<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1998.
Registration No. 333-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ROCKY MOUNTAIN INTERNET, INC.
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(Name of small business issuer in its charter)
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DELAWARE 7375 84-1322326
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(State or 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 and telephone number of principal executive offices)
THE PRENTICE HALL CORPORATION SYSTEM, INC., 1013 CENTRE ROAD, WILMINGTON, DELAWARE 19805
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(Name and address of agent for service)
(800) 927-9800
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(Telephone Number of agent for service)
</TABLE>
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Copies to:
Peter J. Kushar Jeffrey Bartholomew
Rocky Mountain Internet, Inc. Futro & Trauernicht, LLC
1099 Eighteenth Street 707 Seventeenth Street
30th Floor Suite 2900
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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<S> <C> <C> <C> <C>
Common Stock $0.001 par value (3) 2,000,000 $9.9375 $19,875,000 $5,863.13
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (4) 1,365,000 9.9375 13,564,687.50 4,001.58
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (5) 111,500 9.9375 1,108,031.25 326.87
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock Purchase Warrants (6) 129,355 -- -- -0-
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- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (7) 129,355 9.9375 1,285,465.31 379.21
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (8) 621,000 9.9375 6,171,187.50 1,820.50
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (9) 310,500 9.9375 3,085,593.75 910.25
- ----------------------------------------- -------------- ----------------- -------------------- --------------
(Continued on following page
<PAGE>
Common Stock $0.001 par value (10) 62,100 9.9375 617,118.75 182.05
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (11) 31,050 9.9375 308,559.38 91.03
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (12) 2,162,289 9.9375 21,487,746.94 6,338.89
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock Purchase Warrants (13) 3,950,000 -- -- -0-
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Common Stock $0.001 par value (14) 3,950,000 9.9375 39,253,125.00 11,579.67
- ----------------------------------------- -------------- ----------------- -------------------- --------------
- ----------------------------------------- -------------- ----------------- -------------------- --------------
Total Registration Fee: 106,756,515.40 $31,493.18
- ----------------------------------------- -------------- ----------------- -------------------- --------------
</TABLE>
(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 SmallCap-TM- Market on May 13, 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. 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.
(6) To be offered and sold by certain of the Selling Securityholders.
(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.
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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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<PAGE>
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 __________, 1998
ROCKY MOUNTAIN INTERNET, INC.
4,079,355 COMMON STOCK PURCHASE WARRANTS
10,742,794 SHARES OF COMMON STOCK
This Prospectus relates 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.
This Prospectus also relates to 8,742,794 shares of Common Stock
(the "Selling Securityholder Shares"), of which approximately 2,783,289
shares are currently issued and outstanding and of which approximately
5,959,505 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 outstanding warrants. See "DESCRIPTION OF
SECURITIES." 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 4,079,355 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 8,742,794 shares identified
above as being offered by the Selling Securityholders. Of the Warrants that
may be offered and sold pursuant to this Prospectus, 1,365,000 are redeemable
by the Company at a cost of $0.25 per Warrant. The exercise price of those
warrants recently has been less than the market price per share of Common
Stock, and the Company believes that current owners of those
<PAGE>
Warrants may, therefore, have an incentive to exercise those Warrants and
purchase shares of Common Stock. As a means of encouraging the holders of
those Warrants to exercise such Warrants, the Company intends to call those
Warrants for redemption in accordance with their terms in the event that the
exercise price of those Warrants remains less than the market price per share
of Common Stock.
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 SECURITIES."
On May 1, 1998 the closing sale price of the Common Stock on the
NASDAQ SmallCap-TM- Market was $8.875 per share.
SEE "RISK FACTORS," BEGINNING ON PAGE 11, 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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<PAGE>
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. 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 Stock Market, 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 such
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.
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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<PAGE>
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
Company'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 "RISKFACTORS." The Company obtained certain industry data used in
this Prospectus from industry and government sources, and the Company has not
independently verified such data. As used in this Prospectus, unless the
context otherwise requires, the terms the "Company" and "RMI" refer to Rocky
Mountain Internet, Inc., a Delaware corporation, its predecessor, Rocky
Mountain Internet, Inc., a Colorado corporation, and their subsidiaries,
collectively. This Prospectus makes reference to trademarks of other
companies, which marks are the property of such companies.
THE COMPANY
The Company is an evolving and rapidly growing telecommunications
company whose objective is to provide a full range of Internet and
telecommunications services nationwide. See "THE COMPANY."
The Company's Internet access services include dial-up access,
dedicated high speed access, and other Internet related services provided to
business and individuals, including World Wide Web ("Web") services, data
services, and frame relay services. The Company's high speed, digital
telecommunications network provides Internet subscribers with direct access
to the full range of Internet applications and resources including E-mail,
World Wide Web sites, USENET newsgroups and FTP software. The Company gives
particular attention to providing exemplary customer service at competitive
prices. The Company has experienced rapid growth in its customer base,
reaching approximately 13,000 customers at the end of December 1997, up from
approximately 9,800 customers at the end of December, 1996 and approximately
4,000 in December, 1995.
The Company's objective is to become a nationwide resale provider of
communications services to other communications providers, businesses, and
individuals. In particular, the Company intends to add to its current
services such telecommunications services as traditional long distance
services (such as those currently provided by AT&T Corp., MCI Communications,
Inc. ("MCI"), Sprint Corporation ("Sprint"), and WorldCom, Inc. ("WorldCom").
In April, 1998, the Company began offering long distance telephone service by
means of Internet protocol ("IP") telephony, through its Rocky Mountain
Broadband, Inc. subsidiary ("RMB"), to persons located in the Denver,
Boulder, and Colorado Springs areas, with plans to offer such services
nationwide later in 1998. In April, 1998, the Colorado Public Utilities
Commission granted RMB's application to become a competitive local exchange
carrier (a "C-LEC"), which will permit the Company to provide local telephone
service and other services currently provided by U S West Communications,
Inc. ("U S West") in those portions of the State of Colorado in which U S
West is currently certified to provide such services. Also in April, 1998,
RMB entered into a carrier services agreement with Frontier Communications of
the West, Inc., an affiliate of Frontier Corporation, pursuant to which RMB
will be able to offer traditional long distance telephone services to
customers nationwide. The Company's current plans are to begin offering these
services beginning in July, 1998.
The Company also intends to build on its experience to expand its
presence by creating a distinctive brand identity and aggressively marketing its
existing and planned voice, data, and other
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<PAGE>
transmission products and services. The Company plans to build direct end
user relationships by developing strong distribution channels, providing
competitive pricing and superior network quality, and offering enhanced,
market-driven services to businesses and individuals. RMI intends to compete
in each of its targeted markets by providing its customers a comprehensive
high quality, consultative approach to Internet use, applications and
solutions, and quality after sales support. There can be no assurance,
however, that the Company will be able to meet all, or any, of its
objectives. The Company faces a number of substantial competitive, financial,
and other challenges to achieving its objectives. See "RISK FACTORS," "THE
COMPANY," and "REGULATION."
The Company is a Delaware corporation with its executive office
located in Denver, Colorado, and an operating facility located in Colorado
Springs, Colorado. The Company employs approximately 80 persons. The Company
was incorporated in October 1995, and is the successor to Rocky Mountain
Internet, Inc., a Colorado corporation, which was incorporated in 1994.
The Company completed its initial public offering (the "IPO") of
1,365,000 units of securities (the "Units") on September 5, 1996. Each Unit
consisted of one share of Common stock and one redeemable common stock
purchase warrant (each an "IPO Warrant") to purchase a share of Common Stock
at a price of $4.375, subject to adjustment. All of the shares of Common
Stock that may be purchased upon exercise of the IPO Warrants are included in
this Prospectus. See "DESCRIPTION OF SECURITIES."
The Company's address and phone number are: Rocky Mountain Internet,
Inc., 1099 18th Street, Suite 3000, Denver, Colorado 80202, telephone (303)
672-0700.
THE OFFERING
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Common Stock offered by:
The Company 2,000,000 shares (1)
Selling Securityholders 8,742,794 shares (2)
Common Stock Purchase Warrants
("Warrants") offered by
Selling Securityholders 4,079,355 Warrants (3)
Common Stock Outstanding Prior to this Offering 7,311,761 shares
Common Stock Outstanding After this Offering 15,271,266 shares (4)
NASDAQ SmallCap-TM- Market 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 2,783,289 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 5,959,505 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
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<PAGE>
offered and sold by certain Selling Securityholders. See "SELLING
SECURITYHOLDERS" and "DESCRIPTION OF SECURITIES."
(3) Includes 129,355 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 8,742,794 shares of Common Stock offered
by the Selling Securityholders. See "RECENT DEVELOPMENTS--CHANGE IN CONTROL"
and "DESCRIPTION OF SECURITIES."
(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," "RECENT DEVELOPMENTS--CHANGE IN CONTROL," and
"DESCRIPTION OF SECURITIES."
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."
SUMMARY FINANCIAL INFORMATION
The summary consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements of the
Company, and related Notes thereto, and the information included under
"SELECTED CONSOLIDATED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," included
elsewhere herein.
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<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
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STATEMENT OF OPERATIONS DATA:
Revenues $1,179,325 $ 3,281,579 $ 6,127,111
Gross Profit 858,956 2,177,912 4,066,796
Operating (loss) income (108,522) (2,281,194) (3,800,706)
Net (loss) income (128,794) (2,342,571) (4,152,853)
Net (loss) income per share (1) $ (0.04) $ (0.64) $ (0.76)
OTHER OPERATING DATA:
Approximate number of customers
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<PAGE>
at end of period 4,000 9,800 13,000
BALANCE SHEET DATA:
Cash and cash equivalents $ 274,661 $ 348,978 $ 1,053,189
Working capital (deficit) (186,865) 370,884 (209,003)
Total assets 924,603 5,540,167 5,082,119
Long term debt 524,437 1,134,380 904,627
Total stockholders' equity (deficit) 169,036 2,317,437 2,083,370
</TABLE>
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(1) Loss per share for the years ended December 31, 1995, 1996, and 1997
computed based on approximately 3,489,000, 3,715,000, and 5,530,000,
respectively, weighted average common shares outstanding for both basic and
diluted loss per share. See Note 1 to the Company's financial statements
included elsewhere in this Prospectus.
RECENT DEVELOPMENTS--CHANGE IN CONTROL
As of October 1, 1997, Mr. Douglas H. Hanson obtained effective
control of the Company by entering into a series of agreements, described
below, pursuant to which, among other things: (1) the Company 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 the Company's shareholders, 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), the Company
agreed to issue to Mr. Hanson 4,000,000 of the Warrants, which authorize 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, and
subject to the approval by the Company's shareholders at the 1998 Annual
Meeting of Shareholders (the "Meeting"), of an amendment to the Company's
Certificate of Incorporation to authorize an increase in the number of shares
of Common Stock that may be issued by the Company. The amendment was
subsequently approved at the Meeting; (4) the Company 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 Company's 1997 Stock Option Plan, which plan was approved by
the Company's shareholders at the Meeting. The options granted to Mr. Hanson
(the "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
will administer 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. 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; (5) Mr. Hanson obtained proxies
from 10 shareholders of the Company to vote an aggregate of 2,060,294 shares
of Common Stock held by such shareholders (which number includes shares of
Common Stock of which certain of such persons had the right to acquire
beneficial ownership within 60 days after October 1, 1997 through the
exercise of warrants, options, and other rights), of which an aggregate of up
to 789,700 can be voted for up to three years and the remainder expired at
the conclusion of the Meeting; 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 the Company. 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 the Company's shareholders of the proposals at
the Meeting was assured.
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<PAGE>
The ten shareholders 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 the Company, Mr. Loud is the Vice President - Operations of the Company,
and Mr. Roy J. Dimoff was the President, Chief Executive Officer, and a
director of the Company. Mr. Mara is the Vice President - Sales and Marketing
of the Company, and Mr. Brian Dimoff was the Vice President - Customer
Support Operations of the Company.
The NASDAQ Stock Market, Inc. adopted changes to the requirements
applicable to corporations qualifying its common stock for trading on the
NASDAQ SmallCap-TM- Market, among other changes, to increase the minimum net
tangible assets of such corporations to $2,000,000. These changes were
effective February 23, 1998. At December 31, 1997, the Company did not meet
these increased requirements. On March 12, 1998, a committee of the Company's
Board of Directors accelerated the vesting period of the Options to permit
the immediate exercise of the Options, 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, Mr. Hanson exercised 50,000 of the Hanson Warrants. The
result and purpose of the exercise of these Options and Warrants was to
increase the Company's net tangible assets to satisfy the NASDAQ Stock
Market, Inc.'s new requirements.
There is no agreement, arrangement, or understanding between Mr.
Hanson and the Company that requires Mr. Hanson to exercise any Options or
Warrants or to otherwise make any capital contributions to the Company.
Accordingly, in the event that the Company does not meet the NASDAQ Stock
Market, Inc.'s new requirements for minimum net tangible assets in the
future, there can be no assurance that the Company would be able to remedy
such non-compliance. See "RISK FACTORS--Volatility of Stock Prices; Penny
Stock Rules."
SUMMARY OF TRANSACTIONS
Following is a summary and description of certain provisions of the
Stock Purchase Agreement between Douglas H. Hanson and Rocky Mountain
Internet, Inc., 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 Rocky Mountain
Internet, Inc. 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 the Company.
The following summaries do not purport to be complete and are qualified in
their entireties by the full text of the respective agreements which are
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus forms a part. See "AVAILABLE INFORMATION."
STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND THE COMPANY
Pursuant to a Stock Purchase Agreement between Mr. Hanson and the
Company, dated as of October 1, 1997, the Company 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.
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In connection with the execution of this Stock Purchase Agreement,
Roy J. Dimoff resigned as the President, Chief Executive Officer, and a
director of the Company, and Gerald Van Eeckhout resigned as the Chairman of
the Board of Directors but remained as a director of the Company until
November 19, 1997. Contemporaneously, the then-existing Board of Directors of
the Company, in accordance with the Company'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 the Company. Mr. Hanson was elected as the Company'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 agreement, to be elected as directors of the Company. 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 the Company.
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 the Company. In
addition, as discussed below, Mr. Hanson entered into a Shareholders' Voting
Agreement and Irrevocable Proxy with Mr. Dimoff and six other shareholders
pursuant to which Mr. Hanson obtained the right to vote certain shares of
Common Stock beneficially owned by Mr. Dimoff and such other shareholders.
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 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 bank as defined in Section 3(a)(6) of the Exchange Act. The identity of
the bank has been omitted from this Prospectus, pursuant to the rules and
regulations of the Exchange Act, at the request of Mr. Hanson, and the
identity of the bank has been filed separately with the Commission. 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 payable in January
1998, 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 the
Company 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, the Company entered into an agreement with Mr. Hanson to register all
of the shares of Common Stock purchased in the above-described transactions,
i.e., those shares purchased from the Company and those purchased from
Messrs. Dimoff, Phillips, Welch, and Loud, the Hanson Warrants, and the
shares of Common Stock that may be
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issued pursuant to the exercise of the Hanson Warrants. The Company 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 the Company 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 Hanson Warrants subject thereto without
restriction. This Prospectus forms a part of the registration statement that
is the subject of the registration agreement between the Company and Mr.
Hanson.
WARRANT AGREEMENT
The Company 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 the Company's shareholders of an increase in the authorized
capital of the Company, 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 18 months from the
date of issuance of those Warrants. As of the date of the Warrant Agreement,
the Company did not have a sufficient number of shares of its Common Stock
authorized or reserved for issuance upon exercise of all of the Hanson
Warrants. At the Meeting, the shareholders of the Company approved 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 from
10,000,000 to 25,000,000. As a result of the approval of such amendment by
the Company's shareholders at the Meeting, the Company issued all of the
Hanson Warrants to Mr. Hanson on March 23, 1998. Also on March 23, 1998, Mr.
Hanson exercised 50,000 of the Hanson Warrants for an aggregate exercise
price of $95,000.
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 the Company of cash or non-cash dividends, reorganizations, and
other extraordinary events. See "DESCRIPTION OF SECURITIES."
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 shareholder to a person other than: (A) a member of such
shareholder'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 shareholder'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 shareholder's "immediate family." As of
May 1, 1998 the number of shares of Common Stock subject to these proxies
(including shares of which the grantors of the proxies had the right to
acquire within 60 days after October 1, 1997) was 789,700.
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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 are similar to those of the agreement
with Messrs. Phillips, Welch, and Loud, except that the proxies granted
pursuant to the agreement with these seven shareholders expired immediately
after the first meeting of shareholders held after October 1, 1997 at which
directors are elected, i.e., immediately after the Meeting.
Mr. Hanson disclaims beneficial ownership of the shares of Common
Stock as to which he has been granted proxies, including the shares of Common
Stock of which the grantors of those proxies may acquire beneficial ownership
through the exercise of warrants, options, and other rights.
PURPOSE OF THE TRANSACTIONS
Mr. Hanson's purpose in entering into the agreements described above
and acquiring the shares of Common Stock and Warrants pursuant thereto was to
acquire a significant equity position in the Company and to control the
management, policies, and activities of the Company. In connection with such
purchases, three of Mr. Hanson's nominees, including Mr. Hanson, were elected
to the five-member Board of Directors of the Company as contemplated by the
Stock Purchase Agreement between Mr. Hanson and the Company. 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 the Company." Mr. Hanson may determine to purchase or otherwise
acquire additional shares of Common Stock or other equity securities of the
Company by means of open-market or privately negotiated purchases, the
exercise of some or all of the remaining unexercised Hanson Warrants and/or
the Options, or otherwise and may determine to sell or otherwise dispose of
some or all of the shares of Common Stock that he now owns or may hereafter
acquire. In addition, he may determine to sell or otherwise dispose of some
or all of the Warrants or Options, to the extent that such securities may be
sold, transferred, or otherwise disposed of.
