<PAGE>
As filed with the Securities and Exchange Commission on November 6, 1998.
Registration No. 333-52731
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
Pre-Effective Amendment No. 3
to
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ROCKY MOUNTAIN INTERNET, INC.
(Name of small business issuer in its charter)
Delaware 7375 84-1322326
- ---------------------------- ---------------------------- ------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1099 18th Street, Suite 3000, Denver, Colorado 80202 (303) 672-0700
-------------------------------------------------------------------
(Address and telephone number of principal executive offices)
The Prentice Hall Corporation System, Inc., 1013 Centre Road,
Wilmington, Delaware 19805
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(Name and address of agent for service)
(800) 927-9800
---------------------------------------------------
(Telephone Number of agent for service)
------------------------------------------------
Copies to:
Peter J. Kushar Jeffrey Bartholomew
Rocky Mountain Internet, Inc. Hall & Evans, L.L.C.
1099 Eighteenth Street 1200 Seventeenth Street
30th Floor Suite 1700
Denver, CO 80202 Denver, CO 80202
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. X
---
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.___
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ____
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ____
The Exhibit Index begins on page ___ of the sequentially numbered copy. ___
total pages.
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities to be Proposed Maximum Proposed Maximum Amount of
Registered Amount to be Offering Price Aggregate Offering Registration
Registered(1) per Unit(2) Price(2) Fee(1)
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
<S> <C> <C> <C> <C>
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (3) 4,000,000 $9.9375 $19,875,000.00 $5,863.13
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (4) 1,365,000 9.9375 13,564,687.50 4,001.58
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (5) 111,500 9.9375 1,108,031.25 326.87
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock Purchase Warrants (6) 111,500 -- -- -0-
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (7) 111,500 9.9375 1,108,031.25 326.87
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (8) 621,000 9.9375 6,171,187.50 1,820.50
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (9) 310,500 9.9375 3,085,593.75 910.25
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (10) 62,100 9.9375 617,118.75 182.05
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (11) 31,050 9.9375 308,559.38 91.03
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (12) 2,099,702 9.9375 20,865,788.63 6,155.41
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock Purchase Warrants (13) 3,950,000 -- -- -0-
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (14) 7,900,000 9.9375 39,253,125.00 11,579.67
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (15) 189,548 14.219 2,695,183.01 795.08
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (16) 25,000 9.00 225,000.00 62.55
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (17) 468,333 9.00 4,215,006.00 1,171.77
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value (3),(18) 4,000,000 9.00 18,000,000.00 5,004.00
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock Purchase Warrants(19) 535,000 -- -- --
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Common Stock $0.001 par value(20) 535,000 9.00 4,815,000 1,338.57
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
Total Registration Fee: (21) 39,629.32
- ------------------------------------------ ----------------- ---------------------- ------------------------- ------------------
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as
amended, this Registration Statement covers such additional indeterminate number
of shares of Common Stock as may be issued by reason of adjustments in the
number of shares of Common Stock pursuant to anti-dilution provisions contained
in various Common Stock Purchase Warrants. Because such additional shares of
Common Stock will, if issued, be issued for no additional consideration, no
registration fee is required.
(2) Estimated in accordance with Rule 457(c) solely for the purpose
of calculating the registration fee on the basis of the average of the high and
low prices reported on the Nasdaq on May 13, 1998 or, with respect to the shares
of Common Stock described in note 15 below, on July 14, 1998 and, with respect
to the shares of Common Stock described in Notes 16, 17 and 18, below, on
November 2, 1998.
(3) Up to 2,000,000 shares may be offered and issued by the
registrant from time to time in connection with one or more mergers with other
businesses by the registrant or acquisitions by the registrant of other
businesses or assets. Also includes up to an aggregate of 2,000,000 shares that,
with the consent of the registrant, may be resold by persons who receive shares
covered by this Registration Statement in connection with mergers or
acquisitions and who may wish to sell such shares under circumstances requiring
or making desirable the use of the Prospectus herein contained. Resales of such
shares by such persons have not been included in the calculation of the
Registration Fee.
(4) To be offered and sold by certain of the Selling Securityholders.
Shares of Common Stock underlying the Common Stock Purchase Warrants that were
the subject of a registration statement filed by the registrant, Registration
Number 333-05040C, which was declared effective on September 5, 1996.
(5) To be offered and sold by certain of the Selling Securityholders.
(6) To be offered and sold by certain of the Selling Securityholders.
Pursuant to Rule 457(g), no separate registration fee for such securities is
required because such securities are being registered for distribution in the
same registration as the securities being offered pursuant thereto.
(7) To be offered and sold by certain of the Selling Securityholders.
Shares of Common Stock underlying the Common Stock Purchase Warrants identified
in footnote 6, above. These securities were previously the subject of a
registration statement filed by the registrant, Registration Number 333-05040C,
which was declared effective on September 5, 1996. Pursuant to Rule 429, such
securities are being carried forward and included in this registration
statement, and the registration fee associated with such securities was
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previously paid.
(8) To be offered and sold by certain of the Selling Securityholders.
(9) To be offered and sold by certain of the Selling Securityholders.
(10) To be offered and sold by certain of the Selling
Securityholders.
(11) To be offered and sold by certain of the Selling
Securityholders.
(12) To be offered and sold by certain of the Selling
Securityholders.
(13) To be offered and sold by one of the Selling Securityholders.
Pursuant to Rule 457(g), no separate registration fee for such securities is
required because such securities are being registered for distribution in the
same registration as the securities being offered pursuant thereto.
(14) Includes up to 3,950,000 shares to be offered and sold by one of
the Selling Securityholders. Also includes up to an aggregate of 3,950,000
shares that may be resold by donees, pledgees, and other transferees who receive
shares covered by this Registration Statement as gifts, as security for loans,
and similar transactions and who may wish to sell such shares under
circumstances requiring or making desirable the use of the Prospectus herein
contained. Resales of such shares by such persons have not been included in the
calculation of the Registration Fee.
(15) To be offered and sold by certain of the Selling
Securityholders.
(16) To be offered and sold by certain of the Selling
Securityholders.
(17) To be offered and sold by certain of the Selling
Securityholders.
(18) Up to 2,000,000 shares may be offered and issued by the
registrant from time to time in connection with one or more mergers with other
businesses by the registrant or acquisitions by the registrant of other
businesses or assets. Also includes up to an aggregate of 2,000,000 shares that,
with the consent of the registrant, may be resold by persons who receive shares
covered by this Registration Statement in connection with mergers or
acquisitions and who may wish to sell such shares under circumstances requiring
or making desirable the use of the Prospectus herein contained. Resales of such
shares by such persons have not been included in the calculation of the
Registration Fee.
(19) Anticipated to be offered and issued by the registrant in
connection with an anticipated merger with another business by the
registrant. Also includes up to an aggregate of 535,000 Common Stock Purchase
Warrants that, with the consent of the registrant, may be resold by persons
who receive such warrants covered by this Registration Statement in
connection with such merger and who may wish to sell such warrants under
circumstances requiring or making desirable the use of the Prospectus herein
contained. Pursuant to Rule 457(g), no separate registration fee for such
securities is required because such securities are being registered for
distribution in the same registration as the securities being offered
pursuant thereto. Resales of such shares by such persons have not been
included in the calculation of the Registration Fee.
(20) Shares of Common Stock underlying the Common Stock Purchase
Warrants identified in footnote 19, above.
(21) An aggregate of $31,493.18 of the filing fee was paid at the
time of the filing of this Registration Statement on May 15, 1998. An additional
$795.08 of the registration fee was paid with the filing of Pre-Effective
Amendment No. 2 to this Registration Statement on July 24, 1998. The remaining
$7,341.06 of the registration fee is included herewith.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER __, 1998.
ROCKY MOUNTAIN INTERNET, INC.
4,596,500 COMMON STOCK PURCHASE WARRANTS
13,880,233 SHARES OF COMMON STOCK
This Prospectus relates to up to 4,000,000 shares (the "Acquisition
Shares") of common stock, $0.001 par value (the "Common Stock"), that may be
offered and issued by Rocky Mountain Internet, Inc., a Delaware corporation (the
"Company" or "RMI"), from time to time in connection with the merger with or
acquisition by the Company of other businesses or assets. With the consent of
the Company, this Prospectus may also be used by persons or entities who have
received or will receive from the Company shares of Common Stock, including the
Acquisition Shares, in connection with such mergers or acquisitions and who may
wish to sell such shares of Common Stock under circumstances requiring or making
desirable the use of this Prospectus and by certain transferees of such persons.
The Company's consent to such use may be conditioned upon such persons or
entities agreeing not to offer more than a specified number of shares following
amendments to this Prospectus, which the Company may agree to use its best
efforts to prepare and file at certain intervals. The Company may require that
any such offering be effected in an organized manner through securities dealers.
The Company anticipates that the terms of mergers, acquisitions, or business
combinations, if any, involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to market prices current either at the time that a merger or
acquisition are agreed upon or at or about the time of delivery of shares. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
person receiving any such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"). There
can be no assurance that the Company will, in fact, consummate a business
combination or asset acquisition on terms that are favorable to the Company.
This Prospectus also relates to 535,000 Common Stock Purchase
Warrants (the "DataXchange Warrants") that may be offered and issued by the
Company in connection with the proposed acquisition by the Company of all of
the issued and outstanding common stock of DataXchange Network, Inc.
("DataXchange"), a Florida-based national Internet backbone provider. See
"RECENT DEVELOPMENTS -- Acquisitions and Proposed Acquisitions." This
Prospectus also relates to the offer and sale of up to 535,000 shares of
Common Stock that can be issued upon the exercise of the DataXchange
Warrants. This Prospectus may also be used by persons or entities who are
anticipated to receive the DataXchange Warrants and the shares of Common
Stock underlying the DataXchange Warrants and who may wish to sell such
warrants and/or shares of Common Stock under circumstances requiring or
making desirable the use of this Prospectus and by certain transferees of
such persons.
This Prospectus may also be used by donees, pledgees, and other
transferees of up to 3,950,000 shares of Common Stock who receive such shares as
gifts, as security for loans, and similar transactions and who may wish to sell
such shares under circumstances requiring or making desirable the use of this
Prospectus and
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by certain transferees of such persons or entities.
This Prospectus also relates to 9,880,233 shares of Common Stock (the
"Selling Securityholder Shares"), of which approximately 3,135,538 shares are
currently issued and outstanding and of which approximately 6,744,695 shares may
be issued upon the exercise of currently outstanding warrants to purchase shares
of Common Stock. This Prospectus also relates to such additional shares of
Common Stock that may be issued pursuant to the anti-dilution provisions of such
outstanding warrants. See "DESCRIPTION OF CAPITAL STOCK." The Selling
Securityholder Shares will be offered and sold from time to time by certain
persons identified below under the caption "SELLING SECURITYHOLDERS" (the
"Selling Securityholders"), and the Company will receive none of the proceeds of
any such sales.
This Prospectus also relates to 4,596,500 outstanding warrants to
purchase shares of Common Stock (the "Warrants"), of which 4,061,500 Warrants
may be offered and sold from time to time by certain of the Selling
Securityholders, and the Company will receive none of the proceeds of any
such sales. However, the Company will receive proceeds from the exercise of
Warrants if any Warrants are exercised. The remaining 535,000 Warrants are
anticipated to be offered and sold by the Company in connection with the
proposed acquisition of DataXchange. The shares of Common Stock that may be
issued upon the exercise of 4,061,500 of the Warrants are included in the
9,880,233 shares identified above as being offered by the Selling
Securityholders. This Prospectus also relates to the sale and issuance by the
Company of shares of Common Stock to holders of the Warrants (other than the
Selling Securityholders) upon the exercise of those Warrants.
The Company will pay substantially all of the expenses with respect
to the offering and the sale of the Acquisition Shares, the Selling
Securityholder Shares, and the Warrants (sometimes referred to herein
collectively as the "Securities") to the public, including the costs associated
with registering the Securities under the Securities Act and preparing and
printing this Prospectus. Normal underwriting commissions and broker fees,
however, as well as any applicable transfer taxes, are payable individually by
the Selling Securityholders. See "USE OF PROCEEDS," "RECENT DEVELOPMENTS--CHANGE
IN CONTROL," "SELLING SECURITYHOLDERS," and "DESCRIPTION OF CAPITAL STOCK."
On October 15, 1998 the closing sale price of the Common Stock on
the NASDAQ SmallCap(TM)Market ("Nasdaq") was $7.50 per share.
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER __, 1998.
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So long as the Registration Statement of which this Prospectus forms
a part is effective and the disclosure set forth herein is current, the Selling
Securityholders may sell the Selling Securityholder Shares and the Warrants
publicly and the Company may issue and sell shares of Common Stock upon exercise
of the Warrants. The distribution of the Selling Securityholder Shares and the
Warrants by the Selling Securityholders may be effected in one or more
transactions that may take place on Nasdaq, including ordinary broker's
transactions, privately negotiated transactions, pursuant to Rule 144 under the
Securities Act, or through sales to one or more dealers for resale of such
securities as principals at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specially negotiated brokerage fees or commissions may be paid
by the Selling Securityholders in connection with sales of such Selling
Securityholder Shares.
The Selling Securityholders and intermediaries through whom the
Securities are sold may be deemed to be "underwriters" within the meaning of the
Securities Act with respect to the Securities offered, and any profits realized
or commission received may be deemed underwriting compensation. The Company has
agreed to indemnify certain of the Selling Securityholders against certain
liabilities, including liabilities under the Securities Act.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "PROSPECTUS
SUMMARY", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS" IN ADDITION TO CERTAIN STATEMENTS
CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS
PROSPECTIVE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST
SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER
THE HEADING "RISK FACTORS," BEGINNING ON PAGE 17 OF THIS PROSPECTUS, AND
PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information (the
"1934 Act Filings") with the Securities and Exchange Commission (the "SEC" or
the "Commission"). The Company has filed with the Commission a Registration
Statement on Form S-1 of which this Prospectus forms a part (together with any
amendments thereto, the "Registration Statement") under the Securities Act with
respect to the Securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information,
exhibits, and undertakings contained in the Registration Statement. Statements
contained in this Prospectus concerning the provisions of documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission. For further information regarding the Company and the Securities
offered hereby, reference is hereby made to the Registration Statement and the
exhibits and schedules thereto. Copies of the Registration Statement, including
the exhibits thereto and the 1934 Act Filings, can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at
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500 West Madison Street, Room 1400, Chicago, Illinois 60606, and at 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a web site on the World Wide Web that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission, including the Company, and the address is
http://www.sec.gov.
PROSPECTUS SUMMARY
THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS QUALIFY THE FOLLOWING
SUMMARY IN ITS ENTIRETY, AND PROSPECTIVE PURCHASERS OF ANY OF THE SECURITIES
OFFERED HEREBY SHOULD READ SUCH MORE DETAILED INFORMATION IN CONJUNCTION WITH
THE FOLLOWING SUMMARY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTION OF THIS PROSPECTUS UNDER THE CAPTION "RISK FACTORS." THE COMPANY
OBTAINED CERTAIN INDUSTRY DATA USED IN THIS PROSPECTUS FROM INDUSTRY AND
GOVERNMENT SOURCES, AND THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH DATA.
CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY ATTACHED HERETO. THIS
PROSPECTUS MAKES REFERENCE TO TRADEMARKS OF OTHER COMPANIES, WHICH MARKS ARE THE
PROPERTY OF SUCH COMPANIES.
The Company
The Company is a full service communications solutions provider of
switched and Internet Protocol ("IP")-based communications products and services
for small- and medium-sized business enterprises, as well as dial-up residential
customers. The Company operates 9 Internet points of presence ("POPs") in
Colorado and, through agreements with third-party providers, the Company can
provide Internet access in 90 of the 100 largest metropolitan statistical areas
in the United States. The Company monitors and controls its network through its
Network Operations Center ("NOC") located in Denver, Colorado. The Company
intends to provide to its customers on a nationwide basis comprehensive
communications services, including dedicated Internet access, dial-up Internet
access, IP telephony ("IP Telephony"), point-to-point private line, frame relay
and local and long distance telephone service. In addition, the Company offers
its customers value-added web services, including web site hosting, web site
production and marketing, electronic commerce ("e-commerce") and web training.
The Company had combined pro forma revenues for the year ended December 31, 1997
of $9,052,000 and provided dedicated access and web services to over 1,200
business customers and over 15,300 dial-up customers as of September 30, 1998.
INDUSTRY BACKGROUND. The Company enables its customers to take
advantage of emerging Internet technology. The emergence of the Internet, IP
Telephony and the widespread adoption of IP as a data transmission standard in
the 1990's are rapidly accelerating the standardization of networking protocols.
This standardization has revolutionized business-to-business transactions and
e-commerce for consumer shopping. Moreover, business enterprise networks are
rapidly adopting data communications network plans incorporating IP-based
technologies and migration paths to utilize the Internet as much as possible.
Internet access and IP-based services represent two of the fastest
growing segments of the over $200 billion telecommunications services
marketplace according to International Data Corporation ("IDC"). IDC
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estimates that the number of Internet users in the United States who access the
World Wide Web reached approximately 29.2 million in 1997 and is forecasted to
grow to approximately 72.1 million by the year 2000. In addition, total Internet
Service Provider ("ISP") revenues in the United States are projected to grow
from $4.6 billion in 1997 to over $18 billion in 2000. In the past, much of the
growth in ISP revenues has been driven by the dial-up or retail sector of the
Internet. However, today businesses represent the largest and fastest growing
segment of the Internet market. IDC predicts that U.S. corporate Internet access
revenues will grow from approximately $1.9 billion in 1996 to over $6.6 billion
in 2000 and that revenues from enhanced Internet services, such as web site
hosting, security, e-commerce, virtual private networks and advanced Internet
applications, will grow from approximately $352 million in 1997 to over $7
billion in 2000.
The rapidly growing need for Internet access and technology has
resulted in a highly fragmented industry with the proliferation of over 4,000
ISPs operating within the United States, according to industry estimates. These
ISPs are primarily made up of a few large national providers focused on high
bandwidth access and a large number of smaller providers with limited resources
focused on serving local or regional markets. The Company believes that the
solutions offered by these companies often fail to address certain elements
required to ensure that customers' mission-critical Internet operations are
reliable, scalable and high-performing and that these companies fail to provide
a broad array of efficient and low-cost communications products and services.
POSITIONING OF THE COMPANY. The Company offers a broad array of
communications products and services tailored to meet customer needs and
provides high quality customer support. The Company delivers its products and
services through two divisions: Communication Services and Web Services. The
Company believes that, based upon its experience, a growing number of businesses
will demand one point-of-contact for communications solutions for the following
reasons: (i) to ensure proper system/network integration; (ii) to obtain a
single point of responsibility for products and services that might have
numerous providers; and (iii) to continue to take advantage of evolving
communications technologies. The Company intends to increase the breadth of its
products and services delivered to its customers by adopting new technology,
acquiring complementary businesses and capitalizing on strategic relationships.
Divisions and Services
<TABLE>
<CAPTION>
Divisions Services Description
- --------- -------- -----------
<S> <C> <C>
COMMUNICATION SERVICES INTERNET ACCESS
Co-Location T-1 or greater Internet
access provided to
customer's server
located at the Company's
POP
Dedicated Access Fractional T-1, T-1 or
greater Internet access
provided to a customer's
office
Dial-Up Service Nationwide Internet
access for consumer and
small business customers
using modems to dial
into the Company's
network
Wireless Access Evolving
technology allowing up
to 750 kbps wireless
Internet access
currently available in
the Denver metro area
</TABLE>
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<TABLE>
<S> <C> <C>
TELEPHONY SERVICES
e-Phone Long distance calling
using IPTelephony
technology
Long Distance Traditional long
distance services
Local (C-Lec) Traditional local
exchange telephone
service on a resale or
facilities-owned basis
throughout Colorado
Dedicated
Line Services Dedicated and frame
relay networks to carry
voice and data for
business customers
WEB SERVICES WEB SITE HOSTING A customer's web site is
"hosted" on the
Company's servers and
connected to the
Internet via a
high-speed connection
WEB SITE PRODUCTION Design, development and
implementation of
customer web sites
WEB SITE MARKETING
Traffic Builder Plus Unique web site
marketing program
whereby customer web
sites are marketed
exclusively to Internet
users
Infohiway Search engine that
contains a large and
rapidly growing database
of reference information
on the World Wide Web
ELECTRONIC COMMERCE
e-SELL Turnkey solution for
setting up an Internet
store
WEB TRAINING Various levels of
Internet training for
customers from basic
access training to HTML
programming
</TABLE>
Business Strategy
The Company's objective is to become a leading national provider of a
broad array of communications services, distinguished by a state-of-the-art
network and high quality customer service and support. Key elements to the
Company's business strategy include the items discussed below. There can be no
assurance, however, that the Company will be able to fully implement its
strategy or to implement its strategy to the extent that it can become
profitable.
PROVIDE A BROAD ARRAY OF COMMUNICATIONS SOLUTIONS TO ITS CUSTOMERS.
The Company has built a portfolio of products, services and skill sets to
develop and deliver comprehensive internetworking communications solutions to
both business and residential customers. These products and services are
organized under two divisions including Communication Services and Web Services.
The
6
<PAGE>
Company plans to continue to add products and services to its portfolio and
believes that a growing number of businesses and consumers will demand that one
company provide all of their communications needs. The Company believes that
this one point-of-contact service delivery model ensures: (i) high-performance,
cost-effective network planning, design and implementation; (ii) maintenance of
a single point of responsibility; and (iii) an ongoing customer relationship as
a technology partner for communications applications.
PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. The Company
believes that highly differentiated customer service and technical support is a
key competitive asset in the communications industry, and the ISP sector in
particular. Because the Internet is an evolving and complex medium, customers
require significant technical support. Consequently, the Company has developed a
comprehensive strategy to attain maximum customer satisfaction. This strategy
consists of the following elements: (i) maintaining a sufficient number of
qualified service and technical support personnel through proactive recruitment,
retention and training programs; (ii) utilizing the Company's extranet to
provide real-time, interactive customer service; (iii) developing an on-line
billing system enabling customer-controlled account customization and analysis;
and (iv) further deploying and maintaining the Company's service delivery
standards and guarantees. The Company believes that, due to its high quality
customer service, it experiences low turnover rates and achieves a significant
percentage of its subscriber growth from customer referrals.
MAXIMIZE NETWORK UTILIZATION. Through its network and agreements with
third-party providers, the Company provides Internet access in 90 of the 100
largest metropolitan statistical areas in the United States. The Company plans
to continue to selectively add POPs where it can add value to its customers. The
Company believes that the ISP industry has historically been divided between
ISPs focused on business customers and ISPs focused on residential dial-up
customers. The Company's business strategy is to maximize network utilization 24
hours a day by targeting both daytime business and evening-intensive consumer
users.
SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. The Company plans
to expand its sales efforts nationally by focusing on targeted areas where there
is a large concentration of businesses and favorable demographics. In markets
where the Company is using third-party provider networks, the Company intends to
initially target dial-up customers through advertising, promotions, public
relations, telemarketing and customer referrals. Once the Company attains
critical mass in these locations, it intends to establish its own POPs and begin
targeting business and residential customers with its broad array of
communications products and services.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. The
Company believes that the Internet industry is undergoing structural changes
with an increasing use of the Internet for mission-critical applications, which
is creating demand for high quality network operations, customer service and
technical support. The Company also believes that there is a market opportunity
to consolidate ISPs, Internet-based service companies and Internet technologies.
Evidence of this strategy includes the Company's recent acquisitions of
Infohiway, Inc. ("Infohiway") and Application Methods Incorporated (together
with its affiliated entity, e-Sell Commerce Systems, Inc., "Application
Methods"). Infohiway is a company that has developed a search engine that gives
the Company on-line advertising opportunities for its customers. Application
Methods' e-commerce solution, e-SELL, enables the Company to provide business
customers with browser-based software to conduct business over the Internet. The
Company believes these acquisitions enhance the Company's position as a full
service provider of communications solutions. The Company will continue to
evaluate opportunities to acquire companies that it believes will enhance its
product and service offerings. In addition, the Company intends to supplement
its organic national growth efforts by acquiring local ISPs in strategic
locations to maximize economies of scale.
7
<PAGE>
There can be no assurance, however, that the Company will be able to
identify, acquire, or profitably manage additional businesses, if any, without
substantial costs, delays, or other operational or financial difficulties. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings.
Recent Developments
In June 1998, the Company announced it had entered into a merger
agreement to acquire Internet Communications Corporation ("ICC"). The closing of
the acquisition was subject to various closing conditions, and the merger
agreement contained certain rights of termination. On October 13, 1998, the
Company announced that it terminated the merger agreement due to, among other
things, ICC's failure to satisfy certain obligations under the merger agreement.
On October 14, 1998, ICC filed a complaint against the Company in Denver
District Court claiming $30 million in damages and alleging, among other things,
that the Company had breached the merger agreement and had made certain
misrepresentations to ICC with respect to the proposed merger transaction. The
Company believes ICC's claims to be without merit and intends to vigorously
defend such action and to assert counterclaims against ICC; however, there can
be no assurance that the Company will prevail in its defense or any
counterclaims. The Company is hopeful that it can resolve the dispute with ICC
without the necessity for a trial; however, there can be no assurance as to the
Company's ability in this regard. In the event that the dispute cannot be
resolved expeditiously, the Company expects that it would incur additional costs
and expenses as a result of the litigation and that the litigation may hamper
the Company's ability to obtain additional financing. As a result of the
terminated merger transaction and the related financing transactions which were
not completed, the Company estimates that it incurred costs, expenses and
related fees of between $3.8 million and $5.2 million, a portion of which are in
dispute. Of this amount, approximately $2.7 million relates to a non-cash item
relating to warrants issued by the Company. The Company does not currently have
the ability to pay all of such costs, fees and expenses. The Company believes
that it will be able to agree on a schedule for the payment of these costs, fees
and expenses that is satisfactory to all parties; however, there can be no
assurance that the Company will be able to reach an agreement with all parties
regarding the payment of such costs, fees and expenses. See "RECENT
DEVELOPMENTS" and "LEGAL PROCEEDINGS."
