<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (Section )240.14a-11(c) or
(Section )240.14a-12
ROCKY MOUNTAIN INTERNET, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
---------------------------------------------------------------------------
<PAGE>
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------------
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 12, 1998
To the Stockholders of Rocky Mountain Internet, Inc.
On behalf of the Board of Directors and management, I cordially invite you
to attend the Annual Meeting of Stockholders of Rocky Mountain Internet, Inc., a
Delaware corporation (the "Company"), to be held on March 12, 1998 at Embassy
Suites Hotel, 1881 Curtis Street, Denver, Colorado 80202, at 9:00 a.m. for the
following purposes:
1. To elect five members to the Board of Directors to serve for the
ensuing year and until their successors are duly elected and qualified;
2. To approve the Rocky Mountain Internet, Inc. 1997 Stock Option Plan;
3. To approve the Rocky Mountain Internet, Inc. 1998 Employees' Stock
Option Plan;
4. To approve the Rocky Mountain Internet, Inc. 1998 Non-Employee
Directors Stock Option Plan;
5. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's common stock from
10,000,000 to 25,000,000;
6. To approve an amendment to the Company's Certificate of Incorporation
to decrease the number of votes required for action on a matter by the
Stockholders of the Company at a meeting thereof from a majority of the shares
of common stock outstanding to a majority of the shares present in person or
represented by proxy at a meeting and entitled to vote on the matter;
7. To approve an amendment to the Company's Certificate of Incorporation
to implement a reverse split of the Company's Common Stock of up to one-for-ten,
in the event the Board of Directors determines that a reverse stock split is
desirable at any time within one year from the date of the Annual Meeting, with
the exact size of the reverse stock split to be determined by the Board of
Directors;
8. To consider and act upon a proposal to ratify the appointment of
Baird, Kurtz & Dobson, Certified Public Accountants, as the Company's
independent public accountants for the fiscal years ending December 31, 1997
and 1998; and
9. To transact such other business as may be properly brought before the
Annual Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on February 4, 1998
as the record date for the determination of Stockholders entitled to notice of
and to vote at the Annual Meeting and at any adjournments thereof. A list of
such Stockholders will be available for inspection at the Annual Meeting and
during business hours at the offices of the Company at the address below for the
ten-day period prior to the Annual Meeting.
All Stockholders are cordially invited to attend the Annual Meeting.
However, whether or not you expect to attend the Annual Meeting, your vote is
important. To ensure your representation at the meeting, you are requested to
complete, sign, date, and return the enclosed proxy as soon as possible in
accordance with the instructions on the proxy card. A return addressed envelope
is enclosed for your convenience.
BY ORDER OF THE BOARD OF DIRECTORS
Douglas H. Hanson
President, Chief Executive Officer, and Chairman of the Board of Directors
Denver, Colorado
February 13, 1998
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
1099 EIGHTEENTH STREET
30TH FLOOR
DENVER, COLORADO 80202
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Rocky Mountain Internet, Inc. (the "Company" or
"RMI"), a Delaware corporation, of proxies, in the accompanying form, to be
used at the Annual Meeting of Stockholders to be held at Embassy Suites
Hotel, 1881 Curtis Street, Denver, Colorado 80202, on March 12, 1998 at
9:00 a.m., and any adjournments thereof (the "Meeting").
Shares cannot be voted at the Meeting unless the owner is present in person
or by proxy. Where the stockholder specifies a choice on the proxy as to how
his or her shares are to be voted on a particular matter, the shares will be
voted accordingly. If no choice is specified, the shares will be voted FOR the
election of the five nominees for Director named herein, and FOR all of the
proposals in the Notice of Annual Meeting of Stockholders of the Company. A
proxy may be revoked by written instrument delivered to the Company at any
time before the proxy is voted. Any stockholder who has executed a proxy but
is present at the Meeting, and who wishes to vote in person, may do so by
revoking his or her proxy as described in the preceding sentence. Shares
represented by valid proxies in the form enclosed, received in time for use
at the Meeting and not revoked at or prior to the Meeting, will be voted at
the Meeting. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of the Company's common stock, par value
$0.001 per share ("Common Stock"), is necessary to constitute a quorum at the
Meeting. With respect to the tabulation of proxies for purposes of
constituting a quorum, abstentions and broker non-votes are treated as
present, and for purposes of any particular proposal, abstentions and broker
non-votes have the effect of a vote against the proposal.
The close of business on February 4, 1998 has been fixed as the record
date for determining the stockholders entitled to notice of and to vote at
the Meeting. As of that date, the Company had 6,679,045 shares of Common
Stock outstanding and entitled to vote. Holders of Common Stock are entitled
to one vote per share on all matters to be voted on by stockholders. This
Proxy Statement and the accompanying proxy are being mailed on or about
February 13, 1998 to all stockholders entitled to notice of and to vote at
the Meeting.
-1-
<PAGE>
The cost of soliciting proxies, including expenses in connection with
preparing and mailing this Proxy Statement, will be borne by the Company. In
addition, the Company will reimburse brokerage firms and other persons
representing beneficial owners of Common Stock of the Company for their expenses
in forwarding proxy material to such beneficial owners. Solicitation of proxies
by mail may be supplemented by telephone, telegram, and telex, and personal
solicitation by the directors, officers, or employees of the Company. No
additional compensation will be paid to directors, officers, or employees for
such solicitation.
RECENT DEVELOPMENT
As of October 1, 1997, Mr. Douglas H. Hanson has 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 stockholders, namely, Messrs. Roy J.
Dimoff, Christopher K. Phillips, Jim D. Welch, and Kevin R. Loud, for an
aggregate purchase price of $550,000, or $2.00 per share; (3) the Company
agreed to issue to Mr. Hanson warrants (the "Warrants") 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
stockholders at 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 (see "INTERESTS OF CERTAIN PERSONS IN
MATTERS TO BE ACTED UPON" and "PROPOSAL NO. 5--APPROVAL OF AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK"); (4) the Company granted Mr. Hanson incentive stock
options to purchase 191,385 shares of Common Stock for an exercise price of
$2.6125 per share and non-qualified stock options to purchase 408,615 shares
of Common Stock for an exercise price of $1.00 per share (collectively, the
"Options") pursuant to the Company's 1997 Stock Option Plan (the "1997
Plan"), which Plan is subject to the approval by the stockholders at the
Meeting (see "INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON" and
"PROPOSAL NO. 2--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1997 STOCK OPTION
PLAN"). 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, if it is approved); (5) Mr.
Hanson obtained proxies from 10 stockholders of the Company to vote an
aggregate of 2,060,294 shares of Common Stock held by such stockholders
(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 1,224,674 can be voted for up to three years
and the remainder can be voted only until 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 stockholders of all proposals at the Meeting is assured.
-2-
<PAGE>
The ten stockholders from whom Mr. Hanson obtained proxies are Messrs. Roy
J. Dimoff, Christopher K. Phillips, Jim D. Welch, Kevin R. Loud, Brian Dimoff,
Paul B. Davis, Michael R. Mara, Monty Reagan, Tim Scanlon, and Owen Scanlon.
Mr. Phillips was, at the time of such transactions, a director of 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.
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, all of which
were filed with the Securities and Exchange Commission with the Company's
Current Report on form 8-K, dated October 6, 1997 (date of event reported:
October 1, 1997). Management of the Company believes that the following are
accurate summaries of the material provisions of the respective agreements.
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.
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.
-3-
<PAGE>
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 stockholders pursuant to which
Mr. Hanson obtained the right to vote certain shares of Common Stock
beneficially owned by Mr. Dimoff and such other stockholders.
STOCK PURCHASE AGREEMENT AMONG DOUGLAS H. HANSON, CHRISTOPHER K. PHILLIPS, JIM
D. WELCH, AND KEVIN R. LOUD
Pursuant to a Stock Purchase Agreement among Douglas H. Hanson, Christopher
K. Phillips, Jim D. Welch, and Kevin R. Loud, dated as of October 1, 1997, Mr.
Hanson purchased 50,000 shares, 50,000 shares, and 25,000 shares of Common Stock
from Messrs. Phillips, Welch, and Loud, respectively, for an aggregate purchase
price of $250,000, in each case for $2.00 per share. In addition, as discussed
below, Mr. Hanson entered into a Shareholders' Voting Agreement and Irrevocable
Proxy with Messrs. Phillips, Welch, and Loud pursuant to which Mr. Hanson
obtained the right to vote certain shares of Common Stock beneficially owned by
them.
The source of all of the consideration for the purchase by Mr. Hanson of
the shares of Common Stock and the 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 Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"). The identity of the bank has been omitted from this
Proxy Statement, pursuant to the rules and regulations of the Securities
Exchange Act, at the request of Mr. Hanson, and the identity of the bank has
been filed separately with the Securities and Exchange 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, is 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 Warrants, and the shares of Common Stock that may
be issued pursuant to the exercise of the Warrants. The Company also agreed,
not later than thirty days after the closing of the transactions described
-4-
<PAGE>
above, to use its commercially reasonable best efforts to file a registration
statement with the Securities and Exchange 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
Warrants, and the shares of Common Stock issuable upon exercise of the
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 Warrants subject thereto without
restriction. As of the date hereof, the Company has not filed the
registration statement.
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 stockholders of an increase in the authorized capital of the
Company, to issue to Mr. Hanson the 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 the
Warrants. As of the date of this Proxy Statement, the Company does not have a
sufficient number of shares of its Common Stock authorized or reserved for
issuance upon exercise of all of the Warrants. The stockholders will be asked
to vote at the Meeting to approve 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. See "INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE
ACTED UPON" and "PROPOSAL NO. 5--APPROVAL OF AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK"). As a result of the purchase by Mr. Hanson of the shares of
Common Stock described herein and the proxies, described below, obtained by
Mr. Hanson, the approval of such amendment by the Company's stockholders at
the Meeting is assured.
The 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 "INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON--
WARRANTS."
SHAREHOLDERS' VOTING AGREEMENTS AND IRREVOCABLE PROXIES
Contemporaneously with the agreements described above, Mr. Hanson entered
into a Shareholders' Voting Agreement and Irrevocable Proxy with Messrs.
Phillips, Welch, and Loud pursuant to which Messrs. Phillips, Welch, and Loud
granted to Mr. Hanson their proxies to vote certain shares of Common Stock owned
by them as of the date of the agreement and acquired subsequent thereto
(including shares of Common Stock of which Messrs. Phillips, Welch, and Loud
have the right to acquire beneficial ownership through the exercise of warrants,
options, and other rights). The proxies terminate on the earlier of: (i) three
years from the date of execution; or (ii) the date upon which any shares of
Common Stock owned by the grantor of a proxy are sold, transferred, assigned,
or otherwise disposed of (except by a pledge thereof) by such stockholder to
a person other than: (A) a member of such stockholder's
-5-
<PAGE>
"immediate family," as such term is defined in Rule 16a-1(e) promulgated
pursuant to the Securities Exchange Act, 17 C.F.R. Section 240.16a-1(e), or
(B) a trust for the benefit of any member of such stockholder's immediate
family; provided, however, that the termination applies only to such shares
of Common Stock as are sold, transferred, assigned, or otherwise disposed of
to persons other than members of the stockholder's "immediate family." As of
October 1, 1997 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 1,224,674.
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 stockholders expire immediately
after the first meeting of stockholders held after October 1, 1997 at which
directors are elected, i.e., immediately after the Meeting, and the proxies
will not terminate upon transfer of the shares of Common Stock that are
subject to the proxies. As of October 1, 1997, 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 2,060,294.
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. Mr. Hanson believes
that, as a result, he will have control over the management, policies, and
activities of the Company at least until immediately after the Meeting.
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 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
-6-
<PAGE>
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. Mr. Hanson has no
intentions or plans at the current time with respect to the purchase or sale of
any shares of Common Stock, the Warrants, Options, or any other equity
securities of the Company. Depending upon his assessment, from time to time, of
the factors listed above, Mr. Hanson may change his present intentions as stated
above.
None of the persons identified above with whom Mr. Hanson entered into one
or more of the agreements described has any substantial interest in any of the
proposals to be acted upon at the Meeting, except that, as employees of the
Company, Messrs. Loud and Mara may in the future be granted options to purchase
shares of Common Stock pursuant to the Rocky Mountain Internet, Inc. 1998
Employees' Stock Option Plan. It cannot be determined at this time, however,
whether either Mr. Loud or Mr. Mara will be granted any options under such
plan. As of the date of this Proxy Statement, the Company is not aware of any
specific plans by the Board of Directors to issue any options to any particular
employees under such plan.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
Shares Beneficially Owned(1)(2)
Name and Address Number Percentage of
of Beneficial Owner of Shares Shares Outstanding
------------------- --------- ------------------
Current Directors and
Director Nominees
Douglas H. Hanson 7,560,294(3) 70.8%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
D. D. Hock -0- -0-
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Robert W. Grabowski 4,800 *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Lewis H. Silverberg 5,000 *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Mary Beth Vitale -0- -0-
1099 Eighteenth Street
30th Floor
Denver, CO 80202
-7-
<PAGE>
Named Executive Officers Who
Are Not Directors
Richard K. Dingess(4) 77,500 1.2%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
David L. Evans(5) 40,000 *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Kevin R. Loud(1)(6) 466,600 7.0%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Michael R. Mara(1)(7) 137,500 2.1%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
D. Kirk Roberts(8) 50,300 *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
All Directors and named Executive
Officers as a Group
(10 persons) 7,762,894 71.7%
-8-
<PAGE>
Over 5% Stockholders and
Members of a "group" Who
Are Not Directors or Executive
Officers(1) (2)
Christopher K. Phillips(1)(9) 374,500 5.6%
4580 Star Ridge Drive
Colorado Springs, CO 80916
Roy J. Dimoff(1)(10) 363,739 5.4%
2625 South Jay Way
Lakewood, CO 80227
Jim D. Welch(1)(11) 379,035 5.7%
1326 Sorrento Road
Colorado Springs, CO 80910
Brian Dimoff(1)(12) 169,881 2.5%
2 Pin Oak Drive
Littleton, CO 80127
Paul B. Davis(1)(13) 253,600 3.8%
5990 Greenwood Plaza Boulevard
Englewood, CO 80111
Monty Reagan(1)(14) 62,500 *
13789 West Kentucky Drive
Lakewood, CO 80228
Tim Scanlon(1)(15) 62,500 *
6232 North 32nd Street
Phoenix, AZ 85018
Owen Scanlon(1)(16) 62,500 *
2525 East Camelback Road
Suite 300
Phoenix, AZ 85016
* Less than 1%
(1) As set forth above under the caption "RECENT DEVELOPMENT," 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. Accordingly, all of such persons 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
-9-
<PAGE>
dispositive power over the shares listed opposite his name. For the
purposes of the table, shares of other members of the group have not been
attributed to each member.
(2) Shares of Common Stock that were not outstanding but that could
be acquired by a person upon exercise of 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, except as described in
footnote 3, and all shares of Series A Preferred Stock are convertible
into shares of Common Stock. As of October 31, 1997, there were
6,623,690 shares of Common Stock outstanding.
(3) Includes 1,500,000 shares beneficially owned directly by Mr.
Hanson, 4,000,000 shares issuable upon exercise of the Warrants, and
2,060,294 shares as to which Mr. Hanson obtained the rights to vote
pursuant to the two Shareholders' Voting Agreements and Irrevocable Proxies
described above in footnote (1) and under the caption "RECENT DEVELOPMENT."
Does not include shares issuable upon exercise of the Options, described
above under the caption "RECENT DEVELOPMENT," as such Options do not vest
until October 1, 1998. The Warrants are issuable upon approval of
Proposal No. 5.
(4) Includes 37,500 shares and options to acquire 40,000 shares.
(5) Includes options to acquire 40,000 shares.
(6) Includes 458,500 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 DEVELOPMENT."
-10-
<PAGE>
(7) Includes 75,000 shares owned directly by Mr. Mara and options to
acquire 62,500 additional shares. 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 DEVELOPMENT," Mr. Mara has granted to Mr. Hanson an
irrevocable proxy to vote all shares currently owned by him or that may be
acquired by him during the term of such agreement, with the exception of
25,000 shares that may be acquired pursuant to the exercise of certain
options previously granted to him.
(8) Includes 300 shares owned by Mr. Roberts's son and options granted
to Mr. Roberts to acquire 50,000 shares.
(9) Includes 373,000 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 DEVELOPMENT." Mr. Phillips resigned as a
director of the Company effective November 10, 1997.
(10) Includes 360,739 shares owned directly by Mr. Dimoff and options to
acquire 3,000 additional shares. 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 DEVELOPMENT," Mr. Dimoff has granted to Mr. Hanson an
irrevocable proxy to vote 335,739 shares currently owned by him.
(11) 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 DEVELOPMENT."
(12) Includes 149,881 shares owned directly by Mr. Dimoff and options to
acquire 20,000 additional shares. 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 DEVELOPMENT," Mr. Dimoff has granted to Mr. Hanson an
irrevocable proxy to vote 124,881 shares currently owned by him.
(13) Includes 132,100 shares owned directly by Mr. Davis and warrants to
acquire 121,500 additional shares. Mr. Davis has granted to Mr. Hanson an
irrevocable proxy to vote 75,000 shares currently owned 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 DEVELOPMENT."
(14) All shares are owned directly by Mr. Reagan. Mr. Reagan 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 DEVELOPMENT."
-11-
<PAGE>
(15) All shares are owned directly by Mr. Scanlon. Mr. Scanlon 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 DEVELOPMENT."
(16) All shares are owned directly by Mr. Scanlon. Mr. Scanlon 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 DEVELOPMENT."
MANAGEMENT
The names of the Company's directors and nominees for election as
directors at the Meeting to serve for the ensuing year and until their
successors are duly elected and qualified, and executive officers, and certain
information about them are set forth below:
Name Age Position with the Company
---- --- -------------------------
Douglas H. Hanson 54 President, Chief Executive Officer, and
Chairman of the Board of Directors
D. D. Hock 64 Director
Robert W. Grabowski 57 Director
Lewis H. Silverberg 63 Director
Mary Beth Vitale 43 Director
Richard K. Dingess 45 Vice President - Engineering
David L. Evans 56 Executive Vice President, Chief
Financial Officer and Secretary, and
Treasurer
Kevin R. Loud 45 Vice President - Operations
Michael R. Mara 36 Vice President - Sales and Marketing
D. Kirk Roberts 46 Vice President - Finance and Management
Information Systems
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 DEVELOPMENT." 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 DEVELOPMENT." 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.
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 (1991-1993), and Region General Manager for US West
Cellular (1989-1991). 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.
-12-
<PAGE>
RICHARD K. DINGESS has served as Vice President - Engineering since
October, 1997. From April, 1997 to October, 1997, he was Vice President
Network Operations, and from 1995 to 1997, he served as the Company's Director
of Network Operations. From 1994 to 1995, he was Director of Technical Services
for Trident Computer Services, a regional network consulting company. From 1989
to 1994 he worked as a network manager at Fort Carson, Colorado. From 1985 to
1989, he was team leader for software development for NATO's southern region.
Mr. Dingess attended Ohio State University and the University of LaVerne.
DAVID L. EVANS has served as the Executive Vice President, Chief Financial
Officer, and Secretary of the Company since joining the Company in June of 1997.
From January, 1992 until joining the Company, Mr. Evans was the president of
Evanwood Corporation, a corporate financial consulting firm with domestic and
international clients. Prior to Evanwood Corporation, Mr. Evans spent 26
years at Deere and Company, where he last served as Director of Finance and
was responsible for funding John Deere's operations worldwide. Mr. Evans
served on the board of directors of Data Transmission Network Corporation
from 1986 to 1995. He currently serves on the boards of directors of Mutual
Selection Fund, Inc. and John Deere Receivables, Inc. Mr. Evans has a
-13-
<PAGE>
Bachelor of Science degree in Economics from Iowa State University and a Master
of Business Administration degree from Wharton Graduate Division of the
University of Pennsylvania.
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.
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.
COMMITTEES OF THE BOARD OF DIRECTORS
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
stockholders 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.
-14-
<PAGE>
ATTENDANCE AT MEETINGS OF BOARD AND COMMITTEES
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.
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 "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.
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 Securities and Exchange
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 stockholders are required by Securities and Exchange 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, 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.
-15-
<PAGE>
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 executive officers during the 1997 fiscal
year and whose annual compensation (salary and bonus) was greater than $100,000
(the "Named Executive Officers"). The Company's fiscal year ends December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and principal Year Salary Bonus Other Restricted Securities LTIP All Other
position ($) ($)/ Annual Stock Underlying Payouts Compen-
options Compen- Awards Options / sation ($)
sation ($) ($) SARs (#) (4)
(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas H. Hanson, 1997 $30,000 600,000
President, CEO, and
Chairman(1)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Roy J. Dimoff, CEO 1997 $86,150 $25,500(3)
and President(2)
- --------------------------------------------------------------------------------------------------------------------
1996 $101,407 $20,250(4)
- --------------------------------------------------------------------------------------------------------------------
1995 $23,322
- --------------------------------------------------------------------------------------------------------------------
Kevin R. Loud, Vice 1997 $92,300
President-Operations
- --------------------------------------------------------------------------------------------------------------------
1996 $83,967(4) $16,200(4)
- --------------------------------------------------------------------------------------------------------------------
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 Development,"
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.
-16-
<PAGE>
(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.
(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 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 $84,000 per year and is terminable
for cause. The Company may also terminate the agreement without cause subject
to the obligation to pay Mr. Loud a severance equal to five to eight months'
salary based on length of service. The agreement terminates in December 1999.
The employment agreement does not significantly restrict Mr. Loud's ability to
compete with the Company following any termination.
Option/SAR Grants in Last Fiscal year
Individual Grants
---------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Market Price
Options/SARs Employees in Base Price on Date of
Name Granted (#) Fiscal Year ($/Sh) Grant ($/Sh) Expiration Date
- ---- ----------- ------------ ----------- ------------- ---------------
Douglas H. 191,385 21.7% $2.6125 $2.375 October 1, 2002
Hanson 408,615 46.2% $1.00 $2.375 October 1, 2002
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FYT-End(#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable
- -------------------------------------------------------------------------------
Douglas H. -0- -0- -0-/ -0-/
Hanson 600,000 $891,392(1)
(1) Determined, in accordance with Securities and Exchange 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.
-17-
<PAGE>
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 DEVELOPMENT." 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 Proxy Statement.
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 stockholders 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, then 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 initial public offering (the "IPO") of units (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, subject to adjustment as described below under the caption "INTEREST
OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON," after October 5, 1997 and
prior to September 5, 1999. The Company sold to NTB at the closing of the
IPO, for $100, warrants to purchase 136,500 Units (consisting of one share of
Common Stock and one warrant to purchase a share of Common Stock). Such
Units are the same as the
-18-
<PAGE>
Units offered in the IPO except that they (a) have an exercise price of $4.20
per Unit (120% of the Unit offering price) and $6.5625 per underlying Warrant
(150% of the public Warrant exercise price); and (b) will be exercisable for
a 48-month period commencing one year from September 5, 1996 (the date of the
Prospectus relating to the IPO). The NTB Warrants may be exercised in a
cashless transaction whereby the NTB Warrants, at the holder's option, may be
exchanged, in whole or in part, for the underlying Common Stock and Warrants.
Antidilution provisions of the NTB Warrants are described below under the
caption "INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON."
NTB was the Company's placement agent in connection with the private
offering in September, 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 "NTB Private Offering Warrants")
to purchase units of securities, each unit consisting of two shares of Common
Stock and a warrant to purchase one share of Common Stock. The Company
anticipates that it will issue to NTB, for nominal consideration, 31,050 NTB
Private Offering Warrants, although the Company has not entered into a formal
sales agency agreement with NTB with respect to the private offering.
Accordingly, the terms of the NTB Private Offering Warrants, including the
anti-dilution provisions, if any, have not been determined as of the date
hereof.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
The Company is soliciting approval of a proposal to amend its 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. The Certificate
of Incorporation as currently in effect authorizes the Company to issue an
aggregate of 10,000,000 shares of Common Stock. As of December 31, 1997, there
were issued and outstanding 6,678,123 shares of Common Stock. All of the
remaining 3,321,877 shares of Common Stock authorized are reserved for issuance
upon the exercise of outstanding stock options and warrants (including those
issued to Douglas H. Hanson as described in the following paragraph) and the
conversion of outstanding shares of the Company's Series A Preferred Stock
(including anti-dilution provisions pertaining to such options, warrants, and
Series A Preferred Stock).
As is described above under the caption "RECENT DEVELOPMENT," the Company
agreed to issue to Mr. Hanson warrants (the "Warrants") to purchase 4,000,000
shares of Common Stock for an exercise price of $1.90 per share, subject to
adjustment, and the Company granted Mr. Hanson incentive stock options to
purchase 191,385 shares of Common Stock for an exercise price of $2.6125 per
share and non-qualified stock options to purchase 408,615 shares of Common
Stock for an exercise price of $1.00 per share (collectively, the "Options")
pursuant to the Company's 1997 Stock Option Plan (the "1997 Plan"). 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, if it is approved). The 1997 Plan is subject to
the approval by the stockholders of the Company and is being submitted for
such approval at the Meeting. SEE "PROPOSAL NO. 2--APPROVAL OF ROCKY
MOUNTAIN INTERNET, INC. 1997 STOCK OPTION PLAN."
As of the date hereof, the Company is not authorized to issue all of the
shares of Common Stock that could be issued to Mr. Hanson in the event that
he exercises all of the Warrants and Options. In connection with the
issuance of the Options and the agreement to issue the Warrants to Mr.
Hanson, the Company agreed to propose to the stockholders of the Company 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. In
the event that this proposal is not approved, the Company would not have the
authority to issue to Mr. Hanson the Warrants and all of the shares of Common
Stock underlying the Warrants and Options that the Company agreed to issue to
Mr. Hanson. See "PROPOSAL NO. 5--APPROVAL OF AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK."
The Company is soliciting approval of the adoption of the 1998
Non-Employee Directors' Stock Option Plan (the "1998 Non-Employee Directors'
Plan"). The 1998 Non-Employee Directors' Plan has a term of three years, and
a total of 68,000 shares of Common Stock have been reserved for issuance
under the 1998 Non-Employee Directors' Plan. Pursuant to the terms of the
1998 Non-Employee Directors' Plan, each director who is not an employee of
the Company would be granted an option to purchase 8,500 shares of Common
Stock. Each director who is not an employee or officer of the Company will
vest in options to purchase 1,500 shares of Common Stock if he or she has
served as a director from the effective date of the 1998 Non-Employee
Directors' Plan until December 31, 1998, will vest in options to purchase
3,500 shares of Common Stock if he or she has served as a director for the
entire year ending December 31, 1999, and will vest in options to purchase
3,500 shares of Common Stock if he or she has served as a director for the
entire year ending December 31, 2000. See "PROPOSAL NO. 4--APPROVAL OF ROCKY
MOUNTAIN INTERNET, INC. 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN."
The anti-dilution provisions pertaining to the various options, warrants,
and Series A Preferred Stock issued by the Company are summarized below:
COMMON STOCK PURCHASE WARRANTS CONSTITUTING A PORTION OF THE UNITS ISSUED
IN CONNECTION WITH THE COMPANY'S IPO IN SEPTEMBER, 1996. In connection with
the Company's IPO, the Company issued and sold 1,365,000 Units of securities,
each Unit consisting of one share of Common Stock and one common stock purchase
warrant. The initial exercise price of these warrants (for purposes of the
discussion herein, the "Purchase Price") was $4.375 per share of common stock.
In the event that, at any time after the date of the issuance of the warrants,
the Company (i) sells shares of Common Stock for a price per share less than
the Purchase 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, then, upon each occurrence of such an
event, the Purchase Price is changed to a price determined by dividing (i) the
sum of (a) the total number of shares of Common Stock outstanding immediately
prior to such event, multiplied by the Purchase Price in effect immediately
prior to such event, and (b) the consideration, if any, received by the Company
upon such event by (ii) the total number of shares of Common Stock outstanding
immediately after such event, except that the Purchase Price may not be
increased in accordance with this formula unless there has been a combination
of the shares of outstanding Common Stock.
For purposes of this adjustment, the number of shares of Common Stock at
any time outstanding is deemed to include the aggregate number of shares
issuable (subject to adjustment upon actual issuance) upon the exercise of
outstanding options, rights, or warrants and upon the conversion or exchange of
convertible or exchangeable securities. Upon each adjustment of the Purchase
Price as described above, the number of shares of Common Stock purchasable upon
the exercise of each warrant is adjusted and is determined by multiplying the
number of shares of Common Stock purchasable immediately prior to the
adjustment by the Purchase Price in effect immediately prior to such adjustment
and dividing this product by the applicable adjusted Purchase Price.
-19-
<PAGE>
In the event that, at any time after the date of the issuance of the
warrants, the Company issues options, rights, or warrants to subscribe for
shares of Common Stock or issues any securities convertible into or
exchangeable for shares of Common Stock, for a consideration per share less
than the Purchase Price in effect immediately prior to such issuance, or
without consideration, the Purchase Price is reduced according to the formula
described above. For such determination, the aggregate number of shares of
Common Stock issuable upon the exercise or conversion of the options, rights,
warrants, or convertible or exchangeable securities, as the case may be, will
be deemed to be issued and outstanding at the time the time the options,
rights, warrants, or convertible or exchangeable securities were issued, for a
consideration equal to the minimum purchase price per share of Common Stock
provided for in the options, rights, or warrants at the time of their issuance,
plus the consideration, if any, received by the Company for the issuance of the
options, rights, or warrants. If, however, any of such options, rights,
warrants or convertible or exchangeable securities expire without having been
exercised, converted, or exchanged, the number of shares of Common Stock deemed
to be issued and outstanding is reduced by the number of shares as to which
options, rights, warrants, and/or convertible or exchangeable securities have
expired, and the Purchase Price is readjusted accordingly.
No adjustment to the Purchase Price is to be made as a result of the
issuance of shares of Common Stock pursuant to options granted at any time
under the 1996 Plan, as defined below under the caption "Options Granted
Pursuant to Stock Option Plans," or the Directors' Plan, or upon the exercise
of any options granted thereunder.
NTB WARRANTS. In connection with the Company's IPO, the Company issued to
NTB the NTB Warrants, which entitle NTB to purchase 136,500 Units of the
Company's securities, each Unit consisting of one share of Common Stock and one
common stock purchase warrant. The initial exercise price of the NTB Warrants
was $4.20 per Unit. 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 NTB 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.
The price at which the shares of Common Stock underlying the common stock
purchase warrants included in the NTB Warrants are issuable was $6.5625 at the
time of issuance of the NTB Warrants. This exercise price is subject to
adjustment in the manner described above under the caption "Common Stock
Purchase Warrants Constituting a Portion of the Units Issued in Connection with
the Company's IPO in September, 1996."
-20-
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK. The Company issued an aggregate of
250,000 shares of the Series A Preferred Stock in 1996. The Series A
Preferred Stock is convertible into shares of Common Stock at any time after
May 15, 1997 at the option of the holder thereof or at the option of the
Company. Each share of Series A Preferred Stock is convertible into a number
of shares of Common Stock derived by dividing the "Liquidation Value" (equal
to $2.00 per share plus all accrued but unpaid dividends) by the "Conversion
Price" (initially $2.00). In the event that, at any time after the date of
the initial issuance of the Series A Preferred Stock, the Company issues any
"Additional Stock," as defined below, without consideration or for a
consideration per share less than the Conversion Price in effect immediately
prior to such issuance of Additional Stock, the Conversion Price is adjusted
by multiplying the Conversion Price then in effect by a fraction the
numerator of which is (i) the number of shares of Common Stock outstanding
immediately prior to such issuance PLUS (ii) the number of shares of Common
Stock that the aggregate consideration received by the Company for the total
number of shares of Additional Stock issued would purchase at the Conversion
Price then in effect, and the denominator of which is (i) the number of
shares of Common Stock outstanding immediately prior to such issuance PLUS
(ii) the number of shares of Additional Stock issued. For purposes of
adjusting the Conversion Price, all shares of Common Stock issuable upon
conversion of the Series A Preferred Stock are assumed to be outstanding, and
immediately after the issuance of any shares of Additional Stock, those
shares are also treated as outstanding.
For purposes of adjusting the Conversion Price, "Additional Stock"
includes (i) all shares of Common Stock issued, (ii) the maximum number of
shares of Common Stock deliverable upon the exercise of options or rights to
purchase Common Stock that are granted or issued after the initial issuance of
the Series A Preferred Stock, and (iii) all shares of Common Stock issuable
upon the conversion or exchange of convertible or exchangeable securities or
upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities. Also for purposes of adjusting the
Conversion Price, the consideration received by the Company includes, in the
case of the grant or issuance of options or rights described in (ii), above,
the consideration, if any, received upon the grant or issuance of the options
or rights plus the minimum purchase price provided in the options or rights for
the Common Stock covered thereby, and, in the case of the issuance of
convertible or exchangeable securities or of options to purchase or rights to
subscribe to such convertible or exchangeable securities described in (iii),
above, the consideration, if any, received for any such securities and related
options or rights plus the additional consideration, if any, to be received
upon the conversion or exchange of such securities or the exercise of any
related options or rights.
For purposes of adjusting the Conversion Price, "Additional Stock" does
NOT include shares of Common Stock issued or issuable (i) to officers,
directors, employees, or consultants under benefit plans approved by the
stockholders of the Company, (ii) pursuant to a stock split or stock dividend
payable in Common Stock (or rights convertible into Common Stock) (except that
the Conversion Price will be adjusted as described in the preceding
paragraphs), or (iii) upon conversion of the Series A Preferred Stock.
COMMON STOCK PURCHASE WARRANTS CONSTITUTING A PORTION OF THE UNITS ISSUED
IN A PRIVATE OFFERING IN SEPTEMBER, 1997. From June to September, 1997, the
Company sold in a private offering 310,500 units of its 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. The initial exercise of these warrants
was $3.00 per share of Common Stock. In the event that, prior to the
exercise of these warrants, the Company effects a stock split-up, stock
dividend, or other increase or reduction of the number of shares of Common
Stock outstanding without receiving compensation in cash, services, or
property therefor, the number of shares of Common Stock subject to the
warrants is required to be (i) in the event of a net increase in the number
of shares of Common Stock outstanding, proportionately increased, and the
exercise price proportionately reduced, and (ii) in the event of a net
reduction in the number of shares of Common Stock outstanding,
proportionately reduced and the exercise price proportionately increased.
-21-
<PAGE>
In addition, in the event that, within 24 months after June 30, 1997, the
Company sells shares of its Common Stock for cash consideration (other than
upon exercise of employee stock options) and the amount per share paid to the
Company, net of discounts and commissions is less than $1.80, the Company is
required to issue to each purchaser in the private offering an additional
number of shares of Common Stock such that the additional shares, when added to
the shares purchased in the private offering, would result in an effective
purchase price equal to the net price per share paid by purchasers in such
later offering.
NTB PRIVATE WARRANTS. NTB acted as the Company's placement agent in
connection with the private offering described in the preceding paragraph.