The amount, timing, and conditions of any such possible acquisition
or disposition of any shares of Common Stock or other equity securities of
the Company by Mr. Hanson will depend upon the continuing assessment by him
of all relevant factors, including without limitation the following: the
Company's business and prospects; economic conditions generally and in the
telecommunications industry particularly; stock market and money market
conditions; the availability and nature of opportunities to purchase or
dispose of the securities of the Company owned by Mr. Hanson; the
availability and nature of opportunities for Mr. Hanson to purchase
additional securities of the Company; and other plans and requirements of Mr.
Hanson.
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 shares of Common Stock or Warrants 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 in the following "Risk Factors" section.
HISTORY OF LOSSES; NEGATIVE WORKING CAPITAL; NO ASSURANCE OF
PROFITABILITY. The Company has incurred net losses since its inception, and
management expects to incur significant additional losses. Prospective
investors have limited operating and financial data about the Company upon
which to base an
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evaluation of the Company's performance and an investment in the shares of
Common Stock and Warrants offered hereby. For the years ended December 31,
1995, 1996, and 1997, the Company reported net losses of $128,794,
$2,342,571, and $4,152,853, respectively. At December 31, 1997, the Company
had a working capital deficit of $(209,003). For the three years ended
December 31, 1997, the Company reported cumulative cash used by operating
activities of $4,643,247. 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," "--Uncertain Adoption of Internet as Medium of Commerce and
Communications" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
NEED FOR ADDITIONAL CAPITAL. The proceeds of the sale of all of the
Selling Securityholder Shares will be received by the Selling
Securityholders. While the Company may receive cash from the exercise of
Warrants held by the Selling Securityholders, there can be no assurance that
the Company will derive any specific amount of proceeds from this offering.
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. For the three years ended December 31, 1997, the Company
reported cumulative cash used by operating activities of $4,643,247. There
can be no assurance that any additional capital 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 forgo a substantial interest in
its future revenues or dilute the equity interests of existing
securityholders, and a change in control of the Company may result.
The Company may receive cash from the exercise of Warrants held by
Selling Securityholders. 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). As a means of encouraging the owners of the IPO Warrants to
exercise those Warrants and, as a result, to increase the Company's cash and
net tangible assets, the Company intends to call the IPO Warrants for
redemption immediately in accordance with their terms. There can be no
assurance, however, that a significant number of owners of IPO Warrants, if
any, will elect to, or have the cash available to, exercise their IPO
Warrants. See "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES."
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. 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.
INTERNET ACCESS. The Company's current and prospective
competitors in the Internet 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 Internet service providers ("ISPs"), such as Verio Inc.
or one or more of its affiliates, and PSI; (ii) established on-line services
companies that currently offer Internet access, such as America Online, Inc.
("AOL"), CompuServe Corp. ("CompuServe"), and
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and Prodigy Services Company ("Prodigy"); (iii) computer hardware and
software and other technology companies, such as Microsoft Corporation
("Microsoft"); (iv) national long-distance telecommunications carriers, such
as AT&T (with AT&T WorldNet), MCI (MCI Internet), and Sprint (SprintNet), and
Qwest Communications International, Inc.; (v) regional telephone operating
companies ("RBOCs"); (vi) cable television system operators, such as Comcast
Corporation ("Comcast"), Tele-Communications, Inc. ("TCI"), and Time Warner
Inc. ("Time Warner"); (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 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 interexchange carriers ("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." Likewise, the Company's intention to provide IP telephony
services and local exchange carrier 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.
MANAGEMENT OF GROWTH. 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 to add telecommunications services in the future. Depending on
the nature of the Company's intended expansion and the business area into
which it may expand, 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 could adversely affect the
Company's business, results of operations, financial condition, and cash flow.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. As part of its
long-term business strategy, the Company intends to pursue 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
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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. See "THE
COMPANY--The Company's Strategy."
SECURITY RISKS. A risk faced by all Internet service providers,
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 firewalls 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.
RISK OF SYSTEM FAILURE. The operations of the Company are dependent
upon, among other things, its ability to deliver high quality uninterrupted
access to the Internet and other services provided or intended to be provided
by the Company. Any system failure that causes excessive interruptions in the
Company's operations could have a material adverse effect on the Company. As
the Company expands its network and data traffic grows, there will be
increased stress placed upon network hardware and traffic management systems.
Any of a number of potential hardware failures at the Company's operations
center or any of its POPs, as well as failure caused by fire, floods, or
other natural causes, power losses, or telecommunications failures could
result in significant interruptions of the Company's services and could have
a material adverse effect on the business, financial conditions, results of
operations, or cash flow of the Company. The Company has, from time to time,
experienced failures relating to individual POPs.
Although the Company maintains in effect casualty insurance that
would fund most of the cost of replacing equipment lost to fires, floods, or
similar natural causes, such insurance would not protect the Company from
loss of customers and business reputation that could result from such an
event. In addition, some potential losses may not be adequately covered by
such policies. Equipment owned or leased by third parties and co-located at
the Company's POPs is not covered by the Company's insurance policies.
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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
rate of growth of the Company.
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,
which has experienced rapid growth. 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 local access points
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 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
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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.
GOVERNMENT REGULATORY POLICY RISKS. The telecommunications businesses
in which the Company intends to engage 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 Telecommunications Act of 1996 (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.
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 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 report states that, to the extent the FCC concludes that certain forms of
phone-to-phone 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
-16-
<PAGE>
reasonable that they" become subject to the same regulations, including the
requirement to pay access fees to a LECs and to contribute to "universal
service" subsidies. See "THE COMPANY--The Company's Strategy" and
"REGULATION."
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. The Company and third parties with which the Company does
business rely on numerous computer programs in their day to day operations.
The Company has begun the process of identifying computer systems that could
be affected by the Year 2000 issue but has not estimated the costs of
addressing the Year 2000 issue as it relates to Company's internal hardware
and software, as well as third party computer systems with which the Company
interacts. 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 could have a significant adverse impact on the Company'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, particularly Douglas H. Hanson, its President, Chief Executive
Officer, and Chairman of the Board of Directors. The loss of Mr. Hanson's
services could have a detrimental effect on the Company. Key employees'
employment agreements do not significantly limit their ability to compete
with the Company following termination. The Company does not maintain key
person life insurance on Mr. Hanson. The Company's success will also depend
on its ability to attract and retain other qualified management, marketing,
technical, and sales executives and personnel.
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 will 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.
PRODUCT DEVELOPMENT; TECHNOLOGY CHANGE. 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
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<PAGE>
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.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK.
The law relating to the liability of ISPs and online 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 U.S. 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
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 U.S. 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 fow. In addition, 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 U.S. and internationally.
A number of countries are considering content restrictions based on such
factors as political or religious views expressed, and pornography or
indecency.
VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The Company's Common
Stock is qualified for trading on the NASDAQ SmallCap-TM- Market. The prices
at which the Company's Common Stock has been traded have varied considerably
since the Common Stock was qualified for trading on the NASDAQ SmallCap-TM-
Market.
The board of directors of the NASDAQ Stock Market, Inc. recently
approved amendments that increased to $2,000,000 the minimum net tangible
assets required for all companies whose securities are qualified for trading
on the NASDAQ SmallCap-TM- Market. In addition, the Company's common Stock
must have a minimum bid price of $1 per share to maintain its qualification
for trading on the NASDAQ
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<PAGE>
SmallCap-TM- Market. The new requirements went into effect on February 23,
1998. At December 31, 1997, the Company did not meet these increased
requirements. On March 12, 1998, a committee of the Company's Board of
Directors accelerated the vesting period of the Options to permit the
immediate exercise of the Options, 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, Mr. Hanson exercised 50,000 of the Hanson Warrants. The
result and purpose of the exercise of these Options and Warrants was to
increase the Company's net tangible assets to satisfy the NASDAQ Stock
Market, Inc.'s new requirements. There is no agreement, arrangement, or
understanding between Mr. Hanson and the Company that requires Mr. Hanson to
exercise any options or Hanson Warrants or to otherwise make any capital
contributions to the Company. Accordingly, in the event that the Company does
not meet the NASDAQ Stock Market, Inc.'s new requirements for minimum net
tangible assets in the future, there can be no assurance that the Company
would be able to remedy such non-compliance.
If the Company's Common Stock were no longer qualified for trading
on the NASDAQ SmallCap-TM- Market, it 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 the NASDAQ system). Unless an exemption from
the definition of a "penny stock" were available, any broker engaging in a
transaction in the Company'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
Company'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 Company's Common Stock because of the need to comply with the "penny
stock" rules, thereby making it more difficult for purchasers of Common Stock
offered hereby to dispose of their shares.
RISK OF LACK OF ESTABLISHED TRADING MARKET FOR COMMON STOCK AND
WARRANTS. Trading in the Company's Common Stock and 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 Company's Common Stock.
Purchasers of the Company's Common Stock may, therefore, find it difficult to
dispose of these securities.
CONTROL BY MANAGEMENT. As the result of a recent investment in the
Company by Mr. Douglas H. Hanson, its President, Chief Executive Officer, and
Chairman of the Board of Directors, the Company issued and sold 1,225,000
shares of its Common Stock and agreed to issue the Warrants to purchase an
additional 4,000,000 shares of Common Stock to Mr. Hanson, subject to the
approval by the Company's shareholders of an increase in the number of shares
of Common Stock that the Company is authorized to issue. In addition, the
Company granted options to Mr. Hanson to purchase 600,000 shares of Common
Stock. Mr. Hanson also purchased an aggregate of 275,000 shares of Common
Stock from four existing shareholders of the Company and has retained proxies
from 3 shareholders to vote an aggregate of 789,700 shares of Common Stock
(which number included shares that such persons had the right to acquire
pursuant to the exercise of options held by them). As a result of these
transactions, Mr. Hanson beneficially owns approximately 56.3% of the Common
Stock of the Company, as beneficial ownership is determined in accordance
with federal securities laws. The officers and directors of the Company as a
group beneficially own approximately 59.5% of the Company's Common Stock. As a
result, these shareholders 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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<PAGE>
SHARES AVAILABLE FOR ISSUANCE. The Company has 25,000,000 shares of
Common Stock and 750,000 shares of Preferred Stock authorized, of which
7,311,761 shares of Common Stock and no shares of Series A Preferred Stock
were outstanding on April 15, 1998. Another 845,667 shares of Common Stock
were reserved for issuance pursuant to the Company's stock option plans and
other stock options granted, and 6,594,422 have been reserved for issuance
upon exercise of an aggregate of various warrants, including the IPO Warrants
and the 3,950,000 Hanson Warrants remaining outstanding and pursuant to
various anti-dilution provisions contained in the such warrants and the
options described above. Accordingly, there will be approximately 10,248,150
shares of Common Stock and 750,000 shares of Preferred Stock that may be
issued in the future at the discretion of the Company's Board of Directors.
The Preferred Stock may be directed to be issued by the Board of Directors in
its discretion without shareholder 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 Company 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
Company.
In addition, the shareholders of the Company approved, at the Meeting,
an amendment to the Company's Certificate of Incorporation to effect a
reverse exchange (the "Reverse Stock Split") of the Company'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 Meeting, with the exact ratio of the Reverse Stock Split (the "Split
Ratio") 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, 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.
RESALES OF RESTRICTED SHARES. There are currently outstanding 1,952,000
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 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
(approximately 73,118) or (ii) the average weekly trading volume in the
Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed, provided certain
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
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<PAGE>
years may resell such shares without compliance with the foregoing
requirements. Sales of substantial amounts of the Common Stock in the public
market following this offering or the perception that such sales might occur
could adversely affect the then prevailing market price for the Common Stock.
NO DIVIDENDS. The Company has not paid any dividends and does not
intend to pay dividends on the Common Stock in the foreseeable future.
STATE LAW LIMITATIONS ON DIRECTOR LIABILITY FOR MONETARY DAMAGES. The
Company's Certificate of Incorporation substantially limits the liability of
the Company's directors to its shareholders for breach of fiduciary or other
duties to the Company.
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 Company.
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 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
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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 herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumption that the Company will continue to design,
market and provide new services on a timely basis, that competitive
conditions in the Internet connection service market will not change
adversely or materially, that demand for the Company's Internet connection
and other services will gain strength, that the market will accept the other
services that the Company intends to offer, that the Company will retain and
add qualified sales, administrative, and service personnel and consultants,
that the Company's forecasts will accurately anticipate market demand, and
there will be no adverse material change in the Company's operations or
business. The foregoing assumptions are based on 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.
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock and the IPO Warrants are traded on the NASDAQ
SmallCap-TM- Market 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
</TABLE>
The Company has never paid a cash dividend to shareholders, 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
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<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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. The information presented below does not give effect to
the exercise of any of the Warrants or any outstanding stock options.
<TABLE>
<CAPTION>
December 31
1997
-----------
<S> <C>
Long-term Debt:
Capital lease obligations and other long-term debt $ 904,627
-----------
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value; 790,000 shares authorized;
40,000 shares issued and outstanding $ 40
Common stock; $0.001 par value; 10,000,000 shares authorized;
6,677,846 shares issued and outstanding 6,737
Additional paid in capital 9,284,720
Retained earnings (accumulated deficit) (6,747,050)
Unearned compensation (383,077)
Treasury Stock, at cost (78,000)
-----------
Total stockholders' equity 2,083,370
-----------
Total capitalization $ 2,987,997
-----------
-----------
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1994 1995 1996 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 253,806 $1,179,325 $ 3,281,579 $ 6,127,111
Gross profit 170,187 858,956 2,177,912 4,066,796
Operating (loss) income (40,720) (108,522) (2,281,194) (3,800,706)
Net (loss) income (44,086) (128,794) (2,342,571) (4,152.853)
Net (loss) income per share (1) $ (.01) $ (.04) $ (.64) $ (.76)
OTHER OPERATING DATA:
Approximate number of subscribers at end of period 1,300 4,000 9,800 13,000
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 36,470 $ 274,661 $ 348,978 $ 1,053,189
Investments 0 0 1,356,629 0
Working Capital (Deficit) (174,029) (186,865) 370,884 (209,003)
Total Assets 249,818 924,603 5,540,167 5,082,119
Long Term debt 51,745 524,437 1,134,380 904,627
Total Stockholders' (deficit) equity (43,143) (169,036) 2,317,437 2,083,370
</TABLE>
(1) Loss per share computed based on 3,489,000 Shares outstanding for 1994 and
1995, 3,715,000 shares outstanding for 1996, and 5,530,000 shares outstanding
for 1997. See Note 1 to the Company's financial statements included elsewhere in
this Prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company
as of the dates and for the periods indicated. The income statement data for
the years ended December 31, 1996 and 1997, and the balance sheet data as of
such dates have been derived from financial statements of the Company which
have been included herein and which have been audited by Baird, Kurtz, and
Dobson, independent public accountants. These data should be read in
conjunction with the Company's financial statements and related notes
included elsewhere in this Prospectus.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,281,579 $ 6,127,111
Gross profit 2,177,912 4,066,796
Operating (loss) income (2,281,194) (3,800,706)
Net (loss) income (2,342,571) (4,152,853)
Net (loss) income per share (1) (.64) (.76)
OTHER OPERATING DATA:
Approximate number of subscribers at
end of period 9,800 13,000
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 348,978 $ 1,053,189
Investments 1,356,629 0
Working Capital (Deficit) 370,884 (209,003)
Total Assets 5,540,167 5,082,119
Long Term debt 1,134,380 904,627
Total Stockholders' equity 2,317,437 2,083,370
</TABLE>
(1) Loss per share computed based on 3,715,000 Shares outstanding for 1996
and 5,530,000 shares outstanding for 1997. See Note 1 to the Company's
financial statements included elsewhere in this Prospectus.
The Company's common stock is traded on the Nasdaq SmallCap-TM- Market.
The Directors of the Nasdaq Stock Market, Inc. changed Nasdaq listing
requirements. A minimum maintenance standard of two million dollars in net
tangible assets is included in the new listing requirements. As of December
31, 1997, the Company's net tangible assets are approximately $388,000 below
the $2,000,000 minimum requirement for listing. On March 12, 1998, Mr.
Douglas H. Hanson exercised 408,615 of $1.00 options (each option is
exercised for one share of common stock) and on March 23, 1998 Mr. Hanson
exercised 50,000 warrants (each warrant was exercised at a price of $1.90 for
one share of common stock) resulting in a total infusion of equity of
$503,615. Listed below are the proforma balance sheets reflecting the effect
of the infusion of the equity based on the December 31, 1997 balance sheet,
assuming the transaction occurred as of that date. The proforma balance sheet
is not indicative of the financial position of the Company as of March 31,
1998.
-25-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, Investment Proforma
1997 Giving Effect
to Investment
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $1,053,189 $503,615 $1,556,804
Trade receivables, less allowance for
doubtful accounts of $176,000 672,094 672,094
Inventories 46,945 46,945
Other 112,891 112,891
---------------------------------------------------
$1,885,119 $503,615 $2,388,734
Property and equipment
Equipment 2,927,016 2,927,016
Computer software 218,801 218,801
Leasehold improvements 190,235 190,235
Furniture, fixtures, and office equipment 431,814 431,814
---------------------------------------------------
$3,767,866 $ $3,767,866
-
Less accumulated depreciation and amortization 1,118,217 1,118,217
---------------------------------------------------
$2,649,649 $ $2,649,649
-
Other assets
Customer lists 471,096 471,096
Deposits 76,255 76,255
---------------------------------------------------
$ 547,351 $ $ 547,351
-
---------------------------------------------------
$5,082,119 $503,615 $5,585,734
---------------------------------------------------
---------------------------------------------------
</TABLE>
-26-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, Investment Proforma
1997 Giving Effect
to Investment
(Unaudited)
<S> <C> <C> <C>
Current liabilities
Current maturities of long-term debt and
obligations under capital leases $ 609,390 $ 609,390
Accounts payable 581,366 581,366
Deferred revenue 345,857 345,857
Accrued payroll and related taxes 182,569 182,569
Other accrued expense 374,940 374,940
----------------------------------------------------
Total current liabilities $ 2,094,122 $ $ 2,094,122
-
Long-term debt and obligations under capital leases, less
current maturities $ 904,627 $ $ 904,627
-
----------------------------------------------------
Stockholders equity
Preferred stock, $.001 par value; authorized 790,000 $ 40 $ 40
shares; issued and outstanding 12/31/97, 40,000 shares
Common stock, $.001 par value; authorized 10,000,000 6,737 459 7,196
shares; issued; 12/31/97 6,736,889; and outstanding
12/31/97 6,677,846 shares.