In September 1998, the Company entered into a Software License and
Consulting Services Agreement (the "Novazen Agreement") with Novazen Inc.
("Novazen") to provide the Company proprietary billing software tailored to its
business. As consideration for the consulting services to be provided by
Novazen, the Company paid $100,000 in cash and issued to Novazen 25,000 shares
of its Common Stock. The 25,000 shares of Common Stock are being offered for
resale pursuant to this Prospectus. After the Company entered into the Novazen
Agreement, Kevin R. Loud, an officer of the Company, purchased 38,000 shares of
Novazen common stock for $1.60 per share.
In September 1998, the Company entered into non-binding letters of
intent to acquire (i) all of the issued and outstanding capital stock of
DataXchange in exchange for up to 535,000 shares of the Company's Common
Stock and, subject to the achievement of certain financial performance
objectives, warrants to purchase up to 535,000 shares of the Company's Common
Stock; (ii) substantially all of the assets of Stonehenge Business Systems, Inc.
("Stonehenge"), an ISP located in Englewood, Colorado for approximately $450,000
payable in the form of shares of the Company's Common Stock and the assumption
of certain liabilities; and (iii) certain assets that comprise the access and
hosting business of Unicom Communications, Inc. ("Unicom"), a Kansas-based ISP
with approximately 3,500 subscribers in exchange for approximately $1,700,000
payable in the form of shares of the Company's Common Stock and the assumption
of certain liabilities. Additionally,
8
<PAGE>
the Company recently entered into a non-binding memorandum of understanding
regarding the possible acquisition of Internet Now, Inc. ("Internet Now"), an
ISP located in Phoenix, Arizona for approximately $1,520,000, of which
$150,000 would be payable in cash and $1,370,000 would be payable in shares
of the Company's Common Stock. Of the cash portion of the purchase price,
$20,000 has been paid to the shareholder of Internet Now. The Company is
currently negotiating definitive agreements for the acquisitions of
DataXchange, Stonehenge, Unicom and Internet Now (collectively, the "Proposed
Acquisitions") and expects to complete these transactions prior to the end of
November, 1998. There can be no assurance, however, that such transactions,
or any of them, will be completed by such date. The Company believes these
current and proposed acquisitions will accelerate its existing growth plans;
however, there can be no assurance that the Company will be able to enter
into definitive agreements, consummate such transactions or integrate these
companies successfully. See "RECENT DEVELOPMENTS - ACQUISITIONS AND PROPOSED
ACQUISITIONS," "RISK FACTORS," "BUSINESS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In August 1998, Douglas H. Hanson loaned $400,000 to the Company for
various working capital needs and in October, 1998 he loaned another $400,000 to
the Company for working capital needs. Such loans have been consolidated and are
evidenced by one promissory note (the "Hanson Loan"). The principal amount of
the promissory note, together with interest at the rate of 11% per annum, is
payable in full 90 days after October 20, 1998. The Company needs to obtain
additional financing to repay the Hanson Loan, to fund its current working
capital needs and to execute its business plan. There can be no assurance that
the Company will be able to obtain such financing or, if so, whether such
financing will be on terms which are acceptable to the Company.
On June 5, 1998, RMI acquired Infohiway, a Colorado-based company
that developed a search engine that RMI believes has unique data searching
features. RMI also acquired Seattle-based Application Methods on July 1, 1998.
Application Methods has developed a proprietary e-commerce software package,
e-SELL.
At the 1998 Annual Meeting of Stockholders held on March 12, 1998
(the "RMI Annual Meeting"), RMI's stockholders approved an amendment to RMI's
Certificate of Incorporation that authorized (i) an increase in the number of
shares of Common Stock that may be issued by RMI from 10,000,000 to 25,000,000
and (ii) a decrease in the number of votes required for stockholder actions from
a majority of the shares of Common Stock outstanding to a majority of the shares
present in person or represented by proxy at a meeting and entitled to vote
thereon. Also at the RMI Annual Meeting, the stockholders of RMI authorized
RMI's board of directors to declare, at any time or from time to time, in its
discretion until March 12, 1999, reverse stock splits of Common Stock, with the
exact size of the stock splits to be determined by the board of directors up to
a maximum ratio of one-for-ten.
RMI is a Delaware corporation incorporated in October 1995. It
acquired the assets of Rocky Mountain Internet, Inc., a Colorado corporation
incorporated in 1994 that began doing business in 1993 as an unincorporated
enterprise. RMI completed an initial public offering (the "IPO") of 1,365,000
units of securities (the "IPO Units") on September 5, 1996. Each IPO Unit
consisted of one share of Common Stock and one IPO Warrant (as defined below) to
purchase a share of Common Stock at a price of $4.375. On September 14, 1997,
RMI completed a private placement of units consisting of two shares of Common
Stock and a warrant to purchase a share of Common Stock. The per unit price was
$4.00 and was allocated $1.90 to each share of Common Stock and $0.20 to the
warrant to purchase a share of Common Stock. The warrants entitle the holder
thereof to purchase a share of Common Stock for $3.00 and expire on June 13,
2000. Effective October 1, 1997, RMI issued and sold to Mr. Douglas H. Hanson
1,225,000 shares of Common Stock for a purchase price of $2,450,000, or $2.00
per share, as more fully described in "CERTAIN TRANSACTIONS -- CHANGE IN
CONTROL." Mr. Hanson also became RMI's President, Chief Executive
9
<PAGE>
Officer and Chairman of the board of directors of the Company. As a result of
these related transactions, Mr. Hanson obtained effective control of RMI and, as
of October 15, 1998, had the authority to vote 52.3% of RMI's Common Stock. The
Common Stock and the IPO Warrants are quoted on Nasdaq under the symbols "RMII"
and "RMIIW," respectively.
RMI's principal executive offices are located at: 1099 18th Street,
Suite 3000, Denver, Colorado 80202, telephone (303) 672-0700. RMI's web site is
www.rmi.net.
The Offering
<TABLE>
<S> <C>
Common Stock offered by:
The Company 4,000,000 shares (1)
Selling Securityholders 9,880,233 shares (2)
Common Stock Purchase Warrants
("Warrants") offered by:
The Company 535,000 Warrants (3)
Selling Securityholders 4,061,500 Warrants (4)
Common Stock Outstanding Prior to this Offering 8,106,252 shares
Common Stock Outstanding After this Offering 18,850,947 shares (5)
Nasdaq Trading Symbols Common Stock: RMII
Common Stock Purchase Warrants: RMIIW
</TABLE>
(1) Such shares may be offered and issued from time to time in
connection with future acquisitions by the Company, including the Proposed
Acquisitions. With the consent of the Company, this Prospectus may also be used
by persons or entities who have received or will receive from the Company Common
Stock covered by this Prospectus in connection with acquisitions of businesses,
properties or securities and who may wish to sell such stock under circumstances
requiring or making desirable use of this Prospectus and by certain transferees
of such persons or entities.
(2) Approximately 3,135,538 of such shares are currently issued
and outstanding and may be offered and sold from time to time by the Selling
Securityholders. The remaining approximately 6,744,695 shares may be
purchased upon the exercise of the Warrants and thereafter offered and sold
by the holders thereof pursuant to this Prospectus. Does not include shares
of Common Stock that may be issued pursuant to anti-dilution provisions of
various outstanding warrants, including the Warrants to be offered and sold
by certain Selling Securityholders. This Prospectus may also be used for the
resales, from time to time, of up to 3,950,000 shares that may be acquired by
donees, pledgees, and other transferees who receive shares covered by this
Prospectus as gifts, as security for loans, and in other similar transactions
and who may wish to sell such shares under circumstances requiring or making
desirable the use of this Prospectus. See "SELLING SECURITYHOLDERS" and
"DESCRIPTION OF CAPITAL STOCK."
(3) Anticipated to be issued in connection with the proposed
acquisition of DataXchange.
(4) Includes 111,500 Warrants issued to the representative of the
underwriters of the Company's IPO in 1996 and 3,950,000 Warrants owned by
Douglas H. Hanson, President, Chairman, and Chief Executive Officer of the
Company (the "Hanson Warrants"). The Warrants owned by Mr. Hanson may be
exercised until September 22, 1999 for a purchase price of $1.90 per share of
Common Stock purchased. The shares of Common Stock issuable upon exercise of
these Warrants are included in the 9,880,233 shares of Common
10
<PAGE>
Stock offered by the Selling Securityholders. See "CERTAIN TRANSACTIONS--CHANGE
IN CONTROL" and "DESCRIPTION OF CAPITAL STOCK."
(5) Assumes: (i) the issuance of all 4,000,000 of the Acquisition
Shares in one or more mergers by the Company with other businesses or
acquisitions by the Company of other businesses or assets; and (ii) the exercise
of all of the Warrants, including all of the Hanson Warrants. Does not give
effect to the exercise of outstanding options granted to employees or
non-employee directors of the Company pursuant to various stock option plans or
shares of Common Stock that can be issued pursuant to anti-dilution provisions
of the Warrants and other derivative securities. See "RISK FACTORS--SHARES
ELIGIBLE FOR RESALE," "SELLING SECURITYHOLDERS," "CERTAIN TRANSACTIONS--CHANGE
IN CONTROL," and "DESCRIPTION OF CAPITAL STOCK."
Risk Factors
The Company and its business are subject to varying risks, and the
securities offered hereby are speculative, involve a high degree of risk, and
should not be purchased by persons who cannot afford the loss of their
investment. See "RISK FACTORS."
Summary Unaudited Pro Forma Condensed Combined Financial Data of the Company
The following summary unaudited pro forma condensed combined
financial information presented below has been derived from the unaudited and
audited historical financial statements of RMI, Application Methods and
DataXchange, included elsewhere in this Prospectus, and reflect management's
present estimate of pro forma adjustments, including a preliminary estimate of
purchase price allocations, which ultimately may be different. The pro forma
financial data give effect to the acquisition of Application Methods and the
proposed acquisition of DataXchange.
The acquisitions are being accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed are recorded at
their estimated fair values, which are subject to further adjustment based upon
appraisals and other analyses, with appropriate recognition given to the effect
of RMI's income tax rates.
The unaudited pro forma condensed combined statement of operations
for the year ended December 31, 1997 gives effect to the acquisitions as if they
had been consummated at the beginning of such year. This pro forma statement of
operations combines the historical consolidated statement of operations for the
year ended December 31, 1997 for RMI, the historical combined statement of
operations for the year ended December 31, 1997 for Application Methods and the
historical statement of operations for the year ended January 31, 1998 for
DataXchange.
The unaudited pro forma condensed combined statement of operations
for the six months ended June 30, 1998 gives effect to the acquisitions as if
they had been consummated January 1, 1998. This pro forma statement of
operations combines the historical operations for RMI and Application Methods
for the six month period ended June 30, 1998 and for DataXchange for the six
month period ended July 31, 1998.
The unaudited pro forma condensed combined balance sheet as of June
30, 1998 gives effect to the acquisitions as if they had been consummated on
that date. This pro forma balance sheet combines the historical consolidated
balance sheet at that date for RMI and the historical balance sheets at such
date for Application Methods and DataXchange.
11
<PAGE>
The unaudited pro forma condensed combined financial statements may
not be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future. The unaudited pro
forma condensed combined financial data presented below should be read in
conjunction with the audited and unaudited historical financial statements and
related notes thereto of RMI, Application Methods and DataXchange and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," included elsewhere in this Prospectus.
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1997 1998
-------------------------------
<S> <C> <C>
Statement of Operations Data(1):
Revenue $ 9,052 $ 5,624
Cost of sales 4,020 2,216
Gross Margin 5,032 3,408
Operating Expenses 11,199 6,333
Other Expenses 339 133
-------- --------
Loss from operations $ (6,506) $ (3,058)
-------- --------
-------- --------
Basic and Diluted loss per share from operations $ (1.07) $ (0.39)
-------- --------
-------- --------
Average number of common shares outstanding 6,089 7,894
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------
<S> <C>
Balance Sheet Data(1):
Cash and cash equivalents.......................................................$994
Working capital (deficit)....................................................$(1,441)
Goodwill (Net)................................................................$8,654
Total Assets.................................................................$14,515
Long Term Debt and Capital Lease Obligations, net of current portion............$629
Total Stockholders' Equity...................................................$10,116
</TABLE>
(1) This summary information should be read in conjunction with the
Selected Unaudited Pro forma Condensed Combined Balance Sheets,
Statements of Operations and Notes included elsewhere herein.
Summary Historical Financial Data
The following table sets forth selected historical financial and
other data of RMI. RMI was formed in October 1993 and has generated operating
losses since inception as well as negative cash flow in 1996 and 1997. The
selected data set forth below as of December 31, 1995 and for the period then
ended have been derived from the financial statements of RMI which have been
audited by McGladrey & Pullen, LLP,
12
<PAGE>
independent auditors. The selected consolidated statements of operations and the
balance sheet data set forth below as of December 31, 1996 and 1997 and for the
periods then ended have been derived from the financial statements of RMI which
have been audited by Baird, Kurtz & Dobson, independent auditors. The selected
financial data for the six-month periods ended June 30, 1998 and 1997 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which RMI
considers necessary for a fair presentation of the financial position and
results of operations for these periods. The operating results for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for any future period.
The summary historical financial data should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto and the
information included under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- JUNE 30,
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .................... $ 1,179 $ 3,282 $ 6,127 $ 2,849 $ 3,941
Cost of revenues earned ..... 320 1,104 2,060 1,088 1,384
Gross profit ................ 859 2,178 4,067 1,761 2,557
General, selling and
administrative expenses ..... 968 4,459 7,868 3,952 4,476
Operating (loss) income ..... (109) (2,281) (3,801) (2,191) (1,919)
Net (loss) income ........... (129) (2,343) (4,153) (2,368) (2,034)
Net (loss) income per
share (1) ................... $ (0.07) $ (1.03) $ (0.79) $ (0.51) $ (0.29)
OTHER DATA:
EBITDA (2) .................. (9) (1,956) (2,918) (1,778) (1,409)
BALANCE SHEET DATA:
Cash and Cash Equivalents ... $ 275 $ 349 $ 1,053 $ 439 $ 762
Investments ................. 0 1,357 0 577 0
Working Capital (Deficit) ... (187) 371 (209) (1,786) (1,567)
Total Assets ................ 925 5,540 5,082 5,137 6,243
Long Term Debt and Capital
Lease Obligations, net of
current portion ............ 524 1,134 905 1,072 629
Total Stockholders'
(deficit) equity ........... (169) 2,317 2,083 590 2,477
</TABLE>
(1) Loss per share is computed based on 1,868,000 shares outstanding for
1995, 2,295,000 shares outstanding for 1996 and 5,268,000 shares
outstanding for 1997, and 4,848,346 and 7,518,267 shares outstanding
for the six months ended June 30, 1997 and 1998, respectively. This
represents the weighted average of common shares outstanding for both
basic and diluted earnings per share for each period. See Note 1 to
the Company's financial statements included elsewhere in this
Prospectus.
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<PAGE>
(2) EBITDA is earnings from operations before interest, taxes,
depreciation and amortization. EBITDA is included herein because
management believes that certain investors find it to be a useful
tool for measuring a company's ability to service its debt. However,
EBITDA does not represent cash flow from operations, as defined by
generally accepted accounting principles ("GAAP"). EBITDA should not
be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or for cash flow as
a measure of liquidity and should be examined in conjunction with the
Consolidated Financial Statements of the Company and the related
Notes thereto included elsewhere in this Prospectus. EBITDA as
defined by the Company may be different from EBITDA as defined by
other companies.
RECENT DEVELOPMENTS
In June 1998, the Company announced it had entered into a merger
agreement to acquire Internet Communications Corporation ("ICC"). The closing of
the acquisition was subject to various closing conditions, and the merger
agreement contained certain rights of termination. On October 13, 1998, the
Company announced that it terminated the merger agreement due to, among other
things, ICC's failure to satisfy certain obligations under the merger agreement.
On October 14, 1998, ICC filed a complaint against the Company in Denver
District Court claiming $30 million in damages and alleging, among other things,
that the Company had breached the merger agreement and had made certain
misrepresentations to ICC with respect to the proposed merger transaction. The
Company believes ICC's claims to be without merit and intends to vigorously
defend such action and to assert counterclaims against ICC; however, there can
be no assurance that the Company will prevail in its defense or any
counterclaims. The Company is hopeful that it can resolve the dispute with ICC
without the necessity for a trial; however, there can be no assurance as to the
Company's ability in this regard. In the event that the dispute cannot be
resolved expeditiously, the Company expects that it would incur additional costs
and expenses as a result of the litigation and that the litigation may hamper
the Company's ability to obtain additional financing. As a result of the
terminated merger transaction and the related financing transactions which were
not completed, the Company estimates that it incurred costs, expenses and
related fees of between $3.8 million and $5.2 million, a portion of which are in
dispute. Of this amount, approximately $2.7 million relates to a non-cash item
relating to warrants issued by the Company. The Company does not currently have
the ability to pay all of such costs, fees and expenses. The Company believes
that it will be able to agree on a schedule for the payment of these costs, fees
and expenses that is satisfactory to all parties; however, there can be no
assurance that the Company will be able to reach an agreement with all parties
regarding the payment of such costs, fees and expenses.
The terms of the proposed acquisition of ICC required that the
Company pay cash in the aggregate amount of approximately $39,400,000, to the
shareholders of ICC in exchange for their shares of common stock of ICC and
required the Company to repay approximately $5 million of ICC indebtedness. In
connection with the proposed acquisition, and as a condition thereof, the
Company obtained a $42,000,000 loan commitment (the "Bridge Loan") from various
lenders (the "Lenders"). The Lenders also agreed to arrange additional financing
of approximately $8 million (the "Additional Financing"). In connection with the
negotiation of the Bridge Loan and the Additional Financing, the Company agreed
to pay certain fees to and expenses of the Lenders, which are included in the
amounts referred to in the preceding paragraph.
Subsequent to the negotiations for the Bridge Loan commitment and
entering into the ICC merger agreement, the Company sought to obtain financing
by means of issuing $175,000,000 of high-yield debt securities, which securities
were to be issued pursuant to Rule 144A under the Securities Act (the "Rule 144A
Offering"). A portion of the proceeds of the Rule 144A Offering were to have
been used to pay the purchase price and related transactional costs of the ICC
acquisition. The Company incurred fees, costs and expenses
14
<PAGE>
in connection the proposed Rule 144A Offering, which are included in the amounts
referred to in the preceding paragraph.
Acquisitions and Proposed Acquisitions
In September 1998, the Company entered into a Software License and
Consulting Services Agreement with Novazen to provide the Company proprietary
billing software tailored to its business. As consideration for the consulting
services to be provided by Novazen, the Company paid $100,000 in cash and issued
to Novazen 25,000 shares of its Common Stock. The 25,000 shares of Common Stock
are being offered for resale pursuant to this Prospectus. After the Company
entered into the Novazen Agreement, Kevin R. Loud, an officer of the Company,
purchased 38,000 shares of Novazen common stock for $1.60 per share.
On July 1, 1998, RMI acquired all of the outstanding common stock of
Application Methods. Based in Seattle, Washington, Application Methods develops
software and has recently developed an e-commerce product. For the year ended
December 31, 1997, Application Methods had gross revenues of $984,000 and a net
loss of $102,000. Pursuant to the terms of a Merger Agreement by and among RMI,
RMI Acquisition Subsidiary, Inc. ("RMI Acquisition"), a Washington corporation
and a wholly-owned subsidiary of RMI, Application Methods and Ronald M.
Stevenson, Gregory A. Brown and Ronald Nicholl, the shareholders of Application
Methods, Application Methods' shareholders received an aggregate of 286,369
shares of RMI Common Stock as a result of the merger of RMI Acquisition with and
into Application Methods. Subsequent to the merger, Application Methods was
merged into a Colorado corporation which is a wholly-owned subsidiary of RMI.
The Application Methods shareholders may receive additional shares of Common
Stock, not to exceed $2.5 million in value, based on the satisfaction of certain
post-merger performance targets over a three-year period. Of the shares issued
to the shareholders of Application Methods, 114,548 are being offered for resale
pursuant to this Prospectus.
On June 5, 1998, RMI acquired all of the outstanding common stock of
Infohiway pursuant to the terms of a Merger Agreement dated June 5, 1998 by and
among RMI, RMI Subsidiary, Inc., Infohiway and Kenneth Covell, John-Michael
Keyes and Jeremy J. Black, the shareholders of Infohiway (the "Infohiway Merger
Agreement"). Infohiway has developed a search engine that the Company believes
has unique data searching features. For the year ended December 31, 1997,
Infohiway had gross revenues of $31,000. The acquisition was effectuated by the
merger of RMI Subsidiary, Inc., a wholly-owned subsidiary of RMI, with and into
Infohiway. As a result of the merger, Infohiway became a wholly-owned subsidiary
of RMI. Pursuant to the Infohiway Merger Agreement, the shareholders of
Infohiway received an aggregate of 150,000 shares of RMI Common Stock. Of the
shares issued to the shareholders of Infohiway, 75,000 are being offered for
resale pursuant this Prospectus.
In September 1998, the Company entered into non-binding letters of
intent to acquire (i) all of the issued and outstanding capital stock of
DataXchange in exchange for up to 535,000 shares of the Company's Common
Stock and, subject to the achievement of certain financial performance
objectives, up to 535,000 DataXchange Warrants; (ii) substantially all of the
assets of Stonehenge for approximately $450,000 payable in the form of shares
of the Company's Common Stock; and (iii) certain assets which comprise the
access and hosting business of Unicom for approximately $1,700,000 payable in
the form of shares of the Company's Common Stock. For the year ended July 31,
1998, DataXchange had revenues of $1,898,000 and a net loss of $785,900; and
for the year ended December 31, 1997, Stonehenge had gross revenues of
$500,000 and a net profit of $13,000. The DataXchange Warrants and the shares
underlying the DataXchange Warrants may be offered and sold pursuant to this
Prospectus by the persons to whom such securities may be issued.
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Additionally, RMI recently entered into a non-binding memorandum of
understanding regarding the possible acquisition of Internet Now, an ISP located
in Phoenix, Arizona for approximately $1,520,000, of which $150,000 would be
payable in cash and $1,370,000 would be payable in shares of the Company's
Common Stock. For the year ended December 31, 1997, Internet Now had gross
revenues of $620,000 and a net loss of $70,000. Of the cash portion of the
purchase price, $20,000 has been paid to the shareholder of Internet Now. While
the Company believes these current and proposed acquisitions will accelerate its
existing growth plans, there can be no assurance that all, or any of these
proposed transactions will be consummated or that, if they are consummated, the
Company will be able to integrate these companies successfully.
Change in Control
Effective October 1, 1997, RMI issued and sold to Mr. Hanson
1,225,000 shares of Common Stock for a purchase price of $2,450,000, or $2.00
per share, as more fully described in "CERTAIN TRANSACTIONS -- CHANGE IN
CONTROL." Mr. Hanson also became RMI's President, Chief Executive Officer and
Chairman of the board of directors of the Company.
RMI also entered into a warrant agreement with Mr. Hanson, dated as
of October 1, 1997, pursuant to which it agreed, subject to obtaining approval
of RMI's stockholders of an increase in the authorized capital stock of RMI, to
issue to Mr. Hanson the Hanson Warrants for an exercise price of $1.90 per
share, for a period of 18 months from the date of issuance of such warrants. As
of the date of the warrant agreement, RMI did not have a sufficient number of
shares of its Common Stock authorized or reserved for issuance upon the exercise
of the Hanson Warrants. At the RMI Annual Meeting, the stockholders of RMI
approved an amendment to RMI's Certificate of Incorporation to increase the
number of shares of Common Stock that RMI is authorized to issue from 10,000,000
to 25,000,000. As a result of the approval, RMI issued all of the Hanson
Warrants to Mr. Hanson on March 23, 1998. On March 23, 1998, Mr. Hanson
exercised 50,000 of these warrants for an aggregate exercise price of $95,000.
On May 15, 1998, Mr. Hanson exercised a portion of the Hanson Warrants to
purchase 421,053 shares of Common Stock for an aggregate exercise price of
$800,000. It was believed at that time that RMI needed such infusion of capital
to remain in compliance with the listing requirements of Nasdaq. RMI
subsequently determined that such investment by Mr. Hanson was not necessary for
the continued qualification of its Common Stock for trading on Nasdaq.
Accordingly, RMI and Mr. Hanson rescinded his exercise of these warrants.
RMI also granted Mr. Hanson incentive stock options to purchase
222,220 shares of Common Stock at an exercise price of $2.25 per share and
377,780 shares of Common Stock for an exercise price of $1.00 per share (the
"Hanson Options") pursuant to RMI's 1997 Stock Option Plan (the "1997 Plan"),
which plan was approved by RMI's stockholders at the RMI Annual Meeting. These
Hanson Options vest one year from the date of grant (subject to acceleration of
the vesting date by the board of directors or a committee thereof that
administers the 1997 Plan). On March 12, 1998 a committee of the board of
directors amended the 1997 Plan, retroactively to October 1, 1997, in accordance
with the requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), to provide that the number of incentive stock options was 191,385, the
exercise price of those options was $2.6125 and the number of non-qualified
stock options was 408,615 at an exercise price of $1.00. On March 12, 1998, Mr.
