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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----------- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
______________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________
COMMISSION FILE NUMBER: 001-12063
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ROCKY MOUNTAIN INTERNET, INC.
(Name of Small Business Issuer in its Charter)
Delaware 84-1322326
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification
1099 18th Street, Suite 3000 DENVER COLORADO 80202
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Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-672-0700
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
Warrants to purchase common stock
Units, consisting of one share of common stock and one warrant
Check whether the issuer (1)filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days. Yes X No .
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenue for its most recent fiscal year. $6,127,111
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 13, 1997, based upon the closing price of the Common Stock
on the NASDAQ SmallCap Market for such date, was approximately $9,731,829.
The number of outstanding shares of the registrant's Common Stock as of March
13, 1997, was approximately 7,126,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain information contained in this Annual Report on Form 10-KSB, including
"Description of Business" and "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 Form 10-KSB, actual results could differ materially
from the forward-looking information contained in this Annual Report on Form
10-KSB.
Rocky Mountain Internet, Inc (the "Company") is a Delaware corporation with
its executive offices in downtown Denver, Colorado. The Company also has a
call center and operating facility in Colorado Springs. On December 31, 1997
the Company had approximately 72 employees located at its corporate offices
in Denver and in Colorado Springs, Colorado.
At present RMI is a regional Internet Service Provider ("ISP") with a network
infrastructure comprised of a leased high speed fiber optic backbone, computer
hardware and software, and points of presence ("POPs") in nine Colorado cities
providing access availability to more than 85% of the population in Colorado.
RMI is a company in transition. The company recently created a subsidiary named
Rocky Mountain Broadband Inc ("RMBI") for the purpose of offering broadband
telecommunication services. In preparation of providing these services, RMBI
filed an application with the Colorado Public Utilities Commission ("CPUC") to
become a Competitive Local Exchange Carrier ("C-LEC") in all of US West's
operating territory in the State of Colorado. If the application is approved by
the CPUC, RMBI will offer all of the communication services currently offered by
US West and other carriers of this type.
The Company recently announced that it would begin offering IP Telephony
originating service in Colorado Springs, Boulder, and Denver Metro area. By
offering this product RMI can compete in the Long Distance business in those
areas at very competitive rates.
In addition, RMI has entered into an agreement with PSI Net, a nationwide
backbone provider, with 235 POPs throughout the United States. This agreement
will give the Company nationwide capability to offer dial up and dedicated
services at every location in every city in which PSI has a POP. By entering
into the agreement RMI can provide service without the cost of installing
expensive equipment as would normally be required in a situation like this.
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The Company has also entered into an agreement with PacNET, a nationwide, frame
relay provider, thus giving RMI the ability to offer Frame Relay and other high
bandwidth products to small and medium size businesses.
The Company currently offers a wide range of Internet products as a full
service Internet company. Those products include dial-up access, dedicated
high speed access, Integrated Services Digital Network ("ISDN") service,
fractional T1's (transmissions speed up to 1.54 megabits per second), Flex 56
(enhanced speed modem services), and other internet related services to
businesses and individuals including World Wide Web ("Web") services, data
services and network frame relay services. The Company prides its self in
offering exemplary customer service at competitive prices. The Company's
high speed, digital telecommunications network provides subscribers with
direct access to the full range of Internet applications and resources in E
Mail, World Wide Web sites USENET newsgroups and FTP software. The Company
continues to experience rapid growth in all areas of its subscriber base.
INDUSTRY OVERVIEW
The Internet had its origins in 1969 as a project of the Advanced Research
Project Agency ("ARPA") of the U.S. Department of Defense. The network
established by ARPA was designed to provide efficient connections between
different types of computers separated by large geographic areas and to function
even if part of the network became inoperative. Historically, the
infrastructure was used by academic institutions and governmental agencies for
remote access to host computers and electronic mail communications.
Accordingly, the U.S. government historically provided the majority of funding
for the infrastructure. However, as the modern Internet developed and became
commercial, funding shifted to the private sector. The number of worldwide
Internet users continues to increase significantly. In addition, the number of
domains registered, which the Company believes is a forward-indicator of
activity on the Internet, has increased at a rapid pace. The Company believes
that there are several key drivers responsible for the rapid proliferation of
Internet use:
SERVICE QUALITY: the Company's motto is "Customer Service is our
#1 Priority". Quality will be the differentiating aspect that sets RMI
apart from the other carriers.
- Improving Performance - There have been significant bandwidth,
communications, and price/performance improvements in communications
over the Internet. These developments make the Internet an
increasingly attractive medium for conducting business, adding
convenience, and attracting more users.
- High speed Modems - As the installed personal computer ("PC") base has
grown, it has become increasingly common for those PCs to have a modem
connection. Many new computers now have higher speed, pre-installed
modems, such as a K56 Flex, allowing connections to be made even more
easily.
- Improved Content - As the Internet grows new information and services
available on the Internet have attracted attention and created a more
widespread appeal.
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- Expansion of LANs and WANs - Corporate, government, and educational
local area networks ("LANs") and wide area networks ("WANs") are
expanding and these installed networks enable multiple users to be
connected to the Internet through a single point of contact.
Therefore, the actual number of Internet users connected through these
LANs and WANs greatly exceeds the number of connection points.
- Extranet - Businesses can set up a proprietary Network or Virtual
Private Network ("VPN") using the Internet. A VPN is a secure and
cost effective means of data communication.
- Expectations for Electronic Commerce over the Internet - With the
increased recognition of the Internet's potential as a medium for
marketing and purchasing, a growing number of companies are initiating
or expanding their use of the Internet for commercial purposes.
- Dramatic Increase in Navigational and Utility Tools - The
proliferation and improvement of software tools and browsers, which
facilitate Internet use, have attracted more users. The World Wide
Web browsers and other user-friendly interfaces have made it easier
for users to access desired information on the Internet.
A convergence is occurring in the Internet industry as more traditional
Internet providers become communications companies and communication companies
become Internet companies. These factors are creating an environment in which
individuals and businesses and other organizations perceive a compelling need to
establish Internet access and an Internet presence. The Company believes that
its Internet access, Web service and value-added service offerings are
particularly appealing to businesses for a number of reasons. For example, many
businesses are accustomed to working with a vendor with a local presence and may
prefer to contract with an Internet service provider such as RMI which has a
local presence and the experience and reputation of providing quality and
dependable service. Furthermore, many businesses have Internet requirements
that go beyond the simple access that most Internet service providers offer.
These Internet requirements include security, network consulting, high-bandwidth
managed access and data services.
THE RMI STRATEGY
RMI is implementing a strategy to become a full service telecommunications
company providing a full complement of communication services on a resell
basis, a one stop shop for the small and medium size business user and the
consuming public. As a full service Internet provider RMI will continue to
offer full Web services, including production of Web sites, the hosting of
Web sites and the marketing of Web sites. RMI believe the foundation for
business growth and Electronic Commerce ("E Commerce") will be through the
creation, hosting and marketing of Web sites. As more companies want to sell
their products and services over the Internet, the demand for Web services is
expected to increase rapidly. This will require an E Commerce solution for
most Web sites that will be developed for the business community. RMI will
seek to provide that capability to its customers. Marketing will play a more
important role for Web Site owners, as more people will want to monitor the
activity on their site. As a more full featured communications company, RMI
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will offer the more traditional Local and Long Distance Services such as
1-plus-operator services, calling card services and conferencing.
As the demand for speed increases, RMI will meet the challenges of providing
greater bandwidth to its customers. The Company will seek to meet the challenge
through various types of dedicated connections at the local loop level and
greater bandwidth at the backbone level. As ADSL (asymmetric digital subscriber
line - a high speed data transmission technology over telephone lines) and
similar services are deployed, RMI will also provide these services at
competitive prices.
The cable industry faces considerable challenges to enter the Internet access
market. The high cost of cable modems and the cost to upgrade systems may
continue to slow that segment of the industry. Given the significant cost for
the cable companies to rapidly deploy Internet services over coaxial cable, the
traditional wire line carriers will remain the dominant providers of Internet
access in the near term.
IP Telephony, the new kid on the Internet block, is an anticipated source of
revenue enhancement for RMI. It will become more prevalent in its use for
companies and people who want a low cost solution to long distance telephone
communication. RMI recently announced its entry into that segment of the
market, originating service along the Rocky Mountain front range beginning in
April with roll out to other cities as the RMI network is expanded. Customers
will be able to call anywhere in the USA for only 7 cents per minute.
RMI SERVICES TODAY & TOMORROW
Today, RMI primarily provides two high quality services which it believes, are
competitively priced: Internet access service and Web services. Internet access
services can be divided into two basic categories: personal accounts for
individuals and small businesses that connect to the Internet via a modem
(referred to as "dial-up" accounts), and high speed dedicated accounts
(principally for medium to large business users) that connect to the Internet
via dedicated telecommunications lines. Dial-up subscribers can access the
Internet by calling RMI's local POPs. RMI's dedicated accounts consist of
subscribers that desire to connect internal computer networks to the Internet.
The Company offers a wide variety of service options, which vary in price
depending upon the features included and the data rate, or bandwidth, of the
connection. RMI bills its Internet access subscribers monthly, quarterly or
annually in advance. A significant percentage of individual accounts are billed
automatically through pre-authorized credit card accounts. RMI also provides
complete installation services, sales of turnkey networking equipment, education
and training services, and an efficient technical support and network monitoring
support team.
Web services can also be divided into three basic categories: Web hosting
services and Web production (or content) and Web Marketing. RMI designs Web
sites and performs additional programming for Web sites on behalf of its
business subscribers. Charges for Web site design and programming vary widely
with the size and complexity of the project. RMI's Web services produce Web
sites that make use of original graphic arts, interactive forms, data base
queries and search engines. RMI also hosts Web sites on behalf of its customers
enabling them to have a continued presence on the Internet. In addition, RMI
offers its customers a marketing strategy to insure that their Web sites are
visited by would be customers.
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TOMORROW - RMI WILL OFFER
As RMI expands its product offerings and geographical reach, the Company will
focus on six core products.
1. Dedicated high-speed large bandwidth service to the small and medium size
business user, such as ADSL, ISDN & T1's, Fractional T1's and DS3's.
2. Dial up access service to the residential community, focused on easy user
interface and access to information on the World Wide Web.
3. IP Telephony with the ability to offer price competitive service to both
the residential user and the small business user.
4. Traditional long distance service with all the enhancements customers
generally are looking for such as calling cards, debit cards and operator
services. This unit would also provide private line services to the small
and medium size business, including ATM, Frame Relay, VPN and other
traditional private line services.
5. Web Services, including production, hosting, marketing and E Commerce
solutions.
6. Integration, Technology and Engineering Services for small and medium
business including fire wall installations, local area networks ("LAN") and
wide area network ("WAN") installation along with maintenance and
management of those facilities.
RMI'S VALUE-ADDED SERVICES
DATA CENTER SERVICES As more people use the Internet to shop for products and
services, the demands on shared server resources are increasing. RMI offers
businesses the alternative of collocating their servers at RMI; thereby taking
cost-effective advantage of the Company's centralized Internet resources. For
example, a Web developer who collocates a server at RMI can save 40% to 60% of
the monthly cost of maintaining that server in-house.
In addition, RMI has established itself as a provider's provider for Internet
transportation services. The company facilitates and enables businesses that
want to provide Internet transportation services, such as Hypertext Transfer
Protocol ("HTTP") for Web, Simple Mail Transfer Protocol ("SMTP") for mail,
Network News Transfer Protocol ("NNTP") for news, File Transfer Protocol ("FTP")
for file transfer, and Internet Group Multicast Protocol ("IGMP") for
multimedia.
ON-LINE NETWORK REPORTS RMI operates a password-protected on-line network
reporting service to allow customers to monitor the traffic and performance of
both RMI's network and the client's Internet connection in 15-minute increments.
The reports provide hourly, daily or weekly access to high-resolution maps,
tables, and graphs detailing the availability of specific WAN links, network
bandwidth, and error rates to help users prioritize their internal network
activities and reduce network management expenses.
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TRAINING CENTER. RMI's headquarters in downtown Denver includes a training
center with 12 workstations. Customers can schedule their employees for various
levels of Internet training, ranging from basic access training to HTML
programming. Customized, one-on-one training is also available, either at RMI's
facility, or at the customer's site.
BUSINESS RELATIONSHIPS
The Company has established three business alliance agreements covering three
POP locations with unrelated parties pursuant to which the Company and the
unrelated parties provide Internet services in certain rural areas and
smaller population centers in Colorado. Each of the parties to these
agreements is a local small business or businessperson who is not otherwise
affiliated with the Company. These agreements provide for the local party to
provide equipment and marketing services while the Company provides Internet
access and administrative services. The agreements provide for most revenues
from accounts in the geographic areas covered by the agreements to be split
equally between the Company and the local party.
These arrangements apply in specified territories outside of the main Colorado
population areas and accounted for approximately $480,00 in total 1997 revenue.
Each of these alliances is for an unspecified term and is terminable by the
local party on three months notice, subject to certain rights of the Company to
purchase the interest of the other party on termination. Although the Company
may enter into additional similar business alliances in the future, management
expects that revenues from such alliances will represent a proportionately
smaller part of total revenues as the Company expands its operations in the
future.
NETWORK INFRASTRUCTURE
RMI believes that its future success in the Internet access services market
depends in part on its ability to enhance its current service offerings for
individuals and businesses and to advance the capabilities and capacity of its
telecommunications network. The Company operates five B-STDX 9000 Cascade
switches within a regional backbone network. The B-STDX switch is a wide area
network ("WAN") switch that simultaneously supports Frame Relay, Switched
Multimegabit Digital Service ("SMDS"), Integrated Services Digital Network
("ISDN"), and Asynchronous Transfer Mode ("ATM") on a single platform. RMI
installed these switches in various locations in the cities of Denver, Colorado
Springs and Boulder. These switches are interconnected via a DS3 network.