In connection with that offering, the Company agreed to issue to NTB the NTB
Private Offering Warrants which entitle NTB 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 NTB, for
nominal consideration, 31,050 NTB Private Offering Warrants, although the
Company has not entered into a formal sales agency agreement with NTB with
respect to the private offering. Accordingly, the terms of the NTB Private
Offering Warrants, including the anti-dilution provisions, if any, have not
been determined as of the date hereof.
OPTIONS GRANTED PURSUANT TO STOCK OPTION PLANS.
1996 PLAN. Pursuant to the Company's 1996 Employees' Stock Option Plan
(the "1996 Plan"), the Company has reserved 471,300 shares of Common Stock for
issuance thereunder. In the event that the Company at any time increases or
decreases the number of its outstanding shares of Common Stock through the
payment of a stock dividend or any other distribution upon its Common Stock
payable in Common Stock, or through a stock split, subdivision, consolidation,
combination, reclassification, or recapitalization involving its Common Stock
such that an adjustment is required in order to preserve the intended benefits
or potential benefits of the 1996 Plan, the committee that administers the
1996 Plan (or the entire Board of Directors if there is no such committee) is
required to make adjustments to any or all of (i) the number of shares of
Common Stock that may thereafter be made subject to the 1996 Plan, (ii) the
number of shares of Common Stock subject to outstanding options granted under
this plan, and (iii) the purchase or exercise price with respect to any of the
foregoing.
DIRECTORS' PLAN. Upon the occurrence of any of the events described under
the caption "1996 Plan," the following numbers, rights, and privileges are
increased, decreased, or changed in a like manner as if they had been issued and
outstanding at the time of such event: (i) the number of shares of Common Stock
as to which options may be granted under the Directors' Plan; and (ii) the
number of shares of Common Stock then included in each outstanding option
granted under the Directors' Plan.
NON-QUALIFIED PLAN. The anti-dilution provisions of the Non-qualified Plan
are substantially identical to those contained in the 1996 Plan.
1997 PLAN. Pursuant to the 1997 Plan, the Company has reserved 600,000
shares of Common Stock for issuance thereunder. In the event that the
outstanding shares of the Company's Common Stock as a whole are increased,
decreased, changed into, or exchanged for a different number or kind of shares
or securities of the Company, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock
split, combination of shares, change in corporate structure, or the like, an
appropriate and proportionate adjustment is required to be made in the number
and kinds of shares subject to the Plan and in the number, kinds, and per
share exercise price of shares subject to unexercised options (or portions
thereof) granted prior to such change. Any such adjustment, however, is
required to be made without a change in the total price applicable to the
unexercised portion of the outstanding option but with a corresponding
adjustment in the price for each share of Common Stock covered by the option.
The Company has granted an option to Mr. Hanson to purchase 600,000 shares of
Common Stock pursuant to the terms of the 1997 Plan, as described above under
the caption "RECENT DEVELOPMENT."
WARRANTS. As described above under the caption "Recent Development," the
Company issued Warrants to purchase 4,000,000 shares of Common Stock to Mr.
Hanson in connection with his investment in the Company. 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 shares of Common Stock purchasable immediately prior to
such event are adjusted so the holder of the 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 Warrants immediately prior to such event.
-22-
<PAGE>
PROPOSAL NO. 1--ELECTION OF DIRECTORS
As set by the Board of Directors pursuant to the Bylaws of the Company, the
Board of Directors consists of five members. Currently there are five members,
all of whom are nominees for reelection. All directors hold office for one year
until the next Annual Meeting of Stockholders or until their successors have
been duly elected and qualified.
Messrs. Christopher K. Phillips, Gerald Van Eeckhout, and Reynaldo U.
Ortiz have resigned from the Board of Directors, effective November 10,
November 19, and December 1, 1997, respectively. Each of Messrs. Phillips,
Van Eeckhout, and Ortiz has notified the Company that his resignation was not
the result of any disagreement with the Company on any matter relating to the
Company's operations, policies, or practices. On January 10, 1998, the
remaining two directors of the Company, Douglas H. Hanson and D. D. Hock,
filled the vacancies created by the resignations of Messrs. Phillips, Van
Eeckhout and Ortiz by naming Robert W. Grabowski, Lewis H. Silverberg and
Mary Beth Vitale to be directors of the Company.
The affirmative vote of a majority of the outstanding shares of Common
Stock is required to elect the directors.
Only votes cast FOR a nominee will be counted in determining whether that
nominee has been elected as director. Stockholders may withhold authority from
the proxyholders to vote for the entire slate as nominated or, by writing the
name of an individual nominee in the space provided on the proxy card, withhold
the authority to vote for any individual nominee. Instructions on the
accompanying proxy card to withhold authority to vote for one or more of the
nominees will result in such nominees receiving fewer votes.
If any of the nominees should decline or be unable to act as a director,
the shares may be voted for such substitute nominees as the proxyholders may in
their discretion determine. Shares represented by the enclosed proxy will be
voted FOR the election of these nominees, unless authority to vote for one or
more nominees is withheld.
The experience and background of each of the nominees are set forth above
under the caption "MANAGEMENT."
PROPOSAL NO. 2--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1997 STOCK OPTION PLAN
The Company's stockholders are also being asked to approve the Rocky
Mountain Internet, Inc. 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan
was adopted by the Board of Directors as it was constituted immediately prior to
the events described above under
-23-
<PAGE>
the caption "RECENT DEVELOPMENT" and is effective as of October 2, 1997 (as
used in the discussion herein of the 1997 Plan, the "Effective Date"), subject
to stockholder approval. Below is a summary of the principal provisions of the
1997 Plan and its operation. A copy of the 1997 Plan is set forth in full in
Appendix A to this Proxy Statement. Management of the Company believes that
the following is an accurate summary of the material terms and provisions of
the 1997 Plan.
A total of 600,000 shares of Common Stock has been reserved for issuance
over the ten-year term of the 1997 Plan, and all options available for grant
thereunder were granted to Mr. Hanson in connection with the transactions
described above under the caption "RECENT DEVELOPMENT."
Upon dissolution or liquidation of the Company or upon a reorganization,
merger, or consolidation in which the Company is not the surviving corporation,
or upon the sale of substantially all of the assets of the Company to another
corporation, the 1997 Plan and all options issued thereunder will terminate
(except that all outstanding options shall be exercisable in full for at least
30 days prior to the termination date), unless, in connection with such
transaction, provision is made for the assumption of options previously granted
or the substitution of new options of the successor employer corporation (or a
parent or subsidiary thereof), with appropriate adjustment as to the number and
kinds of shares and the per share exercise price. All adjustments made as
described in this paragraph are to be made by the committee that administers the
1997 Plan.
In the event that the Company is the surviving or resulting corporation in
any merger, sale of assets, sale of stock, consolidation, or corporate
reorganization, any award granted under the 1997 Plan shall pertain and apply to
the securities of which the holder of the option would have been entitled.
ADMINISTRATION
Authority to administer the 1997 Plan is vested in a committee (the
"Committee") consisting of persons appointed by the Board of Directors; in the
absence of such appointments, the entire Board of Directors serves as the
Committee.
As is disclosed above under the captions "RECENT DEVELOPMENT" and
"INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON," the Company
granted to Douglas H. Hanson options to purchase all 600,000 shares of Common
Stock reserved for issuance under the 1997 Plan--incentive stock options to
purchase 191,385 shares of Common Stock for an exercise price of $2.6125 per
share and non-qualified stock options to
-24-
<PAGE>
purchase 408,615 shares of Common Stock for an exercise price of $1.00 per
share pursuant to the 1997 Plan.
TERMS OF OPTIONS
Options granted under the 1997 Plan may be either incentive stock options
("ISO's") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or nonstatutory options ("NSO's"), which are not
intended to satisfy such requirements. Options may be granted for a period of
10 years after the Effective Date.
The exercise price of ISO's may not be less than the fair market value of
the Common Stock on the date of grant of the ISO (or 110% of such amount if the
ISO is granted to an individual owning stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company). The
exercise price of NSO's may be equal to or less than the fair market value of
the Common Stock on the date of grant of the NSO. Each ISO and NSO shall expire
not more than 10 years from the date of grant (five years for ISO's granted to
an individual owning stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company), and the Committee may in its
discretion accelerate the time at which an option granted under the 1997 Plan
may be exercised. The aggregate fair market value (as defined in the 1997 Plan
and as determined on the date of grant) of any ISO plus any incentive options
granted under any other Company plan that are first exercisable by any
participant during any one calendar year may not exceed $100,000 (or such other
amount as the Code shall provide).
Payment of the exercise price may be made in cash, by certified check, bank
draft, or money order, or, in the discretion of the Committee, through the
delivery of shares of Common Stock having a fair market value equal to the
aggregate exercise price, or by a combination of these methods. Any options
granted under the 1997 Plan become vested one year from the date of grant,
except that the Committee may accelerate the vesting schedule of some options,
and all options become vested upon the grantee's retirement, disability (as
those terms are defined in the 1997 Plan), or death. The minimum number of
shares of Common Stock that can be acquired upon any exercise of an ISO or NSO
is the lesser of (i) 100 shares or (ii) the total number of shares available for
exercise under the grant. Options granted pursuant to the 1997 Plan are subject
to forfeiture under certain conditions.
The 1997 Plan terminates on the tenth anniversary of its Effective Date.
FEDERAL TAX CONSEQUENCES
NONSTATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of an NSO. The optionee generally will recognize ordinary income in
the year in which the option is exercised equal to the excess of the fair market
value of the purchased shares at the date of exercise over the exercise price,
and the optionee will be required to satisfy the tax withholding requirements
applicable to such income, which the optionee may elect to satisfy by having the
Company withhold shares from the shares otherwise due or by delivering a
sufficient number of
-25-
<PAGE>
previously owned shares of Common Stock to the Company. On ultimate sale of the
shares, the optionee will generally recognize as capital gain or loss the
difference between the fair market value on the date of exercise and the
ultimate sales price.
INCENTIVE STOCK OPTIONS. No taxable income is recognized by the optionee
at the time of the grant of an ISO and, except in determining alternative
minimum tax, no taxable income is recognized at the time the ISO is exercised.
The optionee will, however, recognize taxable income or loss in the year in
which the purchased shares are sold or otherwise made the subject of
disposition.
For federal tax purposes, dispositions of ISO's are divided into two
categories: qualifying and disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other taxable disposition of
such shares is made more than two years after the grant date of the option and
more than one year after the exercise date. If the optionee fails to satisfy
either of these two holding periods prior to the sale or other disposition of
the purchased shares, then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee generally will
recognize long-term capital gain in an amount equal to the excess of (i) the
amount realized upon the sale or other disposition over (ii) the option price
paid for the shares. If there is a disqualifying disposition of the shares,
then the excess of (i) the fair market value of the shares at the date of
exercise (or, if lower, the fair market value of the shares on the date of
disposition) over (ii) the option price paid therefor will be taxable as
ordinary income. Any additional gain recognized upon the disposition will be a
capital gain, and such gain will be long-term if the shares have been held for
more than 18 months following exercise of the option.
ALTERNATIVE MINIMUM TAX. The difference between the fair market value of
shares subject to an ISO on the date of exercise and the exercise price of such
shares is an adjustment to income for purposes of the alternative minimum tax
(the "AMT"). The AMT (imposed to the extent it exceeds the taxpayer's regular
tax) is 26% of an individual taxpayer's alternative minimum taxable income (28%
in the case of alternative minimum taxable income in excess of $175,000).
Alternative minimum taxable income is determined by adjusting regular taxable
income for certain items, increasing that income by certain tax preference items
(including the difference between the fair market value of the shares subject to
the ISO on the date of exercise and the exercise price) and reducing this amount
by the applicable exemption amount ($45,000 in case of a joint return, subject
to reduction under certain circumstances). If a disqualifying disposition of
the shares subject to an ISO occurs in the same calendar year as exercise of the
ISO, there is no AMT adjustment with respect to those shares. Also, upon a sale
of such shares that is a qualifying disposition, alternative minimum taxable
income is reduced in the year of sale by the excess of the fair market value of
the shares subject to the ISO at exercise over the amount paid for such shares.
DEDUCTION TO THE COMPANY. The Company will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the optionee in
connection with the exercise of an NSO. The deduction generally will be allowed
for the taxable year of the
-26-
<PAGE>
Company in which occurs the last day of the calendar year in which the optionee
recognizes ordinary income in connection with such exercise.
If the optionee makes a disqualifying disposition of the shares purchased
on exercise of an ISO, then the Company will be entitled to an income tax
deduction for the taxable year in which such disposition occurs, equal to the
amount which is taxable to the employee as ordinary income. In no other
instance will the Company be allowed a deduction with respect to the optionee's
disposition of the shares purchased upon exercise of an ISO.
Under Section 162(m) of the Code, the Company is not entitled to a
deduction for certain executive compensation in excess of $1,000,000. This
limitation applies to compensation paid to the Company's Chief Executive Officer
and to each of its next four most highly compensated executive officers.
Amounts treated as compensation pursuant to the exercise of stock options are
subject to the deduction limit, unless the option exercise price is at least
equal to the fair market value of the underlying stock on the date of grant. In
addition, the grant of options must be made by a committee of at least two
"outside directors" as defined under Code Section 162(m). Awards granted under
the 1997 Plan are intended to qualify for full deductibility.
AMENDMENTS TO 1997 PLAN
The Board of Directors may alter, amend, suspend, or terminate the 1997
Plan in whole or in part, except that without the approval of stockholders as
may be required by law or the Company's By-laws, no such action may be taken
that changes the minimum option price, increases the maximum term of any options
granted thereunder, materially increases the benefits accruing to participants
in the 1997 Plan, materially increases the number of securities that may be
issued pursuant to the 1997 Plan (except as described above), extends the
period for granting options thereunder, or materially modifies the requirements
as to eligibility for participation thereunder.
REQUIRED VOTE
An affirmative vote of the holders of a majority of the shares of Common
Stock issued and outstanding is required for approval of the 1997 Plan.
Abstentions and broker non-votes are considered shares of stock present in
person or represented by proxy at the Meeting and entitled to vote and are
counted in determining the number of votes necessary for a majority. An
abstention will therefore have the practical effect of voting against approval
of the 1997 Plan because it represents one fewer vote for approval of the 1997
Plan.
THE BOARD OF DIRECTORS AS IT WAS CONSTITUTED IMMEDIATELY PRIOR TO THE EVENTS
DESCRIBED ABOVE UNDER THE CAPTION "RECENT DEVELOPMENT" ADOPTED THE ROCKY
MOUNTAIN INTERNET, INC. 1997 STOCK OPTION PLAN, AND THE CURRENT BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE ROCKY MOUNTAIN
INTERNET, INC. 1997 STOCK OPTION PLAN. UNLESS MARKED TO THE CONTRARY, PROXIES
RECEIVED WILL BE VOTED "FOR" APPROVAL.
-27-
<PAGE>
PROPOSAL NO. 3--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1998 EMPLOYEES' STOCK
OPTION PLAN
The Company's stockholders are also being asked to approve the Rocky
Mountain Internet, Inc. 1998 Employees' Stock Option Plan (the "1998 Plan").
The 1998 Plan was adopted by the Board of Directors on November 5, to be
effective March 1, 1998 (as used in the discussion herein of the 1998 Plan, the
"Effective Date"), subject to stockholder approval.
Equity incentives have continually been a significant component of
compensation for a broad range of the Company's employees. The Company
believes that this practice has enabled the Company to attract and retain
the talent that it continues to require. By linking key employees'
compensation to corporate performance, the employees' reward is directly
related to the Company's success. The Company believes the use of equity
incentives increases employee motivation to improve stockholder value.
The purposes of the 1998 Plan include, among others, providing participants
with added incentives to continue in the long-term service of the Company,
creating in such persons a more direct interest in the future success of the
Company, attracting key employees, consultants, and advisors, and retaining and
motivating participants by providing an opportunity for investment in the
Company.
Below is a summary of the principal provisions of the 1998 Plan and its
operation. A copy of the 1998 Plan is set forth in full in Appendix B to
this Proxy Statement. Management of the Company believes that the following
is an accurate summary of the material terms and provisions of the 1998 Plan.
SHARE RESERVE
A total of 266,544 shares of Common Stock has been reserved for issuance
over the ten-year term of the 1998 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 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
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 Plan.
-28-
<PAGE>
ADMINISTRATION; OPTION AGREEMENTS
Authority to administer the 1998 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 Administrative Committee has the
full power and authority to, among other things, interpret any provision of the
1998 Plan, to select the participants to whom options will be granted, the
amount of each option, and any other terms and conditions of each option
granted or to be granted under the 1998 Plan, consistent with the terms of the
1998 Plan. Each option granted thereunder is to be evidenced by an agreement
between the Company and the optionee, which is required to set forth the number
of shares subject to the option, the option exercise price, the vesting
schedule, the duration of the option, a provision that the option is not
transferable except by will or pursuant to the laws of descent and
distribution, provisions as to the termination of the options granted
thereunder in the event of termination of employment, death, or disability (as
defined in the 1998 Plan), and the method of exercise and payment for the
shares of Common Stock purchased upon exercise. Payment may be made in cash, by
cashier's check, authorization from the Company to retain from the number of
shares being purchased pursuant to such exercise that number of shares having a
fair market value (as defined in the 1998 Plan) equal to the purchase price for
the total number of shares as the which the option is exercised, by delivery to
the Company of a notice of exercise together with irrevocable instructions to a
broker to deliver to the Company the amount of sale or loan proceeds to pay the
exercise price, by delivery to the Company of certificates representing the
number of shares of Common Stock owned by the optionee having a fair market
value equal to the purchase price for the shares purchased pursuant to such
exercise, or any combination of these payment methods.
ELIGIBILITY FOR PARTICIPATION
Persons eligible to participate in the 1998 Plan include full-time (i.e.,
those employees who are employed for a minimum of 30 hours per week) key
employees of the Company (or any affiliated corporation, as defined in the 1998
Plan, or division thereof) whose judgment, initiative, and efforts are, or will
be, important to the successful conduct of its business, and independent
contractors, consultants, and advisors of the Company, except that (i) no
director may be a participant in the 1998 Plan; and (ii) independent
contractors, consultants, or advisors may not be granted ISO's (as described
below) under the 1998 Plan. No options that may be granted under the 1998
Plan, if it is adopted, have been allocated to any person or group of persons.
TERMS OF OPTIONS
Options granted to employees may be either incentive stock options
("ISO's") within the meaning of Section 422 of the Code, or nonstatutory options
("NSO's"), which are not intended to satisfy such requirements. Options may be
granted for a period of 10 years after the Effective Date.
The option exercise price of ISO's may not be less than the fair market
value of the Common Stock on the date of grant of the ISO (or 110% of such
amount if the ISO is granted to an individual owning stock possessing more than
10% of the total combined voting power of all classes of stock of the Company).
The option exercise price of NSO's may be equal to or less than the fair market
value of the Common Stock on the date of grant of the NSO. The Administrative
Committee may, in its discretion, impose a vesting schedule or vesting provision
-29-
<PAGE>
for any options granted under the 1998 Plan. Notwithstanding the foregoing, in
the event of a change in control of the Company (as defined in the 1998 Plan),
unless the applicable agreement with respect to any option provides otherwise,
each outstanding option under the 1998 Plan vests immediately, regardless of any
vesting schedule provided in the particular agreement. 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)
or the fair market value of the Common Stock on the date of cancellation of the
option; (iii) make any other adjustments or amendments to the outstanding
options; or (iv) unless otherwise provided in any stock option agreement,
determine that any or all outstanding options will not vest or become
exercisable immediately in the event of a tender offer or exchange offer to
acquire the Company's securities if provision is made to substitute new options
that are equivalent to the options then outstanding.
Each ISO and NSO shall expire not more than 10 years from the date of grant
(five years for ISO's granted to an individual owning stock possessing more than
10% of the total combined voting power of all classes of stock of the Company).
The aggregate fair market value (as defined in the 1998 Plan) of any ISO plus
any incentive options granted under any other Company plan that are first
exercisable by any participant during any one calendar year may not exceed
$100,000.
The 1998 Plan terminates on the tenth anniversary of its Effective Date,
unless earlier terminated in the discretion of the Administrative Committee.
FEDERAL TAX CONSEQUENCES
NONSTATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of an NSO. The optionee generally will recognize ordinary income in
the year in which the option is exercised equal to the excess of the fair market
value of the purchased shares at the date of exercise over the exercise price,
and the optionee will be required to satisfy the tax withholding requirements
applicable to such income which the optionee may elect to satisfy by having the
Company withhold shares from the shares otherwise due or by delivering a
sufficient number of previously owned shares of Common Stock to the Company. On
ultimate sale of the shares, the optionee will generally recognize as capital
gain or loss the difference between the fair market value on the date of
exercise and the ultimate sales price.
INCENTIVE STOCK OPTIONS. No taxable income is recognized by the optionee
at the time of the grant of an ISO, and, except in determining alternative
minimum tax, no taxable income is recognized at the time the ISO is exercised.
The optionee will, however, recognize taxable income or loss in the year in
which the purchased shares are sold or otherwise made the subject of
disposition.
-30-
<PAGE>
For federal tax purposes, dispositions of ISO's are divided into two
categories: qualifying and disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other taxable disposition of
such shares is made more than two years after the grant date of the option and
more than one year after the exercise date. If the optionee fails to satisfy
either of these two holding periods prior to the sale or other disposition of
the purchased shares, then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee generally will
recognize long-term capital gain in an amount equal to the excess of (i) the
amount realized upon the sale or other disposition over (ii) the option price
paid for the shares. If there is a disqualifying disposition of the shares,
then the excess of (i) the fair market value of the shares at the date of
exercise (or, if lower, the fair market value of the shares on the date of
disposition) over (ii) the option price paid therefor will be taxable as
ordinary income. Any additional gain recognized upon the disposition will be a
capital gain, and such gain will be long-term if the shares have been held for
more than 18 months following exercise of the option.
ALTERNATIVE MINIMUM TAX. The difference between the fair market value of
shares subject to an ISO on the date of exercise and the exercise price of such
shares is an adjustment to income for purposes of the alternative minimum tax
(the "AMT"). The AMT (imposed to the extent it exceeds the taxpayer's regular
tax) is 26% of an individual taxpayer's alternative minimum taxable income (28%
in the case of alternative minimum taxable income in excess of $175,000).
Alternative minimum taxable income is determined by adjusting regular taxable
income for certain items, increasing that income by certain tax preference items
(including the difference between the fair market value of the shares subject to
the ISO on the date of exercise and the exercise price) and reducing this amount
by the applicable exemption amount ($45,000 in case of a joint return, subject
to reduction under certain circumstances). If a disqualifying disposition of
the shares subject to an ISO occurs in the same calendar year as exercise of the
ISO, there is no AMT adjustment with respect to those shares. Also, upon a sale
of such shares that is a qualifying disposition, alternative minimum taxable
income is reduced in the year of sale by the excess of the fair market value of
the shares subject to the ISO at exercise over the amount paid for such shares.
DEDUCTION TO THE COMPANY. The Company will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the optionee in
connection with the exercise of an NSO. The deduction generally will be allowed
for the taxable year of the Company in which occurs the last day of the calendar
year in which the optionee recognizes ordinary income in connection with such
exercise.
If the optionee makes a disqualifying disposition of the shares purchased
on exercise of an ISO, then the Company will be entitled to an income tax
deduction for the taxable year in which such disposition occurs, equal to the
amount which is taxable to the employee as ordinary income. In no other
instance will the Company be allowed a deduction with respect to the optionee's
disposition of the shares purchased upon exercise of an ISO.
-31-
<PAGE>
Under Section 162(m) of the Code, the Company is not entitled to a
deduction for certain executive compensation in excess of $1,000,000. This
limitation applies to compensation paid to the Company's Chief Executive Officer
and to each of its next four most highly compensated executive officers.
Amounts treated as compensation pursuant to the exercise of stock options are
subject to the deduction limit, unless the option exercise price is at least
equal to the fair market value of the underlying stock on the date of grant. In
addition, the grant of options must be made by a committee of at least two
"outside directors" as defined under Code Section 162(m). Awards granted under
the 1998 Plan are intended to qualify for full deductibility.
AMENDMENTS TO 1998 PLAN
The Board of Directors may alter, amend, suspend, or terminate the 1998
Plan in whole or in part, except that without the approval of stockholders as
may be required by law or the Company's By-laws, no such action may be taken
that changes the minimum option price, increases the maximum term of any options
granted thereunder, materially increases the benefits accruing to participants
in the 1998 Plan, materially increases the number of securities that may be
issued pursuant to the 1998 Plan (except as described above), extends the
period for granting options thereunder, or materially modifies the requirements
as to eligibility for participation thereunder.
REQUIRED VOTE
An affirmative vote of the holders of a majority of the shares of Common
Stock outstanding is required for approval of the Rocky Mountain Internet 1998
Employees' Stock Option Plan. Abstentions and broker non-votes are considered
shares of stock present in person or represented by proxy at the Meeting and
entitled to vote and are counted in determining the number of votes necessary
for a majority. An abstention will therefore have the practical effect of
voting against approval of the proposal because it represents one fewer vote
for approval of the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
ROCKY MOUNTAIN INTERNET 1998 EMPLOYEES' STOCK OPTION PLAN. UNLESS MARKED TO
THE CONTRARY, PROXIES RECEIVED WILL BE VOTED "FOR" APPROVAL.
PROPOSAL NO. 4--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1998 NON-EMPLOYEE
DIRECTORS' STOCK OPTION PLAN
The Company's stockholders are also being asked to approve the Rocky
Mountain Internet, Inc. 1998 Non-Employee Directors' Stock Option Plan (the
"1998 Non-Employee Directors' Plan"). The 1998 Non-Employee Directors' Plan
was adopted by the Board of Directors on January 20, 1998, to be effective
January 22, 1998 (as used in the discussion herein of the 1998 Non-Employee
Directors' Plan, the "Effective Date"), subject to stockholder approval.
The Company believes that equity incentives have enabled the Company to
attract and retain the talent that it continues to require at the Board of
Director level and that the use of equity incentives increases their
motivation to improve stockholder value.
Below is a summary of the principal provisions of the 1998 Non-Employee
Directors' Plan and its operation. A copy of the 1998 Non-Employee
Directors' Plan is set forth in full in Appendix C to this Proxy Statement.
Management of the Company believes that the following is an accurate summary
of the material provisions of the 1998 Non-Employee Directors' Plan.
-32-
<PAGE>
SHARE RESERVE
A total of 68,000 shares of Common Stock has been reserved for issuance
over the three-year term of the 1998 Non-Employee 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 Non-Employee 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 Non-Employee 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 of potential benefits intended to be made available under the 1998
Non-Employee Directors' Plan.
ADMINISTRATION; OPTION AGREEMENTS
Authority to administer the 1998 Non-Employee Directors' Plan is vested
in a committee (for purposes of the discussion in this section, 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 Administrative Committee has the
full power and authority to, among other things, interpret any provision of
the 1998 Non-Employee Directors' Plan and to adopt such rules and regulations
for administering the 1998 Non-Employee Directors' Plan as it may deem
necessary to comply with the requirements of the Code or in order to conform
to any regulation or to any change in any law or regulation applicable
thereto, or as it may otherwise deem proper and in the best interests of the
Company, and any other terms and conditions of each option granted or to be
granted under the 1998 Non-Employee Directors' Plan, consistent with the
terms of the 1998 Non-Employee Directors' Plan. However, the Administrative
Committee does not have the authority to select the participants to whom
options will be granted, to determine the amount of any option to be granted
thereunder, to determine the time at which such options are to be granted,
establish the duration of the options, or alter any other terms or conditions
specified in the plan, except in the sense of administering the plan pursuant
to the provisions of the plan. Each option granted thereunder is to be
evidenced by an agreement between the Company and the optionee, which is
required to contain the number of shares subject to the option, the option
exercise price, the duration of the option, a provision that the option is
not transferable except by will or pursuant to the laws of descent and
distribution, provisions as to the termination of the options granted
thereunder in the event of termination of the optionee's status as a director
of the Company, death, or disability (as defined in the 1998 Non-Employee
Directors' Plan), and the method of exercise and payment for the shares of
Common Stock purchased upon exercise. Payment may be made in cash, by
cashier's check, authorization from the Company to retain from the number of
shares being purchased pursuant to such exercise that number of shares having
a fair market value (as defined in the 1998 Non-Employee Directors' Plan)
equal to the purchase price for the total number of shares as the which the
option is exercised, by delivery to the company of a notice of exercise
together with irrevocable instructions to a broker to deliver to the Company
the amount of sale or loan proceeds to pay the exercise price, by delivery to
the Company of certificates representing the number of shares of Common Stock
then owned by the optionee, the fair market value of which is equal to the
purchase price for the shares purchased pursuant to such exercise, or any
combination of these payment methods.
-33-
<PAGE>
ELIGIBILITY FOR PARTICIPATION
Persons eligible to participate in the 1998 Non-Employee Directors' Plan
include only directors of the Company and individuals elected or appointed to
fill vacancies on the Board of Directors or elected to new director seats
established by the Board of Directors who are not employees or officers of the
Company.
TERMS OF OPTIONS
Options granted under the 1998 Non-Employee Directors' Plan are automatic
and non-discretionary and are intended to be NSO's.
The option exercise price of any option granted under the 1998
Non-Employee 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 Non-Employee Directors' Plan, each non-employee director of the
Company will be 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 Non-Employee Directors' Plan), each
outstanding option under the 1998 Non-Employee Directors' Plan vests
immediately, regardless of any vesting schedule provided in the 1998
Non-Employee 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.
On January 22, 1998, the Effective Date of the 1988 Non-Employee Directors'
Plan, the closing price of the Common Stock was $2.625, and on February 3, 1998
the closing price was $2.438 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 Non-Employee Directors' Plan shall
expire not more than 5 years from the date of grant.
The 1998 Non-Employee Directors' Plan terminates on December 31, 2000,
unless earlier terminated in the discretion of the Administrative Committee.
FEDERAL TAX CONSEQUENCES
The federal tax consequences of the grant and exercise of options under
the 1998 Non-Employee Directors' Plan and other matters relating to such plan
are substantially identical to those described above under the caption
"PROPOSAL NO. 3--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1998 EMPLOYEES'
STOCK OPTION PLAN" with respect to NSO's granted under that plan.
-34-
<PAGE>
AMENDMENTS TO 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Board of Directors may alter, amend, suspend, or terminate the 1998
Non-Employee Directors' Plan in whole or in part, except when the approval of
stockholders may be required by law or upon the advice of counsel such
stockholder approval is determined to be necessary or desirable.
REQUIRED VOTE
An affirmative vote of the holders of a majority of the shares of Common
Stock outstanding is required for approval. Abstentions will be counted for
purposes of determining the number of shares present and entitled to vote and
will have the effect of a vote against the 1998 Non-Employee Directors' Plan.
Broker non-votes, if any, will not be counted in determining the number of
shares present and entitled to vote on the 1998 Non-Employee Directors' Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE ROCKY MOUNTAIN INTERNET, INC. 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION
PLAN, UNLESS MARKED TO THE CONTRARY. PROXIES RECEIVED WILL BE VOTED "FOR"
APPROVAL.
PROPOSAL NO. 5--APPROVAL OF AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
On November 5, 1997, the Board of Directors recommended the adoption by the
stockholders of a proposed amendment to Article 4 of the Company's Certificate
of Incorporation of the Company that would increase the number of shares of
Common Stock that the Company shall have authority to issue from Ten Million
(10,000,000) to Twenty-Five Million (25,000,000).
The proposed increase in the number of authorized shares of Common Stock
has been deemed advisable by the Board of Directors in order to provide
additional authorized but unissued shares for issuance from time-to-time for
such proper corporate purposes as may be determined by the Board, without
further action or authorization by the stockholders. Such corporate purposes
might include the acquisition of additional capital funds through the issuance
of shares, the acquisition of other companies, the declaration of stock splits
and/or stock dividends, employee benefit plans (including, but not limited to,
the 1997 Plan and the 1998 Plan), or other corporate actions.
-35-
<PAGE>
As is described above under the caption "RECENT DEVELOPMENT," the Company
agreed, subject to the approval of this Proposal, to issue to Mr. Hanson
warrants (the "Warrants") to purchase 4,000,000 shares of Common Stock for an
exercise price of $1.90 per share, subject to adjustment, and the Company
granted Mr. Hanson incentive stock options to purchase 191,385 shares of
Common Stock for an exercise price of $2.6125 per share and non-qualified
stock options to purchase 408,615 shares of Common Stock for an exercise
price of $1.00 per share (collectively, the "Options") pursuant to the 1997
Plan. 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, if it is approved). The 1997
Plan is subject to the approval by the stockholders of the Company and is
being submitted for such approval at the Meeting. See "PROPOSAL NO.
2--APPROVAL OF ROCKY MOUNTAIN INTERNET, INC. 1997 STOCK OPTION PLAN."
As of the date hereof, the Company is not authorized to issue all of the
shares of Common Stock that could be issued to Mr. Hanson in the event that
he exercises all of the Warrants and Options. In connection with the
agreement to issue the Warrants and the Options, the Company agreed to
propose to the stockholders of the Company 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. In the event that this proposal is
not approved, the Company would not have the authority to issue to Mr. Hanson
all of the shares of Common Stock underlying the Warrants that the Company
agreed to issue and the Options that the Company issued to Mr. Hanson.
As reported in the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 1997, the Company's Common Stock is
qualified for trading on the NASDAQ SmallCap Market. The board of directors of
the NASDAQ Stock Market, Inc. recently approved amendments that will increase
to $2,000,000 the minimum net tangible assets required for all companies whose
securities are qualified for trading on the NASDAQ SmallCap Market. The new
requirements are scheduled to go into effect on February 22, 1998. The Company
anticipates that, assuming its revenues and expense trends continue and the
Company does not obtain additional equity funds, the Company's net tangible
assets will fall below the newly-adopted minimum required to maintain the
qualification for trading its Common Stock on the NASDAQ SmallCap Market. The
Company believes that, to the extent that additional equity capital is
required, Douglas H. Hanson will exercise some or all of the Options or
Warrants to purchase shares of Common Stock from the Company. Nevertheless,
there is no assurance that Mr. Hanson will make such an additional investment.
Mr. Hanson has not provided the Company an agreement to make such an additional
investment. In the event that Mr. Hanson does exercise some or all of the
Warrants or Options, the Company will need to have authorized a sufficient
number of shares of Common Stock to make such an investment possible.
The Company may seek to grow through strategic acquisitions. The Board has
determined that it would enhance the Company's flexibility to have additional
authorized shares of Common Stock available if an acquisition became available.
The Company currently is authorized to issue 10,000,000 shares of Common Stock
with all of such shares either issued or reserved for issuance under warrants,
preferred stock conversion, options, and stock bonus plans.
If this proposal is adopted, and if the 1997 Plan and the 1998 Plan are
approved, there will be approximately 10,623,000 authorized shares of Common
Stock available for issuance (based on information regarding outstanding
shares of Common Stock as of December 31, 1997 and after taking into account
the shares of Common Stock reserved for issuance under the 1997 Plan, the
1998 Plan, and other stock option and bonus plans, the exercise of warrants,
including the Warrants issued to Douglas H. Hanson, and the conversion of
outstanding preferred stock but not taking into account additional shares
that could be issued if Proposal No. 7 is approved). The proposed increase in
the number of authorized shares of Common Stock will not change the rights of
holders of currently outstanding shares of Common Stock. The newly authorized
shares will have the same rights as currently outstanding shares. Current
stockholders of the Company would not have any preemptive rights to purchase
a portion of any newly authorized shares.
