticipates recovering substantially all of
these costs from the contractor during 1998. The Company is indemnified by
Interwest Group under a previous business combination for any losses resulting
from this contract.
The Company has developed a plan to deal with potential Year 2000 issues and
has begun converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. Year
2000 issues are the result of computer programs being written using two digits
rather than four to define the applicable year. The Company is expensing all
costs associated with these system changes as the costs are incurred.
(7) STOCKHOLDERS' EQUITY
The Company has authorized 100,000,000 shares of preferred stock, which may
be issued in series and with such preferences as determined by the Company's
Board of Directors. As of December 31, 1997, no preferred stock has been issued.
During the fiscal year 1996, the Company adopted, and the stockholders
approved, an Incentive Stock Plan (Plan), which, as subsequently amended,
authorizes the issuance of up to 875,000 shares of common stock. Pursuant to the
Plan, the Company may grant "incentive stock options" (intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended), non-qualified
stock options and stock purchase rights or a combination thereof.
F-35
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
Incentive stock options may not be granted at an exercise price of less than
the fair market value of the common stock on the date of grant (except for
holders of more that 10% common stock, whereby the exercise price must be at
least 110% of the fair market value at the date of grant for incentive stock
options). The term of the options may not exceed ten years.
During the fiscal year 1996, the Company also adopted and the stockholders
approved, the Non Employee Directors' Stock Option Plan (Outside Directors'
Plan), which provides for the grant of stock options to non-employee directors
of the Company and any subsidiary. An aggregate of 40,000 shares of common stock
are reserved for issuance under the Outside Directors' Plan. The exercise price
of the options will be the fair market value of the stock on the date of grant.
Outside directors are automatically granted options to purchase 10,000 shares
initially and an additional 2,000 shares for each subsequent year that they
serve. All options granted vest over a 3-year period from the date of the grant.
The following is a summary of activity under these stock option plans for
the eleven months ended December 31, 1997 and the years ended January 31, 1997
and 1996:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 JANUARY 31, 1997 JANUARY 31, 1996
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning of
period...................... 659,844 $4.18 296,800 $3.44 287,424 $3.54
Granted..................... 221,800 5.52 686,344 4.10 107,000 3.88
Exchanged................... -- -- (217,900) 3.20 -- --
Exercised................... (8,333) 4.95 (6,500) 3.00 (10,000) 2.00
Forfeitures................. (40,867) 4.53 (98,900) 4.20 (87,624) 4.42
--------- --------- ---------
Outstanding, end of period.... 832,444 4.62 659,844 4.18 296,800 3.44
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following tables summarize certain information about the Company's stock
options at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------------
<C> <C> <S> <C>
RANGE OF NUMBER OF WEIGHTED AVERAGE
EXERCISE OUTSTANDING REMAINING CONTRACTUAL WEIGHTED AVERAGE
PRICES OPTIONS LIFE EXERCISE PRICE
- ------------- ------------------ ----------------------- -----------------
$3.75 - 4.13 444,844 8.2 years $ 3.88
4.81 - 6.25 364,100 9.0 5.27
7.88 - 8.88 23,500 9.7 8.36
-------
3.75 - 8.88 832,444 8.6 4.62
-------
-------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- ---------------------------------------------------
<S> <C> <C>
RANGE OF NUMBER OF
EXERCISE OPTIONS WEIGHTED AVERAGE
PRICES EXERCISABLE EXERCISE PRICE
- ------------- ----------------- -----------------
$3.75 - 4.13 222,422 $ 3.88
4.81 - 6.25 140,776 5.33
7.88 - 8.88 5,875 8.36
-------
3.75 - 8.88.. 369,073 4.51
-------
-------
</TABLE>
F-36
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA STOCK BASED COMPENSATION DISCLOSURES
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options which are granted to employees. Accordingly, no
compensation cost was recognized for grants of options during the eleven months
ended December 31, 1997 and the years ended January 31, 1997 and 1996 to
employees since the exercise prices were not less than the fair value of the
Company's common stock on the grant dates. Had compensation cost been determined
based on the fair value method described in SFAS 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, JANUARY 31, JANUARY 31,
1997 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported....................................... $ (4,575) (1,125) (977)
Pro forma......................................... (5,612) (1,803) (1,001)
Net loss per common share--basic and diluted:
As reported....................................... (0.88) (0.33) (0.41)
Pro forma......................................... (1.08) (0.53) (0.42)
</TABLE>
The weighted average fair value of options granted in the eleven months
ended December 31, 1997 and the year ended January 31, 1997 on the date of grant
was estimated to be $4.05 and $2.98, respectively, using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
ELEVEN MONTHS ENDED JANUARY 31, JANUARY 31,
DECEMBER 31, 1997 1997 1996
------------------- --------------- ---------------
<S> <C> <C> <C>
Expected volatility................................. 57% 83% 89%
Risk-free interest rate............................. 6% 7% 7%
Expected dividends.................................. -- -- --
Expected terms (in years)........................... 10 5 4
</TABLE>
(8) INCOME TAXES
Deferred income taxes are provided for differences between the tax and book
basis of assets and liabilities as a result of temporary differences in the
recognition of revenues or expenses for tax and financial reporting purposes.
F-37
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
These differences consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1997
------------ -------------
<S> <C> <C>
Income tax loss carryforward...................................... $ 2,401 895
Allowance on assets............................................... 263 272
Deferred revenue.................................................. 53 47
Depreciation expense.............................................. 258 (220)
Other............................................................. 40 (42)
------------ ---
3,015 952
Less valuation allowance........................................ (3,015) (952)
------------ ---
Net......................................................... $ -- $ --
------------ ---
------------ ---
</TABLE>
The Company did not recognize tax benefits for the eleven-month period ended
December 31, 1997, the fiscal year ended January 31, 1997 and January 31, 1996
due to increases in the valuation allowance for deferred tax assets in those
periods. The valuation allowance for deferred tax assets at December 31, 1997
and January 31, 1997 was $3,015,000 and $952,000, respectively, due primarily to
an increase in the Company's net operating loss carryforwards.
As of December 31, 1997, the Company has income tax loss carryforwards of
approximately $6,436,000 which expire in the years 2006 through 2012. The
utilization of the majority of these net operating loss carryforwards have been
restricted because of ownership changes. These restrictions limit the amount of
utilizable net operating loss carryforwards each year.
(9) EMPLOYEE SAVING PLANS
The Company provides two separate savings plans to its' employees: (1) the
Internet Communications Employee Retirement Savings Plan and Trust, and (2) the
Interwest Communications Employee Thrift Retirement Plan.
The Internet Communications Employee Retirement Savings Plan and Trust
permits employees to make contributions by salary reductions pursuant to section
401(k) of the Internal Revenue Code. This plan covers substantially all of the
pre-merger Internet Communications Corporation employees who have been employed
with the Company for six months and are at least 21 years of age. The Company
may also make additional cash contributions at the discretion of the Board of
Directors. Employees are fully vested in employer contributions after they
complete six years of service. There were no Company contributions for the 11
month period ended December 31, 1997 or for the years ended January 31, 1997 and
1996.
The Interwest Communications Employee Thrift Retirement Plan permits
employees to make contributions by salary reductions pursuant to section 401(k)
of the Internal Revenue Code. This plan covers substantially all of the
pre-merger Interwest Communications Corporation employees who have been employed
with the Company for one year and are at least 21 years of age. Each employees
contribution up to a maximum of 10% is matched 50% by the Company. The Company
may also make additional cash contributions at the discretion of the Board of
Directors. Employees are fully vested in employer contributions after they
complete six years of service. Company contributions charged against income for
F-38
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE SAVING PLANS (CONTINUED)
the 11 month period ended December 31, 1997 and for the year ended January 31,
1997 were $97,689 and $44,675, respectively.
Effective January 1, 1998, the Company adopted a new 401(k) plan. The new
plan will merge the two existing plans together.
(10) DISCONTINUED OPERATIONS
In March 1998, the Company's Board of Directors adopted a formal plan to
sell its non-core business segments, consisting of Sound and Cable, as a part of
the Company's strategic focus on providing integrated and high-end network
systems. The Segments which were acquired in September 1996, have been accounted
for as discontinued operations in accordance with APB 30 for the 11 months ended
December 31, 1997 and year ended January 31, 1997, which among other provisions,
requires the plan of disposal to be carried out within one year (the Divestiture
Period). Remaining assets and liabilities of Sound and Cable, primarily consist
of accounts receivable and accounts payable. Summarized results of Sound and
Cable for the periods since acquisition are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SOUND CABLE
---------------------- -------------
1997 1996 1997 1996
--------- ----- ----- -----
<S> <C> <C> <C> <C>
Loss from operations............................................. $ 476 69 749 122
</TABLE>
The January 31, 1997 consolidated financial statements have been restated to
conform with December 31, 1997 presentation.
(11) RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions in the normal course of
business with related parties. As of December 31, 1997, the Company had
outstanding related party receivables of $448,000, which are included in trade
receivables, and related party payables of $129,000 which are included in
accounts payable and accrued expenses.
(12) SUBSEQUENT EVENT
Subsequent to year end, the Company received $1.6 million from a related
party, in exchange for a convertible promissory note, due March 1999. The note
bears interest at 10% and interest payments are due quarterly. If the Company
defaults on the promissory note, the remaining principal outstanding may be
converted into common stock of the Company at $4.25 per share.
F-39
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Trade receivables, net of allowance for doubtful accounts and
sales returns.................................................. $ 6,320 4,907
Inventory........................................................ 3,301 3,255
Prepaid expenses and other....................................... 425 328
Costs and estimated earnings in excess of billings............... 1,291 1,825
----------- -----------
Total current assets........................................... 11,337 10,315
Equipment, net..................................................... 1,805 2,015
Goodwill, net...................................................... 2,162 2,198
Spares inventory................................................... 472 507
Net assets of discontinued operations.............................. 1,394 2,078
Other, net......................................................... 908 1,000
----------- -----------
Total assets................................................... $ 18,078 18,113
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable.................................................... $ 6,639 4,435
Accounts payable and accrued expenses............................ 6,253 4,706
Billings in excess of costs and estimated earnings............... 1,150 1,537
Unearned income and deposits..................................... 992 1,125
----------- -----------
Total current liabilities...................................... 15,034 11,803
Notes Payable and other long term obligations...................... 429 209
Deferred Revenue................................................... 184 117
----------- -----------
Total liabilities.............................................. 15,647 12,129
Stockholders equity:
Common stock, no par value......................................... 13,965 13,965
Stockholders' notes.............................................. (31) (31)
Accumulated deficit.............................................. (11,503) (7,950)
----------- -----------
Total stockholders' equity..................................... 2,431 5,984
----------- -----------
Total liabilities and stockholders' equity..................... $ 18,078 18,113
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to these condensed financial statements
F-40
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
----------------------
MARCH 31, APRIL 30,
1998 1997
--------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales:
Equipment.......................................................... $ 3,645 4,207
Installation....................................................... 867 1,213
Services........................................................... 3,722 3,269
--------- -----------
Total sales...................................................... 8,234 8,689
Cost of sales........................................................ (5,993) (6,022)
--------- -----------
Gross margin..................................................... 2,241 2,667
--------- -----------
Operating expenses:
Selling............................................................ 1,710 1,520
General and administrative......................................... 1,911 1,457
Restructuring...................................................... 1,608 --
Interest expense, net.............................................. 122 143
--------- -----------
Total expenses................................................... 5,351 3,120
--------- -----------
Loss from continuing operations...................................... (3,110) (453)
Discontinued operations--
Loss from operations............................................... (206) (190)
Estimated loss on disposal......................................... (237) --
--------- -----------
Net loss............................................................. $ (3,553) (643)
--------- -----------
--------- -----------
Loss per share--basic and diluted:
Weighted average common shares outstanding......................... 5,398,000 4,756,000
Loss from continuing operations.................................... $ (0.58) $ (0.10)
Loss from discontinued operations.................................. $ (0.08) $ (0.04)
Net loss......................................................... $ (0.66) $ (0.14)
</TABLE>
See accompanying notes to these condensed financial statements
F-41
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, APRIL 30,
1998 1997
----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations................................................ $ (3,110) (453)
Adjustments to reconcile net loss from continued operations to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................................... 352 358
Allowance for doubtful accounts and sale returns................................. 36 67
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables--net............................................................. (1,449) 1,254
Inventory.................................................................... (46) (1,371)
Prepaid expenses and other................................................... (23) 458
Costs in excess of billings and estimated earnings........................... 534 (97)
Increase (decrease) in:
Accounts payable............................................................. 1,343 645
Unearned income.............................................................. (66) (10)
Accrued expenses............................................................. 444 332
Billings in excess of costs and estimated earnings........................... (387) --
----------- ------
Net cash provided by (used in) operating activities.............................. (2,372) 1,183
Net cash provided by (used in) operating activities of discontinued operations... 241 (630)
Cash flows from investing activities:
Capital expenditures............................................................... (53) (166)
----------- ------
Net cash used in investing activities............................................ (53) (166)
Cash flows from financing activities:
Proceeds from sale of common stock................................................. -- 3,000
Expenses from sale of common stock................................................. -- (150)
Repayment of debt.................................................................. (2,241) (2,958)
Proceeds from debt................................................................. 4,425 --
----------- ------
Net cash provided by (used in) financing activities.............................. 2,184 (108)
----------- ------
Increase (decrease) in cash:......................................................... -- 279
Cash, beginning of period -- 643
----------- ------
Cash, end of period.................................................................. -- 922
----------- ------
----------- ------
</TABLE>
See accompanying notes to these condensed financial statements.
F-42
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The financial statements included herein have been prepared by Internet
Communications Corporation ("Internet" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and include all adjustments which are, in the opinion of management, necessary
for a fair presentation. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading; however, it is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto which are incorporated by reference in the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. The
financial data for the interim periods may not necessarily be indicative of
results to be expected for the year.
CHANGE IN FISCAL YEAR END
The Company elected to change its fiscal year end to December 31 from
January 31, effective February 1, 1997. References to the first quarter of 1997
relate to the three month period ended April 30, 1997.
DISCONTINUED OPERATIONS
In March 1998, the Company's Board of Directors adopted a formal plan to
sell its non-core business segments ("Segments"). The Segments have been
accounted for as discontinued operations in accordance with APB 30. Remaining
assets and liabilities of the Segments referred to as Omega Business
Communications Services, Inc. ("Omega") and Interwest Cable Network Systems,
Inc. ("ICNS"), primarily consist of accounts receivable and accounts payable.
The April 30, 1997 consolidated financial statements have been restated to
conform with the March 31, 1998 presentation.
NOTE 2--DEBT
In March 1998, the Company received $1.6 million from a related party, in
exchange for a convertible promissory note, due March 1999. The note bears
interest at 10% and interest payments are due quarterly. If the Company defaults
on the promissory note, the remaining principal outstanding may be converted
into common stock of the Company at $4.25 per share. Proceeds from the note were
used for working capital.
The Company has a borrowing agreement with a lending institution which
provides for a $5.0 million credit facility. At March 31, 1998, the Company had
borrowed $5.0 million against the facility. The borrowing agreement expires in
September 1998. The Company's intention is to renew the line of credit with the
bank, however, there is no assurance that the Company will be successful.
NOTE 3--RESTRUCTURING
In March, 1998, the Company announced a restructuring plan aimed principally
at tightening the strategic focus on the data communications network service
market. Management determined the Company had over-extended resources in the
Rocky Mountain region and had evolved into an overly complex
F-43
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE 3--RESTRUCTURING (CONTINUED)
organization. Accordingly, the number of departments was reduced and 50
employees were separated from the Company, representing 21% of the Company's
workforce (excluding discontinued operations). The personnel reductions were
largely in the sales department and the administration department. In addition,
during the fourth quarter of the fiscal year ended December 31, 1997, the
Company had launched an entirely separate wholesale engineering services
business. The closure of this entity was integral to the restructuring.
These restructuring actions resulted in the Company recognizing an expense
for the three months ended March 31, 1998 in the amount of $1,608,000. The
restructuring expense is comprised of several items, including: employee
severance, reduction in manufacturers' product lines, closure of the wholesale
engineering services company and consolidation of facilities. The restructuring
expenses are detailed in the following table:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Employee Severance.............................................................. $ 653,000
Product Line Reduction.......................................................... 409,000
Closure of Wholesale Engineering Company........................................ 274,000
Facilities Consolidation........................................................ 229,000
Other........................................................................... 43,000
------------
Total....................................................................... $ 1,608,000
------------
------------
</TABLE>
NOTE 4--SUBSEQUENT EVENTS
The Company executed a Stock Purchase Agreement on April 30, 1998 for the
sale of its 80% ownership of the common stock of Omega to Omega's vice president
and sole minority shareholder. The consideration for the sale of Company's
common stock ownership of Omega was $209,000.
The Company executed an Agreement on April 30, 1998 for the transition of
the business activities of its wholly-owned subsidiary, ICNS, to a newly formed
corporation ("Newco") owned and operated by the principal managers of ICNS. The
Agreement specifies that Newco shall satisfactorily complete the existing ICNS
contracts at April 30, 1998, and on June 1, 1998, employ the majority of the
remaining ICNS employees. ICNS shall pay Newco incentive compensation for the
completion and final customer acceptance of ICNS contracts.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Application Methods, Inc./
e-SELL Commerce Systems, Inc.
Seattle, Washington
We have audited the accompanying combined balance sheet of Application
Methods, Inc. and e-SELL Commerce Systems, Inc. as of December 31, 1997, and the
related combined statements of operations and retained earnings, and combined
cash flows for the year then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Application
Methods, Inc. and e-SELL Commerce Systems, Inc. as of December 31, 1997, and the
results of its combined operations and its combined cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ PETERSON SULLIVAN PLLC
May 14, 1998
Seattle, Washington
F-45
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash............................................................................ $ 30,636
Accounts receivable............................................................. 78,107
Advances to shareholder......................................................... 42,201
---------
Total current assets........................................................ 150,944
Furniture and Equipment, at cost, less accumulated depreciation of $50,610........ 8,275
---------
$ 159,219
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................ $ 63,778
Notes payable................................................................... 81,022
---------
Total current liabilities................................................... 144,800
Stockholders' Equity
Common stock, $.10 par value; 60,000 shares authorized (50,000 for Application
Methods, Inc. and 10,000 for e-SELL Commerce Systems, Inc.), 2,000 shares
issued and outstanding (1,000 for each Company)............................... 200
Retained earnings............................................................... 14,219
---------
14,419
---------
$ 159,219
---------
---------
</TABLE>
See Notes to Combined Financial Statements
F-46
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues
Sales and service revenue..................................................... $ 962,895
Other income.................................................................. 21,061
---------
983,956
Expenses
Labor and benefits............................................................ 653,670
Selling, general and administrative........................................... 434,935
---------
1,088,605
---------
Loss before interest expense.............................................. (104,649)
Interest expense................................................................ (12,016)
---------
Loss before deferred income taxes......................................... (116,665)
Recovery of deferred income taxes............................................... 14,742
---------
Net loss.................................................................. (101,923)
Retained earnings, beginning of year............................................ 116,142
---------
Retained earnings, end of year.................................................. $ 14,219
---------
---------
</TABLE>
See Notes to Combined Financial Statements
F-47
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net loss....................................................................... $(101,923)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization................................................ 5,495
Changes in operating assets and liabilities
Accounts receivable........................................................ 58,533
Accounts payable........................................................... 47,521
Deferred income tax........................................................ (14,742)
---------
Cash used in operating activities........................................ (5,116)
Cash Flows From Financing Activities
Increase in notes payable...................................................... 16,022
Issuance of common stock (1,000 shares of e-SELL issued in December 1997)...... 100
---------
Cash provided by financing activities.................................... 16,122
---------
Net increase in cash..................................................... 11,006
Cash, beginning of year.......................................................... 19,630
---------
Cash, end of year................................................................ $ 30,636
---------
---------
</TABLE>
See Notes to Combined Financial Statements
F-48
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Application Methods, Inc. ("Application Methods") develops computer software
for its clients on a custom basis. In addition, it sells certain computer
software products it internally develops. During 1997, sales and service revenue
from one customer accounted for 13% of total sales and service revenue. Accounts
receivable for three customers account for 50% of total accounts receivable.
e-SELL Commerce Systems, Inc. ("e-SELL") was established to sell certain
software created by Application Methods. At December 31, 1997, there had been no
sales and no other operations.
These financial statements are the combination of these two companies ("the
Companies"). Combination is appropriate because the two companies have the same
stock ownership.
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 the
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. Accordingly, actual results could differ from the estimates that were
used.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $6,787 for the year
ended December 31, 1997.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred.
CASH
Cash includes cash balances held at a bank. Cash balances are occasionally
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Cash payments for interest were $12,016 during the year ended December 31,
1997. No cash payments for income taxes were made during the year ended December
31, 1997.
ACCOUNTS RECEIVABLE
The Companies use the allowance method for recognizing bad debts. Management
believes no allowance is necessary at December 31, 1997.
FURNITURE AND EQUIPMENT
Furniture and equipment are depreciated using accelerated methods over the
estimated useful lives of the related assets.
TAXES ON INCOME
The Companies account for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in
financial statements or tax returns. In estimating future tax consequences, the
Companies generally consider all expected future events other than enactments of
changes in the tax laws or rates.
F-49
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. NOTES PAYABLE
<TABLE>
<S> <C>
Note payable to bank bearing interest at 11.5% due November 20,
1998, secured by receivables..................................... $ 65,000
Note payable--revolving line of credit agreement with a bank
bearing interest at 15.4%, unsecured. Maximum borrowings under
the line of credit are $25,000................................... 8,481
Note payable--revolving line of credit agreement with a bank
bearing interest at 13.25%, unsecured. Maximum borrowings under
the line of credit are $11,000................................... 7,541
---------
$ 81,022
---------
---------
</TABLE>
NOTE 3. LEASES
The Companies lease an office under an operating lease expiring January 31,
2002. In addition, the Companies lease certain computer equipment. The following
are the future minimum rental payments required under the lease for the years
ending December 31:
<TABLE>
<S> <C>
1998.............................................................. $ 125,723
1999.............................................................. 99,394
2000.............................................................. 98,764
2001.............................................................. 92,434
2002.............................................................. 7,703
---------
Total............................................................. $ 424,018
---------
---------
</TABLE>
Rent expense was $84,605 for the year ended December 31, 1997.
NOTE 4. DEFERRED INCOME TAXES
The temporary differences causing the deferred tax effects results from
using the cash basis of accounting for income tax purposes and the accrual basis
for financial reporting purposes.
Application Methods has an unused net operating tax loss of $15,100 which
expires in 2012. An asset of $2,265 was established for this net operating tax
loss which has been fully reserved.
NOTE 5. CONTRACTS
Application Methods has contracts for consulting with customers totaling
$90,169 at December 31, 1997. These contracts start in 1998. These amounts have
not been recorded on the balance sheet or included in revenue.
NOTE 6. SUBSEQUENT EVENT
Subsequent to December 31, 1997, Application Methods and e-SELL signed a
letter of intent to sell the Companies to a company that is an internet service
provider. The value of the assets and liabilities have not been adjusted for
this anticipated sale.
F-50
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash............................................................................ $ 14,159
Accounts receivable............................................................. 132,943
Advances to shareholder......................................................... 62,278
---------
Total current assets.......................................................... 209,380
Furniture and Equipment, at cost, less accumulated depreciation of $51,714........ 7,171
---------
$ 216,551
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................ $ 46,266
Notes payable................................................................... 139,559
Deferred income taxes........................................................... 2,909
---------
Total current liabilities..................................................... 188,734
Stockholders' Equity
Common stock, $.10 par value; 60,000 shares authorized, 2,000 shares issued and
outstanding................................................................... 200
Retained earnings............................................................... 27,617
---------
27,817
---------
$ 216,551
---------
---------
</TABLE>
See notes to financial statements.
F-51
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Revenues
Sales and service revenues...................................................... $ 317,226
Other income.................................................................... 15,881
---------
333,107
Expenses
Labor and benefits.............................................................. 207,582
Selling, general and administrative............................................. 105,381
---------
312,963
---------
Income before interest expense................................................ 20,144
Interest expense.................................................................. (3,837)
---------
Income before deferred income tax............................................. 16,307
Deferred income tax............................................................... (2,909)
---------
Net income.................................................................... 13,398
Retained earnings, beginning of period............................................ 14,219
---------
Retained earnings, end of period.................................................. $ 27,617
---------
---------
</TABLE>
See notes to financial statements.
F-52
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net income...................................................................... $ 13,398
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization................................................. 1,105
Changes in operating assets and liabilities
Accounts receivable......................................................... (74,913)
Accounts payable............................................................ (17,513)
Deferred income tax......................................................... 2,909
---------
Cash used in operating activities......................................... (75,014)
Cash Flows From Financing Activities
Increase in notes payable....................................................... 58,537
---------
Net decrease in cash...................................................... (16,477)
Cash, beginning of period......................................................... 30,636
---------
Cash, end of period............................................................... $ 14,159
---------
---------
</TABLE>
See notes to financial statements.
F-53
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Application Methods, Inc. ("Application Methods") develops computer software
for its clients on a custom basis. In addition, it sells certain computer
software products it internally develops. At March 31, 1998, sales and service
revenue from two customers accounted for 32% of total sales and service revenue.
Accounts receivable for three customers accounted for 43% of total accounts
receivable at March 31, 1998.
e-SELL Commerce Systems, Inc. ("e-SELL") was established to sell certain
software created by Application Methods.
These financial statements are the combination of these two companies ("the
Companies"). Combination is appropriate because the two companies have the same
stock ownership.
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 the
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. Accordingly, actual results could differ from the estimates that were
used.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred.
CASH
Cash includes cash balances held at a bank. Cash balances are occasionally
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Cash payments for interest were $3,837 for the period ended March 31, 1998.
No cash payments for income taxes were made during the period ended March 31,
1998.
ACCOUNTS RECEIVABLE
The Companies use the allowance method for recognizing bad debts. Management
believes no allowance is necessary at March 31, 1998.
FURNITURE AND EQUIPMENT
Furniture and equipment are depreciated using accelerated methods over the
estimated useful lives of the related assets.
TAXES ON INCOME
The Companies account for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in
financial statements or tax returns. In estimating future tax consequences, the
Companies generally consider all expected future events other than enactments of
changes in the tax laws or rates.