The Company is continuing to optimize and increase the capacity and capabilities
of its telecommunications network. The Company currently is working to increase
its speed, reliability, and network fault tolerance. The Company operates a
data center, which is located at the corporate head office at 1099 18th Street,
in Denver. The data center is an environmentally controlled facility with
built in network redundancies, dual air conditioning systems, an FM 200 fire
protection system and generator power backup supported by an Uninterrupted Power
Supply. This facility not only provides redundancies and stability to the
Company's network, but also allows the Company to make this facility available
to those clients that want the ability to collocate their Web servers in the RMI
data center and pay RMI for use of the facility and gain high bandwidth access
to the Internet.
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OPERATIONS AND CUSTOMER SUPPORT
The Company has approximately 30 employees dedicated to technical dial-up
support, commercial account support, network operations and customer service.
The Company's Colorado Springs location facilitates the Call Center for its
dial-up & dedicated technical support group that provides phone support for
dial-up & dedicated subscribers. RMI also established a separate commercial
support group for commercial high speed access clients which involves phone
support, on-site support and installations. The Company's network support team
concentrates on the performance, stability and repair of the Company's network,
network equipment and servers.
SALES AND MARKETING
RMI's growth in its subscriber base is attributable to word-of-mouth referrals
primarily in the individual dial-up market. The Company has a direct sales
group in order to support a strong focus on business customers. The Company is
delivering high-speed Internet access solutions and Web services to business
customers in its regional markets and is differentiating itself through an
on-site consultative approach, high-quality services and exemplary customer
service. RMI has increased its effort by adding four inside sales people to
focus on the dial up market and two field sales people focused on Web services.
RMI believes that its ability to differentiate itself from the national Internet
access providers, long distance providers and regional telephone companies can
best be achieved in the business market by becoming a one stop shop and
providing the highest quality of service at competitive prices.
The Company currently employs eight field sales people, seven of whom work in
the Company's Denver office and one of whom works out of the Company's Colorado
Springs office. Due to RMI's full service Web competence, a lot of Web business
comes to RMI by word of mouth. However, field sales people do not rely on
inbound leads alone, but actively pursue new business relationships. The
Company plans to continue to expand its direct field sales force and inside
sales group in order to increase its market coverage. RMI also employs a
customer service group, currently comprised of six people, who concentrate on
business client retention.
The Company intends to increase its advertising and to maximize the amount of
local newspaper, radio and television exposure with press releases and interest
articles on the Company.
COMPETITION
The Internet connectivity business is highly competitive, and there are no
substantial barriers to entry. The Company believes that competition will
intensify in the future and its ability to successfully compete depends on a
number of factors including market presence, the capacity, reliability, and the
security of its network infrastructure, its pricing of services compared to its
competitors, the timing of new products and services by the Company and its
competitors, the Company's ability to react to changes in the market, and
industry and economic trends. The Company's competitors consist of (1) regional
Internet access providers, (2) national Internet service providers, (3) on-line
services companies, (4) regional telephone companies and national long distance
carriers, and (5) hardware/software companies and cable operators.
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REGIONAL INTERNET ACCESS PROVIDERS. The Company's competitors include numerous
regional Internet access providers, including SuperNet, Inc. a subsidiary of
Qwest Communications. SuperNet was formed by the Colorado Advanced Technology
Institute, and is the closest competitor to RMI in the State of Colorado. It
has been in business since 1986. Internet Express, Inc. is an Internet provider
in Colorado Springs that currently offers service in the states of Colorado,
Texas, Arizona and Washington.
NATIONAL INTERNET SERVICE PROVIDERS. National Internet service providers
include companies such as NETCOM, a division of ICG Telecom Group, Inc., PSINet,
Inc., UUNET, a division of Worldcom, Inc., and BBN, a division of GTE Corp.
These national competitors have established national and international networks,
providing extensive coverage throughout the U.S. and select international
locations. NETCOM, PSI and UUNET have established communications and network
infrastructure, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other opportunities
more readily, and devote more resources to the marketing and sale of services,
than the Company. NETCOM, PSI and BBN have targeted the individual dial-up
market, while UUNET has specifically targeted the business markets.
ON-LINE SERVICE COMPANIES. Other competitors include the national on-line
service providers including America On-line, Inc., Delphi Internet Services (a
division of News Corp.), and Genie (a division of General Electric Information
Services). Most of the established on-line services are rapidly expanding their
Internet access services in order to offer more direct access to the Internet at
more competitive prices. On-line service companies are focused on the
individual dial-up market and are becoming direct competitors with the national
Internet providers and the long distance carriers.
REGIONAL TELEPHONE COMPANIES AND NATIONAL LONG DISTANCE COMPANIES. Regional
telephone companies such as U S West Communications Inc. and national long
distance carriers such AT&T, MCI, and Sprint Communications have recently
announced Internet access services. The Company's management believes AT&T will
be a significant competitor to the national Internet providers, long distance
carriers, and on-line services that are targeting the individual dial-up market.
HARDWARE/SOFTWARE COMPANIES AND CABLE OPERAT0RS. In 1995, Microsoft Corporation
announced its entry into the on-line service business with "Microsoft Network",
a consumer on-line service that was released as a standard integrated feature of
the Windows 95 operating system. Microsoft Corporation has recently focused its
significant resources on its new Web browser software called Microsoft Network
Explorer and has proceeded to sign strategic distribution agreements with
America On-line Inc. and AT&T. IBM's most recent version of its OS/2 operating
system software includes Internet utilities, and IBM has announced plans to
introduce Internet connectivity through its own private communications network.
Cable operators such as Tele-Communications, Inc ("TCI") have also announced
their intention to utilize their cable networks to offer Internet services.
Cable modems have the capacity to transmit at speeds up to 10 Megabits per
second versus the normal telephone dial-up speed of 28.8 kilobits per second.
Several cable companies are in the process of upgrading their systems to handle
the Internet because cable services were not originally designed for the two-way
nature of Internet traffic.
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The Company is not currently subject to regulation by the Federal Communications
Commission or any other agency. However, it has filed an application with the
CPUC in Colorado to become a competitive local exchange company and will be
required to file with the FCC and each state that it operates as a long distance
provider.
Because the Internet is a relatively new medium, the legal obligations and First
Amendment rights of participants in the Internet, including service providers
such as RMI, are not well defined and continue to evolve. The Internet has not
been subject to regulation by the Federal Communications Commission or other
governmental agencies, as has television, and standards applicable to print
publishers and television in respect of the law of defamation and obscenity are
not clearly applicable to the Internet. Moreover, to the extent these issues
have been considered by the courts, outcomes have not been uniform. In 1996,
Congress passed a telecommunications act which, among other things, includes
protection from liability for Internet providers who take steps to prevent
defamatory material from being published on the Internet and also includes
provisions to protect children from indecent material on the Internet. Certain
provisions of that legislation regarding the imposition of criminal penalties
for publication of indecent materials on the Internet were recently held to be
unconstitutional by the United States Supreme Court.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters is located in Denver, Colorado at 1099
Eighteenth Street, Suite 3000, where the executive, sales and marketing and
administrative functions exist. The Company leases approximately 19,500 square
feet in Denver under a lease which expires May 8, 2002. Rental payments under
that lease are approximately $31,670 per month. The Company is responsible for
its pro rata share of the landlord's operating expenses. The Company also
leases approximately 4,000 square feet in Denver at 1800 Glenarm which formerly
housed the Corporate headquarters. This facility has been sublet for the
remainder of the lease term which concludes January 7, 2001. The Company
recognized a loss on the subletting of this space in 1996 of approximately
$58,000 which includes the broker commission plus the difference between the
rate paid by the Company and the amount realized from the sublet tenant. The
Company maintains an office of approximately 8,000 square feet in Colorado
Springs which is leased until January, 2000 at a monthly rental of $4,474 plus a
prorata share of increases in the landlord's operating expenses. RMI also has
leased POP locations in Colorado Springs, Denver, Grand Junction, Loveland, and
Pueblo, Colorado. Three additional leased POP locations in Burlington, Durango,
and Montrose, Colorado are leased by the Company's partners in independent third
party contract arrangements. The Company does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
On September 6, 1996, Robert Lewis and Storefronts in Cyberspace, L.L.C., filed
a complaint in Denver District Court naming the Company as defendant. A jury
trial commenced in this case on February 23, 1998. The jury rendered its
verdict on February 27, 1998. Rocky Mountain Internet, Inc. prevailed in three
of the four claims in the case and received a net judgment of $286.74.
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Based on the verdict of the jury, the court found for the plaintiff (Robert
Lewis) in the amount of $12,000 on the plaintiff's claim for breach of contract.
The court found for the defendant (the Company) in the amount of $12,000 for the
defendant's claim for tortious interference with economic advantage. The court
found for the defendant in the amount of $285.74 in its claim for account stated
(amount past due) and for $1 for the defendant's claim of defamation. The
Company is not a party to any other litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
1997.
A Stockholder Meeting was held on March 12, 1998, 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 March 12, 1998 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.
All of the persons who were nominated to become directors of the Company were
elected, and all of the above listed proposals were approved by the
stockholders. Please reference the Definitive Proxy Statement as filed with the
Securities and Exchange Commission Schedule 14A on February 13, 1998 for
additional information.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company completed its initial public offering on September 5, 1996. The
Company's Common Stock is traded on the NASDAQ SmallCap Market under the symbol
RMII and the Company's Warrants are traded on the NASDAQ SmallCap Market under
the symbol RMIIW.
The following table sets forth the closing high and low bid prices of the
Company's Common Stock as reported on the NASDAQ SmallCap Market. These prices
are believed to be representative inter-dealer quotations, without retail markup
or commissions, and may not represent prices at which actual transactions
occurred.
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Bid
1996
High Low
<S> <C> <C>
Quarter Ended September 30 $2.750 $2.500
Quarter Ended December 31 $1.625 $1.000
1997
Quarter Ended March 31 $2.750 $1.125
Quarter Ended June 30 $3.750 $1.875
Quarter Ended September 30 $2.625 $2.000
Quarter Ended December 31 $3.125 $2.375
1998
First Quarter(through March 13) $3.125 $1.875
</TABLE>
The number of record holders of the Company's $.001 par value common stock at
March 13, 1998 was approximately 96. Based on information supplied by certain of
such holders of record, the Company estimates that as of such date there were
approximately 600 beneficial owners of its Common Stock. The Company has never
declared or paid any dividends on its common stock. Since the Company currently
intends to retain future earnings to finance growth, it does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. 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, 1996 and 1997, and the balance sheet data as of such dates
have been derived from financial statements of the Company which have been
included herein and which have been audited by Baird, Kurtz, and Dobson,
independent public accountants. These data should be read in conjunction with
the Company's financial statements and related notes included elsewhere in this
Form 10-KSB.
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,281,579 $ 6,127,111
Gross profit 2,177,912 4,066,796
Operating (loss) income (2,281,194) (3,800,706)
Net (loss) income (2,342,571) (4,152,853)
Net (loss) income per share (1) (.64) (.76)
OTHER OPERATING DATA:
Approximate number of subscribers at end of period 9,800 11,040
Number of POPs at end of period 11 9
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 348,978 $ 1,053,189
Investments 1,356,629 0
Working Capital (Deficit) 370,884 (209,003)
Total Assets 5,540,167 5,082,119
Long Term debt 1,134,380 904,627
Total Stockholders' equity 2,317,437 2,083,370
</TABLE>
(1) Loss per share computed based on 3,715,000 Shares outstanding for 1996 and
5,530,000 shares outstanding for 1997. See Note 1 to the Company's financial
statements included elsewhere in this report.
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. As of December 31, 1997, the
Company's net tangible assets are approximately $407,000 below the $2,000,000
minimum requirement for listing. On March 12, 1998, Mr. Douglas H. Hanson
exercised 408,615 of $1.00 options (each option is exercised for one share of
common stock) and on March 23, 1998 Mr. Hanson exercised 50,000 warrants (each
warrant was exercised at a price of $1.90 for one share of common stock)
resulting in a total infusion of equity of $503,615. Listed below is the
proforma balance sheets reflecting the effect of the infusion of the equity
based on the December 31, 1997 balance sheet, assuming the transaction occurred
as of that date. The proforma balance sheet is not indicative of the financial
position of the Company as of March 31, 1998.
13
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
Proforma
Dec. 31, Investment Proforma
1997 Giving
Effect to
Investment
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 1,053,189 $ 503,615 $ 1,556,804
Trade receivables, less allowance for doubtful accounts; $176,000 672,094 672,094
Inventories 46,945 46,945
Other 112,891 112,891
-------------------------------------------
$1,885,119 $ 503,615 $2,388,734
Property and equipment
Equipment 2,927,016 2,927,016
Computer software 218,801 218,801
Leasehold improvements 190,235 190,235
Furniture, fixtures, and office equipment 431,814 431,814
-------------------------------------------
$ 3,767,866 $ - $ 3,767,866
Less accumulated depreciation and amortization 1,118,217 1,118,217
-------------------------------------------
$ 2,649,649 $ - $ 2,649,649
Other assets
Customer lists 471,096 471,096
Deposits 76,255 76,255
-------------------------------------------
$ 547,351 $ - $ 547,351
-------------------------------------------
$5,082,119 $ 503,615 $5,585,734
-------------------------------------------
-------------------------------------------
</TABLE>
14
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Dec. 31, Investment Proforma
1997 Giving Effect
to Investment
(Unaudited)
<S> <C> <C> <C>
Current liabilities
Current maturities of long-term debt 609,390 609,390
and obligations under capital leases
Accounts payable 581,366 581,366
Deferred revenue 345,857 345,857
Accrued payroll and related 182,569 182,569
taxes
Other accrued expense 374,940 374,940
------------------------------------------------
Total current liabilities $ 2,094,122 $ - $ 2,094,122
Long-term debt and obligations under $ 904,627 $ - $ 904,627
capital leases, less current maturities
------------------------------------------------
Stockholders equity
Preferred stock, $.001 par value; $ 40 $ 40
authorized 790,000 shares; issued and
outstanding 12/31/97, 40,000 shares
Common stock, $.001 par value; 6,737 459 7,196
authorized 10,000,000 shares; issued;
12/31/97 6,736,889; and outstanding
12/31/97 6,677,846 shares.