Additional paid-in capital 9,284,720 503,156 9,787,876
Accumulated deficit (6,747,050) (6,747,050)
Unearned compensation and other (383,077) (383,077)
----------------------------------------------------
$ 2,161,370 $503,615 $ 2,664,985
Treasury stock, at cost, Common: 59,043 shares (78,000) (78,000)
----------------------------------------------------
$ 2,083,370 $ 2,586,985
----------------------------------------------------
$ 5,082,119 $503,615 $ 5,585,734
----------- -------- -----------
----------- -------- -----------
Tangible Net worth $ 1,612,274 $ 2,115,889
</TABLE>
Note: December 31, 1997 financial statement numbers are derived from audited
financial statements contained in this Prospectus.
YEAR 2000 ISSUES
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
-27-
<PAGE>
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.
NATIONAL INTERNET PROVIDER
Effective March 11, 1998, the Company entered into an agreement with
PSINet, Inc., (refer to Exhibit 10.13: PSINet Wholesale Usage Agreement) whereby
the Company obtains access to PSINet's network to provide the Company's
customers access to dialup and "switched" network access in over 235 locations
nationally. The agreement allows the Company to expand service nationally to
provide dial up and ISDN services in each of the locations serviced by PSINet.
Customers will receive technical support, e-mail services, news services, etc.,
from the Company's servers, providing a "private label" solution to the
anticipated new customer base.
IP TELEPHONY
The Company is expanding its communication services in order to provide
a more complete product offering to its customers. The Company has announced its
intent to provide long distance services using Internet Protocol ("IP")
telephony at $0.07 per minute within the continental United States to customers
in Denver, Boulder, and Colorado Springs, Colorado areas. The Company filed an
application in March, 1998 with the Colorado PUC to become a Competitive Local
Exchange Carrier ("C-LEC"). A wholly owned subsidiary, Rocky Mountain Broadband,
Inc., has been formed for providing these services.
FLAT RATE DIALUP ACCESS
Effective November 4, 1997, the Company introduced a flat rate Dial Up
service offering in the Denver, Colorado and Boulder, Colorado markets at the
rate of $24.95 per month. In January, 1998, the Company expanded flat rate
pricing to the Colorado Springs and Pueblo, Colorado markets. Additionally, the
flat rate was reduced to $19.95 in order to meet competitive offerings in the
market. As part of the new service offering, the Company has introduced enhanced
data communication rates using the K 56 Flex technology.
TERMINATION OF THIRD PARTY AGREEMENT
The Company and Zero Error Networks ("ZEN"), a third party with which
the Company had contracted as described below under "Dial-Up Service," signed a
"TERMINATION AGREEMENT" effective July 3, 1997, which affects four points of
presence (POP) located in Pueblo, Hayden, Leadville, and Alamosa, Colorado.
These POPs have been operated under a revenue and expense sharing contract
between the two parties. The Termination Agreement calls for ZEN to operate the
Hayden, Leadville, and Alamosa, Colorado locations and receive the rights to the
customer base currently existing in those locations while the Company will
operate and maintain the customer base in Pueblo and surrounding areas. The
transition occurred during the months of July, August, and December of 1997. The
Company has contracted for a location (POP site) in Pueblo and installed
approximately $35,000 of equipment therein. The Termination Agreement includes a
limited non-compete clause wherein neither party may directly solicit the
existing customer base of the other for a period of one year. The net effect of
the Termination Agreement on net income is expected to be neutral in the short
run and have a positive long term result. The Pueblo revenues are expected to
grow at a faster rate than the other three POP's combined and the Company plans
to focus additional effort to selling dedicated access in the Pueblo market.
However, there can be no assurance that the Company's efforts will be successful
or that the long-term effects of the Termination Agreement on net income will be
positive.
-28-
<PAGE>
ACQUISITIONS
Effective January 22, 1997, the Company acquired from VR-1, Inc.
dial-up and dedicated access subscribers and other assets, which VR-1, Inc. had
been operating under the service mark "ONE", for consideration consisting of
$150,000 of cash and 116,932 shares of the Company's common stock.
Three acquisitions occurred in late 1996 and early 1997 pursuant to the
Company's strategy to expand through acquisitions as well as internal growth.
CompuNerd, Inc., a small Colorado Springs based Web services company was
acquired as of November 1, 1996 for consideration consisting of $70,478 and
30,000 shares of common stock. The Information Exchange ("IE"), a Denver based
voice messaging business was acquired effective December 1, 1996 for 52,723
shares of common stock. IE focuses on voice messaging to commercial customers.
Its acquisition further expands the Company's ability to provide a full
complement of services through the Internet. Several affiliates of the Company
were equity holders in The Information Exchange. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
The Company may experience fluctuations in operating results in the
future caused by various factors, some of which are outside of the Company's
control, including general economic conditions, specific economic conditions in
the Internet access industry, user demand for the Internet, capital expenditures
and other costs relating to the expansion of operations, the timing and number
of customer subscriptions, the introduction of new services by the Company or
its competitors, the mix of services sold and the mix of distribution channels
through which those services are sold. In addition, the Company's expenses,
including but not limited to obligations under equipment leases, facilities
leases, telephone access lines, and Internet access are relatively fixed in the
short term, and therefore variations in the timing and amount of revenues could
have a material adverse effect on the Company's results of operations.
RESULTS OF OPERATIONS
REVENUES
Revenues are generated by a variety of Internet related activities that
include 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 the Company's various
services. The following table provides information regarding amounts of revenues
in the foregoing categories for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 %Change
<S> <C> <C> <C>
REVENUE
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 519,551 387,067 -25%
Other 193,856 281,396 45%
---------- ----------
Total $3,281,579 $6,127,111 87%
</TABLE>
In 1997, the Company's revenue grew 87% compared to the year ended December 31,
1996. The total
-29-
<PAGE>
number of customers grew from 9,800 to 13,000 from during the same periods
representing an increase of 29%. Revenues exclusive of Equipment Sales grew
at 108%. 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. Customer count was also
adversely affected by approximately 1,050 resulting from the termination of
the contract with Zero Error Networks. An additional 390 customers from the
Hayden POP were transferred to Zero Error Networks effective January 1, 1998.
DIAL-UP SERVICE
The Company's dial-up service strategy is to provide high quality
service with few busy signals. In the past the Company was not prepared to offer
flat rate pricing for unlimited access service, however, on November 4, 1997,
the Company announced a flat rate offering to the Denver, Colorado and Boulder
Colorado markets. Subsequently, the Company has added flat rate service in
Colorado Springs, Colorado 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. The remaining contracts with other third
parties provide an higher percentage of lower rate services. Effective with the
December 1997 billings, most Denver and Boulder, Colorado area customers who
were on payment plans over $19.95 per month were converted to the new $19.95
flat rate service, resulting in a lower average billing rate.
<TABLE>
<CAPTION>
For the Three Months Ended
Mar Jun Sep Dec Mar Jun Sep Dec
1995 1995 1995 1995 1996 1996 1996 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
Mar Jun Sep Dec
1997 1997 1997 1997
<C> <C> <C> <C>
$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 have been split approximately
evenly between commercial and residential customers throughout 1995 and 1996 and
1997 based on customer count. Based on revenue the split between commercial and
residential customers is 35% to 65% respectively. Dial-Up revenues increased
from $1,465,269 to $2,359,482 or 61% for the year ending December 31, 1996 as
compared to the year ending December 31, 1997.
RMI has established business alliances through contracts with three
locally-based unrelated parties for the purpose of providing Internet services
in secondary markets in the State of Colorado. The services are provided under a
written contract that provides for the locally-based party to provide equipment
and marketing services while RMI provides Internet access and administrative
services. Dial-up revenues based on these contracts generated $354,100 in
revenues in 1996 and $467,700 in revenues in 1997 for an increase of 32%. The
Company 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
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<PAGE>
contracts began 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 was terminated. Under the
termination agreement, the Company will operate the Pueblo POP as a Company
only location and ZEN will operate Alamosa, Leadville, and Hayden locations.
The similar contract in Grand Junction, Colorado was terminated by the
Company 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. The Company 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), Integrated Services Digital Network 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. The
Company 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 the Company's connection.
Dedicated business has grown based principally on ISDN and high speed
circuits (56K, DS-1, and DS-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 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 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 7 10 10 11 16 25 29 30
Co-location 0 1 4 4 6 4 5 6
Service Mar 31 Jun 30 Sep 30 Dec 31
1997 1997 1997 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 65 84 99 123
Co-location 11 12 11 21
</TABLE>
WEB SERVICES
Web services revenues are composed 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 to
sites by
-31-
<PAGE>
their targeted audiences. The following is a summary of the number of Web
hosting customers as of the dates indicated:
<TABLE>
<CAPTION>
Mar Jun Sep Dec Mar Jun Sep Dec 1996
1995 1995 1995 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341
Mar Jun Sep Dec
1997 1997 1997 1997
<C> <C> <C> <C>
418 424 417 428
</TABLE>
Web site hosting accounted for $239,700 in 1996 and $478,500 in 1997 of
revenue for an increase of 100%. The increase resulted 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 increased from $173,800 for 1996 to $563,500 for
1997 for an increase of 224%. The Company increased the size of the Web
production department as well as provided customers more complex applications.
The Company's direct sales force has focused 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 $519,551 in 1996 to $387,100 in 1997 or a
25% reduction. 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 is 77% for 1996 and 69% for 1997. In December, 1996, the
Company installed a DS-3 network connecting Boulder, Colorado Springs, and
Denver locations utilizing Cascade switches. This is a large capacity network
providing reliable high-speed connections for a wide range of customer needs.
This network is currently underutilized. As the network becomes fully utilized,
the Company anticipates that it will realize significant economies of scale
resulting in increased margins.
GENERAL, SELLING AND ADMINISTRATIVE
SALES AND MARKETING EXPENSES consisting of advertising, promotion,
attendance at trade shows, printing, and finders fees increased from $211,512 in
1996 to $ 286,267 in 1997 or 35%. The Company 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 results from having a fully staffed sales department
throughout 1997 while the department was partially staffed in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES increased from approximately
$3,642,600 in 1996 to approximately $6,611,000 in 1997 or 81%. General and
administrative costs consist of personnel
-32-
<PAGE>
(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 the year ended December
31, 1996 to $3,024,000 for the year ended December 31, 1997 (not including sales
and marketing personnel compensation discussed above). The Company had 67
employees at the end of 1996 and 55 employees at the end of 1997 in all areas of
the Company including administration, technical support, development, and senior
management (excluding sales and marketing). The 1997 total expense includes
$127,700 of compensation expense in regards to options granted to Mr. Douglas H.
Hanson as discussed elsewhere in this Prospectus.
Facilities rent expense was $172,440 for 1996 and increased 156% to
$441,440 in 1997. This increase is principally the result of a move in late 1996
to new corporate headquarters which consists of leased office space of
approximately 19,500 square feet space including a data center comprised of
1,200 square feet. The Company continues to occupy offices in Colorado Springs
for staff performing Dial-In technical support, customer service, and sales
functions. The Company's former offices in Denver at 1800 Glenarm have been sub
leased 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 sub lease rate and the
existing lease rate.
The Company 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. The Company 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 regards to the investments by Mr. Hanson, and negotiations in
regards to the terminations of employees, and preparation of the proxy
statement.
Outside services, which includes temporary to hire staff and
professional services, increased 191% from $150,100 to $437,700 from 1996 to
1997. The Company 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
Company employee.
During 1997, the Company 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 $45,113, a write down of
inventory for sale in the amount of $23,031, and expense of $318,000 relating to
termination of employees, and $107,233 of legal expenses relating to the
terminations and defense of the lawsuit discussed under the caption.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has experienced
negative operating cash flow in 1997. The Company's operations used net cash of
approximately $3.3 million for the year ended December 31, 1997. The cash used
by operating activities is primarily attributable to the Company's continued
expansion of its facilities and employee base in anticipation of continued
growth in revenues.
-33-
<PAGE>
Between December 31, 1996, and December 31, 1997, total assets decreased by
$458,048 from $5,540,167 to $5,082,119. The change is attributable to various
increases and decreases as follows:
<TABLE>
<CAPTION>
Balance at Balance at Increase
12/31/96 12/31/97 (Decrease)
<S> <C> <C> <C>
Cash & investments $1,705,607 $ 1,053,189 $(652,418)
Trade receivables 518,827 672,094 153,267
Inventory 91,047 46,945 (44,102)
Other 143,753 112,891 (30,862)
Equipment & other fixed assets 3,258,000 3,767,866 509,866
Accumulated depreciation and
amortization (403,023) (1,118,217) (715,194)
Customer lists 145,444 471,096 325,652
Deposits 80,512 76,255 (4,257)
Totals $5,540,167 $ 5,082,119 $(458,048)
</TABLE>
The decrease in Cash and investments is due to the use of cash in
operations, trade receivables increased due to larger sales volumes, inventory
fluctuates based on customer installations and changing lead times for products,
equipment and other fixed assets increased based on equipment required for
service expansion and internal computer requirements, accumulated depreciation
and amortization increased based on depreciation and amortization of assets, and
customer lists increased due to the acquisition of the assets from VR-1 in
January, 1997.
The changes in the liabilities and stockholders' equity account from
1996 to 1997 are as follows:
<TABLE>
<CAPTION>
Balance at Balance at Increase
12/31/96 12/31/97 (Decrease)
<S> <C> <C> <C>
Notes payable $ 4,250 $ -0- $ (4,250)
Current maturities of long term debt and
capital lease obligations 451,823 609,390 157,567
Accounts payable 425,160 581,366 156,206
Deferred revenue 218,121 345,857 127,736
Accrued payroll & related taxes
528,160 182,569 (345,591)
Accrued expenses 460,836 374,940 (85,896)
Long-term debt and capital lease
obligations 1,134,380 904,627 (229,753)
Stockholders' equity 2,317,437 2,083,370 (234,067)
Totals $5,540,167 $5,082,119 $(458,048)
</TABLE>
The note payable was retired during the year, current maturities of
long term debt and capital lease obligations increased due to new leases and
existing lease amortization payments having a smaller interest expense (more of
each payment is applied to principal), accounts payable reflects the growth in
the Company, deferred revenues relates to customers who prepaid their accounts
for specific periods of time and credits on customers accounts, accrued payroll
and related taxes decreased year over year as the final payroll for 1997 was
paid on 12/31/97 wherein it was paid on the first work day of 1997 for 1996,
accrued expenses are attributable primarily to deferred office rent, preferred
stock dividend payable, and
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<PAGE>
third parties under contractual agreements pending cash collections, long
term debt and capital lease obligation decreased due to certain leases
approaching the end of the lease term, and a reduction in equity is a
combination of the current year loss and an offset of additional capital
investment in the Company.
During 1997, the Company substantially drew down a line of credit for
$500,000 for working capital uses. This credit line was secured by a pledge of a
$300,000 treasury bill repurchase agreement and by the Company's accounts
receivable. In October, the Company 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. The Company's office lease is also secured by a pledge of a money market
fund of $250,000.
The Company has had a series of financings to provide the funds during
the initial growth phases when earning have been negative. These financings are:
a convertible debenture offering in late 1995 and early 1996 that brought in
$490,000 (the debentures were converted to common stock in October, 1996), a
preferred stock offering in mid-1996 that netted $406,000, an initial public
offering in September, 1996, with proceeds of $3,775,900, and a private
placement (with one unit consisting of two common shares and a warrant to
purchase an additional common share at a set price) from June to September, 1997
which raised $1,117,900. Effective October 1, 1997, Mr. Douglas H. Hanson
invested $2,398,577 in common stock and became the President, Chief Executive
Officer and Chairman of the Board of the Company. Additionally, Mr. Hanson has
invested an additional $503,615 in March, 1998 by exercising purchased warrants
and options that were granted in October, 1997, at the time of his initial
investment. Current income and expense forecasts indicate that the Company will
have sufficient cash in order to reach positive cash flow without further
investments. However, additional equity infusion may be necessary to comply with
the NASDAQ Small Cap listing requirements.
The Company has received a loan commitment from Phoenix Leasing
Incorporated wherein the Company will have available a financing line available
for acquisition of fixed assets in the amount of $352,000 to be used in four
increments of $88,000. The financing will be secured by the assets purchased and
by an Equipment Loan Bond provided by Amwest Surety Insurance Company. The
Company expects to complete this agreement and initiate the first draw around
the end of May 1998.
RMI is an Internet Service Provider ("ISP") with an high growth rate
(as discussed elsewhere in this document). The Company's growth is dependent on
continuing to build a strong infrastructure and hiring high quality sales,
technical, and administrative personnel. In order to build the infrastructure
and acquire the human resources needed to maintain an high growth rate, the
Company has operated with a negative cash flow from operations during 1996 and
1997. The Company's cash requirements are relatively fixed for the near term and
the Company expects to generate positive operating cash flows by mid 1998 if
revenues continue to increase according to expectations without any significant
cost increases. Should revenues not continue to increase according to
expectations, the Company may have to seek additional financing to fund
operating losses or implement reductions in operating expenses. Reductions in
operating expenses, if effected, could adversely affect revenues and therefore
not result in the expected increase in cash flow. The Company does not currently
have access to additional bank financing and therefore additional financing
would have to result from additional issuances of equity or debt securities.