Although the proposed amendment is not intended to be an anti-takeover
provision, the increase in authorized but unissued shares may have an
anti-takeover effect in that additional shares could be used to dilute the stock
ownership of persons seeking to obtain control of the
-36-
<PAGE>
Company. The resulting effect may be to render more difficult or to discourage
the possibility of certain mergers, tender offers, or proxy contests.
If the proposed amendment is approved, all or any part of the authorized
but unissued shares of Common Stock may thereafter be issued without further
approval from the stockholders, except as required by law or the policies of any
stock exchange or registered securities association on which the shares of stock
of the Company may be listed, if any, for such purposes and on such terms as the
Board of Directors may determine.
RECOMMENDATION; REQUIRED VOTE
The Board of Directors unanimously recommends a vote "FOR" approval and
adoption of the proposal to adopt the following two resolutions:
RESOLVED, That, subject to the approval of the Stockholders of the
Corporation at the next Annual Meeting of Shareholders, the Certificate of
Incorporation of the Corporation shall be amended by deleting Section (a)
of Article 4 and replacing it with the following:
(a) AUTHORIZED SHARES. The aggregate number of shares which the
corporation has authority to issue is 25,790,000. The authorized
shares consist of 25,000,000 shares of common stock with a par value
of $.001 per share, such class being designated "common stock," and
790,000 shares of preferred stock with a par value of $.001 per
share, such class being designated "preferred stock."
RESOLVED FURTHER, That, subject to the receipt of the approval of the
stockholders of the Corporation at the Annual Meeting of Stockholders, the
President and the Secretary of the Corporation be, and they are hereby
authorized and directed to prepare, execute, and file or cause to be filed
an appropriate Certificate of Amendment to the Corporation's Certificate of
Incorporation with the Secretary of State of the State of Delaware and
other appropriate authorities and to take such other and further action in
order to carry out the intent and purposes of the preceding resolution and
render effective such amendment to the Certificate of Incorporation.
An affirmative vote of the holders of a majority of the shares of Common
Stock issued and outstanding is required for approval. Abstentions and broker
non-votes are considered shares of stock present in person or represented by
proxy at the Meeting and entitled to vote and are counted in determining the
number of votes necessary for a majority. An abstention will therefore have
the practical effect of voting against approval of the amendment to the
Certificate of Incorporation because it represents one fewer vote for approval
of the amendment.
-37-
<PAGE>
PROPOSAL NO. 6--APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO DECREASE THE NUMBER OF VOTES REQUIRED FOR ACTION BY THE
STOCKHOLDERS OF THE COMPANY AT A MEETING THEREOF FROM A MAJORITY OF THE SHARES
OF COMMON STOCK OUTSTANDING TO A MAJORITY OF THE SHARES PRESENT IN PERSON OR
REPRESENTED BY PROXY AT A MEETING AND ENTITLED TO VOTE ON THE MATTER
On November 5, 1997, the Board of Directors recommended the adoption by the
stockholders of a proposed amendment to Article 4 of the Company's Certificate
of Incorporation of the Company that would decrease the number of votes required
for action by stockholders. The Certificate of Incorporation currently requires
the vote of a majority of all shares of Common Stock outstanding for action by
the stockholders. The amendment, as proposed, would decrease this requirement
to a vote of the majority of the shares present in person or represented by
proxy at a meeting at which a quorum is present and entitled to vote on the
matter. The amendment as proposed is subject to applicable requirements of
Delaware law that would require, as to certain actions, the vote of a greater
number of shares to approve those actions.
The proposed decrease in the number of votes required for action by
stockholders at a meeting has been deemed advisable by the Board of Directors in
order to facilitate the taking or approval of corporate action by the
stockholders. The Board of Directors believes that, if and as the shares of
Common Stock of the Company become more widely distributed, that is, owned by
greater numbers of stockholders, it may be difficult to obtain the votes of a
majority of the shares of Common Stock outstanding for the stockholders to take
action at a meeting of the stockholders, whether those shares are present in
person or are represented by proxy at a meeting. The result may be that some
actions deemed necessary or desirable by the Board of Directors, but which
require the approval of the stockholders, may not be approved, due to the
greater number of shares that would be required to approve such actions.
If the proposed amendment is approved, management believes that it will
facilitate the taking of action by the stockholders of the Company at a meeting
of stockholders. Management also believes that, as it is more likely that
management-owned shares will be present or represented by proxy at meetings of
stockholders than shares that are not owned by management, the relative voting
power represented by management-owned shares would be increased.
RECOMMENDATION; REQUIRED VOTE
The Board of Directors unanimously recommends a vote "FOR" approval and
adoption of the proposal to adopt the following two resolutions:
RESOLVED, That, subject to the approval of the stockholders of the
Corporation at the next Annual Meeting of Stockholders, the Certificate of
Incorporation of the Corporation shall be amended by deleting the last
sentence of Section (b) of Article 4 and replacing it with the following:
-38-
<PAGE>
Unless otherwise provided by the Delaware General Corporation Law,
with respect to any matter submitted to the stockholders of the
Corporation at a meeting of the stockholders, the affirmative vote of
the majority of shares present in person or represented by proxy at
the meeting and entitled to vote on the matter shall be the act of the
stockholders.
RESOLVED FURTHER, That, subject to the receipt of the approval of the
stockholders of the Corporation at the Annual Meeting of Stockholders,
the President and the Secretary of the Company be, and they are hereby
authorized and directed to prepare, execute, and file or cause to be
filed an appropriate Certificate of Amendment to the Company's
Certificate of Incorporation with the Secretary of State of the State
of Delaware and other appropriate authorities and to take such other
and further action in order to carry out the intent and purposes of
the preceding resolution and render effective such amendment to the
Certificate of Incorporation.
An affirmative vote of the holders of a majority of the shares of Common
Stock issued and outstanding is required for approval. Abstentions and broker
non-votes are considered shares of stock present in person or represented by
proxy at the Meeting and entitled to vote and are counted in determining the
number of votes necessary for a majority. An abstention will therefore have
the practical effect of voting against approval of the amendment to the
Certificate of Incorporation because it represents one fewer vote for approval
of the amendment.
PROPOSAL NO. 7 - APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO IMPLEMENT A REVERSE SPLIT OF THE COMPANY'S COMMON STOCK OF UP
TO ONE-FOR-TEN, IN THE EVENT THE BOARD OF DIRECTORS DETERMINES THAT A REVERSE
STOCK SPLIT IS DESIRABLE AT ANY TIME WITHIN ONE YEAR FROM THE DATE OF THE ANNUAL
MEETING, WITH THE EXACT SIZE OF THE REVERSE STOCK SPLIT TO BE DETERMINED BY THE
BOARD OF DIRECTORS.
GENERAL
The Board of Directors, by unanimous vote, has approved, and recommends
that the Company's stockholders approve a proposed 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. The Reverse Stock Split will not alter the
number of shares of the Company's Common Stock authorized for issuance, but
will simply reduce the number of shares of Common Stock issued and
outstanding by a factor equal to the Split Ratio (up to 10), without a change
in the par value of the Common Stock.
By voting to approve the amendment to the Certificate of Incorporation, the
stockholders will approve a reverse stock split pursuant to which multiple
shares of Common Stock will be combined into one share, depending on a
determination by the Board of Directors that that Reverse Stock Split is in the
best interests of the Company and its stockholders. By approving the amendment,
the stockholders authorize the Board of Directors to implement the Reverse Stock
Split at any time within one year following the Meeting. The stockholders,
accordingly, may not, following the approval of the Reverse Stock Split, rescind
their vote even if the timing of the Reverse Stock Split may adversely affect
any stockholder.
If this Proposal No. 7 is approved, the Company's Certificate of
Incorporation would be amended as set forth below under the caption
"Recommendation; Required Vote."
PURPOSE OF PROPOSED REVERSE STOCK SPLIT
Management of the Company believes the Reverse Stock Split is desirable
because it will assist the Company in continuing to meet the new requirements
(effective February 22, 1998) for continued listing on the Nasdaq SmallCap
Market by helping to raise the trading price of the Company's Common Stock.
One of the key requirements for continued listing is that the Company's
Common Stock must maintain a minimum bid price above $1.00 per share. While
the closing bid price of the Company's Common Stock has ranged generally
between a low of $2.00 and a high of $3.063 between September, 1997 and
January 20, 1998, the closing price of the Common Stock could fall below the
new required level in the future. In this regard, it is important to note
that on or about March 5, 1998, approximately 2,791,229 outstanding shares of
Common Stock will become eligible for sale by the owners thereof. The owners
of those shares will be limited to selling, during any three month period, no
more than the greater of: (i) one percent of the total number of shares of
Common Stock then outstanding; or (ii) the average weekly trading volume for
the Common Stock during the four weeks prior to filing of a notice with the
Securities and Exchange Commission of such person's intention to sell his or
her shares. In addition, the Company has contractual obligations to register
approximately 6,183,100 shares of Common Stock, including 4,000,000 shares
issuable to Douglas H. Hanson upon exercise of the Warrants (if Proposal No.
5 is approved) and the 1,500,000 shares purchased by Mr. Hanson, as described
above under the caption "Recent Development." Although these shares have not
been registered as of the date hereof, the owners of those shares will be
able to sell the shares immediately upon registration.
Management of the Company believes that current per share price of the
Common Stock impairs the acceptability of the Common Stock by portions of the
financial community and the investing public. Theoretically, the number of
shares outstanding should not, by itself, affect the marketability of the
stock, the type of investor who acquires it, or a company's reputation in the
financial community, but in practice this is not necessarily the case, as
many investors look upon low priced stock as unduly speculative in nature
and, as a matter of policy, avoid investment in such stocks. Management also
believes that the current per share price of the Common Stock has reduced the
effective marketability of the shares because of the reluctance of many
leading brokerage firms to recommend low priced stock to their clients.
Further, various brokerage house policies and practices tend to discourage
individual brokers from dealing in low priced stocks. Some of those policies
and practices pertain to the payment of brokers' commissions and to
time-consuming procedures that operate to make the handling of low priced
stocks unattractive to brokers from an economic standpoint. In addition, the
structure of trading commissions also tends to have an adverse impact upon
holders of low priced stocks because the brokerage commission on a sale of
low priced stocks generally represents a higher percentage of the sale price
than the commission on higher priced issues.
The Reverse Stock Split is intended to result in a price level for the
Common Stock that will increase investor interest, reduce resistance of
brokerage firms to recommend the Common Stock, and maintain the Company's
listing on the Nasdaq SmallCap Market. Management of the Company believes
that a decrease in the number of shares of Common Stock outstanding without
any material alterations of the proportionate economic interest in the
Company represented by individual stockholdings may increase the trading
price of such shares, although no assurance can be given that the market
price of the Common Stock will rise in proportion to the reduction in the
number of outstanding shares resulting from the Reverse Stock Split. If, as
a result of the Reverse Stock Split and other factors, the market price per
share of the Common Stock is increased sufficiently, the Company believes
that the marketability of the Common Stock may be enhanced. However, no
assurance can be given that such will indeed be the effect. The market price
of the Common Stock also will be based on Company performance and other
factors, some of which may be unrelated to the number of shares outstanding.
Accordingly, there can be no assurance that the market price of the Common
Stock after the Reverse Stock Split will actually increase in an amount
proportionate to the decrease in the number of outstanding shares. In
addition, if the market price of the Common Stock does increase after the
Reverse Stock Split, there can be no assurance that the adjusted market price
for the Common Stock will not drift down immediately or shortly thereafter.
It is not unusual to see some downward movement in a stock's price following
a reverse stock split.
Although the Board of Directors has no present intention of doing so,
the additional shares of authorized but unissued Common Stock that may result
from the proposed Reverse Stock Split could also be used by the Board of
Directors to defeat or delay a hostile takeover. Faced with an actual or
proposed hostile takeover, the directors could issue shares of Common Stock,
in a private transaction, to a friendly party that might align itself with
the Board of Directors in opposing a hostile takeover. Accordingly, the
proposed amendment 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.
EFFECT OF PROPOSED REVERSE STOCK SPLIT ON HOLDERS OF COMMON STOCK
On the Record Date, there were 6,679,045 shares of Common Stock
outstanding. Consummation of the Reverse Stock Split at a Split Ratio of
one-for-two, for example, would decrease the number of outstanding shares of
Common Stock to approximately 3,346,072 shares. The par value of the Common
Stock will remain as $0.001 per share and the authorized number of shares of
Common Stock will remain at 10,000,000 if Proposal No. 5 is not approved, and
will be increased to 25,000,000 if Proposal No. 5 is approved. As a
consequence, the aggregate par value of the outstanding Common Stock will be
reduced, while the aggregate capital in excess of par value attributable to
the outstanding Common Stock for statutory and accounting purposes will be
correspondingly increased. The resolution approving the Reverse Stock Split
provides that this increase in capital in excess of par value will be treated
as capital for statutory purposes. However, under Delaware law, the Board of
Directors of the Company will have the authority, subject to various
limitations, to transfer some or all of such increased capital in excess of
par value from capital to surplus, which additional surplus could be
distributed to stockholders as dividends or used by the Company to repurchase
outstanding stock. The Company currently has no plans to use any surplus so
created to pay any such dividend or to repurchase outstanding stock.
Subject to the provisions for elimination of fractional shares as described
below, consummation of the Reverse Stock Split will not result in a change in
the relative equity position or voting power of the holders of Common Stock.
The per share earnings (loss) and net book value of the Common Stock will be
increased because there will be fewer shares of Common Stock outstanding.
The following table shows the effect of the Reverse Stock Split, as of
February 4, 1998, at a Split Ratio of one-for-two, one-for-five, and
one-for-ten on the number of shares of Common Stock outstanding and on the
number of shares of Common Stock authorized to be issued by the Company. This
table is not exhaustive of all possible Reverse Stock Splits that fall
within Board-approved range and is only intended for illustrative purposes.
On February 4, 1998, there were 6,679,045 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
One-for-Two One-for-Five One-for-Ten
Split Ratio Split Ratio Split Ratio
----------- ------------ ------------
<S> <C> <C> <C>
Common Stock 3,339,523 1,335,809 667,905
Outstanding
Following Reverse
Stock Split (1)
Authorized but
Unissued Shares
Following Reverse
Stock Split (2) 6,660,477 8,664,191 9,332,095
</TABLE>
(1) Assumes that no fractional shares would result from a Reverse Stock
Split. The Company will pay cash to stockholders in lieu of fractional shares
resulting from a Reverse Stock Split as discussed below. A higher Split Ratio
would result in the payment of a higher amount of cash in lieu of the
fractional shares that can be anticipated to result from the Reverse Stock
Split. See "Federal Income Tax Consequences of the Proposed Reverse Stock
Split" below for a discussion of anticipated federal income tax effects of
the Reverse Stock Split.
(2) Assumes that Proposal No. 5 in not approved. In the event that
Proposal No. 5 is approved, the number of authorized but unissued shares
would be 21,660,477 (one-for-two Split Ratio), 23,664,191 (one-for-five Split
Ratio), and 24,332,095 (one-for-ten Split Ratio).
The Company currently has no plans or intent regarding the issuance of
any additional shares of Common Stock that would result from the
effectuation of the Reverse Stock Split.
No scrip or fractional certificates will be issued in the Reverse Stock
Split. Holders of a number of shares of Common Stock not convertible into a
whole number of shares of Common Stock after giving effect to the Reverse
Stock Split will receive a cash payment in lieu thereof as a mechanical means
of rounding off shares of Common Stock. Such payment will be equal to the
value of such fractional share determined by reference to the average closing
prices of the Common Stock for a period of five (5) trading days immediately
preceding the effective date of the Reverse Stock Split (the "Effective
Date"), as reported on the Nasdaq SmallCap Market. Stockholders should be
aware that as a general rule, the Reverse Stock Split would, in and of
itself, neither increase nor decrease the intrinsic value of a stockholder's
investment. Except for holders of a very small number of shares who receive
cash in lieu of a fractional share, the smaller number of shares resulting
from a reverse stock split generally leaves stockholders with approximately
the same proportionate ownership as before the reverse stock split. The
issuance of cash in lieu of a fractional share will increase the
proportionate interest of some stockholders and decrease the proportionate
interest of others. Upon surrender of stock certificates to the transfer
agent, a certificate representing the shares of post-reverse split Common
Stock ("New Shares") will be issued, together with cash for any fractional
interest, and forwarded to the stockholder. The ownership of a fractional
interest of a share will not give the holder thereof any voting, dividend, or
other rights except the right to receive payment therefor as described herein.
The difference in the ownership interest of each stockholder resulting
from the Reverse Stock Split will generally be inversely proportional to the
number of shares held by such stockholder, with large stockholders generally
affected the least. The Company believes that the Reverse Stock Split will
have no detrimental effect on the total value of the Company's Common Stock.
However, the Reverse Stock Split may leave stockholders with one or more "odd
lots" of the Company's stock, i.e., stock holdings in amount of less than 100
shares. To the extent that a stockholder's holding is reduced by reason of
the Reverse Stock Split to less than 100 shares of Common Stock, these shares
may be more difficult to sell, and the brokerage commission for the sale of
his or her shares may in all likelihood be higher than the brokerage
commissions applicable to the sale of shares in lots of 100.
Stockholders have no right under Delaware law or under the Company's
Certificate of Incorporation or By-laws to dissent from the Reverse Stock Split
and obtain appraisal rights with respect to shares owned by them.
The Company does not anticipate that the Reverse Stock Split will result in
a significant reduction in the number of holders of the Common Stock. The
Company does not presently intend to seek, either before or after the Reverse
Stock Split, any change in the Company's status as a reporting company for
federal securities law purposes.
MANNER OF EFFECTING THE REVERSE STOCK SPLIT
The Reverse Stock Split will not be implemented automatically if the
stockholders approve this Reverse Stock Split proposal. If approved at the
Meeting, implementation of the Reverse Stock Split will occur only upon a
subsequent decision by the Board, in its discretion within one year of the
date of the Meeting, to implement the Reverse Stock Split. All references to
the effects of, and other descriptions of, the Reverse Stock Split in this
Proxy Statement will only apply if the Reverse Stock Split is approved by the
stockholders and subsequently implemented by the Board. In addition, the
exact Split Ratio of the Common Stock will be fixed by the Board of Directors
in its discretion, up to a maximum Split Ratio of one-for-ten, if and at the
time the Board of Directors determines to implement the Reverse Stock Split.
The Reverse Stock Split will become effective only in the event the Board of
Directors, in its discretion at any time within one year after the date of
the Meeting, determines that the Reverse Stock Split is desirable, and
directs one or more officers of the Company to file a Certificate of
Amendment to the Company's Certificate of Incorporation with the Secretary of
State of the State of Delaware. If this Reverse Stock Split proposal is
adopted by the stockholders at the Meeting, no further authorization or
approval by the stockholders would be required in order for the Board of
Directors to implement the Reverse Stock Split. The Board of Directors may
consider a variety of factors in determining whether or not to proceed with
the Reverse Stock Split, including, but not necessarily limited to, overall
trends in the stock market, recent changes and anticipated trends in the per
share market price of the Common Stock, business developments, and the
Company's actual and projected financial performance.
If the Reverse Stock Split is approved by the holders of Common Stock at
the Meeting and thereafter implemented by the Board of Directors, an amendment
to the Company's Certificate of Incorporation, in substantially the form set
forth below, will be filed with the Secretary of State of the State of Delaware
to effect the Reverse Stock Split. The Effective Date of the Reverse Stock
Split would be the date of filing of the amendment to the Certificate of
Incorporation, unless the Company specifies otherwise. Without any further
action on the part of the Company or the holders of its Common Stock, the shares
of Common Stock held by stockholders of record as of the Effective Date ("Old
Shares") would be converted at the close of business on the Effective Date into
the right to receive a number of whole New Shares equal to the number of their
Old Shares divided by the Split Ratio. For example, if the Split Ratio were 2,
a holder of 100 Old Shares of Common Stock would have such shares converted into
50 New Shares of Common Stock as a result of the Reverse Stock Split.
Fractional shares resulting from the Reverse Stock Split, if implemented, would
be dealt with as described above under the caption "Effect of Proposed Reverse
Stock Split on Holders of Common Stock."
As soon as practicable after the Effective Date, the Company will forward a
letter of transmittal to each holder of record of shares of Common Stock
outstanding as of the Effective Date. The letter of transmittal will set forth
instructions for the surrender of certificates representing shares of Common
Stock to the Company's transfer agent in exchange for certificates representing
the number of New Shares into which the shares of Common Stock have been
converted as a result of the Reverse Stock Split. CERTIFICATES SHOULD NOT BE
SENT TO THE COMPANY OR THE TRANSFER AGENT PRIOR TO RECEIPT OF SUCH LETTER OF
TRANSMITTAL FROM THE COMPANY.
Until a stockholder forwards a completed letter of transmittal together
with certificates representing its shares of Common Stock to the transfer agent
and receives a certificate representing New Shares, such stockholder's
certificate representing Common Stock shall be deemed to represent that number
of whole New Shares to which such stockholder is entitled as a result of the
Reverse Stock Split.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED REVERSE STOCK SPLIT
The following is a general discussion of certain federal income tax
consequences of the Reverse Stock Split. This discussion does not purport to
deal with all aspects of federal income taxation that may be relevant to holders
of Common Stock and is not intended to be applicable to all categories of
investors, some of which, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, and foreign persons, may be subject to
special rules, AND IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. Furthermore,
the following discussion is based on current provisions of the Code, treasury
regulations now in effect, as well as certain Internal Revenue Service rulings
and judicial decisions, all of which are subject to change at any time. This
discussion is applicable only to those stockholder who are citizens or residents
of the United States for U.S. tax purposes and to domestic corporations. In
addition, this discussion may not be applicable with respect to stock acquired
as compensation, including stock acquired upon the exercise of options. The
summary does not address any consequence of the Reverse Stock Split under any
state, local, or foreign tax laws. No ruling from the Internal Revenue Service
or opinion of counsel will be obtained regarding the Federal income tax
consequences to the stockholders of the Company as a result of the Reverse Stock
Split. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO
SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, AND
FOREIGN INCOME AND OTHER TAX LAWS.
HOLDERS OF SHARES GENERALLY
The Reverse Stock Split is intended to qualify as a "recapitalization" as
described in Section 368(a)(1)(E) of the Code. Before effectuating the Reverse
Stock Spit, the Company's board of Directors will adopt a formal plan of
recapitalization substantially in conformity with the terms and conditions set
forth in this Proposal No. 7. If so adopted, then the Reverse Stock Split
should more likely than not be viewed for federal income tax purposes as an
integrated exchange by stockholders of their Old Shares for New Shares,
resulting in a reshuffling of the capital structure within the framework of the
Company. So viewed, the Reverse Stock Split should constitute a
"recapitalization" of the Company within the meaning of Section 368(a)(1)(E) of
the Code and should be regarded as an isolated transaction that is not part of a
plan to increase periodically the proportionate interest of any stockholder in
the assets or earnings and profits of the Company.
If the Reverse Stock Split is treated as described in the preceding
paragraph, a stockholder will realize gain or loss measured by the difference,
if any, between (i) the sum of (x) the fair market value of the New Shares, and
(y) the amount of cash received in lieu of any fractional shares; and (ii) such
stockholder's tax basis in his or her Old Shares immediately before the Reverse
Stock Split. Gain realized by a stockholder would be recognized only to the
extent of the amount of cash received by a stockholder. Any gain realized in
excess of the amount of cash received by a stockholder and any loss realized by
a stockholder would not be recognized.
The character of any gain recognized by a stockholder in the Reverse Stock
Split, if treated as described above, will depend upon whether the exchange of
such stockholder's Old Shares for New Shares and cash received in lieu of
fractional shares, has the effect of a dividend distribution as to the
stockholder or is treated as a sale or exchange as to such stockholder
(determined by applying the principles of Section 302 of the Code as discussed
below).
If the exchange of Old Shares for the New Shares is treated as a sale or
exchange as to a stockholder, any gain recognized by such stockholder will be
long-term capital gain taxed at a 20% rate if the shares have been held as a
capital asset for more than eighteen months at the Effective Date, will be
long-term capital gain taxed at a 28% rate if the shares have been held as a
capital asset for more than one year but less than eighteen months at the
Effective Date, and will be short-term capital gain if the shares have been so
held for one year or less at that time.
If the exchange of Old Shares for the New Shares has the effect of a
dividend distribution as to a stockholder, the gain recognized by such
stockholder will be taxed as ordinary dividend income to the extent of the
stockholder's ratable share of the Company's accumulated earnings and profits,
and the remainder, if any, will be taxed as gain from the sale or exchange of
stock. The Company has not yet completed the computation of its accumulated
earnings and profits. Following completion of the necessary computations, the
Company will notify stockholders of its determination as to the amount of its
accumulated earnings and profits. Corporate stockholders should refer to the
discussion below under the caption "Corporate Stockholders" for special rules
concerning the taxation of dividends received by corporations.
Whether the exchange of Old Shares for New Shares, and cash received in
lieu of fractional shares, has the effect of a dividend distribution as to a
stockholder or is treated as a sale or exchange will be determined by applying
the principles described in Section 302 of the Code. One safe-harbor test under
that Section provides for sale or exchange (rather than dividend) treatment
provided that the stockholder's percentage ownership in the number of
outstanding New Shares immediately after the Reverse Stock Split is less that 80
percent of his percentage ownership of the number of outstanding Old Shares
immediately before the Reverse Stock Split. Another safe-harbor test resulting
in sale or exchange (rather than dividend) treatment applies where a
stockholder's ownership in the Company is completely terminated. For either
test, a stockholder will be treated as owning not only the Old Shares and New
Shares that the stockholder actually owns but also Old Shares and New Shares
that the stockholder is considered to own constructively under Section 318 of
the Code. In general, under that Section, a stockholder is considered to own
constructively Old Shares and New Shares that are actually owned, and in some
instances constructively owned, by certain individuals and entities or that may
be acquired by such stockholder or related individuals and entities by option or
conversion, including through employee stock options.
If a stockholder fails to satisfy either of the safe-harbor tests described
in the preceding paragraph, the exchange of Old Shares will nonetheless be
treated as a sale or exchange (and not as having the effect of a dividend
distribution) if it results in a "meaningful reduction" of the stockholder's
proportionate interest in the Company. The determination of whether a
stockholder's proportionate interest in a corporation has been meaningfully
reduced ordinarily is based on an evaluation of the reduction in the
stockholder's right to vote, participate in earnings, and participate in
liquidation proceeds. The Internal Revenue Service has ruled that, under
certain circumstances, a 3.3 percent reduction in proportionate interest of a
minority stockholder who owned 0.0001118 percent prior thereto and exercised no
control over corporate affairs was "meaningful."
In determining whether an exchange has the effect of a dividend
distribution as to a stockholder or should be treated as a sale or exchange,
both of the safe-harbor and meaningful reduction tests are applied after taking
into account any related transactions that are part of an integrated plan. It
is possible that dispositions or acquisitions of Old Shares or New Shares (or
options with respect to any such shares) may be considered part of an integrated
plan. ACCORDINGLY, STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX
ADVISERS CONCERNING THE APPLICATION OF BOTH OF THE SAFE-HARBOR AND MEANINGFUL
REDUCTION TESTS TO THEIR PARTICULAR FACTS AND CIRCUMSTANCES.
If the Reverse Stock Split is treated as described above, a stockholder
will have a tax basis in the New Shares equal to the stockholder's tax basis in
the Old Shares immediately prior to the Reverse Stock Split, increased by the
amount of any income recognized by the stockholder and decreased by the amount
of cash received. The holding period of the New Shares will include the holding
period of the Old Shares exchanged in the Reverse Stock Split, provided that the
Old Shares are held as capital assets. Gain, loss, and tax basis, determined as
described above, must be calculated separately for each block of Old Shares
(i.e., Old Shares acquired at the same time in a single transaction) held by a
stockholder.
If the Reverse Stock Split is treated as a recapitalization for federal
income tax purposes but is not viewed to any extent for such purposes as an
integrated exchange of Old Shares for New Shares and cash, then the distribution
of cash in the Reverse Stock Split would be governed by Section 301 of the Code
to that extent. The amount of any distribution to which Section 301 applies
would be taxable as a dividend to the extent of the stockholder's share of the
Company's current and accumulated earnings, then as a tax-free return of capital
to the extent of the stockholder's tax basis in the Old Shares immediately
before the Reverse Stock Split, and the remainder, if any, would be taxed as
gain from the exchange of the Old Shares.
If the Reverse Stock Split is not treated as a recapitalization for federal
income tax purposes, then the distribution of cash and, to the extent that the
distribution of New Shares is disproportionate among the stockholders, the
distribution of such New Shares, would be governed by Section 301.
CORPORATE STOCKHOLDERS
If the exchange of Old Shares is treated to any extent as a dividend
distribution as to a corporate stockholder, the amount of the distribution that
is taxable as a dividend should generally be eligible for the 70 percent
dividends received deduction, subject to the limitations in Sections 246, 246A,
and 1059 of the Code, discussed below. Where the dividends received deduction
is available, a portion of the amount deducted may have to be included by a
corporation (because it is reflected in adjusted current earnings) in computing
its alternative minimum taxable income for the purposes of ascertaining its
possible liability for alternative minimum tax.
The amount, if any, of the distribution that is taxable as a dividend to a
corporate stockholder may be an "extraordinary dividend" as defined in Section
1059 of the Code. Pursuant to at Section, if a corporate stockholder receives
an extraordinary dividend with respect to any stock that has been held for two
years or less on the "dividend announcement date," the nontaxed portion of the
dividend (generally the portion eligible for the dividends received exclusion)
would reduce its tax basis with respect to such stock at the time of any
disposition thereof, thereby increasing the taxable gain recognized on such
disposition. If the nontaxed portion exceeds the corporate stockholder's tax
basis in such stock, the corporate stockholder must treat any such excess as
additional gain upon any disposition of such stock. The Company is not aware of
any direct authority concerning the proper application of Section 1059 to an
extraordinary dividend arising from a "recapitalization" within the meaning of
Section 368(a)(1)(E) of the Code. If the Reverse Stock Split is treated as a
disposition of stock with respect to which an extraordinary dividend has been
paid, the nontaxed portion of the dividend will reduce the corporate
stockholder's basis of the Old Shares as of the date of the Reverse Stock Split,
and any excess of the nontaxed portion of the dividend over the corporate
stockholder's basis in the Old Shares could be recognized as of that date. If
the Reverse Stock Split is not considered to be such a disposition, then the
nontaxed portion of the dividend will reduce the stockholder's basis in the New
Shares received in the Reverse Stock Split, and any gain attributable to such
basis reduction (and any excess of the nontaxed portion of the extraordinary
dividend over the corporate stockholder's basis in such stock) would be
recognized only upon a disposition of the New Shares. CORPORATE STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISERS CONCERNING THE APPLICATION OF
SECTION 1059 TO ANY DIVIDEND INCOME RECOGNIZED AS A RESULT OF THE REVERSE STOCK
SPLIT.
Under Section 246A of the Code, to the extent that a corporation incurs
indebtedness directly attributable to an investment in portfolio stock in
another company (which would include the Common Stock), the dividends
received deduction will be reduced by a percentage equal, in general, to the
average amount of such indebtedness that is outstanding during a base period
of not more than one year before the Reverse Stock Split divided by the total
adjusted tax basis in the investment. Under no circumstances, however, will
the reduction in the dividends received deduction exceed the amount of the
interest deduction allocable to the dividend. In addition under Section
246(c) of the Code, the dividends received deduction will be unavailable with
respect to dividends on Common Stock held by the recipient for forty-five
days or less.
COMPANY TAX CONSEQUENCES
The Reverse Stock Split will not be taxable to the Company for federal
income tax purposes, and the Company will obtain a deduction for such purposes
for certain amounts paid to employees in cancellation of options to acquire Old
Shares and in respect of the vesting of certain Old Shares held by employees and
directors subject to restricted stock agreements.
RECOMMENDATION; REQUIRED VOTE
The Board of Directors unanimously recommends a vote "FOR" approval and
adoption of the proposal to adopt three resolutions substantially in the form as
set forth below:
RESOLVED, That, subject to the approval of the Stockholders of the
Corporation at the next Annual Meeting of Stockholders, the Certificate of
Incorporation of the Corporation shall be amended by adding a Section (d) to
Article IV to read as follows:
(d). Reverse Stock Split. Effective *, each ** shares of issued and
outstanding shares of Common Stock of this Corporation shall be automatically
combined into one share of Common Stock of this Corporation (the "Reverse Stock
Split"). In lieu of the issuance of any fractional shares that would otherwise
result from the Reverse Stock Split, the Corporation shall pay the cash value of
fractions of a share determined by the average closing price of the Common Stock
for the five (5) trading days immediately preceding the Effective Date
multiplied by the fractional interest. Following the effectiveness of this
Certificate of Amendment, certificates representing the shares of Common Stock
to be outstanding thereafter shall be exchanged for certificates now outstanding
pursuant to procedures adopted by the Corporation's Board of Directors and
communicated to those who are to receive new certificates; and
FURTHER RESOLVED, that any time prior to the effectiveness of the foregoing
amendment, without further action by the stockholders, the Board of Directors
may abandon such amendment, or any part thereof authorizing a combination of
shares of Common Stock on a basis which the Board of Directors determines is not
in the best interests of the Company and its stockholders.
FURTHER RESOLVED, that the Plan of Recapitalization presented to the Board
for its consideration and approval, in order to effectuate the Reverse Stock
Split, and attached to these resolutions, is hereby adopted and approved as the
act of the Corporation.
*The Effective Date as determined by the Board of Directors in its
discretion.
**By approving this amendment stockholders will approve the combination
of any number of shares of common stock up to ten shares into one share. The
certificate of amendment filed with the Delaware Secretary of State will
include only that number determined by the Board of Directors to be in the
best interests of the Corporation and its stockholders. In accordance with
these resolutions, the Board of Directors will not implement any amendment
providing for a different Split Ratio.
An affirmative vote of the holders of a majority of the shares of Common
Stock issued and outstanding is required for approval. Abstentions and broker
non-votes are considered shares of stock present in person or represented by
proxy at the Meeting and entitled to vote and are counted in determining the
number of votes necessary for a majority. An abstention will therefore have the
practical effect of voting against the approval of the amendment to the
Certificate of Incorporation because it represents one fewer vote for approval
of the amendment.
PROPOSAL NO. 8--RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Baird, Kurtz & Dobson, Certified
Public Accountants, to audit the financial statements of the Company for the
fiscal years ending December 31, 1997 and 1998. The Board of Directors proposes
that the stockholders ratify this appointment.
On January 21, 1997, the Board of Directors of the Company 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 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.
McGladrey & Pullen's report on the financial statements for the fiscal
years ended December 31, 1995 and 1994 contained a going concern statement, but
otherwise was not qualified or modified as to audit scope or accounting
principles.