F-54
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. NOTES PAYABLE
<TABLE>
<S> <C>
Note payable to bank bearing interest at 11.5%, due November 20,
1998, secured by receivables.................................... $ 95,000
Other notes payable--revolving lines of credit with a bank bearing
interest at 13.25%-15.4%, unsecured. Maximum borrowings under
the lines of credit are $83,000................................. 44,559
---------
$ 139,559
---------
---------
</TABLE>
NOTE 3. LEASES
The Companies lease an office under an operating lease expiring January 31,
2002. In addition, the Companies lease certain computer equipment. The following
are the future minimum rental payments required under the lease for the years
ending December 31:
<TABLE>
<S> <C>
1998.............................................................. $ 125,723
1999.............................................................. 99,394
2000.............................................................. 98,764
2001.............................................................. 92,434
2002.............................................................. 7,703
---------
Total............................................................. $ 424,018
---------
---------
</TABLE>
Rent expense was $35,418 for the three month period ended March 31, 1998.
NOTE 4. DEFERRED INCOME TAXES
The temporary differences causing the deferred tax effects results from
using the cash basis of accounting for income tax purposes and the accrual basis
for financial reporting purposes.
Application Methods has an unused net operating tax loss of $15,100 which
expires in 2012. An asset of $2,265 was established for this net operating tax
loss which has been used to offset the deferred tax liability. For the three
month period ended March 31, 1998, the Companies generated current tax losses of
$52,000. An asset of $7,800 was established for this net operating tax loss
which has also been used to offset the deferred tax liability.
NOTE 5. SUBSEQUENT EVENT
Subsequent to March 31, 1998, Application Methods and e-SELL signed a letter
of intent to sell the Companies to a company that is an internet service
provider. The value of the assets and liabilities have not been adjusted for
this anticipated sale.
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Application Methods, Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Application Methods, Inc.
as of December 31, 1996, and the related statements of operations and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Application Methods, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ PETERSON SULLIVAN PLLC
June 5, 1998
Seattle, Washington
F-56
<PAGE>
APPLICATION METHODS, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash............................................................................ $ 19,630
Accounts receivable............................................................. 114,536
Refundable income tax........................................................... 4,943
---------
Total current assets.......................................................... 139,109
Advances to shareholder........................................................... 59,362
Furniture and Equipment, at cost, less accumulated depreciation of $45,026........ 13,771
---------
$ 212,242
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................ $ 16,257
Notes payable................................................................... 65,000
Deferred income taxes........................................................... 14,742
---------
Total current liabilities..................................................... 95,999
Stockholders' Equity
Common stock, $.10 par value; 50,000 shares authorized, 1,000 shares issued and
outstanding................................................................... 100
Retained earnings............................................................... 116,143
---------
116,243
---------
$ 212,242
---------
---------
</TABLE>
See Notes to Financial Statements
F-57
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues
Sales and service revenue....................................................... $ 784,635
Other income.................................................................... 3,676
---------
788,311
Expenses
Labor and benefits.............................................................. 488,293
Selling, general and administrative............................................. 268,981
---------
757,274
---------
Income before interest expense................................................ 31,037
Interest expense.................................................................. 2,178
---------
Income before income taxes.................................................... 28,859
Provision for income taxes........................................................ 5,107
---------
Net income.................................................................... 23,752
Retained earnings, beginning of year.............................................. 92,391
---------
Retained earnings, end of year.................................................... $ 116,143
---------
---------
</TABLE>
See Notes to Financial Statements
F-58
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net income....................................................................... $ 23,752
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization.................................................. 5,774
Changes in operating assets and liabilities
Accounts receivable.......................................................... (82,819)
Refundable income tax........................................................ (4,943)
Accounts payable............................................................. 16,257
Deferred income tax.......................................................... 10,050
---------
Cash used in operating activities.......................................... (31,929)
Cash Flows From Investing Activities
Purchase of equipment............................................................ (12,689)
Cash Flows From Financing Activities
Increase in notes payable........................................................ 61,078
---------
Net increase in cash....................................................... 16,460
Cash, beginning of year............................................................ 3,170
---------
Cash, end of year.................................................................. $ 19,630
---------
---------
</TABLE>
See Notes to Financial Statements
F-59
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Application Methods, Inc. ("Application Methods") develops computer software
for its clients on a custom basis. In addition, it sells certain computer
software products it internally develops. During 1996, sales and service revenue
from two customers accounted for 54% of total sales and service revenue.
Accounts receivable for two customers account for 55% of total accounts
receivable.
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 the
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. Accordingly, actual results could differ from the estimates that were
used.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $13,648 for the year
ended December 31, 1996.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred.
CASH
Cash includes cash balances held at a bank. Cash balances are occasionally
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Cash payments for interest were $2,178 during the year ended December 31,
1996. No cash payments for income taxes were made during the year ended December
31, 1996.
ACCOUNTS RECEIVABLE
Application Methods uses the allowance method for recognizing bad debts.
Management believes no allowance is necessary at December 31, 1996.
FURNITURE AND EQUIPMENT
Furniture and equipment are depreciated using accelerated methods over the
estimated useful lives of the related assets.
TAXES ON INCOME
Application Methods accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in
Application Methods' financial statements or tax returns. In estimating future
tax consequences, Application Methods generally considers all expected future
events other than enactments of changes in the tax laws or rates.
F-60
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. NOTES PAYABLE
Application Methods has a line of credit for $65,000 bearing interest at
11.5%, due November 20, 1998, secured by receivables.
NOTE 3. LEASES
Application Methods leases an office under an operating lease expiring
January 31, 2002. In addition, Application Methods leases certain computer
equipment. The following are the future minimum rental payments required under
the lease for the years ending December 31:
<TABLE>
<S> <C>
1997.............................................................. $ 138,628
1998.............................................................. 125,723
1999.............................................................. 99,394
2000.............................................................. 98,764
2001.............................................................. 92,434
Thereafter........................................................ 7,703
---------
Total............................................................. $ 562,646
---------
---------
</TABLE>
Rent expense was $28,781 for the year ended December 31, 1996.
NOTE 4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current............................................................ $ (4,943)
Deferred........................................................... 10,050
---------
$ 5,107
---------
---------
</TABLE>
The temporary difference causing the deferred tax liability results from
using the cash basis of accounting for income tax purposes and the accrual basis
for financial reporting purposes.
NOTE 5. SUBSEQUENT EVENT
In 1998, Application Methods signed a letter of intent to sell the Company
and a related company (e-SELL) to a company that is an internet service
provider. The value of the assets and liabilities have not been adjusted for
this anticipated sale.
F-61
<PAGE>
APPLICATION METHODS, INC.
BALANCE SHEET
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash............................................................................ $ 2,075
Accounts receivable............................................................. 128,511
Refundable income tax........................................................... 4,943
---------
Total current assets.......................................................... 135,529
Advances to shareholder........................................................... 32,062
Furniture and Equipment, at cost, less accumulated depreciation of $46,400........ 12,397
---------
$ 179,988
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................ $ 47,745
Notes payable................................................................... 68,500
Deferred income taxes........................................................... 4,723
---------
Total current liabilities..................................................... 120,968
Stockholders' Equity
Common stock, $.10 par value; 50,000 shares authorized, 1,000 shares issued and
outstanding................................................................... 100
Retained earnings............................................................... 58,920
---------
59,020
---------
$ 179,988
---------
---------
</TABLE>
See Notes to Financial Statements
F-62
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Revenues
Sales and service revenue....................................................... $ 209,358
Other income.................................................................... 8,188
---------
217,546
Expenses
Labor and benefits.............................................................. 195,626
Selling, general and administrative............................................. 87,141
---------
282,767
---------
Loss before interest expense.................................................. (65,221)
Interest expense.................................................................. (2,021)
---------
Income before income taxes.................................................... (67,242)
Recovery of deferred income taxes................................................. 10,019
---------
Net loss...................................................................... (57,223)
Retained earnings, beginning of period............................................ 116,143
---------
Retained earnings, end of period.................................................. $ 58,920
---------
---------
</TABLE>
See Notes to Financial Statements
F-63
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net loss........................................................................ $ (57,223)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization................................................. 1,374
Changes in operating assets and liabilities
Receivables................................................................. 13,325
Accounts payable............................................................ 31,488
Deferred income taxes....................................................... (10,019)
---------
Cash used in operating activities......................................... (21,055)
Cash Flows From Financing Activities
Increase in notes payable....................................................... 3,500
---------
Net decrease in cash...................................................... (17,555)
Cash beginning of period.......................................................... 19,630
---------
Cash, end of period............................................................... $ 2,075
---------
---------
</TABLE>
See Notes to Financial Statements
F-64
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Application Methods, Inc. ("Application Methods") develops computer software
for its clients on a custom basis. In addition, it sells certain computer
software products it internally develops. During the three months ended March
31, 1997, sales and service revenue from three customers accounted for 37% of
total sales and service revenue. Accounts receivable for five customers account
for 65% of total accounts receivable at March 31, 1997.
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 the
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. Accordingly, actual results could differ from the estimates that were
used.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred.
CASH
Cash includes cash balances held at a bank. Cash balances are occasionally
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Cash payments for interest were $2,021 during the three months ended March
31, 1997. No cash payments for income taxes were made during the three months
ended March 31, 1997.
ACCOUNTS RECEIVABLE
Application Methods uses the allowance method for recognizing bad debts.
Management believes no allowance is necessary at March 31, 1997.
FURNITURE AND EQUIPMENT
Furniture and equipment are depreciated using accelerated methods over the
estimated useful lives of the related assets.
TAXES ON INCOME
Application Methods accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in
Application Methods' financial statements or tax returns. In estimating future
tax consequences, Application Methods generally considers all expected future
events other than enactments of changes in the tax laws or rates.
F-65
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. NOTES PAYABLE
<TABLE>
<S> <C>
Line of credit note for $65,000, bearing interest at 11.5%, due
November 20, 1998, secured by receivables........................ $ 58,500
Other.............................................................. 10,000
---------
$ 68,500
---------
---------
</TABLE>
NOTE 3. LEASES
Application Methods leases an office under an operating lease expiring
January 31, 2002. In addition, Application Methods leases certain computer
equipment. The following are the future minimum rental payments required under
the lease for the years ending December 31:
<TABLE>
<S> <C>
1997.............................................................. $ 138,628
1998.............................................................. 125,723
1999.............................................................. 99,394
2000.............................................................. 98,764
2001.............................................................. 92,434
Thereafter........................................................ 7,703
---------
Total............................................................. $ 562,646
---------
---------
</TABLE>
Rent expense was $17,017 for the three months ended March 31, 1997.
NOTE 4. DEFERRED INCOME TAXES
The temporary differences causing the deferred tax effects results from
using the cash basis of accounting for income tax purposes and the accrual basis
for financial reporting purposes.
For the three month period ended March 31, 1997, Application Methods
generated current tax losses of $49,300. An asset of $7,395 was established for
this net operating tax loss which has been used to offset the deferred tax
liability.
NOTE 5. SUBSEQUENT EVENT
In 1998, Application Methods signed a letter of intent to sell the Company
and a related company (e-SELL) to a company that is an internet service
provider. The value of the assets and liabilities have not been adjusted for
this anticipated sale.
F-66
<PAGE>
INDEPENDENT AUDITORS' REPORT
STOCKHOLDERS
INFOHIWAY, INC.:
We have audited the accompanying balance sheet of Infohiway, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of Infohiway's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Infohiway, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
July 14, 1998
F-67
<PAGE>
INFOHIWAY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1998 31, 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash................................................................. $ 567 $ 742
Trade receivables.................................................... -- 206
----------- -----------
Total current assets................................................. 567 948
Property and equipment:
Equipment.......................................................... 5,465 5,465
Software........................................................... 13,555 13,555
----------- -----------
19,020 19,020
Less accumulated depreciation...................................... (9,457) (8,448)
----------- -----------
9,563 10,572
----------- -----------
Organization costs................................................... 1,048 1,048
Less accumulated amortization...................................... (384) (332)
----------- -----------
664 716
----------- -----------
$ 10,794 $ 12,236
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 1,369 $ 1,359
Note payable to shareholder (note 2)................................. 8,094 8,094
Note payable (note 2)................................................ 1,000 1,000
----------- -----------
Total current liabilities........................................ 10,463 10,453
----------- -----------
Stockholders' equity:
Common stock, no par value, 13,000 and 10,050 shares authorized,
13,000 and 10,050 shares issued and outstanding at March 31, 1998
and December 31, 1997, respectively.............................. 1 1
Additional paid-in capital......................................... 13,099 13,099
Accumulated deficit................................................ (12,769) (11,317)
----------- -----------
Total stockholders' equity....................................... 331 1,783
----------- -----------
Commitments (note 3).................................................
----------- -----------
$ 10,794 $ 12,236
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
INFOHIWAY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS YEAR ENDED
ENDED ENDED DECEMBER
MARCH 31, MARCH 31, 31,
1997 1998 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue................................................. $ 14,109 $ 4,296 $ 31,484
Operating costs and expenses:
Operating and administrative.......................... 7,588 4,607 29,038
Depreciation.......................................... 1,410 1,009 5,687
Amortization.......................................... 52 52 210
----------- ----------- -----------
9,050 5,668 34,935
----------- ----------- -----------
Operating income (loss)........................... 5,059 (1,372) (3,451)
Interest expense........................................ (75) (80) (300)
----------- ----------- -----------
Net income (loss)................................. $ 4,984 $ (1,452) $ (3,751)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
INFOHIWAY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997.................................................. 1 13,099 (7,566) 5,534
Net loss.................................................................... -- -- (3,751) (3,751)
--
----------- ------------ ---------
Balance at December 31, 1997................................................ 1 13,099 (11,317) 1,783
Net loss (unaudited)........................................................ -- -- (1,452) (1,452)
--
----------- ------------ ---------
Balance at March 31, 1998 (unaudited)....................................... 1 13,099 (12,769) 331
--
--
----------- ------------ ---------
----------- ------------ ---------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
INFOHIWAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE THREE YEAR
MONTHS MONTHS ENDED
ENDED ENDED DECEMBER
MARCH 31, MARCH 31, 31,
1997 1998 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 4,984 $ (1,452) $ (3,751)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization....................... 1,462 1,061 5,897
Changes in operating assets and liabilities:
Receivables....................................... (7,064) 206 (206)
Accounts payable and accrued liabilities.......... 74 10 (1,969)
----------- ----------- -----------
Net cash used in operating activities........... (544) (175) (29)
----------- ----------- -----------
Net cash used in investing activities--
Capital expended for property and equipment........... -- -- (322)
----------- ----------- -----------
Cash flows from financing activities--
Proceeds from shareholder note........................ 2,000 -- 4,194
Repayments of notes payable........................... (1,000) -- (3,600)
----------- ----------- -----------
Net cash used in financing activities........... 1,000 -- 594
----------- ----------- -----------
Net increase (decrease) in cash................. 456 (175) 243
Cash at beginning of period..................... 499 742 499
----------- ----------- -----------
Cash at end of period........................... $ 955 $ 567 $ 742
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
INFOHIWAY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(INFORMATION AS OF AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Infohiway, Inc. (the Company), formed in April of 1996, is a privately held
company located in Denver, CO which maintains their acquired world wide web
search engine and advertises for customers on their web page. In addition to
advertising revenue, the Company receives commissions on sales of third party
products over the internet and also sells their own software. The Company is
dependent upon its shareholders for financial support and support of its
operations.
The shareholders, who are also employees of the Company are not paid an
annual salary.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Computer equipment and software is
depreciated over five years using the double declining balance method.
INTANGIBLE ASSETS
The Company recorded $1,048 of organizational costs in 1996. These costs are
amortized over a five year period using the straight-line method.
REVENUE RECOGNITION
The Company primarily derives revenue from advertisements on their web page,
software sales and commissions from third parties related to sales over the
internet. Advertising agreements are negotiated individually and vary as to
length of time and amounts charged. The Company records accounts receivable and
revenue as services are rendered. The Company sells their software over the
internet and records revenue as customers "download" the software after
remitting payment.
INCOME TAXES
The Company has elected treatment as a "Subchapter S" corporation for state
and federal income tax purposes. Accordingly, all income taxes are paid by its
shareholders.
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 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.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements as of March 31, 1997 and 1998
and for the three-month periods ended on March 31, 1997 and 1998 are unaudited
but, in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for fair presentation of the
F-72
<PAGE>
INFOHIWAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(INFORMATION AS OF AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
results for such periods. The results of any interim period are not necessarily
indicative of results for the full year.
FAIR VALUE
The Company's financial instruments included in current assets and
liabilities approximate fair value due to their short term maturities.
(2) DEBT
As of January 1, 1997, the Company was indebted to three non-shareholders in
the amount of $4,600. During 1997, two of these notes were paid in full. The
remaining liability of $1,000 plus accrued interest of $584 which is recorded in
accounts payable and accrued liabilities was paid in April of 1998. The interest
rates on these loans varied from 12 to 24% over the term of the loans. The
Company also has a note payable due to the principal shareholder of $8,094 as of
December 31, 1997.
(3) SUBSEQUENT EVENT
On June 5, 1998, the Company's shareholder's sold all of the Company's
outstanding stock to Rocky Mountain Internet, Inc. (RMI) in exchange for 150,000
shares of RMI common stock. In connection with the closing of this transaction,
the Company became a wholly owned subsidiary of RMI.
F-73
2<PAGE>
ANNEX A
<TABLE>
<CAPTION>
GLOSSARY
<S> <C>
Access charges The fees paid by long distance carriers to LECs for originating and
terminating long distance calls on the LECs' local networks.
ATM (Asynchronous
Transfer Mode) An information transfer standard that is one of a general class of packet
technologies that relay traffic by way of an address contained within
the first five bytes of a standard fifty-three-byte-long packet or
cell. The ATM format can be used by many different information
systems, including local area networks, to deliver traffic at varying
rates, permitting a mix of voice, data and video (multimedia).
AT&T AT&T Corp.
Backbone The through-portions of a transmission network, as opposed to spurs
which branch off the through-portions.
Band A range of frequencies between two defined limits.
Bandwidth The relative range of analog frequencies or digital signals that can
be passed through a transmission medium, such as glass fibers,
without distortion. The greater the bandwidth, the greater the
information carrying capacity. Bandwidth is measured in Hertz
(analog) or Bits Per Second (digital).
Bit Error Rate A measure of transmission quality stated as the expected probability
of error per bit transmitted.
Capacity Refers to transmission.
Carrier A provider of communications transmission services by fiber, wire or
radio.
C-LEC (Competitive Local
Exchange Carrier) A company that competes with LECs in the local services market.
Common Carrier A government-defined group of private companies offering
telecommunications services or facilities to the general public on a
non-discriminatory basis.
Dark Fiber Fiber that lacks the requisite electronic and optronic equipment
necessary to use the fiber for transmission.
Digital Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses
that represent the binary digits 0 and 1. Digital
transmission/switching technologies employ a sequence of
G-1
<PAGE>
discrete, distinct pulses to represent information, as opposed to the
continuously variable analog signal.
DWDM (Dense Wave
Division Multiplexing) A technique for transmitting 8 or more different light wave
frequencies on a single fiber to increase the information carrying
capacity.
e-commerce Electronic commerce utilizing the Internet.
Equal access The basis upon which customers of IXCs are able to obtain access to
their Primary Interexchange Carriers' (PIC) long distance telephone
network by dialing "1", thus eliminating the need to dial additional
digits and an authorization code to obtain such access.
FBCs (Facilities Based
Carriers) Facilities based carriers that own and operate their own network and
equipment.
FCC Federal Communications Commission.
Frame Relay A high-speed, data-packet switching service used to transmit data
between computers. Frame Relay supports data units of variable
lengths at access speeds ranging from 56 kilobits per second to 1.5
megabits per second. This service is well-suited for connecting local
area networks, but is not presently well suited for voice and video
applications due to the variable delays which can occur. Frame Relay
was designed to operate at high-speeds on modern fiber optic networks.
Gbps Gigabits per second, which is a measurement of speed for digital
signal transmission expressed in billions of bits per second.
GTE GTE Intelligent Network Services Incorporated.
Hertz The unit for measuring the frequency with which an electromagnetic
signal cycles through the zero-value state between lowest and highest
states. One Hz (Hertz) equals one cycle per second. kHz (kilohertz)
stands for thousands of Hertz; MHZ (megahertz) stands for millions of
Hertz.
IDC International Data Corporation, a market research firm.
IP Internet Protocol.
G-2
<PAGE>
ISP (Internet Service
Provider) A company that provides businesses and individuals with access to the
Internet.
10XXX Service The ability for a user to access any carrier's long distance network
by dialing the carrier's Carrier Identification Code (CIC) which is a
1 plus 0 plus three specifically assigned digits, thereby bypassing
the user's primary interexchange carrier.
Interconnect Connection of a telecommunications device or service to the PSTN.
IXC or Interexchange
carrie A company providing inter-LATA or long distance services between LATAs
on an intrastate or interstate basis.
Kbps Kilobits per second, which is a measurement of speed for digital
signal transmission expressed in thousands of bits per second.
LATAs (Local Access and
Transport Areas) The approximately 200 geographic areas that define the areas between
which the RBOCs currently are prohibited from providing long distance
services.
LEC (Local Exchange
Carrier) A company historically providing local telephone services.
Lit fiber Fiber activated or equipped with the requisite electronic and
optronic equipment necessary to use the fiber for transmission.
Local loop A circuit that connects an end user to the LECcentral office within a LATA.
Long-haul circuit A dedicated telecommunications circuit generally between locations in
different LATAs.
Mbps Megabits per second, which is a measurement of speed for digital
signal transmission expressed in millions of bits per second.
MCI MCI Communications, Inc.
MOU Minutes of use of long distance service.
Multiplexing An electronic or optical process that combines a large number of
lower speed transmission lines into one high-speed line by splitting
the total available bandwidth into narrower bands (frequency
division), or by allotting a common channel to several different
transmitting devices, one at a time in sequence (time division).
OC-3, OC-12,
OC-48 and OC-192 OC is a measure of SONET transmission optical carrier level, which is
equal to the corresponding number of DS-3s (e.g. OC-3 is equal to 3
DS-3s and OC-48 is equal to 48 DS-3s).
RBOCs (Regional Bell
Operating Companies) The seven local telephone companies (formerly part of AT&T) established
as a result of the AT&T Divestiture Decree.
G-3
<PAGE>
Regeneration/amplifier Devices which automatically re-transmit or boost signals on an out-bound
circuit.
Reseller A carrier that does not own transmission facilities, but obtains
communications services from another carrier for resale to the public.
SONET (Synchronous
Optical Network Technology) An electronics and network architecture for variable-bandwidth products
which enables transmission of voice, data and video (multimedia) at
very high speeds.
SONET ring A network architecture which provides for instantaneous restoration
of service in the event of a fiber cut by automatically rerouting
traffic the other direction around the ring. This occurs so rapidly
(in 50 milliseconds) it is virtually undetectable to the user.
Spectrum A term generally applied to radio frequencies.
Sprint Sprint Corporation
Switch A device that selects the paths or circuits to be used for
transmission of information and establishes a connection. Switching
is the process of interconnecting circuits to form a transmission
path between users and it also captures information for billing
purposes.
Switched service carriers A carrier that sells switched long distance service and generally
refers to a carrier that owns its switch.
Switchless resellers A carrier that does not own facilities or switches, but purchases
minutes in high volumes from other carriers and resells those minutes.
T-0, T-1, T-3 Standard telecommunications industry digital signal formats, which
are distinguishable by bit rate (the number of binary digits (0 and
1) transmitted per second). T-0 service has a bit rate of 64 kilobits per
second and typically transmits only once voice conversation at a
time. T-1 service has a bit rate of 1.544 megabits per second and
typically transmits 24 simultaneous voice conversations. T-3 service
has a bit rate of 45 megabits per second and typically transmits
672 simultaneous voice conversations.
T-3 miles A measure of the total capacity and length of a transmission path,
calculated as the capacity of the transmission path in T-3's
multiplied by the length of the path in miles.
Terabits A trillion bits of transmission capacity.
Trunk A communications channel between two switches. "Trunking" calls
reduces the likelihood of traffic blockage due to network congestion.
A trunked system combines multiple channels with unrestricted access
in such a manner that user demands for channels are automatically
"queued" and then allocated to the first available channel.
WorldCom WorldCom, Inc.
</TABLE>
G-4
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
FORWARD LOOKING STATEMENTS................................. 3
AVAILABLE INFORMATION ..................................... 3
PROSPECTUS SUMMARY ........................................ 4
RECENT DEVELOPMENTS ....................................... 15
RISK FACTORS .............................................. 17
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY .......... 32
CAPITALIZATION ............................................ 33
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA ...... 35
SELECTED HISTORICAL FINANCIAL DATA -- RMI ................. 39
SELECTED HISTORICAL FINANCIAL DATA -- ICC ................. 41
USE OF PROCEEDS ........................................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................. 44
BUSINESS .................................................. 64
REGULATION ................................................ 79
LEGAL PROCEEDINGS ......................................... 83
MANAGEMENT ................................................ 83
CERTAIN TRANSACTIONS ...................................... 92
PRINCIPAL STOCKHOLDERS .................................... 96
SELLING SECURITYHOLDERS ................................... 97
DESCRIPTION OF CAPITAL STOCK .............................. 99
PLAN OF DISTRIBUTION ...................................... 101
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .................................. 102
LEGAL MATTERS ............................................. 103
EXPERTS.................................................... 103
INDEX TO FINANCIAL STATEMENTS ............................. F-1
GLOSSARY .................................................. G-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of
the securities being registered hereby other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ................................................$ 33,200
Nasdaq listing fee ..................................................$ 7,500
Printing and engraving expenses .....................................$ 20,500
Legal fees and expenses .............................................$ 60,000
Blue Sky fees and expenses ..........................................$ 30,000
Accounting fees and expenses ........................................$ 10,000
Miscellaneous .......................................................$ 3,000
Total .....................................................................$
-------
163,700
-------
</TABLE>
Item 14. Indemnification of Directors and Officers.
Article 8 of the Company's Certificate of Incorporation, as amended
provides
"No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except as to liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for violations of Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit. If the Delaware General
Corporation Law hereafter is amended to eliminate or limit further the
liability of a director, then, in addition to the elimination and limitation
of liability provided by the preceding sentence, the liability of each
director shall be eliminated or limited to the fullest extent provided or
permitted by the amended Delaware General Corporation Law. Any repeal or
modification of this Article 8 shall not adversely affect any right or
protection of a director under this Article 8 as in effect immediately prior
to such repeal or modification with respect to any liability that would have
accrued, but for this Article 8, prior to such repeal or modification."
Section 5.1 of the Company's By-Laws provides, in general, that the
Company shall, to the fullest extent permitted by the DGCL, as now or
hereafter in effect, indemnify any person who was or is threatened to be made
a party to any threatened, pending, or completed action, suit, or proceeding,
whether criminal, civil, administrative, or investigative (a "Proceeding"),
by reason
II-1
<PAGE>
of the fact that he is or was a director or officer of the Company, or, by
reason of the fact that such officer or director is or was serving at the
request of the Company as a director, office, employee, or agent of another
corporation, partnership, joint venture, trust, association, or other
enterprise, against all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties, and
amounts paid in settlement reasonably incurred by him in connection with such
Proceeding, including any Proceeding by or on behalf of the Company and will
advance all reasonable expenses incurred by or on behalf of any such person
in connection with any Proceeding, whether prior to or after final
disposition of such Proceeding. Section 5.8 of the bylaws also provide that
the Company may also indemnify and advance expenses to employees or agents
who are not officers or directors of the Company.