Hanson exercised all of the non-qualified stock options and purchased 408,615
shares of Common Stock pursuant to such exercise. As a result of the
transactions described above, Mr. Hanson obtained effective control of RMI and,
as of October 15, 1998, had the authority to vote 52.3% of RMI's Common Stock
after giving effect to the exercise of 50,000 of the Hanson Warrants and 408,615
of the Hanson Options. Some or all of the Hanson Warrants and shares of Common
Stock issuable upon the exercise thereof may be offered and sold by means of
this Prospectus.
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES BEING OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW.
MANAGEMENT OF GROWTH; NEED FOR ADDITIONAL CAPITAL. The Company's
rapid growth has placed, and in the future is expected to place, a significant
strain on the Company's management, administrative, operational and financial
resources and increased demands on its systems and controls. The Company intends
to expand its Internet network and telecommunications services nationwide. The
Company anticipates that its continued growth will require it to recruit and
hire new managerial, technical, sales, administrative and marketing personnel.
The strain on existing personnel and the need for additional personnel is
expected to be exacerbated to the extent the Company acquires additional
businesses, as each such business must then be integrated into the Company's
operations and systems. See "-- RISKS RELATED TO THE COMPANY'S ACQUISITION
STRATEGY." The inability to continue to upgrade the Company's networking systems
and its operating and financial control systems, the inability to recruit and
hire necessary personnel, or the emergence of unexpected expansion difficulties
would adversely affect the Company's business, results of operations, financial
condition and cash flow.
The Company requires additional funds through equity, debt, or other
external financing in order to fund its current operations and to achieve its
business plan. There can be no assurance that any additional capital resources
will be available to the Company, or, if so, will be available on terms that
will be acceptable to the Company. Any additional equity financing will dilute
the equity interests of existing security holders. If adequate funds are not
available or are not available on acceptable terms, such unavailability would
have a material adverse effect on the Company's ability to execute its business
plans, and on its results of operations, financial condition and cash flow.
HISTORY OF LOSSES; NEGATIVE CASH FLOW FROM OPERATIONS; NO ASSURANCE
OF PROFITABILITY. RMI has incurred net losses since its inception and management
expects that the Company will incur additional losses. Prospective investors
have limited operating and financial data about the Company upon which to base
an evaluation of the Company's performance and an investment in the Securities
offered hereby. For the years ended December 31, 1995, 1996 and 1997, RMI had
net losses of $129,000, $2,343,000 and $4,153,000, respectively, and for the six
month periods ended June 30, 1997 and 1998, it had net losses of $2,368,000 and
$2,033,000, respectively. For the year ended December 31, 1997, RMI had negative
operating cash flow of $3,297,000, and for the six-month period ended June 30,
1998, it had negative operating cash flow of $124,000. As a result of the
terminated merger transaction with ICC and the related financing transactions
which were not completed, the Company estimates that it incurred costs, expenses
and related fees of between $3.8 million and $5.2 million, a portion of which
are in dispute. Of this amount, approximately $2.7 million relates to a non-cash
item relating to warrants issued by the Company. The Company does not currently
have the ability to pay all of such costs, fees and expenses. The Company
believes that it will be able to agree on a schedule for the payment of these
costs, fees and expenses that is satisfactory to all parties; however, there can
be no assurance that the Company will be able to reach an
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agreement with all parties regarding the payment of such costs, fees and
expenses. There can be no assurance that the Company will achieve or sustain
positive operating cash flow or generate net income in the future. To achieve
profitability, the Company must, among other things, increase its customer base
and develop and market products and services that are broadly accepted. There
can be no assurance that the Company will ever achieve profitability. See
"RECENT DEVELOPMENTS," "RISK FACTORS-- INCREASING COMPETITION," and
"--DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATIONS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL
RESOURCES."
CURRENT LITIGATION; UNCERTAINTY OF OUTCOME. In June 1998, the Company
announced it had entered into a merger agreement to acquire Internet
Communications Corporation ("ICC"). The closing of the acquisition was subject
to various closing conditions, and the merger agreement contained certain rights
of termination. On October 13, 1998, the Company announced that it terminated
the merger agreement due to, among other things, ICC's failure to satisfy
certain obligations under the merger agreement. On October 14, 1998, ICC filed a
complaint against the Company in Denver District Court claiming $30 million in
damages and alleging, among other things, that the Company had breached the
merger agreement and had made certain misrepresentations to ICC with respect to
the proposed merger transaction. The Company believes ICC's claims to be without
merit and intends to vigorously defend such action and to assert counterclaims
against ICC; however, there can be no assurance that the Company will prevail in
its defense or any counterclaims. The Company is hopeful that it can resolve the
dispute with ICC without the necessity for a trial; however, there can be no
assurance as to the Company's ability in this regard. In the event that the
dispute cannot be resolved expeditiously, the Company expects that it would
incur additional costs and expenses as a result of the litigation and that the
litigation may hamper the Company's ability to obtain additional financing. See
"RECENT DEVELOPMENTS."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results may in the future vary, depending upon factors such as the timing and
installation of circuits ordered by the Company, which in the past have been and
in the future are expected to be, delayed from time to time by delays in the
installation of lines and equipment by the Company's telecommunications
suppliers. Additional factors contributing to variability of operating results
may include the pricing and mix of services and products sold by the Company,
terminations of service by subscribers, introductions of new products and
services by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's services, changes in pricing policies by its
competitors, the timing of the expansion of the Company's network infrastructure
and entry into new businesses. Variations in the timing and amounts of revenues
could have a material adverse effect on the Company's operating results.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. As part of its
long-term business strategy, the Company intends to pursue acquisitions of other
companies. There can be no assurance that the Company will be able to
implement its acquisition plan. Further, acquisitions may involve a number of
special risks, including potentially dilutive issuances of equity securities,
the incurrence of additional debt, risks associated with unanticipated events
or circumstances or legal liabilities and amortization of expenses related to
goodwill and other intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition,
results of operations and cash flow. All of the Company's acquisitions have
resulted in the allocation of a large portion of the purchase price to
intangible assets such as customer lists and goodwill. In addition, certain
acquisitions that the Company may consummate in the future may have certain
negative effects upon the business of the Company, such as the
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potential loss of customers due to perceived conflicts, duplication of work
force and incompatibility of accounting and other systems. In addition, there
can be no assurance that acquired businesses, if any, will achieve anticipated
revenues and earnings. The potential inability of the Company to implement and
manage its acquisition strategy successfully may have an adverse effect on the
future prospects of the Company. See "BUSINESS -- BUSINESS STRATEGY."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continued contributions of its senior operating
management, particularly Douglas H. Hanson, its President, Chief Executive
Officer and Chairman of the Board of Directors. The loss of Mr. Hanson's
services or other senior operating management could have a materially
detrimental effect on the Company. The Company does not maintain key person life
insurance on any of its personnel. The Company's success will also depend on its
ability to attract and retain other qualified management, marketing, technical
and sales executives and personnel.
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK OR COMMON
STOCK. The Company has 25,000,000 shares of Common Stock and 750,000 shares of
Preferred Stock authorized, of which 8,106,252 shares of Common Stock and no
shares of Preferred Stock were outstanding as of October 15, 1998. Another
803,164 shares of Common Stock were reserved for issuance pursuant to the
Company's stock option plans and other stock options granted and 7,427,620
shares of Common Stock have been reserved for issuance upon exercise of various
warrants, including the IPO Warrants, the Hanson Warrants, warrants issued to
the lenders in connection with the Bridge Loan commitment and shares issuable
pursuant to various anti-dilution provisions contained in the warrants and
options described above. In addition, there are approximately 333,333 (assuming
a $7.50 per share price at the date of calculation) additional shares of Common
Stock that may be issued in connection with the acquisition of Application
Methods. Accordingly, after giving effect to the shares of Common Stock issuable
pursuant to the options and warrants described above, but not giving effect to
additional shares of Common Stock that may be issued pursuant to anti-dilution
provisions of various outstanding warrants and options, there are approximately
3,998,754 shares of Common Stock and 750,000 shares of Preferred Stock that may
be issued in the future at the discretion of the Company's board of directors.
The Preferred Stock may be directed to be issued by the board of directors in
its discretion without stockholder approval, with such designations,
preferences, dividend rates, conversion and other features as the board of
directors may determine. The rights of the holders of Common Stock will be
subject to and may be adversely affected by the terms of any additional classes
of Preferred Stock that the Company may issue in the future. The issuance of
such shares of undesignated Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and serving other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or may discourage a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company or may result
in material dilution to holders of Common Stock depending on the terms of such
Preferred Stock. The issuance of Preferred Stock also could decrease the amount
of earnings and assets available for distribution to the holders of Common
Stock. In addition, future issuances of shares of Common Stock could materially
and adversely affect the market price of the Common Stock, and could materially
impair the Company's future ability to raise capital through an offering of
equity securities. No predictions can be made as to the effect, if any, that
market sales of such shares or the availability of such shares for future sale
will have on the market price of the Common Stock prevailing from time to time.
In addition, the stockholders of RMI approved, at the RMI Annual
Meeting, an amendment to RMI's Certificate of Incorporation to effect a reverse
exchange (a "Reverse Stock Split") of RMI's Common Stock. The Reverse Stock
Split would be in a ratio of up to one-for-ten and would be effected in the
event that the board of directors determines that such a Reverse Stock Split is
desirable at any time within one year from the date of the RMI Annual Meeting,
with the exact ratio of the Reverse Stock Split to be determined by the
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board of directors in its discretion. Although the board of directors has no
present intention of doing so, the additional shares of authorized but unissued
Common Stock that may result from the proposed Reverse Stock Split could also be
used by the board of directors to defeat or delay a hostile takeover. Faced with
an actual or proposed hostile takeover, the directors could issue shares of
Common Stock, in a private transaction, to a friendly party that might align
itself with the board of directors in opposing a hostile takeover. Accordingly,
the Reverse Stock Split could be considered to have the effect of discouraging a
takeover of the Company. The directors are not aware, however, of any current
proposals by any party to acquire control of the Company and the Reverse Stock
Split is not intended to be an anti-takeover device.
DEPENDENCE UPON NETWORK INFRASTRUCTURE. The Company's success will
partially depend upon its ability to develop a reputation for reliability over
the long term and the security of its current and future network connections.
The Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of its customers change. The expansion of the Company's
Internet network infrastructure will require substantial financial, operational
and management resources. There can be no assurance that the Company will be
able to expand or adapt its network infrastructure to meet additional demand or
its customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A
MEDIUM OF COMMERCE AND COMMUNICATIONS. Many of the Company's existing and
proposed products and services are targeted toward users of the Internet. As is
typical in the case of a new and rapidly evolving industry characterized by
rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty. In
addition, critical issues concerning the commercial use of the Internet remain
unresolved and may impact the growth of Internet use, especially in the business
market targeted by the Company. Despite growing interest in the many commercial
uses of the Internet, many businesses have been deterred from purchasing
Internet access services for a number of reasons, including, among others,
inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of POPs for corporate users, inability to
integrate business applications on the Internet, the need to deal with multiple
and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet and a
lack of tools to simplify Internet access and use. The adoption of the Internet
for commerce and communications, particularly by those individuals and
enterprises that have historically relied upon alternative means of commerce and
communication, generally requires the understanding and acceptance of a new way
of conducting business and exchanging information. In particular, enterprises
that have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new strategy that may make their existing personnel and infrastructure
obsolete.
The Company is at risk as a result of fundamental technological
changes in the way Internet solutions may be marketed and delivered. Integrating
technological advances may require substantial time and expense and there can be
no assurance that the Company will succeed in adapting its network
infrastructure. While the Company believes that its plan of combining the scale
and scope of a national operation with the local presence of its ISP operations
offers significant advantages for commerce and communication over the Internet,
there can be no assurance that commerce and communication over the Internet will
become widespread, or that the Company's offered Internet access and
communications services will become widely adopted for these purposes.
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New technologies or industry standards have the potential to replace
or provide lower cost alternatives to the Company's existing products and
services. The adoption of such new technologies or industry standards could
render the Company's existing products and services obsolete and unmarketable.
If the market for Internet access services fails to develop, develops more
slowly than expected, or becomes saturated with competitors, or if the Internet
access and services offered by the Company are not broadly accepted, the
Company's business, operating results, financial condition and cash flow may be
materially adversely affected. Although the Company intends to support emerging
standards in the market for Internet connectivity, there can be no assurance
that industry standards will emerge or if they become established, that the
Company will be able to conform to these new standards in a timely fashion and
maintain a competitive position in the market.
RISK OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS. To date
the Company has not been adversely affected by product or service obsolescence
because changes in the Internet service industry have been largely a matter of
improvements in hardware which have been readily available to the Company and
its competitors. The Company's future success depends, however, upon its ability
to develop new services that meet changing customer requirements. The market for
the Company's service is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new service introductions.
There can be no assurance that the Company can successfully identify new
opportunities and develop and bring new services to market in a timely manner or
that services or technologies developed by others will not render the Company's
services noncompetitive or obsolete.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standards in the market for Internet access, there
can be no assurance that any industry standards will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion or maintain a competitive position in the market.
The failure of the Company to anticipate the prevailing standards, or the
failure of common standards to emerge could have a material adverse effect on
the Company.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK. The
law relating to the liability of ISPs and on-line service companies for
information carried on or disseminated through their networks has not yet been
definitively established. Internet access and content providers face potential
liability of uncertain scope for the actions of subscribers and others using
their systems, including liability for infringement of intellectual property
rights, rights of publicity, defamation, libel and criminal activity under the
laws of the United States and foreign jurisdictions.
The Company does not maintain errors and omissions insurance. Any
imposition of liability on the Company for alleged negligence, intentional
torts, or other liability could have a material adverse effect on the Company.
In addition, recent legislative enactments and pending legislative proposals
aimed at limiting the use of the Internet to transmit indecent or pornographic
materials could, depending upon their interpretation and application, result in
significant potential liability to Internet access and service providers
including the Company, as well as additional costs and technological challenges
in complying with any statutory or regulatory requirements imposed by such
legislation. For example, the Communications Decency Act of 1996 (amending 47
U.S.C. Section 223), which is part of the Telecommunications Act of 1996 (the
"1996 Telecommunications Act"), became effective on February 8, 1996. The 1996
Telecommunications Act imposes criminal liability on persons sending or
displaying in a manner available to minors indecent material on an interactive
computer service such as the Internet and on an entity knowingly permitting
facilities under its control to be used for such activities. While the
constitutionality of these provisions has been successfully challenged in the
U.S. Supreme Court, there can be no assurance as to the final result regarding
the
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constitutionality of the 1996 Telecommunications Act, or as to the scope and
content of any substitute legislation or other legislation in the United States
or foreign jurisdictions restricting the type of content being provided over the
Internet. If these provisions or related legislation are upheld, the effect on
the Internet industry could have a material adverse effect on the Company's
business, financial condition, results of operation, or cash flow. A number of
countries are considering content restrictions based on such factors as
political or religious views expressed and pornography or indecency.
INCREASING COMPETITION. The markets in which the Company operates and
intends to operate are extremely competitive and can be significantly influenced
by the marketing and pricing decisions of the larger industry participants.
Internet Access. The Company expects competition in these markets to
intensify in the future. The Company's current and prospective competitors in
the Internet access market include many large companies that have substantially
greater market presence and financial, technical, operational, marketing and
other resources and experience than the Company. The Company's Internet access
business competes or expects to compete directly or indirectly with the
following categories of companies: (i) other national and regional commercial
ISPs, such as Verio Inc. or one or more of its affiliates and PSINet, Inc.
("PSINet"); (ii) established on-line services companies that currently offer
Internet access, such as America Online, Inc. ("AOL"), CompuServe and Prodigy
Services Company; (iii) computer hardware and software and other technology
companies, such as Microsoft Corporation ("Microsoft"); (iv) national
long-distance telecommunications carriers, such as AT&T (AT&T WorldNet), Sprint
(SprintNet) and Qwest Communications International, Inc.; (v) regional Bell
operating companies ("RBOCs" or "I-LECs"); (vi) cable television system
operators, such as Comcast Corporation, Tele-Communications, Inc. ("TCI") and
Time Warner Inc.; (vii) nonprofit or educational ISPs; and (viii) newly-licensed
providers of spectrum-based wireless data services.
Telecommunication Services. The Company's intention to provide
traditional long distance service will place it directly in competition with
IXCs, which engage in the provision of long-distance access and other
long-distance resellers and providers, including large carriers such as AT&T,
MCI WorldCom and Sprint and new entrants to the long distance market such as the
RBOCs who have entered or have announced plans to enter the U.S. intrastate and
interstate long-distance market pursuant to recent legislation authorizing such
entry. See "REGULATION." On April 22, 1998, the Public Utilities Commission of
Colorado granted the request of Rocky Mountain Broadband, Inc. ("RMB"), a
wholly-owned subsidiary of RMI, to become a competitive local exchange carrier
("C-LEC"). Likewise, the Company's intention to provide IP Telephony services
and C-LEC services will place it directly in competition with other providers
(either resellers or facilities-based carriers) that provide the same services.
Some of the Company's competitors are significantly larger and have
substantially greater market presence as well as financial, technical,
operational, marketing and other resources and experience than the Company.
PRICING PRESSURES. The Company reduced the prices it charges its
Internet customers during 1995, 1997 and 1998 partly as a result of competitive
pricing pressures in the market for Internet services. The Company expects that
continued price pressures may cause the Company to reduce prices further in
order to remain competitive and the Company expects that such further price
reductions could adversely effect the Company's results of operations, unless it
can lower its costs commensurate with such price decreases. The Company may also
face price pressures from its competitors in the telecommunications services
markets in which the Company intends to compete.
SECURITY RISKS. A risk faced by all ISPs, including the Company, is
the risk that, despite the implementation of network security measures by the
Company, its infrastructure remains vulnerable to
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computer viruses, sabotage, break-ins and similar disruptive problems caused by
its subscribers or other Internet users. Furthermore, inappropriate use of the
Internet by third parties could potentially jeopardize the security of
confidential information stored in the computer systems of the Company's
customers, which may deter potential subscribers and may inhibit the growth of
the Internet service industry in general. Security problems continue to plague
public and private data networks. Alleviating or attempting to avoid problems
caused by computer viruses, break-ins, or other problems caused by third parties
may require significant expenditures of capital and resources by the Company,
which could have a material adverse effect on the Company. Until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry in general and the Company's customer base and
revenues in particular.
RISKS OF SYSTEM FAILURE. The Company's Internet operations are
dependent upon its ability to protect its network infrastructure against damage
from acts of nature, power failures, telecommunications failures and similar
events. Physical protection of the Company's network infrastructure is a primary
responsibility of the Company. However, because it leases its lines from
long-distance telecommunications companies, RBOCs and C-LECs, the Company is
dependent upon these companies for physical repair and maintenance of the leased
lines. The Company maintains multiple carrier agreements to reduce the risk of
loss of operations from damage, power failures, telecommunications failures and
similar events. Despite precautions taken by the Company, the occurrence of a
natural disaster or other unanticipated problems at the Company's NOC or any of
its POPs may cause interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity required by the Company as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company.
DEPENDENCE ON TELECOMMUNICATIONS ACCESS. All Internet and most
telecommunications service providers, including the Company, depend on other
companies to provide communications capacity via leased facilities. If one or
more of these companies is unable or unwilling to provide or expand its current
levels of service to the Company in the future, the Company's operations could
be materially and adversely affected. Although leased facilities are available
from several alternative suppliers, including AT&T and Sprint, there can be no
assurance that the Company could obtain substitute services. In addition, the
Company is dependent on local telephone companies to provide local dial-up and
leased, high-speed dedicated access phone lines for access to each of the
Company's POPs. The Company is presently dependent on US West (an RBOC), ICG
Communications, Inc. and Teleport Communications Group, all of which are
competitors of the Company, to provide timely installation of new circuits and
to maintain existing circuits. The Company has experienced delays in the
installation of circuits and inconsistencies in maintenance service which have
adversely affected the Company.
DEPENDENCE UPON SUPPLIERS. In order to provide Internet access and
other on-line services to its customers, the Company leases long distance fiber
optic telecommunications lines from multiple national telecommunications
services provider. The Company is dependent upon these providers of data
communications facilities. In addition, the Company has a wholesale usage
agreement with PSINet, which allows the Company to provide dial-up and
"switched" network access to its customers through PSINet's 235 POPs throughout
the United States and has other agreements with service providers which the
Company relies on to deliver its product and service offerings. Certain of the
Company's suppliers, including RBOCs and C-LECs, currently are subject to
various price constraints, including tariff controls, which in the future may
change. In addition, regulatory proposals are pending that may affect the prices
charged by the RBOCs and C-LECs to the Company. Such regulatory changes could
result in increased prices of products and services, which could have a material
adverse effect on the Company.
23
<PAGE>
The Company relies on other companies to supply certain components of
its computer inventory as well as its network infrastructure (including
telecommunications services and networking equipment) which, in the quantities
and quality required by the Company, is available only from sole or limited
sources. The Company has in the past and may from time to time, experience
delays in receiving telecommunications services and shipments of merchandise
purchased for resale. There can be no assurance that the Company will be able to
obtain such telecommunication services and shipments of merchandise on the scale
and at the times required by the Company at an affordable cost, or at all. There
also can be no assurance that the Company's suppliers will not enter into
exclusive arrangements with the Company's competitors to stop selling their
products or components to the Company at commercially reasonable prices, or at
all, or that such agreements will be terminated for other reasons. Any failure
of the Company's sole or limited-source suppliers to provide products or
components that comply with its standards could have a material adverse effect
on the Company.
DIFFICULTIES IN IMPLEMENTING LOCAL EXCHANGE AND LONG DISTANCE
TELEPHONE SERVICES. The Company is a recent entrant into the newly created
competitive local telephony services industry. The local exchange telephony
services market in most states was only recently opened to competition due to
the passage of the 1996 Telecommunications Act and related regulatory rulings.
There are numerous operating complexities associated with providing these
services. The Company will be required to develop new products, services and
systems and will need to develop new marketing initiatives to sell these
services. The inability to overcome any of these operating complexities could
have a material adverse effect on the Company.
The Company intends to resell local telephony services provided by
I-LECs. Although the 1996 Telecommunications Act requires all I-LECs to permit
resale of their telephony services without unreasonable restrictions or
conditions and requires I-LECs to offer their retail telecommunications services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the I-LEC in such offering, there can be no assurance that
the Company will be able to initiate or provide service in a timely manner or at
competitive prices.
The Company also offers long distance services to its customers. The
long distance business is highly competitive. In addition, the long distance
industry has historically had a high average churn rate and customers continue
to change local distance providers frequently in response to the offering of
lower rate or promotional incentives by competitors. The Company relies on other
carriers to provide transmission and termination services for all of its long
distance traffic pursuant to resale agreements. Such agreements typically
provide for the resale of long distance services on a per-minute basis.
Negotiation of these agreements involves estimates of future supply and demand
for transmission capacity as well as estimates of the calling pattern and
traffic levels of the Company's future customers. In the event the Company
underestimates its need for transmission capacity, it may be required to obtain
capacity through more expensive means.
GOVERNMENT REGULATORY POLICY RISKS; POTENTIAL TAXES. The
telecommunications businesses in which the Company engages are subject to
extensive federal and state regulation. The provision of long distance telephone
service is subject to the provisions of the Communications Act of 1934, as
amended, including amendments effected by the 1996 Telecommunications Act and
the FCC regulations thereunder, as well as the applicable laws and regulations
of the various states, including regulation by Public Utility Commissions
("PUCs") and other state agencies. Federal laws and FCC regulations apply to
interstate telecommunications (including international telecommunications that
originate or terminate in the United States), while state regulatory authorities
have jurisdiction over telecommunications both originating and terminating
within a state.
24
<PAGE>
Regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to the Company. There can
be no assurance that future regulatory, judicial, or legislative activities will
not have a material adverse effect on the Company.
A recent federal legislative change, the 1996 Telecommunications Act,
may have potentially significant effects on the operations of the Company. The
1996 Telecommunications Act, among other things, allows the RBOCs and other
companies to enter the long distance business and enables other entities,
including entities affiliated with power utilities and ventures between local
exchange carriers ("LECs") and cable television companies, to provide an
expanded range of telecommunications services. Entry of such companies into the
long distance business would result in substantial additional competition in one
of the markets into which the Company intends to expand and may have a material
adverse effect on the Company.
On April 10, 1998, the FCC submitted a report to Congress in which it
stated that telephone-to-telephone IP Telephony bears the characteristics of
"telecommunications services" and that the providers of those services may be
"telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April 10,
1998 report states that, to the extent the FCC concludes that certain forms of
telephone-to-telephone IP Telephony service are "telecommunications services,"
and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the same
burdens on the local exchange as do other IXCs, the FCC "may find it reasonable
that they" become subject to the same regulations, including the requirement to
pay access fees to LECs and to contribute to "universal service" subsidies. See
"BUSINESS -- BUSINESS STRATEGY" and "REGULATION." In addition, a number of state
and local government officials have asserted the right or indicated a
willingness to impose taxes on Internet-related services and commerce, including
sales, use and access taxes. Recently enacted federal legislation placed a
moratorium on the imposition by state and local governments of new taxes on ISPs
or other businesses involved in Internet-related commerce. However, there can be
no assurance that federal taxes will not be imposed upon such services in the
future or that stated and local governments will not be permitted, in the
future, to impose similar taxes. The Company cannot predict whether the
imposition of any such additional taxes would have a material adverse effect on
the Company.