Additional paid-in capital 9,284,720 503,156 9,787,876
Accumulated deficit (6,747,050) (6,747,050)
Unearned compensation and other (383,077) (383,077)
------------------------------------------------
$ 2,161,370 $ 503,615 $ 2,664,985
Treasury stock, at cost Common: (78,000) (78,000)
59,043 shares
------------------------------------------------
$ 2,083,370 $ 2,586,985
------------------------------------------------
$ 5,082,119 $ 503,615 $ 5,585,734
------------ ---------- -----------
------------ ---------- -----------
Tangible Networth $ 1,612,274 $ 2,115,889
</TABLE>
Note: December 31, 1997 financial statement numbers are derived from audited
financial statements contained in this report.
Year 2000 Issues
The Company has begun the process of identifying computer systems that could be
affected by the "Year 2000" issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define
15
<PAGE>
the applicable year. The Company has not estimated the cost of addressing the
Year 2000 issue. The impact on the Company's operations of failing to make its
systems Year 2000 compliant in a timely manner cannot presently be determined.
National Internet Provider
Effective March 11, 1998, the Company entered into an agreement with PSINet,
Inc., (refer to Exhibit 10.13: PSINet Wholesale Usage Agreement) whereby the
Company obtains access to PSINet's network to provide the Company's customers
access to dialup and "switched" network access in over 235 locations nationally.
The agreement allows the Company to expand service nationally to provide dial up
and ISDN services in each of the locations serviced by PSINet. Customers will
receive technical support, e-mail services, news services, etc., from the
Company's servers, providing a "private label" solution to the anticipated new
customer base.
IP Telephony
The Company is expanding its communication services in order to provide a more
complete product offering to its customers. The Company has announced its intent
to provide long distance services using Internet Protocol ("IP") telephony at
$0.07 per minute within the continental United States. The Company filed an
application in March, 1998 with the CPUC to become a Competitive Local Exchange
Carrier ("C-LEC"). A wholly owned subsidiary, Rocky Mountain Broadband, Inc.,
has been formed for providing these services.
Flat Rate Dialup Access
Effective November 4, 1997, the Company introduced a flat rate Dial Up service
offering in the Denver, Colorado and Boulder, Colorado markets at the rate of
$24.95 per month. In January, 1998, the Company expanded flat rate pricing to
the Colorado Springs and Pueblo, Colorado markets. Additionally, the flat rate
was reduced to $19.95 in order to meet competitive offerings in the market. As
part of the new service offering, the Company has introduced enhanced data
communication rates using the K 56 Flex technology.
Termination of Third Party Agreement
The Company and Zero Error Networks ("ZEN"), a third party with which the
Company had 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 occurred during the months of July, August, and December of 1997. The
Company has contracted for a location (POP site) in Pueblo and installed
approximately $35,000 of equipment therein. The Termination Agreement includes
a limited non-compete clause wherein neither party may directly solicit the
existing customer base of the other for a period of one year. The net effect of
the Termination Agreement on net income is expected to be neutral in the short
run and have a positive long term result. The Pueblo revenues are expected to
grow at a faster rate than the other three
16
<PAGE>
POPs 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.
Acquisitions
Effective January 22, 1997, the Company acquired from VR-1, Inc. dial-up and
dedicated access subscribers and other assets, which VR-1, Inc. had been
operating under the service mark "ONE", for consideration consisting of $150,000
of cash and 116,932 shares of the Company's common stock.
Three acquisitions occurred in late 1996 and early 1997 pursuant to the
Company's strategy to expand through acquisitions as well as internal growth.
CompuNerd, Inc., a small Colorado Springs based Web services company was
acquired as of November 1, 1996 for consideration consisting of $70,478 and
30,000 shares of common stock. The Information Exchange ("IE"), a Denver
based voice messaging business was acquired effective December 1, 1996 for
52,723 shares of common stock. IE focuses on voice messaging to commercial
customers. Its acquisition further expands the Company's ability to provide a
full complement of services through the Internet. Several affiliates of the
Company were equity holders in The Information Exchange. See Item 12,
"Certain Relationships and Related Transactions."
The Company may experience fluctuations in operating results in the future
caused by various factors, some of which are outside of the Company's control,
including general economic conditions, specific economic conditions in the
Internet access industry, user demand for the Internet, capital expenditures and
other costs relating to the expansion of operations, the timing and number of
customer subscriptions, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of distribution channels
through which those services are sold. In addition, the Company's expenses,
including but not limited to obligations under equipment leases, facilities
leases, telephone access lines, and Internet access are relatively fixed in the
short term, and therefore variations in the timing and amount of revenues could
have a material adverse effect on the Company's results of operations.
17
<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 relay services, and Web hosting and production. Other sources
of revenue include equipment sales related to dedicated access accounts,
educational courses, and setup charges associated with the Company's various
services. The following table provides information regarding amounts of
revenues in the foregoing categories for the years ended December 31, 1996 and
1997.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 %Change
<S> <C> <C> <C>
REVENUE
Dial-Up Service $ 1,465,269 $ 2,359,482 61%
Dedicated Access Service 689,311 2,047,852 197%
Web Services 413,592 1,051,114 154%
Equipment Sales 519,551 387,067 (25%)
Other 193,856 281,596 45%
------- -------
Total $ 3,281,579 $ 6,127,111 87%
</TABLE>
In 1997, the Company's revenue grew 87% compared to the year ended December 31,
1996. The total number of customers grew from 9,800 to 11,000 from during the
same periods representing an increase of 13%. Revenues exclusive of Equipment
Sales grew at 108%. Revenues grew at a faster rate than customer count due to a
focus on commercial customers with higher monthly billing rates and from
increases in Web production and hosting and equipment sales. Customer count was
also adversely affected by approximately 1,050 resulting from the termination of
the contract with Zero Error Networks. An additional 390 customers from the
Hayden POP were transferred to Zero Error Networks effective January 1, 1998.
Dial-Up Service
The Company's dial-up service strategy is to provide high quality service with
few busy signals. In the past the Company was not prepared to offer flat rate
pricing for unlimited access service, however, on November 4, 1997, the Company
announced a flat rate offering to the Denver, Colorado and Boulder Colorado
markets. Subsequently, the Company has added flat rate service in Colorado
Springs, Colorado and Pueblo, Colorado. This offering has become more
economically attractive than in the past due to lower costs for circuits and a
lower cost per port for dial up access. The new offering includes higher speed
modem access using K56 Flex technology.
The table below shows the composite weighted average billing rate for full
service Internet access by quarter for 1995, 1996, and 1997. The reduction in
the average rate for September 1997 is the result of a change in the average
rates resulting from the termination of Dial-Up Service contracts with third
parties in Alamosa and Leadville. The remaining contracts with other third
parties provide an higher percentage of lower rate services. Effective with
the December 1997 billings, most Denver and Boulder, Colorado area customers who
were on payment plans over $19.95 per month were converted to the new $19.95
flat rate service, resulting in a lower average billing rate.
18
<PAGE>
For the Three Months Ended
<TABLE>
<CAPTION>
Mar Jun Sep Dec Mar Jun Sep Dec
1995 1995 1995 1995 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C>
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50
<CAPTION>
Mar Jun Sep Dec
1997 1997 1997 1997
<S> <C> <C> <C>
$20.10 $20.04 $19.65 $18.62
</TABLE>
The 61% revenue growth in Dial-Up Service from 1996 to 1997 is attributable to
customer growth. Dial-up Service have been split approximately evenly between
commercial and residential customers throughout 1995 and 1996 and 1997 based on
customer count. Based on revenue the split between commercial and residential
customers is 35% to 65% respectively. Dial-Up revenues increased from
$1,465,269 to $2,359,482 or 61% for the year ending December 31, 1996 as
compared to the year ending December 31, 1997.
RMI has established business alliances through contracts with three,
locally-based unrelated parties for the purpose of providing Internet services
in secondary markets in the State of Colorado. The services are provided under
a written contract that provides for the locally-based party to provide
equipment and marketing services while RMI provides Internet access and
administrative services. Dial-up revenues based on these contracts generated
$354,100 in revenues in 1996 and $467,700 in revenues in 1997 for an increase of
32%. The Company expects total revenues from these third party relationships
to decrease in the future as explained further in this paragraph. The POPs
established pursuant to these contracts began in the second quarter of 1995 and
grew to six locations by the end of 1995 and nine locations by the end of 1996.
Effective July 3, 1997, the contract with Zero Error Networks was terminated.
Under the termination agreement, the Company will operate the Pueblo POP as a
Company only location and ZEN will operate Alamosa, Leadville, and Hayden
locations. The similar contract in Grand Junction, Colorado was terminated by
the Company effective April 30, 1997. The marketing efforts by the locally-based
third party in this location were minimal and sales were less than $1,000 per
month. The Company is pursuing options to operate this facility and add
dedicated as well as Dial-Up customers.
Dedicated Access Service
Dedicated access services are primarily provided to commercial customers and
include a wide range of connectivity options tailored to the requirements of the
customer. These services include private port (dedicated modem), Integrated
Services Digital Network connections, 56 Kbps frame relay connections, T-1 (1.54
Mbps) frame relay connections, point to point connections, and T-3 (45 Mbps) or
fractional T-3 connections. The Company also offers a collocation service in
which the customer's equipment is located in the RMI data center, thereby
providing access to the Internet directly through the Company's connection.
Dedicated business has grown based principally on ISDN and high speed circuits
(56K, DS-1, and DS-3) growth. ISDN sales have grown from approximately $93,000
to $632,000 for an increase of 580% from 1996 to 1997. Dedicated high
19
<PAGE>
speed circuits and collocation customer billings have increased from
approximately $455,000 to $1,175,000 or 158% from 1996 to 1997. These increases
are the result of a full time sales staff focused on this product line and the
continuing growth in demand for Internet connectivity.
The table below shows the quarterly customer count by each of the component
services offered for dedicated access as of the dates indicated:
<TABLE>
<CAPTION>
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
Service 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
Collocation 0 1 4 4 6 4 5 6
<CAPTION>
Service Mar 31 Jun 30 Sep 30 Dec 31
1997 1997 1997 1997
- ------------ ------- ------ ------- ------
<S> <C> <C> <C> <C>
Private Port 50 41 36 31
56 Kbps 78 72 65 60
ISDN 168 193 211 233
T-1 65 84 99 123
Collocation 11 12 11 21
</TABLE>
Web Services
Web services revenues are composed of Web site hosting and Web site production.
Web site hosting provides ongoing revenue from customers for whom RMI hosts a
Web site on Web servers in the RMI data center. All access made to these Web
sites by the customer and the Internet community as a whole are processed on the
RMI servers. The advantage to customers is high speed access to sites by their
targeted audiences. The following is a summary of the number of Web hosting
customers as of the dates indicated:
<TABLE>
<CAPTION>
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341 418 424 417 428
</TABLE>
Web site hosting accounted for $239,700 in 1996 and $478,500 in 1997 of revenue
for an increase of 100%. The increase resulted from activity by the direct
sales force, increased server capacities and speed, and the increasing
popularity of the Web as a business tool.
Web site production increased from $173,800 for 1996 to $563,500 for 1997 for an
increase of 224%. The Company increased the size of the Web production
department as well as provided customers more complex applications. The
Company's direct sales force has focused on selling Web production sites with
higher average billings.
20
<PAGE>
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
collocations. Sales decreased from $519,551 in 1996 to $387,100 in 1997 or a
25% reduction. Margins on equipment sales increased from 11% in 1996 to 23% in
1997. RMI has established wholesale purchasing relationships with national and
regional vendors in order to provide an attractively priced total Internet
solution to its commercial customers.
Gross Profit
Gross profit 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 77% for 1996 and 69% for
1997. In December, 1996, the Company installed a DS-3 network connecting
Boulder, Colorado Springs, and Denver locations utilizing Cascade switches.
This is a large capacity network providing reliable high-speed connections
for a wide range of customer needs. This network is currently underutilized.
As the network becomes fully utilized, the Company anticipates that it will
realize significant economies of scale resulting in increased margins.
General, Selling and Administrative
SALES AND MARKETING EXPENSES consisting of advertising, promotion,
attendance at trade shows, printing, and finders fees increased from $211,512
in 1996 to $286,267 in 1997 or 35%. The Company hired a full time direct
sales staff beginning in December, 1995. Compensation for sales and
marketing personnel was approximately $565,000 for 1996 and $969,000 in 1997
for an increase of 71% with 16 employees at the end of 1996 and 17 employees
at the end of 1997. The increase results from having a fully staffed sales
department throughout 1997 while the department was partially staffed in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES increased from approximately $3,642,600 in
1996 to approximately $6,611,000 in 1997 or 81%. General and administrative
costs consist of personnel (excluding sales and marketing personnel), physical
facilities, depreciation, amortization, professional services and other related
administrative expenses. Significant items are discussed below.