The Company has purchased a directors' and officers' liability
insurance contract that provides, within stated limits, reimbursement either
to a director or officer whose actions in his capacity result in liability,
or to the Registrant, in the event it has indemnified the director or officer.
Item 15. Recent Sales of Unregistered Securities.
The Company was organized in October of 1995 in connection with the
transfer by its predecessor corporation, Rocky Mountain Internet, Inc., a
Colorado corporation (the "Predecessor"), of substantially all of its assets
to the Company in consideration of the assumption by the Company of
substantially all of the liabilities of the Predecessor. In connection with
its formation, the Company issued 1,868,000 shares of Common Stock to Messrs.
Welch, Phillips, Loud and Dimoff and one other shareholder (who was a
shareholder in the Predecessor) for cash consideration equal to the par value
thereof, or an aggregate of $1,868. That transaction was effected only with
persons familiar with the business of the Predecessor without general
solicitation or advertising and was exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
The Company effected an offering of convertible debentures
commencing in October, 1995, with sales to 33 persons in an aggregate amount
of $490,000 (the "Debenture Private Placement Offering"). The last sale of
debentures occurred February 2, 1996. The debentures are convertible into
common stock at the election of the debenture holders at a conversion price
of $0.40 in principal amount per share. The debentures bear interest at the
rate of 12% per annum, payable quarterly, and are prepayable by RMI at any
time without premium or penalty. No general solicitation or advertising was
conducted in connection with the sale, and most purchasers are family and
friends of officers, directors and shareholders of RMI. All of the purchasers
were given unaudited financial statements of the Company and a disclosure
document describing the Company and its business. Each purchaser signed a
subscription agreement in which such person represented that he or she was
acquiring the debentures for investment and without a view to distribution,
that he or she had knowledge and experience in financial matters, and that he
or she had been given an opportunity to have access to information about, and
to ask questions of officers of, the Company. The Company filed a Form D in
respect of the offering, specifying Rule 504 as the applicable exemption. The
Company is of the view that the Debenture Private Placement Offering was also
exempt from the registration requirements of the Act under Section 4(2).
On or about June 10, 1996, the Company sold 250,000 shares of Series
A Convertible Preferred Stock to a group of approximately 26 persons
(counting spouses holding jointly separately for such purpose) at a price of
$2.00 per share ($500,000 in the aggregate). The Series A Preferred Stock is
convertible into Common Stock, but not until May 15, 1997. All purchasers in
the offering executed subscription agreements pursuant to which, among other
things, each warranted as to his status as an accredited investor and as to
his investment intent. No general solicitation or advertising was used in
connection with the offering or sale of the Series A Preferred Stock.
NTB, the Representative in connection with the offering under this
Registration Statement, acted as placement agent in connection with the sale
of the Series A Preferred Stock and received a commission of 10% of
II-2
<PAGE>
the proceeds of such sale. All investors received a disclosure document
including audited financial statements of the Company prior to their purchase
and the Company filed a Form D in respect of that offering. The Company
believes that the sale of the Series A Preferred Stock was exempt from the
registration requirements of the Act pursuant to Rule 506 of Regulation D and
Sections 4(6) and 4(2) of the Act.
The Predecessor, in connection with its formation in March of 1994,
issued 248,000 shares of common stock to Christopher K. Phillips and 254,000
shares of common stock to Jim D. Welch, both of whom were directors and
officers in the Predecessor. The purchase price paid was $0.0057 cash per
share by Mr. Phillips and $0.0099 per share by Mr. Welch. The Company
understands that this transaction was exempt from registration under the Act
pursuant to Sections 4(6) and 4(2) thereof.
The Predecessor also issued 12,000 common shares to an investment
banker in consideration of the promise by such person to provide financial
advice and investment banking services. The Company understands that such
transaction was exempt under Section 4(2) of the Act.
The Predecessor sold 60,000 common shares to each of three persons
in August 1994, at a cash price of $0.08 per share. The Predecessor also
sold 6,000 common shares to a fourth person in August 1994, at a price of
$0.83 per share. The Company understands that this transaction was exempt
under Section 4(2) of the Act. All of the foregoing persons except the latter
and Messrs. Welch, Phillips and Scott Puryear, ceased to be shareholders of the
Predecessor prior to the Reincorporation Transaction and are not shareholders
of the Company.
Between June 13, 1997, and approximately September 15, 1997, the
Company sold 310,500 units of securities to a group of approximately 17
persons (counting spouses holding jointly as one person for such purpose) at
a price of $4.00 per unit ($1,242,000 in the aggregate, before offering
costs). Each unit consists of two shares of Common Stock and one warrant to
purchase a share of Common Stock for a price of $3.00 per share until June
13, 2000. No general solicitation or advertising was used in connection with
the offering or sale of the units. NTB, the representative of the
underwriters in connection with the Company's IPO, acted as placement agent
in connection with the sale of the units and received a commission of 10% of
the proceeds of such sale. NTB also received an option to purchase 31,050 of
the units. The terms, including the exercise price, of the warrants included
in the units that NTB received an option to purchase are identical to the
terms of the warrants included in the units purchased by the investors in
this offering. All investors received a private placement memorandum, a copy
of the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996, and a copy of the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1997, and the Company filed a Form D in respect of
that offering. The Company believes that the sale of the units was exempt
from the registration requirements of the Act pursuant to Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
As disclosed under the caption "CERTAIN TRANSACTIONS--CHANGE IN
CONTROL" in the Prospectus that forms a part of this registration statement,
the Company issued 1,225,000 shares of Common Stock to Mr. Douglas H. Hanson
in connection with his acquisition of control of the Company as of October 1,
1997. Contemporaneously with this transaction, the Company also agreed to
issue to Mr. Hanson warrants to purchase 4,000,000 shares of Common Stock,
subject to the approval of the Company's shareholders of an amendment to the
Company's certificate of incorporation to increase the number of shares of
Common Stock that the Company is authorized to issue. The offer and sale were
made in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act and Regulation D promulgated thereunder. Mr. Hanson was
represented by counsel in connection with his investment and conducted a
thorough "due diligence" investigation of the Company prior to closing the
transaction. Mr. Hanson "ha[d] access to the same kind of information that
the [Securities] Act would
II-3
<PAGE>
make available in the form of a registration statement," SECURITIES AND
EXCHANGE COMMISSION V. RALSTON PURINA CO., 346 U.S. 981 (1953).
As disclosed under the caption "RECENT DEVELOPMENTS--OTHER
ACQUISITIONS" in the Prospectus that forms a part of this registration
statement, the Company issued an aggregate of 150,000 shares of the Common
Stock on June 5, 1998 to the shareholders of the Infohiway pursuant to the
terms of the Infohiway Merger Agreement. The sale of these shares was made
in reliance on the exemption from registration afforded by Section 4(2) of
the Securities Act. The shareholders of the Infohiway were represented by
counsel in the transaction and received copies of all reports and statements
filed by the Company under the Exchange Act during the period of
approximately one year prior to the acquisition. Accordingly, the Company
believes that such shareholders "ha[d] access to the same kind of information
that the [Securities] Act would make available in the form of a registration
statement."
As disclosed under the caption "RECENT DEVELOPMENTS--OTHER
ACQUISITIONS" in the Prospectus that forms a part of this registration
statement, the Company issued an aggregate of 286,369 shares of Common Stock
on July 1, 1998 to the shareholders of Application Methods pursuant to the
terms of the Application Methods Merger Agreement. The sale of these shares
was made in reliance on the exemption from registration afforded by Section
4(2) of the Securities Act. The shareholders of Application Methods were
represented by counsel in the transaction and received copies of all reports
and statements filed by the Company under the Exchange Act during the period
of approximately one year prior to the acquisition. Accordingly, the Company
believes that such shareholders "ha[d] access to the same kind of information
that the [Securities] Act would make available in the form of a registration
statement."
Item 16. Exhibits and Financial Statement Schedules.
a) Exhibits
<TABLE>
<CAPTION>
Number Description of Exhibits
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Bylaws of Rocky Mountain Internet, Inc. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of Rocky Mountain Internet, Inc.
4.1 Form of Warrant Agreement dated September 5,1996 between Rocky Mountain Internet, Inc. and American Securities
Transfer, Inc. (1)
4.2 Form of Subordinated Convertible Promissory Note (1)
4.3 Form of Lock-Up Agreement for Shareholders (1)
4.4 Form of Lock-Up Agreement for Preferred Stockholders (1)
4.5 Form of Lock-Up Agreement for Debenture Holders (1)
4.6 Form of Stock Certificate (1)
4.7 Form of Warrant Certificate (1)
4.8 Warrant Agreement between Rocky Mountain Internet, Inc. and Douglas H. Hanson dated October 1, 1997 (8)
4.9 1996 Employees' Stock Option Plan(6)
4.10 1996 Non-Employee Directors' Stock Option Plan (6)
4.11 Rocky Mountain Internet Inc. 1997 Non-Qualified Stock Option Plan (7)
4.12 1997 Stock Option Plan (9)
4.12.1 First Amendment to Non-Qualified Stock Option Agreement pursuant to the Rocky Mountain Internet, Inc. 1997 Stock
Option Plan
4.12.2 First Amendment to Incentive Stock Option Agreement pursuant to the Rocky Mountain Internet, Inc. 1997 Stock Option
Plan
4.13 Rocky Mountain Internet, Inc. 1998 Employees' Stock Option Plan (10)
4.14 Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock Option Plan (11)
5.2 Opinion and Consent of Hall & Evans, L.L.C. as to legality of securities being registered
10.1 Agreement of Lease between Denver-Stellar Associates Limited Partnership, Landlord and Rocky Mountain Internet,
Inc., Tenant (2)
10.2 Asset Purchase Agreement - Acquisition of CompuNerd, Inc. (2)
10.3 Confirmation of $2.0 million lease line of credit (2)
10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing the provision of professional information system
development services for the design and development of the MCI internal Intranet project referred to as Electronic
Advice. (2)
10.5 Sublease Agreement-February 26, 1997-1800 Glenarm, Denver, Co.(4)
10.6 Acquisition of The Information Exchange (4)
10.7 Asset purchase of On-Line Network Enterprises (4)
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive(4)
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive(4)
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain Internet, Inc. and Zero Error Networks, Inc. (5)
10.11 Private Placement Memorandum (5)
10.12 Carrier Services Switchless Agreement Between Frontier Communications of the West, Inc. and Rocky Mountain
Broadband, Inc.
II-4
<PAGE>
10.13 Wholesale Usage Agreement Between PSINet Inc. and Rocky Mountain Internet, Inc.
10.14 PacNetReseller Agreement between PacNet Inc. and Rocky Mountain Internet, Inc.
10.15 Operating Agreement of The Mountain Area EXchange LLC
16.1 Letter re change in certifying accountant(3)
23.1 Consent of Baird, Kurtz & Dobson
23.2 Consent of McGladrey & Pullen, LLP
23.3 Consent of KPMG Peat Marwick LLP (ICC)
23.4 Consent of Hein + Associates LLP
23.5 Consent of Peterson Sullivan PLLP
23.6 Consent of KPMG Peat Marwick LLP (Infohiway)
27.1 Financial Data Schedule
(1) Incorporated by reference from the Company's registration statement on Form SB-2 filed with the Commission on
August 30, 1996, registration number 333-05040C.
(2) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB filing dated September 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K filing dated January 28, 1997
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB dated December 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB dated June 30, 1997.
(6) Incorporated by reference to the Company's documents filed with Initial Public Offering.
(7) Incorporated by reference to the Company's Form S-8 Registration Statement filed on September 26, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K dated October 6, 1997.
(9) Incorporated by reference to the Definitive Proxy Statement (Appendix A) filed on Schedule 14A on February 13, 1998.
(10) Incorporated by reference to the Definitive Proxy Statement (Appendix B) filed on Schedule 14A on February 13, 1998.
(11) Incorporated by reference to the Definitive Proxy Statement (Appendix C) filed on Schedule 14A on February 13, 1998.
(12) Previously filed
(13) To be filed by amendment
</TABLE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration;
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City and County
of Denver, State of Colorado, on July 20, 1998.
ROCKY MOUNTAIN INTERNET, INC.
By: /s/ Douglas H. Hanson
-----------------------------------
Douglas H. Hanson, President, Chief
Executive Officer, and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Douglas H. Hanson Principal Executive Officer and July 20, 1998
- ---------------------------- Chairman of the Board of Directors
Douglas H. Hanson
/s/ Peter J. Kushar Chief Financial Officer, Secretary, July 20, 1998
- ---------------------------- Treasurer, and Principal Accounting Officer
Peter J. Kushar
/s/ D. D. Hock Director July 20, 1998
- ----------------------------
D. D. Hock
/s/ Robert W. Grabowski Director July 20, 1998
- ----------------------------
Robert W. Grabowski
/s/ Lewis H. Silverberg Director July 20, 1998
- ----------------------------
Lewis H. Silverberg
/s/ Mary Beth Vitale Director July 20, 1998
- ----------------------------
Mary Beth Vitale
</TABLE>
<PAGE>
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "ROCKY MOUNTAIN INTERNET, INC.", FILED IN THIS OFFICE ON THE
TWENTY-THIRD DAY OF MARCH, A.D. 1998, AT 9 O'CLOCK A.M.
/S/ Edward J. Freel
[SEAL] -----------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2552671 8100 AUTHENTICATION: 9153703
981240632 DATE: 06-22-98
<PAGE>
[LETTERHEAD]
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ROCKY MOUNTAIN INTERNET, INC.
Rocky Mountain Internet, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to Article 4 of the Corporation's
Certificate of Incorporation of said Corporation, declaring said amendment to be
advisable and recommending to the shareholders an amendment to be submit to the
shareholders at the next annual meeting of the stockholders of said corporation
for consideration thereof. The resolution setting forth the proposed amendment
is as follows:
RESOLVED, That, subject to the approval of the Stockholders of the
Corporation at the next Annual Meeting of the Stockholders, the Certificate of
Incorporation of the Corporation shall be amended by deleting Section (a) of
Article 4 and replacing it with the following:
AUTHORIZED SHARES. The aggregate number of shares which the
corporation has authority to issue is 25,790,000. The authorized
shares consist of 25,000,000 shares of common stock with a par value
of $0.001 per share, such class being designated "common stock," and
790,000 shares of preferred stock with a par value of $0.001 per
share, such class being designated "preferred stock."
SECOND: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to Article 4 of the Corporation's
Certificate of Incorporation of said Corporation, declaring said amendment to be
advisable and recommending to the shareholders an amendment to be submit to the
shareholders at the next annual meeting of the stockholders of said corporation
for consideration thereof. The resolution setting forth the proposed amendment
is as follows:
RESOLVED, That, subject to the approval of the stockholders of the
Corporation at the next Annual Meeting of Stockholders, the Certificate of
Incorporation of the Corporation shall be amended by deleting the last sentence
of Section (b) of Article 4 and replacing it with the following:
<PAGE>
Unless otherwise provided by the Delaware General Corporation Law,
with respect to any matter submitted to the stockholders of the Corporation
at a meeting of the stockholders, the affirmative vote of the majority of
shares present in person or represented by proxy at the meeting and
entitled to vote on the matter shall be the act of the stockholders.
THIRD: That thereafter, pursuant to resolution of its Board of Directors,
an annual meeting of the stockholders of said corporation was duly called and
held, upon notices in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section and 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHREOF, said Corporation has caused this Certificate to be
signed by David L. Evans, its authorized officer, this 20th day of March, 1998.
Rocky Mountain Internet, Inc.,
A Delaware corporation
By: /s/ David L. Evans
-----------------------------------
David L. Evans, Corporate Secretary
<PAGE>
FIRST AMENDMENT
TO
NON-QUALIFIED STOCK OPTION AGREEMENT
PURSUANT TO THE
ROCKY MOUNTAIN INTERNET, INC.
1997 STOCK OPTION PLAN
THIS FIRST AMENDMENT TO NON-QUALIFIED STOCK OPTION AGREEMENT, effective as
of the 1st day of October, 1997, between Rocky Mountain Internet, Inc. (the
"Company") and Douglas H. Hanson (the "Optionee").
RECITALS:
WHEREAS, the Company and Optionee entered into the Non-Qualified Stock
Option Agreement (the "Agreement") pursuant to Rocky Mountain Internet, Inc.
1997 Option Plan dated the 1st day of October, 1997;
WHEREAS, the Company and Optionee entered into an Incentive Stock Option
Agreement pursuant to Rocky Mountain Internet, Inc. 1997 Option Plan dated the
1st day of October, 1997;
WHEREAS, the Company made an error in calculating the Incentive Stock
Options at 110% of the Fair Market Value of the Stock as $2.25 rather than the
correct value of $2.6125 on the date of granting of the Options;
WHEREAS, the prior Board of Directors planned to maximize the Incentive
Stock Options granted to the Optionee and based on the corrected Fair Market
Value of the Incentive Stock Options, the number of shares granted pursuant to
the Incentive Stock Option Agreement should be 191,385 (not 222,220 shares),
thereby increasing the Non-Qualified Stock Options to 408,615 (not 377,780
shares); and
WHEREAS, Paragraph 12 of the Agreement provides that the Board may amend
the Agreement for the purpose of promoting the objectives of the Plan and the
current Board of Directors now desires to amend the Non-Qualified Stock Option
Agreement as of the 1st day of October, 1997.
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements hereinafter set forth, the parties hereby mutually covenant and agree
as follows:
1. Section 1 of such Agreement is hereby replaced in its entirety as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set
forth herein and the Plan, the Company hereby grants to the
Optionee for the period commencing on the date of this Agreement
and ending on the
<PAGE>
date ten (10) years from the date of this Agreement (the "Option
Period") non-qualified stock options (the "Option") to purchase from
the Company, at a price of $1.00 per share, up to but not exceeding in
the aggregate Four Hundred Eight Thousand Six Hundred Fifteen
(408,615) shares of the Company's common stock, $0.001 par value
("Stock"), such number being subject to adjustment as provided in the
Plan.
2. The parties further agree that the provisions hereof are incorporated in
and made a part of the Agreement and, to the extent that these provisions
conflict with the provisions of the Agreement, the provisions hereof shall
control. The parties further agree that, except as otherwise expressly provided
herein, the provisions of the Agreement continue in full force and effect. Any
terms not expressly defined herein shall have the meaning as set forth in the
Plan and Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Optionee has hereunto set the Optionee's
hand, all effective as of the day and year first above written.
Rocky Mountain Internet, Inc.
By:
---------------------------------
David L. Evans
Corporate Secretary
The Optionee
---------------------------------
Douglas H. Hanson
<PAGE>
FIRST AMENDMENT
TO
INCENTIVE STOCK OPTION AGREEMENT
PURSUANT TO THE
ROCKY MOUNTAIN INTERNET, INC.
1997 STOCK OPTION PLAN
THIS FIRST AMENDMENT TO INCENTIVE STOCK OPTION AGREEMENT, effective as of
the 1st day of October, 1997, between Rocky Mountain Internet, Inc. (the
"Company") and Douglas H. Hanson (the "Optionee").
RECITALS:
WHEREAS, the Company and Optionee entered into the Incentive Stock Option
Agreement pursuant to Rocky Mountain Internet, Inc. 1997 Option Plan dated the
1st day of October, 1997;
WHEREAS, the Company made an error in calculating 110% of the Fair Market
Value of the Stock as $2.25 rather than the correct value of $2.6125 on the date
of granting of the Options;
WHEREAS, the prior Board of Directors planned to maximize the Incentive
Stock Options granted to the Optionee and based on the corrected Fair Market
Value of the Options, the number of shares granted pursuant to this Agreement
should be 191,385 shares (not 222,220 shares); and
WHEREAS, Paragraph 12 of the Agreement provides that the Board may amend
the Agreement for the purpose of promoting the objectives of the Plan and the
current Board of Directors now desires to correct the error of the prior Board
of Directors and amend the Incentive Stock Option Agreement effective as of the
1st day of October, 1997.
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements hereinafter set forth, the parties hereby mutually covenant and agree
as follows:
1. Section 1 of such Agreement is hereby replaced in its entirety as follows:
1. GRANT OF OPTION. Subject to the terms and conditions
set forth herein and the Plan, the Company hereby grants to
the Optionee for the period commencing on the date of this
Agreement and ending on the date five (5) years from the
date of this Agreement (the "Option Period") incentive stock
options (the "Option") to purchase from the Company, at a
price of $2.6125 per share, up to but not exceeding in the
aggregate One Hundred Ninety One Thousand Three Hundred
Eighty Five
<PAGE>
(191,385) shares of the Company's common stock, $0.001 par value
("Stock"), such number being subject to adjustment as provided in the
Plan.
2. Schedule A to the Incentive Stock Option Agreement shall be amended in its
entirety as set forth on Schedule A attached hereto and incorporated herein by
this reference.
3. The parties further agree that the provisions hereof are incorporated in
and made a part of the Agreement and, to the extent that these provisions
conflict with the provisions of the Agreement, the provisions hereof shall
control. The parties further agree that, except as otherwise expressly provided
herein, the provisions of the Agreement continue in full force and effect. Any
terms not expressly defined herein shall have the meaning as set forth in the
Plan and Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Optionee has hereunto set the Optionee's
hand, all effective as of the day and year first above written.
Rocky Mountain Internet, Inc.
By:
---------------------------------
David L. Evans
Corporate Secretary
The Optionee
---------------------------------
Douglas H. Hanson
<PAGE>
SCHEDULE A
TO THE
INCENTIVE STOCK OPTION AGREEMENT
<TABLE>
<CAPTION>
SHARES OF STOCK FIRST EXERCISABLE
<S> <C>
38,277 First anniversary date
of this Agreement
38,277 Second anniversary date
of this Agreement
38,277 Third anniversary date
of this Agreement
38,277 Fourth anniversary date
of this Agreement
38,277 Fifth anniversary date
of this Agreement
</TABLE>
<PAGE>
CARRIER SERVICES SWITCHLESS AGREEMENT
BETWEEN
FRONTIER COMMUNICATIONS OF THE WEST, INC.
AND
ROCKY MOUNTAIN BROADBAND, INC.
<PAGE>
TABLE OF CONTENTS
SECTION
- -------
1. Services
2. Term Of The Agreement
3. Billing And Payment
4. Billing Disputes
5. Termination Rights
6. Taxes And Assessments
7. Warranties And Limitation Of Liability
8. Indemnification
9. Representation
10. Force Majeure
11. Waivers
12. Assignment
13. Confidentiality
14. Integration
15. Construction
16. Governing Law
17. Notices
18. Counterparts
19. Compliance With Laws
20. Third Parties
21. Survival Of Provisions
22. Unenforceable Provisions
EXHIBITS
- --------
Exhibit A General And Service Definitions
Exhibit B Ancillary Fee Schedule
Exhibit C Call Detail Records; Order Processing Procedures; Letter Of
Agency Requirements
Exhibit D Dedicated Carrier Termination Schedule
Exhibit D(a) Carrier Domestic Termination Service
Exhibit D(b) Carrier Termination International Service
Exhibit D(c) Carrier Directory Assistance
Exhibit D(d) Carrier 800 Transport Service
Exhibit E Network Interconnection Schedule
Exhibit F National Origination Service (1+)
Exhibit G National Origination Service (800 Switched & Dedicated)
Exhibit H National Origination Service (Dedicated)
Exhibit I National Origination Service - (Switched International)
Exhibit I(a) National Origination Service - (Dedicated International)
Exhibit J Interlink Calling Card Service Schedule
Exhibit J(a) Interlink Calling Card Service
Exhibit J(b) Interlink Originating International Service
Exhibit J(c) Interlink Terminating International Service
Exhibit K Cashguard Schedule
Exhibit K(a) Cashguard
Exhibit K(b) Cashguard International
Exhibit L 800 PIN Service Schedule
Exhibit M-(a) SONET Private Line
2
Initials ___
Initials ___
<PAGE>
CARRIER SERVICE AGREEMENT
(Switchless)
This Carrier Service Agreement ("AGREEMENT") is entered into between the
provider of service, Frontier Communications of the West, Inc. f/k/a West Coast
Telecommunications, Inc. on behalf of itself and its affiliates ("FRONTIER"), a
California corporation located at 135 East Ortega Street, Santa Barbara, CA
93101 and Rocky Mountain Broadband, Inc. ("RMBI" or "Purchaser"), a Colorado
corporation with its principal place of business located at 1099 18th Street,
30th Floor, Denver, Colorado 80202 (hereinafter, Frontier and RMBI may be
referred to in the aggregate as "PARTIES", and each singularly as a "PARTY".)
PURPOSE
The Parties are telecommunications carriers subject to the Communications Act of
1934, as amended, as well as the Telecommunications Act of 1996. RMBI desires
to purchase network transport and other telecommunication services from Frontier
for RMBI's resale to its business and residential customers. The Parties agree
as follows:
1. SERVICES:
(a) Frontier shall, in accordance with this Agreement, provide to RMBI
those services RMBI subscribes to hereunder as defined and identified
herein and on exhibits, schedules and other attachments appended
hereto and made a part of this Agreement from time-to-time by the
Parties (collectively, the "SCHEDULES"). All such services being
provided under the Schedules are collectively referred to as the
"SERVICES".
(b) RMBI shall provide Frontier with a forecast covering a good faith
estimate based on historical information (if available) of the monthly
traffic volume and geographic distribution for an ordered Service.
The estimate will be for the 3 calendar month period following the
desired activation date in a format supplied or approved by Frontier.
Frontier may request updated forecasts on a reasonable basis.
Forecasts do not constitute a binding commitment on the part of RMBI.
Provision of Services is contingent on availability of Frontier
facilities.
(c) Orders for Services will be transmitted and processed in accordance
with the procedures set out in Exhibit C attached hereto and made a
part hereof as the same may be modified from time to time by Frontier
upon written notice to RMBI.
2. TERM OF THE AGREEMENT:
(a) INITIAL TERM: This Agreement is effective and the Parties'
obligations commence upon the date of execution by Frontier
("EFFECTIVE DATE") and continues in effect for a period of three (3)
years ("INITIAL TERM") from either the day Service is first utilized
by RMBI (as determined by Frontier's records), or the 90th day after
the Effective Date, whichever date occurs first, such date known as
the "START OF SERVICE DATE".