YEAR 2000 RISKS. Currently, many computer systems, hardware and
software products are coded to accept only two digit entries in the date code
field and, consequently, cannot distinguish 21st century dates from 20th century
dates. The interaction between various software and hardware platforms rely upon
the date coding system. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to function properly after
the turn of the century. The Company, its customers, and suppliers are reliant
on computers and related automated systems for daily business operations.
The Company has begun the process of identifying computer systems
that could be affected by the Year 2000 issue as it relates to the Company's
internal hardware and software, as well as third parties which provide the
Company goods or services.
Three categories or general areas have been identified for review and analysis.
(1) Systems providing customer services. These include hardware and
software systems that are used to provide services to the
Company's customers in the form of Internet connectivity, e-mail
servers, news servers, authentication servers, etc. Hardware in
the form of routers and switches are also included in this area.
25
<PAGE>
(2) Third party vendors providing critical services including
circuits, hardware, long distance and related products. These
include telco providers, suppliers of routers, modems, switches,
etc.
(3) Critical internal systems that support the Company's
administrative systems for billing and collecting, general
accounting systems, computer networks, and communication
systems.
The Company is in the planning and initial study phase of Year 2000
compliance review and testing. In regards to Item (1) listed above, the
Company's critical existing systems are no more than two and one-half years old
and it is anticipated that many of these systems will not have significant Year
2000 problems. Due to the Company's continued growth, most systems providing
customer services are planned to be relocated to an expanded network operations
center. Concurrently with the relocation, many of the critical systems will be
migrated to new hardware and software platforms to increase reliability and
capacities. All newly acquired hardware systems, operating systems, and software
are required to have vendor certification for Year 2000 compliance. These
systems are in process of being inventoried and a systems testing schedule is
being developed.
In regards to Item (2) above - third party products and services -
the Company's significant vendors are large public companies such as US West
Communications, ICG Telecommunications Group, Cisco Systems, Lucent
Technologies, Ascend Communications, etc., that are all under SEC mandates to
report their compliance in all publicly filed documents. The Company intends to
initiate a compliance review program with these vendors during the first quarter
of 1999 and will continue to track progress of all critical vendors for
compliance.
Item (3) above relates to internal systems for company administrative
and communications requirements. The Company intends to implement new billing
and billing presentment systems during the first half of 1999. These system
vendors are required to certify Year 2000 compliance. Additionally, the Company
intends to test these systems for compliance during the implementation
processes. The Company expects that internal computer networks and
communications systems will be tested in the first quarter of 1999 for
compliance.
The costs to address the Year 2000 compliance issues have not been
determined at this time. Based on growth, the Company plans to implement new
hardware platforms and software systems that should be Year 2000 compliant and,
therefore, costs specifically allocated to Year 2000 compliance may not be
significant. However, there can be no assurance that such costs will not be
significant. Systems testing and compliance reviews with third party services
providers will incur manpower and consultant costs.
The nature of the Company's business makes it dependent on computer
hardware, software, and operating systems that are susceptible to Year 2000
issues. Failure to attain at least minimum levels of Year 2000 compliance would
have a material adverse effect on the Company's ability to deliver services and
on the Company's business, operating results, financial condition and cash flow.
The Company has not developed a contingency plan for dealing with
Year 2000 risks at this time.
VOLATILITY OF STOCK PRICES AND PENNY STOCK RULES. The Company's
Common Stock is qualified for trading on Nasdaq. The prices at which the
Company's Common Stock has been traded have varied considerably since the Common
Stock was qualified for trading on Nasdaq. There can be no assurance that the
Company will continue to be able to satisfy certain specified financial tests
and market related criteria required for continued listing on the Nasdaq. If the
Company's Common Stock were no longer qualified for
26
<PAGE>
trading on Nasdaq, trading, if any, would thereafter be conducted in the
over-the-counter market, so called "pink sheets" or the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc. and consequently,
an investor could find it more difficult to dispose of, or to obtain, accurate
quotations as to the price of, the Company's Common Stock. In addition, the
Company could become subject to rules adopted by the Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
Nasdaq, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or Nasdaq system).
Unless an exemption from the definition of a "penny stock" were available, any
broker engaging in a transaction in the Company's Common Stock would be required
to provide any customer with a risk disclosure document, disclosure of market
conditions, if any, disclosure of the compensation of the broker-dealer and its
salesperson in the transaction and monthly accounts showing the market values of
the Company's Common Stock held in the customer's account. The bid and offer
quotation and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. It may be
anticipated that many brokers will be unwilling to engage in transactions in the
Company's Common Stock because of the need to comply with the "penny stock"
rules, thereby making it more difficult for purchasers of Common Stock to
dispose of their shares or for the Company to raise additional capital through
equity financings.
LACK OF ESTABLISHED TRADING MARKET FOR COMMON STOCK AND IPO WARRANTS.
Trading in the Company's Common Stock and IPO Warrants had been inactive until
March 1998. There can be no assurance that an active market can or will be
maintained for the trading of the Company's Common Stock. Purchasers of the
Company's Common Stock may, therefore, find it difficult to dispose of these
securities.
CONTROL BY MANAGEMENT. As the result of a recent investment in RMI by
Mr. Hanson, RMI issued and sold to Mr. Hanson 1,225,000 shares of Common Stock
for a purchase price of $2,450,000, or $2.00 per share, as more fully described
in "CERTAIN TRANSACTIONS -- CHANGE IN CONTROL." Mr. Hanson also became RMI's
President, Chief Executive Officer and Chairman of the board of directors of the
Company. As a result of these related transactions, Mr. Hanson obtained
effective control of RMI and, as of October 15, 1998, had the authority to vote
52.3% of RMI's Common Stock after giving effect to the exercise of the Hanson
Warrants and the Hanson Options. The officers and directors of the Company as a
group beneficially own as of October 15, 1998 approximately 57.4% of the
Company's Common Stock after giving effect to the exercise of the Hanson
Warrants and Hanson Options. As a result, these stockholders will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of capital stock may also have the effect of
delaying or preventing a change of control of the Company. See "PRINCIPAL
STOCKHOLDERS."
SHARES ELIGIBLE FOR RESALE. As of October 15, 1998, there were
outstanding 2,149,646 shares of Common Stock that were issued in connection with
various transactions, all of which are deemed to be "restricted securities," as
defined in Rule 144 under the Securities Act. All but 246,821 of these
restricted securities are currently eligible for resale by the holders thereof
in the public market pursuant to Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including an affiliate, who has beneficially owned restricted securities for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the date on which
notice of such sale is filed, provided certain requirements concerning
availability of public information, manner of sale and notice of sale are
satisfied.
27
<PAGE>
In addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of Common Stock that are not restricted securities. Also,
under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned restricted securities for at least two years may resell such securities
without compliance with the foregoing requirements. Sales of substantial amounts
of the Common Stock in the public market, or the perception that such sales
might occur, could adversely affect the then prevailing market price for the
Common Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities. No predictions can be made as
to the effect, if any, that market sales of such shares or the availability of
such shares for future sale will have on the market price of the Common Stock
prevailing from time to time.
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK IN THE EVENT
OF REDEMPTION OF IPO WARRANTS. The Company has the ability to call the 1,365,000
IPO Warrants for redemption at a price of $0.25 per IPO Warrant, subject to the
approval by securities administrators of various states in which the holders of
the IPO Warrants reside. The exercise price of the Warrants is less than the
market price per share of Common Stock, and the Company believes that the
current owners of those Warrants, may, therefore, have an incentive to exercise
those Warrants and to purchase shares of Common Stock. There can be no
assurance, however, that the securities administrators of all states in which
holders of the IPO Warrants reside will approve the offer by the Company of the
Common Stock underlying the IPO Warrants. In addition, there can be no assurance
that all, or any portion of such IPO Warrants will be exercised in the event
that such approval is obtained. In the event that the Company calls the IPO
Warrants for redemption, holders of the IPO Warrants will have the choice of
exercising their IPO Warrants or selling them to a buyer who could be expected
to exercise such IPO Warrants, or of accepting the redemption price of $0.25 per
IPO Warrant. In the event that a significant number of holders of IPO Warrants
exercise such Warrants, it can be expected that many of the shares of Common
Stock purchased upon such exercise will be sold shortly thereafter. The sale of
a significant number of shares of Common Stock can be expected to have an
adverse impact on the market price for the Company's Common Stock.
NO DIVIDENDS. The Company has not paid any cash dividends and does
not intend to pay cash dividends on the Common Stock in the foreseeable future.
STATE LAW LIMITATIONS ON DIRECTOR LIABILITY FOR MONETARY DAMAGES. The
Company's Certificate of Incorporation, as amended, substantially limits the
liability of the Company's directors to its stockholders for breach of fiduciary
or other duties to the Company. See "LIMITATION ON LIABILITY AND
INDEMNIFICATION MATTERS."
DELAWARE ANTI-TAKEOVER PROVISIONS. Section 203 of the Delaware
General Corporation Law (the "DGCL") prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliate and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain "business
combinations" (defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation or the aggregate value of all of the
outstanding capital stock of the corporation and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock, unless
(i) the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder acquired shares, (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it became an interested stockholder or
(iii) the business combination is approved by a majority of the board
28
<PAGE>
of directors and by the affirmative vote of two-thirds of the outstanding voting
stock not owned by the interested stockholder. The application of Section 203 of
the DGCL could have the effect of delaying or preventing a change of control of
the Company. See "DESCRIPTION OF CAPITAL STOCK -- CERTAIN ANTI-TAKEOVER EFFECTS
OF PROVISIONS OF DELAWARE LAW."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and the Company intends
that such forward-looking statements be subject to the safe harbors for such
statements under such sections. The statements contained in this Prospectus that
are not historical fact are "forward-looking statements" (as such term is
defined in the statutory sections cited above), which can be identified by the
use of forward-looking terminology such as "believes," "expects," "intends,"
"may," "will," "should," "could," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The Company's forward-looking
statements include the plans and objectives of management for future operations,
including plans and objectives relating to its Internet connection services,
plans and objectives for other businesses that the Company may enter and future
economic performance of the Company. The forward-looking statements and
associated risks set forth in this Prospectus include or relate to: (i) ability
of the Company to obtain additional financing, (ii) ability of the Company to
successfully defend itself in the pending ICC litigation, (iii) ability of the
Company to attract and retain qualified technical, sales, marketing and
administrative personnel relating to the services it currently provides and
intends to provide, (iv) ability of the Company to market its services at
competitive prices, (v) development of brand-name recognition and loyalty for
the Company's services, (vi) development of an effective sales staff, (vii)
market acceptance of the Company's services, (viii) success of the Company's
market initiatives, (ix) expansion of sales in the industries to which the
Company provides its current and intended services, (x) success of the Company
in forecasting demand for its current and intended services, (xi) success of the
Company in diversifying the Company's market to provide services to large and
small businesses, professionals and individuals, (xii) success of the Company in
diversifying the types of services it offers to customers, (xiii) achievement of
forecast operating margins dependent upon price and efficient provision of
services, (xiv) availability of suitable licenses or other intellectual property
access and protection for the Company's services, (xv) the ability of the
Company to implement its acquisition strategy and the success of that strategy,
if and to the extent it is implemented and (xvi) success of the Company in
achieving increases in net sales to reduce the cost of services sold and
decrease general, administrative and development costs as a percentage of net
sales.
The forward-looking statements are based on assumptions and judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the "Risk Factors" section of this
Prospectus, there are a number of other risks presented by the Company's
business and operations that could cause the Company's net revenues or net loss,
or growth in net revenues or net loss to vary markedly from prior results or the
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Company to alter its marketing, capital investment and other
expenditures, which may adversely affect the Company's results of operations and
cash flows. In light of significant uncertainties inherent in the
forward-looking information included in this Prospectus, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved.
29
<PAGE>
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock and the IPO Warrants are traded on Nasdaq
under the symbols RMII and RMIIW, respectively. The table below sets forth for
the periods indicated the high and low closing sales prices for the Company's
Common Stock, as reported by the Nasdaq Stock Market, Inc.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ -------
<S> <C> <C>
December 31, 1996 $2.750 $1.375
March 31, 1997 2.750 1.125
June 30, 1997 3.750 1.875
September 30, 1997 2.625 2.000
December 31, 1997 3.125 2.375
March 31, 1998 5.188 1.875
June 30, 1998 11.750 5.313
September 30, 1998 22.500 7.250
</TABLE>
The Company has never paid a cash dividend to Common Stock
stockholders, and the current policy of the Company's board of directors is to
retain the earnings of the Company, if any, for use in the operation and
development of its business. Therefore, the payment of cash dividends on the
Common Stock is unlikely in the foreseeable future. Any future determination
concerning the payment of dividends will depend upon the Company's financial
condition, the Company's results of operations, and any other factors deemed
relevant by the board of directors.
30
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the actual
capitalization of RMI, and (ii) the pro forma capitalization of RMI adjusted for
the acquisition of Application Methods and the proposed acquisition of
DataXchange. This information is qualified by the more detailed information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
HISTORICAL PRO FORMA
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 762 $ 994
Current portion of debt and capital lease obligations 675 675
-------- --------
-------- --------
Debt (excluding current maturities) and
Capital Lease Obligations 629 629
-------- --------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, authorized 750,000
shares, no shares outstanding
Common stock, $.001 par value, authorized 25,000,000 7 8
shares, issued 7,582,347 shares, outstanding 7,518,267
(1)
Additional paid-in capital 11,335 18,973
Treasury Stock (85) (85)
Accumulated deficit (8,780) (8,780)
-------- --------
Total Stockholders' Equity 2,477 10,116
-------- --------
Total Capitalization $ 3,106 $ 10,745
-------- --------
-------- --------
</TABLE>
- --------------------------------------------------------------------------------
(1) Does not include options and warrants to purchase approximately 7,812,291
shares of RMI Common Stock outstanding at June 30, 1998.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial
information presented below has been derived from the unaudited and audited
historical financial statements of RMI, Application Methods and DataXchange
included elsewhere in this Prospectus and reflect management's present estimate
of pro forma adjustments, including a preliminary estimate of purchase price
allocations, which ultimately may be different. The pro forma financial data
give effect to the acquisition of Application Methods and the proposed
acquisition of DataXchange.
The acquisitions are being accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed are recorded at
their estimated fair values, which are subject to further
31
<PAGE>
adjustment based upon appraisals and other analyses, with appropriate
recognition given to the effect of RMI's borrowing rates and income tax rates.
The unaudited pro forma combined statement of operations for the year
ended December 31, 1997 gives effect to the acquisitions as if they had been
consummated at the beginning of such year. This pro forma statement of
operations combines the historical consolidated statement of operations for the
year ended December 31, 1997 for RMI, the historical combined statement of
operations for the year ended December 31, 1997 for Application Methods and
historical statement of operations for the year ended January 31, 1998 of
DataXchange.
The unaudited pro forma condensed combined statement of operations
for the six months ended June 30, 1998 gives effect to the acquisitions as if
they had been consummated at January 1, 1998. This pro forma statement of
operations combines the historical operations for RMI and Application Methods
for the six month period ended June 30, 1998, and for DataXchange for the six
month period ended July 31, 1998.
The unaudited pro forma condensed combined balance sheet as of June
30, 1998 gives effect to the acquisitions as if they had been consummated on
that date. This pro forma balance sheet combines the historical consolidated
balance sheet at that date for RMI and the historical balance sheets at such
date for Application Methods and DataXchange.
The unaudited pro forma condensed combined financial statements may
not be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future. The unaudited pro
forma condensed combined financial data presented below should be read in
conjunction with the audited and unaudited historical financial statements and
related notes thereto of RMI, Application Methods and DataXchange and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," included elsewhere in this Prospectus.
32
<PAGE>
Pro Forma Condensed Combined Balance Sheet
As of June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------------------
Rocky DataXchange Application
Mountain Network, Methods, Pro Forma Pro Forma
Internet, Inc. Inc. Incorporated Subtotal Adjustments (B) Combined
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ........... $ 762 $ 226 $ 6 $ 994 $ 994
Trade receivables ................... 635 153 192 980 980
Inventory ........................... 61 40 101 101
Other ............................... 112 97 45 254 254
-------- -------- -------- -------- -------- --------
Total Current Assets ................ $ 1,570 $ 516 $ 243 $ 2,329 $ 2,329
-------- -------- -------- -------- -------- --------
Property and Equipment, net ............ 2,612 171 6 2,789 2,789
Goodwill, net .......................... 1,324 1,324 7,330 (1) 8,654
Customer lists, net .................... 413 413 413
Other assets, net ...................... 324 6 330 330
-------- -------- -------- -------- -------- --------
Total Assets ........................ $ 6,243 $ 693 $ 249 $ 7,185 $ 7,330 $ 14,515
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Liabilities and Stockholders Equity
Current Liabilities:
Notes Payable ....................... $ 132 $ 132 $ 132
Current maturities of
long term debt and
capital lease obligations ........ 675 675 675
Accounts payable and
accrued expenses ................. 2,147 265 44 2,456 2,456
Unearned income and deposits ........ 315 192 507 507
-------- -------- -------- -------- -------- --------
Total Current Liabilities ........... $ 3,137 $ 457 $ 176 $ 3,770 $ 3,770
-------- -------- -------- -------- -------- --------
Long-term debt and capital
lease obligations ................... 629 629 629
Stockholders' Equity
Common Stock and
additional paid in capital ....... 11,342 1,890 13,232 (1,890)(2) 18,981
7,639 (1)
Accumulated deficit ................. (8,780) (1,654) 73 (10,361) 1,581 (2) (8,780)
Treasury stock, at cost
Common .......................... (85) (85) (85)
-------- -------- -------- -------- -------- --------
Total Stockholders Equity ........... $ 2,477 $ 236 $ 73 $ 2,786 $ 7,330 $ 10,116
-------- -------- -------- -------- -------- --------
Total liabilities & stockholders'
equity ...................... $ 6,243 $ 693 $ 249 $ 7,185 $ 7,330 $ 14,515
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
33
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------------
Rocky DataXchange Application Pro
Mountain Network, Methods, Pro Forma Forma
Internet, Inc. Inc. Incorporated Subtotal Adjustments (B) Combined
--------------------------------------------------------------------------------------
(Amount in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet access and services ...... $ 3,748 $ 962 $ 721 $ 5,431 $ 5,431
Equipment Sales ................... 193 193 193
-------- -------- -------- -------- -------- --------
Total sales .................... $ 3,941 $ 962 $ 721 $ 5,624 $ 5,624
Cost of sales ........................ 1,384 832 2,216 2,216
-------- -------- -------- -------- -------- --------
Gross Margin ................ $ 2,557 $ 130 $ 721 $ 3,408 $ 3,408
-------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative 3,987 427 641 5,055 5,055
Depreciation and amortization ..... 489 54 2 545 733(3) 1,278
Other expenses
-------- -------- -------- -------- -------- --------
Total operating expenses ...... $ 4,476 $ 481 $ 643 $ 5,600 $ 733 $ 6,333
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest expense, net ............. (129) 2 (8) (135) (135)
Other income (expense), net ....... 14 (1) (11) 2 2
-------- -------- -------- -------- -------- --------
$ (115) $ 1 $ (19) $ (133) $ (133)
-------- -------- -------- -------- -------- --------
Income (loss) from operations ........ $(2,034) $ (350) $ 59 $(2,325) $ (733) $(3,058)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Basic and Diluted loss per share
from operations ..................... (0.29) $ (0.39)
-------- --------
-------- --------
Average number of common shares
outstanding ....................... 7,073 7,894
-------- --------
-------- --------
</TABLE>
34
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------------------------------------------------------------------
Rocky DataXchange Application
Mountain Network, Methods, Pro Forma Pro Forma
Internet, Inc. Inc. Incorporated Subtotal Adjustments (B) Combined
---------------------------------------------------------------------------------------
(Amount in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet access and services ...... $ 5,740 $ 1,941 $ 984 $ 8,665 $ 8,665
Equipment Sales ................... 387 387 387
-------- -------- -------- -------- -------- --------
Total sales .................... $ 6,127 $ 1,941 $ 984 $ 9,052 $ 9,052
Cost of sales ........................ 2,060 1,960 4,020 4,020
-------- -------- -------- -------- -------- --------
Gross Margin ................ $ 4,067 $ (19) $ 984 $ 5,032 $ 5,032
-------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative 6,981 722 1,084 8,787 8,787
Depreciation and amortization ..... 887 54 5 946 1,466(3) 2,412
-------- -------- -------- -------- -------- --------
Total operating expenses ...... $ 7,868 $ 776 $ 1,089 $ 9,733 $ 1,466 $ 11,199
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest expense, net ............. (347) 10 (12) (349) (349)
Other income (expense), net ....... (5) 15 10 10
-------- -------- -------- -------- -------- --------
$ (352) $ 10 $ 3 $ (339) $ (339)
-------- -------- -------- -------- -------- --------
Income (loss) from operations ........ $ (4,153) $ (785) $ (102) $ (5,040) $ (1,466) $ (6,506)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Basic and Diluted loss per share
from operations ..................... $ (0.79) $ (1.07)
-------- --------
-------- --------
Average number of common shares
outstanding ....................... 5,268 6,089
-------- --------
-------- --------
</TABLE>
NOTES TO THE PRO FORMA CONDENSED
CONBINED FINANCIAL DATA
(UNAUDITED)
(A) BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet
is presented as of June 30, 1998. The accompanying unaudited pro forma condensed
combined statements of operations are presented for the six month period ended
June 30, 1998 and the year ended December 31,1997, except for DataXchange
Network, Inc. for which the six month period ended July 31,1998 and the year
ended January 31, 1998 are presented.
35
<PAGE>
(B) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited
condensed combined balance sheet as of June 30, 1998 and the unaudited condensed
combined statements of operations for the six months and year ended June 30,
1998 and December 31, 1997:
(1) To reflect the 821,369 shares of RMI stock valued at $7,639,000 which is
the approximate number of shares issued in connection with the
acquisitions of Applications Methods and anticipated to be issued in
connection with the acquisition of DataXchange. The excess purchase price
over the fair value of the net assets acquired has been allocated to
goodwill. The pro forma adjustment reflects the incremental goodwill in
the amount of $7,330,000. Shares of Common Stock issued or anticipated to
be issued for acquisitions were recorded at fair market value as based on
the current market price of RMI's publicly traded stock. The final
allocation of the purchase price will be made after the appropriate
appraisals or analyses are performed. Upon completion of the appraisals
and in accordance with the terms thereof, the excess purchase price
currently allocated to goodwill will be allocated to the appropriate asset
classifications, including customer list and goodwill. While the goodwill
will be amortized over a period of five years, customer list or other
identified intangibles may be amortized over shorter periods, which would
therefore increase amortization expense.
Summary information regarding the acquisitions is as follows (in thousands):
<TABLE>
<CAPTION>
DATE CLOSED STOCK
<S> <C> <C>
Applications Methods July 1,1998 $3,239
DataXchange ** $4,400
------
Total Consideration $7,639
------
------
</TABLE>
**This transaction is anticipated to close in the fourth quarter of 1998;
however no assurances can be given that it will close at that time, if at all.
(2) To eliminate the equity accounts of the acquisitions.
(3) To adjust amortization expense due to increase in the carrying value of
goodwill, using a life of five years, as if such acquisitions had been
completed as of January 1, 1997.
USE OF PROCEEDS
The 4,000,000 Acquisition Shares to be offered and issued by the
Company may be issued from time to time in full or part consideration in
connection with future acquisitions by the Company. 4,061,500 of the Warrants
and approximately an additional 3,135,538 Selling Securityholder Shares
subject of this Prospectus have been previously issued to the Selling
Securityholders and are being offered for sale by the Selling
Securityholders, and approximately an additional 6,209,695 Selling
Securityholder Shares that may be issued upon exercise of Warrants are being
offered for sale by the Selling Securityholders, without giving effect to
additional shares of Common Stock that may be issued pursuant to
anti-dilution provisions of various outstanding warrants and options.
Consequently, the Company will not receive any of the proceeds from the sales
of such shares.
The Company will not receive the proceeds of sales of any
Securities offered hereby by the Selling Securityholders. However, if the
Selling Securityholders who hold IPO Warrants determine to exercise their IPO
Warrants, the Company will receive the proceeds of the exercise of those
Warrants. The 1,365,000 IPO
36
<PAGE>
Warrants are redeemable by the Company at a cost of $0.25 per IPO Warrant,
subject to prior approval under the securities laws and regulations of the
states in which the holders of the IPO Warrants reside.
The Company estimates that it would receive approximately $5,670,000
upon the exercise of all of the 1,365,000 IPO Warrants, net of commissions due
and payable to the representative of the underwriters for the Company's IPO (but
not net of the expenses of this offering). The Company is required to pay to
Neidiger, Tucker, Bruner, Inc. ("NTB"), the representative of the underwriters
of the Company's IPO, a commission equal to 5% of the exercise price of the IPO
Warrants under certain circumstances. See "PLAN OF DISTRIBUTION." The Company
plans to use any such net proceeds for general corporate purposes and working
capital. To the extent such proceeds are not utilized immediately, they will be
invested in instruments that, in the determination of the Company, are low-risk
investment vehicles. There can be no assurance that any of the Warrants will be
exercised.