During the two most recent fiscal years and interim period subsequent to
December 31, 1995, there have been no disagreements with McGladrey & Pullen on
matters of accounting principles or practices, financial statement disclosure,
auditing scope or procedure, or any reportable events.
-39-
<PAGE>
McGladrey & Pullen has furnished company with a copy of its letter
addressed to the Securities and Exchange Commission stating that it agrees
with the above statements.
The Company expects that representatives of Baird, Kurtz & Dobson will be
present at the Meeting, with the opportunity to make a statement if they so
desire, and will be available to respond to appropriate questions.
In the event that ratification of the appointment of Baird, Kurtz & Dobson
as the independent public accountants for the Company is not obtained at the
Meeting, the Board of Directors will reconsider its appointment.
REQUIRED VOTE
An affirmative vote of the holders of a majority of the shares of Common
Stock issued and outstanding is required for ratification of the appointment of
Baird, Kurtz & Dobson. Abstentions and broker non-votes are considered shares of
stock present in person or represented by proxy at the Meeting and entitled to
vote and are counted in determining the number of votes necessary for a
majority. An abstention will therefore have the practical effect of voting
against ratification of the appointment because it represents one fewer vote
for ratification of the appointment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE TO APPROVE THE
RATIFICATION OF THE APPOINTMENT OF BAIRD, KURTZ & DOBSON AS THE INDEPENDENT
AUDITORS FOR THE CURRENT FISCAL YEAR (ENDING DECEMBER 31, 1998) AND THE
FISCAL YEAR ENDED DECEMBER 31, 1997, AND PROXIES SOLICITED BY THE BOARD WILL
BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED OTHERWISE ON THE
PROXY.
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 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.
McGladrey & Pullen's report on the financial statements for the two
fiscal years ended December 31, 1995 and 1994 contained a going concern
statement, but otherwise was not qualified or modified as to audit scope or
accounting principles.
During the two most recent fiscal years and interim period subsequent to
December 31, 1995, there have been no disagreements with McGladrey & Pullen on
matters of accounting principles or practices, financial statement disclosure,
auditing scope or procedure, or any reportable events.
McGladrey & Pullen has furnished the Company with a copy of its letter
addressed to the Securities and Exchange Commission stating that it agrees
with the above statements.
OTHER MATTERS
The Board of Directors knows of no other business that will be presented to
the Meeting. If any other business is properly brought before the Meeting, it
is intended that proxies in the enclosed form will be voted in respect thereof
in accordance with the judgment of the persons voting the proxies.
ANNUAL REPORT AND FINANCIAL STATEMENTS
The 1997 Annual Report of the Company has accompanied or preceded this
Proxy Statement. The Company's audited financial statements for the fiscal
years ended December 31, 1996 and 1995 and corresponding Management's
Discussion and Analysis of Financial Condition and Results of Operations,
extracted from the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and unaudited financial statements for the quarters
ended March 31, 1997, June 30, 1997, and September 30, 1997, and
corresponding Management's Discussion and Analysis of Financial Condition and
Results of Operations, extracted from the Company's Quarterly Reports on Form
10-QSB for the fiscal quarters ending on such dates, respectively, follow.
-40-
<PAGE>
STOCKHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy materials relating to
the 1999 Annual Meeting of Stockholders, stockholder proposals must be received
by the Secretary of the Company no later than December 4, 1998.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, YOU ARE URGED TO FILL
OUT, SIGN, DATE AND RETURN THE ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE.
By order of the Board of Directors:
/s/ David L. Evans
David L. Evans
Corporate Secretary
Denver, Colorado
February 13, 1998
-41-
<PAGE>
Rocky Mountain Internet, Inc.
Accountants' Report and
Consolidated Financial Statements
DECEMBER 31, 1995 AND 1996
and Corresponding Management's
Discussion and Analysis of Financial
Condition and Results of Operations
Extracted from Annual Report on
Form 10-KSB for the Year Ended
December 31, 1996
-42-
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1996 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 28, 1997
-43-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of Rocky Mountain Internet,
Inc. as of December 31, 1995 and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Internet, Inc.
as of December 31, 1995 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ McGLADREY & PULLEN, LLP
Denver, Colorado
February 23, 1996
-44-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS 1995 1996
--------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 274,661 $ 348,978
Investments - 1,356,629
Trade receivables, less allowance for doubtful
accounts; 1995 - $5,700; 1996 - $115,000 90,338 518,827
Inventories 12,185 91,047
Other 5,153 143,753
--------- ----------
Total Current Assets $ 382,337 $2,459,234
--------- ----------
PROPERTY AND EQUIPMENT, AT COST
Equipment $ 555,654 $2,513,944
Computer software 36,806 202,501
Leasehold improvements 4,880 127,877
Furniture, fixtures, and office equipment 15,101 413,678
--------- ----------
$ 612,441 $3,258,000
Less accumulated depreciation and amortization 132,812 403,023
--------- ----------
$ 479,629 $2,854,977
--------- ----------
OTHER ASSETS
Customer lists, at amortized cost $ - $ 145,444
Deposits 62,637 80,512
--------- ----------
$ 62,637 $ 225,956
--------- ----------
$ 924,603 $5,540,167
--------- ----------
--------- ----------
See Notes to Consolidated Financial Statements
-45-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1995 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1995 1996
--------- -----------
CURRENT LIABILITIES
Notes payable $ 19,419 $ 4,250
Current maturities of long-term debt and
capital lease obligations 72,675 451,823
Accounts payable 192,985 425,160
Deferred revenue 169,645 218,121
Accrued payroll and related taxes 83,528 528,160
Accrued expenses 30,950 460,836
--------- -----------
Total Current Liabilities $ 569,202 $ 2,088,350
--------- -----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS $ 524,437 $ 1,134,380
--------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding
1995 - 0 shares, 1996 - 250,000 shares $ - $ 250
Common stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
1995 1,868,000 shares; 1996 4,540,723
shares 1,868 4,541
Additional paid-in capital 28,847 4,879,968
Accumulated deficit (199,751) (2,567,322)
--------- -----------
Total Stockholders' Equity (Deficit) $(169,036) $ 2,317,437
--------- -----------
$ 924,603 $ 5,540,167
--------- -----------
--------- -----------
See Notes to Consolidated Financial Statements
-46-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---------- -----------
REVENUE
Internet access and services $1,034,774 $ 2,762,028
Equipment sales 144,551 519,551
---------- -----------
$1,179,325 $ 3,281,579
---------- -----------
COST OF REVENUE EARNED
Internet access and services $ 193,875 $ 640,880
Equipment sales 126,494 462,787
---------- -----------
$ 320,369 $ 1,103,667
---------- -----------
GROSS PROFIT 858,956 2,177,912
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES $ 967,478 $ 4,459,106
---------- -----------
OPERATING LOSS $ (108,522) $(2,281,194)
---------- -----------
OTHER INCOME (EXPENSE)
Interest expense $ (31,818) $ (157,042)
Interest income 2,397 44,322
Finance charge 3,871 24,654
Other income, net 5,278 26,689
---------- -----------
$ (20,272) $ (61,377)
---------- -----------
LOSS BEFORE INCOME TAXES $ (128,794) $(2,342,571)
INCOME TAX EXPENSE - -
---------- -----------
NET LOSS $(128,794) $(2,342,571)
PREFERRED STOCK DIVIDENDS - 25,000
---------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ 128,794 $(2,367,571)
---------- -----------
---------- -----------
PRIMARY AND FULLY DILUTED LOSS PER SHARE
Net loss per share $ (.04) $ (.64)
---------- -----------
---------- -----------
See Notes to Consolidated Financial Statements
-47-
<PAGE>
<TABLE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1996
Preferred Stock Common Stock Additional
----------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------- ------ ------------ ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 - $ - 1,188,000 $1,188 $ 26,626 $ (70,957) $ (43,143)
Purchase of common stock for
redemption - - (180,000) (180) (18,570) - (18,750)
Issuance of common stock - - 860,000 860 1,008 - 1,868
Capital contribution - - - - 19,783 - 19,783
Net loss - - - - - (128,794) (128,794)
------- ------ --------- ------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1995 - - 1,868,000 1,868 28,847 (199,751) (169,036)
Issuance of preferred stock 250,000 250 - - 405,750 - 406,000
Issuance of common stock - - 1,365,000 1,365 3,775,887 - 3,777,252
Stock option compensation - - - - 52,807 - 52,807
Issuance of underwriters' warrants - - - - 100 - 100
Conversion of debentures into
common stock - - 1,225,000 1,225 488,775 - 490,000
Dividends on preferred stock - - - - - (25,000) (25,000)
Issuance of common stock for the
acquisition of CompuNerd, Inc. - - 30,000 30 67,470 - 67,500
Issuance of common stock for the
acquisition of the Information
Exchange - - 52,723 53 60,332 - 60,385
Net loss - - - - - (2,342,571) (2,342,571)
------- ------ --------- ------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1996 250,000 $ 250 4,540,723 $4,541 $4,879,968 $(2,567,322) $ 2,317,437
------- ------ --------- ------- ---------- ------------ ------------
------- ------ --------- ------- ---------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
-48-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(128,794) $(2,342,571)
Items not requiring (providing) cash:
Depreciation 51,395 88,162
Amortization 39,030 186,044
Salaries paid with stock options - 52,807
Changes in:
Trade receivables (59,621) (417,999)
Inventories (12,185) (78,862)
Other current assets (5,153) (138,066)
Accounts payable 89,395 224,618
Deferred revenue 77,084 41,268
Accrued payroll and related taxes 83,528 443,208
Accrued expenses 30,550 429,886
---------- ------------
Net cash provided by (used in)
operating activities $ 165,229 $(1,511,505)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment $(177,771) $ (900,235)
Purchase of investments - (1,756,629)
Proceeds from investments - 400,000
Payment for purchase of CompuNerd, Inc. - (70,478)
Additions to deposits (60,635) (16,675)
---------- ------------
Net cash used in investing activities $(238,406) $(2,344,017)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 1,868 $ 3,777,252
Proceeds from sale of preferred stock - 406,000
Proceeds from notes payable 18,000 6,689
Proceeds from long-term debt 373,000 135,404
Sale of stock warrants - 100
Payment of preferred stock dividend - (25,000)
Purchase of common stock for redemption (18,750) -
Payments on notes payable (8,217) (26,108)
Payments on long-term debt and capital
leases obligations (54,533) (344,498)
---------- ------------
Net cash provided by financing
activities $ 311,368 $ 3,929,839
---------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 238,191 $ 74,317
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 36,470 274,661
---------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 274,661 $ 348,978
---------- ------------
---------- ------------
See Notes to Consolidated Financial Statements
-49-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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 in eleven locations. 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 consists 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, 1995 and 1996,
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 back bone carriers.
-50-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is computed using
the straight line method over the estimated useful lives of the assets,
ranging from five to seven years. Certain equipment obtained by 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 covered. 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 and 1996, the Company incurred $24,847 and $167,565,
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
amortized on a straight line basis over five years.
-51-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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
method.
LOSS PER COMMON SHARE
For the years ended December 31, 1995 and 1996, loss per share is computed
based upon approximately 3,489,000 and 3,715,000, respectively, weighted
average common shares outstanding for both primary and fully-diluted earnings
per share. The net loss for the year ended December 31, 1996 used in the
calculation was increased by the preferred stock dividends paid of $25,000.
These calculations assumes all shares issued prior to the Company's initial
public offering in September, 1996, were outstanding during all periods
presented, including shares issuable under debenture and preferred stock
conversions. It also includes shares relating to stock options, calculated
using the treasury stock approach.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax basis 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 expense.
-52-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Unrealized gains and losses
are recorded, net of related income tax effects, in stockholders' equity. At
December 31, 1996, the Company had one investment in a U.S. Treasury Note,
and two repurchase agreements with a bank classified as available-for-sale.
The repurchase agreements are secured by U.S. Treasury Notes. The
investments mature in 1997, and the fair value of the investments
approximated cost.
NOTE 2: NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has a commercial line of credit with a Bank that provides for
borrowing of up to $500,000 and is secured by a repurchase agreement in the
amount of $300,000, plus accounts receivable of the Company. The line bears
interest at the bank's prime rate plus 2% and matures September 10, 1997. At
December 31, 1996, the Company had no borrowings on this line, but was fully
drawn in 1997.
Long-term debt and capital lease obligations at December 31, 1995 and 1996,
consisted of the following:
<TABLE>
1995 1996
-------- ----------
<S> <C> <C>
Capital lease obligations payable to finance companies, due in
monthly installments aggregating $62,631 including interest
ranging from 9.5% to 33% through November, 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. $196,732 $1,586,203
Debentures (converted to common stock in 1996) 373,000 -
Other 27,380 -
-------- ----------
597,112 1,586,203
Less current maturities 72,675 451,823
-------- ----------
$524,437 $1,134,380
-------- ----------
-------- ----------
</TABLE>
-53-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 2: NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(continued)
Subsequent to December 31, 1996, the Company borrowed $200,000 from a bank.
The note is due January 3, 2000, is payable $66,660 annually plus one final
principal payment with interest accrued at prime plus 2%, and is secured by
furniture and fixtures.
Aggregate maturities required on long-term debt and obligations under
capital leases at December 31, 1996, are as follows:
Amount
Years ending December 31: ----------
1997 $ 451,823
1998 482,255
1999 573,700
2000 60,322
2001 18,103
----------
$1,586,203
----------
----------
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, 1996:
Amount
Years ending December 31: ----------
1997 $ 751,389
1998 697,443
1999 635,526
2000 72,067
2001 21,392
----------
Future minimum lease payments $2,177,817
Less amount representing interest $ 591,614
----------
Present value of minimum lease
payments $1,586,203
----------
----------
Equipment acquired under capital lease obligations had a cost of $248,586
and $1,976,285 and accumulated depreciation of $33,990 and $186,011 at December
31, 1995 and 1996, respectively.
-54-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS The Company leases operating facilities, facilities storing
Internet point of presence equipment, and certain equipment under
operating lease agreements expiring through May, 2002. Certain lease
agreements require the Company to pay certain operating expenses and
provide for escalation of annual rentals if the landlord's operating
costs increase.
At December 31, 1996, the future minimum payments under these
leases are as follows:
Amount
----------
Years ending December 31:
1997 $ 377,874
1998 525,474
1999 501,366
2000 447,594
2001 382,501
Thereafter 126,679
----------
$2,361,488
----------
----------
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 was $178,648, covering the period through January, 2001, and
is not deducted from in the above future minimum payments.
Rent expense was $82,269 and $240,720 for 1995 and 1996, respectively.
EMPLOYEE CONTRACTS The Company currently has employment agreements with six of
its officers that provide for salaries ranging from $102,000 per year
to $66,000 per year, and are terminable for cause. The Company may
also terminate the agreements without cause subject to the obligation
to pay the terminated employee a severance payment equal to from five
to eight months salary based on length of service. The employment
agreements terminate in December, 1999. Employment agreements with any
employees do not significantly restrict such employee's ability to
compete with the Company following any termination.
-55-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
EMPLOYEE CONTRACTS (continued) In February, 1997, one of the officers'
employment was terminated. The officer was also a shareholder, and
in a negotiated agreement the Company has agreed to purchase 90,000
shares of the Company's common stock from the individual for $120,000.
The stock will be purchased over an eighteen month period.
LETTER OF CREDIT The Company had $250,000 at December 31, 1996, in an
outstanding letter of credit to be used in case of default on its main
operating facilities lease. The letter of credit is secured by
$250,000 currently invested in a U.S. Treasury Note.
OTHER CONTINGENCIES The Company has various claims and legal matters occurring
in the normal course of business which, in the aggregate, are not
expected to have a material adverse effect on the financial
position, results of operations, or cash flows of the Company.
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
contracts provide that the Company receives compensation based on revenues
generated through the use of such equipment. The Company retains a portion of
the revenues (generally 50%) generated through the use of unrelated parties'
equipment. The contracts can be cancelled with notice. In such event, 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 and $354,565 for the years ended December
31, 1995 and 1996, respectively and are included in "Internet access and
services" revenues in the accompanying consolidated statements of operations.
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 $2,238,000, which expires in the years 2010 and 2011. The tax
effects of this and other temporary differences related to deferred taxes were:
1995 1996
-------- ---------
Deferred tax assets:
Net operating loss $ 44,000 $ 850,000
Allowance for doubtful accounts 2,000 44,000
Tax goodwill 20,000 18,000
Accrued expenses - 22,000
-------- ---------
$ 66,000 $ 934,000
Valuation allowance (66,000) (934,000)
-------- ---------
Net deferred tax asset $ - $ -
-------- ---------
-------- ---------
-56-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
The actual provisions for income taxes varied from the expected provision
for income taxes (computed by applying the statutory U.S. Federal income tax
rates to loss before taxes) only because the tax benefit of the net operating
losses for the periods ended December 31, 1995 and 1996, is offset by the
valuation allowance.
NOTE 6: 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.
-57-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 7: 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 and 1996. The stockholders' equity
balances represent shares outstanding as if the transaction had taken place
January 1, 1995.
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 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 antidilution adjustments.
The Company offered 250,000 shares of Series A Stock at $2.00 per share to
accredited investors under an offering that was complete and the shares sold
in June, 1996. The offering netted the Company approximately $406,000 after
expenses of the offering of approximately $94,000.
The Company has the authority to issue up to an additional 750,000 shares of
Preferred Stock. The Board of Directors is authorized to fix the terms and
preferences of the Preferred Stock prior to its being issued.
-58-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 9: COMMON STOCK TRANSACTIONS
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 units are exercisable
through September 5, 2000, at an exercise price of $4.20 per unit (for which
the accompanying warrant is exercisable at $6.5625). Costs of the offering,
including a 10% commission paid to the underwriters, the underwriters
nonaccountable expense allowance and professional fees, totalled $1,000,248,
resulting in net proceeds from the offering of $3,777,252.
In connection with the public offering completed on September 5, 1996, the
Company entered into a consulting agreement retaining the underwriters as
financial consultants to the Company for a twelve month period for a fee of
$30,000.
NOTE 10: BENEFIT PLANS
MANAGEMENT BONUS PLAN
The Company had a bonus plan during 1996 in which named employees were
entitled to receive a cash bonus based upon achievement of specified levels of
revenues by the Company for the year ended December 31, 1996. For the year
ended December 31, 1996, the Company accrued $158,000 in bonuses under the
plan. The Company gave employees the option of receiving their bonuses in cash
or stock options. As a result, 51,230 stock options were issued in 1997 to
employees at an exercise price of $1.00 per share. Additional compensation of
$12,807 was recorded during the year ended December 31, 1996 as a result of
these stock options being issued.
The Company adopted a similar plan for 1997. If the Company achieves its
targeted revenues during 1997 bonuses of $259,000 will be payable. Achieving
revenues above or below the target would result in bonuses above or below this
amount.
-59-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
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 non-qualified options can be granted.
An aggregate of 18,000 shares of Common Stock are reserved for issuance
under the Directors' Plan. All non-employee directors are automatically
granted non-qualified stock options to purchase 1,500 shares initially and an
additional 1,500 shares for each subsequent year that they serve up to a
maximum of 6,000 shares per director.
The following is a summary of the status of the Company's two stock option
plans and the stock options discussed under management bonus plans at December
31, 1995 and 1996, and the changes during the years then ended:
<TABLE>
1995 1996
-------------------------------------- ----------------------------------------
Employee Plan Employee Plan
and Bonus Plan Directors' Plan and Bonus Plan 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 - $ - - $ - - $ - - $ -
Granted during year - - - - 284,230 1.68 1,500 2.00
------ ----- ------ ----- ------- ------ ----- -------
Outstanding, end of year - $ - - $ - 284,230 $ 1.68 1,500 $ 2.00
------ ----- ------ ----- ------- ------ ----- -------
------ ----- ------ ----- ------- ------ ----- -------
Options exercisable,
end of year - - 25,000 1,500
------ ------ ------- -----
</TABLE>
-60-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 10: BENEFIT PLANS (continued)
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:
Dividend per share $0.00
Risk-free interest rate 6.16%
Expected life of options 5 years
Weighted-Average fair value
of options granted during 1996 $1.90
The following table summarized information about stock options under the
plans outstanding at December 31, 1996:
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
- --------------- ----------- ----------- --------- ----------- --------
$ 0.40 25,000 5 years $ 0.40 25,000 $ 0.40
$ 1.00 51,230 5 years $ 1.00 - $ -
$ 2.00 209,500 5 years $ 2.00 1,500 $ 2.00
One non-qualified 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
vest over three years with one-third vested at the end of the first year.
In January, 1997, 184,000 options were issued under the Employee Plan at an
exercise price of $1.50 per share, under the same terms as the remaining
options described above.
-61-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 10: BENEFIT PLANS (continued)
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans, and no compensation cost has been recognized for the plans,
other than the one non-qualified option. 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 in 1996. In addition, the Company's loss per share would
have increased by $.02 in 1996.
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. $67,500 was assigned to the issued stock. 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. $60,385 was assigned to the issued stock. 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 acquired entities from the acquisition
date. Consolidated operations would not have been significantly different
for the Company had the CompuNerd, Inc. acquisition been made at the time of
the periods shown below. Unaudited ProForma consolidated operations assuming
the Information Exchange purchase was made at the beginning of each year are
shown below:
1995 1996
------------------------------
Net sales $ 1,200,645 $ 3,367,720
Net loss $ (214,042) $ (2,377,599)
Net loss per share $ (.06) $ (.65)
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.
The purchase price for the above acquisitions were allocated as follows:
CompuNerd, Information
Inc. Exchange Total
---------- ----------- -----
Equipment $ 48,265 $ 2,560 $ 50,825
Customer Lists 89,713 57,825 147,538
---------- ------- --------
$137,978 $60,385 $198,363
---------- ------- --------
---------- ------- --------
The customer lists are being amortized on a straight line basis over a
five year life.
In January, 1997, the Company entered into an agreement to purchase
substantially all of the assets of O.N.E., an Internet service provider,
including equipment, contracts and intangibles for $150,000 in cash plus
116,932 shares of the Company's common stock. The purchase also requires the
Company to enter into a service agreement with VR-1, Inc., the parent company
of O.N.E., in which VR-1, Inc. would have a credit of up to $175,000 for the
purchase of services from the Company. This acquisition was accounted for as
a purchase.
-62-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
NONCASH INVESTING AND FINANCING ACTIVITIES 1995 1996
--------- -----------
Capital lease obligations incurred for equipment $ 211,654 $ 1,672,244
Capital contributions by reductions of notes payable 19,783 -
Long-term debt converted to common stock - 490,000
Acquisition of CompuNerd, Inc. through issuance of
common stock - 67,500
Acquisition of the Information Exchange through
issuance of common stock - 60,385
ADDITIONAL CASH PAYMENTS INFORMATION
Interest paid $ 22,043 $ 159,007
NOTE 13: CONTINUED OPERATIONS
During the year ended December 31, 1996, the Company incurred a net loss of
$2,342,571 and used $1,511,505 of net cash from operating activities. The
Company's management currently has plans it believes will increase revenues in
order to be come 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 non-qualified 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 primary and fully diluted loss per share by $.01 as of
December 31, 1996 and for the year then ended, compared to what was previously
reported.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations contain forward-looking
statements. 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 assumptions that the Company will continue to
design, market and provide successful new services, that competitive
conditions will not change materially, that demand for the Company's services
will continue to grow, that the Company will retain and add qualified
personnel, that the Company's forecasts will accurately anticipate revenue
growth and the costs of producing that growth, and that there will be no
material adverse change in the Company's business. In light of the
significant uncertainties inherent in the forward-looking information included
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, actual results could differ materially from the
forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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 Proxy Statement.
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
------------ ------------
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)
-63-
<PAGE>
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
Number of POPs at end of period 9 11
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
(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 report.
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 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 Item 12, "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
-64-
<PAGE>
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.
-65-
<PAGE>
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.
Years Ended December 31,
----------------------------------------
1995 1996 % Change
----------- ------------ --------
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
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
March June September December March June September December
1995 1995 1995 1995 1996 1996 1996 1996
- ---- ---- --------- -------- ----- ---- --------- --------
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50
-66-
<PAGE>
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 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.
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 colocation 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>
Service March 31 June 30 Sept 30 Dec 31 March 31 June 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
Colocation 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:
-67-
<PAGE>
March 31 June Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 1996
- -------- ---- ------- ------ -------- ------- ------- ------
1 21 45 90 157 217 242 341
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 servers and Internet grade routers
for colocations. 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.
-68-
<PAGE>
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.
-69-
<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.
-70-
<PAGE>
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 conduct an equity financing which, if completed, the proceeds
would be available to fund operations. In the 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 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 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 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.
-71-
<PAGE>
Rocky Mountain Internet, Inc.
Unaudited Financial Statements
and
Corresponding Management's Discussion and Analysis of
Financial condition and Results of Operations
extracted from
Quarterly Report on Form 10-QSB
for the
Quarter Ended March 31, 1997
-72-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, March 31,
1996 1997
(Note) (Unaudited)
------------ -----------
Current Assets
Cash and Cash equivalents $ 348,978 $ 526,290
Investments 1,356,629 576,918
Trade receivables, less allowance for doubtful
accounts 12/31/1996 $115,700; 3/31/97 $60,173 518,827 621,567
Inventories 91,047 116,908
Other 143,753 42,749
---------- ----------
$2,459,234 $1,884,432
---------- ----------
Property and equipment
Equipment 2,513,944 2,684,992
Computer software 202,501 222,039
Leasehold Improvements 127,877 172,921
Furniture, fixtures, and office equipment 413,678 430,623
---------- ----------
$3,258,000 $3,510,575
Less accumulated depreciation and amortization 403,023 599,740
---------- ----------
$2,854,977 $2,910,835
---------- ----------
Other Assets
Customer Lists 145,444 583,686
Deposits 80,512 95,001
---------- ----------
$ 225,956 $ 678,687
---------- ----------
$5,540,167 $5,473,954
---------- ----------
---------- ----------
Note: The consolidated Balance Sheet information as of December 31, 1996
has been derived from the Company's audited financial statements
appearing in Form 10-KSB previously filed with the U.S. Securities and
Exchange Commission.
See Notes to Consolidated Financial Statements
-73-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1996 1997
(Note) (Unaudited)
---------- -----------
Current liabilities
Note payable $ 4,250 $ 499,250
Current maturities of long-term debt and
obligations under capital leases 451,823 653,458
Accounts payable 425,160 858,355
Deferred revenue 218,121 257,059
Accrued payroll and related taxes 528,160 168,904
Other accrued expense 460,836 251,017
---------- -----------
Total current liabilities $2,088,350 $ 2,688,043
Long-term debt and obligations under capital leases,
less current maturities $1,134,380 $ 1,077,329
---------- -----------
Stockholders equity
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding 1995, no
share and 1996, 250,000 $ 250 $ 250
Common stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding 1996
4,540,723 shares; 1997 4,648,565 shares. 4,541 4,658
Additional paid-in capital 4,879,968 5,173,990
Treasury Stock (12,000)
Accumulated deficit (2,567,322) (3,458,316)
---------- -----------
Total Stockholder's Equity $2,317,437 $ 1,708,582
---------- -----------
$5,540,167 $ 5,473,954
---------- -----------
---------- -----------
See Notes to Consolidated Financial Statements
-74-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended
March 31
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Revenue
Internet access and services $ 508,455 $1,314,039
Equipment sales 60,382 83,244
--------- ----------
$ 568,837 $1,397,283
--------- ----------
Cost of revenue earned
Internet access and services 88,835 437,111
Equipment sales 51,198 63,865
--------- ----------
$ 140,033 $ 500,976
--------- ----------
Gross Profit 428,804 896,307
Selling, general and administrative expenses 675,730 1,708,306
--------- ----------
Operating (loss) income $(246,926) $ (811,999)
Other income (expense)
Interest expense (23,495) (80,122)
Interest income 12,849
Finance charges (4,880)
Other income (expense) 7,147 (5,485)
--------- ----------
$ (16,348) $ (77,638)
--------- ----------
Net (loss) income before income taxes $(263,274) $ (889,637)
Income tax expense
Net (loss) income $(263,274) $ (889,637)
--------- ----------
--------- ----------
Primary and fully diluted loss per share
Net earnings (loss) per share $ (.08) $ (0.18)
--------- ----------
--------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
-75-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months Ended
March 31
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(263,274) $(889,962)
Items not requiring (providing) cash:
Depreciation and amortization 53,507 175,011
Changes in assets and liabilities:
Trade receivables (101,983) (102,740)
Inventories (17,251) (25,861)
Other current assets 811 101,004
Accounts payable 106,863 433,195
Deferred revenue 29,671 38,938
Accrued payroll and related taxes 56,203 (334,979)
Other accrued expenses 82,193 (209,820)
--------- ---------
Net cash provided by (used in)operating activities
$ (53,260) $(815,214)
--------- ---------
Cash Flows from Investing Activities
Proceeds from investments 779,711
Acquisition of ONE, Inc. (125,300)
Purchase of property and equipment (64,851) (166,461)
(Additions) deletions to deposits 47,905 (14,490)
--------- ---------
Net cash provided by (used in) investing activities $ (16,946) $ 473,460
--------- ---------
--------- ---------
Cash Flows from Financing Activities
Proceeds from notes payable 495,000
Proceeds from long-term debt 117,815 248,300
Payment of deferred offering costs (66,518)
Payment of Preferred Stock Dividend (12,500)
RMI stock purchase (12,000)
Payments on notes payable (12,729)
Payments on long-term debt and obligations
under capital leases (76,845) (199,735)
--------- ---------
Net cash provided by (used in) financing activities
$ (38,277) $ 519,065
--------- ---------
Increase (decrease) in cash and cash
equivalents $(108,483) $ 177,311
Cash and cash equivalents
Beginning 274,661 348,978
--------- ---------
Ending $ 166,178 $ 526,289
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
-76-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - REPRESENTATION OF MANAGEMENT
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement on the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
NOTE 2. - INVESTMENT
The Company has invested in Master Repurchase Agreements of US Treasury Notes
as follows;
Description Maturity Date Investment
----------- ------------- ----------
US Treasury Note Oct. 31, 1997 $ 276,918
Repurchase Number 96-1 Sept. 10, 1997 $ 300,000
NOTE 3. - LINE OF CREDIT
The Company has established a line of credit for $500,000 effective September
18, 1996 with a maturity of September 10, 1997. The line of credit is secured
by pledge of a $300,000 Master Repurchase Agreement of a US Treasury Note held
with the lender and by accounts receivable. $495,000 of the $500,000 line of
credit is currently drawn down. Additionally, as part of the acquisition of
the Information Exchange, the Company has an additional $4,250 drawn against
another line of credit.
NOTE 4. ACQUISITION OF ONLINE NETWORK ENTERPRISES, INC.
In January, 1997, the Company acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (ONE), headquartered in
Boulder, Colorado, a division of VR*1, Inc. The ONE acquisition netted RMI
approximately 47 dedicated and 732 dial-up subscribers and equipment valued at
approximately $24,000. The Company paid $150,000 cash and issued 116,932 shares
of the Company's common stock. $306,246 was assigned to the issued stock.
The acquisition has been accounted for as a purchase by recording the
assets acquired at their estimated market value at the acquisition date.
The purchase price is allocated as $431,246 for customer lists and $1,000
for a non-compete agreement and $24,000 for equipment. Customer lists are
being amortized over a sixty month period. Revenues from the acquisition are
included effective January 17, 1997.
NOTE 5. CHANGES IN STOCKHOLDERS EQUITY
During the three months ended March 31, 1997 the following stock transactions
occurred.
Preferred stock, $.001 par value
Beginning Balance $ 250
No transactions
Common stock, $.001 par value
Beginning Balance $ 4,540.73
Shares issued for acquisition of ONE assets (116,932 shares) $ 116.93
----------
Ending Balance $ 4,657.66
Treasury stock
Beginning balance $0.00
Acquired stock from major shareholders and former employee
as part of severance agreement (9,090 shares) $12,000.00
Ending balance $12,000.00
NOTE 6. RESTATEMENT
The 1996 financial statements have been restated to correct the recording
of a non-qualified 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 primary and fully diluted loss per share by $.01 as of
December 31, 1996 and for the year then ended, compared to what was previously
reported.
-77-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations contain forward-looking
statements. 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 assumptions that the Company will continue to
design, market and provide successful new services, that competitive
conditions will not change materially, that demand for the Company's services
will continue to grow, that the Company will retain and add qualified
personnel, that the Company's forecasts will accurately anticipate revenue
growth and the costs of producing that growth, and that there will be no
material adverse change in the Company's business. In light of the
significant uncertainties inherent in the forward-looking information included
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, actual results could differ materially from the
forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company is implementing an operating plan calling for growth through
expansion of existing business categories, acquisitions of Internet providers
that complement existing business, expansion of capabilities through
implementation of a frame relay switch backbone, expanding World Wide Web page
hosting and creation, and additional opportunities that fit within the Internet
business.
Effective January 16, 1997, the Company acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc. (ONE), 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 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.
The Company received notice from a third party with which it had a contract
(see Dial Up Service below) of an intent to terminate the contract effective
July 9, 1997 (90 days notice as required by the contract). This party has
four POP's (points of presence) in Pueblo, Hayden, Leadville, and Alamosa,
Colorado. These locations represent approximately 65% or $90,000 of revenues
from all similar third party contractual arrangements for the first quarter
1997. It is the intent of this party to compete against the Company in
these markets. Effective July 9, 1997 the Company intends to have POP's
installed at these locations and will continue to service the customers. The
cost for equipment for these four locations is estimated at $75,000 to
$100,000. A substantial amount of this is expected to be funded by
arrangements with the equipment vendors. At this date, the Company will
assume the cost of all circuits and will be entitled to all revenue. The
third party contract includes a noncompete clause with regards to the third
party. The Company's legal counsel is currently reviewing the application of
this clause in regards to this termination.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
The Company's revenues grew 146% from $568,837 to $1,396,958 for the three
months ended March 31, 1997 as compared to the comparable period in 1996.
Listed below is a breakdown of the revenue billing categories.
-78-
<PAGE>
Three Months Ended
March 31
--------------------------------------------
1996 1997 % Change
---------- ----------- --------
REVENUE
Dial-Up Service $ 319,576 $ 595,686 86%
Dedicated Access Service 122,633 347,592 183%
Web Services 56,041 216,472 286%
Equipment 60,382 83,244 38%
Other 10,205 153,963 1409%
---------- ----------- --------
Total $ 568,837 $ 1,396,957 146%
---------- ----------- --------
---------- ----------- --------
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, 1996, and
1997.
For the Three Months Ended
Mar Jun Sep Dec Mar Jun Sep Dec Mar
1995 1995 1995 1995 1996 1996 1996 1996 1997
- ---- ---- ---- ---- ---- ---- ---- ---- ----
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 20.50 $20.10
The Dial up business continues to experience strong growth based on
reputation, trade show attendance, and marketing by third parties with which
the Company has contracted in outlying areas of Colorado. Dial-up Service has
been split approximately evenly between commercial and residential customers
throughout 1995, 1996, and 1997. The reduction in the average billing rate
in March 1997 is the result of an aggressive program on the part of the
Company to encourage customers to use credit cards to pay their charges. The
Company provides a discount for certain usage plans if paid by credit card.