(b) AUTOMATIC RENEWAL: This Agreement renews automatically for a 1 year
period at the expiration of the Initial Term, unless canceled in
accordance with the termination provisions of this Agreement
("SUBSEQUENT TERM"). Each Subsequent Term renews automatically for a
1 year period upon its expiration, unless canceled in accordance with
the termination provisions of this Agreement.
(c) CANCELLATION: Either Party may terminate this Agreement upon
expiration of a term upon written notice given at least 90 days prior
to expiration of the then current term.
3
Initials ___
Initials ___
<PAGE>
3. BILLING AND PAYMENT: RMBI shall pay Frontier for the Services at the rates
and charges set out in the applicable Schedules. If RMBI is required to
pay an initial cash deposit or provide other assurance of payment, then
Frontier is not obligated to begin accepting orders or providing Service
until the deposit or other assurance of payment is received.
(a) ***.
(b) Frontier shall invoice RMBI via facsimile, with a follow-up copy sent
via regular U.S. mail or overnight delivery service, on or about the
fifth Business Day after the close of each Billing Cycle for the
Services and for any other sums due Frontier ("INVOICE"). Each Invoice
details: (i) the amount due Frontier, or the credit due RMBI, after a
reconciliation between the actual charges for the Services for the
prior Billing Cycle, and (ii) any other sums due Frontier.
(c) Each Invoice shall be paid by RMBI in immediately available U.S. funds
so that the payment is received by Frontier no later than thirty (30)
calendar days from the date of the Invoice (the "DUE DATE"). Frontier
agrees that (i) the Invoice date will be the same day the Invoice is
faxed to RMBI, and (ii) the Invoice will be faxed on a Business Day.
Any Invoice not paid by the Due Date shall bear late payment fees at
the rate of 1-1/2% per month (or such lower amount as maybe required
by law) until paid.
(d) The RMBI facsimile number and contact for purposes of this Section 3.
are 303-672-0711, Attention: Kirk Roberts. RMBI may change the
facsimile number and contact upon written notice to Frontier.
(e) If RMBI is delinquent in payment of an Invoice and Frontier does not
have security from RMBI equal to RMBI's prior month's usage charges,
RMBI shall provide such additional security as Frontier may reasonably
request in writing.
(f) ***.
(g) RMBI agrees to pay to Frontier any and all local exchange carrier
("LEC") assessed charges (other than access or other LEC charges
otherwise included under this Agreement) and governmentally imposed
charges levied upon Frontier as a result of Services provided to RMBI,
such as but not limited to:
(i) primary Interexchange carrier ("PIC") change and slamming
related charges under Exhibit C, Section III;
(ii) assessments by the National Exchange Carrier's Association,
Inc. (NECA) including but not limited to, the Universal
Service Fund/Lifeline Assistance (USF/LA), the
Telecommunications Relay Service (TRS) Fund, and other
assessments as may be assessed by NECA in the future relative
to the Services; (RMBI understands that NECA charges are
assessed on a per ANI basis for Presubscribed End-User ANIs,
whether such ANIs are active or not);
(iii) assessments by regulatory agencies, including but not limited
to, the Federal Communications Commission (FCC) and state
Public Utility/Service Commissions;
(iv) charges or costs incurred by Frontier for FCC/PUC mandated
initiatives under the Telecommunications Act of 1996, or
otherwise, such as the "access reform" and "payphone dial-
around compensation" initiatives, plus a reasonable fee for
administration of those initiatives applicable to the Services
provided to RMBI;
(v) when Frontier is acting as the RespOrg, National
Administrative Services Center assessments (including any
monthly recurring charges) for "800"/"888" service
installation;
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(vi) applicable charges set out in the Schedule of Ancillary Fees
attached hereto as Exhibit B and made a part hereof as the
same may be modified from time to time by Frontier upon
written notice to RMBI.
(h) ***
(i) ***
(j) RMBI agrees that any make up to minimum charges, shortfall charges and
surcharges for which it is liable under this Agreement are based on
agreed upon minimum commitments on its part and corresponding rate
concessions on Frontier's part, and are not penalties or consequential
or other damages under Section 7.(b).
4. BILLING DISPUTES: The Parties agree that time is of the essence for
payment of all Invoices. RMBI shall provide written notice and supporting
documentation for any good-faith dispute it may have with an Invoice
("DISPUTE") within 60 Business Days after RMBI's receipt. If RMBI does not
report a Dispute within the 60 Business Day period, RMBI shall have waived
its dispute rights for that Invoice. RMBI shall pay disputed amounts,
subject to resolution of the Dispute. Frontier will use reasonable efforts
to resolve timely Disputes within 30 Business Days after its receipt of the
Dispute notice. If a Dispute is not resolved within the 30 Business Day
period to RMBI's satisfaction, then at RMBI's request the Dispute will be
referred to an executive officer of Frontier. If the Dispute is not
resolved within 15 Business Days after the referral, then either Party may
commence an action in accordance with Section 16., provided that the
prevailing Party in such action shall be entitled to payment of its
reasonable attorney fees and costs by the other Party.
5. TERMINATION RIGHTS:
(a) REGULATORY CHANGES: If the FCC, a state PUC or a court of competent
jurisdiction issues a rule, regulation, law or order which has the
effect of canceling, changing, or superseding any material term or
provision of this Agreement (collectively, "REGULATORY REQUIREMENT"),
then this Agreement shall be deemed modified in such a way as the
Parties mutually agree is consistent with the form, intent and purpose
of this Agreement and is necessary to comply with such Regulatory
Requirement. Should the Parties not be able to agree on modifications
necessary to comply with a Regulatory Requirement within 30 days after
the Regulatory Requirement is effective, then upon written notice
either Party may, to the extent practicable, terminate that portion of
this Agreement impacted by the Regulatory Requirement.
(b) Either Party may terminate this Agreement upon the other Party's
insolvency, dissolution or cessation of business operations. Frontier
may, upon 10 days prior written notice, immediately terminate this
Agreement for RMBI's failure to pay any delinquent Invoice not
properly disputed under Section 4, or to maintain any other assurance
of payment that may be required hereunder.
(c) In the event of a breach of any material term or condition of this
Agreement by a Party (other than a failure to pay which is covered
under (b) above), the other Party may terminate this Agreement upon 30
days written notice, unless the breaching Party cures the breach
during the 30 day period. A breach that cannot be reasonably cured
within a 30 day period may be addressed by a written waiver of this
paragraph signed by the Parties.
(d) Upon any material breach by RMBI not cured after expiration of all
applicable notice and cure periods, Frontier may at its sole option do
any or all of the following:
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(i) cease accepting or processing orders for Service and suspend
Service;
(ii) cease all electronically and manually generated information
and reports (including any CDR not paid for by RMBI);
(iii) draw on any letter of credit, security deposit or other
assurance of payment and enforce any security interest
provided by RMBI;
(iv) terminate this Agreement and Service without liability to
Frontier;
(v) collect from RMBI as liquidated damages an amount equal to the
Minimum Charge times the number of months remaining on the
unexpired term of this Agreement; and,
(vi) pursue such other legal or equitable remedy or relief as may
be appropriate.
6. TAXES AND ASSESSMENTS:
RMBI is responsible for the collection and remittance of all governmental
assessments, surcharges and fees pertaining to its resale of the Services
(other than taxes on Frontier's net income) (collectively, "TAXES"). RMBI
shall provide Frontier with, and maintain, valid and properly executed
certificate(s) of exemption for the Taxes, as applicable.
7. WARRANTIES AND LIMITATION OF LIABILITY:
(a) Service shall be provided by Frontier in accordance with the
applicable technical standards established for call transport by the
telecommunications industry. Frontier shall provide Service in a
quality and diligent manner consistent with service Frontier provides
to its other customers via a digital fiber optic network with SS7
signaling (where available). FRONTIER MAKES NO OTHER WARRANTY, EXPRESS
OR IMPLIED, WITH RESPECT TO TRANSMISSION, EQUIPMENT OR SERVICE
PROVIDED HEREUNDER, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FUNCTION.
(b) In no event shall either Party be liable to the other Party for
incidental and consequential damages, loss of goodwill, anticipated
profit, or other claims for indirect damages in any manner related to
this Agreement or the Services.
8. INDEMNIFICATION:
Each Party shall defend and indemnify the other Party and its directors,
officers, employees, representatives and agents from any and all claims,
taxes, penalties, interest, expenses, damages, lawsuits or other
liabilities (including without limitation, reasonable attorney fees and
court costs) relating to or arising out of (i) acts or omissions in the
operation of its business, and (ii) its breach of this Agreement; provided,
however, Frontier shall not be liable and shall not be obligated to
indemnify RMBI, and RMBI shall defend and indemnify Frontier hereunder, for
any claims by any third party, including End-Users, with respect to
services provided by RMBI which may incorporate any of Frontier's services,
except that RMBI shall not be obligated to indemnify Frontier for any third
party claims arising out of Frontier's gross negligence or willful
misconduct.
9. REPRESENTATION:
The Parties acknowledge and agree that the relationship between them is
solely that of independent contractors. Neither Party, nor their respective
employees, agents or representatives, has any right, power or authority to
act or create any obligation, express or implied, on behalf of the other
Party.
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10. FORCE MAJEURE:
Other than with respect to failure to make payments due hereunder, neither
Party shall be liable under this Agreement for delays, failures to perform,
damages, losses or destruction, or malfunction of any equipment, or any
consequence thereof, caused or occasioned by, or due to fire, earthquake,
flood, water, the elements, labor disputes or shortages, utility
curtailments, power failures, explosions, civil disturbances, governmental
actions, shortages of equipment or supplies, unavailability of
transportation, acts or omissions of third parties, or any other cause
beyond its reasonable control.
11. WAIVERS:
Failure of either Party to enforce or insist upon compliance with the
provisions of this Agreement shall not be construed as a general waiver or
relinquishment of any provision or right under this Agreement.
12. ASSIGNMENT:
Neither Party may assign or transfer its rights or obligations under this
Agreement without the other Party's written consent, which consent may not
be unreasonably withheld, except that Frontier may assign this Agreement to
its parent, successor in interest, or an affiliate or subsidiary without
RMBI's consent. Any assignment or transfer without the required consent is
void.
13. CONFIDENTIALITY:
(a) Each Party agrees that all information furnished to it by the other
Party, or to which it has access under this Agreement, shall be deemed
the confidential and proprietary information or trade secrets
(collectively referred to as "PROPRIETARY INFORMATION") of the
Disclosing Party and shall remain the sole and exclusive property of
the Disclosing Party (the Party furnishing the Proprietary Information
referred to as the "DISCLOSING PARTY" and the other Party referred to
as the "RECEIVING PARTY"). Each Party shall treat the Proprietary
Information and the contents of this Agreement in a confidential
manner and, except to the extent necessary in connection with the
performance of its obligations under this Agreement, neither Party may
directly or indirectly disclose the same to anyone other than its
employees on a need to know basis and who agree to be bound by the
terms of this Section, without the written consent of the Disclosing
Party.
(b) The confidentiality of obligations of this Section do not apply to any
portion of the Proprietary Information which is (i) or becomes public
knowledge through no fault of the Receiving Party; (ii) in the lawful
possession of Receiving Party prior to disclosure to it by the
Disclosing Party (as confirmed by the Receiving Party's records);
(iii) disclosed to the Receiving Party without restriction on
disclosure by a person who has the lawful right to disclose the
information; or (iv) disclosed pursuant to the lawful requirements or
formal request of a governmental agency. If the Receiving Party is
requested or legally compelled by a governmental agency to disclose
any of the Proprietary Information of the Disclosing Party, the
Receiving Party agrees that it will provide the Disclosing Party with
prompt written notice of such requests so that the Disclosing Party
has the opportunity to pursue its legal and equitable remedies
regarding potential disclosure.
(c) Each Party acknowledges that its breach or threatened breach of this
Section may cause the Disclosing Party irreparable harm which would
not be adequately compensated by monetary damages. Accordingly, in
the event of any such breach or threatened breach, the Receiving Party
agrees that equitable relief, including temporary or permanent
injunctions, is an available remedy in addition to any legal remedies
to which the Disclosing Party may be entitled.
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(d) Neither Party may use the name, logo, trade name, service marks, trade
marks, or printed materials of the other Party, in any promotional or
advertising material, statement, document, press release or broadcast
without the prior written consent of the other Party, which consent
may be granted or withheld at the other Party's sole discretion.
(e) Notwithstanding the restrictions set forth in this Section, Frontier
may use End-User Information in furtherance of its rights under
Section 5.
14. INTEGRATION:
This Agreement and all Exhibits, Schedules and other attachments
incorporated herein, represent the entire agreement between the Parties
with respect to the subject matter hereof and supersede and merge all prior
agreements, promises, understandings, statements, representations,
warranties, indemnities and inducements to the making of this Agreement
relied upon by either Party, whether written or oral.
15. CONSTRUCTION:
The language used in this Agreement is deemed the language chosen by the
Parties to express their mutual intent. No rule of strict construction
shall be applied against either Party.
16. GOVERNING LAW:
This Agreement is subject the laws of New York, excluding its choice of law
principles. The Parties agree that any action to enforce or interpret the
terms of this Agreement shall be instituted and maintained only in the
Federal Court for the Western District of New York, or if jurisdiction is
not available in the Federal Court, then a state court located in
Rochester, New York. RMBI hereby consents to the jurisdiction and venue of
such courts and waives any right to object to such jurisdiction and venue.
17. NOTICES:
All notices, including but not limited to, demands, requests and other
communications required or pemitted hereunder (not including Invoices)
shall be in writing and shall be deemed to be delivered when actually
received, whether upon personal delivery or if sent by facsimile, mail or
overnight delivery. All notices shall be addressed as follows, or to such
other address as each of the Parties hereto may notify the other:
Frontier Communications of the West, Inc. Rocky Mountain
Broadband, Inc.
ATTN: Peggy L. Palak, Mgr. Contract Svcs. ATTN: Kevin Loud, Vice
Brian V. Fitzpatrick, VP Carrier Svcs. President Operations
135 E. Ortega Street 1099 18th Street, 30th Floor
Santa Barbara, CA 93101 Denver, CO 80202
Facsimile #800-689-2395 Facsimile #303-672-0711
18. COUNTERPARTS:
This Agreement may be executed in several counterparts, each of which shall
constitute an original, but all of which shall constitute one and the same
instrument.
19. COMPLIANCE WITH LAWS:
During the term of this Agreement, the Parties shall comply with all local,
state and federal laws and regulations applicable to this Agreement and to
their respective businesses. Further, each Party shall obtain, file and
maintain any tariffs, permits, certifications, authorizations, licenses or
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<PAGE>
similar documentation as may be required by the FCC, a state Public Utility
or Service Commission, or any other governmental body or agency having
jurisdiction over its business. Upon request, a Party will supply copies
of such permits, certifications, authorizations, licenses and similar
documentation.
20. THIRD PARTIES:
The provisions of this Agreement and the rights and obligations created
hereunder are intended for the sole benefit of Frontier and RMBI, and do
not create any right, claim or benefit on the part of any person not a
Party to this Agreement, including End-Users.
21. SURVIVAL OF PROVISIONS:
Any obligations of the Parties relating to monies owed, as well as those
provisions relating to confidentiality, assurances of payment, limitations
on liability and indemnification, survive termination of this Agreement.
22. UNENFORCEABILITY OF PROVISIONS:
The illegality or unenforceability of any provision of this Agreement does
not affect the legality or enforceability of any other provision or
portion. If any provision or portion of this Agreement is deemed illegal
or unenforceable for any reason, there shall be deemed to be made such
minimum change in such provision or portion as is necessary to make it
valid and enforceable as so modified. This Agreement is voidable by
Frontier if modified by RMBI without the written or initialed consent of a
Frontier Vice President.
By its signature below, each Party acknowledges and agrees that sufficient
allowance has been made for review of this Agreement by respective counsel and
that each Party has been advised as to its legal rights, duties and obligations
under this Agreement.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ROCKY MOUNTAIN BROADBAND, INC.
By: /s/ Brian V. Fitzpatrick By: /s/ Douglas H. Hanson
------------------------------------------ --------------------------
Brian V. Fitzpatrick, Vice President Douglas H. Hanson,
Frontier Carrier Services Group President & CEO
Date: 3-19-98 Date: 3-18-98
---------------------------------------- ------------------------
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<PAGE>
Exhibit A
Page 1 of 2
GENERAL DEFINITIONS
(Not otherwise defined in the body of the Agreement or the Schedules)
1. FRONTIER 800 NUMBERS are 800/888 telephone numbers ordered onto the
Frontier network by RMBI and for which Frontier has either (i) been
appointed the RespOrg, or (ii) reserved and issued the 800 telephone number
to RMBI. Frontier shall be deemed to be the RespOrg for all 800/888
telephone numbers reserved and issued by it under (ii) above.
2. ANI is a telephone number.
3. BILLING CYCLE is the Frontier billing cycle to which RMBI's account
hereunder is assigned by Frontier (a full billing cycle equals
approximately 30 days of Services usage).
4. BUSINESS DAY is Monday through Friday, 8:30 a.m. to 5:30 p.m. Detroit, MI
local time, excluding nationally recognized holidays. Unless otherwise
stated, "DAYS" refers to calendar days.
5. PRESUBSCRIBED means that an End-User has been assigned to Frontier's
network via Frontier's CIC.
6. CARRIER 800 NUMBERS are 800/888 telephone numbers ordered onto the Frontier
network by RMBI for which a party other than Frontier or RMBI has been
appointed the RespOrg.
7. CODE is a calling card authorization number used to access the Calling Card
Services.
8. CDR means call detail records and CDR TAPE is a magnetic tape containing
CDR.
9. RMBI 800 NUMBERS are 800/888 telephone numbers ordered onto the Frontier
network by RMBI for which RMBI has been appointed the RespOrg.
10. END-USERS are customers of RMBI for which RMBI has submitted an order that
has been accepted by Frontier during the term of this Agreement. To the
extent that RMBI subscribes to the Services for its own use, RMBI is deemed
to be an End-User.
11. 800 NUMBERS collectively refers to the Frontier 800 Numbers, Carrier 800
Numbers, RMBI 800 Numbers and PIN 800 Numbers.
12. GUIDELINES refer to the telecommunications industry's general rules with
respect to 800/888 number portability, including but not limited to, (i)
the Federal Communications Commission's ("FCC") 800/888 (and other toll-
free) number portability policies and rules, (ii) the SMS 800 requirements
set forth in the Bell Operating Companies' Tariff FCC No. 1, and (iii) the
800 DataBase Ad-Hoc Committee's Guidelines for 800 DataBase, as all of the
foregoing may be replaced or modified from time to time.
13. PIN 800 NUMBERS are Frontier 800 Numbers assigned to RMBI for use with the
800 PIN Service.
14. RESPORG is a responsible organization as defined in the Guidelines. A
RespOrg is the entity that is responsible for managing and administering
the account records in the 800 Service Management System DataBase.
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Exhibit A
Page 2 of 2
SERVICE DEFINITIONS/DESCRIPTIONS
1. CALLING CARD SERVICES consist of calling card traffic generated via Codes.
2. 800 PIN SERVICE consists of inbound Switched Services combined with a PIN
800 Number accessed via four digit personal identification numbers ("PIN
NUMBERS") used by End-Users ("0000", "4663", "9675" and "9999" are not
available as PIN Numbers). The use of the PIN Numbers with a PIN 800
Number peRMBIts multiple End-Users to utilize the same 800/888 telephone
number on an individual basis. 800 Directory Assistance is not available
with the 800 PIN Service.
3. NOS DEDICATED SERVICES consist of: (i) End-User switched outbound long
distance traffic delivered to a Frontier Point of Presence ("POP") via
dedicated facilities and terminated over the Frontier network, and (ii)
switched inbound 800/888 traffic generated via 800 Numbers which traffic
originates on the Frontier network and is terminated by Frontier onto
RMBI's or an End-User's dedicated facilities.
4. DIRECTORY ASSISTANCE TRANSPORT consists of Frontier terminating calls made
by End-Users to directory providers for assistance in locating a non-800
Number. "800 DIRECTORY ASSISTANCE" consists of calls made to directory
providers for assistance in locating a Frontier 800 Number.
5. INBOUND SERVICES collectively refers to inbound traffic generated via any
of the other Services.
6. INTERNATIONAL SERVICES consist of international traffic generated via any
of the other Services.
7. SWITCHED SERVICES consist of switched inbound and outbound long distance
traffic generated by End-Users that originates and terminates on the
Frontier network.
8. DEDICATED CARRIER TERMINATION consists of switched outbound long distance
traffic delivered by RMBI to a Frontier Point of Presence ("POP") via
dedicated facilities and terminated over the Frontier network.
9. NATIONAL ORIGINATION SERVICES ("NOS"): collectively includes the Switched
Services, the NOS Dedicated Services and related Inbound Services and
International Services.
10. DOMESTIC means the 48 contiguous United States.
11. OFF-SHORE means Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands.
12. OPERATOR SERVICES: see Operator Services Schedule. Operator Services
specifically exclude calling card operator assistance calls made via
Codes, which are deemed to be part of the Calling Card Services.
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[LOGO]
<TABLE>
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<S> <C> <C>
WHOLESALE USAGE AGREEMENT
PSINet Inc. Purchaser: Rocky Mountain Internet, Inc.
510 Huntmar Park Drive Address: 1099 18th St.
Herndon, VA 20170 Suite 3000
Denver, CO 80202
Phone:703.904.4100 Phone: 303. 672.0706
Facsimile:703.397.5318 Facsimile: 303. 672.0711
[email protected] Electronic Mail: [email protected]
Business Contact: Julie Gillespie Business Contact: Kevin Loud
Title: Regional Sales Manager Title: VP, Operations
Phone: 703.904.4100 x1375
Technical Contact: Bob Conant Technical Contact: Richard Dingess
Title: ISP Support Engineer
Phone: 518.283.8860 Title: Vice President
Phone: 303. 672.0727
Fax 303. 672.0711
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</TABLE>
THIS AGREEMENT is made by and between PSINet Inc., a corporation incorporated
under the laws of the State of New York, ("PSINet") and Rocky Mountain Internet,
Inc. ("Retailer") in order for Retailer to obtain from PSINet access to the
PSINet's network and the Internet for the benefit of Retailer's individual
customers desiring dialup or "switched" network access ("Access") as further
described below. In consideration of the mutual promises and covenants
contained herein, the parties agree, intending to be legally bound, as follows:
1. DEFINITIONS. The following terms shall have the following meanings for
purposes of this Agreement:
1.1 "AUTHORIZED USER" shall mean any person authorized by a Subscriber to
have an account on a Host. Retailer may not permit any person or entity
other than an Authorized User to Access to the Network, except with the
written consent of PSINet. No person may be authorized to use the Network
by means of a connection between a Host owned or leased by a Subscriber and
a Host owned or leased by a person other than a Subscriber.
1.2 "EFFECTIVE DATE" of this Agreement is the date accompanying the last
party to sign's signature.
1.3 "FORECAST" shall be the four (4) month rolling forecast Retailer
provides to PSINet on a monthly basis of the estimated number of
Subscribers that will be served by each POP.
1.4 "HOST" shall mean a computer with a network (or IP) address.
1.5 "MARK" is any name, logo, trade name, trademark, copyright, service
mark or other intellectual property right owned by PSINet or its Retailer.
1.6 "NETWORK" shall mean the combination of computer hardware, computer
software programs and data transmission facilities operated by PSINet (or
its duly authorized subcontractors) which will permit computers operated by
Subscribers to communicate with computers at remote locations which are
operated by others via the TCP/IP communications protocol and to provide
access to Internet.
1.7 "POP" shall mean a Network point-of-presence where PSINet equipment
will be located and these POPs will be positioned throughout the world in
order to provide Authorized Users Access via telephone calls.
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
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1.8 "SUBSCRIBER" shall mean any individual person authorized by Retailer to
have Access to the Network, although this Access is not to be used with
Local Area Network (LAN) applications. Retailer may not permit any entity
other than a Subscriber to have Access to the Network, except with the
written consent of PSINet.
2. PSINET OBLIGATIONS.
2.1 GENERAL. PSINet agrees to provide Retailer with Access for Subscribers
to the Network and the Internet. The fees to be paid by Retailer to PSINet
for such Access services are set forth below in Section 4.
2.2 PROVISION OF ACCESS. Throughout the term of this Agreement, PSINet
shall provide Subscribers with Access at the levels then provided and
supported by PSINet. A recent estimated listing of Network POPs can be
retrieved through access to PSINet's world-wide web site at
'HTTP://WWW.PSI.NET'. PSINet reserves the right to install new POPs and/or
to close existing POPs as it, in its sole discretion, deems appropriate.
In the event PSINet deems it necessary to close an existing POP, PSINet
shall provide Retailer with sixty (60) days written notice thereof.
Retailer may order such Access on behalf of its present or future
Subscribers and there shall be no limit on the number of Subscribers who
may use the Network; provided, however, that PSINet may refuse service to
Retailer because there is insufficient capacity on the Network or in the
POP to provide the Access amount requested. In the event PSINet determines
there to be such lack of capacity, then the provisions of Section 4.10
herein do not apply to the effected POP during any month for which such
insufficient capacity occurs.
2.3 ISDN SERVICE. PSINet shall also make ISDN 64k and 128k Internet
connection services available to Retailer for Subscribers. The fees to be
paid by Retailer for such services are set forth below.
2.4 ***
2.5 REPORTS AND INFORMATION REGARDING SERVICE.
2.5.1 ACCESS TO NETWORK MONITORING SYSTEMS. PSINet shall provide
Retailer with read-only access to all applicable network monitoring
systems used by PSINet to monitor the Network.
2.5.2 PSINET NETWORK OUTAGES. PSINet shall provide to Retailer
prompt notification of any Network outages that affect Subscribers.
When possible, at least three days in advance notice of planned
outages shall be given to Retailer so that Subscribers may be alerted.
2.6 PSINET TECHNICAL SUPPORT. PSINet agrees to provide Retailer, at no
additional charge, reasonable back-end technical support and problem
escalation support for Access and Network problems. However, PSINet is not
obligated to provide technical support and problem escalation support to
Subscribers.
2.7 TERMINATION OF ACCESS. PSINet shall terminate the Access rights of
any Subscriber as soon as is reasonably practicable upon written notice
from Retailer to do so or upon mutually agreed upon electronic process with
receipt confirmed, but shall have no liability in connection therewith.
Further, Retailer and its Subscribers are required to comply with PSINet's
Net-Abuse Policy ("Policy") as currently set forth on PSINet's Web site
(http://www.psi.net) and as the Policy may be modified by PSINet in its
sole discretion from time to time. Any content, material, message, or data
made available or transmitted through the Network, wherever it is sent
from, viewed, received, or retrieved, that is in violation of (i) any
local, state, federal or international law, regulation or treaty; (ii) the
Policy; or (iii) any community standard or accepted Internet policy is
prohibited. In the event of violation of the foregoing by any Subscriber,
PSINet will advise Retailer accordingly, and PSINet reserves the right, in
its sole discretion, to terminate such Subscribers Access immediately with
written notice to Retailer. In the event of violation of the foregoing by
Retailer, PSINet may deem such violation a material breach of this
Agreement and may, in its sole discretion, terminate this Agreement with
written notice to Retailer, but without the cure period specified in
Section 5 below.