The Company's common stock is traded on the NASDAQ SmallCap Market. The
NASDAQ Stock Market, Inc. recently implemented changes to the maintenance
criteria for listing eligibility on the Small Cap Market, including a
requirement that issuers have at least $2,000,000 in net tangible assets. As of
December 31, 1997, the Company had net tangible assets of $1,612,274 (equity of
$2,083,370 less intangible customer lists of $471,096). Effective March 12,
1998, Mr. Douglas H. Hanson, President and CEO, exercised 408,615 options
exercisable at $1.00 resulting in an equity infusion of $408,615 and on
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<PAGE>
March 23, 1998, Mr. Hanson exercised 50,000 warrants for $1.90 each which
resulted in an additional equity infusion of $95,000. On a proforma basis as
of December 31, 1997, these investments bring the Company in compliance with
the Nasdaq requirements.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1995
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company
as of the dates and for the periods indicated. The income statement data for the
years ended December 31, 1995 and 1996, and the balance sheet data as of such
dates have been derived from financial statements of the Company which have been
included herein and which have been audited by McGladrey & Pullen, LLP. (1995)
and Baird, Kurtz, and Dobson (1996), independent public accountants. These data
should be read in conjunction with the Company's financial statements and
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $1,179,325 $ 3,281,579
Gross profit 858,956 2,177,912
Operating (loss) income (108,522) (2,281,194)
Net (loss) income (128,794) (2,342,571)
Net (loss) income per share (1) (.04) (.64)
OTHER OPERATING DATA:
Approximate number of subscribers at end
of period 4,000 9,800
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 274,661 $ 348,978
Investments 0 1,356,629
Working Capital (Deficit) (186,865) 370,884
Total Assets 924,603 5,540,167
Long Term debt 524,437 1,134,380
Total Stockholders' (deficit) equity (169,036) 2,317,437
</TABLE>
(1) Loss per share computed based on 3,489,000 Shares outstanding for 1995
and 3,715,000 shares outstanding for 1996. See Note 1 to the Company's
financial statements included elsewhere in this Prospectus.
OVERVIEW
The Company's growth strategy is to focus on commercial accounts in the
high speed access, frame relay network, and Web services areas. The Company also
continues to experience strong growth in dial-up access services based on
quality of service and word of mouth reputation.
Three acquisitions occurred in late 1996 and early 1997 pursuant to the
Company's strategy to expand through acquisitions as well as internal growth.
CompuNerd, Inc., a small Colorado Springs based
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Web services company was acquired as of November 1, 1996 for consideration
consisting of $70,478 and 30,000 shares of common stock. The Information
Exchange (IE), a Denver based voice messaging business was acquired effective
December 1, 1996 for 52,723 shares of common stock. IE focuses on voice
messaging to commercial customers. Its acquisition further expands the
Company's ability to provide a full complement of services through the
Internet. Several affiliates of the Company were equity holders in The
Information Exchange. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Effective January 16, 1997, the Company acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc., a Boulder, Colorado, based
provider of Internet access and Web services for consideration consisting of
$150,000 of cash and 116,932 shares of the Company's common stock.
The Company has positioned itself for continued growth by expanding its
infrastructure and employee base. In December 1996, the Company relocated its
Corporate headquarters in Denver to an 19,500 square foot facility which
includes a data center where Denver based operations are being consolidated. The
Company's principal access servers, Web servers, ISDN routers, dial-up modem
facilities, and management workstations are consolidated in this facility to
provide enhanced management and security. In addition to improved facilities,
the Company continues to seek and hire quality sales, technical, and
administrative management and staff. As a result the Company will continue to
incur losses in the near term. The Company will not generate income or positive
cash flow from operations unless revenues continue to increase at rates
commensurate with past growth while maintaining its existing cost structure.
Although the Company believes that its current investment in equipment and
related infrastructure, and its current employee base (which accounts for a
significant portion of selling, general and administrative expense) can support
substantial growth, there can be no assurance that revenues will continue to
grow at the rate they have over the past year.
The Company may experience fluctuations in operating results in the
future caused by various factors, some of which are outside of the Company's
control, including general economic conditions, specific economic conditions in
the Internet access industry, user demand for the Internet, capital expenditures
and other costs relating to the expansion of operations, the timing and number
of customer subscriptions, the introduction of new services by the Company or
its competitors, the mix of services sold and the mix of distribution channels
through which those services are sold. In addition, the Company's expenses,
including but not limited to obligations under equipment leases, facilities
leases, telephone access lines, and Internet access are relatively fixed in the
short term, and therefore variations in the timing and amount of revenues could
have a material adverse effect on the Company's results of operations.
RESULTS OF OPERATIONS
REVENUES
Revenues are generated by a variety of Internet related activities that
include dial up access services, dedicated access services primarily for
business customers, frame 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 the Company's various
services. The following table provides information regarding amounts of revenues
in the foregoing categories for the years ended December 31, 1995 and 1996.
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<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 % Change
----------- ------------ ---------
<S> <C> <C> <C>
REVENUE
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%
----------- ----------- 178%
Total $1,179,325 $3,281,579 -----
----------- -----------
----------- -----------
</TABLE>
The Company's revenue 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 from during the same periods representing an increase
of 145%. Revenues exclusive of Equipment Sales grew at 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.
DIAL-UP SERVICE
The Company's strategy is to provide an high quality service with few
busy signals. In order to assure this service level the Company does not provide
any unlimited access service price plans during the business day, these plans
have a tendency to congest the network. The Company 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.
For the Three Months Ended
<TABLE>
<CAPTION>
March June September December March June September December
1995 1995 1995 1995 1996 1996 1996 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 growth in customers while maintaining average billing rates.
Dial-up Service has been split approximately evenly between commercial and
residential customers throughout 1995 and 1996.
RMI has established business alliances through contracts with five
unrelated parties for the purpose of providing Internet Services in secondary
markets in the State of Colorado. These contracts provide for the local party to
provide equipment and marketing services while the Company provides Internet
Access and administrative services. Dial-up revenues based on these contracts
generated $67,500 in revenues in 1995 and $ 354,100 in 1996 for an increase of
425%. The joint points of presence (POP) established pursuant to these contracts
began in the second quarter of 1995 and grew to six locations by the end of 1995
and eight locations by the end of 1996.
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<PAGE>
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, point to point
connections, and T-3 (45 Mbps) or fractional T-3 connections. The Company 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 the
Company's connection.
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 Jun 30 Sept 30 Dec 31 Mar 31 Jun 30 Sept 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 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 7 10 10 11 16 25 29 30
Co-location 0 1 4 4 6 4 5 6
</TABLE>
WEB SERVICES
Web services revenues are composed of Web page hosting and Web page
production. Web page 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 hosting customers as of the dates indicated:
<TABLE>
<CAPTION>
Mar 31 Jun 30 Sept 30 Dec 31 Mar 31 Jun 30 Sept 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341
</TABLE>
Web page 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 page production increased from $3,770 for 1995 to $173,800 for 1996
for an increase of 4,510%. The Company increased the size of the Web production
department as well as provided customers more complex applications. The growth
in Web hosting business helped to drive this part of the business plus the
activities of the Company's direct sales force. 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
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<PAGE>
servers and Internet grade routers for co-locations. Sales grew from $144,551
in 1995 to $519,551 in 1996 or 259%. 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 order 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
SALES AND MARKETING EXPENSES increased from $92,300 in 1995 to $776,500
in 1996 inclusive of personnel costs. The Company hired a full time direct sales
staff beginning in December, 1995. Of the total 1996 Sales and marketing
expense, approximately $565,000 relate to personnel expenses. The Company had 6
employees at the end of 1995 and 16 employees at the end of 1996 in sales and
marketing. Extensive efforts have been made 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.
GENERAL AND ADMINISTRATIVE EXPENSES increased from approximately
$875,200 in 1995 to $3,682,600 in 1996. General 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 $459,575 for the year ended December 31,
1995, to $2,178,460 for the year ended December 31, 1996. The Company had 29
employees at the end of 1995 and increased staff to 67 at the end of 1996 in all
areas of the Company including administration, technical support, development,
and senior management (excluding sales and marketing). Rent expense for 1995 was
$82,269 and increased to $240,720 in 1996. During 1996 the Company moved its
corporate headquarters and leased office space of approximately 19,500 square
feet which includes a data center comprised of 1,200 square feet. The Company
continues to occupy offices in Colorado Springs for staff performing Dial-In
technical support, customer service, and sales functions. Additionally, the
Company leases two POP's (points of presence) which contain routers, servers,
and modems to provide Internet access for its customers. The Company's former
offices in Denver at 1800 Glenarm have been sub leased 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 sub lease rate and the existing lease rate.
The Company experienced an increase in communications expense from
$58,400 for the year ended 1995 to $196,800 for the year ended 1996. These
expenses included local telephone service, cellular phones and pager costs and
long distance telephone expenses. The Company uses multiple "800" phone numbers
to provide technical support, customer support, and sales order processing to
its growing base of customers.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has experienced
negative operating cash flow in 1996. The Company's operations used net cash
of approximately $1.5 million for the year ended December 31, 1996. The cash
used by operating activities is primarily attributable to the Company's
continued expansion of its facilities and employee base in anticipation of
continued growth in revenues.
Between December 31, 1995, and December 31, 1996, the Company's
employee base increased from 35 to 83 and its total assets increased from
$924,603 to $5,540,167. The increase in the Company's total assets is
primarily attributable to $2,375,348 of property and equipment (net of
accumulated depreciation, $1,356,629 in short term investments, and $428,489
of accounts receivable. The Company has financed this growth primarily with
revenues from operations, from proceeds of approximately $3.7 million
resulting from completion of the Company's initial public offering in
September 1996, 1.7 million and from capital lease financing. In addition,
sources of cash included $490,000 in proceeds from a private placement of
convertible notes (since converted into common stock) in late 1995 and early
1996, and $406,000 in net proceeds from a private placement of Series A
Convertible Preferred Stock in mid-1996.
During 1996 the Company acquired approximately $2.5 million in
equipment, software, and leasehold improvements. Equipment consisted of
Cascade switches and related equipment for the Company's frame relay network,
routers, servers and computers. Of the $2.5 million expended, approximately
$1.7 million was financed through capital lease transactions.
The Company has a bank line of credit in the amount of $500,000
which, subsequent to December 31, 1996 was fully drawn. No amounts were
outstanding as of December 31, 1996, with respect to this line of credit. The
line of credit is secured by a pledge of a $300,000 treasury bill repurchase
agreement and by the Company's accounts receivable. The Company's office
lease is also secured by a pledge of a treasury bill of $250,000.
As of December 31, 1996, the Company had working capital of
$370,884. This included $348,978 of cash and cash equivalents and $1,356,629
of investments in financial instruments convertible to cash. Trade
receivables as of that date were $518,827. Current liabilities as of that
date were approximately $2,088,350, including $425,160 of accounts payable,
$451,823 of current maturities of long-term debt and capital lease
obligations, $528,160 of accrued payroll and related taxes, and $460,836 of
accrued expenses attributable primarily to a payable on office furniture,
deferred office rent, preferred stock dividend payable, accrual for unbilled
circuit costs, and amounts due third parties pursuant to contracts described
above under "Dial-Up Service" pending cash collections. Also included in
current liabilities as of that date is $218,121 of deferred revenue, which
represents differences in the timing of payments by customers and recognition
of the related revenue.
RMI is an Internet Service Provider (ISP) with an high growth rate.
The Company's growth is dependent on building a strong infrastructure and
hiring high quality sales, technical, and administrative personnel. In order
to build the infrastructure and acquire the human resources needed to
maintain an high growth rate, the Company has operated with a negative cash
flow from operations during 1996 and projects to continue to do so for the
first half of 1997. The company's cash requirements are relatively fixed for
the near term and the Company expects to generate positive operating cash
flows by late 1997 if revenues continue to increase according to expectations
without any significant cost increases. In the near term, the Company expects
to finance negative operating cash flows from incentive programs to customers
designed to increase the rate of realization of accounts receivable, and, if
necessary, from reductions in operating expenses. As discussed below, the
Company may seek to conduct an equity of debt financing which, if completed,
the proceeds of which would be available to fund operations. In the
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<PAGE>
longer term, should revenues not continue to increase according to
expectations, the Company may have to seek additional financing to fund
operating losses or implement additional reductions in operating expenses.
Reductions in operating expenses, if effected, could adversely affect
revenues and therefore not result in the expected increase in cash flow. The
Company does not currently have access to additional bank financing and
therefore additional financing would have to result from additional issuances
of equity or debt securities.
The Company's common stock is traded on the NASDAQ SmallCap-TM-
Market. The NASDAQ Stock Market, Inc. has recently proposed changes to the
maintenance criteria for listing eligibility on the Small Cap Market,
including a requirement that issuers have at least $2,000,000 in net tangible
assets. As of January 31, 1997, the Company had less than $2,000,000 in net
tangible assets. If the proposed changes to the SmallCap-TM- Market listing
criteria are approved by the SEC and if the Company were to fail to meet such
requirements, the Company's common stock would no longer trade in the
SmallCap-TM- Market, which would adversely affect the liquidity and price of
the Company's common stock. In anticipation of the eventual approval of the
new maintenance criteria, the Company is seeking to raise $1 million to $2
million in additional equity capital in a private placement of stock, the
terms and structure of which are not determined at this time. The proceeds of
that offering would be used to meet the more stringent listing criteria and
to improve the Company's working capital and liquidity. There can be no
assurance that additional equity capital will be available to the Company or,
if it is available, that it will be available on terms favorable to the
Company.
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 4,079,355 Warrants
and approximately an additional 2,783,289 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 5,959,505 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 exercise price of those Warrants recently has been less than the
market price per share of Common Stock, and the Company believes that current
owners of those Warrants may, therefore, have an incentive to exercise those
Warrants and purchase shares of Common Stock. As a means of encouraging the
holders of those Warrants to exercise their IPO Warrants, the Company intends
to call those Warrants for redemption in accordance with their terms in the
event that the exercise price of those Warrants remains less than the market
price per share of Common Stock.
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., 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
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<PAGE>
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.
THE COMPANY
DESCRIPTION OF BUSINESS
The Company is an evolving and rapidly growing telecommunications
company that provides a full range of Internet services. In addition, RMB
obtained a certificate from the Colorado Public Utilities Commission in
April, 1998, which authorizes RMB to become a competitive local exchange
carrier (a "C-LEC"). The certificate will permit the Company to provide local
telephone service and other services currently provided by U S West in those
portions of the State of Colorado in which U S West is currently certified to
provide such services. Consistent with terms and conditions established by
the Colorado PUC in prior similar decisions, RMB is required to participate
in the Colorado High Cost Fund (a fund into which LECs must pay into to
subsidize local exchange services in rural and other high-cost areas), the
Telecommunications Relay Services for the Disabled Telephone Users Program,
ad Emergency Telephone Access Act Program, and other financial support
mechanisms established by the Colorado PUC.
Also in April, 1998, the Company began offering long distance
telephone service by means of Internet protocol ("IP") telephony, through
RMB, to persons located in the Denver, Boulder, and Colorado Springs areas,
with plans to offer such services nationwide later in 1998. Also in April,
1998, RMB entered into a carrier services agreement with Frontier
Communications of the West, Inc., an affiliate of Frontier Corporation,
pursuant to which RMB will be able to offer traditional long distance
telephone services to customers nationwide. The Company's current plans are
to begin offering these services beginning in July, 1998.
The Company's Internet access services include dial-up access,
dedicated high speed access, Integrated Services Digital Network ("ISDN")
services, fractional T-1 service (with transmission speeds up to 1.54
megabits per second), enhanced speed modem service, and other Internet
related services provided to business and individuals, including World Wide
Web ("Web") services, data services and network frame services. The Company
gives particular attention to providing exemplary customer service at
competitive prices. The Company's high speed, digital telecommunications
network provides Internet subscribers with direct access to the full range of
Internet applications and resources including E-mail, World Wide Web sites,
USENET newsgroups and FTP software. The Company has experienced rapid growth
in its subscriber base, reaching approximately 13,000 customers at the end of
December 1997, up from approximately 9,800 customers at the end of December,
1996 and approximately 4,000 in December, 1995.
Pursuant to two agreements signed in the first quarter of 1998, the
Company is able to offer its Internet services nationwide. One agreement,
signed with PSINet, allows the Company to provide dial-up access to customers
in PSINet's 235 POPs in the United States. The other agreement, with PacNET,
allows the Company to offer private wide area network ("WAN") services to
businesses throughout the United States.
The Company is a Delaware corporation with its executive office
located in Denver, Colorado, and an operating facility located in Colorado
Springs, Colorado. The Company employs approximately 80 persons. The Company
was incorporated in October 1995, and is the successor to Rocky Mountain
Internet, Inc., a Colorado corporation, which was incorporated in 1994.
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ACQUISITIONS
RMI acquired two businesses in late 1996. In November, 1996, the
Company acquired assets of CompuNerd, Inc., a small Colorado Springs based
Web services company. RMI acquired in that transaction approximately 35 Web
hosting subscribers and 115 Internet access subscribers. In December, 1996,
the Company acquired the assets of The Information Exchange, LLC., a Denver
based voice messaging service company, a related party through common
ownership. The Information Exchange provides voice messaging services to over
370 business clients in the Denver Metropolitan area. RMI completed this
acquisition with the intent to provide a multi-media service (voice
messaging, email and fax) to its dial-up clients in the second half of 1997.
In January, 1997, RMI acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (O*N*E), headquartered in
Boulder, Colorado, a division of VR*1, Inc. The O*N*E acquisition netted RMI
approximately 47 dedicated and 732 dial-up subscribers.