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 $62,600 in revenues for the three month period ending
March 1996 and $136,340 for the same period in 1997 for an increase of 118%.
The 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. Refer to Item 2, paragraph 4 on page 7
for details on termination notice received by the Company from a third party
with which the Company has contracted.
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 colocation 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 circuit
growth. ISDN sales have grown from $3,000 to $107,900 from first quarter 1996
to first quarter 1997, while high speed circuits have increased from $81,400 to
$173,400 for the same periods.
-79-
<PAGE>
The table below shows the quarterly customer count by each of the component
services offered for dedicated access as of the dates indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
1995 1995 1995 1995 1996 1996 1996 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
Private Port 29 30 36 35 42 47 46 54 50
56 Kbps 18 27 27 34 47 69 71 72 78
ISDN 0 0 0 2 3 13 46 80 168
T-1 7 10 10 11 16 25 29 30 65
Colocation 0 1 4 4 6 4 5 6 11
</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:
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
1995 1995 1995 1995 1996 1996 1996 1996 1997
- ------ ------ ------ ------ ------ ------ ------ ------ ------
1 21 45 90 157 217 242 341 418
Web page hosting accounted for $26,580 of revenue in the first quarter of 1996
and $90,820 in the first quarter of 1997 revenue for an increase of 242%. 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 $24,520 for the first quarter 1996 to
$114,100 for the first quarter 1997 for an increase of 365%. 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. The Company did not have a direct sales force until December,
1995.
Other Revenue
The large increase in Other Revenue was from a consulting contract with one
customer that resulted in approximately $100,000 in revenue for the first
quarter of 1997. This contract has concluded and the Company does not
anticipate additional contracts from this customer.
Gross Profit
Gross margin consists of total revenue less the cost of delivering services and
equipment. The gross margin was 75.4% for the three months ended March 31,
1996 and 64.1% for the same period in 1997. In late December, 1996, the
Company implemented a frame relay network using Cascade switches. The switches
are connected with a T-3 fiber optic network to provide a high speed and highly
reliable connection. The implementation of this network has provided very high
capacities for connections and has resulted in a short term erosion of gross
margin while the capacity is sold. Future circuits sold on this network should
have high yields because the capacity is in place.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 160% from the three
months ended March 31, 1996 over the same period of 1997. This increase
resulted from the overall expansion of the business and is in keeping with the
strategy of building an organization capable of handling rapid growth and
expansion. Compensation and
-80-
<PAGE>
related personnel costs increased from $390,100 to $957,900 or 146% from the
three month period in 1996 over 1997. Personnel were added in all areas to
expand the Company's sales efforts, technical support, and administrative
capabilities. The Company believes that future revenue growth will not
require a proportional increase in personnel expense as the company is
positioned to experience economies of scale. Advertising, trade shows, and
marketing expenses growth was flat when comparing the three months ended
March 1996 as compared to the same period for 1997. Outside services expense
increased by $144,100 or 625% for the first quarter 1997 over first quarter
1996. The largest components of the increase are public relations expense
($21,100), accounting expense in regards to the annual audit and preparation
of the Form 10-K ($38,000), legal expenses ($30,500), and clerical accounting
staff hired on a temporary to permanent basis ($50,882). Depreciation and
amortization in regards to equipment, software, furnishings, and capital
leases increased by $144,000 or 385% due to establishing a state of the art
data center, implementing the frame relay network with Cascade switches,
expansion of equipment for dial up connections, plus equipment for
administrative use. Communication expense in the form of 800 number lines,
long distance, and general administration increased to $74,200 or 91% for the
three months ended March 1996 to the same period in 1997. This increase is
reflective of the companies growth plus the increase of toll free 800
technical support service offered for dial in customers.
LIQUIDITY AND CAPITAL RESOURCES
The initial public offering completed on September 5, 1996. Operating cash
flow and earnings for the remainder of 1996 and the first half of 1997 are
projected to be negative. The Company continues to build infrastructure and
human resources to position itself to be a prominent Internet provider in the
regional market. The Company will utilize lease financing, as available, for
capital acquisitions, business acquisitions will be funded based on utilizing
projected cash flows from the acquisition, as well as the public offering
proceeds. The Company believes its capital resources are sufficient to meets
its anticipated needs at least through the second quarter 1997. The Company's
ability to continue operations beyond that date depends on its ability to
generate cash flow from operations, which it has not done to date. If the
Company is not successful in generating cash flow from operations, it will be
required to seek additional funds through equity or debt financing. There is
no assurance that additional capital resources will be available to the Company
if and when required, or on the terms acceptable to the Company if available.
The absence of such financing would have a material adverse effect on the
Company's business, including a possible reduction of operations.
The Company has incurred losses since inception and has experienced negative
operating cash flow in the first quarter of 1997. The Company's operations
used net cash of approximately $815,200 for this period. 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.
The Company acquired $252,575 of property and equipment during the first
quarter of 1997 primarily to complete the Operations Data Center.
Additionally, the Company acquired ONE, Inc. for a combination of stock and
cash. The cash portion was $150,000, of which $24,000 was allocated to
equipment acquisition.
The Company has a bank line of credit in the amount of $500,000 of which
$495,000 is drawn at March 31, 1997. 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 March 31, 1997, the Company had negative working capital of $803,612.
This included $526,290 of cash and cash equivalents and $576,918 of
investments in financial instruments convertible to cash. Trade receivables
as of that date were $621,567. Current liabilities as of that date were
approximately $2,688,043, including $858,355 of accounts payable, $653,458 of
current maturities of long-term debt and capital lease obligations, $165,904
of accrued payroll and related taxes, and $251,017 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 $257,059 of deferred revenue, which represents
differences in the timing of payments by customers and recognition of the
related revenue.
-81-
<PAGE>
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. The Company may conduct an equity
financing which, if completed, the proceeds would be available to fund
operations. In the 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 is currently pursuing additional securities financing in
order to raise a minimum of $500,000 and has entered into discussions to
increase the line of credit by $200,000.
-82-
<PAGE>
Rocky Mountain Internet, Inc.
Unaudited Financial Statements
and
Corresponding Management's Discussion and Analysis of
Financial Condition and Results of Operations
extracted from
Quarterly Report on Form 10-QSB
of the
Quarter Ended June 30, 1997
-83-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, June 30,
1996 1997
(Note) (Unaudited)
------------ -----------
Current assets
Cash and Cash equivalents $ 348,978 $ 439,299
Investments 1,356,629 576,918
Trade receivables, less allowance for doubtful
accounts 12/31/1996 $115,700; 6/30/1997 $39,899
518,827 613,040
Inventories 91,047 29,260
Other 143,753 30,267
---------- ----------
$2,459,234 $1,688,784
---------- ----------
Property and equipment
Equipment 2,513,944 2,756,597
Computer software 202,501 231,737
Leasehold Improvements 127,877 172,921
Furniture, fixtures, and office equipment 413,678 431,013
---------- ----------
$3,258,000 $3,592,268
Less accumulated depreciation and amortization 403,023 767,871
---------- ----------
$2,854,977 $2,824,397
---------- ----------
Other assets
Customer Lists 145,444 529,465
Deposits 80,512 94,384
---------- ----------
$ 225,956 $ 623,849
---------- ----------
$5,540,167 $5,137,030
---------- ----------
---------- ----------
Note: The consolidated Balance Sheet information as of December 31, 1996
has been derived from the Company's audited financial statements
appearing in Form 10-KSB previously filed with the U.S. Securities and
Exchange Commission.
See Notes to Consolidated Financial Statements
-84-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1996 1997
(Note) (Unaudited)
----------- -----------
Current liabilities
Note payable $ 4,250 $ 499,250
Current maturities of long-term debt and obligations
under capital leases 451,823 539,363
Accounts payable 425,160 1,437,639
Deferred revenue 218,121 256,983
Accrued payroll and related taxes 528,160 136,057
Other accrued expense 460,836 605,714
----------- -----------
Total current liabilities $ 2,088,350 $ 3,475,006
Long-term debt and obligations under capital
leases, less current maturities $ 1,134,380 $ 1,071,948
----------- -----------
Stockholders equity
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding 1996,
250,000 shares and 1997 182,500 shares $ 250 $ 183
Common stock, $.001 par value; authorized
10,000,000 shares; issued 1996 4,540,723 shares;
6/30/97 4,947,660 shares and outstanding 1996
4,540,723 shares; 6/30/1997 4,915,846 shares 4,541 4,947
Additional paid-in capital 4,879,968 5,587,075
Treasury Stock (42,000)
Accumulated deficit (2,567,322) (4,960,129)
----------- -----------
Total stockholders' equity $ 2,317,437 $ 590,076
----------- -----------
$ 5,540,167 $ 5,137,030
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
-85-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1997 1996 1997
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue
Internet access and services $ 593,692 $ 1,332,071 $1,102,147 $ 2,645,785
Equipment sales 40,835 120,342 101,217 203,586
--------- ----------- ---------- -----------
634,527 1,452,413 1,203,364 2,849,371
--------- ----------- ---------- -----------
Cost of revenue earned
Internet access and services 122,491 490,155 211,326 927,265
Equipment sales 33,980 97,263 85,178 161,128
--------- ----------- ---------- -----------
156,471 587,418 296,504 1,088,393
--------- ----------- ---------- -----------
Gross Profit 478,056 864,995 906,860 1,760,978
Selling, general and administrative expenses 850,189 1,908,932 1,525,919 3,617,237
Other operating expenses 334,371 334,371
--------- ----------- ---------- -----------
Operating (loss) income (372,133) (1,378,308) (619,059) (2,190,630)
Other income (expense)
Interest expense (44,074) (106,988) (67,569) (191,477)
Other Income (Expense) (5,268) 1,211 1,879 (4,754)
Interest income 2,813 6,009 2,813 18,637
Finance charges 11,115 229 11,115 416
--------- ----------- ---------- -----------
(35,414) (99,539) (51,762) (177,178)
--------- ----------- ---------- -----------
Net (loss) income before income taxes (407,547) (1,477,847) (670,821) (2,367,808)
Income tax expense 0 0 0 0
--------- ----------- ---------- -----------
Net (loss) income $(407,547) $(1,477,847) $ (670,821) $(2,367,808)
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
Primary and fully diluted loss per share
Net earnings (loss) per share $ (0.128) $ (0.298) $ (0.19) $ (0.477)
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
-86-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------
1996 1997
--------- ---------
Cash Flows from Operating Activities
Net (loss) income $(670,821) $(2,367,808)
Items not requiring (providing) cash:
Depreciation and amortization 111,875 413,074
Changes in assets and liabilities:
Trade receivables (135,181) (94,213)
Inventories (24,424) 61,788
Other current assets 1,107 113,486
Accounts payable 131,504 1,012,478
Deferred revenue 30,863 38,862
Accrued payroll and related taxes 117,804 (392,103)
Other accrued expenses 127,305 144,879
--------- -----------
Net cash used in operating activities $(309,968) $(1,069,557)
--------- -----------
Cash Flows from Investing Activities
Proceeds from investments 779,711
Acquisition of ONE, Inc. assets (150,000)
Purchase of property and equipment (99,855) (200,950)
(Additions) deletions to deposits 49,905 (13,873)
--------- -----------
Net cash provided by (used in) investing
activities $ (49,950) $ 414,888
--------- -----------
Cash Flows from Financing Activities
Proceeds from notes payable 495,000
Proceeds from long-term debt 117,000 312,582
Proceeds from sale of preferred stock 406,000
Proceeds from sale of common stock 400,500
Additions to deferred offering cost (108,170)
Payment of Preferred Stock Dividend (25,000)
RMI stock purchase (42,000)
Payments on notes payable (12,729)
Payments on long-term debt and obligations
under capital leases (99,020) (396,092)
--------- -----------
Net cash provided by (used in) financing
activities $ 303,081 $ 744,990
--------- -----------
Increase (decrease) in cash and cash
equivalents $ (56,837) $ 90,321
Cash and cash equivalents
Beginning 274,661 348,978
--------- -----------
Ending $ 217,824 $ 439,299
--------- -----------
--------- -----------
See Notes to Consolidated Financial Statements
-87-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - REPRESENTATION OF MANAGEMENT
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement on the results
for the interim periods. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principals have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures included herein are adequate to make the information
presented not misleading.
NOTE 2. - INVESTMENT
The Company has invested in Master Repurchase Agreements of US Treasury Notes
as follows;
Description Maturity Date Investment
----------- ------------- ----------
US Treasury Note Oct. 31, 1997 $276,918
Repurchase Number 96-1 Sept. 10, 1997 $300,000
NOTE 3. - LINE OF CREDIT
The Company has established a line of credit for $500,000 effective September
18, 1996 with a maturity of September 10, 1997. The line of credit is secured
by pledge of a $300,000 Master Repurchase Agreement of a US Treasury Note
held with the lender and by accounts receivable. $495,000 of the $500,000
line of credit is currently drawn down. Additionally, as part of the
acquisition of the Information Exchange, the Company has an additional $4,250
drawn against another line of credit.
NOTE 4. ACQUISITION OF ONLINE NETWORK ENTERPRISES, INC.
In January, 1997, the Company acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (ONE), headquartered in
Boulder, Colorado, a division of VR*1, Inc. The ONE acquisition netted RMI
approximately 47 dedicated and 732 dial-up subscribers and equipment valued
at approximately $24,700. The Company paid $150,000 cash and issued 116,932
shares of the Company's common stock. $306,246 was assigned to the issued
stock.
The acquisition has been accounted for as a purchase by recording the assets
acquired at their estimated market value at the acquisition date. The
purchase price is allocated as $431,246 for customer lists and $1,000 for a
non-compete agreement and $24,000 for equipment. Customer lists are being
amortized over a sixty month period. Revenues from the acquisition are
included effective January 17, 1997.
NOTE 5. PRIVATE PLACEMENT
The Company issued a Private Placement Memorandum on June 13, 1997 for the
sale of 600,000 Units. Each unit is sold for $4.00 and consists of two
shares of Common Stock, $.001 par value per share, and one Warrant. The
$4.00 per Unit purchase price is allocated $1.90 to each share of Common
Stock and $.20 to the Warrant. Each Warrant entitles the registered holder
to purchase one share of Common Stock at an exercise price of $3.00 per
share. As of 6/30/97, gross proceeds from the offering were $445,000 or
111,250 Units.
NOTE 6. CHANGES IN STOCKHOLDERS EQUITY
During the three months ended June 30, 1997 the following stock transactions
occurred.
Preferred stock, $.001 par value
Beginning Balance $ 250.00
Shares converted to Common stock (67,500 shares) $ (67.50)
----------
Ending balance $ 182.50
----------
----------
Common stock, $.001 par value
Beginning Balance $ 4,657.66
Preferred stock converted to Common stock (67,500 shares) $ 67.50
Shares issued for Private Placement $ 222.50
----------
Ending Balance $ 4,947.66
----------
----------
Treasury stock
Beginning balance $12,000.00
Acquired stock from major shareholders and former employee
as part of severance agreement (22,719 shares) $30,000.00
----------
Ending balance $42,000.00
----------
----------
NOTE 7. RESTATEMENT
The 1996 financial statements have been restated to correct the recording
of a non-qualified 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 primary and fully diluted loss per share by $.01 as of
December 31, 1996 and for the year then ended, compared to what was previously
reported.
-88-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations contain forward-looking
statements. 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 assumptions that the Company will continue to
design, market and provide successful new services, that competitive
conditions will not change materially, that demand for the Company's services
will continue to grow, that the Company will retain and add qualified
personnel, that the Company's forecasts will accurately anticipate revenue
growth and the costs of producing that growth, and that there will be no
material adverse change in the Company's business. In light of the
significant uncertainties inherent in the forward-looking information included
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, actual results could differ materially from the
forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company is implementing an operating plan calling for growth through
expansion of existing business categories, expansion of capabilities through
implementation of a frame relay switch backbone, expanding World Wide Web
page hosting and creation, and additional opportunities that fit within the
Internet business.
Effective January 16, 1997, the Company acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc. (ONE), 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 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.
Termination Agreement - Contract with Zero Error Networks
The Company and Zero Error Networks (ZEN), a third party with which the
Company had contacted 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 POP's 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 is to occur during the months of July and August, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
-89-
<PAGE>
The Company's revenues grew 129% from $634,526 to $1,452,413 for the three
months ended June 30, 1997 as compared to the comparable period in 1996.
Listed below is a breakdown of the revenue billing categories.
Three Months Ended
June 30,
----------------------------------
1996 1997 % Change
-------- ---------- --------
REVENUE
Dial-Up Service $349,239 $ 570,992 63%
Dedicated access Service 149,221 461,239 209%
Web Services 92,612 251,413 171%
Equipment 40,835 120,342 195%
Other 2,620 48,427 1748%
-------- ---------- -----
Total $634,527 $1,452,413 129%
-------- ---------- -----
-------- ---------- -----
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, since 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, 1996, and 1997.
For the Three Months Ended
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
- ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50 $20.10 20.04
The Dial-up business continues to experience growth based on reputation,
trade show attendance, and marketing by third parties with which the Company
has contracted in outlying areas of Colorado. Dial-up Service has been split
approximately evenly between commercial and residential customers throughout
1995, 1996, and 1997. Dial-Up revenues increased from $349,240 to $570,990 or
63% from the 3 months ending June 30, 1996 to the 3 months ending June 30,
1997.
RMI has established business alliances with five, locally-based unrelated
parties for the purpose of providing Internet services in secondary markets
in the State of Colorado. The services conducted are provided under a
written contract that provides for the locally-based party to provide
equipment and marketing services while the Company provides Internet access
and administrative services. Dial-up revenues based on these contracts
generated $76,539 in revenues for the three month period ending June 1996 and
$151,082 for the same period in 1997, for an increase of 97%. The 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. Effective July 3, 1997, the contract with Zero
Error Networks (ZEN) 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.
-90-
<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 colocation 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 circuit
growth. ISDN sales have grown from $6,800 to $150,300 from second quarter
1996 to second quarter 1997 for an increase of 2110%, while high speed
circuits have increased from $98,720 to $236,750 for the same periods for an
increase of 140%.
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:
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
1 21 45 90 157 217 242 341 418 424
Web page hosting accounted for $52,600 of revenue in the second quarter of
1996 and $114,700 in the second quarter of 1997 revenue for an increase of
118%. 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 $40,000 for the second quarter 1996 to
$136,700 for the second quarter 1997 for an increase of 242%. The Company
increased the size of the Web production department as well as provided
customers more complex applications. The growth in Web hosting business plus
the activities of the Company's direct sales force helped to drive this part
of the business. The Company did not have a direct sales force until
December, 1995.
Other Revenue
Other revenue includes training revenue ($2,570 increased to $9,040), network
consulting ($0 increased to $10,750)and sales from the Information Exchange,
a voice messaging subsidiary ($0 increased to $27,400). The Information
Exchange was acquired in a stock transaction in late 1996.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services
and equipment. The gross profit (exclusive of equipment sales) was 79.4% for
the three months ended June 30, 1996 and 63.2% for the same period in 1997.
In late December, 1996, the Company implemented a frame relay network using
Cascade switches. The switches are connected with a T-3 fiber optic network
to provide a high speed and highly reliable connection. The implementation
of this network has provided very high capacities for connections and has
resulted in a short term erosion of gross margin while the capacity is sold.
Future circuits sold on this network should have high yields because the
capacity is in place. Gross profits on equipment sales were 16.8% and 19.2%
for the 3 month periods
-91-
<PAGE>
ending June 30, 1996 and 1997 respectively. Sale of equipment is provided as
an accommodation to the Company's customers.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 125% from the three
months ended June 30, 1997 over the same period of 1996. This increase
resulted from the overall expansion of the business and is in keeping with
the strategy of building an organization capable of handling rapid growth and
expansion. Compensation and related personnel costs increased from $542,200
to $1,084,300 or 100% from the three month period in 1996 to 1997. Personnel
were added in all areas to expand the Company's sales efforts, technical
support, and administrative capabilities. The Company believes that future
revenue growth will not require a proportional increase in personnel expense
as the Company is positioned to experience economies of scale. Advertising,
trade shows, and marketing expenses increased from $59,450 to $81,620 or 37%
for the three months ended June 30 1996 as compared to the same period for
1997. Outside services expense increased from $21,060 to $148,400 or 605%
for the second quarter of 1967 over the second quarter of 1996. The largest
components of the increase are professional services for consultants
($58,200), legal expenses ($33,800), and clerical accounting staff and
customer technical support staff hired on a temporary to permanent basis
($36,520). Depreciation and amortization in regards to equipment, software,
furnishings, and capital leases increased by $149,800 or 201% due to
establishing a state of the art data center, implementing the frame relay
network with Cascade switches, expansion of equipment for dial up
connections, plus equipment for administrative use. Communication expense in
the form of 800 number lines, long distance, and general administration
increased to $72,900 or 70% for the three months ended June 30, 1997 to the
same period in 1996. This increase is reflective of the company's growth
plus the increase of toll free 800 technical support service offered for dial
in customers.
Other Operating Expenses
During the three months ended June 30, 1997, the Company incurred one time
expenses for: a write-off of Joint Venture project costs in Grand Junction
and Burlington, Colorado in the amount of $45,113, a write down of inventory
for sale in the amount of $23,031, an expense of $158,994 relating to
termination of employees, and $107,233 of legal expenses relating to the
terminations and defense of the lawsuit referenced in Part II, Item 1 of this
document.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
The Company's revenues grew 137% from $1,203,364 to $2,849,371 for the six
months ended June 30, 1997 as compared to the comparable period in 1996.
Listed below is a breakdown of the revenue billing categories.
Six Months Ended
June 30,
----------------------------------
1996 1997 % Change
---------- ---------- --------
REVENUE
Dial-Up Service $ 667,143 $1,166,678 75%
Dedicated access Service 275,083 808,832 194%
Web Services 147,096 467,886 218%
Equipment 101,217 203,586 101%
Other 12,825 202,389 1478%
---------- ---------- -----
Total $1,203,364 $2,849,371 137%
---------- ---------- -----
---------- ---------- -----
-92-
<PAGE>
Dial-Up Service
The Dial up business continues to experience growth based on reputation,
trade show attendance, and marketing by third parties with which the Company
contracted in outlying areas of Colorado. Revenues increased from $667,140 to
$1,166,680 or 75% from the 6 months ending June 30, 1996 to the 6 months
ending June 30, 1997. Dial-up Service has been split approximately evenly
between commercial and residential customers throughout 1995, 1996, and 1997.
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 $138,290 in revenues for the six month period ending
June 1996 and $283,240 for the same period in 1997 for an increase of 105%.
Dedicated Access Service
Dedicated business has grown based principally on ISDN and High Speed circuit
growth. ISDN sales have grown from $9,840 to $258,220 from the first half of
1996 to first half of 1997 for an increase of 2524%, while high speed
circuits have increased from $180,120 to $410,170 for the same periods for an
increase of 128%.
Web Services
Web page hosting accounted for $82,810 of revenue in the six months ending
June 30, 1996 and $218,300 for the same period in 1997 for an increase of
164%. 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 $64,280 to $249,580 or 288% for the first
six months of 1996 as compared to the same period in 1997. The Company
increased the size of the Web production department as well as provided
customers more complex applications. The growth in Web hosting business plus
the activities of the Company's direct sales force helped to drive this part
of the business.
Other Revenue
Other revenue includes training revenue ($12,780 increased to $16,860),
consulting ($0 increased to $121,470)and sales from the Information Exchange
($0 increased to $63,700), a voice messaging subsidiary. The Information
Exchange was acquired in a stock transaction in late 1996.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services
and equipment. The gross profit (exclusive of equipment sales) was 80.8% for
the six months ended June 30, 1996 and 65.0% for the same period in 1997. In
late December, 1996, the Company implemented a frame relay network using
Cascade switches. The switches are connected with a T-3 fiber optic network
to provide a high speed and highly reliable connection. The implementation
of this network has provided very high capacities for connections and has
resulted in a short term erosion of gross margin while the capacity is sold.
Future circuits sold on this network should have high yields because the
capacity is in place. Gross profits on equipment sales were 15.8% and 20.9%
for the 6 month periods ending June 30, 1996 and 1997 respectively. Sale of
equipment is provided as an accommodation to the Company's customers.
-93-
<PAGE>
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 137% from the six
months ended June 30, 1997 over the same period of 1996. This increase resulted
from the overall expansion of the business and is in keeping with the strategy
of building an organization capable of handling rapid growth and expansion.
Compensation and related personnel costs increased from $932,300 to $2,042,250
or 119% from the six month period in 1996. Personnel were added in all areas
to expand the Company's sales efforts, technical support, and administrative
capabilities. The Company believes that future revenue growth will not require
a proportional increase in personnel expense as the Company is positioned to
experience economies of scale. Advertising, trade shows, and marketing
expenses increased from $106,850 to $129,300 or 21% for the six months ended
June 30 1997 as compared to the same period for 1996. Outside services expense
increased from $44,100 to $315,550 or 615% for the first half of 1997 over the
first half of 1996. The largest components of the increase are professional
services for consultants ($104,980), legal expenses ($64,400), accounting
services for the year end audit and SEC reporting assistance ($44,580), and
clerical accounting staff and customer technical support staff hired on a
temporary to permanent basis ($89,650). Depreciation and amortization in
regards to equipment, software, furnishings, and capital leases increased by
$305,130 or 273% due to establishing a state of the art data center,
implementing the frame relay network with Cascade switches, expansion of
equipment for dial up connections, plus equipment for administrative use.
Communication expense in the form of 800 number lines, long distance, and
general administration increased to $147,100 or 80% for the six months ended
June 30, 1996 to the same period in 1997. This increase is reflective of the
companies growth plus the increase of toll free 800 technical support service
offered for dial in customers.
Other Operating Expense
During the six months ended June 30, 1997, the Company incurred one time
expenses for: a write-off of project costs related to Dial-Up contracts with
unrelated parties in Grand Junction and Burlington, Colorado in the amount of
$45,113, a write down of inventory for sale in the amount of $23,031, an
expense of $158,994 relating to termination of employees, and $107,233 of
legal expenses relating to the terminations and defense of a lawsuit.
LIQUIDITY AND CAPITAL RESOURCES
The initial public offering was completed on September 5, 1996. Operating cash
flow and earnings for the remainder of 1997 are projected to be negative. The
Company continues to build infrastructure and human resources to position
itself to be a prominent Internet provider in the regional market. The Company
will utilize lease financing, as available, for capital acquisitions. The
Company is in the process of a Private Placement with a stated value of
$2,400,000 with a net to the Company of $2,160,000 if the offering is fully
subscribed. As of June 30, 1997, gross proceeds of $445,000 had been received
and as of July 31, 1997, an additional $447,000 had been received. The
Company has incurred losses since inception and has experienced negative
operating cash flow in the first half of 1997. The Company's operations used
net cash of approximately $1,069,557 for this period. 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.
The Company acquired $334,270 of property and equipment during the first half
of 1997 primarily to complete the Operations Data Center and for various other
needs. Additionally, the Company acquired ONE, Inc. for a combination of stock
and cash. The cash portion was $150,000 of which, $24,700 was allocated to
equipment acquisition.
The Company has a bank line of credit in the amount of $500,000 of which
$495,000 is drawn at June 30, 1997. 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.
-94-
<PAGE>
As of June 30, 1997, the Company had negative working capital of $1,786,222.
This included $436,299 of cash and cash equivalents and $576,918 of
investments in financial instruments convertible to cash. Trade receivables
as of that date were $613,040. Current liabilities as of that date were
approximately $3,475,006, including $1,437,639 of accounts payable, $539,363
of current maturities of long-term debt and capital lease obligations,
$136,057 of accrued payroll and related taxes, and $605,714 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 unrelated parties pursuant to contracts described
above under "Dial-Up Service" pending cash collections. Also included in
current liabilities as of that date is $256,983 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 through 1997. The
Company's cash requirements are relatively fixed for the near term and the
Company expects to generate positive operating cash flows in 1998 if revenues
continue to increase according to expectations without any significant cost
increases. Should revenues not continue to increase according to
expectations, in the near term 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's common stock is traded on the Nasdaq SmallCap Market. The
Directors of The Nasdaq Stock Market, Inc. recently proposed changes to Nasdaq
Listing Requirements. These changes are pending approval by the SEC. If
approved, the Nasdaq will give companies six months to comply with the new
requirements. A minimum maintenance standard of $2 million in net tangible
assets is included in these proposed changes. The current requirement is
$1,000,000 of net equity in order to be listed with Nasdaq. As of June 30,
1997, the Company had less than $2,000,000 in net tangible assets and less than
$1,000,000 of net equity. The Company is in the process of a Private Placement
in the amount of $2,400,000 of which $445,000 had been received by June 30,
1997 and an additional $447,000 had been received as of July 31, 1997. The
successful completion of the Company's private placement offering would not
satisfy the proposed Nasdaq Listing Requirements. Although the existing Nasdaq
Listing Requirements would be satisfied by the successful completion of the
private placement offering, there can be no assurances that the Company can
continue to satisfy these Listing Requirements. If the proposed changes to the
SmallCap Market listing criteria are approved by the SEC and if the Company
fails to meet such requirements, the Company's common stock would no longer
trade in the SmallCap Market, which would adversely affect the liquidity and
price of the Company's common stock. There can be no assurance that the
Private Placement will be completed in full.
-95-
<PAGE>
Rocky Mountain Internet, Inc.
Unaudited Financial Statements
and
Corresponding Management's Discussion and Analysis of
Financial Condition and Results of Operations
extracted from
Quarterly Report on Form 10-QSB
for the Quarter Ended September 30, 1997
-96-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
December 31, September 30,
1996 1997
------------ -------------
(Note) Unaudited)
Current assets
Cash and cash equivalents $ 348,978 $ 287,197
Investments 1,356,629 276,918
Trade receivables, less allowance for
doubtful accounts 12/31/1996 $115,700;
9/30/1997 $73,120 518,827 662,737
Deferred offering costs 43,496
Inventories 91,047 47,559
Other 143,753 15,586
---------- ----------
$2,459,234 $1,333,493
---------- ----------
Property and equipment
Equipment 2,513,944 2,898,510
Computer software 202,501 227,830
Leasehold improvements 127,877 190,235
Furniture, fixtures, and office equipment 413,678 431,014
---------- ----------
$3,258,000 $3,747,589
Less accumulated depreciation and amortization 403,023 967,984
---------- ----------
$2,854,977 $2,779,605
---------- ----------
Other assets
Customer lists 145,444 500,280
Deposits 80,512 94,137
---------- ----------
$ 225,956 $ 594,417
---------- ----------
$5,540,167 $4,707,515
---------- ----------
---------- ----------
Note: The consolidated Balance Sheet information as of December 31, 1996 has
been derived from the Company's audited financial statements appearing in Form
10-KSB previously filed with the U.S. Securities and Exchange Commission.
See Notes to Consolidated Financial Statements
-97-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1996 1997
------------- -------------
(Note) (Unaudited)
Current liabilities
Note payable $ 4,250 199,250
Current maturities of long-term debt and
obligations under capital leases 451,823 577,171
Accounts payable 425,160 1,314,787
Deferred revenue 218,121 388,550
Accrued payroll and related taxes 528,160 178,614
Other accrued expense 460,836 623,948
----------- -----------
Total current liabilities $ 2,088,350 $ 3,282,320
----------- -----------
Long-term debt and obligations under capital
leases, less current maturities $ 1,134,380 $ 984,504
----------- -----------
Stockholders equity
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding 1996,
250,000 shares and 1997, 92,500 shares $ 250 $ 93
Common stock, $.001 par value; authorized
10,000,000 shares; issued 1996 4,540,723 shares;
9/30/97 5,436,160 shares and outstanding 1996
4,540,723 shares; 9/30/1997 5,390,734 shares. 4,541 5,436
Additional paid-in capital 4,879,968 6,304,096
Treasury stock (60,000)
Accumulated deficit (2,567,322) (5,808,934)
----------- -----------
Total stockholders' equity $ 2,317,437 $ 440,691
----------- -----------
$ 5,540,167 $ 4,707,515
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
-98-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Internet access and services $ 705,785 $1,489,562 $ 1,807,933 $ 4,135,344
Equipment sales 215,252 92,857 316,469 296,442
---------- ---------- ----------- -----------
$ 921,037 $1,582,419 $ 2,124,402 $ 4,431,786
---------- ---------- ----------- -----------
Cost of revenue earned
Internet access and services $ 191,082 $ 327,573 $ 402,408 $ 1,254,838
Equipment sales 197,547 69,365 282,726 230,493
---------- ---------- ----------- -----------
$ 388,629 $ 396,938 $ 685,134 $ 1,485,331
---------- ---------- ----------- -----------
Gross Profit $ 532,408 $1,185,481 $ 1,439,268 $ 2,946,455
Selling, general and administrative expenses 1,130,606 1,834,317 2,656,387 5,451,553
Other operating expenses 119,519 0 453,629
---------- ---------- ----------- -----------
Operating (loss) income $ (598,198) $ (768,355) $(1,217,119) $(2,958,727)
Other income (expense)
Interest expense (49,181) (100,722) (116,750) (297,838)
Other income (expense) (277) (764)
Interest income 10,079 3,659 12,892 22,297
Finance charges 9,087 17,489 20,202 17,905
Other income 312 1,274 2,054 2,388
---------- ---------- ----------- -----------
$ (29,703) $ (78,577) $ (81,602) $ (256,012)
---------- ---------- ----------- -----------
Net (loss) income before income taxes $ (627,701) $ (846,932) $(1,298,721) $(3,214,739)
---------- ---------- ----------- -----------
Income tax expense 0 0 0 0
Net (loss) income $ (627,901) $ (846,932) $(1,298,721) $(3,214,739)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Primary and fully diluted loss per share
Net loss per share $ (0.162) $ (0.157) $ (0.359) $ (0.633)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
-99-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Nine Months Ended
September 30,
--------------------------
1996 1997
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(1,298,721) $(3,214,738)
Items not requiring (providing) cash:
Depreciation and amortization 184,468 642,371
Salaries paid with stock options 40,000 --
Changes in assets and liabilities:
Trade receivables (309,427) (143,910)
Inventories (99,859) 43,489
Other current assets (151,968) 128,167
Accounts payable 607,403 889,627
Deferred revenue 16,446 170,429
Accrued payroll and related taxes 156,349 (349,546)
Other accrued expenses 139,300 163,113
----------- -----------
Net cash used in operating activities $ (716,009) $(1,670,999)
Cash Flows from Investing Activities
Purchase of investments $(1,200,000)
Proceeds from investments $ 1,079,712
Acquisition of ONE, Inc. assets (150,000)
Purchase of property and equipment (150,405) (264,471)
----------- -----------
(Additions) deletions to deposits (19,389) (13,626)
----------- -----------
Net cash provided by (used in) investing
activities $(1,369,794) $ 651,615
Cash Flows from Financing Activities
Proceeds from notes payable $ 88,842 $ 495,000
Proceeds from debentures / long-term debt 117,000 329,868
Proceeds from sale of preferred stock 406,000
Proceeds from sale of common stock 3,793,628 1,117,920
Additions to deferred offering cost (43,496)
Payment of Preferred Stock Dividend (26,875)
RMI stock purchase (60,000)
Payments on notes payable (19,419) (300,000)
Payments on long-term debt and obligations
under capital leases (164,789) (554,814)
----------- -----------
Net cash provided by (used in) financing
activities $ 4,221,262 $ 957,603
Increase (decrease) in cash and cash
equivalents $ 2,135,458 $ (61,782)
Cash and cash equivalents
----------- -----------
Beginning 274,661 348,978
----------- -----------
----------- -----------
Ending $ 2,410,119 $ 287,196
</TABLE>
See Notes to Consolidated Financial Statements
-100-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - REPRESENTATION OF MANAGEMENT
The interim financial data are unaudited; however, in the opinion of
management, the interim data include all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
NOTE 2. - INVESTMENT
The Company has invested in a US Treasury Note as follows;
Description Maturity Date Investment
----------- ------------- ----------
US Treasury Note Oct. 31, 1997 $ 276,918
This US Treasury Note is pledged against a letter of credit securing the
Company's office lease.