21
<PAGE>
Payroll costs increased 41% from $2,138,000 for the year ended December 31,
1996 to $3,024,000 for the year ended December 31, 1997 (not including sales
and marketing personnel compensation discussed above). The Company had 67
employees at the end of 1996 and 55 employees at the end of 1997 in all areas
of the Company including administration, technical support, development, and
senior management (excluding sales and marketing). The 1997 total expense
includes $127,700 of compensation expense in regards to options granted to
Mr. Douglas H. Hanson as discussed elsewhere in this report.
Facilities rent expense was $172,440 for 1996 and increased 156% to $441,440
in 1997. This increase is principally the result of a move in late 1996 to
new corporate headquarters which consists of leased office space of
approximately 19,500 square feet space including a data center comprised of
1,200 square feet. The Company continues to occupy offices in Colorado
Springs for staff performing Dial-In technical support, customer service, and
sales functions. The Company's former offices in Denver at 1800 Glenarm
have been sub leased effective March 1, 1997 for the remainder of the lease
term. A one time charge of approximately $58,000 has been recorded in 1996
for commission expense on the transaction as well as the difference between
the sub lease rate and the existing lease rate.
The Company experienced an increase in communications expense from $196,800 for
the year ended 1996 to $260,500 for the year ended 1997 or 32%. These expenses
included local telephone service, cellular phones and pager costs and long
distance telephone expenses. The Company uses multiple "800" phone numbers to
provide technical support, customer support, and sales order processing to its
growing base of customers.
Legal and accounting expenses increased from $77,400 in 1996 to $218,100 in 1997
or an increase of 182%. This increase resulted from the first full year of
filing SEC quarterly and annual reports, due diligence work performed in regards
to the investments by Mr. Hanson, and negotiations in regards to the
terminations of employees, and preparation of the proxy statement.
Outside services, which includes temporary to hire staff and professional
services, increased 191% from $150,100 to $437,700 from 1996 to 1997. The
Company hires many of the technical support call center staff and the Web
production staff on a "temp to hire" program wherein the new employee remains on
the temporary employment agency's payroll for approximately ninety days. This
allows the staff to be fully evaluated prior to becoming a full time Company
employee.
During 1997, the Company incurred one time expenses for: a write-off of costs
incurred in Grand Junction and Burlington, Colorado for development of third
party marketing agreements in the amount of $45,113, a write down of inventory
for sale in the amount of $23,031, and expense of $318,000 relating to
termination of employees, and $107,233 of legal expenses relating to the
terminations and defense of the lawsuit referenced in Part II, Item 1 of this
report.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has experienced negative
operating cash flow in 1997. The Company's operations used net cash of
approximately $3.3 million for the year ended December 31, 1997. The cash used
by operating activities is primarily attributable to the Company's continued
expansion of its facilities and employee base in anticipation of continued
growth in revenues.
Between December 31, 1996, and December 31, 1997, total assets decreased by
$458,048 from $5,540,167 to $5,082,119. The change is attributable to various
increases and decreases as follows:
<TABLE>
<CAPTION>
Balance at Balance at Increase
12/31/96 12/31/97 (Decrease)
<S> <C> <C> <C>
Cash & investments $ 1,705,607 $ 1,053,189 $ (652,418)
Trade receivables 518,827 672,094 153,267
Inventory 91,047 46,945 (44,102)
Other 143,753 112,891 (30,862)
Equipment & other fixed assets 3,258,000 3,767,866 509,866
Accumulated depreciation and amortization (403,023) (1,118,217) (715,194)
Customer lists 145,444 471,096 325,652
Deposits 80,512 76,255 (4,257)
Totals $ 5,540,167 $ 5,082,119 $ (458,048)
</TABLE>
The decrease in Cash and investments is due to the use of cash in operations,
trade receivables increased due to larger sales volumes, inventory fluctuates
based on customer installations and changing lead times for products, equipment
and other fixed assets increased based on equipment required for service
expansion and internal computer requirements, accumulated depreciation and
amortization increased based on depreciation and amortization of assets, and
customer lists increased due to the acquisition of the assets from VR-1 in
January, 1997.
The changes in the liabilities and stockholders' equity account from 1996 to
1997 are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
Balance at Balance at Increase
12/31/96 12/31/97 (Decrease)
<S> <C> <C> <C>
Notes payable $ 4,250 $ (4,250)
Current maturities of long
term debt and capital lease
obligations 451,823 $ 609,390 157,567
Accounts payable 425,160 581,366 156,206
Deferred revenue 218,121 345,857 127,736
Accrued payroll & related taxes 528,160 182,569 (345,591)
Accrued expenses 460,836 374,940 (85,896)
Long-term debt and capital
lease obligations 1,134,380 904,627 (229,753)
Stockholders equity 2,317,437 2,083,370 (234,067)
Totals $ 5,540,167 $5,082,119 $(458,048)
</TABLE>
The note payable was retired during the year, current maturities of long term
debt and capital lease obligations increased due to new leases and existing
lease amortization payments having a smaller interest expense (more of each
payment is applied to principal), accounts payable reflects the growth in the
Company, deferred revenues relates to customers who prepaid their accounts for
specific periods of time and credits on customers accounts, accrued payroll and
related taxes decreased year over year as the final payroll for 1997 was paid on
12/31/97 wherein it was paid on the first work day of 1997 for 1996, accrued
expenses are attributable primarily to deferred office rent, preferred stock
dividend payable, and third parties under contractual agreements pending cash
collections, long term debt and capital lease obligation decreased due to
certain leases approaching the end of the lease term, and a reduction in equity
is a combination of the current year loss and an offset of additional capital
investment in the Company.
During 1997, the Company substantially drew down a line of credit for $500,000
for working capital uses. This credit line was secured by a pledge of a
$300,000 treasury bill repurchase agreement and by the Company's accounts
receivable. In October, the Company repaid the line of credit and transferred
the funds from the treasury bill to cash. The line of credit has been
discontinued and the secured position of the bank on the accounts receivable has
ceased. The Company's office lease is also secured by a pledge of a money market
fund of $250,000.
The Company has had a series of financings to provide the funds during the
initial growth phases when earning have been negative. These financings are:
a convertible debenture offering in late 1995 and early 1996 that brought in
$490,000 (the debentures were converted to common stock in October, 1996), a
preferred stock offering in mid-1996 that netted $406,000, an initial public
offering in September, 1996, with proceeds of $3,775,900, and a private
placement (with one unit consisting of two common shares and a warrant to
purchase an additional common share at a set price) from June to September,
1997 which raised $1,117,900. Effective October 1, 1997, Mr. Douglas H.
Hanson invested $2,398,577 in common stock and became the President, Chief
Executive Officer and Chairman of the Board of the Company. Additionally,
Mr. Hanson has invested an additional $503,615 in March, 1998 by exercising
purchased warrants and options that were granted in October, 1997, at the
time of his initial investment. Current income and expense forecasts
indicate that
24
<PAGE>
the Company will have sufficient cash in order to reach positive cash flow
without further investments. However, additional equity infusion may be
necessary to comply with the NASDAQ Small Cap listing requirements.
The Company has received a loan commitment from Phoenix Leasing Incorporated
wherein the Company will have available a financing line available for
acquisition of fixed assets in the amount of $352,000 to be used in four
increments of $88,000. The financing will be secured by the assets purchased and
by an Equipment Loan Bond provided by Amwest Surety Insurance Company. The
Company expects to complete this agreement and initiate the first draw around
the end of March 1998.
RMI is an Internet Service Provider ("ISP") with an high growth rate (as
discussed elsewhere in this document). The Company's growth is dependent on
continuing to build a strong infrastructure and hiring high quality sales,
technical, and administrative personnel. In order to build the
infrastructure and acquire the human resources needed to maintain an high
growth rate, the Company has operated with a negative cash flow from
operations during 1996 and 1997. The Company's cash requirements are
relatively fixed for the near term and the Company expects to generate
positive operating cash flows by mid 1998 if revenues continue to increase
according to expectations without any significant cost increases. Should
revenues not continue to increase according to expectations, the Company may
have to seek additional financing to fund operating losses or implement
reductions in operating expenses. Reductions in operating expenses, if
effected, could adversely affect revenues and therefore not result in the
expected increase in cash flow. The Company does not currently have access
to additional bank financing and therefore additional financing would have to
result from additional issuances of equity or debt securities.
The Company's common stock is traded on the NASDAQ SmallCap Market. The
NASDAQ Stock Market, Inc. recently implemented changes to the maintenance
criteria for listing eligibility on the Small Cap Market, including a
requirement that issuers have at least $2,000,000 in net tangible assets. As
of December 31, 1997, the Company had net tangible assets of $1,612,274
(equity of $2,083,370 less intangible customer lists of $471,096). Effective
March 12, 1998, Mr. Douglas H. Hanson, President and CEO, exercised 408,615
options exercisable at $1.00 resulting in an equity infusion of $408,615 and
on March 23, 1998, Mr. Hanson exercised 50,000 warrants for $1.90 each which
resulted in an additional equity infusion of $95,000. On a proforma basis as
of December 31, 1997, these investments bring the Company in compliance with
the Nasdaq requirements.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ROCKY MOUNTAIN INTERNET, INC.
Accountants' Report and
Consolidated Financial Statements
December 31, 1996 and 1997
26
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
DECEMBER 31, 1996 AND 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT. . . . . . . . . . . . . . . . . . . . . . . 28
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 31
Statements of Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . 32
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 33
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
27
<PAGE>
Independent Accountants' Report
-------------------------------
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 27, 1998
28
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 348,978 $ 1,053,189
Investments 1,356,629 -
Trade receivables, less allowance for doubtful
accounts; 1996 - $115,000; 1997 - $176,000 518,827 672,094
Inventories 91,047 46,945
Other 143,753 112,891
----------- -----------
Total Current Assets 2,459,234 1,885,119
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Equipment 2,513,944 2,927,016
Computer software 202,501 218,801
Leasehold improvements 127,877 190,235
Furniture, fixtures, and office equipment 413,678 431,814
----------- -----------
3,258,000 3,767,866
Less accumulated depreciation and amortization 403,023 1,118,217
----------- -----------
2,854,977 2,649,649
----------- -----------
OTHER ASSETS
Customer lists, at amortized cost 145,444 471,096
Deposits 80,512 76,255
----------- -----------
225,956 547,351
----------- -----------
$ 5,540,167 $ 5,082,119
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 4,250 $ -
Current maturities of long-term debt and capital
lease obligations 451,823 609,390
Accounts payable 425,160 581,366
Deferred revenue 218,121 345,857
Accrued payroll and related taxes 528,160 182,569
Accrued expenses 460,836 374,940
----------- -----------
Total Current Liabilities 2,088,350 2,094,122
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 1,134,380 904,627
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
1996 - 1,000,000, 1997 - 790,000 shares;
issued and outstanding 1996 - 250,000
shares, 1997 - 40,000 shares 250 40
Common stock, $.001 par value; authorized 10,000,000
shares; issued 1996 - 4,540,723 shares, 1997 -
6,736,889 shares; outstanding 1996 - 4,540,723
shares, 1997 - 6,677,846 shares 4,541 6,737
Additional paid-in capital 4,879,968 9,284,720
Accumulated deficit (2,567,322) (6,747,050)
Unearned compensation - (383,077)
----------- -----------
2,317,437 2,161,370
Treasury stock, at cost
Common; 1996 - 0 shares, 1997 - 59,043 shares - (78,000)
----------- -----------
2,317,437 2,083,370
----------- -----------
$ 5,540,167 $ 5,082,119
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
REVENUE
Internet access and services $ 2,762,028 $ 5,740,044
Equipment sales 519,551 387,067
----------- -----------
3,281,579 6,127,111
----------- -----------
COST OF REVENUE EARNED
Internet access and services 640,880 1,760,262
Equipment sales 462,787 300,053
----------- -----------
1,103,667 2,060,315
----------- -----------
GROSS PROFIT 2,177,912 4,066,796
GENERAL, SELLING, AND ADMINISTRATIVE EXPENSES 4,459,106 7,867,502
----------- -----------
OPERATING LOSS (2,281,194) (3,800,706)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (157,042) (402,086)
Interest income 44,322 54,461
Other income (expense), net 51,343 (4,522)
----------- -----------
(61,377) (352,147)
----------- -----------
LOSS BEFORE INCOME TAXES (2,342,571) (4,152,853)
INCOME TAX EXPENSE - -
----------- -----------
NET LOSS (2,342,571) (4,152,853)
PREFERRED STOCK DIVIDENDS 25,000 26,875
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (2,367,571) $ (4,179,728)
----------- -----------
----------- -----------
BASIC AND DILUTED LOSS PER SHARE
Net loss per share $ (.64) $ (.76)
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- -------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 - $ - 1,868,000 $ 1,868
Issuance of preferred stock 250,000 250 - -
Issuance of common stock - - 1,365,000 1,365
Stock option compensation - - - -
Issuance of underwriters' warrants - - - -
Conversion of debentures into
common stock - - 1,225,000 1,225
Dividends on preferred stock - - - -
Issuance of common stock for the
acquisition of CompuNerd, Inc. - - 30,000 30
Issuance of common stock for the
acquisition of the Information
Exchange - - 52,723 53
Net loss - - - -
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 250,000 250 4,540,723 4,541
Conversion of preferred to common
stock (210,000) (210) 210,136 210
Issuance of common stock in private
placement - - 621,000 621
Stock option compensation - - - -
Issuance of common stock in stock
purchase agreement - - 1,225,000 1,225
Dividends on preferred stock - - - -
Issuance of common stock for the
acquisition of Online Network
Enterprises, Inc. - - 116,930 117
Purchase of treasury stock - - - -
Stock options exercised - - 23,100 23
Net loss - - - -
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 40,000 $ 40 6,736,889 $ 6,737
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
Additional
Paid-in Accumulated Unearned Treasury
Capital Deficit Compensation Stock Total
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 28,847 $ (199,751) $ - $ - $ (169,036)
Issuance of preferred stock 405,750 - - - 406,000
Issuance of common stock 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 488,775 - - - 490,000
Dividends on preferred stock - (25,000) - - (25,000)
Issuance of common stock for the
acquisition of CompuNerd, Inc. 67,470 - - - 67,500
Issuance of common stock for the
acquisition of the Information
Exchange 60,332 - - - 60,385
Net loss - (2,342,571) - - (2,342,571)
---------- ------------ ---------- ---------- -------------
BALANCE, DECEMBER 31, 1996 4,879,968 (2,567,322) - - 2,317,437
Conversion of preferred to common
stock - - - - -
Issuance of common stock in private
placement 1,117,299 - - - 1,117,920
Stock option compensation 551,194 - (383,077) - 168,117
Issuance of common stock in stock
purchase agreement 2,397,352 - - - 2,398,577
Dividends on preferred stock - (26,875) - - (26,875)
Issuance of common stock for the
acquisition of Online Network
Enterprises, Inc. 306,830 - - - 306,947
Purchase of treasury stock - - - (78,000) (78,000)
Stock options exercised 32,077 - - 32,100
Net loss - (4,152,853) - - (4,152,853)
---------- ------------ ---------- ---------- -------------
BALANCE, DECEMBER 31, 1997 $9,284,720 $(6,747,050) $ (383,077) $ (78,000) $ 2,083,370
---------- ------------ ---------- ---------- -------------
---------- ------------ ---------- ---------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,342,571) $ (4,152,853)
Items not requiring cash:
Depreciation 88,162 196,491
Amortization 186,044 690,794
Loss on disposal of fixed assets - 13,128
Stock option compensation 52,807 168,117
Changes in:
Trade receivables (417,999) (140,067)
Inventories (78,862) 44,102
Other current assets (138,066) 30,862
Accounts payable 224,618 156,206
Deferred revenue 41,268 127,736
Accrued payroll and related taxes 443,208 (345,591)
Accrued expenses 429,886 (85,896)
--------------- ---------------
Net cash used in operating activities (1,511,505) (3,296,971)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (900,235) (287,931)
Purchase of investments (1,756,629) -
Proceeds from investments 400,000 1,356,629
Payment for purchase of Online Network Enterprises, Inc. (70,478) (150,000)
(Increase) decrease in deposits (16,675) 2,257
--------------- ---------------
Net cash provided by (used in) investing activities (2,344,017) 920,955
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and warrants 3,777,252 3,535,397
Proceeds from sale of preferred stock 406,000 -
Proceeds from notes payable 6,689 500,000
Proceeds from long-term debt 135,404 200,000
Sale of stock warrants 100 -
Payment of preferred stock dividend (25,000) (26,875)
Purchase of treasury stock - (78,000)
Payments on notes payable (26,108) (504,250)
Payments on long-term debt and capital lease obligations (344,498) (546,045)
--------------- ---------------
Net cash provided by financing activities 3,929,839 3,080,227
--------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS 74,317 704,211
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 274,661 348,978
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 348,978 $ 1,053,189
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Rocky Mountain Internet, Inc. (the Company) is a provider of Internet access
services and Web services to businesses, professionals, and individuals in the
state of Colorado. The Company facilitates access to the Internet by means of a
regional telecommunications network comprised of a backbone of leased,
high-speed dedicated phone lines, computer hardware and software, and local
access points known as points of presence in nine 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 consist solely of the ownership of equipment,
which it leases to the Company. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of three
months or less to be cash equivalents. At December 31, 1996 and 1997, cash
equivalents consisted primarily of money market accounts.