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial and
other data of RMI. RMI was formed in October 1993 and has generated operating
losses since inception as well as negative cash flow in 1996 and 1997. The
selected data set forth below as of December 31, 1995 and for the period then
ended have been derived from the financial statements of RMI which have been
audited by McGladrey & Pullen, LLP, independent auditors. The selected
consolidated statements of operations and the balance sheet data set forth below
as of December 31, 1996 and 1997, for the periods then ended have been derived
from the financial statements of RMI which have been audited by Baird, Kurtz &
Dobson, independent auditors. The selected financial data for the six month
periods ended June 30, 1998 and 1997 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which RMI considers necessary for a
fair presentation of the financial position and results of operations for these
periods. The operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for any future period.
37
<PAGE>
The selected historical financial data should be read in conjunction
with the Consolidated Financial Statements of RMI and related Notes thereto, and
the information included under "SUMMARY HISTORICAL FINANCIAL DATA" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
STATEMENT OF OPERATIONS DATA:
Revenues .................... $ 1,179 $ 3,282 $ 6,127 $ 2,849 $ 3,941
Cost of revenues earned ..... 320 1,104 2,060 1,088 1,384
Gross profit ................ 859 2,178 4,067 1,761 2,557
General, selling and
administrative expenses ..... 968 4,459 7,868 3,952 4,476
Operating (loss) income ..... (109) (2,281) (3,801) (2,191) (1,919)
Net (loss) income ........... (129) (2,343) (4,153) (2,368) (2,034)
Net (loss) income per
share (1) ................... $ (0.07) $ (1.03) $ (0.79) $ (0.51) $ (0.29)
OTHER DATA:
EBITDA (2) .................. (9) (1,956) (2,918) (1,778) (1,409)
BALANCE SHEET DATA:
Cash and Cash Equivalents ... $ 275 $ 349 $ 1,053 $ 439 $ 762
Investments ................. 0 1,357 0 577 0
Working Capital (Deficit) ... (187) 371 (209) (1,786) (1,567)
Total Assets ................ 925 5,540 5,082 5,137 6,243
Long Term Debt and Capital
Lease Obligations, net of
current portion ............ 524 1,134 905 1,072 629
Total Stockholders'
(deficit) equity ........... (169) 2,317 2,083 590 2,477
</TABLE>
(1) Loss per share is computed based on 1,868,000 shares outstanding for
1995, 2,295,000 shares outstanding for 1996 and 5,268,000 shares
outstanding for 1997, and 4,848,346 and 7,518,267 shares outstanding
for the six months ended June 30, 1997 and 1998, respectively. This
represents the weighted average of common shares outstanding for both
basic and diluted earnings per share for each period. See Note 1 to
the Company's financial statements included elsewhere in this
Prospectus.
(2) EBITDA is earnings from operations before interest, taxes,
depreciation and amortization. EBITDA is included herein because
management believes that certain investors find it to be a useful
tool for measuring a company's ability to service its debt. However,
EBITDA does not represent cash flow from operations, as defined by
generally accepted accounting principles ("GAAP"). EBITDA should not
be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or for cash flow as
a measure of liquidity and should be examined in conjunction with the
Consolidated Financial Statements of the Company and the related
Notes thereto included
38
<PAGE>
elsewhere in this Prospectus. EBITDA as defined by the Company may be
different from EBITDA as defined by other companies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS IS QUALIFIED IN ITS ENTIRETY
BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
Overview
RMI is a Delaware corporation incorporated in October 1995. It
acquired the assets of Rocky Mountain Internet, Inc., a Colorado corporation
incorporated in 1994 that began doing business in 1993 as an unincorporated
enterprise. RMI is an ISP providing a broad range of Internet-based services to
business and residential customers. RMI offers its services through its own
network in Colorado and through third-party providers nationwide. For the year
ended December 31, 1997 RMI had gross revenues of $6.1 million.
In September 1998, the Company entered into a Software License and
Consulting Services Agreement with Novazen to provide the Company proprietary
billing software tailored to its business. As consideration for the consulting
services to be provided by Novazen, the Company paid $100,000 in cash and issued
to Novazen 25,000 shares of its Common Stock. After the Company entered into the
Novazen Agreement, Kevin R. Loud, an officer of the Company, purchased 38,000
shares of Novazen common stock for $1.60 per share.
On July 1, 1998, RMI acquired all of the outstanding common stock of
Application Methods. Based in Seattle, Washington, Application Methods develops
software and has recently developed an e-commerce product. For the year ended
December 31, 1997, Application Methods had gross revenues of $984,000 and a net
loss of $102,000. Subsequent to the merger, Application Methods was merged into
a Colorado corporation which is a wholly-owned subsidiary of RMI. The
Application Methods shareholders may receive additional shares of Common Stock,
not to exceed $2.5 million in value, based on the satisfaction of certain
post-merger performance targets over a three-year period.
On June 5, 1998, RMI acquired all of the outstanding common stock of
Infohiway pursuant to the terms of a Merger Agreement dated June 5, 1998 by and
among RMI, RMI Subsidiary, Inc., Infohiway and Kenneth Covell, John-Michael
Keyes and Jeremy J. Black, the shareholders of Infohiway (the "Infohiway Merger
Agreement"). Infohiway has developed a search engine that the Company believes
has unique data searching features. For the year ended December 31, 1997,
Infohiway had gross revenues of $31,000. The acquisition was effectuated by the
merger of RMI Subsidiary, Inc., a wholly-owned subsidiary of RMI, with and into
Infohiway. As a result of the merger, Infohiway became a wholly-owned subsidiary
of RMI. Pursuant to the Infohiway Merger Agreement, the shareholders of
Infohiway received an aggregate of 150,000 shares of RMI Common Stock.
In September 1998, the Company entered into non-binding letters of
intent to acquire, among other businesses and assets, all of the issued and
outstanding capital stock of DataXchange Network, Inc. ("DataXchange"), a
Florida-based national internet backbone provider, in exchange for up to 535,000
shares of the Company's Common Stock and, subject to the achievement of certain
financial performance objectives, warrants to purchase up to 535,000 shares of
the Company's Common Stock.
39
<PAGE>
The Company offers a broad array of communications products and
services tailored to meet customer needs and provides high quality customer
support. The Company delivers its products and services through two divisions:
Communication Services and Web Services. The Company believes that, based upon
its experience, a growing number of businesses will demand one point-of-contact
for communications solutions for the following reasons: (i) to ensure proper
system/ network integration; (ii) to obtain a single point of responsibility for
products and services that might have numerous providers; and (iii) to continue
to take advantage of evolving communications technologies. The Company intends
to increase the breadth of its products and services delivered to its customers
by adopting new technology, acquiring complementary businesses and capitalizing
on strategic relationships.
Six Months Ended June 30, 1997 and 1998
The Company's revenue grew 38% from $2,849,000 to $3,941,000 for
the six months ended June 30, 1998 as compared to the comparable period in
1997. Revenue growth performance is attributable to increasing size of the
sales force and segmenting the sales team by product group.
Dial-Up Service
Revenues increased from $1,166,700 to $1,258,200 or 8% from the six
months ending June 30, 1997 to the six months ending June 30, 1998. Dial-up
customer count increased from 10,300 to 13,600 or 32% from the six months ending
June 30, 1997 to the six months ending June 30, 1998. As a result of the
re-structure of the dial-up product, the Company experienced a reduction in
revenue growth while making greater gains in its customer base.
Dedicated Access Service
The Company assigned a direct sales team for dedicated access service
and with that focus has received the benefit of higher revenue growth. As a
result, dedicated access service business has grown based principally on ISDN
and High Speed circuit growth. ISDN sales have grown from $258,200 to $435,400
from the first half of 1997 to the first half of 1998 for an increase of 69%,
while sales of high speed circuits services have increased from $387,000 to
$717,000 for the same periods for an increase of 85%.
Web Services
Web site hosting accounted for $218,300 of revenue in the six months
ending June 30 1997 and $298,800 for the same period in 1998 for an increase of
37%. The increase resulted from increases in the direct sales force, increased
server capacities and speed, and the increasing popularity of the web as a
business tool.
Web site production increased from $249,600 to $330,400 or 32% for
the first six months of 1997 as compared to the same period in 1998. The growth
in web hosting business plus the activities of the Company's direct sales force
helped to drive this part of the business.
Other Services
Other revenue includes training revenue ($16,900 decreased to
$9,000), consulting ($121,500 decreased to $13,300) and sales from the
Information Exchange L.L.C. ($64,000 decreased to $53,400). IP Telephony
generated $400 in revenue for the six months ended June 30, 1998; this service
was not available in 1997.
Gross Profit
Gross profit consists of total revenue less the cost of delivering
services and equipment. The gross profit (exclusive of equipment sales) was 65%
for the six months ended June 30, 1997 and 67% for the same
40
<PAGE>
period in 1998. Gross profits on equipment sales were 21% and 22% for the six
months ending June 30, 1997 and 1998, respectively. Sale of equipment is
provided as an accommodation to the Company's customers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("S G & A") increased
from $3,618,000 in the six months ended 1997 to $4,478,200 in the six months
ended 1998 or 23%. Exclusive of option compensation expense, discussed in the
following paragraph, S G & A increased 13% from the six months ended 1997 to the
six months ended 1998. Significant items are discussed below.
Payroll costs and benefits increased 21% from $2,042,200 to
$2,464,400 for the six months ended 1997 and 1998, respectively. Payroll costs
included a non-cash charge to compensation for the first quarter of 1998 in the
amount of $383,100 for the exercise of employee stock options. Exclusive of this
amount, payroll costs and related benefits increased 2%.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders fees, decreased from $129,300
for the six months ending 1997 to $81,200 for the same period in 1998 for a
decrease of 37%.
Facilities rent expense decreased by 1% from $225,200 to $222,000 for
the six months ended 1997 to the six months ended 1998. The Company has
headquarters in downtown Denver, Colorado with additional office facilities in
Colorado Springs, Colorado.
The Company experienced a decrease in communications expenses from
$147,100 for the six months ended 1997 to $121,300 for the six months ended 1998
or 18%. 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 $120,000 in the six
months ended 1997 to $380,200 in the six months ended 1998 or an increase of
217%. This increase resulted from legal and accounting work required in
preparation of the Company's proxy statement for the Shareholder meeting held on
March 12, 1998, legal work in the preparation of a registration statement on
Form S-1 and other miscellaneous legal expenses, which is discussed elsewhere in
this document and other miscellaneous legal expenses, and due diligence work
performed in regards to potential acquisitions.
Other outside services, which includes temporary to hire staff and
professional services, decreased 20% from $195,600 to $235,000 from the six
months ended 1997 to the same period in 1998. 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.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1997
Results of Operations
REVENUES. Revenues were generated by a variety of Internet-related
activities that included dial-up access services, dedicated access services
primarily for business customers, frame relay services, and web
41
<PAGE>
hosting and production. Other sources of revenue include equipment sales related
to dedicated access accounts, educational courses, and setup charges associated
with RMI's various services.
In 1997, RMI's revenues grew 87% compared to the year ended December
31, 1996. The total number of customers grew from 9,800 at year end 1996 to
13,000 at year end 1997, representing an increase of 33%. Revenues exclusive of
equipment sales grew by 108%. Revenues grew at a faster rate than customer count
due to RMI's continuing focus on commercial customers with higher monthly
billing rates and due to increases in web production and hosting. Customer count
was also adversely affected by approximately 1,050 resulting from the
termination of the contract with Zero Error Network (ZEN). An additional 390
customers from the Hayden, Colorado POP were transferred to ZEN effective
January 1, 1998. The following table provides information regarding amounts of
revenues by category for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 % CHANGE
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE CATEGORY:
Dial-Up Service ........ $1,465,300 $2,359,500 61%
Dedicated Access Service 689,300 2,047,900 197%
Web Services ........... 413,600 1,051,100 154%
Equipment Sales ........ 519,500 389,300 (25)%
Other .................. 193,900 279,300 45%
---------- ---------- ----------
Total .................. $3,281,600 $6,127,100 87%
</TABLE>
DIAL-UP SERVICE. RMI's dial-up service strategy is to provide high
quality service with few busy signals. In the past, RMI was not prepared to
offer flat rate pricing for unlimited access service. However, on November 4,
1997, RMI introduced a flat rate price offering to the Denver and Boulder,
Colorado markets. Subsequently, RMI added flat rate service in Colorado Springs
and Pueblo, Colorado. This offering has become more economically attractive than
in the past due to lower costs for circuits and a lower cost per port for
dial-up access. The new offering includes higher speed modem access using K56
Flex technology.
The table below shows the composite weighted average billing rate for
full service Internet access by quarter for 1995, 1996, and 1997. The reduction
in the average rate for September 1997 is the result of a change in the average
rates resulting from the termination of dial-up service contracts with third
parties in Alamosa and Leadville, Colorado. RMI has historically offered billing
rates ranging from $8.95 to $29.95. The remaining contracts with other third
parties provide a higher percentage of lower rate services. Effective with the
December 1997 billings, most Denver and Boulder, Colorado area customers who
were on payment plans higher than $19.95 per month were converted to a new
$19.95 flat rate service, resulting in a lower average billing rate.
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
Mar June Sept. Dec. March June Sept. Dec. March June Sept. 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>
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50 $20.10 $20.04 $19.65 $18.62
</TABLE>
The 61% revenue growth in dial-up service from 1996 to 1997 is
attributable to customer growth. Dial-up service has been approximately even
between commercial and residential customers throughout 1995,
42
<PAGE>
1996 and 1997 based on customer count. Based on revenues, the split between
commercial and residential is 35% to 65%, respectively. Dial-up service revenues
increased from $1,465,300 to $2,359,500 or 61% for the year ended December 31,
1996 as compared to the year ended December 31, 1997.
Through business alliances with three locally-based unrelated parties
RMI provides Internet services in secondary markets in the State of Colorado.
The services are provided under written contracts that provide for the
locally-based party to provide equipment and marketing services while RMI
provides Internet access and administrative services. Dial-up service revenues
based on these contracts generated $354,100 in revenues in 1996 and $480,400 in
revenues in 1997 for an increase of 36%. RMI expects total revenues from these
third party relationships to decrease in the future as explained further in this
paragraph. The joint POPs established pursuant to these contracts were
established commencing in the second quarter of 1995 and grew to six locations
by the end of 1995 and nine locations by the end of 1996. Effective July 3,
1997, the contract with ZEN was terminated. Under the termination agreement, RMI
will operate the Pueblo, Colorado POP as an RMI-only location and ZEN will
operate the Alamosa, Leadville, and Hayden, Colorado locations. These three POPs
were transitioned to ZEN beginning in July 1997 and concluding in December 1997
as ZEN was able to implement facilities. The Pueblo, Colorado POP transitioned
100% to RMI in July 1997. Due to the timing of the changes there was minimal
impact on total RMI revenues. A similar contract in Grand Junction, Colorado was
terminated by RMI effective April 30, 1997. The marketing efforts by the
locally-based third party in this location were minimal and sales were less than
$1,000 per month. RMI is pursuing options to operate this facility and add
dedicated as well as dial-up customers.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily
provided to commercial customers and include a wide range of connectivity
options tailored to the requirements of the customer. These services include
private port (dedicated modem), ISDN connections, 56 Kbps frame relay
connections, T-1 (1.54 Mbps) frame relay connections, T-1 and fractional T-1
point-to-point connections and T-3 (45 Mbps) or fractional T-3 connections. RMI
also offers a co-location service in which the customer's equipment is located
in the RMI data center, thereby providing access to the Internet directly
through RMI's connection.
Dedicated business has grown based principally on ISDN and high-
speed circuits (56K, T-1, and T-3) growth. ISDN sales have grown from
approximately $93,000 to $632,000, for an increase of 580% from 1996 to 1997.
Dedicated high-speed circuits and co-location customer billings have increased
from approximately $455,000 to $1,293,200 or 184% 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
SERVICE 1995 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Private Port.................................... 29 30 36 35 42 47
56 Kbps......................................... 18 27 27 34 47 69
ISDN............................................ 0 0 0 2 3 13
T-1 and T-3..................................... 7 10 10 11 16 25
Co-location..................................... 0 1 4 4 6 4
</TABLE>
<TABLE>
<CAPTION>
SEP 30 DEC 31
SERVICE 1996 1996
---- ----
<S> <C> <C>
Private Port.................................... 46 54
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
56 Kbps......................................... 71 72
ISDN............................................ 46 80
T-1 and T-3..................................... 29 30
Co-location..................................... 5 6
</TABLE>
<TABLE>
<CAPTION>
MAR 31 JUN 30 SEP 30 DEC 31
SERVICE 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 and T-3..................................... 65 84 99 123
Co-location..................................... 11 12 11 21
</TABLE>
WEB SERVICES. Web services revenues are primarily comprised of web
site hosting and web site production. Web site hosting provides ongoing revenue
from customers for whom RMI hosts a web site on web servers in the RMI data
center. All access made to these web sites by the customer and the Internet
community as a whole are processed on the RMI servers. The advantage to
customers is high-speed access 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 revenues of $239,700 in 1996 and
$478,500 in 1997 for an increase of 100%. The increase resulted primarily from
activity by the direct sales force, increased server capacities and speed, and
the increasing popularity of the Internet as a business tool.
Web site production revenues increased from $173,800 for 1996 to
$563,500 for 1997 for an increase of 224%. The increase in 1997 resulted
primarily from an increase in the size of the web site production department and
the purchase by customers of more complex applications. In addition, RMI's
direct sales force focused in 1997 on selling web production sites with higher
average billings.
EQUIPMENT SALES. RMI sells hardware to its customers as an
accommodation and to provide a "one stop shop" for Internet services. Equipment
sales can vary from a single router for an ISDN connection to providing servers
and Internet grade routers for co-locations. Sales decreased from $519,600 in
1996 to $389,300 in 1997 or a 25% reduction. The equipment sales for 1996
included some large dollar sales to key customers and sales to third party
business alliances for POP equipment with very low margin. 1997 did not have
similar large-scale sales. Margins on equipment sales increased from 11% in 1996
to 23% in 1997. RMI has established wholesale purchasing relationships with
national and regional vendors in order to provide an attractively priced total
Internet solution to its commercial customers.
GROSS PROFIT. Gross profit on Internet services (exclusive of
equipment) as a percentage of sales was 77% for 1996 and 69% for 1997. In
December 1996, RMI installed a T-3 network connecting Boulder, Colorado Springs
and Denver, Colorado locations utilizing Cascade switches. This is a large
capacity network providing reliable high-speed connections for a wide range of
customer needs, which in 1997 was underutilized. As the network becomes fully
utilized, RMI anticipates that it will realize significant economies of scale
resulting in increased margins.
44
<PAGE>
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES. General, selling and
administrative expenses increased from approximately $3,682,660 in 1996 to
approximately $6,611,000 in 1997, or 81%. General, selling and administrative
costs consist of personnel (excluding sales and marketing personnel), physical
facilities, depreciation, amortization, professional services and other related
administrative expenses. Significant items are discussed below.
Payroll costs increased 41% from $2,138,000 for 1996 to $3,024,000
for 1997 (not including sales and marketing personnel compensation discussed
below). RMI had 55 employees at the end of 1996 and 67 employees at the end of
1997 in all areas of RMI including administration, technical support,
development, and senior management (excluding sales and marketing). The 1997
total expense includes $127,700 of compensation expense in connection with
options granted to Mr. Douglas H. Hanson as discussed elsewhere in this
Prospectus.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders' fees, increased from $211,500
in 1996 to $286,300 in 1997, or 35%. RMI hired a full time direct sales staff
beginning in December 1995. Compensation for sales and marketing personnel was
approximately $565,000 for 1996 and $969,000 in 1997, for an increase of 71%,
with 16 employees at the end of 1996 and 17 employees at the end of 1997. The
increase resulted primarily from having a fully staffed sales department
throughout 1997 while the department was partially staffed in 1996.
Facilities rent expense was $172,400 in 1996 and increased 156% to
$441,400 in 1997. This increase was principally the result of a move in late
1996 to new corporate headquarters consisting of leased office space of
approximately 19,500 square feet space including a data center comprised of
1,200 square feet. RMI continues to occupy offices in Colorado Springs, Colorado
for staff performing dial-in technical support, customer service, and sales
functions. RMI's former offices in Denver, Colorado at 1800 Glenarm have been
subleased effective March 1, 1997 for the remainder of the lease term. A
one-time charge of approximately $58,000 has been recorded in 1996 for
commission expense on the transaction as well as the difference between the
sublease rate and the existing lease rate.
RMI experienced an increase in communications expense from $196,800
for the year ended 1996 to $260,500 for the year ended 1997, or 32%. These
expenses included local telephone service, cellular phones and pager costs and
long distance telephone expenses. RMI uses multiple "800" phone numbers to
provide technical support, customer support, and sales order processing to its
growing base of customers.
Legal and accounting expenses increased from $77,400 in 1996 to
$218,100 in 1997, or an increase of 182%. This increase resulted from the first
full year of filing SEC quarterly and annual reports, due diligence work
performed in connection with the investments in RMI made by Mr. Hanson in 1997
(discussed elsewhere herein), negotiations in connection with the termination of
employees and preparation of a proxy statement.
Outside services expense, which includes temporary to hire staff and
professional services, increased 191% from $150,100 to $437,700 from 1996 to
1997. RMI hires many of the technical support call center staff and the web
production staff on a "temp to hire" program wherein the new employee remains on
the temporary employment agency's payroll for approximately ninety days. This
allows the staff to be fully evaluated prior to becoming a full-time employee.
During 1997, RMI incurred one time expenses for a write-off of costs
incurred in Grand Junction and Burlington, Colorado for development of
third-party marketing agreements in the amount of $45,100, a write
45
<PAGE>
down of inventory for sale in the amount of $23,000, an expense of $314,600
relating to termination of employees and $107,200 of legal expenses primarily
relating to the terminations.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1996
Results of Operations
REVENUES. Revenues were generated by a variety of Internet-related
activities that included dial-up services, dedicated access services primarily
for business customers, frame services, and web site hosting and production.
Other sources of revenue included equipment sales related to dedicated access
accounts, educational courses, and setup charges associated with RMI's various
services.
RMI's revenues grew 178% from the year ended December 31, 1995 as
compared to the year ended December 31, 1996. The total number of customers grew
from 4,000 to 9,800 during the same periods, representing an increase of 145%.
Revenues exclusive of equipment sales grew by 167%. Revenues grew at a faster
rate than customer count due to a focus on commercial customers with higher
monthly billing rates and from increases in web site production and hosting and
equipment sales. The following table provides information regarding amounts of
revenues by category for the years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 % CHANGE
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE CATEGORY:
Dial-Up Service ........ $ 621,500 $1,465,300 135%
Dedicated Access Service 262,300 689,300 163%
Web Services ........... 29,100 413,600 1321%
Equipment Sales ........ 144,500 519,500 259%
Other .................. 121,900 193,900 59%
---------- ---------- ----------
Total .................. $1,179,300 $3,281,600 178%
</TABLE>
DIAL-UP SERVICE. RMI's dial-up service strategy is to provide high
quality service with few busy signals. In order to assure this service level,
RMI does not provide any unlimited access service price plans during the
business day, as these plans have a tendency to congest the network. RMI does
provide a range of service offerings based on a set number of hours for a set
rate with additional hours billed as overage. The table below shows the
composite weighted average billing rate for full service Internet access by
quarter for 1995 and 1996.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
March 1995 June 1995 Sept. 1995 Dec. 1995 March 1996 June 1996 Sept. 1996 Dec. 1996
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50
</TABLE>
The 135% revenue growth in dial-up service in 1996 over 1995 is
attributable to a growth in customers while average billing rates remained
stable year over year. Dial-up service has been approximately even between
commercial and residential customers throughout 1995 and 1996, based on customer
count.
46
<PAGE>
RMI has established business alliances through contracts with five
unrelated parties for the purpose of providing Internet services in secondary
markets in Colorado. These contracts provide for the local party to provide
equipment and marketing services while RMI provides Internet access and
administrative services. Dial-up service revenues based on these contracts
generated $67,500 in revenues in 1995 and $354,100 in 1996 for an increase of
425%. The joint POPs pursuant to these contracts were established commencing in
the second quarter of 1995 and grew to six locations by the end of 1995 and
eight locations by the end of 1996.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily
provided to commercial customers and include a wide range of connectivity
options tailored to the requirements of the customer. These services include
private port (dedicated modem), ISDN connections, 56 Kbps frame relay
connections, T-1 (1.54 Mbps) frame relay connections, T-1 or fractional T-1
point-to-point connections, and T-3 (45 Mbps) or fractional T-3 connections. RMI
also offers a co-location service in which the customer's equipment is located
in the RMI data center, thereby providing access to the Internet directly
through RMI's connection.