NOTE 3. - LINE OF CREDIT
The Company has established a line of credit for $500,000 effective September
18, 1996 with a maturity of September 10, 1997. The line of credit was secured
by pledge of a $300,000 Master Repurchase Agreement of a US Treasury Note held
with the lender and by accounts receivable. Additionally, as part of the
acquisition of the Information Exchange, the Company has an additional $4,250
drawn against another line of credit. The two credit lines have been
consolidated and then reduced by applying the $300,000 Master Repurchase
Agreement to the outstanding balance. The remaining balance at September 30,
1997 was $199,250. This balance was retired in October 1997.
NOTE 4. ACQUISITION OF ONLINE NETWORK ENTERPRISES, INC.
In January, 1997, the Company acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (ONE), headquartered in
Boulder, Colorado, a division of VR*1, Inc. The ONE acquisition netted RMI
approximately 47 dedicated and 732 dial-up subscribers and equipment valued at
approximately $24,700. The Company paid $150,000 cash and issued 116,932 shares
of the Company's common stock for the assets acquired from ONE. $306,246 was
assigned to the issued stock.
The acquisition has been accounted for as a purchase by recording the assets
acquired at their estimated market value at the acquisition date. The
purchase price is allocated as $431,246 for customer lists and $1,000 for a
non-compete agreement and $24,000 for equipment. Customer lists are being
amortized over a sixty month period. Revenues from the acquisition are
included effective January 17, 1997.
NOTE 5. PRIVATE PLACEMENT
The Company prepared a Private Placement Memorandum dated June 13, 1997 for the
sale of 600,000 units. Each unit is sold for $4.00 and consists of two shares
of Common Stock, $.001 par value per share, and one Warrant. The $4.00 per
Unit purchase price is allocated $1.90 to each share of Common Stock and $.20
to the Warrant. Each Warrant entitles the registered holder to purchase one
share of Common Stock at an exercise price of $3.00 per share. This offering
closed on September 14, 1997. As of 9/30/97, the final gross proceeds from the
offering were $1,242,000 or 310,500 Units.
In addition, in the event that, within 24 months after June 30, 1997, the
Company sells shares of its Common Stock for cash consideration (other than upon
exercise of employee stock options) and the amount per share paid to the
Company, net of discounts and commissions is less than $1.80, the Company is
required to issue to each purchaser in the private offering an additional number
of shares of Common Stock such that the additional shares, when added to the
shares purchased in the private offering, would result in an effective purchase
price equal to the net price per share paid by purchasers in such later
offering.
Neidiger, Tucker, Bruner ("NTB") was the Company's placement agent in
connection with the private offering described in the preceding paragraphs.
In connection with that offering, the Company agreed to issue to NTB warrants
(the "NTB Private Offering Warrants") to purchase units of securities, each
unit consisting of two shares of Common Stock and one common stock purchase
warrant. The terms of the NTB Private Offering Warrants, including the
antidilution provisions, if any, have not been determined as of the date
hereof. The Company anticipates that it will issue to NTB, for nominal
consideration, 31,050 NTB Private Offering Warrants, although the Company has
not entered into a formal sales agency agreement with NTB with respect to the
private offering. Accordingly, the terms of the NTB Private Offering
Warrants, including the anti-dilution provisions, if any, have not been
determined as of the date hereof.
NOTE 6. CHANGES IN STOCKHOLDERS EQUITY
During the three months ended September 30, 1997 the following stock
transactions occurred.
Preferred stock, $.001 par value
Beginning Balance $ 182.50
Shares converted to Common stock (90,000 shares) $ (90.00)
----------
Ending balance $ 92.50
----------
----------
Common stock, $.001 par value
Beginning Balance $ 4,947.66
Preferred stock converted to Common stock (90,000 shares) $ 90.00
Shares issued for Private Placement $ 398.50
----------
Ending Balance $ 5,436.16
----------
----------
Treasury stock
Beginning balance $42,000.00
Acquired stock from major shareholders and former employee
as part of severance agreement (13,617 shares) $18,000.00
----------
Ending balance $60,000.00
----------
----------
NOTE 7. RESTATEMENT
The 1996 financial statements have been restated to correct the recording
of a non-qualified 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 primary and fully diluted loss per share by $.01 as of
December 31, 1996 and for the year then ended, compared to what was previously
reported.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCE CONDITION AND RESULTS OF
OPERATIONS
Certain information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain
forward-looking statements. 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 assumptions that the Company will
continue to design, market and provide successful new services, that
competitive conditions will not change materially, that demand for the
Company's services will continue to grow, that the Company will retain and add
qualified personnel, that the Company's forecasts will accurately anticipate
revenue growth and the costs of producing that growth, and that there will be
no material adverse change in the Company's business. In light of the
significant uncertainties inherent in the forward-looking information included
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, actual results could differ materially from the
forward-looking information contained in this Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
On October 1, 1997, Mr. Douglas H. Hanson obtained effective control of Rocky
Mountain Internet, Inc., by entering into a series of agreements wherein he
invested $2,450,000 in the Company in exchange for 1,225,000 shares of common
stock at a price of $2.00 per share in addition to acquiring warrants, options,
and voting rights from certain shareholders. The details of this transaction
are contained in a current report on Form 8-K filed with the U.S. Securities and
Exchange Commission on October 6, 1997. The Company will recognize
compensation expense of $472,225 over a twelve month period in respect of the
377,780 options to purchase stock under a non-qualified stock option plan
which were granted to Mr. Hanson. Mr. Hanson received 4,000,000 warrants
exercisable at $1.90 for a period of one and one-half years. Each warrant
may be exchanged for one share of common stock.
The following is a Proforma Balance Sheet reflecting the effect of the
$2,450,000 investment as of the funding date of October 3, 1997.
-101-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
Proforma
Sep. 30, 1997 Investment Oct. 3, 1997
(Unaudited) Oct. 3, 1997 (Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 287,197 $ 2,450,000 $ 2,737,197
Investments 276,918 276,918
Trade receivables, less allowance for doubtful accounts; 9/30/1997 662,737 662,737
$73,120
Deferred offering costs 43,496 (43,496) 0
Inventories 47,559 47,559
Other 15,586 15,586
----------------------------------------------------------
$ 1,333,493 $ 2,406,504 $ 3,739,997
Property and equipment
Equipment 2,898,510 2,898,510
Computer software 227,830 227,830
Leasehold improvements 190,235 190,235
Furniture, fixtures, and office equipment 431,014 431,014
----------------------------------------------------------
$ 3,747,589 $ - $ 3,747,589
Less accumulated depreciation and amortization 967,984 967,984
----------------------------------------------------------
$ 2,779,605 $ - $ 2,779,605
Other assets
Customer lists 500,280 500,280
Deposits 94,137 94,137
----------------------------------------------------------
$ 594,417 $ - $ 594,417
----------------------------------------------------------
$ 4,707,515 $ 2,406,504 $ 7,114,019
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
-102-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Proforma
Sep. 30, 1997 Investment Oct. 3, 1997
(Unaudited) Oct. 3, 1997 (Unaudited)
<S> <C> <C> <C>
Current liabilities
Note payable 199,250 199,250
Current maturities of long-term debt and obligations under capital 577,171 577,171
Accounts payable 1,314,787 1,314,787
Deferred revenue 388,550 388,550
Accrued payroll and related taxes 178,614 178,614
Other accrued expense 623,948 623,948
----------------------------------------------------------
Total current liabilities $ 3,282,320 $ - $ 3,282,320
Long-term debt and obligations under capital leases, less current $ 984,504 $ - $ 984,504
maturities
----------------------------------------------------------
Stockholders equity
Preferred stock, $.001 par value; authorized 1,000,000 shares; $ 93 $ 93
issued and outstanding 9/30/97 and 10/3/97, 92,500 shares
Common stock, $.001 par value; authorized 10,000,000 shares; issued; 5,436 1,225 6,661
9/30/97 5,432,116; 10/3/97 6,657,116 shares and outstanding
9/30/1997 5,386,690 shares 10/3/97 6,611,690 shares.
Additional paid-in capital 6,304,096 2,448,775
(43,496) 8,709,375
Treasury Stock (60,000) (60,000)
Accumulated deficit (5,808,934) (5,808,934)
----------------------------------------------------------
Total Stockholders' Equity $ 440,691 $ 2,406,504 $ 2,847,195
----------------------------------------------------------
$ 4,707,515 $ 2,406,504 $ 7,114,019
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
-103-
<PAGE>
This investment brings the Company into compliance with the Nasdaq SmallCap
Market listing requirements as of October 3, 1997. See LIQUIDITY AND CAPITAL
RESOURCES below for additional discussion of this matter.
Effective January 16, 1997, the Company acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc. (ONE), 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 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 pricing alternatives, 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.
Effective November 4, 1997, the Company introduced a flat rate Dial Up service
offering in the Denver, Colorado and Boulder, Colorado markets. Introduction is
also under consideration into the other market area served by the Company. This
offering provides unlimited access to dial up services for a flat monthly rate
of $24.95. As part of the new service offering, the Company is also introducing
enhanced data communication rates using the K 56 Flex technology.
Termination Agreement - Contract with Zero Error Networks
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 POP's 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 is in progress with Alamosa and Leadville completed. The
Hayden location is still pending due to problems with installation of
circuits. 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.
-104-
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
The Company's revenues grew 72% from $921,037 to $1,582,420 for the three months
ended September 30, 1997 as compared to the comparable period in 1996. Listed
below is a breakdown of the revenue billing categories.
Three Months Ended
September 30,
-------------------------------------------
1996 1997 % Change
-------------- -------------- -----------
REVENUE
Dial-Up Service $ 355,867 $ 568,707 60%
Dedicated access Service 191,615 556,329 190%
Web Services 107,850 323,569 200%
Equipment 215,252 92,857 (57%)
Other 50,453 40,957 (19%)
-------------- -------------- -----------
Total $ 921,037 $ 1,582,419 72%
-------------- -------------- -----------
-------------- -------------- -----------
Dial-Up Service
The Company's strategy is to provide an 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. 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 K 56 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.
For the Three Months Ended
Mar Jun Sep Dec Mar Jun Sep Dec
1995 1995 1995 1995 1996 1996 1996 1996
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50
Mar Jun Sep
1997 1997 1997
$20.10 $20.04 $19.65
The Dial-up business continued to experience growth based on reputation,
trade show attendance, and marketing by third parties with which the Company
has contracted in outlying areas of Colorado. Dial-up Service has been split
approximately evenly between commercial and residential customers throughout
1995, 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
-105-
<PAGE>
from $355,867 to $568,708 or 60% from the three months ending September 30, 1996
to the three months ending September 30, 1997.
RMI has established business alliances through contracts with five,
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 $ 92,071 in revenues for the three month period ending
September 30, 1996 and $ 99,594 for the same period in 1997, for an increase
of 8%. The 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. Effective July 3, 1997, the
contract with Zero Error Networks (ZEN) 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 (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 colocation
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 $25,989 to $177,792
from third quarter 1996 to third quarter 1997 for an increase of 584%, while
high speed circuits have increased from $116,272 to $240,730 for the same
periods for an increase of 107%.
The table below shows the quarterly customer count by each of the component
services offered for dedicated access as of the dates indicated:
-106-
<PAGE>
<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
Colocation 0 1 4 4 6 4 5 6
</TABLE>
Service Mar 31 Jun 30 Sep 30
1997 1997 1997
- ------------------- ---------- ---------- ----------
Private Port 50 41 36
56 Kbps 78 72 65
ISDN 168 193 211
T-1 65 84 99
Colocation 11 12 11
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:
Mar Jun Sep Dec Mar Jun Sep Dec
1995 1995 1995 1995 1996 1996 1996 1996
1 21 45 90 157 217 242 341
Mar Jun Sep
1997 1997 1997
418 424 417
Web page hosting accounted for $58,391 of revenue in the third quarter of 1996
and $122,489 in the third quarter of 1997 for an increase of 110%.
Web page production increased from $43,533 for the third quarter 1996 to
$189,763 for the third quarter 1997 for an increase of 336%. The Company
increased the size of the Web production department as well as provided
customers more complex applications. The growth in Web hosting business plus the
activities of the Company's direct sales force helped to drive this part of the
business. The Company did not have a direct sales force until December, 1995.
Other Revenue
Other revenue includes training revenue ($1,800 increased to $4,025), network
consulting ($25,469 decreased to $11,376)and sales from the Information
Exchange, a voice messaging subsidiary ($0 increased to $25,366). The
Information Exchange was acquired in a stock transaction in late 1996.
-107-
<PAGE>
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. The gross profit from Internet access and services was 73% of
revenues from that segment for the three months ended September 30, 1996 and 78%
of revenues from that segment for the same period in 1997. The higher gross
profit for the third quarter 1997 resulted due to credits received from US West
relating to circuit overcharges in excess of $100,000. In late December, 1996,
the Company implemented a frame relay network using Cascade switches. The
switches are connected with a DS-3 fiber optic network to provide a high speed
and highly reliable connection. The implementation of this network has provided
very high capacities for connections and has resulted in a short term erosion of
gross margin while the capacity is sold. Future circuits sold on this network
should have high yields because the capacity is in place. Gross profits on
equipment sales were 8% and 25% for the 3 month periods ending September 30,
1996 and 1997 respectively. Sale of equipment is provided as an accommodation
to the Company's customers and gross profit margin will vary considerably based
on the mix of products sold.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 62% from the three
months ended September 30, 1997 over the same period of 1996. This increase
resulted from the overall expansion of the business and is in keeping with the
strategy of building an organization capable of handling rapid growth and
expansion. Administrative expenses increased by 88% from $132,367 to $248,637
from the three months ended September 30, 1996 to the same period of 1997.
Compensation and related personnel costs increased from $723,913 to $961,552 or
33% from the three month period in 1996 to 1997. Personnel were added in all
areas to expand the Company's sales efforts, technical support, and
administrative capabilities. The Company believes that future revenue growth
will not require a proportional increase in personnel expense as the Company
believes that it is positioned to experience economies of scale. Advertising,
trade shows, and marketing expenses increased from $46,593 to $65,995 or 42% for
the three months ended September 30, 1996 as compared to the same period for
1997. Outside services expense increased from $72,787 to $214,753 or 195% for
the second quarter of 1967 over the second quarter of 1996. The Company has
used "temporary to hire" programs for Web production staff and technical support
to identify for hiring qualified personnel. Depreciation and amortization in
regards to equipment, software, furnishings, and capital leases increased from
$72,592 to $229,296 or 216% due to establishing a state of the art data center,
implementing the frame relay network with Cascade switches, expansion of
equipment for dial up connections, plus equipment for administrative use.
Communication expense in the form of 800 number lines, long distance, and
general administration decreased to $54,112 from $59,281 for the three months
ended September 30, 1997 to the same period in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
The Company's revenues grew 109% from $2,124,402 to $4,431,787 for the nine
months ended September 30, 1997 as compared to the comparable period in 1996.
Listed below is a breakdown of the revenue billing categories.
-108-
<PAGE>
Nine Months Ended
September 30,
--------------------------------------------
1996 1997 % Change
------------ ------------ --------
REVENUE
Dial-Up Service $ 1,048,792 $ 1,735,386 65%
Dedicated access Service 440,917 1,365,158 210%
Web Services 254,945 791,455 210%
Equipment 316,469 296,442 -6%
Other 63,279 243,346 285%
------------ ----------- --------
Total $ 2,124,402 $ 4,431,787 109%
------------ ----------- --------
Dial-Up Service
The Dial up business continued to experience growth based on reputation,
trade show attendance, and marketing by third parties with which the Company
has contracted in outlying areas of Colorado. Revenues increased from
$1,048,792 to $1,735,386 or 65% from the nine months ending September 30,
1996 to the nine months ending September 30, 1997.
RMI 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 $230,366 in revenues for the nine month period ending
September 1996 and $376,745 for the same period in 1997 for an increase of
64%. The 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. Effective July 3, 1997, the
contract with Zero Error Networks (ZEN) 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 business has grown based principally on ISDN and high speed circuit
growth. ISDN sales have grown from $35,833 to $436,012 from the first nine
months of 1996 to the first nine months of 1997 for an increase of 1,117%, while
high speed circuits have increased from $296,389 to $627,731 for the same
periods for an increase of 112%.
Web Services
Web page hosting accounted for $133,160 of revenue in the nine months ending
September 30, 1996 and $316,446 for the same period in 1997 for an increase of
138%.
Web page production increased from $108,440 to $437,182 or 303% for the first
nine months of 1996 as compared to the same period in 1997. The Company
increased the size of the Web
-109-
<PAGE>
production department as well as provided customers more complex applications.
The growth in Web hosting business plus the activities of the Company's direct
sales force helped to drive this part of the business.
Other Revenue
Other revenue includes training revenue ($14,575 increased to $20,881),
consulting ($25,519 increased to $132,854)and sales from the Information
Exchange ($0 increased to $89,005), a voice messaging subsidiary. The
Information Exchange was acquired in a stock transaction in late 1996.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. The gross profit from Internet access and services 78% of revenues
from that segment for the nine months ended September 30, 1996 and 70% of
revenues from that segment for the same period in 1997. In late December, 1996,
the Company implemented a frame relay network using Cascade switches. The
switches are connected with a DS-3 fiber optic network to provide a high speed
and highly reliable connection. The implementation of this network has provided
very high capacities for connections and has resulted in a short term erosion of
gross margin while the capacity is sold. Future circuits sold on this network
should have high yields because the capacity is in place. The gross profit
percentage for the nine months ending September 30, 1997, was enhanced due to
credits received from US West relating to circuit overcharges in excess of
$100,000. Gross profits on equipment sales were 11% and 22% for the nine month
periods ending September 30, 1996 and 1997 respectively. Sale of equipment is
provided as an accommodation to the Company's customers.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased from $2,656,387 to
$5,451,553 or by 105% from the nine months ended September 30, 1996 to the same
period of 1997. This increase resulted from the overall expansion of the
business and is in keeping with the strategy of building an organization capable
of handling rapid growth and expansion. Administrative expenses increased by 82%
from $343,473 to $624,668 from the nine months ended September 30, 1996 to the
same period of 1997. Compensation and related personnel costs increased from
$1,656,212 to $3,003,797 or 81% from the nine month period in 1996 to same
period in 1997. Personnel were added in all areas to expand the Company's sales
efforts, technical support, and administrative capabilities. The Company
believes that future revenue growth will not require a proportional increase in
personnel expense as the Company believes it is positioned to experience
economies of scale. Advertising, trade shows, and marketing expenses increased
from $153,442 to $195,291 or 27% for the nine months ended September 30, 1996 as
compared to the same period for 1997. Outside services expense increased from
$116,888 to $530,304 or 354% for the first nine months of 1996 over the first
nine months of 1997. The largest components of the increase are professional
services for consultants ($144,915), legal expenses ($99,735), accounting
services for the year end audit and SEC reporting assistance ($62,397), and
clerical accounting staff, Web production staff, and customer technical
support staff hired on a temporary to permanent basis ($223,257). Depreciation
and amortization in regards to equipment, software, furnishings, and capital
leases increased from $184,467 to $646,308 or 250% due to establishing a state
of the art data center, implementing the frame relay network
-110-
<PAGE>
with Cascade switches, expansion of equipment for dial up connections, plus
equipment for administrative use and amortization of customer lists from
acquisitions. Communication expense in the form of 800 number lines, long
distance, and general administration increased from $140,810 to $201,219 or 43%
for the nine months ended September 30, 1996 to the same period in 1997. This
increase is reflective of the companies growth plus the increase of toll free
800 technical support service offered for dial in customers.
Other Operating Expense
During the second and third quarters of 1997, the Company incurred one time
expenses for: a write-off of Joint Venture project costs in Grand Junction and
Burlington, Colorado in the amount of $45,113, a write down of inventory for
sale in the amount of $23,031, and expense of $267,216 relating to termination
of employees, and $107,233 of legal expenses relating to the terminations and
defense of a lawsuit.
LIQUIDITY AND CAPITAL RESOURCES
The initial public offering was completed on September 5, 1996. Operating cash
flow and earnings for the remainder of 1997 are projected to be negative. The
Company continues to build infrastructure and human resources to position itself
to be a prominent Internet provider in the regional market. The Company will
utilize lease financing, as available, for capital acquisitions. The Company
raised $1,117,920 net funds from a Private Placement by issuing 310,500 units.
Each unit is composed of two shares of common stock and one warrant to buy one
share of common stock at $3.00 per share. The Company has incurred losses since
inception and has experienced negative operating cash flow in the first nine
months of 1997. The Company's operations used net cash of approximately
$1,670,999 for this period. 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.
The Company acquired $489,590 of property and equipment during the first nine
months of 1997 primarily to complete the Operations Data Center and for various
other needs. Additionally, the Company acquired the dedicated high speed and
dial-up subscribers and certain equipment from ONE, Inc. for a combination of
stock and cash. The cash portion was $150,000 of which, $24,700 was allocated
to equipment acquisition.
The Company has a bank line of credit in the amount of $200,000 of which
$199,250 is drawn at September 30, 1997. This credit line was paid off in early
October, 1997 and has not been renewed. The Company's office lease is secured
by a pledge of a treasury note of $250,000.
As of September 30, 1997, the Company had negative working capital of
$1,840,605. This included $287,196 of cash and cash equivalents and $276,918 of
investments in financial instruments convertible to cash. Trade receivables as
of that date were $662,737. Current liabilities as of that date were 3,174,098,
including $1,314,787 of accounts payable, $577,172 of current maturities of
long-term debt and capital lease obligations, $178,614 of accrued payroll and
related taxes, and $485,819 of accrued expenses attributable primarily to
deferred office rent, preferred stock dividend payable, accrual for unbilled
circuit costs, and amounts due joint venture partners pending cash collections.
Also included in current liabilities as of that date is $388,550 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.
-111-
<PAGE>
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 through 1997. The Company's cash
requirements are relatively fixed for the near term and the Company expects to
generate positive operating cash flows at a point in 1998 if revenues continue
to increase according to expectations without any significant cost increases.
Effective October 1, 1997, (with funding on October 3, 1997), Mr. Douglas H.
Hanson purchased 1,225,000 common shares at $2.00 per share for a total purchase
price of $2,450,000. Additionally, he acquired warrants to purchase 4,000,000
additional shares at $1.90, which warrants are exercisable for eighteen months.
The complete details of the transaction are reported in a current report on Form
8K filed with the U.S. Securities and Exchange Commission on October 6, 1997.
These funds along with cash flow from operations are expected to be sufficient
to fund working capital until cash flows turn positive. There can be no
assurance however that this will occur.
The Company's common stock is traded on the Nasdaq SmallCap 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. Assuming the Company's revenue and
expense trends continue and no additional equity funds are infused into the
Company by December 31, 1997, the Company expects it will fall below the minimum
Nasdaq SmallCap Market listing requirement for tangible net worth. However, the
Company anticipates any deficiency will be correct by an additional equity
investment. Nevertheless, there is not assurance that the Company will obtain
the funds necessary to meet these listing requirements.
-112-
<PAGE>
Appendix A
Rocky Mountain Internet, Inc.
1997 Stock Option Plan
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
1997 STOCK OPTION PLAN
ARTICLE I - INTRODUCTION
1.1 ESTABLISHMENT. Rocky Mountain Internet, Inc., a Delaware
corporation, hereby establishes the Rocky Mountain Internet, Inc. 1997 Stock
Option Plan for certain key employees of the Company.
1.2 PURPOSE OF PLAN. The purpose of the Rocky Mountain Internet, Inc.
1997 Stock Option Plan is to serve as a performance incentive and to encourage
the ownership of Rocky Mountain Internet, Inc. common stock by officers and
other key employees of the Company so that the person to whom the option is
granted may acquire a proprietary interest in the success of the Company, and to
encourage such person to remain in the employ of the Company. This Plan shall
consist of grants of incentive stock options, which are intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended, and of
options which are intended not to so qualify.
ARTICLE II - DEFINITIONS
2.1 "Award" means an Option granted hereunder.
2.2 "Board" means the Board of Directors of Rocky Mountain Internet, Inc.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
Reference in this Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations
promulgated thereunder.
2.4 "Committee" means a committee or committees, each consisting of a
member or members of the Board and/or such other person or persons as may be
appointed from time to time by the Board, or the entire Board if no such
Committee has been appointed. With respect to the making of a grant or grants
under the Plan to Eligible Employees subject to Rule 16b-3, the Committee shall
be constituted so as to comply with Rule 16b-3 and shall consist of either two
(2) "non-employee directors" within the meaning of Rule 16b-3, or the entire
Board ("16b-3 Committee); provided, however, that if a 16b-3 Committee is not
required for such grant or grants to meet the exemption requirements of Rule
16b-3, then this sentence shall not be applicable.
2.5 "Company" means Rocky Mountain Internet, Inc., a Delaware
corporation, or any successors as described in Article XI and any subsidiary of
the Company of which the Company owns, directly or indirectly, fifty percent
(50%) or more of its voting capital stock.
2.6 "Date of Disability" means the date on which a Participant is
classified as Disabled.
-1-
<PAGE>
2.7 "Disability" or "Disabled" means the classification of a Participant
as "Disabled" pursuant to a long-term disability plan of the Company, if any, or
successor to such plan (or, if there is no such plan, as determined by the
Committee), provided that the Participant meets the requirements of Section
22(e)(3) of the Code.
2.8 "Effective Date" means October 1, 1997.
2.9 "Eligible Employee" means any person employed by the Company on a
full-time, salaried basis who satisfies all of the requirements of Article VI.
2.10 "Fair Market Value" means the fair market value of the Stock, as
determined by the Committee; provided, however, that (i) if the Stock is
admitted to trading on a national securities exchange on the date the Option is
granted, Fair Market Value shall not be less than the last sale price reported
for the Stock on such exchange on such date or, if no sales are reported on the
date the Option is granted, on the date next preceding such date on which a sale
was reported, or (ii) if the Stock is not admitted to trading on a national
securities exchange on the date the Option is granted but the Stock is admitted
to quotation on the National Association of Securities Dealers Automated
Quotation system on the date the Option is granted, Fair Market Value shall not
be less than the average of the highest bid and lowest asked prices of the stock
on such system on such date.
2.11 "Incentive Stock Option" means an Option which is an "incentive stock
option" within the meaning of Section 422 of the Code and which is granted under
Article VII.
2.12 "Insider" means an "officer" or "director" of the Company within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended.
2.13 "Nonqualified Stock Option" means an Option which is not an Incentive
Stock Option and which is granted under Article VII.
2.14 "Option" means either a Nonqualified Stock Option or an Incentive
Stock Option granted under Article VII.
2.15 "Participant" means an Eligible Employee who has been granted an
Award under this Plan.
2.16 "Plan" means this Rocky Mountain Internet, Inc. 1997 Stock Option
Plan.
2.17 "Retirement" means voluntary resignation from the Company for any
reason, except in the event of death, Disability, or Termination.
2.18 "Retirement Date" is the employee's date of Retirement from the
Company.
2.19 "Rule 16b-3" means Rule 16b-3 or any successor rule promulgated under
the Securities Exchange Act of 1934, as amended.
-2-
<PAGE>
2.20 "Stock" means common stock of Rocky Mountain Internet, Inc., $.01 par
value per share.
2.21 "Stock Option Agreement" means an agreement with respect to an
Option, as described in Article VIII.
2.22 "Termination" means discharge from employment with the Company for
cause, except in the event of death, Disability, or Retirement. For this
purpose, "cause" shall constitute (i) any act or omission of fraud or
dishonesty, (ii) a breach of any material provision of a Participant's written
employment agreement, (iii) a Participant's willful, intentional, or grossly
negligent failure to perform his duties under his written employment agreement,
or (iv) any indictment or conviction of a Participant for a crime involving
moral turpitude or for any felony.
2.23 "Vested Option" means, at any date, any portion of an Option which a
Participant is then entitled to exercise pursuant to the terms of the Plan and
an applicable Stock Option Agreement.
ARTICLE III - EFFECTIVE DATE AND DURATION
3.1 EFFECTIVE DATE. Subject to the approval by a majority of the holders
of Stock voted, in person or by proxy, at the 1998 Annual Meeting of
Stockholders of the Company (which meeting shall be held within twelve (12)
months after this Plan is adopted by the Board), this Plan shall be effective as
of October 1, 1997.
3.2 PERIOD FOR GRANTS OF AWARDS. Awards may be made as provided herein
for a period of ten (10) years after the Effective Date.
3.3 TERMINATION. This Plan may be terminated as provided in Article XII,
but shall continue in effect until all matters relating to the payment of Awards
and the administration of the Plan have been settled.
ARTICLE IV - ADMINISTRATION
4.1 ADMINISTRATION. Except where this Plan expressly reserves
administrative or other powers to the Company or the Board, this Plan shall be
administered by the Committee. All questions of interpretation and application
of this Plan, or of the terms and conditions pursuant to which Awards are
granted, exercised, or forfeited under the provisions hereof, shall be subject
to the determination of the Committee. Such determination shall be final and
binding upon all parties affected thereby.
It is contemplated that Awards granted hereunder will be recommended by the
management of the Company or the Board to the Committee, and that the Committee
will determine whether to accept such recommendations.
-3-
<PAGE>
ARTICLE V - GRANT OF AWARDS AND
LIMITATION OF NUMBER OF SHARES OF STOCK AWARDED
5.1 GRANTS OF AWARDS; NUMBER OF SHARES. The Committee may, from time to
time, grant Awards of Options to one or more Eligible Employees in its
discretion; provided, however, that:
(i) Subject to any adjustment pursuant to Article X or Article XI, the
aggregate number of shares of Stock subject to Awards under this Plan may
not exceed six hundred thousand (600,000) shares of Stock;
(ii) To the extent that an Award lapses or the rights of the Participant
to whom it was granted terminate, or to the extent that the Award is
canceled by mutual agreement of the Committee and the Participant (which
cancellation opportunities may be offered by the Committee to Participants
from time to time), any shares of Stock subject to such Award shall again
be available for the grant of an Award hereunder; and
(iii) Shares of Stock ceasing to be subject to an Award because of the
exercise of an Option shall no longer be available for the grant of an
Award hereunder.
In determining the size of Awards, the Committee may take into account
recommendations by the Board or the Company's management, a Participant's
responsibility level, performance, potential, and cash compensation level, the
Fair Market Value of the Stock at the time of Awards, and such other
considerations as it deems appropriate.
ARTICLE VI - ELIGIBILITY
6.1 ELIGIBLE INDIVIDUALS. All full-time, salaried employees of the
Company (including salaried officers or employees who are members of the Board,
but excluding directors who are not officers or employees of the Company) shall
be eligible to receive Awards hereunder. Subject to the provisions of this
Plan, the Committee shall from time to time select from such Eligible Employees
those to whom Awards shall be granted and determine the size of the Awards. A
Participant may hold more than one Option at any one time. No officer or
employee of the Company shall have any right to be granted an Award under this
Plan, as all Awards granted hereunder are granted in the sole and absolute
discretion of the Committee, as provided herein.
ARTICLE VII - OPTIONS
7.1 GRANTS OF OPTIONS. An Award shall be granted to Participants in the
form of an Option to purchase Stock. An Award shall be considered as having
been granted on the date specified in the grant resolution of the Committee.
7.2 TYPE OF OPTION. The Committee may choose to grant a Participant who
is an Eligible Employee either an Incentive Stock Option or a Nonqualified Stock
Option or both,
-4-
<PAGE>
subject to the limitations contained herein. Incentive Stock Options and
Nonqualified Stock Options, whether granted at the same or different times,
shall be deemed to been awarded in separate grants, shall be clearly identified,
and in no event shall the exercise of one Option affect the right to exercise
any other Option or affect the number of shares of Stock for which any other
Option may be exercised.
7.3 INCENTIVE STOCK OPTION DOLLAR LIMITATIONS. If the Committee grants
an Incentive Stock Option, the aggregate Fair Market Value (determined as of the
date the Option is granted) of any such Option plus any incentive stock options
granted under any other plans of the Company which shall be first exercisable by
any one Participant during any one calendar year shall not exceed $100,000, or
such other dollar limitation as may be provided in the Code.
7.4 RESTRICTIONS ON DISPOSITIONS. To preserve tax treatment under
Section 422 of the Code upon the disposition of any shares of Stock acquired
pursuant to any Incentive Stock Option granted under this Plan, a Participant
may not dispose of any such shares of Stock within two (2) years from the date
of grant of such Option nor within one (1) year of the exercise of such Option.
ARTICLE VIII - TERMS AND CONDITIONS
OF STOCK OPTION AGREEMENTS
8.1 STOCK OPTION AGREEMENTS. Awards shall be evidenced by Stock Option
Agreements in such form as the Committee shall, from time to time, approve.
Such Stock Option Agreements, which need not be identical, shall comply with and
be subject to the following terms and conditions:
(a) MEDIUM OF PAYMENT. Upon exercise of the Option, the Option price
shall be payable either (i) in United States dollars in cash or by
certified check, bank draft, or money order payable to the order of
the Company, or (ii) in the discretion of the Committee, through the
delivery of shares of Stock with a Fair Market Value equal to the
total Option price, or (iii) by a combination of the methods described
in (i) and (ii); provided, however, that in the case of an Option
price which is paid by an Insider in whole or in part by the delivery
of shares of Stock, the Stock acquired in the exercise of such Option
shall not be disposed of by the Insider for a six (6) month period
commencing on the date on which the Insider last purchased Stock
(including the Stock tendered in connection with such exercise),
except that this limitation shall not apply (i) if an Award was
granted by a 16b-3 Committee as defined in Section 2.4 above, or (ii)
in the event of the Participant's death or Disability during such
six-month period.
(b) NUMBER OF SHARES. The Stock Option Agreement shall state the
total number of shares to which it pertains.
-5-
<PAGE>
(c) OPTION PRICE. With respect to a Nonqualified Stock Option, the
Option price may be any price equal to or less than Fair Market Value,
as determined in the sole discretion of the Committee. With respect
to an Incentive Stock Option, the option price shall be not less than
the Fair Market Value of such shares on the date of the granting of
the Option (or one hundred ten percent (110%) of such amount if the
Option is granted to an individual owning stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company).
(d) TERM OF OPTIONS. Each Nonqualified Stock Option and Incentive
Stock Option granted under this Plan shall expire not more than ten
(10) years from the date the Option is granted, except that each
Incentive Stock Option granted under the Plan to an individual owning
stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company shall expire not
more than five (5) years from the date the Option is granted.