COST OF REVENUE EARNED
Included in Internet access and services cost of revenue earned is primarily the
cost of high speed data circuits and telephone lines that allow customers access
to the Company's service plus Internet access fees paid by the Company to
Internet backbone carriers.
34
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed using the
straight-line method over the estimated useful lives of the assets, ranging from
five to seven years. Certain equipment obtained through capital lease
obligations are amortized over the life of the lease. Improvements to leased
property are amortized over the lesser of the life of the lease or life of the
improvements.
Major additions and improvements to property and equipment are capitalized,
whereas replacements, maintenance and repairs which do not improve or extend the
lives of the respective assets, are expensed.
REVENUE RECOGNITION
The Company charges customers (subscribers) monthly access fees to the Internet
and recognizes the revenue in the month the access is provided. For certain
subscribers billed in advance, the Company recognizes the revenue over the
period the billing covers. Revenue for other services provided, including
set-up fees charged to customers when their accounts are activated, or equipment
sales, are recognized as the service is performed or the equipment is delivered
to the customer.
ADVERTISING
The Company expenses advertising costs as incurred. During the years ended
December 31, 1996 and 1997, the Company incurred $167,565 and $274,726,
respectively, in advertising costs.
CUSTOMER LISTS
The excess of the purchase price over the fair value of net assets acquired in
business acquisitions is recorded as customer lists and is being amortized on a
straight line basis over five years.
INVENTORIES
Inventories consist of Internet access equipment and are valued at the lower of
cost of market. Cost is determined using the first-in, first-out (FIFO) method.
35
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOSS PER COMMON SHARE
For the years ended December 31, 1996 and 1997, loss per share is computed based
upon approximately 3,715,000 and 5,530,000, respectively, weighted average
common shares outstanding for both basic and diluted earnings per share. The
net loss for the years ended December 31, 1996 and 1997 used in the calculation
was increased by the preferred stock dividends paid of $25,000 and $26,875,
respectively. These calculations assume all shares issued prior to the
Company's initial public offering in September 1996, were outstanding during all
periods presented, including shares issueable under debenture and preferred
stock conversions, and shares relating to stock options, calculated using the
treasury stock approach. All stock options and warrants issued during or
subsequent to the Company's initial public offering are excluded from the
computation of diluted earnings per share as they would have an antidilutive
effect on earnings per share during the years ended December 31, 1996 and 1997.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
RENT EXPENSE
The Company recognizes rent expense on a straight-line basis over the lease
terms. Differences between expense recognized and payments made are recorded as
accrued expenses.
INVESTMENTS
Debt securities and marketable equity securities for which the Company has no
immediate plans to sell but which may be sold in the future are classified as
available-for-sale and carried at fair value. Any unrealized gains and losses
are recorded, net of related income tax effects, in stockholders' equity. At
December 31, 1996, the Company had one U.S. Treasury Note, and two repurchase
agreements with a bank classified as available-for-sale. The repurchase
agreements were secured by U.S. Treasury Notes. Fair value of the investments
approximated cost as of December 31, 1996, the investments matured in 1997.
36
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31, 1996 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Capital lease obligations payable to finance companies, due in
monthly installments aggregating $73,562 including interest
ranging from 9.5% to 33% through December 2001, collateralized
by equipment. An officer and shareholder of the Company has
guaranteed certain of the leases and one of the leases restricts
the payment of preferred stock dividends. $ 1,586,203 $ 1,375,123
Notes payable to bank, due in monthly installments of $5,555 plus
interest at 2% over the Bank's index rate (10.5% at December
31, 1997) collateralized by furniture and fixtures. - 138,894
--------------- ---------------
1,586,203 1,514,017
Less current maturities 451,823 609,390
--------------- ---------------
$ 1,134,380 $ 904,627
--------------- ---------------
--------------- ---------------
</TABLE>
Aggregate maturities required on long-term debt and obligations under capital
leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
Years ending December 31:
1998 $ 609,390
1999 722,287
2000 142,138
2001 40,202
---------------
$ 1,514,017
---------------
---------------
</TABLE>
37
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The following is a schedule by years of the future minimum lease payments under
the capital leases, together with the present value of the minimum lease
payments as of December 31, 1997:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
Years ending December 31:
1998 $ 813,364
1999 785,416
2000 166,707
2001 43,667
---------------
Future minimum lease payments 1,809,154
Less amount representing interest (434,031)
---------------
Present value of minimum lease payments $ 1,375,123
---------------
---------------
</TABLE>
Equipment acquired under capital lease obligations had a cost of $1,976,285 and
$2,291,092 and accumulated depreciation of $186,011 and $681,597 at December 31,
1996 and 1997, respectively.
NOTE 3: COMMITMENTS
LEASE COMMITMENTS
The Company leases operating facilities, and equipment under operating lease
agreements expiring through May 2002. Certain of these lease agreements require
the Company to pay operating expenses and provide for escalation of annual
rentals if the lessor's operating costs increase.
38
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 3: COMMITMENTS (CONTINUED)
At December 31, 1997, the future minimum payments under these leases, exclusive
of sublease payments, are as follows:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
Years ending December 31:
1998 $ 556,072
1999 531,964
2000 454,268
2001 380,036
2002 126,680
---------------
$ 2,049,020
---------------
---------------
</TABLE>
In February 1997, the Company subleased one of its operating facilities. The
Company accrued a loss of $58,073 as of December 31, 1996, as a result of this
sublease. Minimum future rentals receivable under this noncancellable operating
sublease are $148,796, covering the period through January 2001, which have not
been deducted from in the above future minimum payments.
Rent expense was $240,720 and $538,625 for 1996 and 1997, respectively.
EMPLOYEE CONTRACTS
The Company currently has employment agreements with two of its officers that
provide for salaries ranging from $70,000 per year to $90,000 per year. The
Company may terminate the agreements for cause, or without cause subject to the
obligation to pay the terminated employee a severance payment ranging from five
to eight months salary based on length of service. The employment agreements
terminate in December 1999. The agreements do not significantly restrict such
employee's ability to compete with the Company following any termination.
39
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 3: COMMITMENTS (CONTINUED)
LETTER OF CREDIT
At December 31, 1997, the Company had an outstanding letter of credit in the
amount of $150,000 to be used in case of default on its main operating
facilities lease. The letter of credit was secured by $170,000 currently
invested in a money market account.
REGISTRATION REQUIREMENTS
The Company has agreed to file a registration statement with the Securities
and Exchange Commission to register the shares issued in its 1997 private
placement and the shares issued/acquired pursuant to the stock purchase
agreement discussed in Note 8, including the shares issueable under the warrant
agreements.
NOTE 4: BUSINESS ALLIANCES
The Company has entered into various contracts with unrelated entities to
enable the Company to provide customers Internet service within certain areas of
Colorado. The unrelated entities own equipment in "points of presence" (POP)
sites which the Company utilizes to provide service to customers. The Company
pays a portion of the revenues (generally 50%) generated through the use of
unrelated parties' equipment. The contracts can be cancelled with notice and if
cancelled by the other party the Company has the right, but not the obligation,
to acquire the equipment owned by the unrelated parties. The revenues to the
Company related to these arrangements amounted to $354,565 and $480,951 for the
years ended December 31, 1996 and 1997, respectively, and are included in
"Internet access and services" revenues in the accompanying consolidated
statements of operations. The payables to the unrelated entities for their
portion of the aforementioned revenues of $10,069 and $48,089 at December 31,
1996 and 1997, respectively, are included in accrued expenses in the
accompanying balance sheets.
40
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 5: INCOME TAXES
Under the provisions of the Internal Revenue Code, the Company has available
for federal income tax purposes, a net operating loss carryforward of
approximately $6,212,000, which expires in the years 2010, 2011, and 2012. The
tax effects of this and other temporary differences related to deferred taxes
were:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 850,000 $ 2,317,000
Allowance for doubtful accounts 44,000 66,000
Tax goodwill 18,000 15,000
Accrued expenses 22,000 108,000
Amortization of customer lists - 27,000
--------------- ---------------
934,000 2,533,000
Deferred tax liabilities:
Accumulated depreciation - (101,000)
--------------- ---------------
Net deferred tax asset before valuation allowance 934,000 2,432,000
Valuation allowance (934,000) (2,432,000)
--------------- ---------------
Net deferred tax asset $ - $ -
--------------- ---------------
--------------- ---------------
</TABLE>
The actual provisions (credits) for income taxes varied from the expected
provision (computed by applying the statutory U.S. federal income tax rates to
loss before taxes) because the tax benefits of the net operating losses for the
periods ended December 31, 1996 and 1997, are offset by the valuation allowance.
41
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles requires disclosures of certain
significant estimates and current vulnerability due to certain concentrations.
Those matters include the following:
DEPENDENCE ON SUPPLIERS
The Company depends upon third-party suppliers for its access to the Internet
through leased telecommunications lines. Although this access is available from
several alternative suppliers, there can be no assurance that the Company could
obtain substitute services from other providers at reasonable or comparable
prices or in a timely manner. The Company is also dependent upon the regional
Bell operating company to provide installations of circuits and to maintain
those circuits.
YEAR 2000
The Company has begun the process of identifying computer systems that could
be affected by the "Year 2000" issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company has not estimated the cost of addressing the Year
2000 issue. The impact on the Company's operations of failing to make its
systems Year 2000 compliant in a timely manner cannot presently be determined.
NOTE 7: PREFERRED STOCK
On April 26, 1996, the Board of Directors designated 250,000 shares of
Preferred Stock as Series A Convertible Preferred Stock (Series A Stock) and set
the terms of the stock. The Series A Stock accrues cumulative dividends at the
rate of 10% per annum. The dividends are payable quarterly to the extent
permitted by applicable law. The Series A Preferred Stock may be converted into
shares of Common Stock at the option of the holder at any time after May 15,
1997. The rate of conversion is the Series A Stock's liquidation value divided
by the conversion price, currently set at $2.00 per share. The Series A Stock's
liquidation value is equal to the price paid for the Series A Stock plus any
cumulative dividends unpaid as of the conversion date. The conversion price is
subject to change due to certain anti-dilution adjustments.