3. RETAILER OBLIGATIONS.
3.1 RETAILER RESPONSIBILITY FOR ITS SUBSCRIBERS. Retailer shall be
responsible for all customer support, pricing and service plans, billing
and collections with respect to its own Subscribers.
3.2 RETAILER CONNECTION TO THE NETWORK. Retailer shall provide, at its
own expense, the telecommunications circuit for its connection to the
Network which shall run between the best suited PSINet POP (as determined
by
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
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PSINet) and the Retailer's operations center (which includes the local
telephone company or Competitive Access Provider circuits). In addition,
Retailer shall provide an estimate of the traffic it anticipates between
Retailer's network and PSINet's Network.
3.3 SUBSCRIBER EQUIPMENT. PSINet shall not be responsible for the
installation, operation or maintenance of any computer equipment or
computer software programs provided by Retailer or any Subscriber.
3.4 ***
3.5 USE OF MARKS. Neither party is authorized through this Agreement to
use the other party's Marks in connection with their sales, advertisements
and promotion of its services to Subscribers, except in materials either
provided or approved by the authorized user of the mark prior to it's use.
Each party shall send to the other party a copy of any printed material
using the other party's Mark or other copyrighted material, and the
authorized party shall have the right to disapprove such use (although
approval shall not be unreasonably withheld). Upon termination of this
Agreement, each party shall cease to use any of such Marks or copyrighted
material and shall, within a reasonable time agreeable to the authorized
party, remove any reference to authorized party from its advertising and
promotional material.
3.6 ***
4. PRICE AND PRICING TERMS.
4.1 ***
4.2 ***
The applicable Base Charge above is to be applied to all Subscribers
irrespective of the rate that previously was applied to that group of
Subscribers. For example, if there are a sufficient number of Subscribers
to satisfy the second-tier pricing requirement, the applicable Base Charge
shall apply to all Subscriber Base Charges. Should the amount of
Subscribers subsequently fall below such tier, incurring a higher Base
Charge, the applicable Base Charge shall be adjusted to the higher Base
Charge for all Subscribers as indicated in this section.
The payment to be made for the initial month of Access for any Subscriber
shall include (i) an amount equal to the applicable Base Charge for such
initial month, prorated in the case of a partial month, and (ii) an amount
equal to such Base Charge as payment in advance for the next month of
Access. If one of the Subscribers cancels service within any month, there
will either be no charge or a pro-rated charge depending upon the time of
that Subscriber's service cancellation within that month.
4.3 ADJUSTMENTS TO BASE CHARGE.
4.3.1 **.
4.3.2 ***
4.3.3 ADDITIONAL ADJUSTMENT. Once the number of Subscribers using
the Network exceeds 150,000, the parties will negotiate in good faith
to agree upon an appropriate adjustment to the applicable Base Charge.
4.4 MINIMUM COMMITMENT.
4.4.1 ***
4.4.2 ***
4.5 TAXES. Retailer shall be liable for and shall reimburse PSINet for
all taxes and related charges however designated resulting from the
transactions contemplated hereby (except those relating to PSINet's gross
income), including federal, state, provincial or local sales, use or
value-added taxes (VAT) and excise taxes, imposed in connection with or
arising from the provision of Access.
4.6 INVOICES. PSINet shall invoice Retailer monthly in advance for all
charges under this Agreement. All invoices will be payable within thirty
(30) days of date of invoice. Invoices not paid by their due date shall be
subject to a 1.5% per month interest fee, or the maximum extent allowed by
applicable laws, whichever is less, on all past-due
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
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balances. In the event PSINet incurs additional fees as a result of any
collection activity, such as collection agencies or legal fees, Retailer
shall reimburse PSINet for all such fees. In the event Retailer shall fail
to pay PSINet any amount due under this Agreement, PSINet, in addition to
charging applicable delinquency fees, may discontinue providing Access to
Retailer and its Subscribers upon ten (10) days prior written notice by
overnight courier or certified mail to Retailer and chance to cure. PSINet
shall resume providing Access immediately upon receipt of such payment, and
in such event Retailer shall pay PSINet a reasonable reconnection fee.
4.7 ***
5. TERM/EXTENSIONS/TERMINATION. The term of this Agreement shall be three (3)
years, commencing on the last day of the Ramp Period as defined above, and,
unless either party notifies the other in writing not less than one-hundred
eighty (180 days) prior to the end of the initial term or any extension thereof,
this Agreement shall be automatically renewed annually thereafter for a period
of one year.
Either party may terminate this Agreement if such other party has materially
breached this Agreement and has failed to cure such breach within thirty (30)
days after receiving written notice clearly specifying such breach; provided,
however, that this notice period shall not apply to a termination by PSINet in
accordance with the provisions of Section 2.7, 4.4.2 and/or 4.6.
6. WARRANTIES EXCLUDED. EXCEPT AS EXPRESSLY PROVIDED HEREIN, PSINET MAKES NO
WARRANTIES IN CONNECTION WITH ITS NETWORK OR THE PROVISION OF ACCESS AS
CONTEMPLATED HEREIN, WHETHER WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION THE WARRANTY OF MERCHANTABILITY, THE WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE OR USE AND NON-INFRINGEMENT OF THIRD PARTY
RIGHTS. RETAILER'S SOLE AND EXCLUSIVE REMEDY SHALL BE PSINET'S OBLIGATION TO
ADJUST THE FEES PAYABLE BY RETAILER AS SET FORTH ELSEWHERE HEREIN.
7. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING CONTAINED IN THIS
AGREEMENT TO THE CONTRARY, THE PARTIES AGREE THAT PSINET SHALL IN NO EVENT BE
LIABLE TO RETAILER, ITS SUBSCRIBERS OR ANY OTHER PERSON FOR ANY ACTUAL, DIRECT,
INDIRECT, CONSEQUENTIAL, SPECIAL, INCIDENTAL, RELIANCE, PUNITIVE OR ANY OTHER
DAMAGES OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES
FOR THE LOSS OF DATA, GOODWILL OR PROFITS) REGARDLESS OF THE FORESEEABILITY
THEREOF, ARISING OUT OF THE PROVISION OF ACCESS OR IN ANY WAY ARISING OUT OF
THIS AGREEMENT, WHETHER IN AN ACTION ARISING OUT OF BREACH OF CONTRACT, BREACH
OF WARRANTY, DELAY, NEGLIGENCE, STRICT TORT LIABILITY, PATENT MATTERS OR ANY
OTHER THEORY. NO ACTION OR PROCEEDING AGAINST PSINET MAY BE COMMENCED MORE THAN
TWO YEARS AFTER THE SERVICES ARE RENDERED. THIS CLAUSE SHALL SURVIVE FAILURE OF
AN EXCLUSIVE REMEDY. PSINET'S TOTAL LIABILITY FOR GROSS NEGLIGENCE DURING THE
LIFETIME OF THIS AGREEMENT SHALL IN NO EVENT EXCEED ONE HUNDRED TWENTY-FIVE
THOUSAND DOLLARS ($125,000) IN THE AGGREGATE.
8. INDEMNIFICATION OF PSINET. RETAILER SHALL INDEMNIFY AND HOLD HARMLESS PSINET
AND PSINET'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND ADVISORS FROM AND
AGAINST ANY AND ALL CLAIMS OF OTHER PERSONS OR ENTITIES ARISING OUT OF MATERIAL,
DATA, INFORMATION OR OTHER CONTENT TRANSMITTED BY SUBSCRIBERS OR OTHER ACTS OR
OMISSIONS OF RETAILER AND/OR ITS SUBSCRIBERS.
9. ***
10. MISCELLANEOUS.
10.1 INDEPENDENT PARTIES/NO AGENCY. The relationship of PSINet and
Retailer shall be that of independent third parties. Except as otherwise
expressly provided in this Agreement, this Agreement does not constitute
either party as the agent or legal representative of the other party and
does not create a partnership or joint venture between the parties. Except
as otherwise expressly provided in this Agreement, neither party shall have
any authority to contract for or bind any other party in any manner
whatsoever. This Agreement confers no rights of any kind upon any third
party.
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
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10.2 FORCE MAJEURE. PSINet shall not be liable for failure to fulfill
its obligations hereunder if such failure is due to causes beyond its
reasonable control, including, without limitation, actions or failures to
act of Retailer or any Subscriber, acts of God, fire, catastrophe,
governmental prohibitions or regulations, viruses which did not result from
the acts or omissions of PSINet, its employees or agents, national
emergencies, insurrections, riots or wars, or strikes, lockouts, work
stoppages or other labor difficulties. The time for any performance
required hereunder shall be extended by the delay incurred as a result of
such act of force majeure, and PSINet shall act with diligence to correct
such force majeure.
10.3 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to a party under this Agreement shall impair any
such right, power or remedy of such party nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or
in any similar breach or default thereafter occurring; nor shall any waiver
of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent
or approval of any kind or character on the part of either party of any
breach or default under this Agreement, or any waiver on the part of either
party of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or
otherwise afforded to a party, shall be cumulative and not alternative.
10.4 BENEFIT AND ASSIGNMENT. No party hereto shall assign this Agreement,
in whole or in part, whether by operation of law or otherwise, without the
prior written consent of the other parties hereto (which consent shall not
be unreasonably delayed or withheld); and any purported assignment in
violation of the foregoing shall be void. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns as permitted hereunder. No person or
entity other than the parties hereto is or shall be entitled to bring any
action to enforce any provision of this Agreement against any of the
parties hereto, and the covenants and agreements set forth in this
Agreement shall be solely for the benefit of, and shall be enforceable only
by, the parties hereto or their respective successors and assigns as
permitted hereunder.
10.5 ADDITIONAL ACTIONS, DOCUMENTS AND INFORMATION. Each of the parties
hereto agrees that it will, at any time, prior to, at or after the date
hereof, take or cause to be taken such further actions, and execute,
deliver and file or cause to be executed, delivered and filed such further
documents and instruments and obtain such consents, as may be reasonably
requested in order to fully effectuate the purposes, terms and conditions
of this Agreement.
10.6 NOTICES.
(a) All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by certified or
registered mail (return receipt requested), express air courier,
charges prepaid, or facsimile addressed as follows:
To Retailer: as specified above.
To PSINet:
PSINet Inc. with copy to PSINet Inc.
510 Huntmar Park Drive 510 Huntmar Park Drive
Herndon, Virginia 20170 Herndon, Virginia 20170
Facsimile: 703.397.5318 Facsimile: 703.904.4200
Attn: John Kraft, Vice President, Carrier
& ISP Services Attn: General Counsel
or to such other address as either party shall have furnished to the
other in writing.
(b) If a notice is given by either party by certified or registered
mail, it will be deemed received by the other party on the third
business day following the date on which it is deposited for mailing.
If a notice is given by either party by air express courier, it will
be deemed received by the other party on the next business day
following the date on which it is provided to the air express courier.
If a notice is given by facsimile, it will be deemed received by the
other party after confirmation of receipt. Notwithstanding the
foregoing, any payments made under this Agreement shall be deemed
received only when actually received.
10.7 COMPLIANCE WITH LAW. Retailer is responsible for complying with all
applicable rules, regulations, statutes, codes, ordinances and other
requirements, whether federal, state, provincial, local, international or
otherwise in connection with the matters contemplated by this Agreement.
10.8 SEVERABILITY/SURVIVAL/WAIVERS. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, such provision shall
be construed so as to render it enforceable and effective to the maximum
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
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extent possible in order to effectuate the intention of this Agreement; and
if such provision shall be wholly invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby. The parties' rights
and obligations that, by their nature, would continue beyond the
termination, cancellation, or expiration of this Agreement, shall survive
such termination, cancellation or termination. The waiver or failure of
either party to exercise in any respect any right provided for in this
Agreement shall not be deemed a waiver of any further right under this
Agreement.
10.9 TITLES AND SUBTITLES. The titles of the Sections of this Agreement
are for convenience of reference only and are not to be considered in
construing this Agreement.
10.10 GOVERNING LAW AND VENUE. Customer agrees to the non-exclusive
jurisdiction of the federal and state courts of the Commonwealth of
Virginia for any action or proceeding arising out of or in relation to this
Agreement. This Agreement shall be governed by the substantive law of the
Commonwealth of Virginia.
10.11 ENTIRE AGREEMENT/AMENDMENTS. This Agreement represents the complete
agreement and understanding of the parties with respect to the subject
matter herein, and supersedes any other agreement or understanding, written
or oral. In the event of any conflict arising between Customer's purchase
order terms and this Agreement, this Agreement shall take precedence. This
Agreement may be modified only in writing signed by both parties.
Both PARTIES REPRESENT AND WARRANT THAT THEY HAVE FULL CORPORATE POWER AND
AUTHORITY TO EXECUTE AND DELIVER THIS AGREEMENT AND TO PERFORM THEIR OBLIGATIONS
HEREUNDER, AND THAT THE PERSON WHOSE SIGNATURE APPEARS BELOW IS DULY AUTHORIZED
TO ENTER INTO THIS AGREEMENT ON BEHALF OF THE PARTY.
IN WITNESS WHEREOF, THE PARTIES HAVE ENTERED INTO THIS AGREEMENT AS OF THE DATE
SET FORTH:
Kevin R. Loud, Vice President
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Authorized Retailer Representative/Title (please type or print)
/s/ Kevin R. Loud 3/10/98
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Retailer Signature Date
John F. Kraft
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Authorized PSINet Representative (please type or print)
/s/ John F. Kraft 3/11/98
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PSINet Representative Signature Date
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PSINET WHOLESALE USAGE AGREEMENT 6/16/97
<PAGE>
PACNET RESELLER AGREEMENT
THIS AGREEMENT is made and entered into this 30th day of May, 1997, by and
between PacNet Inc., a Washington corporation with its principal office located
at 1111 Third Avenue, Seattle, Washington 98101 (hereinafter "CARRIER"), and
Rocky Mountain Internet, Inc., a Delaware corporation, with its principal office
located at 1099 Eighteenth Street, Suite 3000, Denver, Colorado 80202
(hereinafter "RESELLER") for the purpose of establishing a sales representation
relationship between them.
WHEREAS, CARRIER is in the business of providing data communications services in
certain geographic market areas; and
WHEREAS, RESELLER has applied to CARRIER for the right to market, sell, and
distribute CARRIER's services to the general public; and
WHEREAS, both CARRIER and RESELLER recognize the compatible nature of their
individual goals in expanding competition in the services offered by CARRIER as
well as any services to be offered by RESELLER and the benefits which will
accrue to the public through the Parties' cooperation; and
WHEREAS, CARRIER has agreed to engage RESELLER pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
warranties which appear below, and intending to be legally bound thereby, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, as hereinafter defined, the following terms
shall have the respective meanings given to them in this Article I, unless the
context requires otherwise. Said terms also shall have the said meanings when
used in any exhibit, schedule, attachment or addendum hereto or in any document
made or otherwise delivered pursuant to this Agreement, unless the context
otherwise requires. Each said term defined in this Article I shall be deemed to
refer to the singular, plural, masculine, feminine or neuter as the context
required.
1.1 "AGREEMENT" means this Agreement, as originally executed and as the
same may be amended, modified and supplemented from time to time by
exhibits, schedules, attachments or addendum executed in accordance
herewith.
1.2 "ASSIGNMENT" means a sale, exchange, transfer or other disposition of
all or any portion of Party's rights and obligations hereunder.
1.3 "AFFILIATE" means any person who directly or indirectly, through one
or more intermediaries, controls, is controlled by or is under common
control with such specific
<PAGE>
person. A person shall be deemed to control another person when such
controlling person has the power, directly or indirectly to cause the
direction of the management or policies of such person, whether
through the ownership of voting securities, by contact, agency or
otherwise. This term shall also include any person who, directly or
indirectly, through one or more intermediaries, has the contractual
right or option to acquire or vote more than ten percent of the voting
interest of a specific person.
1.4 "BUSINESS DAY" means a day other than Saturdays, Sundays and legal
holidays.
1.5 "CUSTOMER" means an end-user of CARRIER's Services.
1.6 "EFFECTIVE DATE" means the date of last necessary signature hereto.
1.7 "FCC" refers to the Federal Communications Commission.
1.8 "FINAL ORDER" means an action by any applicable federal or state
agency or court as to which (i) no request for stay by the federal
or state agency or court of the action is pending, no such stay is in
effect, and if any deadline for filing any such request is designated
by statute or regulation, it has passed; (ii) no petition for
rehearing or reconsideration of the action is pending and the item for
filing any such petition has passed; (iii) the federal or state agency
or court does not have the action under reconsideration on its own
motion and the time for such reconsideration has passed, and (iv) no
appeal to a court, or request for stay by a court, or the federal or
state agency's or court's action is pending or in effect, and if any
deadlines for filing such appeal or request is designated by statute
or rule, it has passed.
1.9 "HOST CONNECTION" refers to connections from CARRIER network through
to the network of RESELLER.
1.10 "PARTY" refers to one or both of the parties to this Agreement,
CARRIER or RESELLER, as the context indicates.
1.11 "PERSON" means any general partnership, limited partnership,
corporation, joint venue, trust, business trust, governmental agency,
cooperative, association, individual or other entity, and the heirs,
executors, administrators, legal representatives, successors and
assigns of such person as the context may require.
1.12 "PROPRIETARY INFORMATION" means information relating to the present or
future business activities and operations of CARRIER, RESELLER or
their respective subsidiaries, Affiliates, clients and consultants
which is marked as "Proprietary" or "Confidential". Proprietary
Information shall include, but not be limited to, all technical,
marketing and financial information relating thereto, any information
relating to other pricing methods, processes, financial data, lists,
apparatus, statistics, programs, research, development or related
information, or the results of the provision of Services performed
by RESELLER under this Agreement. Proprietary Information needs to
be also marked as "Proprietary
<PAGE>
or Confidential" information.
1.13 "SERVICES" OR "CARRIER SERVICES" refers to the data communications
services delineated in Schedule A hereto, to be resold hereunder by
RESELLER to the general public in certain geographic market areas.
ARTICLE II
UNDERTAKING OF THE PARTIES
2.1 SCOPE. RESELLER and CARRIER wish to set forth a standard of general
terms and conditions which will facilitate RESELLER's ability to
market, sell and distribute the Services within certain geographic
market areas.
2.2 FORMATION. CARRIER hereby agrees to provide RESELLER, and RESELLER
hereby agrees to accept use of certain CARRIER Services. The Services
are as set forth in Schedule A hereto and in any applicable tariffs.
The Schedule may be revised from time to time by CARRIER in accordance
with generally applicable changes in CARRIER's service offerings.
Services are provided pursuant to the PacNet Services Agreement to be
entered into by the parties, the terms of which are incorporated into
this Agreement by reference.
2.3 AUTHORITY OF RESELLER. CARRIER hereby grants to RESELLER the
non-exclusive right to solicit orders from and enter into contracts
with Customers for the Services. This Agreement constitutes RESELLER
as a nonexclusive independent contractor only and not as CARRIER's
general or specific agent and does not create a joint venture or
apply to confer any status, power or authority upon RESELLER other
than expressly set forth herein. The scope of the RESELLER's
authority is specifically limited to the minimum authority necessary
to perform the duties accepted pursuant to this Agreement and
RESELLER shall, to the maximum extent not inconsistent with the
provision hereof, control the means, details, manner and method of
allotment associated therewith. RESELLER shall make no
representations as to the policies and procedures of CARRIER other
than as specifically authorized by CARRIER and shall be liable for
any misrepresentation made by RESELLER with regard to CARRIER's
Services. RESELLER shall have no right to enter into a contract on
CARRIER's account or to bind CARRIER in any manner.
2.4 RESELLER'S AUTHORIZATIONS. RESELLER shall secure and maintain at its
sole expense all licenses and permits required by federal, state or
municipal law or regulation for it and its employees, agents or other
representatives to ensure RESELLER's lawful performance of this
Agreement.
ARTICLE III
PAYMENT AND COLLECTION TERMS
3.1 RATES FOR SERVICES. Subject to the following Sections of this
Article III, RESELLER will
<PAGE>
be charged pursuant to Schedule B hereto for Frame Relay Services and
pursuant to Schedule C hereto for Private Line Services and pursuant
to Schedule D hereto for Internet Services. Schedules B, C & D may
be changed from time to time by CARRIER in accordance with these
changes in CARRIER's applicable tariffs, if any, or generally
applicable schedule of rates. In the event that the underlying
carrier or provider increases its rates for services used by CARRIER
in providing Service hereunder, CARRIER shall have the option to
increase rates to RESELLER upon 30 days prior written notice.
3.2 MINIMUM COMMITMENT PERIODS. RESELLER understands and agrees that
the rates for Service are based upon an expected usage level and
that, absent this minimum usage CARRIER would be unable to offer the
Services at the rates given to RESELLER herein. In view thereof,
RESELLER shall have certain Minimum Commitment Levels for Service
hereunder. RESELLER shall have a six (6) month period, commencing on
the Effective Date of this Agreement, during which no Minimum
Commitment Level shall apply. Commencing on the seventh (7th) month
after the Effective Date of this Agreement and continuing thereafter,
RESELLER's total monthly usage revenue attributable to its Customer
accounts shall equal or exceed a Minimum Commitment Level of $5,000
per month. CARRIER will have at its sole option the right to
terminate this Agreement under section 4.4 and 4.5.1 of this Agreement
in the Minimum Commitment Level is not met as specified herein.
3.3 LATE PAYMENT, BILLING DISPUTES. Payment and billing disputes shall be
tendered in accordance with the provisions of the PacNet Services
Agreement to be entered into between the CARRIER and the RESELLER.
3.4 CREDITWORTHINESS. In addition to any other remedies available to
CARRIER, CARRIER may elect with ten (10) days prior written notice,
in its sole discretion, to cause start of service for Services
applicable to a Customer to be withheld or decline to accept a
Customer if there is a material change in RESELLER's creditworthiness
or CARRIER may condition the provision of Services on assurance of
payment by RESELLER or Customer which shall take the form of a deposit
or similar assurance as specified by CARRIER.
3.5 SALES FORECAST. RESELLER will forecast quarterly sales objectives.
These objectives will not be considered by CARRIER as RESELLER's
contractual agreements.
ARTICLE IV
TERMS OF AGREEMENT
4.1 EFFECTIVE DATE; RENEWAL. This Agreement shall become effective upon
the Effective Date, and shall remain in effect for a period of three
(3) years unless otherwise terminated in accordance herewith. This
Agreement shall be automatically renewed thereafter for successive
periods of one (1) year or as otherwise agreed by the Parties. This
Agreement thereupon shall be terminated by either Party at the end
of the initial or then current renewal term upon written notice
ninety (90) days prior to the end of the then current
<PAGE>
term.
4.2 INSOLVENCY. Either Party may terminate this Agreement upon ninety
(90) days written notice to the other Party in the event of an
admission by the other Party of an inability to pay its debts, the
entering in to by the other Party of a composition or other
arrangement with its creditors, the appointment of a trustee or
receiver, with or without consent, for the other Party of all or any
substantial portion of its property, or the filing of a petition for
relief by or against the other Party under the Bankruptcy Code of
any similar federal or state statute (including moratorium laws);
provided, however, that in the case of an involuntary petition, there
shall be no right of cancellation hereunder unless such petition
remains undismissed sixty (60) days after the filing thereof.
4.3 LOSS OR SUSPENSION OF OPERATING AUTHORITY. This Agreement shall
terminate automatically and without liability or further obligation
on the part of either party to the other if, by Final Order, CARRIER
loses its authority to provide the Services as contemplated
hereunder. If such authority is suspended, this Agreement shall not
terminate, but shall be suspended until such time as CARRIER regains
such authority. If such authority is lost or suspended with regard
to a portion of the Services or service areas, then this Agreement
shall terminate automatically (in the case of lost authority) or be
suspended (in the case of suspended authority) with regard only to the
Services or service area concerned. The provisions of this Section
4.3 shall not be construed to affect any liabilities which arise
prior to the termination or suspension hereunder, or which may later
arise from the Parties' activities during the term of this Agreement.
4.4 EVENTS OF DEFAULT. Aside from any other events of default set forth
in this Agreement, the following shall constitute an event of default
hereunder: (i) the failure by RESELLER to make any payments due to
CARRIER hereunder and continue failure to cure such default within a
period of ten (10) days after receiving written notice of such fault;
(ii) the violation by either Party hereto of any material term or
provision of this Agreement or the failure of either party hereto to
perform any of its material obligations hereunder and continued
failure to cure such default within thirty (30) days after receiving
written notice of such default; (iii) the misapplication by RESELLER
of CARRIER's services and continued failure to cure such default
within thirty (30) days after receiving written notice of such
default; (iv) a consistently poor payment record or other evidence of
lack of financial ability to perform and continued failure to cure
such default within thirty (30) days after receiving written notice
of such default; (v) any action that violates applicable federal or
state law or regulation or other unlawful act and continued failure
to cure such default within thirty (30) days after receiving written
notice of such default; (vi) the failure of RESELLER to abide by the
terms of Sections 3.2, 3.3, 5.1, 5.2 and 7.4 hereof and continued
failure to cure such default within thirty (30) days after receiving
written notice of such default; or (vii) the willful or intentional
violation by either Party hereto of any term or provision of this
Agreement.
4.5 REMEDIES.
<PAGE>
4.5.1 TERMINATION. Upon the occurrence of an event of default, as
defined in Section 4.4, the non-defaulting Party shall have the
right to terminate this Agreement upon thirty (30) days written
notice.
4.5.2 CUSTOMER CONTRACTS. If RESELLER defaults in its performance
hereunder, as defined in Section 4.4, then CARRIER may, at its
option, and as consideration for CARRIER capital expenditures
in providing Service to RESELLER's Customers hereunder, enter
into direct contracts with Customers obtained hereunder and
bill such Customers directly, with no compensation being due
to RESELLER therefor.
4.5.3 SPECIFIC PERFORMANCE. CARRIER shall have the right to enforce
the provisions of this Article IV by obtaining an injunction or
specific performance from any court of competent jurisdiction.
4.5.4. ALTERNATIVE REMEDIES. The remedies set forth herein are
cumulative and in addition to, and not in limitation of, other
remedies available at law or in equity. None of the remedies
specified in this Article IV for any default of breach of this
Agreement shall be exclusive.