Notwithstanding any other provision of the Plan, any Participant who
is an Insider may not exercise any portion of an Option during the
first six (6) months following the grant of an Award, except that this
limitation shall not apply (i) if such Award was granted by a 16b-3
Committee as defined in Section 2.4 above, or (ii) in the event of the
Participant's Retirement, Disability or death during such six-month
period.
(e) DATE OF VESTING. Any Option awarded hereunder shall become a
Vested Option, as follows:
(i) The aggregate number of shares of Stock subject to an Award
shall become a Vested Option one (1) year from the date of such
award.
(ii) Except as otherwise provided hereunder, the Committee may
in its discretion accelerate the time at which an Option granted
hereunder becomes a Vested Option.
(iii) Notwithstanding the preceding, all Options which are
awarded to a Participant hereunder shall become Vested Options
upon the Participant's Retirement, Disability, or death.
(f) FORFEITURE OR EXERCISE OF OPTION. In the event of a
Participant's Termination with the Company, each Option held by him or
her which is not a Vested Option shall terminate. Except as otherwise
provided in the Stock Option Agreement, if a Participant terminates
employment with the Company prior to exercise of the Participant's
Vested Option, such Vested Option shall be forfeited, or be exercised,
as follows:
(i) TERMINATION. In the event of a Participant's Termination,
the Participant's Vested Option shall be forfeited immediately.
-6-
<PAGE>
(ii) RETIREMENT. In the event of a Participant's Retirement,
the Participant shall have the right to exercise his or her
Vested Option within three (3) months (or such shorter period as
the Code or the terms of the particular Stock Option Agreement
may require) of the Participant's Retirement Date.
(iii) DISABILITY. Upon the Disability of a Participant, the
Participant's Vested Option shall be exercisable within twelve
(12) months (or such shorter period as the Code or the terms of
the particular Stock Option Agreement may require) of the
Participant's Date of Disability.
(iv) DEATH. If the Participant dies while in the employment of
the Company or within the period of time after Retirement during
which the Participant would have been entitled to exercise his or
her Vested Option rights, the Participant's estate, personal
representative, or beneficiary (as applicable) shall have the
right to exercise such Vested Option within one (1) year from the
date of the Participant's death (or such shorter period as the
Code or the terms of the particular Stock Option Agreement may
require).
(g) AGREEMENT AS TO SALE OF SECURITIES. If, at the time of the
exercise of any Option, in the opinion of counsel for the Company, it
is necessary or desirable, in order to comply with any applicable laws
or regulations relating to the sale of securities, that the
Participant exercising the Option shall agree to purchase the shares
that are subject to the Option for investment only and not with any
present intention to resell the same and that the Participant will
dispose of such shares only in compliance with such laws and
regulations, the Participant will, upon the request of the Company,
execute and deliver to the Company an agreement to such effect.
(h) MINIMUM NUMBER OF SHARES. The minimum number of shares of Stock
with respect to which an Option may be exercised at any one time shall
be one hundred (100) shares, unless the number is the total number at
the time available for exercise under the Award.
(i) REQUIRED AMENDMENTS. Each Award shall be subject to any
provision necessary to assure compliance with federal and state
securities laws.
(j) LIMITATION OF PARTICIPANT RIGHTS. A Participant shall not be
deemed to be the holder of, or to have any of the rights of a holder
with respect to, any shares of Stock subject to an Option unless and
until the Option shall have been exercised pursuant to the terms
thereof, the Company shall have issued and delivered the shares to the
Participant, and the Participant's name shall have been entered as a
stockholder of record on the books of the Company. Thereafter, the
Participant
-7-
<PAGE>
shall have full voting, dividend, and other ownership rights with
respect to such shares of stock.
(k) ACCELERATION. The Committee may in its discretion accelerate the
time at which an Option granted hereunder may be exercised; provided,
however, that in the event of any such acceleration with respect to an
Option held by an Insider, at least six (6) months shall elapse from
the date of such acceleration to the later of the date of exercise of
the Option or the disposition of the Stock acquired by exercising the
Option, except that this limitation shall not apply (i) if an Award
was granted by a 16b-3 Committee as defined in Section 2.4 above, or
(ii) in the event of the Participant's death or Disability during such
six-month period.
In the event of any inconsistency between the provisions of the Plan and a
Stock Option Agreement entered into hereunder, the provisions of the Plan shall
govern.
ARTICLE IX - GRANTS IN SUBSTITUTION
FOR OPTIONS GRANTED BY OTHER CORPORATIONS
9.1 SUBSTITUTE AWARDS. Awards may be granted under this Plan from time
to time in substitution for similar awards held by employees of corporations who
become or are about to become employees of the Company as the result of a merger
or consolidation of the employing corporation with the Company, or the
acquisition by the Company of the assets of the employing corporation, or the
acquisition by the Company of fifty percent (50%) or more of the stock of the
employing corporation causing it to become a subsidiary of the Company. Subject
to the procurement of the approval of the stockholders of the Company as may be
required for the Plan to satisfy the requirements of Rule 16b-3, the terms and
conditions of the substitute Awards so granted may vary from the terms and
conditions set forth in this Plan to such extent as the Committee at the time of
the grant may deem appropriate to conform, in whole or in part, to the
provisions of the options in substitution for which they are granted.
ARTICLE X - CHANGES IN CAPITAL STRUCTURE
10.1 CAPITAL STRUCTURE CHANGES.
(a) If the outstanding shares of the Company's Stock as a whole are
increased, decreased, changed into, or exchanged for a different
number or kind of shares or securities of the Company, whether through
merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split, combination of shares,
exchange of shares, change in corporate structure, or the like, an
appropriate and proportionate adjustment shall be made in the number
and kinds of shares subject to the Plan and in the number, kinds, and
per share exercise price of shares subject to unexercised Options or
portions thereof granted prior to any such change. Any such
adjustment in an outstanding Option, however, shall be made without a
change in the total price applicable to the unexercised portion of
-8-
<PAGE>
the Option, but with a corresponding adjustment in the price for each
share of Stock covered by the Option.
(b) Upon dissolution or liquidation of the Company, or upon a
reorganization, merger, or consolidation in which the Company is not
the surviving corporation, or upon the sale of substantially all of
the assets of the Company to another corporation, the Plan and the
Options issued thereunder shall terminate, unless provision is made in
connection with such transaction for the assumption of Options
theretofore granted, or the substitution for such Options of new
options of the successor employer corporation or a parent or
subsidiary thereof, with appropriate adjustment as to the number and
kinds of shares and the per share exercise prices. In the event of
such termination, all outstanding Options shall be exercisable in full
for at least thirty (30) days prior to the termination date whether or
not otherwise exercisable during such period.
(c) In the event of a change in the Stock which is limited to a
change in the designation thereof to "capital stock" or other similar
designation, or in par value to no par value, without increase or
decrease in the number of issued shares, the shares resulting from any
such change shall be deemed to be Stock within the meaning of this
Plan.
(d) Adjustments under this Section shall be made by the Committee,
whose determination as to what adjustment shall be made, and the
extent thereof, shall be conclusive. The Committee shall have the
discretion and power in any such event to determine and to make
effective provision for the acceleration of time during which the
Option may be exercised, notwithstanding the provisions of the Option
setting forth the date or dates on which all or any part of it may be
exercised. No fractional shares of Stock shall be issued under the
Plan on account of any adjustment specified above.
ARTICLE XI - COMPANY SUCCESSORS
11.1 IN GENERAL
(a) If the Company shall be the surviving or resulting corporation in
any merger, sale of assets or sale of stock, consolidation, or
corporate reorganization (including a reorganization in which the
holders of Stock receive securities of another corporation), any Award
granted hereunder shall pertain to and apply to the securities to
which a holder of Stock would have been entitled. The Committee shall
make such appropriate determinations and adjustments as it deems
necessary so as to preserve substantially the rights and benefits,
both as to number of shares and otherwise, of Participants under this
Plan.
(b) If the Company shall not be the surviving corporation in any
merger, sale of assets or sale of stock, consolidation, or corporate
reorganization (including a
-9-
<PAGE>
reorganization in which the holders of Stock receive securities of
another corporation) involving the Company, the successor corporation
may, but shall not be required to, issue substitute options so as to
preserve substantially the rights and benefits of the Participants
under this Plan.
ARTICLE XII - AMENDMENT OR TERMINATION OF PLAN
12.1 AMENDMENTS AND TERMINATION. The Plan shall terminate on the tenth
(10th) anniversary of the Effective Date of the Plan. The Board may at any time
and from time to time alter, amend, suspend, or terminate this Plan in whole or
in part, except (i) without such stockholder approval as may be required by law
and the Company's by-laws, no such action may be taken which changes the minimum
option price, increases the maximum term of Options, materially increases the
benefits accruing to Participants hereunder, materially increases the number of
securities which may be issued pursuant to this Plan (except as provided in
Section 10.1 and 11.1), extends the period for granting Awards hereunder, or
materially modifies the requirements as to eligibility for participation
hereunder, and (ii) without the consent of the Participant to whom any Award
shall theretofore have been granted, no such action may be taken which adversely
affects the rights of such Participant concerning such Award, except as such
termination or amendment of this Plan is required by statute, or rules and
regulations promulgated thereunder, or as otherwise permitted hereunder.
ARTICLE XIII - MISCELLANEOUS PROVISIONS
13.1 NONTRANSFERABILITY. Except by the laws of descent and distribution,
no benefit provided hereunder shall be subject to alienation, assignment, or
transfer by a Participant (or by any person entitled to such benefit pursuant to
the terms of this Plan), nor shall it be subject to attachment or other legal
process of whatever nature, and any attempted alienation, assignment,
attachment, or transfer shall be void and of no effect whatsoever and, upon any
such attempt, the benefit shall terminate and be of no force or effect. During
a Participant's lifetime, Options granted to the Participant shall be
exercisable only by the Participant. Shares of Stock shall be delivered only
into the hands of the Participant or death beneficiary entitled to receive the
same or into the hands of the Participant's authorized legal representative.
13.2 NO EMPLOYMENT RIGHT. Neither this Plan nor any action taken
hereunder shall be construed as giving any right to any individual to be
retained as an officer or employee of the Company.
13.3 TAX WITHHOLDING. The Company's obligation to deliver Stock upon the
exercise of an Option shall be subject to the satisfaction of all applicable
federal, state and local income and other tax withholding requirements. At the
time an Option is exercised by the Participant, the Committee, in its sole
discretion, may permit the Participant to pay all such amounts of tax
withholding or any part thereof, by transferring to the Company, or directing
the Company to withhold from the Stock otherwise issuable to such Participant,
Stock having a value equal to the amount required to be withheld or such lesser
amount as may be determined
-10-
<PAGE>
by the Committee at such time. The value of Stock to be withheld shall be based
on the Fair Market Value of the Stock on the date that the amount of tax to be
withheld is to be determined.
13.4 FRACTIONAL SHARES. Any fractional shares concerning Awards shall be
eliminated at the time of payment or payout by rounding down for fractions of
less than one-half (1/2) and rounding up for fractions of equal to or greater
than one-half (1/2). No cash settlements shall be made with respect to
fractional shares eliminated by rounding.
13.5 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to
make payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be deemed necessary or appropriate by the Committee. If Stock awarded
hereunder may in certain circumstances be exempt from registration under the
Securities Act of 1933, the Company may restrict its transfer in such manner as
it deems advisable to ensure such exempt status. The Plan is intended to comply
with Rule 16b-3. Any provision inconsistent with Rule 16b-3 shall be
inoperative and shall not affect the validity of the Plan. The Plan shall be
subject to any provision necessary to assure compliance with federal and state
securities laws.
13.6 INDEMNIFICATION. Each person who is or at any time serves as a
member of the Board or the Committee shall be indemnified and held harmless by
Rocky Mountain Internet, Inc. against and from (i) any loss, cost, liability, or
expense that may be imposed on or reasonably incurred by such person in
connection with or resulting from any claim, action, suit, or proceeding to
which such person may be a party or in which such person may be involved by
reason of any action or failure to act under this Plan; and (ii) any and all
amounts paid by such person in satisfaction of judgment in any such action,
suit, or proceeding relating to this Plan. Each person covered by this
indemnification shall give the Company an opportunity, at its own expense, to
handle and defend the same before such person undertakes to handle and defend
the same on such person's own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such
persons may be entitled under the charter or by-laws of the Company, as a matter
of law, or otherwise, or any power that the Company may have to indemnify such
person or hold such person harmless.
13.7 RELIANCE ON REPORTS. Each member of the Board or the Committee shall
be fully justified in relying or acting in good faith upon any report made by
the independent public accountants of the Company, and upon any other
information furnished in connection with this Plan. In no event shall any
person who is or shall have been a member of the Board or the Committee be
liable for any determination made or other action taken or any omission to act
in reliance upon any such report or information, or for any action taken,
including the furnishing of information, or failure to act, if in good faith.
13.8 GOVERNING LAW. All matters relating to this plan or to Awards
granted hereunder shall be governed by the laws of the State of Colorado,
without regard to the principles of conflict of laws thereof, except to the
extent preempted by the laws of the United States.
-11-
<PAGE>
13.9 RELATIONSHIP TO OTHER BENEFITS. No payment under this Plan shall be
take into account in determining any benefits under any pension, retirement,
profit sharing, or group insurance plan of the Company.
13.10 EXPENSES. The expenses of implementing and administering this Plan
shall be borne by the Company.
13.11 TITLES AND HEADINGS. The titles and headings of the Articles and
Sections in this Plan are for convenience of reference only, and in the event of
any conflict, the text of this Plan, rather than such titles or headings, shall
control.
13.12 USE OF PROCEEDS. Proceeds from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the Company.
13.13 NONEXCLUSIVITY OF PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options other than under
the Plan, and such arrangements may be applicable either generally or only in
specific cases.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its
duly authorized officers and its seal to be affixed hereto, effective, except as
specified to the contrary herein, as of October 1, 1997.
ATTEST/WITNESS ROCKY MOUNTAIN INTERNET, INC.
By: By:
----------------------------- -----------------------------
Name: Kevin Loud Name: Roy J. Dimoff
Title: Secretary Title: President
[SEAL]
-12-
<PAGE>
Appendix B
Rocky Mountain Internet, Inc.
1998 Employees' Stock Option Plan
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
1998 EMPLOYEES' STOCK OPTION PLAN
SECTION 1
INTRODUCTION
1.1 ESTABLISHMENT. Rocky Mountain Internet, Inc., a Delaware corporation,
hereby establishes the Rocky Mountain Internet, Inc. 1998 Employees' Stock
Option Plan (the "Plan") for certain key employees, consultants and advisors of
Rocky Mountain Internet, Inc. (together with its affiliated corporations as
defined in Section 2.1(a) below, the "Company").
1.2 PURPOSES. The purposes of the Plan are to provide Eligible Persons (as
defined in Section 2.1 (f) below) selected for participation in the Plan with
added incentives to continue in the long-term service of the Company and to
create in such persons a more direct interest in the future success of the
operations of the Company by relating incentive compensation to increases in
stockholder value, so that the income of the Eligible Persons is more closely
aligned with the income of the Company's stockholders. The Plan also is designed
to attract key employees, consultants, and advisors and to retain and motivate
Eligible Persons by providing an opportunity for investment in the Company.
SECTION 2
DEFINITIONS
2.1 DEFINITIONS. The following terms shall have the meanings set forth
below:
(a) "AFFILIATED CORPORATION" means any corporation or other entity
(including, but not limited to, a partnership) which is affiliated with Rocky
Mountain Internet, Inc. through stock ownership or otherwise and is treated as a
common employer under the provisions of Code Sections 414(b) and (c).
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
(d) "DISABILITY" means a physical or mental condition which, in the
judgment of the Company, based on medical reports or other evidence satisfactory
to the Company, permanently prevents an employee from satisfactorily performing
his or her usual duties for the Company or the duties of such other position or
job which the Company makes available to him or her and for which such employee
is qualified by reason of his or her training, education or experience.
(e) "EFFECTIVE DATE" means the effective date of the Plan, which will
be March 1, 1998 subject to the approval of the Plan by the Company's
stockholders.
-1-
<PAGE>
(f) "ELIGIBLE PERSONS" means full-time key employees of the Company
or any Affiliated Corporation or any division thereof, whose judgment,
initiative and efforts are, or will be, important to the successful conduct of
its business; provided that no person who is a director of the Company may be an
Eligible Person. An employee will be considered a "full-time" employee if such
employee is employed by the Company on a minimum basis of thirty hours of
service a week. Eligible Persons also include independent contractors,
consultants and advisors of the Company or any Affiliated Corporation or any
division thereof; provided that such independent contractors, consultants and
advisors may not be granted Incentive Stock Options under this Plan.
(g) "FAIR MARKET VALUE" means the officially quoted closing price of
the Stock on the Small Cap National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System on a particular
date, or if no such prices are reported on NASDAQ, then Fair Market Value shall
mean the average of the high and low sale prices for the Stock (or if no sales
prices are reported, the average of the high and low bid prices) as reported by
the principal regional stock exchange, or if not so reported, as reported by a
quotation system of general circulation to brokers and dealers. If there are no
Stock transactions on such date, the Fair Market Value shall be determined as of
the immediately preceding date on which there were Stock transactions. If the
Stock is not publicly traded, the Fair Market Value of the Stock on any date
shall be determined in good faith by the Administrative Committee after such
consultation with outside legal, accounting and other experts as the
Administrative Committee may deem advisable.
(h) "ADMINISTRATIVE COMMITTEE means a committee or committees, each
consisting of a member or members of the Board and/or such other person or
persons as may be appointed from time to time by the Board, or the entire Board
if no such Committee has been appointed. With respect to the administration of a
grant or grants under the Plan to Eligible Persons subject to Rule 16b-3, such
Administrative Committee shall be constituted so as to comply with Rule 16b-3
and shall consist of (i) two non-employee directors or (ii) the entire Board
("16b-3 Committee"); PROVIDED THAT if a 16b-3 Committee is not required for such
grant or grants to meet the exemption requirements under Rule 16b-3, then this
sentence shall not be applicable.
(i) "INCENTIVE STOCK OPTION" means any Option designated as such and
granted in accordance with the requirements of Code Section 422.
(j) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(k) "NON-STATUTORY OPTION" means any Option other than an Incentive
Stock Option.
(l) "OPTION" means a right to purchase Stock at a stated price for a
specified period of time.
-2-
<PAGE>
(m) "OPTION PRICE" means the price at which Shares of Stock subject,
to an Option may be purchased, determined in accordance with Section 5.2(b).
(n) "OPTION HOLDER" means an Eligible Person of the Company
designated by the Administrative Committee from time to time during the term of
the Plan to receive one or more Options under the Plan.
(o) "OPTIONED SHARES" means the Shares subject to an Option.
(p) "PLAN YEAR" means each 12-month period beginning January 1 and
ending the following December 31, except that for the first year of the Plan,
the Plan Year shall begin on the Effective Date and extend to the first December
31 following the Effective Date.
(q) "RULE 16b-3" means Rule 16b-3 promulgated under the 1934 Act or
any successor rule.
(r) "SHARE" or "SHARES" means a share or shares of Stock.
(s) "STOCK" means the common stock of the Company.
2.2 GENDER AND NUMBER. Except where otherwise indicated by the content,
the masculine gender also shall include the feminine gender, and the definition
of any term herein in the singular also shall include the plural.
SECTION 3
PLAN ADMINISTRATION
3.1 ADMINISTRATIVE COMMITTEE; POWERS. The Plan shall be administered by
the Administrative Committee. In accordance with the provisions of the Plan, the
Administrative Committee shall have full power and authority, in its sole
discretion, to administer the Plan, including authority to interpret and
construe any provision of the Plan and any Option granted hereunder, to select
the Eligible Persons to whom Options will be granted, the amount of each Option,
and any other terms and conditions of each Option as the Administrative
Committee may deem necessary or desirable and consistent with the terms of the
Plan. The Administrative Committee shall have full power and authority to
determine the form or forms of the agreements with Option Holders, which shall
evidence the particular provisions, terms, conditions, rights and duties of the
Company and the Option Holders with respect to Options granted pursuant to the
Plan, which provisions need not be identical except as may be provided herein.
The Administrative Committee in granting an Option may provide for the granting
or issuance of additional, replacement or alternative Options upon the
occurrence of specified events, including the exercise of the original Option.
3.2 ACTIONS OF ADMINISTRATIVE COMMITTEE. The Administrative Committee may
from time to time adopt such rules and regulations for administering the Plan as
it may deem necessary in order to comply with the requirements of the Code or in
order to conform to any regulation or to any change in law or regulation
applicable thereto, or as it may otherwise deem proper and in the best interests
of the Company. The Administrative Committee may correct any
-3-
<PAGE>
defect, supply any omission or reconcile any inconsistency in the Plan or in any
agreement entered into hereunder in the manner and to the extent it shall deem
expedient and it shall be the sole and final judge of such expediency. No member
of the Administrative Committee shall be liable for any action, interpretation
or determination made in good faith (including determinations of Fair Market
Value), and all members of the Administrative Committee shall, in addition to
their rights as directors, be fully protected by the Company with respect to any
such action, interpretation or determination. All actions taken and all
interpretations and determinations made by the Administrative Committee pursuant
to the provisions of the Plan shall be final, binding and conclusive for all
purposes and on Option Holders, the Company and all other persons. Any
determination reduced in writing and signed by all of the members shall be fully
effective as if it had been made by a majority vote at a meeting duly called and
held.
SECTION 4
STOCK RESERVED FOR THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of Section 4.3 below,
266,544 Shares are authorized for issuance under the Plan in accordance with the
provisions of the Plan. Shares which may be issued upon the exercise of Options
shall be applied to reduce the maximum number of Shares remaining available
under the Plan. The 266,544 Shares reserved for issuance under the Plan may be
either authorized and unissued or held in the treasury of the Company.
4.2 UNUSED AND FORFEITED STOCK. Any Shares that are subject to an Option
under this Plan which are not used because the terms and conditions of the
Option are not met, including any Shares that are subject to an Option which
expires or is terminated for any reason, any Shares which are used for full or
partial payment of the purchase price of Shares with respect to which an Option
is exercised and any Shares retained by the Company pursuant to Section 5 or
Section 11 automatically shall become available for use under the Plan.
4.3 ADJUSTMENTS FOR STOCK SPLIT, STOCK DIVIDEND, ETC. If the Company shall
at any time increase or decrease the number of its outstanding Shares of Stock,
or change in any way the rights and privileges of such Shares by means of the
payment of a stock dividend or any other distribution upon such Shares payable
in Stock, or through a stock split, subdivision, consolidation, combination,
reclassification or recapitalization involving the Stock, except in connection
with an initial public offering, then in relation to the Stock that is affected
by one or more of the above events, such that an adjustment is required in order
to preserve the benefits or potential benefits intended to be made available
under this Plan, then the Administrative Committee shall, in its sole discretion
and in such manner as the Administrative Committee may deem equitable and
appropriate, make such adjustments to any or all of (i) the number and kind of
Shares which thereafter may be made subject to the benefits contemplated by the
Plan, (ii) the number and kind of Shares subject to outstanding Options, and
(iii) the purchase or exercise price with respect to any of the foregoing,
provided, however, that the number of Shares subject to any Option shall always
be a whole number. The Administrative Committee may, if deemed appropriate,
provide for a cash payment to any Option Holder of an Option in connection with
any adjustment made pursuant to this Section.
-4-
<PAGE>
4.4 GENERAL ADJUSTMENT RULES. If any adjustment or substitution provided
for in this Section 4 shall result in the creation of a fractional Share under
any Option, the Company shall, in lieu of issuing such fractional Share, pay to
the Option Holder a cash sum in an amount equal to the product of such fraction
multiplied by the Fair Market Value of a Share on the date the fractional Share
otherwise would have been issued.
SECTION 5
STOCK OPTIONS
5.1 GRANT OF OPTIONS. An Eligible Person may be granted one or more
Options. The Administrative Committee, in its sole discretion, shall designate
whether an Option is to be considered an Incentive Stock Option or a
Non-Statutory Option. The Administrative Committee may grant both an Incentive
Stock Option and a Non-Statutory Option to the same Eligible Person at the same
time or at different times. Incentive Stock Options and Non-Statutory Options,
whether granted at the same or different times, shall be deemed to have been
awarded in separate grants, shall be clearly identified, and in no event shall
the exercise of one Option affect the right to exercise any other Option or
affect the number of Shares for which any other Option may be exercised.
5.2 OPTION AGREEMENTS. Each Option granted under the Plan shall be
evidenced by a written stock option agreement which shall be entered into by the
Company and the Option Holder, and which shall contain the following terms and
conditions, as well as such other terms and conditions not inconsistent
therewith, as the Administrative Committee may consider appropriate in each
case. In the event of any inconsistency between the provisions of the Plan and
any such agreement entered into hereunder, the provisions of the Plan shall
govern. Any such agreement may be supplemented or amended from time to time as
approved by the Administrative Committee as contemplated herein.
(a) NUMBER OF SHARES. Each stock option agreement shall state that it
covers a specified number of Shares, as determined by the Administrative
Committee. Notwithstanding any other provision of the Plan, the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Option Holder in any calendar year, under
the Plan and all other plans of the Company and its parent and subsidiary
companies, shall not exceed $100,000. For this purpose, the Fair Market Value of
the Shares shall be determined as of the time an Option is granted.
(b) PRICE. The price at which each Optioned Share may be purchased
shall be determined by the Administrative Committee and set forth in the stock
option agreement. In no event shall the Option Price for each Share covered by
an Incentive Stock Option be less than the Fair Market Value of the Stock on the
date the Option is granted; provided, however, that the Option Price for each
Share covered by an Incentive Stock Option granted to an Eligible Person who
then owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company must be at least 110% of the Fair Market
Value of the Stock subject to the Incentive Stock Option on the date the Option
is granted. The Option Price for each Share covered by a Non-Statutory Option
may be granted at any price equal to or less than Fair Market Value, in the sole
discretion of the Administrative Committee.
-5-
<PAGE>
(c) VESTING. The Administrative Committee in its discretion may
impose a vesting schedule or vesting provision with respect to any Options
granted hereunder which shall be specified in the stock option agreement
evidencing such Option.
(d) DURATION OF OPTIONS. Each stock option agreement shall state the
period of time, determined by the Administrative Committee, within which the
Option may be exercised by the Option Holder (the "Option Period"). The Option
Period must expire, in all cases, not more than ten years from the date an
Option is granted; provided, however, that the Option Period of an Incentive
Stock Option granted to an Eligible Person who then owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company must expire not more than five years from the date such Option is
granted. Notwithstanding any other provision of the Plan, any Option Holder who
is subject to Section 16 of the 1934 Act may not exercise any portion of an
Option during, the first six months following the grant of such Option, except
that this limitation shall not apply (i) if such Option was granted by a 16b-3
Committee as defined in Section 2.1(h) above or (ii) in the event of the Option
Holder's death or Disability during such six-month period.
(e) TERMINATION OF EMPLOYMENT, DEATH, DISABILITY, ETC. Except as
otherwise determined by the Administrative Committee, each stock option
agreement shall provide as follows with respect to the exercise of the Option
upon termination of the employment or the death of the Option Holder:
(i) If the employment of the Option Holder is terminated (or,
in the case of a consultant or advisor, if the services of the Option Holder are
terminated) within the Option Period for cause, as determined by the Company,
the Option thereafter shall be void for all purposes. As used in this section,
"cause" shall mean an act of fraud or dishonesty, moral turpitude or a gross
violation, as determined by the Company, of the Company's established policies
and procedures. The effect of this section shall be limited to determining the
consequences of a termination, and nothing in this section shall restrict or
otherwise interfere with the Company's discretion with respect to the
termination of any employee, consultant or advisor.
(ii) If the Option Holder dies, or if the Option Holder becomes
Disabled during the Option Period while still employed (or, in the case of a
consultant or advisor, while the Option Holder is performing services), or
within the three-month period referred to in (iii) below, the Option may be
exercised by those entitled to do so under the Option Holder's will or by the
laws of descent and distribution within twelve months following the Option
Holder's death or Disability, but not thereafter. In any such case, the Option
may be exercised only as to the Shares as to which the Option had become
exercisable on or before the date of the Option Holder's death or Disability
(iii) If the employment of the Option Holder by the Company is
terminated (which for this purpose means that the Option Holder is no longer
employed by the Company or by an Affiliated Corporation and which, in the case
of a consultant or advisor, means that the Option Holder is no longer performing
services for the Company or an Affiliated Corporation) within the Option Period
for any reason other than cause, Disability, or the Option Holder's death, the
Option may be exercised by the Option Holder within three months following
-6-
<PAGE>
the date of such termination (provided that such exercise must occur within the
Option Period), but not thereafter. In any such case, the Option may be
exercised only as to the Shares as to which the Option had become exercisable on
or before the date of termination of employment or termination of services.
(f) TRANSFERABILITY. Each stock option agreement shall provide that
the Option granted therein is not transferable by the Option Holder except by
will or pursuant to the laws of descent and distribution, and that such Option
is exercisable during the Option Holder's lifetime only by him or her, or in the
event of Disability or incapacity, by his or her guardian or legal
representative.
(g) EXERCISE, PAYMENTS, ETC.
(i) Each stock option agreement shall provide that the method
for exercising the Option granted therein shall be by delivery to the Company of
written notice specifying the particular Option (or portion thereof) which is
being exercised, the number of Shares with respect to which such Option is
exercised and including payment of the Option Price. Such notice shall be in a
form satisfactory to the Administrative Committee. An Option for the purchase of
Shares granted hereunder may be exercised either in whole at any time, or from
time to time in part in lots of no less than 100 Shares or, in the event any
balance as to which the Option remains unexercised shall be less than 100
Shares, in a lot equal to such balance. The exercise of the Option shall be
deemed effective upon receipt of such notice by the Company and payment to the
Company of the Option Price. The purchase of such Stock shall take place at the
principal offices of the Company upon delivery of such notice, at which time the
purchase price of the Stock shall be paid in full by any of the methods or any
combination of the methods set forth in (ii) below. A properly executed
certificate or certificates representing the Stock shall be issued by the
Company and delivered to the Option Holder.
(ii) The method or methods of payment of the Option Price for
the Shares to be purchased upon exercise of an Option shall be determined by the
Administrative Committee and may consist of any of the following methods or any
combination of the following methods:
(A) in cash;
(B) by cashier's check payable to the order of the
Company;
(C) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised;
(D) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price;
-7-
<PAGE>
(E) by delivery to the Company of certificates
representing the number of Shares then owned by the Option Holder, the Fair
Market Value of which equals the purchase price of the Stock purchased pursuant
to the Option, properly endorsed for transfer to the Company; provided however,
that Shares used for this purpose must have been held by the Option Holder for
such minimum period of time as may be established from time to time by the
Administrative Committee. The Fair Market Value of any Shares delivered in
payment of the purchase price upon exercise of the Option shall be the Fair
Market Value as of the exercise date and the exercise date shall be the day of
the delivery of the Certificates for the Stock used as payment of the Option
Price.
(h) DATE OF GRANT. An Option shall be considered as having been
granted on the date specified in the grant resolution of the Administrative
Committee.
5.3 STOCKHOLDER PRIVILEGES. Prior to the exercise of the Option and the
transfer of Shares to the Option Holder, an Option Holder shall have no rights
as a stockholder with respect to any Shares subject to any Option granted to
such person under this Plan, and until the Option Holder becomes the holder of
record of such Stock, no adjustments shall be made for dividends or other
distributions or other rights as to which there is a record date preceding the
date such Option Holder becomes the holder of record of such Stock, except as
provided in Section 4.
SECTION 6
CHANGE IN CONTROL
6.1 CHANGE IN CONTROL. In the event of a change in control of the Company,
as defined in Section 6.2, notwithstanding any contrary vesting schedules unless
the applicable stock option agreement provides otherwise, each outstanding
Option shall become exercisable in full in respect of the aggregate number of
Shares covered thereby, upon the occurrence of the events described in clause
(a) and (b) of Section 6.2 or immediately prior to the consummation of the
events described in clause (c) of Section 6.2, and the Administrative Committee,
in its sole discretion, without obtaining stockholder approval, to the extent
permitted in Section 10, may take any or all of the following actions: (a) grant
a cash bonus award to any Option Holder in an amount necessary to pay the Option
Price of all or any portion of the Options then held by such Option Holder; (b)
pay cash to any or all Option Holders in exchange for the cancellation of their
outstanding Options in an amount equal to the difference between the Option
Price of such Options and the greater of the tender offer price for the
underlying Stock or the Fair Market Value of the Stock on the date of the
cancellation of the Options; and (c) make any other adjustments or amendments to
the outstanding Options. Notwithstanding the foregoing, unless otherwise
provided in the applicable stock option agreement, the Administrative Committee
may, in its discretion, determine that any or all outstanding Options granted
pursuant to the Plan will not vest or become exercisable on an accelerated basis
in connection with an event described in clause (c) of Section 6.2 and/or will
not terminate if not exercised prior to consummation of such event, if the Board
or the surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of, such action as in the opinion of
the Administrative Committee is equitable and appropriate to substitute a new
Option for such Option or to assume such Option and in order to make such new or
assumed Option, as nearly as may be practicable, equivalent to the old Option
(before giving effect to any acceleration of the vesting or exercisability
thereof), taking into account, to the extent applicable, the kind and amount of
-8-
<PAGE>
securities, cash or other assets into or for which the Stock may be changed,
converted or exchanged in connection with such event.
6.2 DEFINITION. A "change in control" shall be deemed to have occurred if
(a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2)
of the 1934 Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
more than 50% of the then outstanding voting stock of the Company; or (b) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 50% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders approve a plan or complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets; or (c) a tender offer or exchange offer to acquire
securities of the Company (other than such an offer made by the Company or any
subsidiary), whether or not such offer is approved or opposed by the Board is
made to acquire securities of the Company entitling the holders thereof to 50%
or more of the voting power in the election of directors of the Company.
6.3 GOLDEN PARACHUTE PAYMENTS. IF the provisions of this Section would
result in the receipt by any Option Holder of a payment within the meaning of
Code Section 280G and the regulations thereunder and if the receipt of such
payment would result in the imposition of any excise tax under Code Sections
280G and 4999, then the amount of such payment will be reduced to the extent
required, in the opinion of independent tax counsel, to prevent the imposition
of such excise tax; provided, however, that the Administrative Committee, in its
sole discretion, may authorize the payment of all or any portion of the amount
of such reduction to the Option Holder. In such event, the Company will have no
obligation or liability with respect to the Option Holder for the amount of any
excise tax imposed on the Option Holder under Code Sections 280G and 4999.
SECTION 7
RIGHTS OF EMPLOYEES AND OPTION HOLDERS
7.1 EMPLOYMENT. Nothing contained in the Plan or in any Option shall
confer upon any Eligible Person any right with respect to the continuation of
his or her employment by the Company (or, in the case of an advisor or
consultant, to the continuation of the performance of services for the Company),
or interfere in any way with the right of the Company, subject to the terms of
any separate employment agreement to the contrary, at any time to terminate such
employment or services or to increase or decrease the compensation of such
Eligible Person from the rate in existence at the time of the grant of an
Option. Whether an authorized leave of absence, or absence in military or
government service, shall constitute a termination of employment or a
termination of services shall be determined by the Administrative Committee at
the time.