INDUSTRY OVERVIEW
INTERNET. The Internet had its origins in 1969 as a project of the
Advanced Research Project Agency ("ARPA") of the U.S. Department of Defense.
The network established by ARPA was designed to provide efficient connections
between different types of computers separated by large geographic areas and
to function even if part of the network became inoperative. Historically, the
infrastructure was used by academic institutions and governmental agencies
for remote access to host computers and electronic mail communications.
Accordingly, the U.S. government historically provided the majority of
funding for the infrastructure. However, as the modern Internet developed and
became commercial, funding shifted to the private sector.
The Internet is a loose interconnection of networks belonging to
many owners. It is comprised of tens of thousands of networks that
communicate using the Internet protocol (IP). Entities commercially involved
in the Internet may be divided into five types of entities: (1) end users;
(2) access providers; (3) application providers; (4) content providers; and
(5) backbone providers. END USERS obtain access to and send information
either through dial-up connections over the public switched telephone
network, or through dedicated data circuits over wireline, wireless, cable,
or satellite networks. ACCESS PROVIDERS, more commonly known as Internet
service providers, combine computer processing, information storage, protocol
conversion, and routing with transmission to enable users to access Internet
content and services. Major Internet access providers include America Online,
AT&T WorldNet, Netcom, Earthlink, and the Microsoft Network. APPLICATION
PROVIDERS offer users a discrete end-to-end service rather than open-ended
Internet connectivity. Examples include IP telephony service providers and
free electronic mail vendors. CONTENT PROVIDERS make information available on
"servers" connected to the Internet, where it can be accessed by end users.
Major content providers include Yahoo, Netscape, ESPN Sportszone, and
Time-Warner's Pathfinder service. Finally, BACKBONE PROVIDERS, such as
WorldCom, Sprint, AGIS, and PSINet, route traffic between Internet access
providers, and interconnect with other backbone providers. Many companies
fall into more than one of these categories. For example, America Online
offers Internet access as well as content (which can be purchased separately
for a lower fee), and until recently owned backbone provider ANS. In
addition, many of the networks connected to the Internet are "intranets," or
private data networks, that offer better performance or security to a limited
set of users, but can still communicate with the Internet using IP. The
Internet is a distributed packet-switched network, which means that
information is split up into small chunks or "packets" that are individually
routed through the most efficient path to their destination. Even two packets
from the same message may travel over different physical paths through the
network. Packet switching also enables users to invoke multiple Internet
services simultaneously, and to access information with no knowledge of the
physical location of the server where that information resides. Internet
usage has grown steadily and rapidly, especially since the development of the
World Wide Web in 1989. According to one survey cited by the FCC in its April
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10, 1998 report to Congress, there are currently more than 4,000 Internet
service providers and 40 national Internet backbones operating in the United
States. According to data presented at an FCC hearing on February 19, 1998,
Internet service provider market revenues are projected to grow from under
four billion dollars in 1996 to eighteen billion dollars in the year 2000.
Over the past three years, the number of worldwide Internet users
has increased significantly. In addition, the number of domains registered,
which the Company believes is a forward-indicator of activity on the
Internet, has increased at a rapid pace. There are several key drivers
responsible for the rapid proliferation of Internet use:
- IMPROVING PERFORMANCE - There have been significant bandwidth,
communications, and price/performance improvements in
communications over the Internet. These developments make the
Internet an increasingly attractive medium for conducting
business, adding convenience, and attracting more users.
- GROWTH OF MODEM-ENABLED PCS - As the installed personal computer
("PC") base has grown, it has become increasingly common for those
PCs to have a modem connection. Many new computers now have
pre-installed modems, allowing connections to be made even more
easily.
- IMPROVED CONTENT - As the Internet grows, new information and
services available on the Internet have attracted attention and
created a more widespread appeal.
- EXPANSION OF LANS AND WANS - Corporate, government, and
educational local area networks ("LANs") and wide area networks
("WANs") are expanding and these installed networks enable
multiple users to be connected to the Internet through a single
point of contact. Therefore, the actual number of Internet users
connected through these LANs and WANs greatly exceeds the number
of connection points.
- EXPECTATIONS FOR ELECTRONIC COMMERCE OVER THE INTERNET - With the
increased recognition of the Internet's potential as a medium for
marketing and purchasing, a growing number of companies are
initiating or expanding their use of the Internet for commercial
purposes.
- DRAMATIC INCREASE IN NAVIGATIONAL AND UTILITY TOOLS - The
proliferation and improvement of software tools and browsers which
facilitate Internet use have attracted more users. The World Wide
Web and other user-friendly interfaces have made it easier for
users to access desired information on the Internet.
TELECOMMUNICATIONS. The telecommunications industry involves the
transmission of voice, data and video communications from the point of
origination to the point of termination. The industry has been undergoing
rapid change due to deregulation, the construction of additional
infrastructure and the introduction of new technologies, which has resulted
in increased competition and demand for telecommunications services.
UNITED STATES DOMESTIC LONG DISTANCE. The structure of the
domestic long distance telecommunications industry was significantly changed as
the result of a 1982 court decree that required the divestiture by AT&T of its
seven RBOCs and divided the country into approximately 200 Local Access and
Transport Areas ("LATAs") that range in size from metropolitan areas to entire
states. The seven RBOCs were initially limited to providing local telephone
service, access to long distance carriers and "in-region" long distance service
(service within a LATA). The right to provide inter-LATA service
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was initially ceded to AT&T and other long distance carriers, as well as to
LECs other than the RBOCs. However, under the 1996 Telecommunications Act,
the RBOCs may now provide inter-LATA long distance service, subject to
certain conditions. See "Regulation--General Regulatory Environment."
For each long distance call, the originating and terminating LECs
charge the long distance carrier an access fee to carry the call across their
local networks. The long distance carrier charges the customer a fee for its
transmission of the call, a portion of which consists of the access fees
charged by the originating and terminating LECs. To encourage the development
of competition in the long distance market, the LECs are required to provide
all long distance carriers with access to local exchange service that is
"equal in type, quality and price" to that provided to AT&T. These "equal
access" and related provisions were intended to prevent preferential
treatment of AT&T and to require that the LECs charge the same access fees to
all long distance carriers, regardless of their volume of traffic. These
provisions, along with the development and evolution of fiber optic
technology with its increased capacity and transmission quality, have helped
smaller long distance carriers emerge as alternatives to the largest
companies for long distance telecommunications services. See
"REGULATION--General Regulatory Environment."
MULTIMEDIA. Continuing developments in multimedia
applications are bringing new entrants to the telecommunications market.
Internet service providers and cable television, entertainment and data
transmission companies, for instance, are potential customers for voice, data
and video communications over high bandwidth networks.
LONG DISTANCE NETWORK SERVICES. Switched voice and data
services originate and terminate with end users and require varying amounts
of bandwidth, depending on the nature of the communication. Traditional
telephony services such as "1 Plus" dialing require only limited bandwidth
(such as 64 Kbps). Emerging broadband services, such as the Internet, private
networks and multimedia applications, require higher bandwidth for effective
communication. Such services are increasingly transmitted over SONET
ring-protected Optical Carrier level paths (such as OC- 48 or OC-192) using
advanced transmission protocols, such as frame relay and ATM.
TELECOMMUNICATIONS MARKETS. Companies in the domestic long
distance market generated estimated total revenue of approximately $72
billion in 1995. AT&T is the dominant long distance carrier with an estimated
53% of total market revenue in 1995, while MCI and Sprint held the number two
and three market positions with approximately 17.8% and 10% of 1995 market
revenues, respectively. These three carriers, together with WorldCom,
constitute what are generally referred to as the "Tier 1" companies in the
long distance market.
Long distance companies may generally be categorized as
"facilities-based" carriers and "nonfacilities-based" carriers. The four Tier
1 companies are facilities-based carriers because each operates a network
principally using its own transmission facilities and extensive
geographically dispersed switching equipment. All of the Tier 1 carriers,
including AT&T, lease some of their transmission facilities from other
carriers to back up their service routing, augment areas where they may have
traffic bottlenecks or cover a particular geographic area not covered by
their own networks.
Medium-sized long distance companies, some with national
capabilities, constitute the "Tier 2" companies in the long distance market.
Certain Tier 2 carriers are known as "partial facilities-based" carriers in
that they own some of their own transmission facilities but operate using
mostly leased facilities. However, most Tier 2 carriers are
nonfacilities-based carriers in that they lease all of their transmission
facilities. Tier 2 carriers design, manage and operate their own networks
just as the Tier 1 carriers, but generally on a smaller regional scale,
focusing on selling traffic originating in their target geographic area.
These carriers are also generally referred to as "switch-based" or "switched"
because
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they typically operate their own switches. Some of these carriers lease high
volume DS-3 capacity and resell lower volume DS-1 capacity to other carriers
at higher unit prices. DS-3 level capacity is generally only sold by carriers
that own facilities on the route on which the service is sold.
The "Tier 3" carriers, often called "switchless" resellers, neither
operate networks nor own facilities, but rather resell "minutes" of service
which they purchase from other carriers. These companies, which vary
significantly in size, are primarily sales and marketing companies that
generate their margins by buying in large volumes to obtain a low price per
minute from switch-based carriers and reselling at higher prices. These
companies may receive an invoice from their underlying carrier and bill the
end user or, in some cases, the underlying carrier may bill the end user
directly. The barriers to entry into this segment of the long distance market
are minimal and there are currently numerous Tier 3 companies providing long
distance services. As its business increases, a Tier 3 company may install
its own switch and move into the Tier 2 category. The Company is seeking to
become a "Tier 3" reseller of long distance services by purchasing capacity
from other long distance providers and selling the service to its customers.
In addition, in April, 1998 the Company began offering long distance service
by means of IP telephony to persons in the Denver and Colorado Springs areas.
See "--The Company's Strategy" and "--Sales and Marketing."
Operator services companies concentrate on providing operator
services and other communications services to long distance industry, private
pay phone operators, prisons, and credit card companies. These carriers also
manage their own networks and switching networks and switching equipment
while leasing virtually all of their facilities.
Management believes that competition in the retail long distance
industry is based upon pricing, customer service, network quality and
valued-added services, creating opportunities for smaller long distance
providers. Sales efforts of long distance companies focus increasingly on
telemarketing and the use of independent contractors rather than full-time
employees. This has created an opportunity for smaller companies to compete
in certain segments of the long distance market, and many of them are quickly
able to build sizable customer bases on the strength of their marketing
efforts and distribution channels.
A convergence is occurring in the Internet industry as more
traditional Internet providers become communications companies and
communication companies become Internet companies. These factors are creating
an environment in which individuals and businesses and other organizations
perceive a need to establish Internet access and an Internet presence. The
Company believes that its Internet access, Web service and value-added
service offerings are particularly appealing to businesses for a number of
reasons. For example, many businesses are accustomed to working with a vendor
with a local presence and may prefer to contract with an Internet service
provider such as RMI which has a local presence and the experience and
reputation of providing quality and dependable service. Furthermore, many
businesses have Internet requirements that go beyond the simple access that
most Internet service providers offer. These Internet requirements include
security, network consulting, high-bandwidth managed access, and data
services.
THE COMPANY'S STRATEGY
The Company's goal is to become a full service telecommunications
company providing a full complement of communication services on a resale
basis--a one stop shop for the small and medium size business user and the
consuming public. As a full service internet provider RMI intends to continue
to offer full Web services, including production of web pages, the hosting of
web pages and the marketing of web pages. RMI believes the foundation for
business growth and electronic commerce ("E Commerce") will be through the
creation, hosting and marketing of web pages. As more companies
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want to sell their products and services over the Internet, the demand for
Web services will increase rapidly. This will require an E Commerce solution
for most web pages that will be developed for the business community. RMI's
goal is to provide that capability to its customers. Management believes that
marketing will play a more important role for Web page owners, as more people
will want to monitor the activity on their sites.
In accordance with its strategy, the Company has reviewed and
examined, and continues to review and examine, several potential acquisitions
or business combinations; however, the Company at this time has no
commitments or agreements to consummate any material acquisition or business
combination and has not signed a letter of intent with respect to any
potential material acquisition or business combination. There can be no
assurance that the Company will be able to locate suitable acquisition
candidates or to consummate business combinations (principally asset
acquisitions or mergers) on terms that are favorable to the Company. In
addition, there can be no assurance that the Company will be able to
profitably manage additional businesses or successfully integrate acquired
businesses, if any, into the Company without substantial costs, delays, or
other operational or financial problems or that acquired businesses, if any,
will achieve anticipated revenues and earnings.
As the demand for speed increases, RMI will attempt to meet the
challenges of providing greater bandwidth to its customers through various
types of dedicated connections at the local loop level and greater bandwidth
at the backbone level. As ADSL and similar services are deployed, RMI
believes that it will be able to also provide these services at competitive
prices.
Management believes that IP telephony will become more prevalent in
its use for companies and people who want a low cost solution to traditional
long distance telephone service. RMI recently announced its entry into that
segment of the markets, originating service in Denver and Colorado Springs
beginning in April with an anticipated roll out to other cities as the RMI
network is expanded. Customers are able to call anywhere in the USA for only
7 cents per minute.
RMI SERVICES TODAY AND TOMORROW
Today, RMI primarily provides two high quality services, which it
believes are competitively priced: Internet access service and Web services.
Internet access services can be divided into two basic categories: personal
accounts for individuals and small businesses that connect to the Internet
via a modem (referred to as "dial-up" accounts), and high speed dedicated
accounts (principally for medium to large business users) that connect to the
Internet via dedicated telecommunications lines. Dial-up subscribers can
access the Internet by calling RMI's local POPs. RMI's dedicated accounts
consist of subscribers that desire to connect internal computer networks to
the Internet. The Company offers a wide variety of service options, which
vary in price depending upon the features included and the data rate, or
bandwidth, of the connection. RMI bills its Internet access subscribers
monthly, quarterly or annually in advance. A significant percentage of
individual accounts are billed automatically through pre-authorized credit
card accounts. RMI also provides complete installation services, sales of
turnkey networking equipment, education and training services, and an
efficient technical support and network monitoring support team.
Web services can also be divided into two basic categories: Web
hosting services and Web production (or content). RMI designs Web pages and
performs additional programming for Web sites on behalf of its business
subscribers. Charges for Web page design and programming vary widely with the
size and complexity of the project. RMI's Web services produce Web sites that
make use of original graphic arts, interactive forms, data base queries and
search engines. RMI also hosts Web pages on behalf of its customers enabling
them to have a continued presence on the Internet. In addition, RMI offers
its customers a marketing strategy to insure that their web pages are visited
by would be customers.
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The Company intends to expand its product offerings and geographical
reach by focusing on six core products.
1. Dedicated high-speed large bandwidth service to the small and medium
size business user, such as ADSL, ISDN & T-1s.
2. Dial up access service to the residential community, focused on easy
user interface and access to information on the World Wide Web.
3. IP Telephony with the ability to offer price competitive service to
both the residential user and the small business user.
4. Traditional Long Distance Service with all the enhancements
customers generally are looking for such as calling cards, debit cards and
operator services. This unit would also provide private line services to the
small and medium size business, including ATM, Frame Relay, VPN and other
traditional private line services.
5. Web Services, including production, hosting, marketing, and E
commerce solutions.
6. Integration, Technology and Engineering Services for small and
medium business including fire wall installations, LAN and WAN installation
along with maintenance and management of those facilities.
There can be no assurance as to when, or if, the Company will be able
to expand its product and service offerings to include those identified above.
Moreover, if the Company is able to offer such products and services, there can
be no assurance that the Company will be able to operate any of them profitably.
Each of these businesses is subject to many uncertainties and matters over which
the Company has no control, such as unforeseen costs that may be incurred to
establish and market such businesses, the ability of the Company to attract and
retain experienced marketing, operational, and other personnel to operate such
businesses, competitive pressures (including competitive pricing pressures), and
potential changes in the regulatory environment in which such businesses may
operate.
In April, 1998 the Company began offering long distance service by
means of IP telephony to persons in the Denver and Colorado Springs areas at a
price of $0.07 per minute. See "--Sales and Marketing."
RMI'S VALUE ADDED SERVICES
DATA CENTER SERVICES. As more people use the Internet to shop for
products and services, the demands on shared server resources are increasing.
RMI offers businesses the alternative of co-locating their servers at RMI,
thereby taking cost-effective advantage of the Company's centralized Internet
resources. For example, a Web developer who co-locates a server at RMI can save
40% to 60% of the monthly cost of maintaining that server in-house.
In addition, RMI 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.
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ON-LINE NETWORK REPORTS. RMI operates a password-protected on-line
network reporting service to allow customers to monitor the traffic and
performance of both RMI's network and the client's Internet connection in
15-minute increments. The reports provide hourly, daily or weekly access to
high-resolution maps, tables, and graphs detailing the availability of
specific WAN links, network bandwidth, and error rates to help users
prioritize their internal network activities and reduce network management
expenses.
TRAINING CENTER. RMI's new headquarters in downtown Denver includes
a training center with 12 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 RMI's headquqarters, or at the customer's site.
BUSINESS RELATIONSHIPS
The Company has established three agreements covering three POP
locations with unrelated parties pursuant to which the Company and the
unrelated parties provide Internet services in certain rural areas and
smaller population centers in Colorado. Each of the parties to these
agreements is a local small business or businessperson who is not otherwise
affiliated with the Company. These agreements provide for the local party to
provide equipment and marketing services while the Company provides Internet
access and administrative services. The agreements provide for most revenues
from accounts in the geographic areas covered by the agreements to be split
equally between the Company and the local party.
These arrangements apply in specified territories outside of the
main Colorado population areas and accounted for approximately $480,000 in
total revenue during 1997. Each of these alliances is for an unspecified term
and is terminable by the local party on three months' notice, subject to
certain rights of the Company to purchase the interest of the other party on
termination. Although the Company may enter into additional similar business
alliances in the future, management expects that revenues from such alliances
will represent a proportionately smaller part of total revenues as the
Company expands its operations in the future.