The table below shows the quarterly customer count by each of the
component services offered for dedicated access as of the dates indicated:
<TABLE>
<CAPTION>
SERVICE MAR 31 1995 JUN 30 1995 SEP 30 1995 DEC 31 1995 MAR 31 1996 JUN 30 1996
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Private Port............................ 29 30 36 35 42 47
56 Kbps................................. 18 27 27 34 47 69
ISDN.................................... 0 0 0 2 3 13
T-1 and T-3............................. 7 10 10 11 16 25
Co-location............................. 0 1 4 4 6 4
</TABLE>
<TABLE>
<CAPTION>
SERVICE SEP 30 1996 DEC 31 1996
- ---------------------------------------- ----------- -----------
<S> <C> <C>
Private Port............................ 46 54
56 Kbps................................. 71 72
ISDN.................................... 46 80
T-1 and T-3............................. 29 30
Co-location............................. 5 6
</TABLE>
WEB SERVICES. Web services revenues are primarily composed of web
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 site hosting customers as of the
dates indicated:
<TABLE>
<CAPTION>
MAR 1995 JUN 1995 SEP 1995 DEC 1995 MAR 1996 JUN 1996 SEP 1996 DEC 1996
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341
</TABLE>
47
<PAGE>
Web site hosting accounted for $26,200 of revenue in 1995 and
$239,700 of 1996 revenue, for an increase of 815%. The increase resulted from
increases in the direct sales force, increased server capacities and speed, and
the increasing popularity of the web as a business tool.
Web site production increased from $3,800 for 1995 to $173,800 for
1996, for an increase of 4,474%. RMI increased the size of the web site
production department and as provided customers more complex applications. The
growth in the web site hosting business as well as the efforts of RMI's direct
sales force helped to drive this part of the business. RMI did not have a direct
sales force until December 1995.
EQUIPMENT SALES. RMI sells hardware to its customers as an
accommodation and to provide a "one stop shop" for Internet services. Equipment
sales can vary from a single router for an ISDN connection to providing servers
and Internet grade routers for co-locations. Sales grew from $144,600 in 1995 to
$519,600 in 1996, or 259%. The equipment sales for 1996 included some large
dollar sales to key customers and sales to third party business alliances for
POP equipment with low margins. Equipment sales are typically low margin
transactions and can fluctuate dramatically depending on large server orders.
RMI has established wholesale purchasing relationships with national and
regional vendors in an effort to provide an attractively priced total Internet
solution to its commercial customers.
GROSS PROFIT. Gross profit consists of total revenue less the direct
costs of delivering services and the cost of equipment. Gross profit on Internet
services (exclusive of equipment) as a percentage of sales is 81% for 1995 and
77% for 1996. The reduction in gross profit percentage is principally the result
of increasing capacity for Internet access, ISDN facilities, and dial-up
facilities.
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES. General, selling and
administrative expenses increased from $875,200 in 1995 to $3,682,600 in 1996,
or 321%. General, selling and administrative costs consist of personnel
(excluding sales and marketing personnel), physical facilities, depreciation,
amortization, professional services and other related administrative expenses.
Significant items are discussed below.
Payroll costs increased from $459,600 for the year ended December 31,
1995 to $2,178,500 for the year ended December 31, 1996, or 374%. RMI had 29
employees at the end of 1995 and increased staff to 67 at the end of 1996 in all
areas of RMI including administration, technical support, development and senior
management (excluding sales and marketing).
Sales and marketing expenses increased from $92,300 in 1995 to
$776,500 in 1996, or 741% inclusive of personnel costs. RMI hired a full time
direct sales staff beginning in December 1995. Of the total 1996 sales and
marketing expense, approximately $565,000 related to personnel expenses. RMI had
6 employees at the end of 1995 and 16 employees at the end of 1996 in sales and
marketing. Extensive efforts were made in 1996 to identify, hire and train sales
personnel with expertise in Internet access and in web applications.
Approximately $211,500 for 1996 was spent on advertising, developing and
printing marketing and sales support materials, and trade show attendance.
Facilities rent expense for 1995 was $82,300 and increased to
$172,400 in 1996, or 109%. In late 1995, RMI opened offices on one floor in
Denver at 1800 Glenarm. At mid-year, RMI acquired an additional floor at the
same location. In late 1996, RMI moved its corporate headquarters and leased
office space of approximately 19,500 square feet (including a data center
comprised of 1,200 square feet). RMI continues to occupy offices in Colorado
Springs, Colorado for staff performing dial-in technical support, customer
service and sales functions. Additionally, RMI leased two POPs which contain
routers, servers, and modems
48
<PAGE>
to provide Internet access for its customers. RMI's former offices in Denver,
Colorado at 1800 Glenarm were sub-leased effective March 1, 1997 for the
remainder of the lease term. A one-time charge of approximately $58,000 was
recorded in 1996 for commission expense on the transaction as well as the
difference between the sublease rate and the existing lease rate.
RMI experienced an increase in communications expense from $58,400
for the year ended 1995 to $196,800 for the year ended 1996, or 237%. These
expenses included local telephone service, cellular phones and pager costs and
long distance telephone expenses. RMI uses multiple "800" phone numbers to
provide technical support, customer support, and sales order processing to its
growing base of customers.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
RMI has incurred losses since its inception in October 1993. RMI's
operations used net cash of approximately $3.3 million for the year ended
December 31, 1997. RMI has operated with a negative cash flow from operations
during 1996, 1997 and 1998. The cash used by operating activities is primarily
attributable to RMI's continued expansion of its facilities and employee base in
anticipation of continued growth in revenues.
RMI has relied on a series of private and public financings to
provide the funds necessary to finance its operations. These financings have
included (a) a convertible debenture offering in late 1995 and early 1996 that
generated $490,000 (the debentures were converted into shares of Common Stock in
October 1996), (b) a preferred stock offering in mid-1996 that generated
$406,000, (c) an initial public offering in September 1996, with proceeds of
$3,777,000 and (d) a private placement of equity from June to September 1997
which raised $1,117,920. During 1997, RMI substantially drew down a line of
credit for $500,000 for working capital purposes. This credit line was secured
by a pledge of a $300,000 treasury bill repurchase agreement and by RMI's
accounts receivable. In October 1997, RMI repaid the line of credit and
transferred the funds from the treasury bill to cash. The line of credit has
been discontinued and the secured position of the bank on the accounts
receivable has ceased. RMI's office lease is also secured by a pledge of a money
market fund of $250,000. On October 1, 1997, Mr. Hanson invested $2,398,600 by
purchasing shares of RMI Common Stock and invested an additional $503,600 in
March 1998 by exercising warrants and options that were granted at the time of
his initial investment in October 1997. The March 1998 investment by Mr. Hanson
was made in order to permit RMI to maintain its qualification for listing on
Nasdaq. It is possible that RMI will need additional cash resources to meet its
obligations.
Net cash used by RMI for investing activities in 1996 was
$1,511,500. Net cash used for investing activities in 1996 was primarily due to
purchases of property and equipment, the purchase of investments needed to
secure financing and payment for acquisitions. Net cash provided by investing
activities in 1997 and the first half of 1998 was $921,000 and ($524,916),
respectively (primarily due to proceeds of $1,356,600 from the release and sale
of such investments which were no longer needed to secure such financing which
was offset by purchase of equipment and the acquisition of O.N.E. customers.)
Upon the effectiveness of the Registration Statement of which this
Prospectus forms a part and related "Blue Sky" filings with various states, RMI
has the right to call the 1,365,000 IPO Warrants for $0.25 each, and each
warrantholder has, upon such call, a thirty-day period to exercise such warrant
at an exercise price of $3.07 per underlying share. Such IPO Warrants are
exercisable for the purchase of 1,900,566 shares of Common Stock. If all of the
shares underlying these warrants are exercised, RMI would realize proceeds of
approximately $5,670,000. RMI has not announced plans to call these warrants,
but may elect to do so following the date of this Prospectus. In addition, there
can be no assurance that all, or any portion, of the IPO
49
<PAGE>
Warrants will be exercised. See "RISK FACTORS-- POTENTIAL ADVERSE IMPACT ON
MARKET PRICE OF COMMON STOCK IN THE EVENT OF REDEMPTION OF IPO WARRANTS."
The Company intends to make capital expenditures during the next 12
months for expansion of its network, including the acquisition of POPs and the
upgrade of the NOC and other computers and financial and management information
systems.
If the Company's expansion occurs more rapidly than currently
anticipated or if the Company's available cash resources are not sufficient to
fund all of the Company's operating expenses and capital expenditures, the
Company will require additional capital before that time. In addition, depending
on market conditions, the Company may determine to raise additional capital
before such time. The Company may obtain additional funding through the call of
the IPO Warrants, sale of public or private debt and/or equity securities, bank
financings, lease financings, strategic relationships or other arrangements.
There can be no assurance as to the availability or the terms upon which such
financing might be available. See "RISK FACTORS -- FUTURE CAPITAL NEEDS;
UNCERTAINTY OF ADDITIONAL FINANCING."
The Company's cash position has changed due to events subsequent to
June 30, 1998. The Company did not complete a $175 million Rule 144A Offering
scheduled to fund in mid-August. Douglas H. Hanson loaned $800,000 to the
Company, which loan is evidenced by a promissory note dated October 20,1998, to
fund working capital shortfall. The Company terminated a merger agreement on
October 13, 1998 with ICC, which was originally scheduled to close September 5,
1998, and which was subsequently extended to October 2, 1998. The Bridge Loan
for approximately $42 million was also not completed due to the decision to
terminate the merger agreement. Costs, expenses and related fees associated with
the terminated merger and related proposed financing are estimated at between
$3.8 million and $5.2 million, a portion of which are in dispute, and of which
approximately $2.7 million relates to a non-cash item relating to warrants
issued by the Company. These costs will be charged to expense in the third
quarter of 1998. See "RECENT DEVELOPMENTS." As a result of the terminated merger
agreement, ICC filed a $30 million lawsuit against the Company. The Company
believes the lawsuit is without merit and intends to assert counterclaims
against ICC; however, there can be no assurance that the Company will prevail in
its defense or any counterclaims. The Company requires additional capital to
fund its current operation and execute its business plan.
Upon the effectiveness of the Registration Statement of which this
Prospectus forms a part and related "Blue Sky" filings with various states, RMI
has the right to call the 1,365,000 IPO Warrants for $0.25 each, and each
warrantholder has, upon such call, a thirty-day period to exercise such warrant
at an exercise price of $3.07 per underlying share. Such IPO Warrants are
exercisable for the purchase of 1,900,566 shares of Common Stock. If all of the
shares underlying these warrants are exercised, RMI would realize proceeds of
approximately $5,670,000. RMI has not announced plans to call these warrants,
but may elect to do so following the date of this Prospectus.
In connection with the investment by Douglas H. Hanson in the
Company in October, 1997, he was granted warrants to purchase shares of stock at
$1.90 per share. Currently, there are 3,950,000 warrants exercisable which would
net to the Company $7.5 million if fully exercised. These warrants expire in
September, 1999. There can be no assurance that these Warrants will be
exercised.
YEAR 2000 ISSUES
Currently, many computer systems, hardware and software products are
coded to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. The interaction
between various software and hardware platforms rely upon the date coding
system.
50
<PAGE>
As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to function properly after the turn of the
century. The Company, its customers, and suppliers are reliant on computers and
related automated systems for daily business operations.
The Company has begun the process of identifying computer systems
that could be affected by the Year 2000 issue as it relates to the Company's
internal hardware and software, as well as third parties which provide the
Company goods or services.
Three categories or general areas have been identified for review and analysis.
(1) Systems providing customer services. These include hardware
and software systems that are used to provide services to the
Company's customers in the form of Internet connectivity, e-mail
servers, news servers, authentication servers, etc. Hardware in
the form of routers and switches are also included in this area.
(2) Third party vendors providing critical services including
circuits, hardware, long distance and related products. These
include telco providers, suppliers of routers, modems, switches,
etc.
(3) Critical internal systems that support the Company's
administrative systems for billing and collecting, general
accounting systems, computer networks, and communication
systems.
The Company is in the planning and initial study phase of Year 2000
compliance review and testing. In regards to Item (1) listed above, the
Company's critical existing systems are no more than two and one-half years old
and it is anticipated that many of these systems will not have significant Year
2000 problems. Due to the Company's continued growth, most systems providing
customer services are planned to be relocated to an expanded network operations
center. Concurrently with the relocation, many of the critical systems will be
migrated to new hardware and software platforms to increase reliability and
capacities. All newly acquired hardware systems, operating systems, and software
are required to have vendor certification for Year 2000 compliance. These
systems are in process of being inventoried and a systems testing schedule is
being developed.
In regards to Item (2) above - third party products and services -
the Company's significant vendors are large public companies such as US West
Communications, ICG Telecommunications Group, Cisco Systems, Lucent
Technologies, Ascend Communications, etc., that are all under SEC mandates to
report their compliance in all publicly filed documents. The Company intends to
initiate a compliance review program with these vendors during the first quarter
of 1999 and will continue to track progress of all critical vendors for
compliance.
Item (3) above relates to internal systems for company administrative
and communications requirements. The Company intends to implement new billing
and billing presentment systems during the first half of 1999. These system
vendors are required to certify Year 2000 compliance. Additionally, the Company
intends to test these systems for compliance during the implementation
processes. The Company expects that internal computer networks and
communications systems will be tested in the first quarter of 1999 for
compliance.
The costs to address the Year 2000 compliance issues have not been
determined at this time. Based on growth, the Company plans to implement new
hardware platforms and software systems that should be Year 2000 compliant and,
therefore, costs specifically allocated to Year 2000 compliance may not be
significant. However, there can be no assurance that such costs will not be
significant. Systems testing and
51
<PAGE>
compliance reviews with third party services providers will incur manpower and
consultant costs.
The nature of the Company's business makes it dependent on computer
hardware, software, and operating systems that are susceptible to Year 2000
issues. Failure to attain at least minimum levels of Year 2000 compliance would
have a material adverse effect on the Company's ability to deliver services and
on the Company's business, operating results, financial condition and cash flow.
The Company has not developed a contingency plan for dealing with
Year 2000 risks at this time.
BUSINESS
Overview
The Company is a full service communications solutions provider of
switched and IP-based communications products and services for small- and
medium-sized business enterprises, as well as dial-up residential customers. The
Company operates 9 Internet POPs in Colorado, and through agreements with
third-party providers, the Company can provide Internet access in 90 of the 100
largest metropolitan statistical areas in the United States. The Company
monitors and controls its network through its NOC located in Denver, Colorado.
The Company intends to provide to its customers on a nationwide basis
comprehensive communications services, including dedicated Internet access,
dial-up Internet access, IP Telephony, point-to-point private line, frame relay
and local and long distance telephone service. In addition, the Company offers
its customers value-added web services, including web site hosting, web site
production and marketing, e-commerce and web training. The Company had combined
pro forma revenues for the year ended December 31, 1997 of $9,052,000 and
provided dedicated access and web services to over 1,200 business customers and
over 15,300 dial-up customers as of September 30, 1998.
Industry Background
OVERVIEW. The telecommunications industry is rapidly transforming
itself from a segmented multi-technology marketplace to an industry that is
characterized by the convergence of technologies and companies capable of
providing a full array of communication services. Three of the main factors
driving this significant transformation of the industry include (i) the
convergence of voice and data transmission, (ii) the need for broadband
transmission technologies and infrastructure, and (iii) the convergence of
technologies and companies providing what were formerly independent products and
services into one industry. As data and voice transmission converges, operators
continually need higher bandwidth capacity networks. Today the communications
services market can be divided into two basic categories: (i) traditional,
circuit switched and dedicated voice oriented services; and (ii) packet switched
services compatible with Internet standards. Traditional, circuit switched and
dedicated voice oriented services in the United States can be further divided
into long distance services and local exchange services.
TRADITIONAL TELECOMMUNICATIONS SERVICE MARKET. The present structure
of the U.S. telecommunications market resulted largely from the divestiture of
the "Bell System" in 1984 (the "Divestiture"). As a result of the Divestiture,
seven RBOCs were created to offer services in geographically defined areas
called local access transport areas ("LATA's"). The RBOC's were separated from
the long distance provider, AT&T, resulting in the creation of two distinct
industries--local phone service and long distance (also known as interexchange)
phone services. The Divestiture, in and of itself, did not result in competition
in the local exchange market, but it did provide for direct open competition for
long distance. Since the Divestiture, several factors have served to promote
competition in the local exchange market, including: (i) customer desire for an
alternative to the RBOCs (also referred to as the I-LECs); (ii) technological
advances in the transmission of data and video requiring greater capacity and
reliability than
52
<PAGE>
I-LEC networks were able to accommodate; (iii) a monopoly position and regulated
pricing structure, which provided little incentive for the I-LECs to reduce
prices, improve service or upgrade their networks; and (iv) the significant
fees, called "access charges," long distance carriers were required to pay to
the I-LECs to access the I-LECs' networks.
The first competitors in the local exchange market, designated as
"competitive access providers" or "CAPs" by the FCC, were established in the
mid-1980s. Most of the early CAPs were entrepreneurial enterprises that operated
limited networks in the central business districts of major cities in the United
States where the highest concentration of voice and data traffic is found. Since
most states prohibited competition for local switched services, early CAP
services primarily consisted of providing dedicated, unswitched connections to
long distance carriers and large businesses. These connections allowed
high-volume users to avoid the relatively high prices charged by I-LECs for
dedicated, unswitched connections or for switched access.
As CAPs proliferated during the latter part of the 1980s, certain
regulators issued rulings that favored competition and promised to open local
markets to new entrants. These rulings allowed CAPs to offer a number of new
services, including, in certain states, a broad range of local exchange
services, including switched services. Companies providing a combination of CAP
and switched local services are sometimes referred to as C-LECs. This
pro-competitive trend continued with the passage of the Telecommunications Act
of 1996, which provided a legal framework for introducing competition to local
telecommunications services throughout the United States. As a result the RBOCs,
which previously had an oligopoly in the $92 billion (1997 estimate) local
service market, are now facing increased competition from C-LECs. Conversely,
local carriers are being allowed to compete in the $104 billion long distance
market (1997 estimate) only after they have "opened" their local markets to
competition.
Over the last three years, several significant transactions have
been announced representing consolidation of the U.S. telecommunications
industry driven by both competitive pressures and the convergence of voice and
data networks. Among the I-LECs, Bell Atlantic Corporation and NYNEX Corporation
merged in August of 1997 and Pacific Telesis Group and SBC Communications Inc.
merged in April 1997. Major long distance providers have sought to enhance their
positions in local markets, through transactions such as AT&T's acquisition of
Teleport Communications Group and WorldCom's mergers with MFS and Brooks Fiber
Properties and to otherwise improve their competitive positions, through
transactions such as WorldCom's merger with MCI. In addition AT&T, in order to
capitalize on the trends of convergence and consolidation and gain access to the
local markets, has announced plans to merge with the cable company, TCI.
THE INTERNET SERVICES MARKET. The Internet is a global collection of
interconnected computer networks that allows commercial organizations,
educational institutions, government agencies and individuals to communicate
electronically, access and share information and conduct business. The Internet
originated with the ARPAnet, a restricted network that was created in 1969 by
the United States Department of Defense Advanced Research Projects Agency
("DARPA") to provide efficient and reliable long distance and data
communications among the disparate computer systems used by government-funded
researchers and academic organizations. The networks that comprise the Internet
are connected in a variety of ways, including by public switched telephone
network and by high speed, dedicated leased lines. Communications on the
Internet are enabled by IP, an inter-networking standard that enables
communication across the Internet regardless of the hardware and software used.
Over time, as businesses have begun to utilize e-mail, file transfer
and, more recently, intranet and extranet services, commercial usage has become
a major component of Internet traffic. In 1989, the U.S.
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government effectively ceased directly funding any part of the Internet
backbone. In the mid-1990s, contemporaneous with the increase in commercial
usage of the Internet, a new type of provider called an ISP became more
prevalent. ISPs offer access, e-mail, customized content and other specialized
services and products aimed at allowing both commercial and residential
customers to obtain information from, transmit information to and utilize
resources available on the Internet.
ISPs generally operate networks comprised of dedicated lines leased
from Internet backbone providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
ISP's POP by facilities obtained by the customer or the ISP from either I-LECs
or C-LECs through a dedicated access line or the placement of a circuit-switched
local telephone to call the ISP. The rapidly growing need for Internet access
and technology has resulted in a highly fragmented industry with the
proliferation of over 4,000 ISPs operating within the United States. These ISPs
are primarily made up of a few large national providers focused on high
bandwidth access and a large number of small providers with limited resources
focused on serving local markets. Often the solutions offered by these companies
fail to address certain elements required to ensure that customers'
mission-critical Internet operations are reliable, scalable and high-performing
and that these companies fail to provide a broad array of efficient, low-cost
communications products and services. The Company believes that customer service
has emerged as an increasingly important element of providing Internet services
and that often the large, national ISPs do not offer individual customers the
level of support desired and that many of the small, regional ISPs do not have
the resources necessary to offer adequate customer support.
According to industry estimates, the number of Internet users in the
United States who access the World Wide Web reached approximately 29.2 million
in 1997 and is forecasted to grow to approximately 72.1 million by the year
2000. In addition, IDC estimates that total ISP revenues in the United States
are projected to grow from $4.6 billion in 1997 to over $18 billion in 2000. In
the past, much of the growth in ISP revenues has been driven by the dial-up or
retail sector of the Internet. However, businesses today represent the largest
and fastest growing segment of the Internet market. IDC predicts that U.S.
corporate Internet access revenues will grow from approximately $1.9 billion in
1996 to over $6.6 billion in 2000. In addition, IDC predicts that enhanced
Internet services, such as web hosting, security e-commerce, virtual private
networks and advanced Internet applications are expected to grow from
approximately $352 million in 1997 to over $7 billion in 2000. Internet access
and enhanced Internet services represent two of the fastest growing segments of
the telecommunications services marketplace.
IP COMMUNICATIONS TECHNOLOGY. The most significant trend in the
Internet and indeed in the broader telecommunications industry, is the
convergence of voice and data communications to a singular mode of transmission.
From the turn of the century, when Alexander Graham Bell made his historic first
telephone call, traditional copper phone wires carried only voice information.
Typically, circuit-switch based communications systems establish a dedicated
channel for each communication (such as a telephone call for voice and fax),
maintain the channel for the duration of the call and disconnect the channel at
the conclusion of the call. With the inception of faxes and computer data in the
late seventies and early eighties, the resources of such circuit-switch based
networks became taxed. Various technologies have come to exist to address the
need for greater bandwidth. Today there is a convergence of both voice, data and
video transmission to one high-speed data packaging network. The most widely
used solution has been the advent and rapid adoption of TCP/IP data transmission
standard. Originally constructed as a network of computer networks, the Internet
revolves around the TCP/IP, which moves data in a series of packets. These
packets are disassembled at the point of transmission and routed over the
Internet backbone in the most efficient manner and reassembled at the point of
receipt. The disadvantage of these packets is that they are cumbersome and
occupy large amounts of space on telephone wires and as a result data is slow to
arrive at
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its destination. Various solutions have been created to address this problem,
yet to date the most common and effective is to access a high bandwidth network
for transmission.
Packet-switch based systems offer several advantages over
circuit-switch based systems, particularly the ability to commingle packets from
several communication sources together simultaneously onto a single channel. For
most communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, certain
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communications transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.
Many initiatives are under way to develop technology to address
these disadvantages of packet-switched based systems. The Company believes that
the IP standard, which is an "open networking standard" broadly adopted in the
Internet and elsewhere, should remain a primary focus of these development
efforts. The Company expects the benefits of these efforts to be improved
communications throughout, reduced latency and declining networking hardware
costs. As IP technology improves, the Company believes that such packet-switch
based networks will become the standard for providing telecommunication
services. Already, IP Telephony, or transmission of voice calls from a telephone
to a telephone using the Internet backbone to haul the data, is being offered to
consumers.
Positioning of the Company
The Company offers a broad array of communications products and
services tailored to meet customer needs and provides high quality customer
support. The Company delivers its products and services through two divisions:
Communications Services and Web Services. The Company believes that, based upon
its experience, a growing number of businesses will demand one point-of-contact
for communications solutions for the following reasons: (i) to ensure proper
system/network integration; (ii) to obtain a single point of responsibility for
products and services that might have numerous providers; and (iii) to continue
to take advantage of evolving communications technologies. The Company intends
to increase the breadth of its products and services delivered to its customers
by adopting new technology, acquiring complementary businesses and capitalizing
on strategic relationships.
Business Strategy
The Company's objective is to become a leading national provider of
a broad array of communications services distinguished by a state-of-the-art
network and high quality customer service and support. Key elements to the
Company's business strategy include the following.
PROVIDE A BROAD ARRAY OF COMMUNICATIONS SOLUTIONS TO ITS CUSTOMERS.
The Company has built a portfolio of products, services and skill sets to
develop and deliver comprehensive internetworking communications solutions to
both business and residential customers. These products and services are
organized under two divisions: Communication Services and Web Services. The
Company plans to continue to add products and services to its portfolio and
believes that a growing number of businesses and consumers will demand that one
company provide all of their communications needs. The Company believes that
this one point-of-contact service delivery model ensures: (i) high-performance,
cost-effective network planning, design and implementation; (ii) maintenance of
a single point of responsibility; and (iii) an ongoing customer relationship as
a technology partner for communications applications.
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PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. The Company
believes that highly differentiated customer service and technical support is a
key competitive asset in the communications industry, and the ISP sector in
particular. Because the Internet is an evolving and complex medium, customers
require significant technical support. Consequently, the Company has developed a
comprehensive strategy to attain maximum customer satisfaction. This strategy
consists of the following elements: (i) maintaining a sufficient number of
qualified service and technical support personnel through proactive recruitment,
retention and training programs; (ii) utilizing the Company's extranet to
provide real-time, interactive customer service; (iii) developing an on-line
billing system enabling customer-controlled account customization and analysis;
and (iv) further deploying and maintaining the Company's service delivery
standards and guarantees. The Company believes that due to its high quality
customer service, it experiences low turnover rates and achieves a significant
percentage of its subscriber growth from customer referrals.