7.2 NONTRANSFERABILITY. No right or interest of any Option Holder in an
Option granted pursuant to the Plan shall be assignable or transferable during
the lifetime of the Option Holder,
-9-
<PAGE>
either voluntarily or involuntarily, or be subjected to any lien, directly or
indirectly, by operation of law, or otherwise, including execution, levy,
garnishment, attachment, pledge or bankruptcy. In the event or an Option
Holder's death, an Option Holder's rights and interests in Options shall, to the
extent provided in Section 5, be transferable by testamentary will or the laws
of decent and distribution. In the opinion of the Administrative Committee, if
an Option Holder is disabled from caring for his affairs because of mental
condition, physical condition or age, such Option Holder's Options shall be
exercised by such person's guardian, conservator or other legal personal
representative upon furnishing the Administrative Committee with evidence
satisfactory to the Administrative Committee of such status.
SECTION 8
GENERAL RESTRICTIONS
8.1 INVESTMENT REPRESENTATIONS. The Company may require any Option
Holder, as a condition of exercising such Option or receiving Stock under the
Option, to give written assurances, in the substance and form satisfactory to
the Company and its counsel, to the effect that such person is acquiring the
Stock subject to the Option for his own account for investment and not with
any present intention of selling or otherwise distributing the same, and to
such other effects as the Company deems necessary or appropriate in order to
comply with federal and applicable state securities laws. Legends evidencing
such restrictions may be placed on the certificates evidencing the Stock.
8.2 COMPLIANCE WITH SECURITIES LAWS. Each Option shall be subject to the
requirement that, if at any time counsel to the Company shall determine that
the listing, registration or qualification of the Shares subject to such
Option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, is necessary as a
condition of, or in connection with, the issuance or purchase of Shares
thereunder, such Option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained on conditions acceptable to the Administrative
Committee. Nothing herein shall be deemed to require the Company to apply for
or to obtain such listing, registration or qualification.
8.3 STOCK RESTRICTION AGREEMENT. The Administrative Committee may provide
that Shares of Stock issuable upon the exercise of an Option shall, under
certain conditions, be subject to restrictions whereby the Company has a right
of first refusal with respect to such Shares or a right or obligation to
repurchase all or a portion of such Shares, which restrictions may survive an
Option Holder's term of employment or term of service with the Company.
8.4 RESTRICTION ON DISPOSITION To preserve tax treatment under Section 422
of the Code upon the disposition of any Optioned Shares acquired pursuant to any
Incentive Stock Option granted under this Plan, an Option Holder may not dispose
of any such Optioned Shares within two years from the date of the grant of such
Option nor within one year of the exercise of such Option.
SECTION 9
OTHER EMPLOYEE BENEFITS
-10-
<PAGE>
The amount of any compensation deemed to be received by an Option Holder as
a result of the exercise of an Option shall not constitute "earnings" with
respect to which any other employee benefits of such Option Holder are
determined, including without limitation benefits under any pension, profit
sharing, life insurance or salary continuation plan.
SECTION 10
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time-to-time may amend or
modify, the Plan; provided, however, that no amendment or modification may
become effective without approval of the amendment or modification by the
stockholders if stockholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if the Company, on the
advice of counsel, determines that stockholder approval otherwise is necessary
or desirable.
No amendment, modification or termination of the Plan shall in any manner
adversely affect any Options theretofore granted under the Plan without the
consent of the Option Holder holding such Options.
SECTION 11
WITHHOLDING
11.1 WITHHOLDING REQUIREMENT. The Company's obligation to deliver Shares
upon the exercise of an Option shall be subject to the satisfaction of all
applicable federal, state and local income and other tax withholding
requirements.
11.2 WITHHOLDING WITH STOCK. At the time an Option is exercised by the
Option Holder, the Administrative Committee, in its sole discretion, may permit
the Option Holder to pay all such amounts of tax withholding, or any part
thereof, by transferring to the Company, or directing the Company to withhold
from Shares otherwise issuable to such Option Holder, Shares having a value
equal to the amount required to be withheld or such lesser amount as may be
determined by the Administrative Committee at such time. The value of Shares to
be withheld shall be based on the Fair Market Value of the Stock on the date
that the amount of tax to be withheld is to be determined.
SECTION 12
NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to stockholders of the Company for approval shall be construed as creating
any limitations on the power or authority of the Board to adopt such other or
additional incentive or other compensation arrangements of whatever nature as
the Board may deem necessary or desirable or preclude or limit the continuation
of any other plan, practice or arrangement for the payment of compensation or
fringe benefits to employees generally, or to any class or group of employees,
which the Company or any Affiliated Corporation now has lawfully put into
effect, including,
-11-
<PAGE>
without limitation, any retirement, pension, savings and stock purchase plan,
insurance, death and disability benefits and executive short-term incentive
plans.
SECTION 13
REQUIREMENTS OF LAW
13.1 REQUIREMENTS OF LAW. The issuance of Stock and the payment of cash
pursuant to the Plan shall be subject to all applicable laws, rules and
regulations.
13.2 FEDERAL SECURITIES LAW REQUIREMENTS. With respect to Eligible
Persons subject to Section 16 of the 1934 Act, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or
action by the Administrative Committee fails to so comply, it shall be deemed
null and void with respect to such Eligible Persons, to the extent permitted by
law and deemed advisable by the Administrative Committee.
13.3 GOVERNING Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
SECTION 14
DURATION OF THE PLAN
The Plan shall terminate at such time as may be determined by the Board,
and no Option shall be granted after such termination. If not sooner terminated
under the preceding sentence, the Plan shall fully cease and expire at midnight
on the date that is ten years from the Effective Date of the Plan. Options
outstanding at the time of the Plan termination may continue to be exercised in
accordance with their terms.
-12-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly
authorized officers and its seal to be affixed hereto, effective, except as
specified to the contrary herein, as of March 1, 1998.
ROCKY MOUNTAIN INTERNET, INC.
By:
----------------------------------
Name:
--------------------------------
Title: President
-------------------------------
ATTEST/WITNESS:
By:
----------------------------------
Name:
--------------------------------
Title: Secretary
-------------------------------
[SEAL]
-13-
<PAGE>
Appendix C
Rocky Mountain Internet, Inc.
1998 Non-Employee Directors' Stock Option Plan
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
SECTION 1
INTRODUCTION
1.1 ESTABLISHMENT. Rocky Mountain Internet, Inc., a Delaware
corporation, hereby establishes the Rocky Mountain Internet, Inc. 1998
Non-Employee Directors' Stock Option Plan (the "Plan") for certain directors
of Rocky Mountain Internet, Inc. ("Company").
1.2 PURPOSES. The purposes of the Plan are to provide Eligible
Directors (as defined in Section 2.1(e) below) selected for participation in
the Plan with added incentives to continue as directors of the Company and to
create in such persons a more direct interest in the future success of the
operations of the Company by relating incentive compensation to increases in
stockholder value, so that the income of the Eligible Directors is more
closely aligned with the income of the Company's stockholders.
SECTION 2
DEFINITIONS
2.1 DEFINITIONS. The following terms shall have the meanings set forth
below:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CODE" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
(c) "DISABILITY" means a physical or mental condition which, in
the judgment of the Company, based on medical reports or other evidence
satisfactory to the Company, permanently prevents an individual from
satisfactorily performing his or her duties as a director for the Company.
(d) "EFFECTIVE DATE" means the effective date of the Plan, which
will be January 22, 1998 subject to the approval of the Plan by the Company's
stockholders.
(e) "ELIGIBLE DIRECTOR" means each member of the Board and any
individual elected as a new director to the Board or elected or appointed to
the Board to fill a vacancy on the Board, and who is not an employee or
officer of the Company.
(f) "FAIR MARKET VALUE" means the officially quoted closing price
of the Stock on the Small Cap National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System
on a particular date, or if no such prices are reported on NASDAQ, then Fair
Market Value shall mean the average of the high and low sale prices for the
Stock (or if no sales prices are reported, the average of the high and low
bid prices) as reported by the principal regional stock exchange, or if not
so reported, as reported by a quotation system of general circulation to
brokers and dealers. If there are no Stock transactions
<PAGE>
on such date, the Fair Market Value shall be determined as of the immediately
preceding date on which there were Stock transactions. If the Stock is not
publicly traded, the Fair Market Value of the Stock on any date shall be
determined in good faith by the Administrative Committee after such
consultation with outside legal, accounting and other experts as the
Administrative Committee may deem advisable.
(g) "ADMINISTRATIVE COMMITTEE means a committee or committees,
each consisting of a member or members of the Board and/or such other person
or persons as may be appointed from time to time by the Board, or the entire
Board if no such Committee has been appointed. With respect to the
administration of a grant or grants under the Plan to Eligible Directors
subject to Rule 16b-3, such Administrative Committee shall be constituted so
as to comply with Rule 16b-3 and shall consist of (i) two non-employee
directors or (ii) the entire Board ("16b-3 Committee"); PROVIDED THAT if a
16b-3 Committee is not required for such grant or grants to meet the
exemption requirements under Rule 16b-3, then this sentence shall not be
applicable.
(h) "NON-STATUTORY OPTION" means options that do not qualify as
"incentive stock options" under Code Section 422.
(i) "OPTION" means a right to purchase Stock at a stated price for
a specified period of time.
(j) "OPTION PRICE" means the price at which Shares of Stock
subject to an Option may be purchased, determined in accordance with Section
5.2(c).
(k) "OPTION HOLDER" means an Eligible Director of the Company who
receives one or more Options under the Plan.
(l) "OPTIONED SHARES" means the Shares subject to an Option.
(m) "PLAN YEAR" means each 12-month period beginning January 1 and
ending the following December 31, except that for the first year of the Plan,
the Plan Year shall begin on the Effective Date and extend to the first
December 31 following the Effective Date.
(n) "RULE 16b-3" means Rule 16b-3 promulgated under the 1934 Act
or any successor rule.
(o) "SHARE" or "SHARES" means a share or shares of Stock.
(p) "STOCK" means the common stock of the Company.
2.2 GENDER AND NUMBER. Except where otherwise indicated by the
content, the masculine gender also shall include the feminine gender, and the
definition of any term herein in
-2-
<PAGE>
the singular also shall include the plural.
SECTION 3
PLAN ADMINISTRATION
3.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by the Board
or by a committee consisting of a member or members of the Board or other
person(s) as may be appointed by the Board (the "Administrative Committee").
The Administrative Committee or the Board, as the case may be, shall have full
authority to administer the Plan, including the authority to interpret and
construe any provision of the Plan and any Option granted thereunder, and to
adopt such rules and regulations for administering the Plan as it may deem
necessary in order to comply with the requirements of the Code or in order to
conform to any regulation or to any change in any law or regulation applicable
thereto, or as it may otherwise deem proper and in the best interests of the
Company. The Administrative Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or in any agreement entered
into hereunder in the manner and to the extent it shall deem expedient and it
shall be the sole and final judge of such expediency. However, the
Administrative Committee shall have no authority, discretion or power to select
the Eligible Directors who will receive any Option, determine the number of
Shares to be issued hereunder, determine the time at which such Options are to
be granted, establish the duration of the Options or alter any other terms or
conditions specified in the Plan, except in the sense of administering the Plan
pursuant to the provisions of the Plan. The Board may reserve to itself any of
the authority granted to the Administrative Committee as set forth herein, and
it may perform and discharge all of the functions and responsibilities of the
Administrative Committee at any time that a duly constituted Administrative
Committee is not appointed and serving. All references in this Plan to the
"Administrative Committee" shall be deemed to refer to the Board whenever the
Board is discharging the powers and responsibilities of the Administrative
Committee.
3.2 ACTIONS OF ADMINISTRATIVE COMMITTEE. No member of the Administrative
Committee shall be liable for any action, interpretation or determination made
in good faith (including determinations of Fair Market Value), and all members
of the Administrative Committee shall, in addition to their rights as directors,
be fully protected by the Company with respect to any such action,
interpretation or determination. All actions taken and all interpretations and
determinations made by the Administrative Committee pursuant to the provisions
of the Plan shall be final, binding and conclusive for all purposes and on
Option Holders, the Company and all other persons. Any determination reduced in
writing and signed by all of the members shall be fully effective as if it had
been made by a majority vote at a meeting duly called and held.
SECTION 4
STOCK RESERVED FOR THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of Section 4.3 below,
68,000 Shares
-3-
<PAGE>
are authorized for issuance under the Plan in accordance with the provisions
of the Plan. Shares which may be issued upon the exercise of Options shall be
applied to reduce the maximum number of Shares remaining available under the
Plan. The 68,000 Shares reserved for issuance under the Plan may be either
authorized and unissued or held in the treasury of the Company.
4.2 UNUSED AND FORFEITED STOCK. Any Shares that are subject to an Option
under this Plan which are not used because the terms and conditions of the
Option are not met, including any Shares that are subject to an Option which
expires or is terminated for any reason, any Shares which are used for full or
partial payment of the purchase price of Shares with respect to which an Option
is exercised and any Shares retained by the Company pursuant to Section 5
automatically shall become available for use under the Plan.
4.3 ADJUSTMENTS FOR STOCK SPLIT, STOCK DIVIDEND, ETC. If the Company shall
at any time increase or decrease the number of its outstanding Shares of Stock,
or change in any way the rights and privileges of such Shares by means of the
payment of a stock dividend or any other distribution upon such Shares payable
in Stock, or through a stock split, subdivision, consolidation, combination,
reclassification or recapitalization involving the Stock, except in connection
with an initial public offering, then in relation to the Stock that is affected
by one or more of the above events, such that an adjustment is required in order
to preserve the benefits or potential benefits intended to be made available
under this Plan, then the Administrative Committee shall, in such manner as the
Administrative Committee may deem equitable and appropriate, make such
adjustments to any or all of (i) the number and kind of Shares which thereafter
may be made subject to the benefits contemplated by the Plan, (ii) the number
and kind of Shares subject to outstanding Options, and (iii) the purchase or
exercise price with respect to any of the foregoing, provided, however, that the
number of Shares subject to any Option shall always be a whole number.
4.4 GENERAL ADJUSTMENT RULES. If any adjustment or substitution provided
for in this Section 4 shall result in the creation of a fractional Share under
any Option, the Company shall, in lieu of issuing such fractional Share, pay to
the Option Holder a cash sum in an amount equal to the product of such fraction
multiplied by the Fair Market Value of a Share on the date the fractional Share
otherwise would have been issued.
SECTION 5
STOCK OPTIONS
5.1 FORM OF OPTIONS. The Options granted under the Plan shall be automatic
and non-discretionary and shall be Nonstatutory Stock Options ("NSOs").
5.2 OPTION AGREEMENTS. Each Option granted under the Plan shall be
evidenced by a written stock option agreement which shall be entered into by the
Company and the Option Holder, and which shall contain the following terms and
conditions. In the event of any inconsistency between the provisions of the
Plan and any such agreement entered into hereunder, the provisions of the Plan
shall govern.
-4-
<PAGE>
(a) NUMBER OF SHARES. Eligible Directors shall be eligible to
receive Options as follows, which options shall be subject to the vesting
schedule set forth in Subsection 5.2(b) below and subject to adjustment
pursuant to Section 4.3 hereof:
(i) Upon the Effective Date of this Plan each existing
Eligible Director as of said date shall be granted an Option to purchase
8,500 Shares of Stock.
(ii) Each individual who becomes an Eligible Director by reason
of being elected or appointed to any vacancy on the Board caused by the
termination of the directorship, for any reason, of an existing Eligible
Director, shall be granted an Option to purchase the number of Shares of Stock
represented by the Options forfeited by the director whose directorship vacancy
the new Eligible Director is elected or appointed to fill.
(iii) Each individual who is elected as a director to fill a new
seat on the Board and becomes an Eligible Director thereby shall be entitled to
a grant of Options as follows: 1) if the individual is elected to the Board in
the Plan Year in which this Plan becomes effective (the first Plan Year), he/she
shall be granted to Options to purchase 8,500 Shares of Stock; 2) if the
individual is elected to the Board in the second Plan Year following the
Effective Date of this Plan, he/she shall be granted Options to purchase 7,000
Shares of Stock; and 3) if the individual is elected to the Board in the third
Plan Year following the Effective Date of this Plan, he/she shall be granted
Options to purchase 3,500 Shares of Stock.
(b) VESTING. Each Eligible Director shall vest in his or her Options
as follows:
(i) Eligible Directors granted Options as of the Effective Date
of this Plan shall vest according to the following schedule: 1) If the Eligible
Director has continued to serve as a director of the Company for the entirety of
the Plan Year in which this Plan becomes effective (the first Plan Year), he/she
shall vest in Options to purchase 1,500 Shares of Stock; 2) if the Eligible
Director has continued to serve as a director of the Company for the entirety of
the second Plan Year following the Effective Date of this Plan, he/she shall
vest in Options to purchase 3,500 Shares of Stock; and 3) if the Eligible
Director has continued to be a director and served as a director of the Company
for the third Plan Year following the Effective Date of this Plan, he/she shall
vest in Options to purchase 3,500 Shares of Stock.
(ii) If an individual becomes an Eligible Director after the
Effective Date of this Plan by reason of filling the vacancy of any Eligible
Director whose directorship has terminated for any reason, such new Eligible
Director shall be subject to the remaining vesting schedule to which the
previous Eligible Director was subject. For example, if an existing Eligible
Director terminates his or her directorship half way through the second Plan
Year he/she shall forfeit their Options for the second Plan Year and the third
Plan Year, and the new Eligible Director, pursuant to Subsection 5.2(a) above,
shall be awarded the terminated Eligible Director's Options for the second and
third Plan Years (7,000 Options) and shall be subject to the same vesting
requirements remaining for that directorship - 3,500 Options in the second Plan
-5-
<PAGE>
Year and 3,500 Options in the third Plan Year.
(iii) If an individual becomes an Eligible Director after the
Effective Date of this Plan by reason of being elected to fill a new seat on the
Board, such new Eligible Director shall be subject to vesting for the remainder
of the term of this Plan according to the vesting schedule for the initial
Eligible Directors as set forth in subsection 5.2(b)(I) above. For example if
an individual is elected to a new director seat on the Board in the second Plan
Year, he/she shall be granted Options for the second and third Plan Years (7,000
Options) and shall be subject to the vesting requirements for the remaining Plan
term at the rate of 3,500 Options in the second Plan Year and 3,500 Options in
the third Plan Year.
Notwithstanding the foregoing, if an Eligible Director terminates his or
her services as a director prior to the end of a Plan Year, for any reason, then
he/she shall be unvested in and forfeit all Options for that Plan Year and any
subsequent Plan Year.
(c) PRICE. The Option Price per Share of Stock for the Shares to be
purchased pursuant to the exercise of any Option shall be 100% of the Fair
Market Value of a Share of Stock on the date on which the Eligible Director is
granted the Option.
(d) DURATION OF OPTIONS. Each stock option agreement shall state the
period of time within which the Option may be exercised by the Option Holder
(the "Option Period"). The Option Period must expire, in all cases, not more
than five years from the date an Option is granted. Notwithstanding any other
provision of the Plan, any Option Holder who is subject to Section 16 of the
1934 Act may not exercise any portion of an Option during the first six months
following the grant of such Option, except that this limitation shall not apply
in the event of the Option Holder's death or Disability during such six-month
period or unless otherwise allowed by law.
(e) TERMINATION OF DIRECTOR STATUS, DEATH, OR DISABILITY. Each stock
option agreement shall provide as follows with respect to the exercise of the
Option upon termination of the Option Holder's term as a director of the
Company, or the death or Disability of the Option Holder:
(i) If the Option Holder dies, or if the Option Holder becomes
Disabled during the Option Period while such a director of the Company, or
within the three-month period referred to in (ii) below, the Option may be
exercised by those entitled to do so under the Option Holder's will or by the
laws of descent and distribution within twelve months following the Option
Holder's death or Disability, but not thereafter. In any such case, the Option
may be exercised only as to the Shares as to which the Option had become
exercisable on or before the date of the Option Holder's death or Disability.
(ii) If the Option Holder's term as a director of the Company is
terminated within the Option Period for any reason other than Disability or the
Option Holder's death, the Option may be exercised by the Option Holder within
three months following the date of such termination (provided that such exercise
must occur within the Option Period), but not
-6-
<PAGE>
thereafter. In any such case, the Option may be exercised only as to the
Shares as to which the Option had become exercisable on or before the date of
termination of the Eligible Director's term as a director of the Company.
(f) TRANSFERABILITY. Each stock option agreement shall provide that
the Option granted therein is not transferable by the Option Holder except by
will or pursuant to the laws of descent and distribution, and that such Option
is exercisable during the Option Holder's lifetime only by him or her, or in the
event of Disability or incapacity, by his or her guardian or legal
representative.
(g) EXERCISE, PAYMENTS, ETC.
(i) Each stock option agreement shall provide that the method
for exercising the Option granted therein shall be by delivery to the Company of
written notice specifying the particular Option (or portion thereof) which is
being exercised, the number of Shares with respect to which such Option is
exercised and including payment of the Option Price. Such notice shall be in a
form satisfactory to the Administrative Committee. An Option for the purchase of
Shares granted hereunder may be exercised either in whole at any time, or from
time to time in part in lots of no less than 100 Shares or multiples thereof or,
in the event any balance as to which the Option remains unexercised shall be
less than 100 Shares, in a lot equal to such balance. The exercise of the Option
shall be deemed effective upon receipt of such notice by the Company and payment
to the Company of the Option Price. The purchase of such Stock shall take place
at the principal offices of the Company upon delivery of such notice, at which
time the purchase price of the Stock shall be paid in full by any of the methods
or any combination of the methods set forth in (ii) below. A properly executed
certificate or certificates representing the Stock shall be issued by the
Company and delivered to the Option Holder.
(ii) The exercise price shall be paid by any of the following
methods or any combination of the following methods:
(A) in cash;
(B) by cashier's check payable to the order of the Company;
(C) authorization from the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised;
(D) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price;
-7-
<PAGE>
(E) by delivery to the Company of certificates representing
the number of Shares then owned by the Option Holder, the Fair Market Value of
which equals the purchase price of the Stock purchased pursuant to the Option,
properly endorsed for transfer to the Company; provided however, that Shares
used for this purpose must have been held by the Option Holder for such minimum
period of time as may be established from time to time by the Administrative
Committee. The Fair Market Value of any Shares delivered in payment of the
purchase price upon exercise of the Option shall be the Fair Market Value as of
the exercise date and the exercise date shall be the day of the delivery of the
certificates for the Stock used as payment of the Option Price.
(h) DATE OF GRANT. An Option shall be considered as having been
granted on the date specified in Section 5.2(a).
5.3 STOCKHOLDER PRIVILEGES. Prior to the exercise of the Option and the
transfer of Shares to the Option Holder, an Option Holder shall have no rights
as a stockholder with respect to any Shares subject to any Option granted to
such person under this Plan, and until the Option Holder becomes the holder of
record of such Stock, no adjustments shall be made for dividends or other
distributions or other rights as to which there is a record date preceding the
date such Option Holder becomes the holder of record of such Stock, except as
provided in Section 4.
SECTION 6
CHANGE IN CONTROL
6.1 CHANGE IN CONTROL. In the event of a change in control of the Company,
as defined in Section 6.2, notwithstanding any contrary vesting schedules or
other restrictions on exercise contained herein each outstanding Option shall
become exercisable in full in respect of the aggregate number of Shares covered
thereby regardless of any restrictions provided herein, upon the occurrence of
the events described in clause (a) and (b) of Section 6.2 or immediately prior
to the consummation of the events described in clause (c) of Section 6.2, and
the Administrative Committee, in its sole discretion, without obtaining
stockholder approval, to the extent permitted in Section 9, may take any or all
of the following actions: (a) grant a cash bonus award to any Option Holder in
an amount necessary to pay the Option Price of all or any portion of the Options
then held by such Option Holder; (b) pay cash to any or all Option Holders in
exchange for the cancellation of their outstanding Options in an amount equal to
the difference between the Option Price of such Options and the greater of the
tender offer price for the underlying Stock or the Fair Market Value of the
Stock on the date of the cancellation of the Options; and (c) make any other
adjustments or amendments to the outstanding Options. Notwithstanding the
foregoing, unless otherwise provided in the applicable stock option agreement,
the Administrative Committee may, in its discretion, determine that any or all
outstanding Options granted pursuant to the Plan will not vest or become
exercisable on an accelerated basis in connection with an event described in
clause (c) of Section 6.2 and/or will not terminate if not exercised prior to
consummation of such event, if the Board or the surviving or acquiring
corporation, as the case may be, shall have taken or made effective provision
for the taking of, such action as in the opinion of the Administrative Committee
is equitable and appropriate to substitute a new Option for such Option or to
assume such Option and in order to make such new or assumed Option, as
-8-
<PAGE>
nearly as may be practicable, equivalent to the old Option (before giving
effect to any acceleration of the vesting or exercisability thereof), taking
into account, to the extent applicable, the kind and amount of securities,
cash or other assets into or for which the Stock may be changed, converted or
exchanged in connection with such event.
6.2 DEFINITION. A "change in control" shall be deemed to have occurred if
(a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2)
of the 1934 Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
more than 50% of the then outstanding voting stock of the Company; or (b) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 50% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders approve a plan or complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets; or (c) a tender offer or exchange offer to acquire
securities of the Company (other than such an offer made by the Company or any
subsidiary), whether or not such offer is approved or opposed by the Board is
made to acquire securities of the Company entitling the holders thereof to 50%
or more of the voting power in the election of directors of the Company.
6.3 GOLDEN PARACHUTE PAYMENTS. IF the provisions of this Section would
result in the receipt by any Option Holder of a payment within the meaning of
Code Section 280G and the regulations thereunder and if the receipt of such
payment would result in the imposition of any excise tax under Code Sections
280G and 4999, then the amount of such payment will be reduced to the extent
required, in the opinion of independent tax counsel, to prevent the imposition
of such excise tax; provided, however, that the Administrative Committee, in its
sole discretion, may authorize the payment of all or any portion of the amount
of such reduction to the Option Holder. In such event, the Company will have no
obligation or liability with respect to the Option Holder for the amount of any
excise tax imposed on the Option Holder under Code Sections 280G and 4999.
SECTION 7
RIGHTS OF ELIGIBLE DIRECTORS' AND OPTION HOLDERS
7.1 EMPLOYMENT. Nothing contained in the Plan or in any Option shall
confer upon any Eligible Director any right or expectation with respect to the
continuation of his or her status as a director of the Company.
7.2. DIRECTORSHIP OF COMPANY. Nothing in this Plan shall interfere in any
way with the right of the stockholders of the Company to remove the Option
Holder from the Board pursuant to applicable state laws and the Company's
Articles of Incorporation and Bylaws.
7.3 NONTRANSFERABILITY. No right or interest of any Option Holder in an
Option granted
-9-
<PAGE>
pursuant to the Plan shall be assignable or transferable during the lifetime
of the Option Holder, either voluntarily or involuntarily, or be subjected to
any lien, directly or indirectly, by operation of law, or otherwise,
including execution, levy, garnishment, attachment, pledge or bankruptcy. In
the event or an Option Holder's death, an Option Holder's rights and
interests in Options shall, to the extent provided in Section 5, be
transferable by testamentary will or the laws of decent and distribution. In
the opinion of the Administrative Committee, if an Option Holder is disabled
from caring for his or her affairs because of mental condition, physical
condition or age, such Option Holder's Options shall be exercised by such
person's guardian, conservator or other legal personal representative upon
furnishing the Administrative Committee with evidence satisfactory to the
Administrative Committee of such status.
-10-
<PAGE>
SECTION 8
GENERAL RESTRICTIONS
8.1 INVESTMENT REPRESENTATIONS. The Company may require any Option Holder,
as a condition of exercising such Option or receiving Stock under the Option, to
give written assurances, in the substance and form satisfactory to the Company
and its counsel, to the effect that such person is acquiring the Stock subject
to the Option for his/her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to such other
effects as the Company deems necessary or appropriate in order to comply with
federal and applicable state securities laws. Legends evidencing such
restrictions may be placed on the certificates evidencing the Stock
8.2 COMPLIANCE WITH SECURITIES LAWS. Each Option shall be subject to the
requirement that, if at any time counsel to the Company shall determine that the
listing registration or qualification of the Shares subject to such Option upon
any securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, is necessary as a condition of,
or in connection with, the issuance or purchase of Shares thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained on conditions acceptable to the Administrative Committee. Nothing
herein shall be deemed to require the Company to apply for or to obtain such
listing, registration or qualification.
8.3 STOCK RESTRICTION AGREEMENT. The Administrative Committee may provide
that Shares of Stock issuable upon the exercise of an Option shall, under
certain conditions, be subject to restrictions whereby the Company has a right
of first refusal with respect to such Shares or a right or obligation to
repurchase all or a portion of such Shares, which restrictions may survive an
Option Holder's term of employment or term of service with the Company.
SECTION 9
PLAN AMENDMENT, MODIFICATION AND TERMINATION
9.1 The Board may at any time terminate, and from time-to-time may amend
or modify, the Plan; provided, however, that no amendment or modification may
become effective without approval of the amendment or modification by the
stockholders if stockholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if the Company, on the
advice of counsel, determines that stockholder approval otherwise is necessary
or desirable.
9.2 No amendment, modification or termination of the Plan shall in any
manner adversely affect any Options theretofore granted under the Plan without
the consent of the Option Holder holding such Options.
-11-
<PAGE>
SECTION 10
NONEXCLUSIVITY OF THE PLAN
10.1 Neither the adoption of the Plan by the Board nor the submission of
the Plan to stockholders of the Company for approval shall be construed as
creating any limitations on the power or authority of the Board to adopt such
other or additional incentive or other compensation arrangements of whatever
nature as the Board may deem necessary or desirable or preclude or limit the
continuation of any other plan, practice or arrangement for the payment of
compensation or fringe benefits to non-employee directors generally.
SECTION 11
REQUIREMENTS OF LAW
11.1 REQUIREMENTS OF LAW. The issuance of Stock and the payment of cash
pursuant to the Plan shall be subject to all applicable laws, rules and
regulations.
11.2 FEDERAL SECURITIES LAW REQUIREMENTS. With respect to Eligible
Directors subject to Section 16 of the 1934 Act, transactions under this Plan
are intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or
action by the Administrative Committee fails to so comply, it shall be deemed
null and void with respect to such Eligible Director, to the extent permitted by
law and deemed advisable by the Administrative Committee.
11.3 GOVERNING Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
SECTION 12
DURATION OF THE PLAN
The Plan shall terminate at such time as may be determined by the Board,
and no Option shall be granted after such termination. If not sooner terminated
under the preceding sentence, the Plan shall fully cease and expire at midnight
on the date that is December 31, 2000. Options outstanding at the time of the
Plan termination may continue to be exercised in accordance with their terms.
-12-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its
duly authorized officers and its seal to be affixed hereto, effective, except as
specified to the contrary herein, as of _____________________, 1998.
ROCKY MOUNTAIN INTERNET, INC.
By:
---------------------------------
Name: Douglas H. Hanson
Title: President
ATTEST/WITNESS:
By:
----------------------------------
Name: David L. Evans
Title: Secretary
[SEAL]
-13-
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
THIS PROXY IS BEING SOLICITED BY ROCKY MOUNTAIN INTERNET, INC.'S
BOARD OF DIRECTORS
P R O X Y
The undersigned, revoking previous proxies relating to these shares,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders
and Proxy Statement dated February 13, 1998 in connection with the Annual
Meeting to be held at 9:00 a.m. on March 12, 1998 at Embassy Suites
Hotel, 1881 Curtis Street, Denver, Colorado, 80202 and hereby appoints
Douglas H. Hanson, the attorney and proxy of the undersigned, with power of
substitution, to vote all shares of the Common Stock of Rocky Mountain Internet,
Inc. registered in the name provided herein which the undersigned is entitled to
vote at the 1998 Annual Meeting of Stockholders, and at any adjournment or
adjournments thereof, with all the powers the undersigned would have if
personally present. Without limiting the general authorization hereby given,
said proxy is instructed to vote or act as follows on the proposals set forth
in said Proxy Statement.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
In his discretion the proxy is authorized to vote upon such other
matters as may properly come before the meeting or any adjournments thereof.
Election of Five Directors (or if any nominee is not available for
election, such substitute as the Board of Directors may designate).
(1) FOR / / election of the five (5) nominees for director named in the
accompanying Proxy Statement, namely: Douglas H. Hanson, D. D. Hock, Robert
W. Grabowski, Lewis H. Silverberg, and Mary Beth Vitale and for the terms
described in the Proxy Statement.
INSTRUCTION: To withhold authority to vote for any individual nominee, write
each such nominee's name below.
WITHHOLD / / authority to vote for all of the aforementioned nominees as
director.
(2) FOR / / AGAINST / / ABSTAIN / / Approval of the Rocky Mountain Internet,
Inc. 1997 Stock Option Plan set forth in the Proxy Statement.
(3) FOR / / AGAINST / / ABSTAIN / / Approval of the Rocky Mountain Internet,
Inc. 1998 Employees' Stock Option Plan set forth in the Proxy Statement.
(4) FOR / / AGAINST / / ABSTAIN / / Approval of the Rocky Mountain
Internet, Inc. 1998 Non-Employee Directors' Stock Option Plan.
<PAGE>
(5) FOR / / AGAINST / / ABSTAIN / / Approval of the amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock from 10,000,000 to 25,000,000.
(6) FOR / / AGAINST / / ABSTAIN / / Approval of the amendment to the
Company's Certificate of Incorporation to decrease the number of votes required
for action by the stockholders of the Company at a meeting thereof from a
majority of the shares of common stock outstanding to a majority of the shares
present in person or represented by proxy at a meeting and entitled to vote on
the matter.
(7) FOR / / AGAINST / / ABSTAIN / / Approval of the amendment to the
Company's Certificate of Incorporation to implement a reverse split of the
Company's Common Stock of up to one-for-ten, in the event the Board of
Directors determines that a reverse stock split is desirable at any time within
one year from the date of the Annual Meeting, with the exact size of the reverse
stock split to be determined by the Board of Directors.
(8) FOR / / AGAINST / / ABSTAIN / / Ratification of the appointment of the
Baird, Kurtz & Dobson, Certified Public Accountants, as the Company's
independent public accountants for the fiscal years ending December 31, 1997
and 1998.
(8) In his discretion, upon any other business that may properly come before
the meeting or adjournment thereof.
This proxy is revocable. The undersigned hereby revokes any proxy or proxies to
vote or act with respect to such shares heretofore given by the undersigned.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS SPECIFIED HEREIN
AND, IN THE ABSENCE OF SUCH SPECIFICATIONS, WILL BE VOTED FOR THE NOMINEES FOR
DIRECTOR AND FOR PROPOSALS (2), (3), (4), (5), (6), (7), AND (8).
PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
/ / I expect to attend this meeting.
/ / I do not expect to attend this meeting.
Please sign exactly as your stock is registered. Joint owners should each
sign personally. Executors, administrators, trustees, etc. should so indicate
when signing.
SIGNATURE(S) DATE