NETWORK INFRASTRUCTURE
RMI believes that its future success in the Internet access services
market depends in part on its ability to enhance its current service
offerings for individuals and businesses and to advance the capabilities and
capacity of its telecommunications network. The Company operates B-STDX 9000
Cascade switches within a regional backbone network. The B-STDX switch is a
wide area network (WAN) switch that simultaneously supports Frame Relay,
Switched Multimegabit Digital Service (SMDS), Integrated Services Digital
Network (ISDN), and Asynchronous Transfer Mode (ATM) on a single platform.
These switches are interconnected via a DS3 network
The Company is continuing to optimize and increase the capacity and
capabilities of its telecommunications network. The Company currently is
working to increase its speed, reliability, and network fault tolerance. The
Company operates a data center, which is located at the corporate
headquarters office at 1099 18th Street, in Denver. The data center is an
environmentally controlled facility with built in network redundancies, dual
air conditioning systems, an FM 200 fire protection system and generator
power backup supported by an Uninterrupted Power Supply (UPS). This facility
not only provides redundancies and stability to the Company's network, but
also allows the Company to make this facility available to those clients that
want the ability to co-locate their Web servers in the RMI data center and
pay RMI for use of the facility and gain high bandwidth access to the
Internet.
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OPERATIONS AND CUSTOMER SUPPORT
As of April 15, 1998, the Company had 76 employees. The Company's
Colorado Springs location facilitates the Call Center for dial-up & dedicated
technical support group that provides telephone support for dial-up &
dedicated subscribers. RMI also established a separate commercial support
group for commercial high speed access clients which involves phone support,
on-site support and installations. The Company's network support team
concentrates on the performance, stability, and repair of the Company's
network, network equipment, and servers. The Company's employees have never
been covered by a collective bargaining agreement. The Company has never
experienced any work stoppages, slowdowns, or other serious labor problems
and considers its relations with its employees to be excellent.
SALES AND MARKETING
RMI's growth in its Internet subscriber base is attributable to
word-of-mouth referrals primarily in the individual dial-up market. The
Company has a direct sales group in order to support a strong focus on
business customers. The Company is delivering high-speed Internet access
solutions and Web services to business customers in its regional markets and
is differentiating itself through an on-site consultative approach,
high-quality services, and exemplary customer service. RMI has increased its
effort by adding 5 inside sales people to focus on the dial up market. The
Company believes that its ability to differentiate itself from the national
Internet access providers, long distance providers, and regional telephone
companies can best be achieved in the business market by becoming a one stop
shop and providing the highest quality of service at competitive prices.
Dial-up subscribers provide the Company with credit card information
at the time of signup, and the Company is paid automatically from credit card
strikes monthly.
The Company's currently markets its IP telephony service only
through its Internet Web home page. Persons interested in purchasing this
service click on the appropriate icon on the home page, which is linked to an
on-screen signup process. The purchaser must provide credit card information
and may purchase time in increments of 6 hours, 8 hours 20 minutes, 12 hours,
or 24 hours. The cost to the purchaser is 7 cents per minute.
The Company currently has sales offices in Denver and Colorado
Springs. Web salespeople handle calls, which have been primarily generated by
word-of-mouth and by the local press coverage the Company has been receiving.
The Company plans to continue to expand its direct field sales force and
inside sales group in order to increase its market coverage. RMI also employs
a customer service group, currently comprised of six people, who concentrate
on business client retention.
The Company intends to increase its advertising and to maximize the
amount of local newspaper, radio and television exposure with press releases
and interest articles on the Company.
COMPETITION
The Internet connectivity business is highly competitive and there
are no substantial barriers to entry. 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 the security of its network infrastructure, its pricing of services
compared to its competitors, the timing of new products and services by the
Company and its competitors, the Company's ability to react to changes in the
market, and industry and economic trends. The Company's competitors consist
of (1) regional Internet access providers, (2) national Internet service
providers, (3) on-line services companies, (4)
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regional telephone companies and national long distance carriers, and (5)
hardware/software companies and cable television operators.
REGIONAL INTERNET ACCESS PROVIDERS. The Company's competitors
include numerous regional Internet access providers, including SuperNet,
Inc. a subsidiary of Qwest Communications. SuperNet was formed by the
Colorado Advanced Technology Institute, and is the closest competitor to
RMI in the State of Colorado. It has been in business since 1986. Internet
Express, Inc. is an Internet provider in Colorado Springs that currently
offers service in the states of Colorado, Texas, Arizona and Washington.
NATIONAL INTERNET SERVICE PROVIDERS. National Internet service
providers include companies such as NETCOM, PSI, UUNET and BBN. These
national competitors have established national and international networks,
providing extensive coverage throughout the U.S. and select international
locations. NETCOM, PSI, IBM, and UUNET have established communications and
network infrastructure, adapt more swiftly to new or emerging technologies
and changes in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote more resources to the marketing and
sale of services, than the Company. NETCOM, PSI and BBN have targeted the
individual dial-up market, while UUNET has specifically targeted the business
markets.
ON-LINE SERVICE Companies. Other competitors include the national
on-line service providers including America On-line, Inc., Microsoft Network,
and CompuServe. Most of the established on-line services are rapidly
expanding their Internet access services in order to offer more direct access
to the Internet at more competitive prices. On-line service companies are
focused on the individual dial-up market and are becoming direct competitors
with the national Internet providers and the long distance carriers.
REGIONAL TELEPHONE COMPANIES AND NATIONAL LONG DISTANCE COMPANIES.
Regional telephone companies such as U S West and national long distance
carriers such AT&T, MCI, Sprint, and WorldCom have recently announced
Internet access services. The Company's management believes AT&T will be a
significant competitor to the national Internet providers, long distance
carriers, and on-line services that are targeting the individual dial-up
market.
HARDWARE/SOFTWARE COMPANIES AND CABLE TELEVISION COMPANIES. In 1995,
Microsoft Corp. announced its entry into the on-line service business with
"Microsoft Network," a consumer on-line service that was released as a
standard integrated feature of the Windows 95 operating system. Microsoft
Corp. has recently focused its significant resources on its new Web browser
software called Microsoft Internet Explorer. IBM's most recent version of its
OS/2 operating system software includes Internet utilities, and IBM has
announced plans to introduce Internet connectivity through its own private
communications network. Cable operators such as TCI, have also announced
their intention to utilize their cable networks to offer Internet services.
Cable modems have the capacity to transmit at speeds up to 10 Megabits per
second versus the normal telephone dial-up speed of 28.8 kilobits per second.
Several cable companies are in the process of upgrading their systems to
handle the Internet because cable services were not originally designed for
the two-way nature of Internet traffic.
Many of the established on-line services companies and
telecommunications companies, such as AT&T and the RBOCs, have begun to offer
or announced plans to offer expanded Internet access services. All of the
major on-line services companies now compete fully in the Internet access
market. Many of the Company's competitors offer unlimited Internet access at
a competitively-priced flat monthly rate. In addition, the Company believes
that new competitors, including large computer hardware and software, cable,
media, wireless, and wireline telecommunications companies, will enter the
Internet access market, resulting in even greater competition for the
Company. The ability of these competitors or others to bundle with Internet
access services other services and products not offered by
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the Company could place the Company at a significant competitive
disadvantage. In addition, certain of the Company's competitors that are
telecommunications companies may be able to provide customers with reduced
communications costs in connection with their Internet access services or
other incentives, reducing the overall cost of their Internet access solution
and significantly increasing price pressures on the Company. This price
competition could result in significant reductions in the average selling
price of the Company's services. In addition, increased competition for new
subscribers could result in increased sales and marketing expenses and
related subscriber acquisition costs, which could materially adversely affect
the Company's profitability. There can be no assurance that the Company will
be able to offset the effects of any such price reductions or incentives with
an increase in the number of its customers, higher revenue from enhanced
services, cost reductions, or otherwise.
Moreover, the Company uses local exchange carrier ("LEC") networks
to connect its Internet customers to its POPs. Under current federal and
state regulations, the Company and its Internet customers pay no charges for
this use of the LECs' networks other than the flat-rated, monthly service
charges that apply to basic telephone service. In 1996, LECs asked the
Federal Communications Commission (the "FCC") to change its rules and require
ISPs to pay additional, per minute charges for their use of local networks.
The LECs' request of the FCC has begun a rulemaking to consider changes to
federal access charges that may produce new or different charges for Internet
services was rejected in 1997. Nonetheless, LECs may in the future submit
another request to the FCC to reconsider its position taken in 1997. The
Company currently offers Internet access for a flat monthly fee. Per minute
access charges could significantly increase the Company's costs of doing
business and could, therefore, have a material adverse effect on the
Company's competitive position and on its business, financial condition,
results of operations, or cash flow, although such a change could be expected
to have a similar effect on all Internet service providers that use LEC
networks to connect to their customers to their POPs.
The Company believes that its ability to compete successfully in the
Internet access market depends upon a number of factors, including: market
presence; the adequacy of the Company's customer support services; the
capacity, reliability and security of its network infrastructure; the ease of
access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; price requirements for interconnection to and use
of existing LEC networks by Internet services; the timing of introductions of
new products and services and pricing policies by the Company and its
competitors; the Company's ability to support existing and emerging industry
standards; and trends within the industry as well as the general economy.
There can be no assurance that the Company will have the financial resources,
technical expertise, or marketing and support capabilities to continue to
compete successfully in the Internet access market.
TELECOMMUNICATION SERVICES. The Company's intention to
provide traditional long distance service will place it directly in
competition with interexchange carriers ("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. intra and interstate
long-distance market pursuant to recent legislation authorizing such entry.
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.
The Company believes that competition for customers in the
telecommunication markets in which the Company intends to compete is
primarily on the basis of price and, to a lesser extent, on the basis of the
type and quality of service offered. Increased competition could force the
Company to reduce its prices and profit margins if the Company's competitors
are able to procure rates or enter into service agreements comparable to or
better than those the Company obtains, or to offer other incentives to
existing and potential customers. Similarly, the Company has no control over
the prices set by its
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competitors in the long-distance resale carrier-to-carrier market. Although
the Company has no reason to believe that its competitors will pursue
directly aggressive pricing policies that could adversely affect the Company,
there can be no assurance that such price competition will not occur or that
the Company will be able to compete successfully in the future. In addition,
the Company is aware that its ability to market its carrier services depends
upon the existence of spreads between the rates offered by the Company and
those offered by the IXCs with whom it competes as well as those from whom it
obtains service. A decrease in such spreads could have a material adverse
effect on the Company's business, financial condition, results of operations,
or cash flow.
In addition, the 1996 Telecommunications Act will allow the RBOCs
and others to enter the long distance telephone market. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new entrants in this market. Failure by the Company to do so
would have a material adverse effect on the Company's business, financial
condition, and results of operations, and cash flow.
INTERNET TELEPHONY. Numerous companies have entered the
Internet telephony market in the past year and a half and have established
their Internet telephony products in the marketplace. While the Company's
services allow phone-to-phone communications over the Internet, with the
Internet transmission service connected to the public switched telephone
network at centralized switching platforms, and where users of the service
are billed on a per-minute basis, there can be no assurance that the Company
will be able to successfully compete in the developing Internet telephony
market. Although Internet telephony continues to be an area of intense focus
from various Internet software providers, traditional telephone service
companies, and telephone equipment manufacturers, there can be no assurance
that Internet telephony will gain market acceptance or prove to be a viable
alternative to traditional telephone service. Many international telephone
callers, accustomed to the convenience and quality of phone-to-phone calling
by means of traditional circuit switch telephone networks, may not switch to
Internet telephony services notwithstanding the potential cost savings.
Because the Internet is a relatively new medium, the legal
obligations and First Amendment rights of participants in the Internet,
including service providers such as RMI, are not well defined and continue to
evolve. The Internet has not been subject to regulation by the FCC
or other governmental agencies, as has television, and standards applicable
to print publishers and television in respect of the law of defamation and
obscenity are not clearly applicable to the Internet. Moreover, to the extent
these issues have been considered by the courts, outcomes have not been
uniform. In 1996, Congress passed a telecommunications act which, among other
things, includes protection from liability for Internet providers who take
steps to prevent defamatory material from being published on the Internet and
also includes provisions to protect children from indecent material on the
Internet. Certain provisions of that legislation regarding the imposition of
criminal penalties for publication of indecent materials on the Internet were
recently held to be unconstitutional by a federal district court.
REGULATION
GENERAL REGULATORY ENVIRONMENT
The telecommunications businesses in which the Company 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
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FCC regulations apply to the facilities of, and services offered by,
telecommunications common carriers, to the extent that those facilities are
used to provide, originate, or 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-
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<PAGE>
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.
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-LECs. The 1996
Telecommunications Act requires the I-LECs 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 U S 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-LECs 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
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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. 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 interexchange carriers, 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 interexchange carriers' 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 interexchange carriers. 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 Internet 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 report states that, to the extent the FCC
concludes that certain forms of phone-to-phone 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 a 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
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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. See "--Description of Business."
Those states that permit the offering of intrastate/intra-LATA
service by interexchange carriers 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 interexchange carriers to provide intra-LATA calling on a 1 +
basis. Further, the 1996 Telecommunications Act requires in most cases that
the RBOCs provide 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position With the Company
---- --- -------------------------
<S> <C> <C>
Douglas H. Hanson 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
Peter J. Kushar 43 Chief Financial Officer and Secretary, and
Treasurer
Kevin R. Loud 45 Vice President - Operations
Michael R. Mara 37 Vice President - Sales and Marketing
D. Kirk Roberts 46 Vice President - Finance and Management
Information Systems
Michael D. Shaeffer 31 Vice President - Marketing
</TABLE>
DOUGLAS H. HANSON has been the President, Chief Executive Officer,
and Chairman of the Board of Directors of the Company since October 1, 1997.
See "RECENT DEVELOPMENTS--CHANGE IN CONTROL." Prior to assuming his positions
with the Company Mr. Hanson was the President of Qwest Communications, Inc.,
a Denver-based telecommunications company.
D. D. HOCK has been a director of the Company since October 1, 1997.
See "RECENT DEVELOPMENTS--CHANGE IN CONTROL." Prior to becoming a director of
the Company, Mr. Hock was the President, CEO, and Chairman of the Board of
Directors (from February 1989 to July 1994; Chairman and CEO from July 1994
to January 1996; Chairman from January 1996 to February 1997, when he
retired) of Public Service Company of Colorado.
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<PAGE>
ROBERT W. GRABOWSKI has been a director of the Company since January
10, 1998. He is 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 Company 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 Company 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.
PETER J. KUSHAR has served as Chief Financial Officer, Secretary,
and Treasurer since joining the company in April 1998. From June 1997 to
April 1998 he operated his own consulting practice advising clients 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 1983 to1988.
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 Master of Business
Administration Degree in 1979 from the University of Montana.
KEVIN R. LOUD is Vice President - Operations of the Company. Before
joining the Company 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 and Associates, where he consulted with regional and national
communication organizations on market development and operation 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 Master of Business Administration
degree from William and Mary and a Bachelors of Arts in Economics from UCLA.
MICHAEL R. MARA is Vice President -- Sales and Marketing of the
Company. Prior to joining the Company 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.
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<PAGE>
D. KIRK ROBERTS has served as Controller of the Company since
January, 1995. He also served as Chief Financial Officer of the Company 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.
MICHAEL D. SCHAEFER is Vice President - Marketing of the Company.
Prior to joining the Company 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 Bachelors of Science in Business
Administration degree from the University of Denver, and a Dual Masters of
Business Administration degree from Regis University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. In November, 1997, the Company'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 Company. Members of the Audit
Committee are appointed annually by the full Board of Directors. The
functions of the Audit Committee are to review the Company'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 for its approval and for ratification by the
shareholders the engagement of the independent auditors to serve the
following year in examining the accounts of the Company. In connection with
these reviews the Audit Committee intends to meet alone with appropriate
Company financial and legal personnel and outside professionals and with
independent auditors who are expected to have free access to the Audit
Committee at any time.
COMPENSATION COMMITTEE. The compensation committee of the Board of
Directors (the "Compensation Committee") is responsible for reviewing the
salaries, benefits and other compensation of the officers of the Company 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 Company. 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.
From January 1 through November 24, 1997 the Board of Directors held
no regular meetings and 11 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
consent pursuant to Delaware law the Company's By-laws. The Audit Committee
was formed in November, 1997 and has not met. The compensation Committee was
formed in March, 1998 and has not met.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company's policy is to pay no cash compensation to members of
the Board for attendance at meetings of the Board of Directors or committees
thereof. Directors are eligible to participate in the Company's 1996
Non-Employee Directors' Stock Option Plan (the "1996 Directors' Plan"). Under
the Directors' Plan, each director who is not an employee of the Company
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 Directors' Plan
is the fair market value (as defined in the Directors' Plan) on the date that
the option is granted. All such options are exercisable beginning 6 months
after the date of grant.
At the Meeting, the shareholders of the Company 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 (the "Effective Date").
A total of 68,000 shares of Common Stock has been reserved for
issuance over the three-year term of the 1998 Directors' Plan. In the event
that the outstanding shares of the Company's Common Stock are increased or
decreased, or in the event that the Company changes the rights and privileges
of the Common Stock by means of the payment of a stock dividend, or through a
stock split, subdivision, consolidation, combination, reclassification, or
recapitalization involving the Common Stock, the committee administering the
1998 Directors' Plan is required to make such adjustments as it deems
equitable and appropriate to any or all of: (i) the number and kind of shares
that may be made subject to the benefits of the 1998 Directors' Plan; (ii)
the number and kind of shares subject to outstanding options; and (iii) the
exercise price with respect to any of the items identified in (i) and (ii),
in order to preserve the benefits or potential benefits intended to be made
available under the 1998 Directors' Plan.