ARTICLE V
CORPORATE IDENTITY
5.1 TRADE NAMES AND TRADEMARKS. All trade names, trademarks and service
marks owned or employed by CARRIER, RESELLER or their respective
subsidiaries or Affiliates, shall remain the sole and exclusive
property of such Party, subsidiary or Affiliate, and such trade names,
trademarks and service marks shall not be used by the other Party
without the prior written consent of such Party, subsidiary or
Affiliate. The breaching Party shall immediately discontinue any use
of such marks and names upon Notice of such breach.
5.2 ADVERTISING. CARRIER shall establish standards for all advertising,
promotional and customer training materials used or distributed by
RESELLER which relate to CARRIER's services. RESELLER may refer to
itself as an authorized reseller of CARRIER Services whenever it
refers to the services in promotional, advertising, or other
materials. In addition, RESELLER shall provide to CARRIER for its
prior review and written approval, all promotional, advertising, or
other materials or activity using or displaying CARRIER's name,
Services or referring to RESELLER as an authorized reseller of
CARRIER services. Such review and standards will be limited to
factual matters, pertain to services furnished by CARRIER and use of
CARRIER's marks and name. RESELLER agrees to change or correct, at
RESELLER's expense, any such material or activity which CARRIER, in
its sole judgment, determines to be inaccurate, misleading or
otherwise objectionable.
ARTICLE VI
<PAGE>
OPERATING DUTIES OF THE PARTIES
6.1 CUSTOMER SUBSCRIPTION AND SERVICE. RESELLER shall provide Customers
with applications for Services using pre-printed forms provided or
approved by the CARRIER. Such applications shall then be forwarded
by RESELLER to CARRIER within no more than three (3) business days
after execution. RESELLER agrees to comply with all of CARRIER's
customer service procedures regarding CARRIER's Services hereunder.
CARRIER reserves the right in its full discretion to decline to accept
a Customer contract solicited by RESELLER pursuant to its generally
applicable business criteria.
6.2 RESELLER'S REPRESENTATION; CONTRACTS. RESELLER shall make no
representations, warranties, promises, understandings or agreements
concerning CARRIER and CARRIER's Services not approved in advance by
CARRIER. RESELLER may represent itself as a RESELLER of CARRIER's
Services.
6.3 CONDUCT OF RESELLER.
***
6.4 COLLECTION OF CHARGES.
***
6.5 RESELLER'S RESPONSIBILITIES.
***
6.6 CARRIER RESPONSIBILITIES.
***
ARTICLE VII
LIABILITY AND INDEMNIFICATION
7.1 RESELLER'S EMPLOYEES. All persons employed by RESELLER to perform
RESELLER's duties under this Agreement are employees and agents of
RESELLER. RESELLER shall be solely responsible for the acts and
omissions of its employees and agents and shall have sole
responsibility for their supervision, direction and control. RESELLER
shall comply with all applicable laws regarding withholding and
payment of all income taxes, social security taxes, unemployment
insurance and worker's compensation and disability benefits as well
as those regarding equal employment opportunities and safety of the
workplace insofar as such concerns the subject matter hereof.
7.2 RIGHT TO CONDUCT OTHER BUSINESS. Each Party hereto understands and
acknowledges
<PAGE>
that this Agreement is non-exclusive and that the Parties, their
Affiliates, their representatives and other entities with whom they
may contact may compete with the other Party hereto in the business
subject in CARRIER's geographic market areas. This Agreement shall
not in any way limit CARRIER's power and right to contract with other
Persons concerning the subject matter hereof on such terms as CARRIER
sees fit even though such Persons, as a result, compete with
RESELLER. This Agreement also shall not in any way limit RESELLER's
power and right to contract with other Persons concerning the subject
matter hereof, either during the term hereof or thereafter, on such
terms as RESELLER sees fit even though such persons, as a result,
compete with CARRIER.
7.3 INSURANCE. RESELLER shall, at its sole expense, be insured at all
times during the term of this Agreement, and any extension of renewal
thereof, under a comprehensive liability insurance policy against
claims for bodily and personal injury, death and property damage
caused by or occurring in conjunction with RESELLER's activities
hereunder. Such insurance coverage shall be maintained under one
or more policies of insurance issued by insurance companies qualified
to do business in the states where RESELLER performs its duties
hereunder, and shall be in amounts not less than one million dollars
($1,000,000) per occurrence for bodily and personal injury and death,
five hundred thousand dollars ($500,000) per occurrence for
property damage and five hundred thousand dollars ($500,000) per
occurrence for general liability arising out of RESELLER's conduct
hereunder. RESELLER shall provide CARRIER with copies of said
policies upon written notice and shall provide for not less than
thirty (30) days prior written notice of any modification,
cancellation, or non-renewal thereof. RESELLER's insurance coverage
hereunder is only for the purpose of assuring CARRIER that Customers
being solicited for CARRIER's Services shall receive good service.
It does not and shall not be construed to give CARRIER any control
over or interest in any enterprise of RESELLER other than the
solicitation of Customers for CARRIER's Services.
7.4 INDEMNIFICATION. Notwithstanding any of the provisions of this
Agreement which may be construed to the contrary, RESELLER and
CARRIER will indemnify each other and their respective directors,
officers, employees, agents and representatives ("Indemnified
Parties") and save them harmless from and against any and all
claims, actions, damages, liabilities and expenses (collectively,
"Losses") occasioned by any willful or negligent act or omission of
the other Party, its directors, officers, employees, agents or
representatives ("Indemnifying Party"), relating to the performance
of its obligations hereunder. If any Indemnified Party shall,
without fault on its part, be made a party to any litigation
commenced by or against such Indemnified Party, then Indemnifying
Party shall protect and hold such Indemnified Party harmless, and
shall pay all costs, expenses, losses and reasonable attorney's fees
incurred or paid by such Indemnified Party in connection with said
litigation.
7.5 QUALITY OF SERVICE. CARRIER will make every reasonable effort to
provide continuous and uninterrupted service hereunder in
accordance with generally applicable industry
<PAGE>
standards. EXCEPT FOR ANY EXPRESS WARRANTIES STATED IN THIS
AGREEMENT, CARRIER DISCLAIMS ALL WARRANTIES, INCLUDING, WITHOUT
LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS AND
OF FITNESS FOR A PARTICULAR PURPOSE, WHETHER SUCH WARRANTIES ARE MADE
BEFORE OR AFTER THE EXECUTION HEREOF. THE STATED WARRANTIES ARE IN
LIEU OF ALL OBLIGATIONS OR LIABILITIES ON THE PART OF THE CARRIER FOR
DAMAGES INCLUDING, BUT NOT LIMITED TO SPECIAL, INDIRECT, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR IN CONNECTION
WITH THE USE OR PERFORMANCE OF CARRIER'S SERVICES. IT IS EXPRESSLY
UNDERSTOOD THAT THE SOLE REMEDY OF RESELLER FOR BREACH OF THIS
AGREEMENT BY CARRIER OR FOR ANY DAMAGE TO RESELLER OR OTHER PERSON
CLAIMED TO HAVE RESULTED FROM RESELLER'S RESALE HEREUNDER OR FROM THE
USE OF CARRIER'S SERVICES IS CREDIT FOR NETWORK OUTAGES AS SET FORTH
IN THE ASSOCIATED PACENET SERVICES AGREEMENT.
7.6 TAXES. RESELLER shall be solely responsible to pay all applicable
local, state and federal taxes, including sales and uses taxes,
excise, access, bypass or other local, state and federal taxes or
charges imposed based upon the provision, sales or use of the
Services provided hereunder. RESELLER also shall pay any applicable
gross receipts taxes with regard to said Services, including
surcharges. Such taxes will be billed by CARRIER to RESELLER and
will be separately stated on RESELLER's invoice, provided, however,
that CARRIER will not bill to RESELLER such taxes as may be exempted
by a tax exemption or resale certificate for operations in any state
for which RESELLER obtains such a certificate.
ARTICLE VIII
CONFIDENTIALITY
***
ARTICLE IX
MISCELLANEOUS
9.1 FORCE MAJEURE. Neither Party shall be liable to the other Party for
any delay or failure to perform hereunder due to causes beyond the
control of said Party, including, but not limited to: acts of God;
acts of the public enemy; acts of the United States of America, or
any state, territory or political subdivision thereof or of the
District of Columbia; fires; floods; epidemics; quarantine
restrictions; or strikes or freight embargoes.
9.1.1 Notwithstanding the foregoing provisions, in every case the
delay or failure to perform must be beyond the control and
without the fault or negligence of the Party claiming excusable
delay.
<PAGE>
9.1.2 Performance times under this Agreement shall be considered
extended for a period of time equivalent to the time lost
because of any delay or failure to perform which is excusable
hereunder; provided however, that is any such delay or failure
shall, in the aggregate, last for a period of more than
thirty (30) days, the Party not relying on the excusable delay
or failure, at it option, may terminate this Agreement.
9.2 SUCCESSION. This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective heirs, executors,
administrators, legal representatives, successors, and assigns,
provided, however, that RESELLER may not assign its rights, nor may
it delegate its duties hereunder, except with CARRIER's prior written
consent. Any such attempted transfer shall be void and shall
constitute a breach of this Agreement.
9.3 NOTICES. All notices pursuant to this Agreement shall be in writing
and shall be sent by overnight mail.
If to CARRIER, to:
PacNet, Inc.
Carrier Sales
1111 3rd Avenue
Suite 1600
Seattle, WA 98101
If to RESELLER, to:
Rocky Mountain Internet, Inc.
Chief Financial Officer
1099 Eighteenth Street
Suite 3000
Denver, CO 80202
9.4 ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding between CARRIER and RESELLER as to the subject matter
hereof. No waiver, alteration, or modification of any of the
provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representative of the Party against which
enforcement of such waiver, alteration or modification is sought.
9.5 SAVINGS CLAUSE. If any term, covenant or condition of circumstance
shall to any extent be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition
to person or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby and each term,
covenant or condition of the Agreement shall be valid and be enforced
to the fullest extent permitted by law. All obligations and duties
which by their nature extend beyond the expiration or termination of
this Agreement shall survive and remain in effect beyond any
expiration or termination.
<PAGE>
9.6 GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of Washington.
9.7 ARBITRATION. Any dispute between CARRIER and RESELLER arising under
this Agreement shall be subject to arbitration in the City of Seattle,
State of Washington, pursuant to the rules then in effect of the
American Arbitration Association (or any other place or under any form
of arbitration mutually acceptable to the Parties). The decision
rendered by the arbitrator shall be final and conclusive upon the
Parties and a judgment thereon may be entered in the highest court of
the forum having jurisdiction of the matter.
9.8 ATTORNEY FEES AND COSTS. In the event of any legal dispute between
the Parties relating to this Agreement, including arbitration
provided for in Section 9.7, the most prevailing party shall be
entitled to all costs and legal expenses, including, but not limited
to reasonable, ordinary and necessary attorney fees, accounting fees,
court costs, expert witness expenses and investigation expenses.
9.9 REGULATORY APPROVAL. This Agreement shall be subject to and governed
by any applicable state and federal regulatory agencies having
jurisdiction over the subject matter hereof. Should any approval or
authority be required for any acts, duties or obligations to be
performed hereunder, the Parties will cooperate in securing the same.
9.10 AUTHORITY TO CONTRACT. RESELLER warrants that it has full authority
to enter into this Agreement and that such action has been duly
authorized in accordance with RESELLER's articles of incorporation,
bylaws or other applicable organizational documents and procedures.
9.11 CAPTIONS. Captions contained herein are inserted only as a matter of
convenience and in no way define, limit or extend the scope or intent
of any provision hereof and have been duly authorized to do so in
accordance with RESELLER's corporate or other organizational documents
and procedures.
9.12 INDEPENDENT BUSINESS JUDGMENT. The Parties hereby acknowledge and
agree that RESELLER is an independent business sufficiently
sophisticated to exercise and exercising its own business judgment.
The Parties hereby further acknowledge and agree that CARRIER has made
no recommendations or representations regarding any aspect of
RESELLER's business, including, but not limited to, any
representations with regard to RESELLER's profits therefrom.
9.13 WAIVER. Failure or delay on the part of either Party to exercise any
right, power or privilege hereunder shall not operate as a waiver of
any other obligation. Waiver by CARRIER or RESELLER of a breach of
any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other
Party.
<PAGE>
9.14 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall, for all purposes, be deemed to be an original and
all of which together shall be deemed the same agreement.
9.15 OPPORTUNITY TO PARTICIPATE IN DRAFTING. The Parties have been
furnished an equal opportunity to participate in the drafting of
this Agreement and any exhibits or schedules attached hereto. No
ambiguity shall be construed against any Party based upon a claim
that that Party drafted the applicable language.
9.16 AUTHORITY TO EXECUTE. Each person executing this Agreement on behalf
of another person or organization represents and warrants to the other
Party that he or she is fully authorized to execute and deliver this
Agreement on behalf of such person or organization.
9.17 NON-SOLICITATIONS. During the term of this Agreement and for a period
of one (1) year thereafter, CARRIER agrees not to aggressively solicit
the customers of RESELLER, with any products or services that directly
compete with those the RESELLER is offering the customers.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized officers as of the day and year first above written.
CARRIER: PacNet, Inc. RESELLER: Rocky Mountain Internet, Inc.
By: /s/ Stephen L. Sperry By: /s/ Kevin R. Loud
----------------------------- ---------------------------------------
Name: Stephen L. Sperry Name Kevin R. Loud
--------------------------- ------------------------------------
Title: Director Title: Vice President-Business Development
-------------------------- -----------------------------------
Date: 6/13/97 Date: June 2, 1997
--------------------------- -------------------------------------
<PAGE>
OPERATING AGREEMENT
OF
THE MOUNTAIN AREA EXCHANGE LLC
Effective as of June 11, 1997
<PAGE>
OPERATING AGREEMENT
OF
THE MOUNTAIN AREA EXCHANGE LLC
THIS OPERATING AGREEMENT ("Agreement") is made and entered into as of the
11th day of June, 1997, by and between the persons listed in EXHIBIT B attached
hereto and incorporated herein by this reference.
W I T N E S S E T H:
WHEREAS, articles of organization for The Mountain Area eXchange LLC
("Company") were filed by its organizer with the Secretary of State of the State
of Colorado on June 11, 1997; and
WHEREAS, The persons listed in EXHIBIT B are the present Members (defined
below) of the Company which, since its formation, has not been subject to a
written operating agreement; and
WHEREAS, the persons listed in EXHIBIT B hereto now desire to memorialize
the terms and conditions of their agreements with respect to the Company, and
otherwise continue the Company.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
of the parties hereto, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to continue The Mountain Area eXchange LLC as follows:
<PAGE>
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. The capitalized terms used in this Operating Agreement
shall have the meanings provided in EXHIBIT A attached hereto and incorporated
herein by this reference.
ARTICLE 2
THE COMPANY
2.1 NAME. The name of the company shall be The Mountain Area eXchange
LLC.
2.2 PRINCIPAL PLACE OF BUSINESS. The initial principal place of business
of the Company shall be as established by a majority of the Managers. The
Managers may change the principal place of business of the Company upon ten (10)
Business Days notice to the Members.
2.3 REGISTERED AGENT. The name and business address of the Company's
initial registered agent for service of process are Matthew Scott Finberg, 885
Arapahoe Avenue, Boulder, CO 80302. The Managers may, from time to time, change
the Company's registered agent. In the event the registered agent ceases to act
as such for any reason, the Managers shall promptly designate a replacement
registered agent. In the event of any change in the name or business address of
the Company's registered agent, the Managers shall timely make such filings as
are required by the Act.
2.4 TERM. The term of the Company commenced June 11, 1997, and shall
continue until the winding up and liquidation of the Company and its business
are completed following an Event of Dissolution.
2.5 PURPOSE OF THE COMPANY. The purpose of the Company shall be to
facilitate the exchange of electronic data at the lowest practicable cost for
the mutual benefit of the Members and the customers of the Company, and to
engage in any and all activities incidental or related thereto.
2.6 TITLE TO PROPERTY. All real and personal property owned by the
Company shall be owned by the Company as an entity and no Member shall have any
ownership interest in such property in its individual name or right, and each
Member's interest in the Company shall be personal property for all purposes.
Notwithstanding anything contained herein to the contrary, the Members shall be
entitled to bring their individual personal assets to the place or places where
the Company's business is conducted, and such assets shall remain the separate
property of such Members.
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<PAGE>
2.7 PAYMENTS OF INDIVIDUAL OBLIGATIONS. The Company's credit and assets
shall be used solely for the benefit of the Company, and no asset of the Company
shall be transferred or encumbered for or in payment of any individual
obligation of any Member.
2.8 MEMBERS. The names, addresses, and Interests of the Members of the
Company are as set forth in EXHIBIT B attached hereto and incorporated herein by
this reference. At such time that other Persons are admitted to the Company as
Members, their names, addresses, and Interests shall be included in EXHIBIT B
attached hereto which shall be amended from time to time by the Managers to
reflect such admissions to, as well as withdrawals from, the Company.
ARTICLE 3
MANAGEMENT OF COMPANY
3.1 AUTHORITY OF THE MANAGERS. Subject to the limitations and
restrictions set forth in this Agreement, the Managers shall have the sole and
exclusive right to manage the business of the Company and shall have all of the
rights and powers which may be possessed by Managers under the Act.
3.2 LIMITATIONS ON AUTHORITY OF MANAGERS. Notwithstanding any other
provision of this Agreement, the Managers shall have no authority to perform any
of the following acts without the concurring vote of all of the Members:
(a) Cause or permit the Company to engage in any activity that is not
consistent with the purposes of the Company as set forth in Section 2.5;
(b) Knowingly do any act in contravention of this Agreement, except
as required by applicable law;
(c) Knowingly do any act which would make it impossible to carry on
the ordinary business of the Company, except as otherwise provided by this
Agreement or required by applicable law;
(d) Compromise, settle, or confess judgment on any claim against or
inuring to the benefit of the Company or make any assignment for the
benefit of creditors;
(e) Knowingly perform any act which would expose the Members to
unlimited liability for any debt of the Company; or
(f) Sell, exchange or otherwise dispose of all or substantially all
of the assets of the Company.
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<PAGE>
3.3 ACTIONS BY THE MANAGERS. Any action that may be taken by the Managers
shall require the consent of a majority of the Managers; PROVIDED, HOWEVER, that
the Managers may, by unanimous agreement, delegate to one or more of their
number the right and power to deal with any aspect of the Company's business
and/or take any action that the Managers are authorized to take, without the
further consent of the other Managers.
3.4 DUTIES OF THE MANAGERS. The Managers shall devote such time and
attention as shall be appropriate to manage and supervise the Company's business
properly and efficiently, and shall take all such actions as shall be prudent
and appropriate for the proper management and supervision of the business of the
Company and the accomplishment of its purposes.
3.5 SEPARATE OPERATION OF COMPANY BUSINESS. The Managers shall cause the
Company to conduct its business and operations separate and apart from that of
any Manager, Member, or Affiliate of a Manager or Member.
3.6 APPOINTMENT, NUMBER, TENURE AND QUALIFICATIONS OF MANAGERS. The
number of Managers of the Company shall be fixed from time to time by vote of
Members owning two-thirds (2/3) or more of the Interests, but in no instance
shall there be fewer than three (3) Managers. Each Manager shall hold office
until the next annual meeting of Members or until his/her successor shall have
been elected and qualified. Managers shall be elected by a vote of two-thirds
(2/3) or more in Interest of the Members.
3.7 RIGHT TO RELY ON MANAGERS. Any Person dealing with the Company may
rely (without duty of further inquiry) upon a certificate signed by any Manager
as to:
(i) The identity of any Manager or Member;
(ii) The existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by a Manager or which are in
any other manner germane to the affairs of the Company;
(iii) The Persons who are authorized to execute and deliver any
instrument or document of the Company; or
(iv) Any act or failure to act by the Company or any other matter
whatsoever involving the Company or any Member.
3.8 SALARIES AND REIMBURSEMENTS. The salaries and other compensation
of the Managers of the Company shall be fixed from time to time by the vote
of two-thirds (2/3) or more in Interest of the Members, and no Manager shall
be prevented from receiving such salary by reason of the fact that he or she
is also a Member of the Company. The Managers shall be reimbursed by the
Company
4
<PAGE>
for all reasonable expenses incurred by them on the Company's behalf.
3.9 OTHER ACTIVITIES.
(a) Subject to the terms and conditions of this Section 3.9, each
Manager shall be free to serve any other Person or enterprise in any capacity
that such Manager may deem appropriate in its discretion provided that if
activities of the other Person or enterprise competes, directly or indirectly,
with the business of the Company, the Manager shall disclose in writing to the
other Managers and to the Members information relating to its relationship to
the other Person or enterprise and the activities thereof.
(b) Any Manager may acquire or hold any ownership interest in any
activity, business, or enterprise that is or may become competitive with the
Company or which is within or related to the business purpose of the Company,
provided that, in the case of any such activity, business, or enterprise that is
or may become competitive with the Company or which is within or related to the
business purpose of the Company, each such Manager shall disclose in writing to
the other Managers and to the Members information relating to the fact of such
ownership interests and the activities involved therein.
3.10 LIABILITY. Notwithstanding anything to the contrary in this
Agreement, and except to the extent required by applicable law, the Managers
shall not be liable to the Company or to any Member for any action taken or
omitted to be taken by such Manager, provided that such Manager acted in good
faith and such action or omission does not involve the gross negligence, willful
misconduct, or fraud of such Manager.
3.11 INDEMNIFICATION OF MANAGERS.
(a) The Company, its receiver, or its trustee (in the case of its
receiver or trustee, to the extent of Company Property) shall, except as
otherwise provided below in Section 3.11(d), indemnify, save harmless, and pay
all judgments and claims against each Manager relating to any liability or
damage incurred by reason of any act performed or omitted to be performed by
such Manager in connection with the business and activities of the Company,
including attorneys' fees incurred by such Manager in connection with the
defense of any action based on any such act or omission, which attorneys' fees
may be paid as incurred, as permitted by law.
(b) In the event of any action by a Member against any Manager (in
their respective capacities as such) the Company shall, except as otherwise
provided below in Section 3.11(d), indemnify, save harmless, and pay all
expenses of such Manager,
5
<PAGE>
including attorneys' fees, incurred in the defense of such action, if such
Manager is successful in such action.
(c) The Company shall, except as otherwise provided below in
Section 3.11(d), indemnify, save harmless and pay all expenses, costs, or
liabilities of any Manager who for the benefit of the Company makes any deposit,
acquires any option, or makes any other similar payment or assumes any
obligations in connection with any property proposed to be acquired by the
Company and who suffers any financial loss as the result of such action.
(d) Notwithstanding the foregoing provisions of this Section, no
Manager shall be indemnified from any liability arising as a consequence of
fraud, bad faith, willful misconduct, or gross negligence by such Manager.
(e) Notwithstanding any other provision to the contrary in this
Section above, in the event that any provision in any of this Section is
determined to be invalid in whole or in part, such Section shall be enforced to
the maximum extent permitted by law.
3.12 RESIGNATION. Any Manager of the Company may resign at any time by
giving two (2) weeks written notice to the Members and to the Company. The
resignation of any Manager shall take effect two (2) weeks following receipt of
notice thereof by the Company, or at such later time as shall be specified in
such notice. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.13 REMOVAL. All or any lesser number of Managers may be removed at any
time at a meeting called expressly for that purpose, by the affirmative vote of
the Members owning two-thirds (2/3) or more of the Interests. Any Manager who
is also a Member of the Company shall lose its status as a Manager for all
purposes hereunder on the effective date of its dissociation from the Company
under Article 12 hereof.
3.14 VACANCIES. Any vacancy occurring for any reason in the group of
Managers may be filled by written agreement of a majority of the remaining
Managers. A Manager chosen to fill a vacancy shall serve the unexpired term of
his or her predecessor in office. Any Manager's position to be filled by reason
of an increase in the number of Managers shall be filled by written agreement of
a majority of the Managers then in office or by election at an annual meeting or
at a special meeting of Members called for that purpose. A Manager chosen to
fill a position resulting from an increase in the number of Managers shall hold
office until the next annual meeting of Members and until his successor has been
elected and qualified.
3.15 CONFIDENTIALITY. Each Manager acknowledges that he has or may have
obtained knowledge of confidential matters, trade
6
<PAGE>
secrets, techniques, accounting procedures, and other methods developed by
the Company or the other Members which are owned by the Company or the other
Members and necessary and essential to the operation of their businesses,
without which information the Manager could not efficiently, effectively, and
profitably discharge his obligations as a Manager of the Company. Each
Manager further acknowledges that some of such confidential information was
or may have been unknown to him prior to association with the Company and
that the methods developed by the Company and the other Members for their
respective businesses may be unique and novel to them. Each Manager agrees
that he will take all necessary steps, at his own expense, to protect such
information as he knows is confidential and which was so obtained and that he
will not divulge same, either during or upon termination of this Agreement,
without the prior written consent of the Company and the other Member to whom
such confidential information belongs. Each Manager acknowledges the
Company's exclusive right to its business systems, its methods of operation,
its distinguishing characteristics, including but not limited to, service
marks, trademarks, tradenames, copyrights, certification marks, designs,
slogans, logos, names, and other advertising copy now or hereafter displayed,
used, or becoming a part of the Company's business. Each Manager agrees
neither to infringe upon, use, or imitate said system or any of the
Company-distinguishing characteristics after termination of this Agreement
without the prior written consent of the Company and the other Members.
Because of the difficulty of measuring economic loss to the Company as a
result of the breach of any of the covenants of this Section 3.15, and
because of the immediate and irreparable harm that such a breach would cause
the Company, for which it would have no adequate remedy, each Manager agrees
that any of the foregoing covenants may be enforced by injunction and
restraining order. In the event the Company is required to employ an
attorney to enforce any of the covenants of this Section 3.15, or to
institute legal proceedings incident to such enforcement, each Manager
expressly covenants and agrees to pay, in addition to all other sums for
which such Manager may be found liable, reasonable attorneys' fees, court
costs, and litigation expenses incurred by the Company.
3.16 TECHNICAL REVIEW COMMITTEE. The Managers shall appoint a Technical
Review Committee of no fewer than three (3) persons. All customer initial
service connections and service connection changes shall be subject to the
approval of the Technical Review Committee. The Technical Review Committee
shall advise the Managers on technical issues of the Company's business, and
shall recommend to the Managers the cessation of service to any customer whose
service connection interferes with the service of other Internet users. The
Managers shall adopt a recommendation of the Technical Review Committee unless
it clearly violates state law, this Agreement, or the policies of the Company.
7
<PAGE>
ARTICLE 4
MEMBERS
4.1 AUTHORITY. No Member of the Company, in his capacity solely as a
Member, shall have any power or authority to bind the Company in any way, to
pledge its credit, or to render it liable for any purpose.
4.2 LIMITATION OF LIABILITY. Each Member's liability for the debts and
obligations of the Company shall be limited as set forth in the Act and other
applicable law.