MAXIMIZE NETWORK UTILIZATION. Through its network and agreements with
third-party providers, the Company provides Internet access in 90 of the 100
largest metropolitan statistical areas in the United States. The Company plans
to continue to selectively add POPs where it can add value to its customers. The
Company believes that the ISP industry has historically been divided between
ISPs focused on business customers and ISPs focused on residential dial-up
customers. The Company's business strategy is to maximize network utilization 24
hours a day by targeting both daytime business and evening-intensive consumer
users.
SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. The Company plans
to expand its sales efforts nationally by focusing on targeted areas where there
is a large concentration of businesses and favorable demographics. The Company
will initially target markets where it has existing facilities. In these
locations the Company will actively pursue both business and residential
customers. In markets where the Company is using third-party provider networks,
the Company will initially target dial-up customers through advertising,
promotions, public relations, telemarketing and customer referrals. Once the
Company attains critical mass in these locations, it will establish its own POPs
and begin targeting business and residential customers with its broad array of
communications products and services.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. The
Company believes that the Internet industry is undergoing structural changes
with an increasing use of the Internet for mission-critical applications, which
is creating demand for high quality network operations, customer service and
technical support. The Company also believes that there is a market opportunity
to consolidate ISPs, Internet-based service companies and Internet technologies.
Evidence of this strategy includes the Company's recent acquisitions of
Infohiway and Application Methods. Infohiway is a company that developed a
search engine that gives the Company on-line advertising opportunities for its
customers. Application Methods' e-commerce solution, e-SELL, enables the Company
to provide business customers with browser-based software to conduct business
over the Internet. The Company believes these acquisitions enhance the Company's
position as a full service provider of communications solutions. The Company
will continue to evaluate opportunities to acquire companies that it believes
will enhance its product and service offerings. In addition, the Company intends
to supplement its organic national growth efforts by acquiring local ISPs in
strategic locations to maximize economies of scale.
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Divisions and Services
<TABLE>
<CAPTION>
Divisions Services Description
- --------- --------- -----------
<S> <C> <C>
COMMUNICATION SERVICES INTERNET ACCESS
Co-Location T-1 or greater Internet access
provided to customer's server
located at the Company's POP
Dedicated Access Fractional T-1, T-1 or greater
Internet access provided to a
customer's office
Dial-Up Service Nationwide Internet access for consumer and
small business customers using modems to dial
into the Company's network
Wireless Access Evolving technology allowing up to
750 kbps wireless Internet access
currently available in the Denver
metro area
TELEPHONY SERVICES
e-Phone Long distance calling using
IPTelephony technology
Long Distance Traditional long distance services
Local (C-Lec) Traditional local exchange telephone
service on a resale or
facilities-owned basis throughout
Colorado
Dedicated
Line Services Dedicated and frame relay networks
to carry voice and data for business
customers
WEB SERVICES WEB SITE HOSTING A customer's web site is "hosted" on
the Company's servers and connected
to the Internet via a high-speed
connection
WEB SITE PRODUCTION Design, development and implementation of
customer web sites
WEB SITE MARKETING
Traffic Builder Plus Unique web site marketing program whereby
customer web sites are marketed exclusively to
Internet users
Infohiway Search engine that contains a large
and rapidly growing database of
reference information on the World
Wide Web
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Divisions Services Description
- --------- --------- -----------
<S> <C> <C>
ELECTRONIC COMMERCE Turnkey solution for setting
e-SELL up an Internet store
WEB TRAINING Various levels of Internet training
for customers from basic access
training
</TABLE>
COMMUNICATION SERVICES
INTERNET ACCESS
The Company provides Internet services through its 9 Internet POPs in
the state of Colorado and, through agreements with third party providers, in 90
of the 100 largest metropolitan statistical areas in the United States.
CO-LOCATION. As more people use the Internet to shop for products and
services, the demands on shared server resources are increasing. The Company
offers businesses the alternative of co-locating their servers in the Company's
data center, thereby taking cost-effective advantage of the Company's
centralized Internet resources. For example, a web developer who co-locates a
server at the Company can save up to 40% to 60% of the monthly cost of
maintaining that server in-house.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily
provided to commercial customers and include a wide range of connectivity
options tailored to the requirements of the customer. These services include
private port (dedicated modem), ISDN connections, 56 Kbps frame relay
connections, T-1 (1.54 Mbps) connections, and T-3 (45 Mbps) or fractional T-3
connections. This type of connectivity is generally used to connect local area
networks, wide area networks or server applications to the Internet, ensuring a
dedicated connection. This connection requires a dedicated telecommunications
facility, ranging from an analog phone line, ISDN, frame relay, leased line T-1
or leased line T-3 and a router and a device to convert digital signal to serial
interface, usually referred to as a CSU/DSU. Dedicated services range in price
from $199 per month to over $15,000 per month depending on the connection type.
Installation fees generally range from $300 to $5,000.
DIAL-UP SERVICE. The Company offers nationwide dial-up service for
unlimited usage, which is available for $19.95 per month plus a one-time $15
set-up fee. This offering includes high-speed modem access using K56 Flex
technology and a high quality connection due to the redundancy that has been
built into the network.
Through its arrangement with PSINet, the Company is able to provide dial-up
access to customers in over 230 locations nationwide.
WIRELESS SERVICE. The Company has recently signed an agreement with
American Telecasting, Inc., to offer high-speed megabit Internet access
technology to 80% of the homes and businesses in the Denver metro area. The
service includes download speeds of about 750 kbps, a microwave receiver, an
external modem, a cable modem and an Ethernet card. Costs include an
installation fee and an approximate $50 per month service charge. The Company
intends to enter into similar agreements with other providers as the Company
expands its geographic presence.
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TELEPHONY SERVICES
The Company provides IP Telephony and local (C-LEC) telephone service
in the state of Colorado and provides traditional long distance service
nationwide, subject to tariff approvals.
IP TELEPHONY. IP Telephony is new technology that enables long
distance calling using Internet technology. Rather than using traditional
switched voice technology the caller dials into a server that converts the voice
signal into IP packets and routes the call to a long distance carrier. This
technology enables the caller to bypass the LEC, thereby removing the local
exchange fees at this time. The Company is now able to deliver "toll quality"
long distance calls that originate in Colorado to anywhere in the contiguous
United States using IP Telephony. IP Telephony service is priced at $.07 per
minute to anywhere in the contiguous United States, 24 hours per day.
TRADITIONAL LONG DISTANCE SERVICE. The Company's recent agreement
with Frontier Communications of the West, Inc. will permit the Company to offer
a full line of traditional long distance services. The Company will be offering
the following services:
- 1+ long distance dialing
- Dedicated long distance
- 1-800 service
- Calling card
- Conference calling
LOCAL (C-LEC). The Company resells local exchange telephone services
in Colorado.
DEDICATED LINE SERVICES. The Company operates extensive dedicated and
frame relay networks to carry voice and data traffic across the country and
across town for its business customers.
WEB SERVICES
WEB SITE HOSTING. Web site hosting provides ongoing revenue from
customers for whom the Company hosts a web site on web servers located in the
Company's data center. All access made to these web sites by the customer and
the Internet community as a whole is processed on the Company's servers. The
advantage to customers is high-speed access to sites by their targeted
audiences. Prices for web site hosting generally consist of $99 per month for
virtual hosting service and $49 per month for static hosting services. There
is also a one-time set-up fee of approximately $99 for virtual hosting and $49
for static hosting.
WEB SITE PRODUCTION. Web site production encompasses the design,
development and implementation of customer web sites. These sites may be public
domain sites or private sites (extranets or intranets). The functionality of
these sites will continue to evolve and require a great deal of graphic design
talent as well as high end programming skills.
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WEB SITE MARKETING
TRAFFIC BUILDER PLUS. This is a web site marketing program whereby
customer web sites are marketed exclusively to Internet users. This service
includes sophisticated search engine submission and management techniques,
cross-linking related web sites, posting to relevant news groups and customizing
banner ad campaigns. The pricing for this service varies dramatically based on a
customer's budget and desired results.
INFOHIWAY. This is a search engine that contains a large and rapidly
growing database of reference information on the World Wide Web. The search
engine also contains certain features, including: PREVIEW buttons, which permit
users to see a site's content without waiting for a full download of all the
site's graphics; FUZZY LINKS, which provide visitors with a handy way to search
for related but perhaps not specifically targeted information; and SITE MAPPING,
which provides a simple and visual way to see a site's structure. The site also
contains banner advertisements, which the Company may sell to its customers as
part of a web marketing package.
ELECTRONIC COMMERCE
e-SELL. The Company provides small- to medium-sized businesses with
turnkey software package solutions for e-commerce that they can use themselves.
Rather than simply offering a web site, it acts as a true Internet store,
enabling a dynamic, interactive shopping experience for the customer, using
secure credit card transactions and "behind the scenes" functionality, like
inventory management and custom reporting. Through e-SELL, the Company will be
able to offer a low-cost, fast implementation of a true, database-driven
Internet store. Competing packages require the involvement of technical experts,
consultants or developers to set up and configure a store. Because of these
extra "soft costs", implementation costs usually reach several times the basic
cost of the package and implementation time can be weeks or months. By contrast,
an e-SELL store can be up and running in hours. e-SELL is scalable and
extensible as a business grows, because it is based on an open
architecture--Microsoft Windows NT and BackOffice. While competing packages
often utilize proprietary programming languages or tools (and many started out
as Macintosh or Unix products), e-SELL is an extension to the industry-standard
BackOffice platform, enabling easy customization. In addition, any
industry-standard database can be connected, furthering the ease of integration
with merchants' existing information systems.
WEB TRAINING. The Company's headquarters include a training center
with multiple workstations. Customers can schedule their employees for various
levels of Internet training, ranging from basic access training to HTML
programming. Customized, one-on-one training is also available, either at the
Company's headquarters or at the customer's site.
NETWORK OPERATIONS
The Company operates 9 Internet POPs in Colorado and, through
agreements with third-party providers, the Company can provide Internet access
in 90 of the 100 largest metropolitan statistical areas in the United States.
TECHNICAL AND CUSTOMER SUPPORT
The Company's customer service philosophy is to thoroughly understand
the customer's needs so that it may deliver a very high level of value-added
services and after-sales support. The Company believes that highly
differentiated customer support is a key competitive asset in the communications
industry, and the ISP
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<PAGE>
sector in particular. Because the Internet is an evolving and complex medium,
customers require significant technical support. Consequently, the Company has
developed a comprehensive strategy to attain maximum customer satisfaction. As a
result, the Company experiences low turnover rates and achieves subscriber
growth from customer referrals. This strategy consists of the following
elements: (i) maintaining a sufficient number of qualified service and technical
support personnel through proactive recruitment, retention and training
programs; (ii) utilizing the Company's extranet to provide real-time,
interactive customer service; (iii) developing an on-line billing system
enabling customer-controlled account customization; and (iv) further deploying
and maintaining the Company's service delivery standards and guarantees. The
Company continually monitors its customer service strategy through customer
satisfaction surveys, which are monitored by a third-party consulting firm. Over
75 employees, consisting of engineers, technicians, project managers, account
managers and customer service representatives, are directly responsible for
supporting the Company's customers.
MANAGEMENT INFORMATION SYSTEMS. The Company is focusing on management
information systems to achieve a competitive advantage in the marketplace
through the implementation of enabling technologies to deliver and support IP-
based services.
Currently, the Company's administrative office functions are
standardized on Microsoft Office products operating on Microsoft NT Server
Networks. Finance and accounting utilize Great Plains accounting software
products for general ledger, payables processing and receivables collection and
management. Billing and customer management software products are a combination
of custom written software and third party products. The billing systems are
currently under review to determine the optimal billing platform to handle new
product offerings and support expansion.
One goal of implementing automated systems is to move customer
support functions to a web interface which would allow customers to change
service types, review invoicing details, troubleshoot through on-line
information and communicate with the Company's technical support staff. These
systems are expected to provide enhanced customer support and reduce the cost of
the technical support function on a per customer basis. Enhanced billing systems
are expected to permit the Company to offer promotions and marketing programs to
attract new customers. The new billing systems are expected to provide greater
flexibility in offering discounts for selecting a wide range of the product
offerings.
SALES AND MARKETING
COMMERCIAL. The Company's ability to deliver an Internet solution,
coupled with an excellent technical knowledge base and an attention to providing
high quality service, will be the Company's key selling point. The Company
believes it will be capable of designing, implementing and maintaining a
complete enterprise network solution encompassing integrated voice, data, video
and Internet services addressing all facets of internal and external
communications for a business. A number of providers represent themselves as
"one-stop shops" or "turnkey providers" of these services, but rarely do they
have the ability to deliver, manage and support all services "in-house."
Therefore, the Company believes its competitive advantage will be its ability to
effectively package, price, brand and then implement its wide range of
communications services. This competitive advantage is expected to cultivate
financial growth as the Company focuses its sales and marketing efforts on
expanding nationally, focusing on the small- to medium-sized business market and
efficiently delivering a comprehensive set of products and services.
The Company's sales and marketing efforts focus on the direct sales
approach of its field sales representatives. Although each representative has a
specific product or service focus, each is assigned to an account team headed up
by an account manager. The Company believes that this account team approach
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<PAGE>
allows the Company to effectively cross-sell, package, and blend all of the
Company's products and services to best meet the needs of the customers.
Marketing elements that will be used to support the sales team include strategic
direct mail campaigns, public relations efforts and targeted industry
advertising. Each marketing activity is designed to generate Company and brand
recognition, provide product/service information and stimulate referral business
from a consumer as well as a commercial standpoint.
CONSUMER. The Company believes that its commercial competitive
advantage of packaging, pricing, branding and promoting its wide range of
communications services will also serve as a competitive advantage in the
consumer marketplace as the Company extends its sales and marketing reach across
the nation. The Company's sales efforts will focus on its "outbound/inbound"
telemarketing unit. In addition, the Company plans to build an extensive vendor
network capable of distributing all of its communication services to the public
through co-branding programs, affinity marketing agreements and cause-related
marketing initiatives. The Company also plans to employ extensive radio and
print advertising campaigns, event marketing opportunities, in-market retail
promotions and a nationwide public relations effort. As of October 15, 1998, the
Company had 10 sales representatives targeting dial-up customers.
CUSTOMERS
DEDICATED COMMUNICATIONS SERVICE CUSTOMERS. The Company's primary
commercial target market is small- to medium-sized businesses with 25-5,000
work-stations, multiple office locations, a dependence on communications
technology and with headquarters located in tier one or tier two cities ranked
in the top thirty high-tech BPI index. The secondary target markets will be
small- and medium-sized businesses with 25-5,000 work-stations, multiple office
locations, a dependence on communications technology and with headquarters
located in tier two and three cities that are close to the Company's
headquarters, or in the top thirty high-tech BPI index.
DIAL-UP INTERNET ACCESS CUSTOMERS. The Company's dial-up customer
base consists mainly of residential consumers and small businesses throughout
Colorado. Through the use of demographic market research data, the Company is
targeting its marketing and sales efforts towards new and current Internet
households and small businesses nationwide. Because the Company has experienced
a significant amount of dial-up sales through word-of-mouth advertising, the
Company operates an in-bound calling center and an out-bound telemarketing sales
unit. As of September 30, 1998, the Company served over 15,300 dial-up customers
which include consumers and small businesses.
COMPETITION
The markets in which the Company operates and intends to operate are
extremely competitive and can be significantly influenced by marketing and
pricing decisions of the larger industry principals. The Company believes that
competition will intensify in the future and its ability to successfully compete
depends on a number of factors including market presence, the capacity,
reliability and security of its network infrastructure, its packaging and
pricing of products and services compared to its competitors, the timing of new
product and service roll-outs, its ability to react to changes in the market and
industry and economic trends.
INTERNET ACCESS. The Company expects competition in these markets to
intensify in the future. There are no substantial barriers to entry in the
Internet access markets in which the Company competes. The Company's current and
prospective competitors in the Internet access market include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects
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to compete directly or indirectly with the following categories of companies:
(i) other national and regional commercial ISPs, such as Verio Inc. or one or
more of its affiliates and PSINet; (ii) established on-line services companies
that currently offer Internet access, such as AOL, CompuServe and Prodigy
Services Company; (iii) computer hardware and software and other technology
companies, such as Microsoft; (iv) national long-distance telecommunications
carriers, such as AT&T (with AT&T WorldNet), Sprint (SprintNet) and Qwest
Communications International, Inc.; (v) RBOCs; (vi) cable television system
operators, such as Comcast Corporation, TCI and Time Warner Inc.; (vii)
nonprofit or educational ISPs; and (viii) newly-licensed providers of
spectrum-based wireless data services. Modems offered by cable television
companies can transmit information at speeds of up to 10 megabits per second, as
opposed to the Company's K56 Flex (enhanced speed modem) service, which can
transmit information at speeds of up to only 56 kilobits per second. In
addition, TCI has recently announced it had reached separate agreements with Sun
Microsystems, Inc. and Microsoft to produce the software necessary to permit
access to the Internet through television set-top boxes beginning in 1999.
TELECOMMUNICATION SERVICES. The Company's intention to provide
traditional long distance service will place it directly in competition with
IXCs, which engage in the provision of long-distance access and other
long-distance resellers and providers, including large carriers such as AT&T,
MCI WorldCom and Sprint and new entrants to the long distance market such as the
RBOCs who have entered or have announced plans to enter the U.S. intrastate and
interstate long-distance market pursuant to recent legislation authorizing such
entry. See "REGULATION." On April 22, 1998, the Public Utilities Commission of
Colorado granted the request of RMB, a wholly-owned subsidiary of RMI, to become
a C-LEC. Likewise, the Company's intention to provide IP Telephony services and
C-LEC services will place it directly in competition with other providers
(either resellers or facilities-based carriers) that provide the same services.
Most of the Company's competitors are significantly larger and have
substantially greater market presence as well as substantially greater
financial, technical, operational, marketing and other resources and experience
than the Company.
LEGAL PROCEEDINGS
In June 1998, the Company announced it had entered into a merger
agreement to acquire Internet Communications Corporation ("ICC"). The closing of
the acquisition was subject to various closing conditions, and the merger
agreement contained certain rights of termination. On October 13, 1998, the
Company announced that it terminated the merger agreement due to, among other
things, ICC's failure to satisfy certain obligations under the merger agreement.
On October 14, 1998, ICC filed a complaint against the Company in Denver
District Court claiming $30 million in damages and alleging, among other things,
that the Company had breached the merger agreement and had made certain
misrepresentations to ICC with respect to the proposed merger transaction. The
Company believes ICC's claims to be without merit and intends to vigorously
defend such action and to assert counterclaims against ICC; however, there can
be no assurance that the Company will prevail in its defense or any
counterclaims. The Company is hopeful that it can resolve the dispute with ICC
without the necessity for a trial; however, there can be no assurance as to the
Company's ability in this regard. In the event that the dispute cannot be
resolved expeditiously, the Company expects that it would incur additional costs
and expenses as a result of the litigation and that the litigation may hamper
the Company's ability to obtain additional financing. As a result of the
terminated merger transaction and the related financing transactions which were
not completed, the Company estimates that it incurred costs, expenses and
related fees of between $3.8 million and $5.2 million, a portion of which are in
dispute. Of this amount, approximately $2.7 million relates to a non-cash item
relating to warrants issued by the Company. The Company does not currently have
the ability to pay all of such costs, fees and expenses. The Company believes
that it will be able to agree on a schedule for the payment of these costs,
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fees and expenses that is satisfactory to all parties; however, there can be no
assurance that the Company will be able to reach an agreement with all parties
regarding the payment of such costs, fees and expenses.
The Company is not involved in any other legal proceedings which the
Company believes would, if adversely determined, have a material adverse effect
upon its business, financial condition or results of operations.
REGULATION
General Regulatory Environment
The telecommunications businesses in which the Company operates or
intends to operate, namely, providing traditional long distance service,
providing long distance service by means of IP Telephony and activities as a
C-LEC, are subject to extensive federal and state regulation. In particular,
these services are subject to the provisions of the Communications Act of 1934,
as amended, including amendments effected by the 1996 Telecommunications Act and
the FCC regulations thereunder, as well as the applicable laws and regulations
of the various states, including regulation by PUCs and other state agencies.
Federal laws and FCC regulations apply to the facilities of and services offered
by, telecommunications common carriers including regulating the prices charged,
to the extent that those facilities are used to provide, originate, or terminate
interstate communications. State regulatory authorities retain jurisdiction over
telecommunications both originating and terminating within the state. The
regulation of the telecommunications industry is changing rapidly and the
regulatory environment varies substantially from state to state. Moreover, as
deregulation at the federal level occurs, some states are reassessing the level
and scope of regulation that may be applicable to the Company. All of the
Company's operations are also subject to a variety of environmental, safety,
health and other governmental regulations. There can be no assurance that future
regulatory, judicial, or legislative activities will not have a material adverse
effect on the Company, or that regulators, competitors, or third parties will
not raise material issues with regard to the Company's compliance or
noncompliance with applicable regulations.
The 1996 Telecommunications Act effected plenary changes in
regulation at both the federal and state levels that affect virtually every
segment of the communications industry. The stated purpose of the 1996
Telecommunications Act is to promote competition in all areas of communications
and to reduce unnecessary regulation to the greatest extent possible. While it
will take years for the industry to feel the full impact of the 1996
Telecommunications Act, it is already clear the legislation provides the Company
with both opportunities and challenges. The 1996 Telecommunications Act, among
other things, allows the RBOCs to enter the long distance business and enables
other entities, including entities affiliated with power utilities and ventures
between LECs and cable television companies, to provide an expanded range of
telecommunications services. Entry of such companies into the long distance
business would result in substantial competition to the Company's intended
telecommunications services (i.e., traditional long distance, IP Telephony and
LEC services) and may have a material adverse effect on the Company's business,
financial condition and results of operations and cash flow.
Under the 1996 Telecommunications Act, the RBOCs may immediately
provide long distance service outside those states in which they provide local
exchange service ("out-of-region" service) and long distance service within the
regions in which they provide local exchange service ("in-region" service) upon
meeting certain conditions. The 1996 Telecommunications Act does, however,
impose certain restrictions on, among others, the RBOCs in connection with their
provision of long distance services. Out-of-region services by RBOCs
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are subject to receipt of any necessary state and/or federal regulatory
approvals that are otherwise applicable to the provision of intrastate and/or
interstate long distance service. In-region services by RBOCs are subject to
specific FCC approval and satisfaction of other conditions, including a
checklist of pro-competitive requirements. The RBOCs may provide in-region long
distance services only through separate subsidiaries with separate books and
records, financing, management and employees and all affiliate transactions must
be conducted on an arm's length and nondiscriminatory basis. The RBOCs are also
prohibited from jointly marketing local and long distance services, equipment
and certain information services unless competitors are permitted to offer
similar packages of local and long distance services in their market. Further,
the RBOCs must obtain in-region long distance authority before jointly marketing
local and long distance services in a particular state. Additionally, AT&T and
other major carriers serving more than 5% of presubscribed long distance access
lines in the United States are also restricted from packaging other long
distance services and local services provided over RBOC facilities.
Federal Regulation
The FCC has established different levels of regulation for dominant
and non-dominant carriers. Of domestic common carrier service providers, only
GTE, the RBOCs and other I-LECs are classified as dominant carriers and all
other providers of domestic common carrier services, including the Company, are
classified as non-dominant carriers. The 1996 Telecommunications Act provides
the FCC with the authority to forebear from imposing any regulations it deems
unnecessary, including requiring non-dominant carriers to file tariffs. On
November 1, 1996, in its first major exercise of regulatory forbearance
authority granted by the 1996 Telecommunications Act, the FCC issued an order
detariffing domestic interexchange services. The order required mandatory
detariffing and gave carriers nine months to withdraw federal tariffs and move
to contractual relationships with their customers. This order subsequently was
stayed by a federal appeals court.
Although the FCC does not directly regulate local exchange service,
which is within the jurisdiction of state regulatory authorities, its actions
may impact directly on such service. The 1996 Telecommunications Act greatly
expands the FCC's interconnection requirements on the I-LEC. The 1996
Telecommunications Act requires the I-LEC to: (i) provide physical co-location,
which would allow RMB and other interconnectors to install and maintain their
own network termination equipment in I-LEC central offices, i.e., offices of US
West and virtual co-location only if requested or if physical co-location is
demonstrated to be technically unfeasible, (ii) unbundle components of their
local service networks so other providers of local service can compete for a
wider range of local services customers, (iii) establish "wholesale" rates for
their services to promote resale by C-LECs and other competitors, (iv) establish
number portability, which will allow a customer to retain its existing phone
number if it switches from the I-LEC to a competitive local service provider,
(v) establish dialing parity, which ensures customers will not detect a quality
difference in dialing telephone numbers or accessing operators or emergency
services and (vi) provide nondiscriminatory access to telephone poles, ducts,
conduits and rights-of-way. In addition, the 1996 Telecommunications Act
requires I-LECs to compensate competitive carriers for traffic originated by the
I-LEC and terminated on the competitive carrier's networks. The FCC is charged
with establishing national guidelines to implement the 1996 Telecommunications
Act. The FCC issued its Interconnection Order on August 8, 1996, which
established detailed rules regarding rates, terms and conditions for
interconnection between C-LECs and I-LECs. The Interconnection Order was
appealed to the U.S. Court of Appeals for the Eighth Circuit. On July 18, 1997,
the Court issued a final decision vacating the interconnection pricing rules and
"most favored nation" rules as well as certain other interconnection rules. The
FCC's and other parties' petitions to the Supreme Court requesting review of
these decisions have been granted. It is not possible at this time to determine
how the Supreme Court will respond to these appeals.