Authority to administer the 1998 Directors' Plan is vested in a
committee (the "Administrative Committee") consisting of persons appointed by
the Board of Directors; in the absence of such appointments, the entire Board
of Directors serves as the Administrative Committee.
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 Company was granted
options to purchase 8,500 shares of Common Stock, subject to adjustment as
described above. If an eligible director has continued to serve as a director
of the Company from the Effective Date until December 31, 1998, he or she
will vest in options to purchase 1,500 shares of Common Stock; if he or she
continues to serve as a director for the entire calendar year ending December
31, 1999, he or she will vest in options to purchase 3,500 shares of Common
Stock; and if he or she continues to serve as a director for the entire
calendar year ending December 31, 2000, he or she will vest in options to
purchase 3,500 shares of Common Stock. Notwithstanding the foregoing, in the
event of a change in control of the Company (as defined in the 1998
Directors' Plan), each outstanding option under the 1998 Directors' Plan
vests immediately, regardless of any vesting schedule provided in the 1998
Directors' Plan. In addition, in the event of a change in control of the
Company, the Administrative 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 Company); (iii) make any
other adjustments or amendments to the outstanding options.
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<PAGE>
On January 22, 1998, the Effective Date of the 1998 Directors' Plan,
the closing price of the Common Stock was $2.625, and on May 1, 1998 the closing
price was $8.875 per share, according to data obtained from the Nasdaq Stock
Market, Inc.
If a director terminates his or her services as a director of the
Company in any year for any reason, that director will forfeit all options in
which he or she would have vested at the end of such year and any subsequent
year. A person who becomes a director by reason of filling a vacancy of any
director whose directorship has terminated will be granted options to
purchase the shares represented by the options forfeited by the director
whose vacancy he or she has been elected or appointed to fill and will be
subject to the remaining vesting schedule to which the previous director was
subject.
A person who becomes a director by reason of his or her election to
fill a new seat on the Board of Directors will be granted options to purchase
the same number of shares of Common Stock as the existing directors, at the
time of such person's election, will be granted options.
Each option granted under the 1998 Directors' Plan shall expire not
more than 5 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.
On January 20, 1998 the Board of Directors approved an arrangement
pursuant to which the Company will pay cash compensation to each of its
non-employee directors in the amount 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 of special assignments.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act requires the Company's
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 of the Company (Form 4). Directors,
Executive officers, and greater than ten percent shareholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based on a review of the copies of such
reports furnished to the Company or representations that no other reports
were required, the Company 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 Company), 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.
EXECUTIVE COMPENSATION
Following is information concerning compensation paid to all persons
who served as the Company's Chief Executive Officer during the 1997 fiscal year
and all others who were serving as
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executive officers during the 1997 fiscal year and whose annual compensation
(salary and bonus) was greater than $100,000 (the "Named Executive
Officers"). The Company's fiscal year ends December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary Bonus ($) Other Restricted Securities LTIP All other
Principal /options Annual Stock Underlying Payouts Compen-
Position Compen- Awards Options/ sation
sation SARs (#) ($0)(4)
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas H. 1997 $30,000 600,000
Hanson
President,
CEO and
Chairman(1)
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
Roy J. 1997 $86,150 $25,500
Dimoff, CEO (3)
and
President(2)
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
1996 $101,407 $20,250 (4)
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
1995 $23,322
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
Kevin R. 1997 $92,300
Loud, Vice
President -
Operations
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
1996 $83,967 (4) $16,200
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
1995 $17,822
- ------------- --------- ------------ ------------ ---------- ---------- ------------ --------- ----------
</TABLE>
(1) Mr. Hanson was elected President, Chief Executive Officer, and
Chairman of the Board of Directors of the Company as of October 1, 1997. For
a description of securities underlying options see "RECENT
DEVELOPMENTS--CHANGE IN CONTROL," above, and the following table.
(2) Mr. Dimoff and Mr. Loud joined the company in July, 1995.
Mr. Dimoff resigned as the President and Chief Executive Officer of the
Company as of October 1, 1997.
(3) In connection with the resignation by Mr. Dimoff effective
October 1, 1997, the Company and Mr. Dimoff entered Into a Waiver and Release
pursuant to which, among other matters, (i) the Company 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 Company 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 Company;
and (iii) Mr. Dimoff agreed to not compete with the Company, 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 not to compete by giving 30 days'
prior written notice to the Company of this election. In the event that Mr.
Dimoff terminates his covenant not to compete, the Company will have no
further obligation to make any remaining severance payments to Mr. Dimoff. On
March 6, 1998, Mr. Dimoff gave notice to the Company that he elected to
terminate the covenant not to compete. As a result, the Company 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 is
based on achieving 81% of the Company's revenue plan. Mr. Dimoff elected to
receive $3,000 of the bonus in the form of 3,000
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stock options exercisable in September, 1997. Mr. Loud elected to receive
$8,100 of the bonus in the form of 8,100 stock options exercisable in
September, 1997. All employees who received 1996 bonuses had the same choice
of receiving their bonus as cash or stock options. The options were granted
pursuant to the Company's 1997 Non-Qualified Stock Option Plan (the "Bonus
Plan"). The Bonus Plan authorizes the Company 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 Company is terminated
for cause but may be exercised for a period of three months following
termination other than for cause.
The Company currently has an employment agreement with Mr. Loud. The
employment agreement provides for a salary of $84,000 per year and is
terminable for cause. The Company may also terminate the agreement without
cause subject to the obligation to pay Mr. Loud a severance equal to five to
eight months' salary based on length of service. The agreement terminates in
December 1999. The employment agreement does not significantly restrict Mr.
Loud's ability to compete with the Company following any termination.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ------------------- --------------------- -------------------- --------------------- ----------------- -------------------
(a) (b) (c) (d) (e)
- ------------------- --------------------- -------------------- --------------------- ----------------- -------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Market Price on
Name Options/SARs Employees in Exercise or Base Date of Grant
Granted (#) Fiscal Year Price ($/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 $2.375 October 1, 2002
- ------------------- --------------------- -------------------- --------------------- ----------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
- ------------------- --------------------- -------------------- --------------------- -------------------
(a) (b) (c) (d) (e)
- ------------------- --------------------- -------------------- --------------------- -------------------
Number of
Securities
underlying Value of
Unexercised In-the-Money
Options/SAR at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired on Unexercised Exercisable Exercisable/Unexer-
Name Exercise (#) Value Realized /Unexercisable cisable
- ------------------- --------------------- -------------------- --------------------- -------------------
<S> <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 Company implemented an employee savings and
retirement plan (the "401(k) Plan") covering certain of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to
reduce their current compensation by up to the lesser of 6% 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 Company
will make contributions to the 401(k) Plan on behalf of
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<PAGE>
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 Company's
contribution to the 401(k) Plan is in the form of the Company's Common Stock.
The 401(k) Plan is intended to qualify under Section 401 of the Internal
Revenue Code of 1986, as amended, so that contributions by employees or by
the Company 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 Company, if any, will be deductible by
the Company when made.
CHANGES IN CONTROL
There are no arrangements or agreements known to the Company that
may result in a change in control of the Company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's bylaws provide, in general, that the Company shall, to
the fullest extent permitted by the Delaware General Corporation Law (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 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.
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.
Section 8 of the Company's Certificate of Incorporation provides
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 of 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 bylaws 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 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,
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<PAGE>
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 entered into an underwriting agreement with Neidiger,
Tucker, Bruner, Inc. ("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 Company against certain liabilities, including liabilities under the
Securities Act. The Company has entered into similar agreements with certain
of the Selling Securityholders, including Mr. Hanson.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Company pursuant to the provisions contained in the
Certificate of Incorporation and bylaws of the Company, the DGCL, the
underwriting agreement, the other agreements that provide for such
indemnification, or otherwise, the Company 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 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 Company, in the event it has indemnified the director or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
Effective October 1, 1997, the Company 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 described above under the caption "RECENT DEVELOPMENTS--CHANGE
IN CONTROL." Mr. Hanson also became the Company's President, Chief Executive
Officer, and Chairman of the Board of Directors as the result of the
transactions described in such section of this Prospectus.
The Company also 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 the Company's shareholders of an increase in the
authorized capital of the Company, 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 18
months from the date of issuance of those Warrants. As of the date of the
Warrant Agreement, the Company did not have a sufficient number of shares of
its Common Stock authorized or reserved for issuance upon exercise of all of
the Hanson Warrants. At the Meeting, the shareholders of the Company approved
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 from
10,000,000 to 25,000,000. As a result of the approval of such amendment by
the Company's shareholders at the Meeting, the Company has 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.
The Company also the Company granted Mr. Hanson incentive stock
options to purchase 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 Company's 1997 Stock Option Plan, which Plan was approved by
the Company's
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<PAGE>
shareholders at the Meeting. The 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 will administer 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 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 March 12, 1998, Mr. Hanson exercised all of the incentive stock
options and purchased 408,615 shares of Common Stock pursuant to such
exercise.
In December, 1996, the Company acquired the assets of The
Information Exchange, LLC., a Denver-based voice messaging service company, a
related party through common ownership. Roy J. Dimoff, then-President and CEO
of the Company, held a 51% ownership share of The Information Exchange and
Nancy Phillips, then-Vice President of Operations of the Company, held a 31%
share of The Information Exchange. The Company issued 52,723 shares of Common
Stock in exchange for 100% of the outstanding common stock of The Information
Exchange.
In late 1995 and early 1996, the Company effected an offering of
convertible debentures in the aggregate principal amount of $490,000. The
debentures bear interest at the rate of 12% per annum, payable quarterly, and
are convertible into shares of Common Stock at the option of the holder at a
conversion price of $0.40 per share. All of the debentures were converted to
Common Stock in October, 1996. Certain of the debentures were purchased by
persons who are relatives of the Company's principal shareholders on terms
the same as those offered to unrelated purchasers. Relatives of Mr. Dimoff
purchased $132,000 (subsequently converted to 330,000 common shares) and
relatives of Mr. Loud purchased $68,000 (subsequently converted to 170,000
common shares), respectively, in aggregate principal amounts of the
debentures.
In February 1997, the Company entered into a negotiated agreement
with Jim D. Welch, an officer and a stockholder of the Company, wherein the
Company agreed to purchase 90,000 shares of the Company's common stock from
him for $120,000. The stock will be purchased over an eighteen month period.
As part of the agreement, Mr. Welch separated from employment with the
Company.
TRANSACTIONS WITH PROMOTERS
Neidiger, Tucker, Bruner, Inc. ("NTB") was the principal underwriter
of the IPO of the Units of the Company's securities, each Unit consisting of
one share of Common Stock and one redeemable 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. The
Company sold to NTB at the closing of the IPO, for $100, warrants (the "Unit
Warrants") to purchase 136,500 Units, each Unit consisting of one share of
Common Stock and one warrant (collectively, the "NTB Warrants") to purchase a
share of Common Stock. Such Units 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 Units have an exercise price of $6.5625
per share (150% of the public Warrant exercise price) and are exercisable
until September 5, 2001. The Unit Warrants may be exercised in a cashless
transaction whereby the Unit 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 Warrants. In addition, the NTB Warrants included in the
Units may be exercised in a cashless transaction. See "DESCRIPTION OF
SECURITIES."
NTB was the Company's placement agent in connection with the private
offering in 1997 of units of the Company's securities, each unit consisting
of two shares of Common Stock and a warrant to purchase one share of Common
Stock, for $4.00 per unit. In connection with that offering, the Company
agreed to issue to NTB warrants (the "Private Offering
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<PAGE>
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. See
"DESCRIPTION OF SECURITIES--Private Offering Units Issued to Sales Agent."
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
ownership of Common Stock as of October 31, 1997 (except as to Messrs.
Grabowski and Silverberg and Ms. Vitale, as to which such information is as
of January 20, 1998) by (i) each stockholder of the Company known by the
Company to be the beneficial owner of more than 5% of its outstanding shares
of Common Stock, (ii) each current member and nominee for election to the
Board of Directors of the Company, (iii) each executive officer of the
Company named in the Summary Compensation Table appearing under the caption
"Executive Compensation," below and (iv) all current directors and executive
officers of the Company 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 6,889,700(3) 56.3%
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
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<PAGE>
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) 7,284,300 59.5%
Over 5% Stockholders and
Members of a "group" Who
Are Not Directors or
Executive Officers(1)(2)
- ------------------------
Christopher K. Phillips(1)(9) 234,500 3.2%
4580 Star Ridge Drive
Colorado Springs, CO 80916
Jim D. Welch(1)(10) 186,000 2.5%
1326 Sorrento Road
Colorado Springs, CO 80910
Kennedy Capital 375,000 5.1%
Management, Inc. (11)
10829 Olive Boulevard
St. Louis, MO 63141
</TABLE>
* Less than 1%
(1) As set forth above under the caption "RECENT DEVELOPMENTS--CHANGE
IN CONTROL," Mr. Douglas H. 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 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) 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. 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,
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<PAGE>
except as described in footnote 3. As of April 15, 1998, there were 7,311,761
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 Warrants, 191,385
shares issuable upon exercise of incentive stock options, and 789,700 shares
as to which Mr. Hanson obtained the rights to vote pursuant to the remaining
one of the two Shareholders' Voting Agreements and Irrevocable Proxies
described above in footnote (1) and under the caption "RECENT
DEVELOPMENTS--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
"RECENT DEVELOPMENTS--CHANGE IN CONTROL."
(9) Includes 233,600 shares and options to acquire 1,500 shares. All
shares are owned directly by Mr. Phillips. Mr. Phillips 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
"RECENT DEVELOPMENTS--CHANGE IN CONTROL." Mr. Phillips resigned as a director
of the Company effective November 10, 1997.
(10) All shares are owned directly by Mr. Welch. Mr. Welch 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 "RECENT DEVELOPMENTS--CHANGE IN CONTROL."
(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. See "MANAGEMENT."
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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; 56.26% ___%
Douglas H. Hanson 3,950,000 Warrants
Neidiger/Tucker/Bruner, Inc. 4,000 Warrants
Neidiger/Tucker/Bruner, Inc. 101,150 Shares 1.4% *
Eugene L. Neidiger 12,700 Warrants
Eugene L. Neidiger 25,400 Shares * *
Anthony B. Petrelli 12,300 Warrants
Anthony B. Petrelli 24,600 Shares * *
Charles C. Bruner 11,800 Warrants
Charles C. Bruner 23,600 Shares * *
Robert L. Parrish 6,400 Warrants
Robert L. Parrish 12,800 Shares * *
J. Henry Morgan 7,200 Warrants
J. Henry Morgan 14,400 Shares * *
John J. Turk, Jr. 1,500 Warrants
John L. 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 Tavy 150,000 Shares 2.1% *
John E. Tarrillion 37,500 Shares * *
Jim Clausius 48,750 Shares * *
Roger Marino 75,000 Shares * *
Michael Carney 37,500 Shares * *
David Leider 99,000 Shares 1.4% *
Robert and Patti Werts 15,000 Shares * *
Paul Davis 112,500 Shares 1.5% *
Burton Levy 82,500 Shares 1.1% *
MBM Young 37,500 Shares * *
Stephen Young, Sr. 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 * *
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 * *
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<PAGE>
James F. Seifert & Nancy L. Seifert 7,537 Shares * *
ACT Teleconferencing, Inc. 25,000 Shares * *
Kent Hultquist 12,562 Shares * *
Michael K. Carney 20,100 Shares * *
Roswell Monroe & Wando 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 * *
</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. Neidiger/Tucker/Bruner,
Inc. and Chatfield Dean & Co., Inc. acted as underwriters in connection with
the Company's IPO in 1996, 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, Neidiger/Tucker/Bruner, Inc. or Chatfield Dean & Co., Inc. None
of the other Selling Securityholders has a position, office, or other
material relationship with the Company, except that Advanced
Telecommunications Technologies, Inc. is the lessor of certain switches and
other equipment leased by the Company.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company 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 entirely by, the provisions of the Company's Certificate of
Incorporation which is included as an exhibit to the Registration Statement
of which this Prospectus is a part.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 750,000 additional 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
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<PAGE>
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. At present, there are no shares of
preferred stock outstanding and the Company has no plans to issue any of the
preferred stock.
COMMON STOCK
As of April 15, 1998, there were 7,311,761 shares of Common Stock
outstanding that were held of record by 86 stockholders. Another 845,667
shares of Common Stock were reserved for issuance pursuant to the Company's
stock option plans and other stock options granted, 6,954,422 have been
reserved for issuance upon exercise of an aggregate of various warrants,
including the IPO Warrants and the 3,950,000 Hanson Warrants remaining
outstanding and pursuant to various anti-dilution provisions contained in the
such warrants and the options described above. Accordingly, there will be
10,883,067 shares of Common Stock and 750,000 shares of Preferred Stock that
may be issued in the future at the discretion of the Company'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. See "PRICE RANGE FOR COMMON
STOCK AND DIVIDEND POLICY." In the event of a liquidation, dissolution, or
winding up of the Company, 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 Company is subject to Section 203 of the Delaware General
Corporation Law ("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
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
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<PAGE>
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
IPO WARRANTS. The IPO Warrants were issued as a component of the
Units of securities offered and sold in connection with the Company's IPO in
1996. Each IPO Warrant entitles the holder thereof to purchase one share of
Common Stock or 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 Company (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 Company's IPO, the Company issued to NTB the Unit Warrants, which
entitle the holder to purchase 136,500 Units of the Company's securities,
each Unit consisting of one share of Common Stock and one NTB Warrant. The
initial exercise price of the Unit Warrants was $4.20 per Unit. The Unit
Warrants may also be exercised in a cashless exercise, in which a portion
of the exercise price may be paid by the surrender of a number of the Unit
Warrants. In the event that, any time within 60 months after September 11,
1996, the Company (i) issues Common Stock or convertible securities (except
as compensation for services rendered to the Company) by way of dividend or
other distribution on any stock of the Company and such Common Stock or
convertible securities are issued without payment of consideration or are
convertible into shares of Common Stock without payment of consideration; or
(ii) effects a stock split or a reverse split of its outstanding Common
Stock, the exercise price of the Unit Warrants is proportionately decreased
(or increased in the case of a reverse stock split) by multiplying the
exercise price in effect immediately prior to the stock dividend, stock
split, or reverse stock split by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately prior to such event
and the denominator of which is the number of shares of Common Stock
outstanding immediately after such event. Of the 136,500 Unit Warrants,
111,500 are among the securities offered for resale pursuant to this
Prospectus.