4.3 PRIORITY AND RETURN OF CAPITAL. Except as expressly provided herein,
no Member shall have priority over any other Member, either as to the return of
Capital Contributions or as to Net Profits, Net Losses, or distributions;
provided that this Section shall not apply to loans (as distinguished from
capital contributions) which a Member has made to the Company.
ARTICLE 5
MEETINGS OF, AND ACTIONS BY, MEMBERS
5.1 ACTIONS BY MEMBERS. Except as provided in Section 5.2, all actions
required or permitted to be taken by the Members as a group (as opposed to any
Member individually) shall only be taken at a meeting held in accordance with
the provisions of this Article 5. If a quorum is present at such meeting, the
affirmative vote of Members holding at least two-thirds (2/3) or more in
Interest of the Members represented at such meeting, in person or by proxy,
entitled to vote on the subject matter shall be the act of the Members, unless
the vote of a greater or lesser proportion or number is otherwise required by
the Act, by the Articles or by this Agreement.
5.2 ACTION WITHOUT A MEETING. Action required or permitted to be taken by
the Members as a group may be taken without a meeting if the action is evidenced
by one or more written consents describing the action taken, signed by each
Member entitled to vote and delivered to the Managers of the Company for
inclusion in the minutes or for filing with the Company records. Action taken
pursuant to this Section is effective when all Members entitled to vote have
signed the consent, unless the consent specifies a different effective date.
The record date for determining Members entitled to take action without a
meeting shall be the date the first Member signs a written consent.
5.3 ANNUAL MEETING. The annual meeting of the Members shall be held on
such date and at such time and place, either within or without the State of
Colorado, as designated by the Managers from time to time, for the purpose of
the transaction of such business as may come before the meeting.
5.4 SPECIAL MEETINGS. Special meetings of the Members, for any purpose or
purposes, unless otherwise prescribed by statute,
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may be called by any Manager or by any Member or Members holding at least 10%
of the votes entitled to be cast at such meeting. The date, time and place
of a special meeting of the Members shall be set by the person or persons
calling such special meeting, provided that the place of the special meeting
shall be within the State of Colorado at a reasonably convenient location,
and the time and date of the special meeting shall be reasonable.
5.5 NOTICE OF MEETINGS. Whenever Members are required or permitted to
take any action at a meeting, a written notice of the meeting shall be given
which shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise provided by law, the written notice of any meeting shall be
given not less than ten days or more than fifty days before the date of the
meeting, either personally or by mail, to each Member entitled to vote at such
meeting. If mailed, such notice shall be deemed to be given when deposited in
the United States mail, postage prepaid, directed to the Member at his address
as it appears on the records of the Company. Notwithstanding the foregoing, any
required notice may be waived by any Member by execution of a written waiver
either prior to or at a meeting for which notice was required to be given.
5.6 WAIVER OF NOTICE. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the Person entitled to such
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice. If a Member attends any meeting, such
Member (i) waives objection to lack of notice or defective notice of such
meeting unless the Member, at the beginning of the meeting, objects to the
holding of the meeting or the transacting of business at the meeting; and (ii)
waives objection to consideration at such meeting of a particular matter not
within the purpose or purposes described in the meeting notice unless the Member
object to considering the same when it is presented.
5.7 RECORD DATE. For the purpose of determining Members entitled to
notice of or to vote at any meeting of Members or any adjournment thereof, or
Members entitled to receive payment of any distribution, or in order to make a
determination of Members for any other purpose, the date on which notice of the
meeting is mailed or the date on which the resolution declaring such
distribution is adopted, as the case may be, shall be the record date for such
determination of Members. When a determination of Members entitled to vote at
any meeting of Members has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
5.8 PROXIES. At all meetings of Members, a Member may vote in person
or by proxy executed in writing by the Member or by a duly authorized
attorney-in-fact. Such proxy shall be filed with the Manager of the Company
before or at the time of the meeting.
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No proxy shall be valid after eleven months from the date of its execution,
unless otherwise provided in the proxy.
5.9 VOTING POWER. Each Member shall have one vote, or fraction of a vote,
for each percentage point, or fraction of a percentage point, in the Member's
Interest, determined as of the relevant record date.
5.10 QUORUM. Members holding at least two-thirds (2/3) in Interest of the
total votes held by all Members, represented in person or by proxy, shall
constitute a quorum at any meeting of Members.
ARTICLE 6
CAPITAL
6.1 MEMBERS' INITIAL CONTRIBUTIONS. The amount of cash and the nature and
agreed value of any property, initially contributed or to be contributed to the
Company by each Member, are set forth on EXHIBIT B hereto.
6.2 ADDITIONAL CONTRIBUTIONS. The Members shall make additional capital
contributions to the Company from time to time in accordance with this Section.
(a) Additional capital contributions from the Members may be
required during the term of the Company in such amounts as may be necessary to
fund the operations of the Company in the ordinary course of its business and
provide for timely payment of its obligations.
(b) Any additional capital contribution must be approved by the
affirmative vote of Members owning not less than two-thirds (2/3) of the Company
Interests, and in the event of such approval, it shall be binding upon all
Members.
(c) Unless the Members unanimously otherwise agree, additional
capital contributions shall be contributed by the Members in proportion to their
Interests.
(d) Each Member agrees to pay to the Company all additional
capital contributions which are approved as provided in paragraph (b), above
within ten (10) days following notice of assessment of such additional capital
contribution by the Managers. Notice of assessment shall state the aggregate
amount of the additional capital contribution called for and each Member's share
thereof.
6.3 RIGHTS NON-PERFORMING MEMBER. Whenever a Member shall have failed
to perform his obligations under Section 6.2 or 6.6, the Member shall have no
vote in the decisions of the Company and shall be bound by all decisions of
the remaining Members who did perform such obligations. Furthermore, the
non-performing Member's distribution of capital, profit, and cash flow shall
be
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applied to such payment obligation until such obligation is met. At such
time that the non-performing Member shall have paid all such obligations,
with interest at the rate of twelve percent (12%) per annum, such Member's
rights suspended under this Section 6.3 shall be reinstated on a prospective
basis. The rights and remedies provided in this Section 6.3 shall be the
exclusive rights and remedies of the Members and the Company for such
non-performance.
6.4 WITHDRAWAL OR REDUCTION OF MEMBERS' CONTRIBUTIONS TO CAPITAL. A
Member, irrespective of the nature of his or her contribution, has only the
right to demand and receive cash in return for his or her contribution to
capital.
6.5 INTEREST ON AND RETURN OF CAPITAL CONTRIBUTIONS. No Member shall be
entitled to interest on his Capital Contribution or to return of his Capital
Contribution except with the consent of the Members or as otherwise specifically
provided for herein.
6.6 PROPORTIONATE HOLD-HARMLESS. It is recognized by the Company that, in
order to obtain the necessary loans needed to carry on the purposes of the
Company, it may be necessary for the individual Members to execute loan
agreements which call for individual, joint and several liability. If such
loans are approved by affirmative vote of Managers owning two-thirds (2/3) or
more in Interest of the voting power in the Company, the Members hereby agree to
execute such loan agreements upon request by the Managers. Notwithstanding such
individual liability to third parties, as among the Members, it is specifically
understood and agreed that no Member or Members shall be forced to suffer any
greater liquidated loss than is equal to their percentage of the net losses of
the Company. Further, the Members hereby agree that those Members which are
obligated to pay more than their proportional share of any Company loan shall be
reimbursed by those Members who are required to pay less than their proportional
share of any such loan so that liability for such loan is ultimately shared by
all Members in proportion to their interest in the losses of the Company. The
sole remedies for non-performance by any Member under this Section 6.6 shall be
limited to those provided above in Section 6.3.
6.7 NO THIRD PARTY BENEFICIARIES. This Article 6 shall not confer any
rights or benefit to or upon any person or entity not a party to this Agreement,
including, but not limited to, any holder of any obligation secured by a
mortgage, deed of trust, security interest or other lien or encumbrance upon or
affecting the Company, its assets or any interest of a Member therein.
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ARTICLE 7
DISTRIBUTIONS
7.1 DISTRIBUTIONS. The Managers shall distribute any cash of the Company
which they, in the reasonable exercise of their discretion, believe is not
required to meet the anticipated cash requirements of the Company.
Distributions of cash shall be made to the Members in proportion with their
Interests.
7.2 WITHHOLDING. All amounts withheld pursuant to the Code or any
provisions of state or local tax law with respect to any payment or distribution
to the Members from the Company shall be treated as amounts distributed to the
relevant Member or Members.
ARTICLE 8
ALLOCATIONS
8.1 GENERAL ALLOCATIONS OF PROFITS AND LOSSES. Subject to the other
provisions of this Article 8, the Profits and Losses of the Company for each
Fiscal Year shall be allocated to and shared by the Members in proportion to
their Interests.
8.2 RECAPTURES. All recapture of income tax deductions resulting from the
sale or disposition of Company property shall be allocated to the Member or
Members to whom the deduction that gave rise to such recapture was allocated
hereunder to the extent that such Member is allocated any gain from the sale or
other disposition of such property.
8.3 LIMITATION ON ALLOCATION OF LOSSES. Notwithstanding any other
provision of this Agreement, no allocation of losses, or any item in the nature
of expenses or losses shall be made to a Member if such allocation would cause
or increase an Adjusted Capital Account Deficit for such Member. The amount
otherwise allocable to a Member but for the foregoing sentence shall instead be
allocated to the other Members in proportion to their Interests, subject again
to the first sentence of this Section.
8.4 ALLOCATION IN THE EVENT OF A CHANGE IN INTEREST. In the event that a
Member's interest in the Company changes during any Fiscal Year, the Managers
shall determine such Member's distributive share of any item of income, gain,
loss, deduction, or credit for such Fiscal Year by reference to this Agreement
and by using any convention permitted by Code Section 706 and the Regulations
thereunder.
8.5 QUALIFIED INCOME OFFSET. In the event a Member receives any
adjustments, allocations, or distributions described in Section
1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Regulations, items of Company
income and gain (consisting of a pro rata portion of each item of Company
income, including gross income, and gain for such year) shall be specially
allocated to that Member in an amount and manner sufficient to eliminate, to
the extent required
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by the Regulations, any Adjusted Capital Account Deficit of that Member as
quickly as possible, provided that an allocation pursuant to this Section
shall be made only if and to the extent that the Member would have an
Adjusted Capital Account Deficit after all other allocations provided for in
this Agreement have been tentatively made as if this Section were not in this
Agreement. The provisions of this Section are intended to comply with the
requirements of Section 1.704-1(b)(2)(ii)(d) of the Regulations, and shall be
interpreted consistently therewith.
8.6 GROSS INCOME ALLOCATION. In the event any Member has a deficit
Capital Account at the end of any Company Fiscal Year which is in excess of the
sum of (i) the amount such Member is obligated to restore, and (ii) the amount
such Member is deemed to be obligated to restore pursuant to the penultimate
sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each
such Member shall be specially allocated items of Company income and gain in the
amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section shall be made if and only to the extent that such
Member would have a deficit Capital Account in excess of such sum after all
other allocations provided for in this Agreement have been tentatively made as
if this Section and Section 8.5 hereof were not in this Agreement.
8.7 SPECIAL PROVISIONS APPLICABLE IN THE EVENT OF NONRECOURSE BORROWINGS.
(a) Capitalized terms used in this Section and not otherwise
defined shall have the meaning given them in Section 1.704-2 of the Regulations.
(b) Nonrecourse Deductions of the Company for any fiscal year or
other period shall be allocated in the same manner as Net Losses under Section
8.1.
(c) Any Partner Nonrecourse Deductions for any Fiscal Year shall
be specially allocated to the Member who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse
Deductions are attributable in accordance with Regulations Section
1.704-2(i)(1).
(d) Except as otherwise provided in Section 1.704-2(f) of the
Regulations, notwithstanding any other provision of this Article 8, if there is
a net decrease in Partnership Minimum Gain during any Company Fiscal Year, each
Member shall be specially allocated items of Company income and gain for such
Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to
such Member's share of the net decrease in Partnership Minimum Gain, determined
in accordance with the Regulations Section 1.704-2(g). Allocations pursuant to
the previous sentence shall be made in proportion to the respective amounts
required to be allocated to each Member pursuant thereto. The items to be so
allocated shall be determined in accordance with Sections 1.704-2(f)(6) and
1.704-
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2(j)(2) of the Regulations. This Section 8.7(d) is intended to comply with
the minimum gain chargeback requirement in Section 1.704-2(f) of the
Regulations and shall be interpreted consistently therewith.
(e) Except as otherwise provided in Section 1.704-2(i)(4) of the
Regulations, notwithstanding any other provision of this Article 8, if there is
a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a
Partner Nonrecourse Debt during any Company Fiscal Year, each Member who has a
share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the
Regulations, shall be specially allocated items of Company income and gain for
such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal
to such Member's share of the net decrease in Partner Nonrecourse Debt Minimum
Gain attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Member pursuant thereto. The items to be so allocated shall
be determined in accordance with Section 1.704-2(i)(4) and 1.704-2(j)(2) of the
Regulations. This Section 8.7(e) is intended to comply with the minimum gain
chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be
interpreted consistently therewith.
(f) To the extent permitted by Section 1.704-2 of the Regulations,
the Managers shall endeavor to treat distributions of cash as having been made
from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Liability
only to the extent that such distributions would cause or increase an Adjusted
Capital Account Deficit for any Member.
8.8. The allocations set forth in Section 8.5, 8.6, and 8.7 ("Regulatory
Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Members that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Company income, gain, loss, or
deduction pursuant to this Section 8.7. Therefore, notwithstanding any other
provision of this Article 8 (other than the Regulatory Allocations), the
Managers shall make such offsetting special allocations of Company income, gain,
loss, or deduction in whatever manner they determine appropriate so that, after
such offsetting allocations are made, each Member's Capital Account balance is,
to the greatest extent possible, equal to the Capital Account balance such
Member would have had if the Regulatory Allocations were not part of this
Agreement and all Company items were allocated pursuant to the other Sections of
this Article 8. In exercising their discretion under this Section, the Managers
shall take into account future Regulatory
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Allocations that, although not yet made, are likely to offset other
Regulatory Allocations previously made.
8.9 TAX ALLOCATIONS: CODE SECTION 704(c).
(a) In accordance with Code Section 704(c) and the Regulations
thereunder, income, gain, loss, and deduction with respect to any property
contributed to the capital of the Company shall, solely for tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for federal income tax purposes
and its initial Gross Asset Value.
(b) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to the definition thereof contained in EXHIBIT A hereto,
subsequent allocations of income, gain, loss and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for federal income tax purposes and its Gross Asset Value in the same
manner as under Code Section 704(c) and the Regulations thereunder.
ARTICLE 9
ADMINISTRATIVE MATTERS
9.1 BOOKS AND RECORDS. At the expense of the Company, the Managers shall
maintain at the principal place of business of the Company separate books and
records of all operations and expenditures of the Company. The books and
records of the Company shall be maintained in accordance with generally accepted
accounting practices and principles. The Managers shall further maintain at the
principal place of business of the Company the following documents:
(a) A current list of the full name and last known business,
residence, or mailing address of each Member and Manager, both past and
present;
(b) A copy of the Articles of Organization of the Company and all
amendments thereto;
(c) Copies of the Company's federal, state and local income tax
returns and reports, if any, for the four most recent years;
(d) Copies of the Company's currently effective written Operating
Agreement, copies of any writings permitted or required with respect to a
Member's obligation to contribute cash, property or services to the Company
for the three most recent Fiscal Years;
(e) Minutes of every annual, special and court-ordered meeting of
the Members;
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(f) Any written consents obtained from Members for actions taken
by Members without a meeting.
Any Member or his designated representative shall have the right, at any
reasonable time, to have access to and inspect and copy the contents of the
books and records of the Company and the other documents described in this
Section.
9.2 ANNUAL REPORTS. Within ninety (90) days after the end of each Fiscal
Year, the Managers shall cause to be prepared, and each Member furnished with,
an annual report of the Company's operations, prepared on the basis of the
accounting method specified in Section 9.1, and consisting of at least a balance
sheet of the Company as of the last day of such Fiscal Year, a statement of
income and expenses for such Fiscal Year, and a statement of each Member's
Capital Account as of the end of such Fiscal Year. Such annual reports shall be
reviewed by an independent Certified Public Accountant. The Managers shall
cooperate with any Members and the accountants who desire an audit of the books
and records of the Company. The scope and nature of any such audit shall be
clearly defined by the requesting Members, and they shall bear the full cost of
all such work including any out of pocket expenses incurred by the Company in
connection therewith.
9.3 RETURNS AND ELECTIONS.
(a) The Managers shall cause the preparation and timely filing of
all tax returns required to be filed by the Company pursuant to the Code and all
other tax returns deemed necessary and required in each jurisdiction in which
the Company does business. Copies of such returns, or pertinent information
therefrom, shall be furnished to the Members within a reasonable time after the
end of the Company's Fiscal year.
(b) All elections permitted to be made by the Company under
federal or state laws shall be made by the Managers in their sole discretion.
9.4 TAX MATTERS MEMBER. Colorado Internet Cooperative Association is
hereby designated the "tax matters partner [member]" as defined in Section
6231(a)(7) of the Code for U.S. income tax administration and reporting
purposes. The tax matters partner[member] is authorized and required to
represent the Company, at the Company's expense, in connection with all
examinations of the Company's affairs by tax authorities, including resulting
judicial and administrative proceedings, and to expend Company funds for
professional services and costs associated therewith.
9.5 LOANS TO COMPANY. Any Person, with the consent of the Managers, may
lend or advance money to the Company. If any Member makes any loan or loans to
the Company or advances money on its
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behalf, the amount of any such loan or advance shall not be treated as a
Capital Contribution but shall be a debt due from the Company. The amount of
any such loan or advance by a lending Member shall be repayable out of the
Company's cash and shall bear interest at such rate as the Managers and the
lending Member shall agree but not in excess of the maximum rate permitted by
law. If any Manager, or an Affiliate of any Manager is the lending Person,
the rate of interest shall be determined by the Managers taking into
consideration, without limitation, prevailing interest rates and the interest
rates the lender is required to pay in the event such lender has itself
borrowed funds to loan or advance to the Company and the terms and
conditions of such loan, including the rate of interest, shall be no less
favorable to the Company than if the lender had been an independent third
party. None of the Members shall be obligated to make any loan or advance to
the Company unless otherwise unanimously agreed by them.
9.6 LIMITATION ON OUT-OF STATE BUSINESS.
(a) In addition to any other limitation or restriction contained
herein on the activities of the Company, the Company shall not, without the
unanimous consent of the Members, engage in any business or activity outside the
State of Colorado unless the Company shall have first satisfied the following
prerequisites:
(1) The Company shall have satisfied the requirements, if
any, imposed by the law of such other state relating to registration
or qualification of foreign limited liability companies doing business
in such other state; and
(2) The Company shall have received the opinion of its
legal counsel to the effect that the liability of the Members for
Company obligations arising under the law of such other state will not
exceed the liability of the Members under the Act.
9.7 TRANSACTIONS WITH MEMBERS AND MANAGERS. To the extent permitted by
applicable law and except as otherwise provided in this Agreement, the Managers
are hereby authorized to purchase property from, sell property to, or otherwise
deal with any Member or Manager acting on its own behalf, or any Affiliate of
any Member or Manager, provided that such purchase, sale or other transaction
shall be made on terms and conditions which are no less favorable to the Company
than if the sale, purchase or other transaction has been entered into with an
independent third party.
ARTICLE 10
RESTRICTIONS ON TRANSFERABILITY
10.1 GENERAL. Except as otherwise specifically provided herein or by
operation of law, a Member shall not have the right or power to sell, assign,
pledge, transfer, or in any other manner
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whatsoever dispose of all or any part of its Membership interest in the
Company (including, without limitation, voting rights or the rights to
receive the Member's share of profits or other compensation by way of income
and the return of contributions) in the Company. Any purported transfer of
all or any part of a Member's Membership interest made in violation of this
Agreement shall be void as against the Company, its Managers, and its Members.
10.2 RIGHT OF FIRST REFUSAL.
(a) Except as set forth in Section 10.3 and Section 10.2(b) below,
if a Member ("Selling Member") desires to sell or transfer all or any portion of
its Membership interest in the Company ("Offered Interest"), the Selling Member
shall give notice ("Offering Notice") to the Company and the other Members
stating the Selling Member's desire to sell, the identity of the proposed
purchaser (if known), the proposed purchase price and any other material terms
of the proposed sale (including, without limitation, the terms of any purchase
of indebtedness owed by the Company to the Selling Member). The other Members
shall then have a right to purchase all, but not less than all, of the Offered
Interest, in the manner set forth below.
(i) The Company, as an entity, upon the approval of
two-thirds (2/3) or more in Interest of the Members, shall purchase all of
the Offered Interest. In the event that the Company does not so purchase
the Offered Interest within thirty (30) days after receiving the Offering
Notice, each Member (other than the Selling Member) shall have the right to
purchase all or a portion of his pro rata share of the Offered Interest, and
all or a portion of his pro rata share of the amount of the Offered Interest
another Member has the right to purchase but declines to purchase. For this
purpose, the Members' pro rata shares shall be determined by reference to the
respective Interests of the Members desiring to acquire a portion of the
Offered Interest.
(ii) A Member's or the Company's right to purchase shall be
exercised by giving notice ("Acceptance Notice") to the Selling Member within
thirty (30) days after receiving the Offering Notice. The Acceptance Notice of
a Member shall state the portion of the Offered Interest that the Member desires
to purchase, and shall constitute a binding contract to purchase that portion of
Offered Interest, or the portion of the Offered Interest the Member has the
right to purchase, whichever is less.
(iii) The aggregate consideration to be paid by the Company
or the other Members upon exercise of the right of first refusal option granted
by this paragraph, shall consist of (A) cash in an amount equal to the sum of
(I) the amount of cash, if any, and (II) the value, determined by agreement of
the parties or by independent appraisal, of any non-cash consideration, included
in the consideration for purchase of the Offered Interest
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and Company indebtedness described in the Offering Notice (without regard to
any differences in tax consequences to the Selling Member of receiving cash
in lieu of such other consideration); and (B) if the terms described in the
Offering Notice contemplate payment of any portion of the purchase price in
the form of a promissory note or other obligation to pay cash in the future,
a note or obligation of the Company or other Members, as applicable, upon
terms equivalent thereto in all material respects.
(iv) If the Company or other Members elect to purchase the
full amount of the Offered Interest, the closing of the purchase shall occur not
later than 45 days after the expiration of the 30-day option period.
(v) If the Company or other Members do not collectively
elect to purchase the entire Offered Interest, the Selling Member shall, for a
period of ninety (90) days after the expiration of the 30-day option period, be
free to sell the Offered Interest to any financially responsible purchaser upon
terms no more favorable to the purchaser than those disclosed in the Offering
Notice.
(b) Upon the death of a Member, Section 10.2(a) above shall apply to
the deceased Member's Membership Interest and his estate shall be treated as the
Selling Member; PROVIDED, HOWEVER, the purchase price of said interest shall be
determined by the appraisal of the interest employed and the value reported for
federal estate tax purposes (or if no such value is determined, the appraisal of
said interest by a licensed appraiser mutually selected by the decedent's
personal representative and the remaining Members). The cost of any such
appraisal shall be solely borne by decedent's estate.
10.3 ENCUMBRANCES BY A MEMBER. No Member, and no joint tenant in a
Membership interest, shall have the right to pledge, mortgage, assign for
security purposes or hypothecate all or any portion of its Membership interest
or joint tenancy therein at any time, except with the written consent of all
other Members. Violation of this provision shall afford each other Member the
right and option to void any such pledge, mortgage, assignment or hypothecation
within ninety (90) days after receiving actual written notice of such event.
The right to invalidate a transaction shall be exercised by serving written
notice upon the creditor or other third party, and upon the Member who violated
this provision, and the invalidation shall be effective ten (10) days
thereafter. If a Member or a joint tenant in a Membership interest violates
this provision, it agrees to hold harmless and indemnify all other Members and
the Company from all costs and expenses, including attorneys' fees, in regard
thereto or as the result of the taking of action pursuant to this section.
10.4 TRANSFEREE NOT SUBSTITUTE MEMBER IN ABSENCE OF UNANIMOUS CONSENT.
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(a) Notwithstanding anything contained herein to the contrary,
if all of the remaining Members do not approve of the proposed sale,
transfer, or assignment of the Selling Member's interest by unanimous written
consent, the proposed purchaser, transferee, or assignee of the Selling
Member's interest shall have no right to participate in the management of the
business and affairs of the Company or to become a Member. The purchaser,
transferee, or assignee shall only be entitled to receive the share of
profits or other compensation by way of income and the return of
contributions, to which the Selling Member would otherwise be entitled
("Economic Interest" of a Member). No transfer of a Member's interest in the
Company (including any transfer of the Economic Interest or any other
transfer which has not been approved by unanimous written consent of the
Members) shall be effective unless and until written notice (including the
name and address of the proposed purchaser, transferee or assignee and the
date of such transfer) has been provided to the Company and the
non-transferring Member(s) in accordance with the requirements of this
Article 10.
(b) Upon and contemporaneously with any transfer of a Selling
Member's Economic Interest in the Company which does not at the same time
transfer the Selling Member's other Membership interests in the Company
(including, without limitation, the voting rights of the Selling Member), the
Company shall purchase from the Selling Member, and the Selling Member shall
sell to the Company, all remaining Membership interests retained by the
Selling Member which were previously attributable to the transferred Economic
Interest for a purchase price of $100.00.
(c) The restrictions on transfer contained in this Section are
intended to comply (and shall be interpreted consistently) with the
restrictions on transfer set forth in Section 7-80-702 of the Act.
10.6 EXECUTION OF CERTIFICATES, ETC. In the event of the sale, transfer
or assignment of a Selling Member's interest in the Company, and as a
condition to recognizing the effectiveness and the binding nature of any such
sale, transfer, or assignment as against the Company or otherwise,
(irrespective of whether the Members unanimously approve the substitution of
the purchaser, transferee, or assignee as a new Member) the remaining Members
may require the Selling Member and the proposed purchaser, transferee, or
assignee to execute, acknowledge, and deliver to the transferee, or assignee
to execute, acknowledge, and deliver to the Company such instruments of
transfer, assignment and assumption and such other certificates,
representations and documents, and to perform all such other acts which the
remaining Members may deem necessary or desirable to:
(i) constitute such purchaser, transferee, or assignee as such;
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(ii) confirm that the person desiring to acquire an interest or
interests in the Company, or to be admitted as a Substituted Member, has
accepted, assumed and agreed to be subject and bound by all of the terms,
obligations and conditions of the Operating Agreement, as the same may have
been further amended;
(iii) preserve the Company after the completion of such sale,
transfer, or assignment under the laws of each jurisdiction in which the
Company is qualified, organized or does business;
(iv) maintain the status of the Company as an association not
taxable as a corporation under the then applicable provisions of the Code;
and
(v) assure compliance with any applicable state and federal
securities laws and regulations.