In June of 1996, 250,000 shares of Series A preferred shares were sold to
accredited investors in a private placement transaction at a price of $2.00 per
share. Net proceeds to the Company were $406,000 after expenses of the offering
of $94,000. During 1997, 210,000 shares of preferred stock were converted into
common stock.
42
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 7: PREFERRED STOCK (CONTINUED)
The Company has the authority to issue up to an additional 750,000 shares of
Preferred Stock. The Board of Directors is authorized to determine terms and
preferences of the Preferred Stock prior to issuance.
NOTE 8: COMMON STOCK TRANSACTIONS
PUBLIC OFFERING
On September 5, 1996, the Company completed a public offering of 1,365,000
units at an offering price of $3.50 per unit. Each unit consisted of one share
of common stock and one warrant to purchase one share of common stock at $4.375
per share for a 23-month period commencing October 5, 1997, and prior to
September 5, 1999. Under certain circumstances, the Company may redeem the
warrants at $.25 per warrant. Additionally, the Company sold the underwriter for
$100 warrants to purchase 125,000 units. These underwriter warrants to purchase
units are exercisable through September 5, 2000, at an exercise price of $4.20
per unit (for which the accompanying warrant to purchase a share of common stock
is exercisable at $6.5625). Costs of the offering, including a 10% commission
paid to the underwriters, the underwriter's nonaccountable expense allowance,
and professional fees, amounted to $1,000,248, resulting in net proceeds from
the offering of $3,777,252.
PRIVATE PLACEMENT
On September 14, 1997, the Company completed a private placement of units
consisting of two shares of common stock and a warrant to purchase one share of
common stock. The per unit price was $4.00 and was allocated $1.90 to each
share of common stock and $0.20 to the warrant to purchase a share of common
stock. The warrants entitle the holder to purchase a share of common stock for
$3.00 and expire on June 13, 2000. The net proceeds to the Company from the
sale of 310,500 units amounted to $1,117,920 after deducting offering expenses
of $124,080. The terms of the offering requires the issuance of additional
shares of common stock in the event the Company sells common stock in the future
at a cash price, net of discounts and commissions of less than $1.80 per share,
exclusive of shares issued upon the exercise of employee stock options. The
number of shares issueable under this provision would equate to the number of
shares by which purchasers would have been diluted if shares are sold at net
price of less than $1.80.
43
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 8: COMMON STOCK TRANSACTIONS (CONTINUED)
PRIVATE PLACEMENT (CONTINUED)
In connection with that offering, the Company agreed to issue to the placement
agent, warrants ("Agent's Private Offering Warrants") to purchase units of
securities, each unit consisting of two shares of Common Stock and one common
stock purchase warrant. The Company anticipates that it will issue to the
placement agent, for nominal consideration, 31,050 Agent's Private Offering
Warrants. The Warrants will be exercisable for $4.00 per unit (consisting of
two shares of common stock and one warrant to purchase one share of common stock
for $3.00) and will be exercisable for 5 years.
STOCK PURCHASE AGREEMENT
On October 1, 1997, the Current President (Current President) of the Company
acquired directly from the Company 1,225,000 shares of the Company's Common
Stock and a warrant to purchase 4,000,000 shares of the Company's Common Stock
for $2,450,000. The warrant is exercisable, in whole or in part for an eighteen
month period, at $1.90 per share. At December 31, 1997, the Company lacked
sufficient authorized shares to accommodate the issuance of all of the shares
underlying the warrant. The Company intends to amend its Certificate of
Incorporation to increase the authorized common shares from 10,000,000 to
25,000,000 shares.
In connection with the execution of this Stock Purchase Agreement, the former
president resigned as the President, Chief Executive Officer, and a director of
the Company. Contemporaneously, the Current President was elected as the
Company's President, Chief Executive Officer, and Chairman of the Board of
Directors.
The Current President also purchased 275,000 shares of Common Stock from the
former president and former members of the Board of Directors for $550,000, or
$2.00 per share.
44
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 9: BENEFIT PLANS
MANAGEMENT BONUS PLAN
The Company had a bonus plan during 1996 which entitled certain employees to
receive a cash bonus based upon achievement of specified levels of revenues by
the Company for the year ended December 31, 1996. The Company accrued $158,000
in bonuses under the plan in 1996. The Company gave employees the option of
receiving their bonuses in cash or stock options. As a result, 40,425 stock
options were issued in 1997 to employees at an exercise price of $1.00 per
share. The Company adopted a similar plan for 1997, however, no bonuses were
earned under the 1997 Plan.
STOCK OPTION PLANS
In July 1996, the Company adopted the 1996 Employee Stock Option Plan (the
Employee Plan) and the Non-Employee Directors' Stock Option Plan (the Directors'
Plan). The Employee Plan provides for an authorization of 471,300 shares of
Common Stock for issuance upon exercise of stock options granted under the Plan.
The Employee Plan is administered by the Board of Directors, which determines
the persons to whom options are granted, the type, number, vesting schedule,
exercise price, and term of options granted. Under this plan both incentive and
nonqualified options can be granted.
An aggregate of 18,000 shares of Common Stock are reserved for issuance under
the Directors' Plan. All nonemployee directors are automatically granted
nonqualified stock options to purchase 1,500 shares initially and additional
1,500 shares for each subsequent year that they serve up to a maximum of 6,000
shares per director.
In September 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan).
The 1997 Plan provides for an authorization of 50,000 shares of Common Stock for
issuance upon exercise of stock options granted under the Plan. The 1997 Plan
was established to issue the stock options discussed under Management Bonus
Plan.
45
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 9: BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
In October 1997, the Company granted the Current President (see Note 8)
incentive stock options to purchase 191,385 shares of Common Stock at $2.6125
per share and nonqualified stock options to purchase 408,615 shares of Common
Stock at $1.00 per share, subject to approval by the stockholders. The options
vest one year from the date of grant. Compensation of $168,117 relating to the
nonqualified stock options was recorded to compensation expense during the year
ended December 31, 1997.
The Board of Directors has approved the 1998 Employees' Stock Option Plan,
subject to approval by the stockholders. This plan reserves 266,544 shares of
Common Stock for issuance over the ten-year term of the plan.
The following is a summary of the status of the Company's stock option plans
at December 31, 1996 and 1997, and the changes during the years then ended:
<TABLE>
<CAPTION>
1996 1997
--------------------------------------------- ------------------------------------------
Employees' Plans Directors' Plan Employees' Plans Directors' Plan
-------------------- -------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
-------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year - $ - - $ - 284,230 1.68 1,500 $ 2.00
Options granted 284,230 1.68 1,500 2.00 896,400 1.68 4,500 2.42
Options expired - - - (73,860) 1.81 - -
Options exercised - - - (23,100) 1.65 - -
-------------------- -------------------- ------------------- ------------------
Outstanding, end of year 284,230 $ 1.68 1,500 $ 2.00 1,083,670 $ 1.67 6,000 $ 2.31
-------------------- -------------------- ------------------- ------------------
-------------------- -------------------- ------------------- ------------------
Options exercisable,
end of year 25,000 1,500 483,670 6,000
-------- ------- --------- ------
</TABLE>
46
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 9: BENEFIT PLANS (CONTINUED)
STOCK OPTION 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:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Dividend per share $ 0.00 $ 0.00
Risk-free interest rate 6.16% 6.0%
Expected life of options 5 years 5 years
Weighted-average fair value of options granted $ 1.90 $ 1.29
</TABLE>
The following table summarized information about stock options under the plans
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.40 25,000 4 years $ 0.40 25,000 $ 0.40
$ 1.00 437,885 10 years $ 1.00 29,270 $ 1.00
$ 1.50 104,700 5 years $ 1.50 104,700 $ 1.50
$ 1.875 38,200 5 years $ 1.875 38,200 $ 1.875
$ 2.00 160,500 4 years $ 2.00 160,500 $ 2.00
$ 2.25 3,000 5 years $ 2.25 3,000 $ 2.25
$ 2.50 127,500 5 years $ 2.50 127,500 $ 2.50
$ 2.61 191,385 5 years $ 2.61 - $ 2.61
$ 2.75 1,500 5 years $ 2.75 1,500 $ 2.75
</TABLE>
One nonqualified stock option to purchase 25,000 shares at $.40 per share was
granted under the Employee Plan. This option vested immediately. Compensation
of $40,000 relating to this option was recorded to compensation expense. The
remaining Employee Plan options above have a five year term and vested fully
during 1997 due to a change in control of the Company (see Note 8).
47
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 9: BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans, and $52,807 and $168,117 in compensation costs have been recognized
in December 31, 1996 and 1997, respectively. Had compensation cost for the
Plans been determined based on the fair value at the grant dates using Statement
of Financial Accounting Standards No. 123, the Company's net loss would have
increased by $74,258 and $768,647 in 1996 and 1997, respectively. In addition,
the Company's loss per share would have increased by $.02 and $.14 in 1996 and
1997, respectively.
401(k) PLAN
The Board of Directors has approved a 401(k) Savings and Retirement Plan that
will cover substantially all employees effective January 16, 1998. The
Company's contributions to the Plan will be determined annually by the Board
of Directors.
NOTE 10: ACQUISITIONS
On November 1, 1997, the Company acquired the customer base and selected assets
of CompuNerd, Inc. for $70,478 in cash and 30,000 shares of the Company's common
stock valued at $67,500. On December 1, 1996, the Company acquired the
Information Exchange, a related party through common ownership, in exchange for
52,723 shares of the Company's common stock valued at $60,385. On January 22,
1997, the Company acquired the dedicated high speed and dial-up subscribers from
Online Network Enterprises, Inc. (O.N.E). The O.N.E. acquisition netted the
Company approximately 50 dedicated and 725 dial-up subscribers and equipment
valued at approximately $24,700. The Company paid $150,000 cash and issued
116,930 shares of the Company's common stock valued at $306,947. The
acquisitions have been accounted for as purchases by recording the assets
acquired at their estimated market value at the acquisition date. The operations
of the Company include the operations of the acquirees from the acquisition
date. Consolidated operations would not have been significantly different for
the Company had the CompuNerd, Inc. and O.N.E. acquisitions been made at January
1, 1996. Unaudited proforma consolidated operations for the year ended December
31, 1996, assuming the Information Exchange purchase was made at the beginning
of 1996 is shown below:
<TABLE>
<S> <C>
Net sales $ 3,367,720
Net loss $ (2,377,599)
Net loss per share $ (.65)
</TABLE>
48
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 10: ACQUISITIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
CompuNerd, Information
Inc. Exchange O.N.E. Total
---------- ----------- -------- --------
<S> <C> <C> <C> <C>
Equipment $ 48,265 $ 2,560 $ 24,700 $ 75,525
Customer lists 89,713 57,825 432,247 579,785
------ ------ ------- -------
$137,978 $60,385 $456,947 $655,310
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
NOTE 11: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NONCASH INVESTING AND FINANCING ACTIVITIES 1996 1997
------------ ----------
<S> <C> <C>
Capital lease obligations incurred for equipment $ 1,672,244 $ 273,859
Long-term debt converted to common stock 490,000 -
Preferred stock converted to common stock - 210
Acquisition of CompuNerd, Inc. through issuance of
common stock 67,500 -
Acquisition of the Information Exchange through
issuance of common stock 60,385 -
Acquisition of the Online Network Exchange, Inc. through
issuance of common stock - 306,947
Other - 32,100
ADDITIONAL CASH PAYMENTS INFORMATION
Interest paid $ 159,007 $ 396,731
</TABLE>
49
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 12: CONTINUED OPERATIONS
During the years ended December 31, 1996 and 1997, the Company incurred net
losses of $2,342,571 and $4,152,853, respectively, used $1,511,505 and
$3,296,971, respectively, of net cash from operating activities. The Company's
President has plans to contribute approximately $500,000 in additional capital
in 1998. In addition, the Company's management currently has plans it believes
will increase revenues in order to become profitable and generate positive cash
flows from operations. However, there are no assurances that the Company's
plans for revenue growth and improved operating cash flows will be successful.
It could be necessary to raise additional capital or reduce operating costs to
meet liquidity requirements. Reducing operating costs could inhibit the
Company's planned rate of revenue growth.
NOTE 13: RESTATEMENT
The 1996 financial statements have been restated to correct the recording of a
nonqualified stock option. The effect of this change was to increase additional
paid-in capital, accumulated deficit and net loss by $40,000 and to increase
basic and diluted loss per share by $.01.
NOTE 14: FUTURE CHANGES IN ACCOUNTING PRINCIPLE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to
owners. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes that the adoption of
this Statement will not have a material effect on the Company's consolidated
results of operations or financial position.
50
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 14: FUTURE CHANGES IN ACCOUNTING PRINCIPLE (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
reporting information about operating segments in annual financial statements of
public business enterprises and requires disclosure of selected information
about operating segments in interim financial reports. The Statement is
effective for financial statements for periods beginning after December 15,
1997. Management believes that the adoption of this Statement will not have a
material effect on the Company's consolidated results of operations or financial
position.
51
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
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 44 Director
Richard K. Dingess 46 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 37 Vice President - Sales and Marketing
D. Kirk Roberts 46 Vice President - Finance and Management
Information Systems
</TABLE>
All directors were elected at the Stockholder Meeting held on March 12, 1998 to
serve for the ensuing year and until their successors are duly elected and
qualified.