The price at which the shares of Common Stock underlying the NTB
Warrants are issuable was $6.5625 per share at the time of issuance of the
Unit Warrants. The NTB Warrants may also be exercised pursuant to a cashless
exercise feature. The original exercise price per share of Common Stock
underlying the NTB Warrants and number of shares purchasable upon the
exercise of the NTB Warrants are subject to adjustment in the event that, at
any time after the date of the issuance of the NTB Warrants, the Company (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.
HANSON WARRANTS. As described above under the caption "RECENT
DEVELOPMENTS--CHANGE IN CONTROL," the Company issued the 4,000,000 Hanson
Warrants to Douglas H. Hanson on March 23, 1998. Each of the Hanson Warrants
is exercisable for an exercise price of $1.90 per share of Common Stock. Also
on March 23, 1998, Mr. Hanson exercised 50,000 of these Warrants for an
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<PAGE>
aggregate exercise price of $95,000. In the event that the Company (i) pays a
dividend in, or makes a distribution of, shares of Common Stock or other
securities, (ii) completes a stock split of its Common Stock, (iii) completes
a reverse stock split of its Common Stock, (iv) spins off a subsidiary by
distributing shares of the subsidiary to its stockholders, or (v) distributes
to all of the holders of Common Stock any other assets, the total number of
shares and the purchase price of the shares of Common Stock purchasable
immediately prior to such event are adjusted so the holder of the Hanson
Warrants will be entitled to receive, at the same aggregate purchase price,
the number of shares of Common Stock and the number of shares or other
securities that the holder would have owned or have been entitled to receive
immediately following such event had the holder exercised the Hanson Warrants
immediately prior to such event.
PRIVATE OFFERING WARRANTS ISSUED TO SALES AGENT. As described above
under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Transactions With Promoters," the Company conducted a private
offering of units of securities in 1997. In connection with that offering,
the Company issued the Private Offering Unit Warrants to NTB. The Private
Offering Unit Warrants have anti-dilution provisions similar to those of the
Unit Warrants and that the anti-dilution provisions of the Private Offering
NTB Warrants have anti-dilution provisions similar to those of the NTB
Warrants.
The warrants included in the units offered in the 1997 private
offering, the Private Offering Unit Warrants, and the Private Offering NTB
Warrants are not being offered for resale pursuant to this Prospectus.
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. 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.
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<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. The Company intends to call the IPO
Warrants for redemption in accordance with their terms. See "DESCRIPTION OF
SECURITIES." 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 Rocky Mountain
Internet, Inc. 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
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<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 Futro & Trauernicht, LLC, Denver, Colorado, special
counsel to the Company. The company is also represented as to certain matters
by Minor & Brown, P.C., Denver, Colorado, and as to certain matters by
Sherman & Howard L.L.C., Denver, Colorado. R. Michael Sanchez, a Member of
Sherman & Howard L.L.C., is the holder of 25,125 shares of Common Stock.
LEGAL PROCEEDINGS
On September 6, 1996, Robert Lewis and Storefronts in Cyberspace,
L.L.C. filed a complaint in Denver District Court naming the Company as
defendant. A jury trial commenced in this case on February 23, 1998. The jury
rendered its verdict on February 27, 1998. The Company prevailed in three of
the four claims in the case and received a net judgment of $286.74. Based on
the verdict of the jury, the court found for the plaintiff (Robert Lewis) in
the amount of $12,000 on the plaintiff's claim for breach of contract. The
court found for the defendant (the Company) in the amount of $12,000 for the
defendant's claim for tortious interference with economic advantage. The
court found for the defendant in the amount of $285.74 in its claim for
account stated (amount past due) and for $1 for the defendant's claim of
defamation. The Company is not a party to any other litigation.
EXPERTS
The consolidated financial statements of the Company and its
consolidated subsidiaries as of December 31, 1997 and 1996, and for each of
the two years ended December 31, 1997 and 1996 included in this Prospectus
have been audited by Baird, Kurtz & Dobson, as stated in their report
appearing herein and elsewhere in the Registration Statement. The financial
statements of the Company and its subsidiaries as of December 31, 1995 and for
the year then ended have been audited by McGladrey & Pullen, LLP, as stated in
their report included herein. Such financial statements of the Company and its
consolidated subsidiaries are included herein in reliance upon the respective
reports of such firms given upon their authority as experts in accounting and
auditing. Both of the foregoing firms are independent auditors.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report
Baird, Kurtz & Dobson ..........................................F-2
McGladrey & Pullen, LLP ........................................F-3
Financial Statements
Balance Sheets .................................................F-4
Statements of Operations .......................................F-6
Statements of Stockholders' Equity (Deficit) ...................F-7
Statements of Cash Flows .......................................F-8
Notes to Financial Statements ..................................F-9
F-1
<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-2
<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-3
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 348,978 $1,053,189
Investments 1,356,629 -
Trade receivables, less allowance for doubtful
accounts; 1996 - $115,000, 1997 - $176,000 518,827 672,094
Inventories 91,047 46,945
Other 143,753 112,891
---------- ------------
Total Current Assets 2,459,234 1,885,119
---------- ------------
PROPERTY AND EQUIPMENT, AT COST
Equipment 2,513,944 2,927,016
Computer software 202,501 218,801
Leasehold improvements 127,877 190,235
Furniture, fixtures, and office equipment 413,678 431,814
---------- ------------
3,258,000 3,767,866
Less accumulated depreciation and amortization 403,023 1,118,217
---------- ------------
2,854,977 2,649,649
---------- ------------
OTHER ASSETS
Customer lists, at amortized cost, less accumulated
amortization; 1996 - $2,094, 1997 - $108,689 145,444 471,096
Deposits 80,512 76,255
---------- ------------
225,956 547,351
---------- ------------
$5,540,167 $5,082,119
---------- ------------
---------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31, 1996 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 4,250 $ -
Current maturities of long-term debt and capital lease obligations 451,823 609,390
Accounts payable 425,160 581,366
Deferred revenue 218,121 345,857
Accrued payroll and related taxes 528,160 182,569
Accrued rent 44,659 136,182
Accrued severance expenses - 138,472
Accrued bonus 157,642 -
Other accrued expenses 258,535 100,286
---------- ----------
Total Current Liabilities 2,088,350 2,094,122
---------- ----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 1,134,380 904,627
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized 1996 - 1,000,000,
1997 - 790,000 shares; issued and outstanding 1996 - 250,000
shares, 1997 - 40,000 shares 250 40
Common stock, $.001 par value; authorized 10,000,000
shares; issued 1996 - 4,540,723 shares, 1997 - 6,736,889 shares;
outstanding 1996 - 4,540,723 shares, 1997 - 6,677,846 shares 4,541 6,737
Additional paid-in capital 4,879,968 9,284,720
Accumulated deficit (2,567,322) (6,747,050)
Unearned compensation - (383,077)
---------- ----------
2,317,437 2,161,370
Treasury stock, at cost
Common; 1996 - 0 shares, 1997 - 59,043 shares - (78,000)
---------- ----------
2,317,437 2,083,370
----------- -----------
$ 5,540,167 $ 5,082,119
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Internet access and services $ 1,034,774 $ 2,762,028 $ 5,740,044
Equipment sales 144,551 519,551 387,067
----------- ----------- -----------
1,179,325 3,281,579 6,127,111
----------- ----------- -----------
COST OF REVENUE EARNED
Internet access and services 193,875 640,880 1,760,262
Equipment sales 126,494 462,787 300,053
----------- ----------- -----------
320,369 1,103,667 2,060,315
----------- ----------- -----------
GROSS PROFIT 858,956 2,177,912 4,066,796
GENERAL, SELLING, AND ADMINISTRATIVE
EXPENSES 967,478 4,459,106 7,867,502
----------- ----------- -----------
OPERATING LOSS (108,522) (2,281,194) (3,800,706)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (31,818) (157,042) (402,086)
Interest income 2,397 44,322 54,461
Other income (expense), net 9,149 51,343 (4,522)
----------- ----------- -----------
(20,272) (61,377) (352,147)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (128,794) (2,342,571) (4,152,853)
INCOME TAX EXPENSE -- -- --
----------- ----------- -----------
NET LOSS (128,794) (2,342,571) (4,152,853)
PREFERRED STOCK DIVIDENDS -- 25,000 26,875
----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (128,794) $(2,367,571) $(4,179,728)
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED LOSS PER SHARE
Net loss per share $ (.04) $ (.64) $ (.76)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<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. - - 30,00 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
-------- ----- --------- ------ ---------- ----------- --------- -------- -----------
-------- ----- --------- ------ ---------- ----------- --------- -------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(128,794) $(2,342,571) $(4,152,853)
Items not requiring (providing) cash:
Depreciation 51,395 88,162 196,491
Amortization 39,030 186,044 690,794
Loss on disposal of fixed assets - - 13,128
Stock option compensation - 52,807 168,117
Provision for doubtful accounts (17,369) (112,458) (188,452)
Changes in:
Trade receivables (42,252) (305,541) 48,385
Inventories (12,185) (78,862) 44,102
Other current assets (5,153) (138,066) 30,862
Accounts payable 89,395 224,618 156,206
Deferred revenue 77,084 41,268 127,736
Accrued payroll and related taxes 83,528 443,208 (345,591)
Accrued expenses 30,550 429,886 (85,896)
--------- ----------- -----------
Net cash provided by (used in) operating activities 165,229 (1,511,505) (3,296,971)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (177,771) (900,235) (287,931)
Purchase of investments - (1,756,629) -
Proceeds from investments - 400,000 1,356,629
Payment for acquisitions. - (70,478) (150,000)
(Increase) decrease in deposits (60,635) (16,675) 2,257
--------- ----------- -----------
Net cash (used in) provided by investing activities (238,406) (2,344,017) 920,955
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and warrants 1,868 3,777,252 3,535,397
Proceeds from sale of preferred stock - 406,000 -
Proceeds from notes payable 18,000 6,689 500,000
Proceeds from long-term debt 373,000 135,404 200,000
Sale of stock warrants - 100 -
Payment of preferred stock dividend - (25,000) (26,875)
Purchase of common/treasury stock (18,750) - (78,000)
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)
--------- ----------- -----------
Net cash provided by financing activities 311,368 3,929,839 3,080,227
--------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 238,191 74,317 704,211
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 36,470 274,661 348,978
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 274,661 $ 348,978 $ 1,053,189
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<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.
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-9
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS 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.
F-10
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOSS PER COMMON SHARE
For the years ended December 31, 1995, 1996, and 1997, loss per share is
computed based upon approximately 3,489,000, 3,715,000, and 5,530,000,
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. These calculations assume all shares
issued prior to the Company's initial public offering in September 1996, were
outstanding during all periods presented, including shares issueable under
debenture and preferred stock conversions, and shares relating to stock options,
calculated using the treasury stock approach. All stock options and warrants
issued during or subsequent to the Company's initial public offering 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,
1996 and 1997.
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.
F-11
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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>
F-12
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
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
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.
F-14
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: COMMITMENTS (CONTINUED)
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 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.
F-15
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-16
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
F-17
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 5 years.
F-18
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: COMMON STOCK TRANSACTIONS (CONTINUED)
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 eighteen
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.
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.
F-19
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: BENEFIT PLANS (CONTINUED)
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-20
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: BENEFIT PLANS (CONTINUED)
STOCK OPTION 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>
F-21
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarized information about stock options under the plans
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- -------------------------
Weighted-
Average Weighted- Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ------------ ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$ 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 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.
F-22
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: BENEFIT PLANS (CONTINUED)
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, 1996, 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-23
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: ACQUISITIONS (CONTINUED)
The purchase price for the above acquisitions were allocated as follows:
<TABLE>
<CAPTION>
CompuNerd, Inc. Information 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>
F-24
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-25
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: FUTURE CHANGES IN ACCOUNTING PRINCIPLE (Continued)
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-26
<PAGE>
GLOSSARY
<TABLE>
<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. 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 discrete, distinct
pulses to represent information, as opposed
to the continuously variable analog signal.
G-1
<PAGE>
DS-0, DS-1, DS-3 Standard telecommunications industry
digital signal formats, which are
distinguishable by bit rate (the number
of binary digits (0 and 1) transmitted
per second). DS-0 service has a bit rate
of 64 kilobits per second and typically
transmits only one voice conversation at
a time. DS-1 service has a bit rate of
1.544 megabits per second and typically
transmits 24 simultaneous voice
conversations. DS-3 service has a bit
rate of 45 megabits per second and
typically transmits 672 simultaneous
voice conversations.
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.
DS-3 miles A measure of the total capacity and length of
a transmission path, calculated as the
capacity of the transmission path in DS-3s
multiplied by the length of the path in miles.
Equal access The basis upon which customers of
interexchange carriers 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.
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 public switched
telephone network ("PSTN").
Interexchange carrier A company providing inter-LATA or long
distance services between LATAs on an
intrastate or interstate basis.
Kbps Kilobits per second, which is a
measurementof 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).
</TABLE>
G-3
<PAGE>
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.
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.
Terabits A trillion bits of transmission capacity.
G-4
<PAGE>
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.
G-5
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION ..................................... 3
PROSPECTUS SUMMARY ........................................ 4
RECENT DEVELOPMENTS--CHANGE IN CONTROL .................... 7
RISK FACTORS .............................................. 11
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY .......... 22
CAPITALIZATION ............................................ 23
SELECTED CONSOLIDATED FINANCIAL DATA ...................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................. 24
USE OF PROCEEDS ........................................... 42
THE COMPANY ............................................... 43
REGULATION ................................................ 54
MANAGEMENT ................................................ 58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............ 66
PRINCIPAL SHAREHOLDERS .................................... 68
SELLING SECURITYHOLDERS ................................... 70
DESCRIPTION OF SECURITIES ................................. 72
PLAN OF DISTRIBUTION ...................................... 75
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .................................. 76
LEGAL MATTERS ............................................. 77
LEGAL PROCEEDINGS ......................................... 77
EXPERTS ................................................... 77
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 ................................................$
Nasdaq listing fee ..................................................$
Printing and engraving expenses .....................................$
Legal fees and expenses .............................................$
Blue Sky fees and expenses ..........................................$
Accounting fees and expenses ........................................$
Miscellaneous .......................................................$3,000
Total .....................................................................$
------
------
</TABLE>
Item 14. Indemnification of Directors and Officers.
Article 8 of the Company's Certificate of Incorporation 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 of 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 bylaws provides, in general, that the
Company shall, to the fullest extent permitted by the Delaware General
Corporation Law (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 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 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, amount 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.
Neidiger, Tucker, Bruner, Inc., 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 and Phillips, 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 "RECENT DEVELOPMENTS--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).
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 Futro & Trauernicht as to legality of
securities being registered (12)
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. (12)
II-4
<PAGE>
10.13 Wholesale Usage Agreement Between PSINet Inc. and Rocky Mountain Internet, Inc. (12)
10.14 PacNetReseller Agreement (12)
16.1 Letter re change in certifying accountant(3)
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Baird Kurtz & Dobson
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) 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 May 14, 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 May 14, 1998
- ---------------------------- Chairman of the Board of Directors
Douglas H. Hanson
/s/ Peter J. Kushar Chief Financial Officer, Secretary, May 14, 1998
- ---------------------------- Treasurer, and Principal Accounting Officer
Peter J. Kushar
/s/ D. D. Hock Director May 14, 1998
- ----------------------------
D. D. Hock
/s/ Robert W. Grabowski Director May 14, 1998
- ----------------------------
Robert W. Grabowski
/s/ Lewis H. Silverberg Director May 14, 1998
- ----------------------------
Lewis H. Silverberg
/s/ Mary Beth Vitale Director May 14, 1998
- ----------------------------
Mary Beth Vitale
</TABLE>
<PAGE>
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 23, 1996 relating to the 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 caption "Experts' in
such Registration Statement.
/s/ McGLADREY & PULLEN, LLP
Charlotte, North Carolina
May 11, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this Registration Statement on Form S-1 of our
independent accountants' report, dated February 27, 1998, relating to the
consolidated balance sheets of Rocky Mountain Internet, Inc. as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. We
also consent to the reference in the aforementioned registration statement to
our firm under the caption "Experts."
BAIRD, KURTZ & DOBSON
Denver, Colorado
May 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 FOR ROCKY MOUNTAIN
INTERNET, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,053,189
<SECURITIES> 0
<RECEIVABLES> 829,194
<ALLOWANCES> 176,000
<INVENTORY> 46,945
<CURRENT-ASSETS> 1,885,119
<PP&E> 3,767,866
<DEPRECIATION> 1,118,217
<TOTAL-ASSETS> 5,082,119
<CURRENT-LIABILITIES> 2,094,122
<BONDS> 0
0
40
<COMMON> 6,737
<OTHER-SE> 2,076,593
<TOTAL-LIABILITY-AND-EQUITY> 5,082,119
<SALES> 387,067
<TOTAL-REVENUES> 6,127,111
<CGS> 300,053
<TOTAL-COSTS> 2,060,315
<OTHER-EXPENSES> 7,817,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 402,086
<INCOME-PRETAX> (4,152,853)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,152,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,179,728)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