Without limiting the generality of the foregoing, the effectiveness of any
sale, transfer, or assignment by a Member may be conditioned, in the
discretion of the Managers, upon receipt by the Company of:
(A) an opinion of counsel satisfactory to the Managers (both as to
opinion and counsel), the cost of which shall be borne by the transferor, to
the effect that such transfer will be exempt from registration under the
Securities Act of 1933, as amended, and any applicable state securities laws,
and
(B) any other documentation determined by the Managers to be
necessary or advisable in order to assure that such transfer will not violate
applicable securities laws. In addition, without violating the generality of
the foregoing, the Managers may prohibit any transfer by a Member if such
transfer would result in the "termination" of the Company pursuant to Section
708 of the Code.
10.7 EFFECTIVE DATE OF TRANSFER. Any sale, transfer, or assignment of a
Membership interest in the Company or subscription of a Member made in
compliance with this Article 10 shall be deemed effective as of the last day
of the calendar month in which the remaining Members' consent thereto was
given.
10.8 COVENANTS OF SELLING MEMBER. The Selling Member agrees, upon
request of the remaining Members, to execute such certificates or other
documents and perform such other acts as may be reasonably requested by the
remaining Members from time to time in connection with such sale, transfer,
assignment, or substitution. The Selling Member hereby indemnifies the
Company and the remaining Members against any and all loss, damage, or
expense (including, without limitation, tax liabilities or loss of tax
benefits) arising directly or indirectly as a result of any transfer or
purported transfer in violation of this Article 10.
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10.9 OTHER RESTRICTIONS AND LIMITATIONS ON TRANSFER.
(a) In the event that, as a consequence of a sale, transfer, or
assignment of all or a portion of a Member's Membership interest, two or more
persons or entities (at least one of whom is not a Member) hold interests in
such Membership interest, such sale, transfer, or assignment shall be void as
against the Company, its Managers, and its Members unless and until all of
the persons and entities holding an interest in such Membership interest
designate in writing to the Managers one among them as their representative
for purposes of receiving and giving all notices or other communications
provided for herein and all dealings with the Company and its Members.
(b) No sale, transfer, or assignment of a Member's entire
interest shall be made unless the purchaser, transferee, or assignee
concurrently acquires all indebtedness of the Company to the Member.
ARTICLE 11
ADDITIONAL MEMBERS
11.1 ADMISSION OF NEW MEMBERS. From the date of the formation of the
Company, any Person or Entity acceptable to the Members by their unanimous
vote thereof may become a Member in this Company by the sale of new
Membership Interests for such consideration as the Members by their unanimous
votes shall determine, or as a transferee of a Member's Interest or any
portion thereof, subject to the terms and conditions of this Operating
Agreement. No person shall be eligible to become an Additional Member unless
such person is a National Service Provider or has a direct inter-network
connection at 45 megabits per second or greater to a National Service
Provider. The Managers may, at their option, at the time an Additional
Member is admitted, close the Company books (as though the Company's tax year
had ended) or make pro rata allocations of loss, income and expense
deductions as to an Additional Member for that portion of the Company's tax
year in which an Additional Member was admitted in accordance with the
provisions of Section 706(d) of the Code and the Regulations promulgated
thereunder.
ARTICLE 12
DISSOCIATION OF A MEMBER
12.1 A Person shall cease to be a Member upon the happening of any of
the following events:
(a) The delivery by the Member to all other Members of his
resignation from the Company;
(b) In the case of a Member who is a natural person, the death of
a Member or the entry of an order by a court of competent jurisdiction
adjudicating the Member incompetent;
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(c) In the case of a Member who is acting as a Member by virtue of
being a trustee of a trust, the termination of the trust (but not merely
the substitution of a new trustee);
(d) In the case of a Member that is a separate entity other than a
corporation, the dissolution and commencement of winding up of the separate
entity;
(e) In the case of a Member that is a corporation, the filing of a
certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter;
(f) In the case of an estate, the distribution by the fiduciary
of the estate's entire interest in the Company; or
(g) In the case of a Member that is not a natural person, the
acquisition of direct or indirect ownership of fifty percent (50%) or more
of the value of or voting power in the Member.
12.2 COVENANT NOT TO DISSOCIATE. Each of the Members hereby covenants
and agrees that it shall not voluntarily taken any action which would cause
him to cease to become a Member under the provisions of Section 12.1 without
the prior approval of other Members holding a majority of the votes held by
such other Members. If a Member breaches this covenant he shall be liable to
the Company for any damages caused by such breach, which may be offset
against the amount otherwise distributable to such Member under this
Agreement.
12.3 STATUS OF A DISSOCIATING MEMBER. In the event any Member ceases to
be a Member by virtue of the provisions of Section 12.1, such Member shall
have no right to participate in the management of the business or affairs of
the Company and shall be entitled to receive only the share of profits and
distributions to which such Member would have been entitled had such Member
not resigned or withdrawn.
ARTICLE 13
DISSOLUTION AND TERMINATION
13.1 DISSOLUTION. The Company shall be dissolved upon the unanimous
written agreement of all Members ("Event of Dissolution").
13.2 STATEMENT OF INTENT TO DISSOLVE. As soon as possible following the
occurrence of an Event of Dissolution, the appropriate representative of the
Company shall execute a statement of intent to dissolve in such form as shall
be prescribed by the Colorado Secretary of State and file same with the
Colorado Secretary of State's office. Upon the filing by the Colorado
Secretary of State of a statement of intent to dissolve,
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the Company shall cease to carry on its business, except insofar as may be
necessary for the winding up of its business, but its separate existence
shall continue until a certificate of dissolution has been issued by the
Secretary of State or until a decree dissolving the Company has been entered
by a court of competent jurisdiction.
13.3 WINDING UP, LIQUIDATION AND DISTRIBUTION OF PROPERTY. Upon
dissolution, the Managers shall immediately proceed to wind up the affairs of
the Company and distribute the Property in the following manner:
(a) The Managers shall (i) sell or otherwise liquidate all of the
Property as promptly as practicable (except to the extent the Managers may
determine to distribute any items of Property to the Members in kind), (ii)
allocate any profit or loss resulting from such sales to the Members'
Capital Accounts, (iii) discharge all liabilities of the Company (other
than liabilities to Members), including all costs relating to the
dissolution, winding up, and liquidation and distribution of assets, (iv)
establish such reserves as may be reasonably necessary to provide for
contingent and unknown liabilities of the Company (for purposes of
determining the Capital Accounts of the Members, the amounts of such
reserves shall be deemed to be an expense of the Company, (v) discharge any
liabilities of the Company to the Members other than on account of their
interests in Company capital or profits, and (vi) distribute the remaining
assets in the following order:
(I) If items of Property are to be distributed in
kind, the net fair market value of items as of the date of dissolution
shall be determined by independent appraisal or by agreement of the
Members. Such items shall be deemed to have been sold as of the date
of dissolution for their fair market value, and the Capital Accounts
of the Members shall be adjusted to reflect such deemed sale.
(II) The positive balance of each Member's Capital Account
as determined after taking into account all Capital Account
adjustments for the Company's Fiscal Year during which the liquidation
occurs, and the adjustments described in Section 13.3(a)(I) above,
shall be distributed to the Members, either in cash or in kind, as
determined by the Managers, with any items of Property distributed in
kind being valued for this purpose at their fair market value as
determined pursuant to Section 13.3(a)(I). Any such distributions to
the Members in respect of their Capital Accounts shall be made in
accordance with the time requirements set forth in Section
1.704-1(b)(2)(ii)(b)(2) of the Regulations.
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(b) The Managers shall comply with any applicable requirements of
law pertaining to the winding up of the affairs of the Company and the
final distribution of its assets.
(c) Upon completion of the winding up, liquidation and
distribution of the assets, the Company shall be deemed terminated.
13.4 ARTICLES OF DISSOLUTION. When all debts, liabilities and
obligations have been paid and discharged or adequate provisions have been
made therefor and all of the Property has been distributed to the Members,
articles of dissolution containing the information required by the Act shall
be executed in duplicate, verified by the person signing the articles, and
filed in duplicate with the Colorado Secretary of State. The Manager shall
have authority to distribute any Company property discovered after
dissolution, convey real estate and take such other action as may be
necessary on behalf of or in the name of the Company.
13.5 RETURN OF CONTRIBUTION NON-RECOURSE TO OTHER MEMBERS. Except as
provided by law, upon dissolution, each Member shall look solely to the
assets of the Company for the return of his Capital Contribution. If the
Company property remaining after the payment or discharge of the debts and
liabilities of the Company is insufficient to return the cash or other
property contribution of one or more Members, such Member or Members shall
have no recourse against any other Member.
13.6 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provisions of this Article 13, in the event the Company is "liquidated"
within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Event
of Dissolution has occurred, the assets of the Company shall not be sold, the
Company's liabilities shall not be paid or discharged, and the Company's
affairs shall not be wound up. Instead, solely for federal income tax
purposes, the Company shall be deemed to have distributed the Property in
kind to Members, who shall be deemed to have assumed and taken subject to all
Company liabilities, all in accordance with their respective Capital
Accounts. Immediately thereafter, the Members shall be deemed to have
recontributed the Property in kind to the Company, which shall be deemed to
have assumed and taken subject to all such liabilities.
ARTICLE 14
MEDIATION AND ARBITRATION
14.1 PROCEDURE. Except for any claim for injunctive relief, any
controversy, claim, or dispute arising under this Agreement ("Controversy")
shall be first submitted to mediation before a mediator jointly selected by
the Members within thirty (30) days
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of written demand therefor by a Member. In the event that the Members are
unable to agree upon the selection of a mediator, then the Members shall
request that Matthew Scott Finberg select a mediator to assist in the
resolution of the Controversy. Any mediator selected hereunder shall have
not less than five (5) years of experience in the area of businesses similar
in scope and nature to the business of the Company either as a business
owner, an attorney representing business owners, or a judge deciding issues
affecting such business owners, and shall not be related or affiliated in any
way with any of the parties to the Controversy. In the event an attempted
mediated resolution of any Controversy is not reached within one hundred
twenty (120) days of commencement of such efforts, then the Controversy shall
be submitted to the American Arbitration Association for resolution under its
expedited procedures provided that the arbitration decision shall be made by
a panel of three (3) arbitrators by majority vote. The American Arbitration
Association shall provide a list of arbitrators equal to 3 plus the number of
parties to the Controversy. Each party to the Controversy shall strike one
(1) name from the list and the remaining 3 shall be the arbitration panel.
14.2 AWARDS. Any arbitration award shall be final and binding on all
parties to the extent and in the manner provided by applicable state statute.
All awards may be filed with the clerk of one or more courts, state or
federal, having jurisdiction over the party against whom such award is
rendered or his property, as a basis of judgment and of the issuance of
execution for its collection.
14.3 GOVERNING LAW. Venue shall be in Colorado and Colorado law shall
govern.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 NOTICES. Any notice, demand, or communication required or
permitted to be given by any provision of this Operating Agreement shall be
deemed to have been sufficiently given or served for all purposes if
delivered personally to the party or to an executive officer of the party to
whom the same is directed or, if sent by registered or certified mail,
postage and charges prepaid, addressed to the Member's and/or Company's
address, as appropriate, which is set forth in this Operating Agreement.
Except as otherwise provided herein, any such notice shall be deemed to be
given three business days after the date on which the same was deposited in a
regularly maintained receptacle for the deposit of United States mail,
addressed and sent as aforesaid.
15.2 APPLICATION OF COLORADO LAW. This Operating Agreement, and the
application and interpretation hereof, shall be governed exclusively by its
terms and by the laws of the State of Colorado and specifically the Act.
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15.3 WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives
during the term of the Company, any right that he may have to maintain any
action for partition with respect to the property of the Company.
15.4 AMENDMENTS. This Agreement may not be amended except by the
unanimous written agreement of all of the Members.
15.5 EXECUTION OF ADDITIONAL INSTRUMENTS. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney and other instruments necessary to comply
with any laws, rules or regulations.
15.6 CONSTRUCTION. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the
plural, and the masculine general shall include the feminine and neuter
genders and vice versa; and the word "person" or "party" shall include a
corporation, firm, partnership, proprietorship or other form of association.
15.7 HEADINGS. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define,
or limit the scope, extent or intent of this Agreement or any provision
hereof.
15.8 WAIVERS. The failure of any party to seek redress for violation of
or to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation.
15.9 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided
by this Agreement are cumulative and the use of any one right or remedy by
any party shall not preclude or waive the right to use any or all other
remedies. Said rights and remedies are given in addition to any other rights
the parties may have by law, statute, ordinance or otherwise.
15.10 SEVERABILITY. If any provision of this Agreement or the
application thereof shall be invalid, illegal or unenforceable to any extent,
the remainder of this Operating Agreement and the application thereof shall
not be affected and shall be enforceable to the fullest extent permitted by
law.
15.11 HEIRS, SUCCESSORS AND ASSIGNS. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding upon and
inure to the benefit of the parties hereto, and to the extent permitted by
this Agreement, their respective heirs, legal representatives, successors and
assigns.
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15.12 CREDITORS. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any creditors of the Company.
15.13 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which shall constitute
one and the same instrument.
15.14 TAX LANGUAGE. The parties intend and agree that the provisions
hereof, including the provisions of Article 8 and 13, shall be and are hereby
amended to include any provision necessary for this Agreement to have
"substantial economic effect" for purpose of the Code and thereby allow this
Agreement to avoid containing a capital account deficit restriction
provision. To the extent possible, distributions will be made such that they
do not result in any capital account deficits.
CERTIFICATE
The undersigned hereby agree, acknowledge, and certify that the
foregoing Operating Agreement constitutes the Operating Agreement of The
Mountain Area eXchange LLC and they hereby set their hands as of the 11th day
of June, 1997.
COLORADO INTERNET COOPERATIVE ROCKY MOUNTAIN INTERNET, INC.
By: By:
--------------------------- -----------------------------
Name: Name:
--------------------- ------------------------
Title: Title:
-------------------- -----------------------
Date: Date:
--------------------- ------------------------
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EXHIBIT A
TO OPERATING AGREEMENT
OF
THE MOUNTAIN AREA EXCHANGE LLC
"ACT" shall mean the Colorado Limited Liability Company Act, Colo. Rev.
Stat. Section 7-80-102, ET SEQ.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member the
deficit balance, if any, in such Member's Capital Account as of the end of
the relevant Fiscal Year, after giving effect to the following adjustments:
(a) Credit to such Capital Account any amounts which such Member
is obligated to restore or is deemed to be obligated to restore pursuant to
the penultimate sentences of Regulations Sections 1.704-2(g)(1) and
1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(ii)(d)(6)
of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
"AFFILIATE" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by, or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of
the outstanding voting interests of such Person, (iii) any officer, director,
or general partner of such Person, or (iv) any Person who is an officer,
director, general partner, trustee, or holder of ten percent (10%) or more of
the voting interests of any Person described in clauses (i) through (iii) of
this sentence.
"AGREEMENT" shall mean this Operating Agreement.
"ARTICLES" means the Articles of Organization of the Company, as amended
from time to time.
"BUSINESS DAY" means a day of the year on which banks are not required
or authorized to close in Boulder, Colorado.
"CAPITAL ACCOUNT" means, with respect to any Member, the capital account
maintained for such Person in accordance with the following provisions:
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(a) To each Member's Capital Account there shall be credited such
Member's Capital Contributions, such Member's distributive share of Profits
and any items in the nature of income or gain which are specially allocated
to such Member, and the amount of any Company liabilities assumed by such
Member or which are secured by any Company Property distributed to such
Member.
(b) To each Member's Capital Account there shall be debited the
amount of cash and the Gross Asset Value of any Company Property
distributed to such Member pursuant to any provision of this Agreement,
such Member's distributive share of Losses and any items in the nature of
expenses or losses which are specially allocated to such Member, and the
amount of any liabilities of such Member assumed by the Company or which
are secured by any property contributed by such Member to the Company.
(c) In the event all or a portion of an interest in the Company is
transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent it
relates to the transferred interest.
(d) In determining the amount of any liability for purposes of
subsections (a) and (b) above, there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
the Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such Regulations. In the event the Managers shall
determine that it is prudent to modify the manner in which the Capital
Accounts or any debits or credits thereto (including, without limitation,
debits or credits relating to liabilities that are secured by contributed or
distributed property or that are assumed by the Company or the Members), are
computed in order to comply with such Regulations, the Managers may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Member pursuant to Section 13 hereof upon the
dissolution of the Company. The Managers also shall (i) make any adjustments
that are necessary or appropriate to maintain equality between the Capital
Accounts of the Members and the amount of Company capital reflected on the
Company's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate
modifications in the event unanticipated events (for example, the acquisition
by the Company of oil or gas properties) might otherwise cause this Agreement
not to comply with Regulations Section 1.704-1(b).
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"CAPITAL CONTRIBUTIONS" means, with respect to any Member, the amount of
money and the initial Gross Asset Value of any property (other than money)
contributed to the Company with respect by such Member. The principal amount
of a promissory note which is not readily traded on an established securities
market and which is contributed to the Company by the maker of the note (or a
Person related to the maker of the note within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of
any Member until the Company makes a taxable disposition of the note or until
(and to the extent) principal payments are made on the note, all in
accordance with Regulations Section 1.704-1(b)(2)(iv)(d)(2).
"CODE" shall mean the Internal Revenue Code of 1986 or corresponding
provisions of subsequent superseding federal revenue laws.
"COMPANY" shall refer to The Mountain Area eXchange LLC, a Colorado
limited liability company.
"DEPRECIATION" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such Fiscal Year, Depreciation shall be an
amount which bears the same ratio to such beginning Gross Asset Value as the
federal income tax depreciation, amortization, or other cost recovery
deduction for such Fiscal Year bears to such beginning adjusted tax basis;
PROVIDED, HOWEVER, that if the adjusted basis for federal income tax purposes
of an asset at the beginning of such Fiscal Year is zero, Depreciation shall
be determined with reference to such beginning Gross Asset Value using any
reasonable method selected by the Managers.
"FISCAL YEAR" means the Company's fiscal year, which shall be the
calendar year.
"GROSS ASSET VALUE" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such asset,
as reasonably determined by the contributing Member and the Managers,
provided that, if the contributing Member is a Manager, the determination
of the fair market value of a contributed asset shall be determined by
appraisal;
(b) The Gross Asset Values of all Company assets shall be adjusted
to equal their respective gross fair market
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values, as determined by the Managers as of the following times: (a) the
acquisition of an additional interest in the Company by any new or
existing Member in exchange for more than a DE MINIMIS Capital
Contribution; (b) the distribution by the Company to a Member of more than
a DE MINIMIS amount of Company Property as consideration for an interest
in the Company; and (c) the liquidation of the Company within the meaning
of Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED, HOWEVER, that the
adjustments pursuant to clauses (a) and (b) above, shall be made only if
the Managers reasonably determine that such adjustments are necessary or
appropriate to reflect the relative economic interest of the Members in
the Company;
(c) The Gross Asset Value of any Company asset distributed to any
Member shall be adjusted to equal the gross fair market value of such asset
on the date of distribution as determined by the distributee and the
Managers, provided that, if the distributee is a Manager, the determination
of the fair market value of the distributed asset shall be determined by
appraisal; and
(d) The Gross Asset Values of Company assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such
assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining
Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m);
PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant
to this subsection to the extent the Managers determine that an adjustment
pursuant to subsection to (b) above, is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to this subsection.
If the Gross Asset Value of an asset has been determined or adjusted pursuant
to subsection (a), (b), or (c) above, such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Profits and Losses.
"INTEREST" shall mean the relationship of a Member's interest in profits
and losses under Section 2.8 to the aggregate interest in profits and losses
under Section 2.8 of all Members, expressed as a percentage.
"MANAGERS" shall mean all of the Managers of the Company, or the Manager
of the Company if there is only one Manager. Until the next annual meeting
of the Company, the Managers are and shall be Chris Phillips, Barbara Dijker,
and Kevin Loud.
"MEMBER" shall mean each of the parties who executes a counterpart of
this Agreement as a Member and each of the parties
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<PAGE>
who may hereafter become Members of the Company. To the extent a Manager is
a Member, he will have all the rights of a Member with respect to such
Membership interest, and the term "Member" as used herein shall include a
Manager to the extent he is a Member.
"NATIONAL SERVICE PROVIDER" means an organization with a nationwide
network architecture of 45 megabits per second or greater over which
inter-network services are provided to the public.
"PERSON" means any individual, partnership, corporation, trust, or other
entity.
"PROFITS" and "LOSSES" means, for each Fiscal Year, an amount equal to
the Company's taxable income or loss for such year or period, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits and Losses
pursuant to this Section shall be added to such taxable income or loss;
(b) Any expenditures of the Company described in Code Section
705(a)(2)(b) or treated as Code Section 705(a)(2)(b) expenditures pursuant
to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing Profits or Losses pursuant to this Section shall be
subtracted from such taxable income or loss;
(c) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to Section 1.14 (b) or (c), the amount of such adjustment
shall be taken into account as gain or loss from the disposition of such
asset for purposes of computing Profits and Losses;
(d) Gain or loss resulting from any disposition of Company
Property with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Gross Asset Value
of the property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Gross Asset Value;
(e) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Fiscal Year
or other period;
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<PAGE>
(f) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be
taken into account in determining Capital Accounts as a result of a
distribution other than in liquidation of a Member's interest in the
Company, the amount of such adjustment shall be treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Profits or
Losses;
(g) Notwithstanding any other provision of this Section, any items
of income, gain, loss or deduction which are specially allocated to a
Member shall not be taken into account in computing Profits or Losses.
The amounts of the items of Company income, gain, loss, or deduction
available to be specially allocated pursuant to Sections hereof shall be
determined by applying rules analogous to those set forth in subsections (a)
through (f) above.
"PROPERTY" means all real and personal property acquired and operated by
the Company, and any improvements thereto, and shall include both tangible
and intangible property.
"PRO RATA" shall mean in proportion to the Members' Interests.
"REGULATIONS" means the Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as such regulations may be amended
from time to time (including corresponding provisions of succeeding
regulations).
"SECTION" when capitalized, shall mean a section of this Agreement,
unless the context otherwise requires.
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<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this registration statement of Rocky Mountain
Internet, Inc. on Amendment No. 1 to Form S-1 of our report dated February 27,
1998, with respect to the balance sheets of Rocky Mountain Internet, Inc. as of
December 31, 1997 and 1996, and the related statements of income, stockholders'
equity (deficit), and cash flows for the years then ended. We also consent to
the reference to us under the heading "Experts" in such registration statement.
BAIRD, KURTZ & DOBSON
Denver, Colorado
July 20, 1998
<PAGE>
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form S-1 of our report dated February 23, 1996 relating to the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows of Rocky Mountain Internet, Inc. for the year ended December 31, 1995.
We also consent to the reference to our firm under the captions "Experts",
"Summary Historical Financial Data--RMI" and "Selected Historical Financial
Data--RMI" in such Registration Statement.
/s/ McGLADREY & PULLEN, LLP
Charlotte, North Carolina
July 20, 1998
<PAGE>
The Board of Directors
Internet Communications Corporation:
We consent to the inclusion in the registration statement (No. 333-52731) on
Form S-1, as amended, of Rocky Mountain Internet, Inc. of our report dated
March 20, 1998, with respect to the consolidated balance sheet of Internet
Communications Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the eleven month period ended December 31, 1997, and to the
reference to our firm under the headings "Experts", "Summary Historical
Financial Data--ICC" and "Selected Historical Financial Data--ICC" in the
registration statement.
KPMG Peat Marwick LLP
Denver, Colorado
July 19, 1998
<PAGE>
The Board of Directors
Internet Communications Corporation:
We consent to the inclusion in Amendment No. 1 on Form S-1, of Rocky Mountain
Internet, Inc. of our report dated May 2, 1997, with respect to the consolidated
balance sheet of Internet Communications Corporation and Subsidiaries as of
January 31, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended January 31, 1997 and
1996, and to the reference to our firm under the headings "Experts", "Summary
Historical Financial Data--ICC" and "Selected Historical Financial Data--ICC"
in the registration statement.
HEIN + ASSOCIATES LLP
Denver, Colorado
July 19, 1998
<PAGE>
The Board of Directors
Application Methods, Inc. and e-SELL Commerce Systems, Inc.:
We consent to the inclusion in the registration statement (No. 333-52731) on
Form S-1, as amended, of Rocky Mountain Internet, Inc. of our report dated May
14, 1998 with respect to the combined balance sheet of Application Methods,
Inc. and e-SELL Commerce Systems, Inc. as of December 31, 1997, and the related
combined statements of operations and retained earnings, and combined cash flows
for the year then ended.
We also consent to the inclusion in the registration statement (No. 333-52731)
on Form S-1, as amended, of Rocky Mountain Internet, Inc. of our report dated
June 5, 1998 with respect to the balance sheet of Application Methods, Inc. as
of December 31, 1996, and the related statements of operations and retained
earnings, and cash flows for the year then ended.
In addition, we consent to the reference to our firm under the heading "Experts"
in the registration statement.
PETERSON SULLIVAN PLLC
Seattle, Washington
July 19, 1998
<PAGE>
The Board of Directors
Infohiway, Inc.:
We consent to the inclusion in the registration statement (No. 333-52731) on
Form S-1, as amended, of Rocky Mountain Internet, Inc. of our report dated
July 14, 1998 with respect to the balance sheet of Infohiway, Inc. as of
December 31, 1997, and the related statement of operations stockholders'
equity, and cash flows for the year then ended, and to the reference to our
firm under the heading "Experts" in the registration statement.
KPMG Peat Marwick LLP
Denver, Colorado
July 19, 1998
`
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
BALANCE SHEET DATED MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998 FOR ROCKY MOUNTAIN INTERNET INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,152,420
<SECURITIES> 0
<RECEIVABLES> 843,671
<ALLOWANCES> 226,857
<INVENTORY> 67,019
<CURRENT-ASSETS> 1,989,689
<PP&E> 3,970,573
<DEPRECIATION> 1,329,005
<TOTAL-ASSETS> 5,152,424
<CURRENT-LIABILITIES> 2,711,519
<BONDS> 0
0
0
<COMMON> 7,286
<OTHER-SE> 1,738,317
<TOTAL-LIABILITY-AND-EQUITY> 5,152,424
<SALES> 65,969
<TOTAL-REVENUES> 1,779,285
<CGS> 50,956
<TOTAL-COSTS> 652,086
<OTHER-EXPENSES> 2,379,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,826
<INCOME-PRETAX> (1,314,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,314,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,314,350)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
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