DOUGLAS H. HANSON has been the President, Chief Executive Officer, and Chairman
of the Board of Directors of the Company since October 1, 1997. 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. 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
52
<PAGE>
privately held businesses on their formation, sale, and financing. In September,
1990 Mr. Silverberg joined Liquor Barn, Inc., which operated a chain of retail
stores and was in a bankruptcy reorganization proceeding at that time. Mr.
Silverberg was the Executive Vice President and a director of Liquor Barn, Inc.,
until December, 1993. The business was liquidated after Mr. Silverberg's
departure in 1993. Mr. Silverberg is an attorney and has been a member of the
California bar since 1959.
MARY BETH VITALE has been a director of the Company since January 10, 1998. From
1994 to October, 1997, she was an executive of AT&T Corporation (Vice President
of In-State Services from 1994 to 1996; Vice President and Corporate Officer,
Local Service Organization, Western Region, from 1994 to 1996; and President -
Western States from January to October, 1997) in Denver, Colorado. Prior to
joining AT&T, Ms. Vitale was Vice President of Marketing for US West
Communications, Inc. (1994), Region Executive Director for US West Cellular
(1991 to 1993), and Region General Manager for US West Cellular (1989 to 1991).
She holds a Bachelor of Arts degree from Hillsdale College, a Master of Science
degree from the University of Colorado, and an Advanced Management degree from
the Wharton School of Business.
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. Mr.
Dingess resigned from the Company effective March 31, 1998.
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 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
53
<PAGE>
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 Vice President - Finance and Management
Information Systems since June, 1997. He served as Chief Financial Officer and
Controller of the Company from January, 1995 to June, 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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than ten
percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of the Company's Common Stock. Officers, directors and greater than
ten percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
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 1996 calendar year, all filing requirements applicable to its officers,
directors and greater-than-10% beneficial owners were complied with, except that
Statements of Changes in Beneficial Ownership (Form 4) were filed late for Roy
J. Dimoff, Kevin Loud, Chris Phillips, Richard Dingess, and D. Kirk Roberts and
Initial Statement of Beneficial Ownership (Form 3) were filed late for David L.
Evans and Gerald Van Eeckhout.
ITEM 10. EXECUTIVE COMPENSATION.
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 $100,000 (the
"Named Executive Officers"). The Company's fiscal year ends December 31.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary Bonus ($) Other Restricted Securities LTIP All other
Principal /options Annual Stock Awards Underlying Payouts Compen-
Position Compen- Options / sation
sation SARs (#) ($0) (4)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas H. Hanson 1997 $30,000 600,000
President, CEO
and Chairman(1)
- ------------------------------------------------------------------------------------------------------------------------
Roy J. Dimoff, 1997 $86,150 $25,500
CEO and President (2) (3)
-----------------------------------------------------------------------------------------------
1996 $101,407 $20,250
(4)
-----------------------------------------------------------------------------------------------
1995 $23,322
- ------------------------------------------------------------------------------------------------------------------------
Kevin R. Loud, 1997 $92,300
Vice President -
Operations
-----------------------------------------------------------------------------------------------
1996 $83,967 $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. 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 was subject
to the approval by the stockholders at the Shareholder Meeting. Such
approval was granted on March 12, 1998 at the Shareholder Meeting.
(2) Mr. Dimoff and Mr. Loud joined the Company in July, 1995. Mr. Dimoff
resigned as the President and Chief Executive Officer of the Company as of
October 1, 1997.
(3) In connection with the resignation by Mr. Dimoff effective October 1, 1997,
the Company and Mr. Dimoff entered into a Waiver and Release pursuant to
which, among other matters, (i) the Company agreed to pay Mr. Dimoff
$102,000 (less all federal and state withholdings on wages) in respect of
the severance of his prior employment relationship with the Company and to
reimburse Mr. Dimoff for his attorney's fees (up to a maximum of $2,000)
for the negotiation of the Waiver and Release. One quarter of the
severance amount ($25,500) was payable, and was paid, upon execution of the
Waiver and Release and the remainder is payable in nine equal monthly
installments on the first day of each month commencing on January 1, 1998;
(ii) Mr. Dimoff agreed not to make use of or to divulge to any other
person any confidential information (as defined in the Waiver and Release)
relating to the Company; and (iii) Mr. Dimoff agreed to not compete with
the Company, directly or indirectly, in certain geographic areas specified
in the Waiver and Release until October 1, 1998, except that, at any time
after December 2, 1997, Mr. Dimoff may elect to terminate the agreement
not to compete by giving 30
55
<PAGE>
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. Mr. Dimoff has provided such notice and effective March 6, 1998 no
further severance payments are due him and his agreement not to compete is
terminated.
(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 option holder'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 option holder'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.
56
<PAGE>
The Company currently has an employment agreement with Mr. Loud. The employment
agreement provides for a salary of $84,000 per year and is terminable for cause.
The Company may also terminate the agreement without cause subject to the
obligation to pay Mr. Loud a severance equal to five to eight months' salary
based on length of service. The agreement terminates in December 1999. The
employment agreement does not significantly restrict Mr. Loud's ability to
compete with the Company following any termination.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FYT-End(#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas H. -0- -0- -0-/ -0-/
Hanson 600,000 $891,392(1)
</TABLE>
(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.
57
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the ownership of
Common Stock as of March 13, 1998 by (i) each stockholder of the Company known
by the Company to be the beneficial owner of more than 5% of its outstanding
shares of Common Stock, (ii) each current member and nominee for election to the
Board of Directors of the Company, (iii) each executive officer of the Company
named in the Summary Compensation Table appearing under the caption "Executive
Compensation," below and (iv) all current directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class of Name and Address of Beneficial Notes Number of Percentage
Stock Owner Shares of Shares
Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Directors
- --------------------------------------------------------------------------------
Common Douglas H. Hanson 1,2,3 7,280,840 56.1%
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common D. D. Hock 2 1,500 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common Robert W. Grabowski 2 6,300 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common Lewis H. Silverberg 2 6,500 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common Mary Beth Vitale 2 1,500 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
<CAPTION>
Named Executive Officers Who Are Not
Directors
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Common Richard K. Dingess 2,4 77,500 1.2%
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common David L. Evans 2,5 40,000 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
58
<PAGE>
- --------------------------------------------------------------------------------
Common Kevin R. Loud 1,2,6 466,600 6.5%
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common Michael R. Mara 2,7 137,500 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
Common D. Kirk Roberts 2,8 50,300 *
Shares 1099 Eighteenth Street
30th Floor
Denver, CO 80202
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common All Directors and Named Executive 7,727,155 59.8%
Shares Officers as a Group ( 10 persons)
- --------------------------------------------------------------------------------
<CAPTION>
Over 5% Stockholders and Members of a "group" Who Are Not
Directors or Executive Officers
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Common Christopher K. Phillips 1,2,9 376,500 5.2%
Shares 4580 Star Ridge Drive
Colorado Springs, CO 80916
- --------------------------------------------------------------------------------
Common Jim D. Welch(1)(11) 1,2,10 356,340 5.0%
Shares 1326 Sorrento Road
Colorado Springs, CO 80910
- --------------------------------------------------------------------------------
Common Kennedy Capital Management, 11 375,000 5.3%
Shares Inc.
10829 Olive Blvd.
St. Louis, MO 63141
- --------------------------------------------------------------------------------
</TABLE>
* Less than 1%
(1) As set forth below in Item 12 and footnotes 3,6, 9, and 10, 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. 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 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. As of March 13, 1998, there were 7,125,902
shares of Common Stock outstanding.
(3) Includes 1,908,615 shares beneficially owned directly by Mr. Hanson
59
<PAGE>
4,000,000 shares issuable upon exercise of warrants, 191,385 shares
issuable upon exercise of options,and 1,180,840 shares as to which
Mr. Hanson obtained the rights to vote pursuant to a Shareholders' Voting
Agreements and Irrevocable Proxy described below in Item 12. Does not
include 50,000 shares acquired upon the exercise 50,000 warrants for
$1.90 per share on March 23, 1998.
(4) Richard K. Dingess - Includes 37,500 common shares and options to acquire
40,000 common shares.
(5) David L. Evans - Includes options to acquire 40,000 common shares.
(6) Kevin Loud - Includes 458,500 shares owned directly by Mr. Loud and options
to acquire 8,100 additional common shares. Mr. Hanson entered into a
Shareholders' Voting Agreement and Irrevocable Proxy with Mr. Loud pursuant
to which Mr. Hanson obtained the right to vote all shares currently owned
by him or that may be acquired by him. The proxy terminates upon the
earlier of: (i) three years from the date of execution; or (ii) the date
upon which any shares of Common Stock owned by the grantor of a proxy are
sold, transferred, assigned, or otherwise disposed of (except by a pledge
thereof) by such stockholder to a person other than: (A) a member of such
stockholder's "immediate family," as such term is defined in Rule 16a-1(e)
promulgated pursuant to the 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.".
(7) Michael R. Mara - Includes 75,000 shares owned directly by Mr. Mara and
options to acquire 62,500 additional shares.
(8) D. Kirk Roberts - Includes 300 common shares owned by Mr. Roberts' son and
options granted to Mr. Roberts to acquire 50,000 common shares.
(9) Christopher K. Phillips - Includes 373,000 common shares and options to
acquire 1,500 common shares. Mr. Phillips resigned as a director of the
Company effective November 10, 1997. Mr. Hanson entered into a
Shareholders' Voting Agreement and Irrevocable Proxy with Mr. Phillips
pursuant to which Mr. Hanson obtained the right to vote all shares
currently owned by him or that may be acquired by him. The proxy terminates
upon the earlier of: (i) three years from the date of execution; or (ii)
the date upon which any shares of Common Stock owned by the grantor of a
proxy are sold, transferred, assigned, or otherwise disposed of (except by
a pledge thereof) by such stockholder to a person other than: (A) a member
of such stockholder's "immediate family," as such term is defined in Rule
16a-1(e) promulgated pursuant to the 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."
(10) Jim D. Welch - All 356,340 shares are owned directly by Mr. Welch. Mr.
Hanson entered into a Shareholders' Voting Agreement and Irrevocable Proxy
with Mr. Welch pursuant to which Mr. Hanson obtained the right to vote all
shares currently owned by him or that may be acquired by him. The proxy
60
<PAGE>
terminates upon the earlier of: (i) three years from the date of execution;
or (ii) the date upon which any shares of Common Stock owned by the grantor
of a proxy are sold, transferred, assigned, or otherwise disposed of
(except by a pledge thereof) by such stockholder to a person other than:
(A) a member of such stockholder's "immediate family," as such term is
defined in Rule 16a-1(e) promulgated pursuant to the 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."
(11) Kennedy Capital Management, Inc. beneficially owns 375,000 shares as
reported to the Securities and Exchange Commission on Form SC 13G on
February 10, 1998.
ITEM 12. 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. 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.
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 hereof 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 was submitted for such approval.
The 1997 Plan was approved by a vote of shareholders on March 12, 1998 at the
Shareholder Meeting. On March 12, 1998, the Board of Directors accelerated
the vesting schedule of The Options to make them exercisable as of that
date.
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.
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
61
<PAGE>
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.
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, at the time President and CEO of Rocky
Mountain Internet, Inc. (RMI), held a 51% ownership share of The Information
Exchange and Nancy Phillips, Vice President of Operations of RMI at the time
held a 31% share of The Information Exchange. RMI issued 52,723 shares of
common stock in exchange for 100% ownership 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 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 were relatives of the
Company's major shareholders at the time 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 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. Mr. Dimoff has provided such notice and effective March
6, 1998 no further severance payments are due him and his agreement not to
compete is terminated
In February 1997, the Company entered into a negotiated agreement with Jim D.
Welch, an officer and a shareholder of the Company, wherein the Company agreed
to purchase 90,000 shares of the Company's common stock from him for $120,000.
As of March 13, 1998, the Company has purchased 72,660 shares in the amount of
$96,000. The stock will be purchased over an eighteen month period. As part of
the agreement, Mr. Welch separated from employment with the Company.
62
<PAGE>
Transactions with Promoters
Neidiger, Tucker, Bruner, Inc. (NTB) was the principal underwriter of the
initial public offering (IPO). The Company sold to NTB at the closing of the
IPO, for $100, warrants to purchase 136,500 Units (comprised of one share of
common stock and one warrant). Such Units are the same as the Units offered in
the IPO except that they (a) have an exercise price of $4.20 per Unit (120% of
the Unit offering price), subject to certain anti-dilution provisions and
$6.5625 per underlying Warrant (150% of the public Warrant exercise price),
subject to certain anti-dilution provisions; and (b) will be exercisable for a
48-month period commencing one year from September 5, 1996 (the date of the
Prospectus). 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.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Number Description of Exhibits
3.1 Certificate of Incorporation (1)
3.2 Bylaws of Rocky Mountain Internet, Inc. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of Rocky
Mountain Internet, Inc.
4.1 Form of Warrant Agreement dated September 5,1996 between Rocky
Mountain Internet, Inc. and American Securities Transfer, Inc.
(1)
4.2 Form of Subordinated Convertible Promissory Note (1)
4.3 Form of Lock-Up Agreement for Shareholders (1)
4.4 Form of Lock-Up Agreement for Preferred Stockholders (1)
4.5 Form of Lock-Up Agreement for Debenture Holders (1)
4.6 Form of Stock Certificate (1)
4.7 Form of Warrant Certificate (1)
4.8 Warrant Agreement between Rocky Mountain Internet, Inc. and
Douglas H. Hanson dated October 1, 1997 (8)
4.9 1996 Employees' Stock Option Plan(6)
4.10 1996 Non-Employee Directors' Stock Option Plan (6)
4.11 Rocky Mountain Internet Inc. 1997 Non-Qualified Stock Option Plan
(7)
63
<PAGE>
4.12 1997 Stock Option Plan (9)
4.12.1 First Amendment to Non-Qualified Stock Option Agreement pursuant
to the Rocky Mountain Internet, Inc. 1997 Stock Option Plan
4.12.2 First Amendment to Incentive Stock Option Agreement pursuant to
the Rocky Mountain Internet, Inc. 1997 Stock Option Plan
4.13 Rocky Mountain Internet, Inc. 1998 Employees' Stock Option Plan
(10)
4.14 Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock
Option Plan (11)
10.1 Agreement of Lease between Denver-Stellar Associates Limited
Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant
(2)
10.2 Asset Purchase Agreement - Acquisition of CompuNerd, Inc. (2)
10.3 Confirmation of $2.0 million lease line of credit (2)
10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing
the provision of professional information system development
services for the design and development of the MCI internal
Intranet project referred to as Electronic Advice. (2)
10.5 Sublease Agreement-February 26, 1997-1800 Glenarm,
Denver, Co. (4)
10.6 Acquisition of The Information Exchange (4)
10.7 Asset purchase of On-Line Network Enterprises (4)
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain
Internet, Inc. and Zero Error Networks, Inc. (5)
10.11 Private Placement Memorandum (5)
16.1 Letter re change in certifying accountant (3)
23.1 Consent of McGladrey & Pullen, LLP (4)
23.2 Consent of Baird Kurtz & Dobson (4)
27.1 Financial Data Schedule
(1) Incorporated by reference from the Company's registration
statement on Form SB-2 filed with the Commission on August 30,
1996, registration number 333-05040C.
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-QSB filing dated November 14, 1996.
(3) Incorporated by reference to the Company's Current Report on Form
8-K filing dated January 28, 1997
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB dated March 31, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB dated June 30, 1997.
(6) Incorporated by reference to the Company's documents filed with
Initial Public Offering.
(7) Incorporate by reference to the Company's Form S-8 Registration
Statement filed on September 26, 1997.
(8) Incorporated by reference to the Company's Form 8-K filing dated
October 6, 1997.
(9) Incorporated by reference to the Definitive Proxy Statement
(Appendix A) filed on Schedule 14A on February 13, 1998.
(10) Incorporated by reference to the Definitive Proxy Statement
(Appendix B) filed on Schedule 14A on February 13, 1998.
(11) Incorporated by reference to the Definitive Proxy Statement
(Appendix C) filed on Schedule 14A on February 13, 1998.
64
<PAGE>
(b) Reports on 8-K. State whether any reports on Form 8-K were filed during
the last quarter of the period covered by this report, listing the items
reported, any financial statements filed and the dates of such reports.
ITEM 5 - OTHER EVENTS, filed on October 1, 1997. The Company signed a non-
binding letter of intent with a third party investor on September 17,
1997 under the terms of which the Company would sell to the investor
newly-issued common shares of the Company representing 13 percent of
the outstanding common shares of the Company (as such percentage is
determined on a fully diluted basis after the issuance of shares to
the investor and giving effect to the dilution resulting from the
exercise or conversion of any warrants, options, convertible preferred
shares or other similar interests in the Company outstanding on the
date hereof) for a cash purchase price of approximately $2,450,000.
ITEM 1 - CHANGES IN CONTROL OF REGISTRANT, filed on October 6, 1997. 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. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS as
related to the change in control.
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<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Rocky Mountain Internet, Inc.
Registrant
March 30, 1998
By: /S/ DAVID L. EVANS
----------------------------
David L. Evans
Executive Vice President and
Chief Financial Officer
By: /S/ DOUGLAS H. HANSON
----------------------------
Douglas H. Hanson
Chairman of the Board,
Chief Executive Officer
and President
By: /S/ D. D. HOCK
----------------------------
D. D. Hock
Board of Directors
By: /S/ ROBERT W. GRABOWSKI
----------------------------
Robert W. Grabowski
Board of Directors
By: /S/ LEWIS H. SILVERBERG
----------------------------
Lewis H. Silverberg
Board of Directors
By: /S/ MARY BETH VITALE
----------------------------
Mary Beth Vitale
Board of Directors
66
<PAGE>
3.4 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF
ROCKY MOUNTAIN INTERNET, INC.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ROCKY MOUNTAIN INTERNET, INC.
Rocky Mountain Internet, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to Article 4 of the
Corporation's Certificate of Incorporation of said Corporation, declaring said
amendment to be advisable and recommending to the shareholders an amendment to
be submit to the shareholders at the next annual meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, That, subject to the approval of the Stockholders of the
Corporation at the next Annual Meeting of the Stockholders, the
Certificate of Incorporation of the Corporation shall be amended by
deleting Section (a) of Article 4 and replacing it with the following:
AUTHORIZED SHARES. The aggregate number of shares which
the corporation has authority to issue is 25,790,000. The
authorized shares consist of 25,000,000 shares of common stock
with a par value of $0.001 per share, such class being
designated "common stock," and 790,000 shares of preferred stock
with a par value of $0.001 per share, such class being
designated "preferred stock."
SECOND: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to Article 4 of the
Corporation's Certificate of Incorporation of said Corporation, declaring said
amendment to be advisable and recommending to the shareholders an amendment to
be submit to the shareholders at the next annul meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, That, subject to the approval of the stockholders of the
Corporation at the next Annual Meeting of Stockholders, the Certificate of
Incorporation of the Corporation shall be amended by deleting the last
sentence of Section (b) of Article 4 and replacing it with the following:
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
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<PAGE>
entitled to vote on the matter shall be the act of the
stockholders.
THIRD: That thereafter, pursuant to resolution of its Board of Directors,
an annual meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section and 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHREOF, said Corporation has caused this Certificate to be
signed by David L. Evans, its authorized officer, this 20th day of March, 1998.
Rocky Mountain Internet, Inc.,
A Delaware Corporation
By: /s/ David L. Evans
--------------------
David L. Evans, Corporate Secretary
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EXHIBIT 4.12.1 FIRST AMENDMENT TO NON-QUALIFIED STOCK OPTION AGREEMENT
PURSUANT TO THE ROCKY MOUNTAIN INTERNET, INC. 1997 STOCK
OPTION PLAN
FIRST AMENDMENT
TO
NON-QUALIFIED STOCK OPTION AGREEMENT
PURSUANT TO THE
ROCKY MOUNTAIN INTERNET, INC.
1997 STOCK OPTION PLAN
THIS FIRST AMENDMENT, effective as of the 1st day of October, 1997, between
Rocky Mountain Internet, Inc. (the "Company") and Douglas H. Hanson (the
"Optionee").
RECITALS:
WHEREAS, the Company and Optionee entered into the Non-Qualified Stock Option
Agreement pursuant to Rocky Mountain Internet, Inc. 1997 Stock Option Plan
dated the 1st day of October, 1997;
WHEREAS, the Company and Optionee entered into an Incentive Stock Option
Agreement pursuant to Rocky Mountain Internet, Inc. 1997 Option Plan dated the
1st day of October, 1997;
WHEREAS, the Company made an error in calculating the Incentive Stock Options
at 110% of the Fair Market Value of the Stock as $2.25 rather than the correct
value of $2.6125 on the day of granting of the Options;
WHEREAS, the prior Board of Directors planned to maximize the Incentive Stock
Options granted to the Optionee and based on the corrected Fair Market Value of
the Incentive Stock Options, the number of shares granted pursuant to the
Incentive Stock Option Agreement is 191,385 (not 222,220 shares), thereby
increasing the Non-Qualified Stock Options to 408,615 (not 377,780); and
WHEREAS, Paragraph 12 of the Agreement provides that the Board may amend the
Agreement for the purpose of promoting the objectives of the Plan and the
current Board of Directors now desires to amend the Non-Qualified Stock Option
Agreement as of the 1st day of October, 1997; and
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements hereinafter set forth, the parties hereby mutually covenant and
agree as follows:
1. Section 1 of such Agreement is hereby replaced in its entirety as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein
and the Plan, the Company hereby grants to the Optionee for the
period commencing on the date of this Agreement and ending on the
date ten (10) years from the date of this Agreement (the "Option
Period") non-qualified stock options (the "Option") to purchase
from the Company, at a price of $1.00 per share, up to but not
exceeding in the aggregate Four Hundred Eight Thousand Six Hundred
Fifteen (408,615) shares of the Company's common stock, $.01 par
value ("Stock"), such number being subject to adjustment as
provided in the Plan.
69
<PAGE>
2. The parties further agree that the provisions hereof are incorporated
in and made a part of the Agreement and, to the extent that these provisions
conflict with the provisions of the Agreement, the provisions hereof shall
control. The parties further agree that, except as otherwise expressly
provided herein, the provisions of the Agreement continue in full force and
effect. Any terms not expressly defined herein shall have the meaning as set
forth in the Plan and Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Optionee has hereunto set
the Optionee's hand, all effective as of the day and year first above
written.
Rocky Mountain Internet, Inc.
By: /s/ David L. Evans
-------------------
David L. Evans
Corporate Secretary
The Optionee
/s/ Douglas H. Hanson
---------------------
Douglas H. Hanson
70
<PAGE>
EXHIBIT 4.12.2 FIRST AMENDMENT TO INCENTIVE STOCK OPTION AGREEMENT PURSUANT TO
THE ROCKY MOUNTAIN INTERNET, INC. 1997 STOCK OPTION PLAN
FIRST AMENDMENT
TO
INCENTIVE STOCK OPTION AGREEMENT
PURSUANT TO THE
ROCKY MOUNTAIN INTERNET, INC.
1997 STOCK OPTION PLAN
THIS FIRST AMENDMENT, effective as of the 1st day of October, 1997, between
Rocky Mountain Internet, Inc. (the "Company") and Douglas H. Hanson (the
"Optionee").
RECITALS:
WHEREAS, the Company and Optionee entered into the Incentive Stock Option
Agreement pursuant to Rocky Mountain Internet, Inc. 1997 Option Plan dated the
1st day of October, 1997;
WHEREAS, the Company made an error in calculating 110% of the Fair Market Value
of the Stock as $2.25 rather than the correct value of $2.6125 on the day of
granting of the Options;
WHEREAS, the prior Board of Directors planned to maximize the Incentive Stock
Options granted to the Optionee and based on the corrected Fair Market Value of
the Options, the number of shares granted pursuant to the Incentive Stock
Option Agreement is 191,385 (not 222,220 shares); and
WHEREAS, Paragraph 12 of the Agreement provides that the Board may amend the
Agreement for the purpose of promoting the objectives of the Plan and the
current Board of Directors now desires to amend the Incentive Stock Option
Agreement as of the 1st day of October, 1997; and
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements hereinafter set forth, the parties hereby mutually covenant and
agree as follows:
2. Section 1 of such Agreement is hereby replaced in its entirety as follows:
2. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and the Plan, the Company hereby grants to the Optionee for the
period commencing on the date of this Agreement and ending on the
date five (5) years from the date of this Agreement (the "Option
Period") incentive stock options (the "Option") to purchase from the
Company, at a price of $2.6125 per share, up to but not exceeding in
the aggregate One Hundred Ninety-one Thousand Three Hundred
Eighty-five (191,385) shares of the Company's common stock, $.01 par
value ("Stock"), such number being subject to adjustment as provided
in the Plan.
3. Schedule A to the Incentive Stock Option Agreement shall be amended in
its entirety as set forth on Schedule A attached hereto and
incorporated herein by this reference.
71
<PAGE>
3. The parties further agree that the provisions hereof are incorporated
in and made a part of the Agreement and, to the extent that these
provisions conflict with the provisions of the Agreement, the provisions
hereof shall control. The parties further agree that, except as otherwise
expressly provided herein, the provisions of the Agreement continue in
full force and effect. Any terms not expressly defined herein shall have
the meaning as set forth in the Plan and Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Optionee has hereunto set
the Optionee's hand, all effective as of the day and year first above
written.
Rocky Mountain Internet, Inc.
By: /s/ David L. Evans
-------------------
David L. Evans
Corporate Secretary
The Optionee
/s/ Douglas H. Hanson
----------------------
Douglas H. Hanson
72
<PAGE>
SCHEDULE A
TO THE
INCENTIVE STOCK OPTION AGREEMENT
<TABLE>
<CAPTION>
SHARES OF STOCK FIRST EXERCISABLE
--------------- -----------------
<S> <C>
38,277 First anniversary date
of this Agreement
38,277 Second anniversary date
of this Agreement
38,277 Third anniversary date
of this Agreement
38,277 Fourth anniversary date
of this Agreement
38,277 Fifth anniversary date
of this Agreement
</TABLE>
73
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 FOR ROCKY MOUNTAIN
INTERNET, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,053,189
<SECURITIES> 0
<RECEIVABLES> 829,194
<ALLOWANCES> 176,000
<INVENTORY> 46,945
<CURRENT-ASSETS> 1,885,119
<PP&E> 3,767,866
<DEPRECIATION> 1,118,217
<TOTAL-ASSETS> 5,082,119
<CURRENT-LIABILITIES> 2,094,122
<BONDS> 0
0
40
<COMMON> 6,737
<OTHER-SE> 2,076,593
<TOTAL-LIABILITY-AND-EQUITY> 5,082,119
<SALES> 387,067
<TOTAL-REVENUES> 6,127,111
<CGS> 300,053
<TOTAL-COSTS> 2,060,315
<OTHER-EXPENSES> 7,817,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 402,086
<INCOME-PRETAX> (4,152,853)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,179,728)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