On April 18, 1997, the FCC ordered that the RBOCs and independent
LECs offering domestic interstate inter-LATA services, in-region or
out-of-region, be regulated as non-dominant carriers. However,
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such services offered in-region must be offered in compliance with the
structural separation requirements mentioned above. AT&T was classified as a
dominant carrier, but AT&T successfully petitioned the FCC for non-dominant
status in the domestic interstate interexchange market in October 1995 and in
the international market in May 1996. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated. A number of parties have,
however, sought the FCC's reconsideration of AT&T's status. The Company is
unable to predict the outcome of these proceedings on its operations.
On May 8, 1997, the FCC released an order intended to reform its
system of interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act.
Access service is the use of local exchange facilities for the origination and
termination of interexchange communications. The FCC's historic access charge
rules were formulated largely in anticipation of the 1984 divestiture of AT&T
and the emergence of long distance competition and were designated to replace
piecemeal arrangements for compensating LECs for use of their networks for
access, to ensure that all long distance companies would be able to originate
and terminate long distance traffic at just, reasonable and non-discriminatory
rates and to ensure that access charge revenues would be sufficient to provide
certain levels of subsidy to local exchange service. While there has been
pressure on the FCC historically to revisit its access pricing rules, the 1996
Telecommunications Act has made access reform timely. The FCC's recent access
reform order adopts various changes to its rules and policies governing
interstate access service pricing designed to move access charges, over time, to
more economically efficient levels and rate structures. Among other things, the
FCC modified rate structures for certain non-traffic sensitive access rate
elements, moving some costs from a per-minute-of-use basis to flat-rate
recovery, including one new flat rate element; changed its structure for
interstate transport services; and affirmed that ISPs may not be assessed
interstate access charges. In response to claims that existing access charge
levels are excessive, the FCC stated that it would rely on market forces first
to drive prices for interstate access to levels that would be achieved through
competition but that a "prescriptive" approach, specifying the nature and timing
of changes to existing access rate levels, might be adopted in the absence of
competition. The FCC intends to address these and other related matters in
subsequent proceedings.
Though the Company believes that access reform through lowering
and/or eliminating excessive access service charges will have a positive effect
on its service offerings and operations, it cannot predict how or when such
benefits may present themselves, or the outcome of any possible judicial appeal
or petition for FCC reconsideration.
The FCC also released a companion order on universal service reform
on May 8, 1997. The universal availability of basic telecommunications service
at affordable prices has been a fundamental element of U.S. telecommunications
policy since enactment of the Communications Act of 1934. The current system of
universal service is based on the indirect subsidization of LEC pricing, funded
as part of a system of direct charges on some LEC customers, including IXCs and
above-cost charges for certain LEC services such as local business rates and
access charges. In accordance with the 1996 Telecommunications Act, the FCC
adopted plans to implement the recommendations of a Federal-State Joint Board to
preserve universal service, including a definition of services to be supported
and defining carriers eligible for contributing to and receiving from universal
service subsidies. The FCC ruled, among other things, that: contributions to
universal service funding be based on all IXCs' gross revenues from both
interstate and international telecommunications services; only common carriers
providing a full complement of defined local services be eligible for support;
and up to $2.25 billion in new annual subsidies for discounted
telecommunications services used by schools, libraries and rural health care
providers be funded by an assessment on total interstate and intrastate revenues
of all IXCs. The FCC stated that it intends to study the mechanism for continued
support of universal service in high cost areas in a subsequent proceeding. The
Company is unable
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to predict the outcome of these proceedings or of any judicial appeal or
petition for FCC reconsideration on its operations.
On April 10, 1998, the FCC submitted a report to Congress in which it
stated that telephone-to-telephone IP Telephony bears the characteristics of
"telecommunications services" and that the providers of those services may be
"telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April 10,
1998 report states that, to the extent the FCC concludes that certain forms of
telephone-to-telephone IP Telephony service are "telecommunications services,"
and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the same
burdens on the local exchange as do other IXCs, the FCC "may find it reasonable
that they" become subject to the same regulations, including the requirement to
pay access fees to LECs and to contribute to universal service subsidies.
State Regulation
Companies conducting intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in many
jurisdictions, certification and tariff filing requirements. Generally, these
providers must obtain and maintain certificates of authority from regulatory
bodies in most states in which it offers intrastate services. In April 1998, RMB
obtained a certificate of authority from the Colorado PUC to provide local
exchange services as a C-LEC. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Fines and other penalties also
may be imposed for such violations.
Those states that permit the offering of intrastate/intra-LATA
service by IXCs generally require that end users desiring to use such services
dial special access codes. This may put the Company at a competitive
disadvantage compared with LECs whose customers can make intrastate/intra-LATA
calls simply by dialing 1 plus the desired number. If a long distance carrier's
customer attempts to make an intra-LATA call by simply dialing 1 plus the
desired number, the call will be routed to and completed by the LEC. Regulatory
agencies in a number of states have issued decisions that would permit IXCs to
provide intra-LATA calling on a 1 + basis. Further, the 1996 Telecommunications
Act requires in most cases that the RBOCs provide such dialing parity coincident
to their providing in-region inter-LATA services. The Company expects to benefit
from the ability to offer 1 + intra-LATA services in states that allow this type
of dialing parity.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company as of the date
hereof are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- -----------------------------------------------
<S> <C> <C>
Douglas H. Hanson 54 President, Chief Executive
Officer and Chairman of the Board of Directors
D. D. Hock 63 Director
Robert W. Grabowski 57 Director
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Lewis H. Silverberg 63 Director
Mary Beth Vitale 44 Director
Jeremy J. Black 46 Vice President--Infohiway/Web Services
Ronald M. Stevenson 42 President--Application Methods
Peter J. Kushar 43 Chief Financial Officer, Secretary and Treasurer
Kevin R. Loud 45 Vice President--Communication Services
Michael R. Mara 37 Vice President--Internet Services
Michael D. Schaefer 31 Vice President--Marketing
D. Kirk Roberts 47 Vice President
</TABLE>
DOUGLAS H. HANSON has been the President, Chief Executive Officer and
Chairman of the board of directors of the Company since October 1, 1997. See
"CERTAIN TRANSACTIONS--CHANGE IN CONTROL." Prior to assuming his positions with
the Company, Mr. Hanson was the President and Chief Executive Officer and a
director of Qwest Communications, Inc., a Colorado-based telecommunications
company, as well as the founder of Qwest's predecessor, SP Telecom. Mr. Hanson
formed SP Telecom in 1987 as a subsidiary of SP Railroad to install fiber optic
cable along the railroad's right-of-way. Before founding SP Telecom, Mr. Hanson
was vice president of FiberTrak, a telecommunications joint venture among Santa
Fe, Norfolk and SP railroads. He also held various positions at Southern Pacific
Transportation Co. Mr. Hanson currently sits on the board of directors of the
Competitive Telecommunications Association, The Metropolitan State College
Foundation Board, and the Board of Trustees of the Salvation Army, Intermountain
Division, and is engaged in other civic activities.
D. D. HOCK has been a director of the Company since October 1, 1997.
See "CERTAIN TRANSACTIONS-- CHANGE IN CONTROL." Prior to becoming a director of
the Company, Mr. Hock was the President, Chief Executive Officer and Chairman of
the board of directors (from February 1989 to July 1994; Chairman and Chief
Executive Officer from July 1994 to January 1996; Chairman from January 1996 to
February 1997, when he retired) of Public Service Company of Colorado.
ROBERT W. GRABOWSKI has been a director of the Company since January
10, 1998. He has been the Vice President, Finance and Administration, Sunny
Side, Inc./Temp Side, a private employment service, since 1988. He has been a
certified public accountant since 1968 and holds a Bachelor of Science degree
from De Paul University.
LEWIS H. SILVERBERG has been a director of the Company since January
10, 1998. Mr. Silverberg has been a business consultant since January 1994,
advising privately held businesses on their formation, sale and financing. In
September 1990, Mr. Silverberg joined Liquor Barn, Inc., which operated a chain
of retail stores and was in a bankruptcy reorganization proceeding at that time.
Mr. Silverberg was the Executive Vice President and a director of Liquor Barn,
Inc. until December 1993. The business was liquidated after Mr.
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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 U S WEST
Communications, Inc. (1994), Region Executive Director for U S West Cellular
(1991 to 1993) and Region General Manager for U S WEST Cellular (1989 to 1991).
She holds a Bachelor of Arts degree from Hillsdale College, a Master of Science
degree from the University of Colorado and an Advanced Management degree from
the Wharton School of Business.
JEREMY J. BLACK is Vice President--Infohiway. Mr. Black was the Chief
Executive Officer of Infohiway from 1996 until joining RMI upon its acquisition
of Infohiway. Prior to joining Infohiway, Mr. Black was the Executive Vice
President of Wilson Associates International. From 1986 to 1992, Mr. Black was
the President of Advanced Investment Software, where he developed the design for
RAMCAP software (Risk program). Mr. Black is an adjunct professor for the
College of Financial Planning and a national professor in investment risk
management and asset allocation.
RONALD M. STEVENSON is Vice President--Application Methods. Mr.
Stevenson founded Application Methods and was its President and founder from
1986 until 1997. In 1997, Mr. Stevenson became President of E-Sell Commerce
Systems and held that position until its acquisition by RMI. During 1988-1989,
Mr. Stevenson was product manager for Software Products International and prior
to that he acted as a consultant to IBM.
PETER J. KUSHAR has served as Chief Financial Officer, Secretary and
Treasurer since joining the Company in April 1998. From June 1997 to April 1998
he operated his own consulting practice advising customers in specialized
economic and telecommunication requirements such as C-LEC network economics and
operation. Prior to consulting, Mr. Kushar spent 14 years with U S WEST
Communications (Executive Director--Carrier Division from 1993 to 1997;
Executive Director--Network Operations from 1991 to 1993; Chief Financial
Officer--Federal Services from 1988 to 1991; Manager, Director and Chief
Financial Officer for U S WEST Information Systems from 1983 to 1988). Prior to
U S WEST, Mr. Kushar was a system planner, market analyst and account executive
for Southern New England Telephone from 1979 to 1983. Mr. Kushar received his
Bachelor of Science Degree in 1977 and Master of Business Administration Degree
in 1979 from the University of Montana.
KEVIN R. LOUD is Vice President--Communication Services 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 & Associates, where he consulted with regional and national
communication organizations on market development and operations efficiencies
until 1994. While operating Loud & Associates, Mr. Loud undertook a year-long
project for Automated Communications, Inc., during which he was treated as a
statutory employee. From 1984 until 1992, he was employed by Houston Network,
Inc. and held positions ranging from Director of Finance, Vice President of
Operations and Carrier Sales, Vice President Sales and President. The primary
business of that organization was switched long distance communication Services.
Mr. Loud holds a Master of Business Administration degree from William and Mary
and a Bachelor of Arts in Economics from UCLA.
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MICHAEL R. MARA is Vice President--Internet Services 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.
MICHAEL D. SCHAEFER is Vice President--Marketing of the Company.
Prior to joining the Company in April 1998, Mr. Schaefer had been working as an
event producer/promoter in the Denver area for the prior 10 years. Major events
to his credit include: The Denver Museum of Natural History's Imperial Tombs of
China, The Denver International Airshow, World Youth Day and the Denver Grand
Prix. Mr. Schaefer holds a Bachelor of Science degree in Business Administration
from the University of Denver and a Master of Business Administration degree
from Regis University.
D. KIRK ROBERTS has served as Vice President--Management Information
Systems and Administration of the Company since April 1995. From June 1997 to
April 1998 he served as Vice-President--Finance and Management Information
Systems. He also served as Chief Financial Officer of the Company from January
1995 until June of 1997. He was an accountant employed by Potter, Littlewood, &
Petty, PC, an accounting firm in Houston, Texas from 1991 to 1994. From 1989 to
1990, he worked for a national computer retailer as National Product
Manager--Accounting Solutions. He has a Bachelor of Business Administration
degree from the University of Houston and is a certified public accountant.
Committees of the Board of Directors
AUDIT COMMITTEE. In November 1997, the Company's board of directors
formed an Audit Committee composed of three directors, a majority of whom were
outside directors. The members of the initial Audit Committee were Douglas H.
Hanson, D. D. Hock and Reynaldo U. Ortiz until the resignation of Mr. Ortiz as a
director effective December 1, 1997. Mr. Robert W. Grabowski, an outside
director, now serves on the Audit Committee with Messrs. Hanson and Hock. Mr.
Hanson is also the President, Chief Executive Officer and the Chairman of the
board of directors of the Company. Members of the Audit Committee are appointed
annually by the full board of directors. The functions of the Audit Committee
are to review the Company's internal controls, accounting policies and financial
reporting practices; to review the financial statements, the arrangements for
and scope of the independent audit, as well as the results of the audit
engagement; and to review the services and fees of the independent auditors,
their independence and recommend to the board of directors for its approval and
for ratification by the stockholders the engagement of the independent auditors
to serve the following year in examining the accounts of the Company.
COMPENSATION COMMITTEE. On March 12, 1998, the Company's board of
directors formed the Compensation Committee. This committee is responsible for
reviewing the salaries, benefits and other compensation of the officers of the
Company and will make recommendations to the board of directors based on its
review. The members of the Compensation Committee are D. D. Hock, Mary Beth
Vitale and Douglas H. Hanson. Mr. Hanson is also the President, Chief Executive
Officer and the Chairman of the Board of Directors of the Company. Mr. Hanson,
as a director, will not vote on any matters affecting his personal compensation.
Mr. Hanson will be responsible for reviewing and establishing salaries, benefits
and other compensation for all other employees.
From January 1 through December 31, 1997 the board of directors held
no regular meetings and 13 special meetings. During such fiscal year, each
director attended at least 75% of the aggregate of the meetings of the board of
directors. In addition, the board of directors acted by unanimous written
consents pursuant to Delaware law and the Company's By-laws. The Audit Committee
was formed in November 1997 and has not met. The Compensation Committee was
formed in March 1998 and met on March 12, 1998 and June 2, 1998.
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16b COMMITTEE. In March 1998, the Company's board of directors formed
the 16b Committee comprised of two outside directors. The members of the 16b
Committee are D. D. Hock and Mary Beth Vitale. The 16b Committee is responsible
for the review of management's recommendations regarding various compensation
issues, including the issuance of stock options to officers and directors who
are subject to the Section 16 reporting requirements under the Exchange Act.
COMPENSATION OF DIRECTORS
The Company pays cash compensation to each of its non-employee
directors of $12,000 per year for his or her services as a director. The
compensation is to be paid at the end of each year and will be prorated on a
monthly basis for each month (or majority of each month, if the director serves
only a partial month) during which the director served as such. There are no
additional amounts payable to any director for committee participation or
special assignments.
Directors are also eligible to participate in the Company's 1996
Non-Employee Directors' Stock Option Plan (the "1996 Directors' Plan"). Under
the 1996 Directors' Plan, each director who is not an employee of the Company
receives a grant, upon his or her appointment or election to the board of
directors, of an option to purchase 1,500 shares of Common Stock. Thereafter, on
each of the first, second and third anniversary dates of the date of election or
appointment, the director is granted an additional option to purchase an
additional 1,500 shares of Common Stock, up to a maximum of 6,000 shares. The
exercise price of the options granted under the 1996 Directors' Plan is the fair
market value (as defined in the 1996 Directors' Plan) on the date that the
option is granted. All such options are exercisable beginning six months
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after the date of grant. To date, options under the 1996 Directors'
Plan have been issued to the following persons in the following amounts:
<TABLE>
<CAPTION>
<S> <C>
D.D. Hock 3,000
Robert Grabowski 1,500
Lewis Silverberg 1,500
Mary Beth Vitale 1,500
-----
Total 7,500
</TABLE>
At the RMI Annual Meeting, the stockholders of the Company approved
the adoption of the Rocky Mountain Internet, Inc. 1998 Non-Employee Directors'
Stock Option Plan (the "1998 Directors' Plan"), to be effective January 22,
1998. A total of 68,000 shares of Common Stock have been reserved for issuance
over the three-year term of the 1998 Directors' Plan.
The option exercise price of any option granted under the 1998
Directors' Plan may not be less than the fair market value of the Common Stock
on the date of grant of the option. Upon the effective date of the 1998
Directors' Plan, each non-employee director of the Company was granted options
to purchase 8,500 shares of Common Stock, subject to certain adjustments. If an
eligible director has continued to serve as a director of the Company from the
effective date until December 31, 1998, options to purchase 1,500 shares of
Common Stock will vest; if he or she continues to serve as a director for the
entire calendar year ending December 31, 1999, options to purchase 3,500 shares
of Common Stock will vest; and if he or she continues to serve as a director for
the entire calendar year ending December 31, 2000, options to purchase 3,500
shares of Common Stock will vest. Notwithstanding the foregoing, in the event of
a change in control of the Company (as defined in the 1998 Directors' Plan),
each outstanding option under the 1998 Directors' Plan vests immediately. In
addition, in the event of a change in control of the Company, the Administrative
Committee (or the board of directors in the absence of such a committee) may:
(i) grant a cash bonus award to any optionee in an amount equal to the exercise
price of all or any portion of the options then held by the optionee; (ii) pay
cash to any or all optionees in exchange for the cancellation of their
outstanding options in an amount equal to the difference between the exercise
price and the greater of the tender offer price for the Common Stock underlying
such options (in the event of a tender offer for the securities of the Company)
or the fair market value of the stock on the date of cancellation; and (iii)
make any other adjustments or amendments to the outstanding options. On January
22, 1998, the effective date of the 1998 Directors' Plan, the closing price of
the Common Stock was $2.625 and on October 15, 1998 the closing price was $7.50
per share, according to data obtained from the Nasdaq Stock Market, Inc.
Each option granted under the 1998 Directors' Plan shall expire not
more than five years from the date of grant. The 1998 Directors' Plan terminates
on December 31, 2000, unless earlier terminated in the discretion of the
Administrative Committee (or the board of directors in the absence of such a
committee).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires directors, executive
officers and persons who own more than ten percent of the outstanding Common
Stock to file with the Commission an Initial Statement of Beneficial Ownership
of Securities (Form 3) and Statements of Changes of Beneficial Ownership of
Securities (Form 4). Directors, executive officers and greater than ten percent
stockholders are required by Commission regulation to furnish the Company with
copies of all Section 16(a) forms they file.
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To the Company's knowledge, based on a review of the copies of such
reports furnished to the Company or representations that no other reports were
required, the Company believes that, during the fiscal year ended December 31,
1997, all filing requirements applicable to its directors, executive officers
and greater-than-10% beneficial owners were complied with, except that the
Initial Statement of Beneficial Ownership of Securities (Form 3) were filed late
for Messrs. Reynaldo U. Ortiz, Richard K. Dingess, Michael R. Mara and David L.
Evans (the then-Chief Financial Officer and Executive Vice President of the
Company) and Statements of Changes of Beneficial Ownership of Securities (Form
4) were filed late for Messrs. Roy J. Dimoff, Kevin R. Loud, Christopher K.
Phillips and D. Kirk Roberts. Since December 31, 1997, the Initial Statements of
Beneficial Ownership of Securities were filed late for Messrs. Peter Kushar and
Michael Schaefer and a Statement of Changes of Beneficial Ownership of
Securities was filed late for Mr. Hanson.
EXECUTIVE COMPENSATION
Following is information concerning compensation paid to all persons
who served as the Company's Chief Executive Officer during the 1997 fiscal year
and all others who were serving as executive officers during the 1997 fiscal
year and whose annual compensation (salary and bonus) was greater than $100,000
(the "Named Executive Officers"). The Company's fiscal year ends December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL BONUS($) COMPENSA RESTRICTED OPTIONS / SAR LTIP PAY- COMPENSA-
POSITION YEAR SALARY /OPTIONS -TION STOCK AWARDS (#) OUTS TION($)(4)
- -------- ---- -------- --------- --------- -------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas H. 1997 $ 30,000 600,000
Hanson
President, CEO
and Chairman (1)
Roy J.Dimoff, 1997 $ 86,150 $25,500(3)
CEO and
President (2) 1996 $101,407 $20,250(4)
1995 $ 23,322
Kevin R. Loud, 1997 $ 92,300
Vice President -
Communication
Services
1996 $ 83,967(4) $16,200
1995 $ 17,822
</TABLE>
(1) Mr. Hanson was elected President, Chief Executive Officer and
Chairman of the board of directors of the Company as of October 1,
1997. For a description of securities underlying his options see
"CERTAIN TRANSACTIONS --CHANGE IN CONTROL," above and the table set
forth below.
(2) Mr. Dimoff 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
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<PAGE>
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 to not compete by giving 30 days' prior
written notice to the Company of this election. In the event that Mr.
Dimoff terminates his covenant not to compete, the Company will have
no further obligation to make any remaining severance payments to Mr.
Dimoff. On March 6, 1998, Mr. Dimoff gave notice to the Company that
he elected to terminate the covenant not to compete. As a result, the
Company has avoided the requirement to pay the remaining $58,000 to
Mr. Dimoff under the Waiver and Release.
(4) This bonus was earned in 1996 and paid in 1997. The bonus was
based on achieving 81% of the Company's revenue plan. Mr. Dimoff
elected to receive $3,000 of the bonus in the form of a stock option
to acquire 3,000 shares of Common Stock exercisable in September
1997. Mr. Loud elected to receive $8,100 of the bonus in the form of
a stock option to acquire 8,100 shares of Common Stock exercisable in
September 1997. All employees who received 1996 bonuses had the same
choice of receiving their bonus in cash or stock options. The options
were granted pursuant to the Company's 1997 Non-Qualified Stock
Option Plan (the "Bonus Plan"). The Bonus Plan authorizes the Company
to issue options to purchase an aggregate of 50,000 shares of Common
Stock, subject to adjustment in the event of stock splits, stock
dividends and similar extraordinary events. The options were
exercisable immediately upon the grant thereof (September 26, 1997)
and can be exercised for a period of five years thereafter in lots of
100 shares or multiples thereof. The exercise price is $1.00 per
share of Common Stock purchased. The options may not be transferred
by the optionholder otherwise than by will or pursuant to the laws of
descent and distribution. The options may be exercised during the
optionholder's lifetime only by the optionholder or, in the event of
his disability or incapacity, by his guardian or legal
representative. The options become void immediately in the event that
the optionholder's employment with the Company is terminated for
cause but may be exercised for a period of three months following
termination other than for cause.
The Company currently has an employment agreement with Mr. Loud. The
employment agreement provides for a salary of $84,000 per year and is terminable
for cause. The Company may also terminate the agreement without cause subject to
the obligation to pay Mr. Loud a severance equal to five to eight months' salary
based on length of service. The agreement terminates in December 1999. The
employment agreement does not restrict Mr. Loud's ability to compete with the
Company following any termination.
The Company currently has an employment agreement with Mr. Roberts.
The employment agreement provides for a salary of $66,000 per year and is
terminable for cause. The Company may also terminate the agreement without cause
subject to the obligation to pay Mr. Roberts a severance equal to five to eight
months' salary based on length of service. The agreement terminates in December
1999. The employment agreement does not restrict Mr. Roberts' ability to compete
with the Company following any termination.
In connection with RMI's acquisition of Infohiway, Infohiway, a
wholly-owned subsidiary of RMI, entered into employment agreements with Mr.
Black and Kenneth Covell. Mr. Black's and Mr. Covell's
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<PAGE>
agreements provide for two-year terms at annual salaries of $80,000 and $70,000,
respectively, and include restrictive covenants binding on the employees with
respect to confidentiality, non-solicitation and non-competition matters.
Additionally, Messrs. Black and Covell are eligible for additional compensation
of up to $40,000 and $30,000, respectively, during each year of the term of
their employment agreement (i.e., two years) based on established performance
criteria.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE MARKET PRICE ON
OPTIONS/SARS EMPLOYEES IN PRICE DATE OF GRANT EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE
- ------------------ ------------ ------------- --------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Douglas H. Hanson 191,385 21.7% $2.6125 $2.375 October 1, 2002
Douglas H. Hanson 408,615 46.2% $ 1.00 $2.375 October 1, 2002
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
OPTIONS/SARS AT MONEY OPTIONS/ SARS AT
SHARES FY END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------ ------------ ---------- ----------------- ------------------------
<S> <C> <C> <C> <C>
Douglas H. Hanson -0- -0- -0-/600,000 -0-/$891,392(1)
</TABLE>
(1) Determined, in accordance with Commission rules, by the difference
between the fair market value of the Common Stock on December 31,
1997 ($3.00) and the exercise price of the options.
401(K) PLAN
In January 1998, the Company implemented an employee savings and
retirement plan (the "401(k) Plan") covering certain of its employees. Pursuant
to the 401(k) Plan, eligible employees may elect to reduce their current
compensation by up to the lesser of 15% of such compensation or the statutorily
prescribed annual limit ($10,000 in 1998) and have the amount of such reduction
contributed to the 401(k) Plan. The Company will make contributions to the
401(k) Plan on behalf of eligible employees in an amount equal to one-half of
the employee's contribution, up to a maximum of 3% of the employee's salary. The
Company's contribution to the 401(k) Plan is in the form of the Company's Common
Stock. The 401(k) Plan is intended to qualify under Section 401 of the Code, so
that contributions by employees or by the Company to the 401(k) Plan and income
earned on the 401(k) Plan contribution, are not taxable to employees until
withdrawn from
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<PAGE>
the 401(k) Plan and so that contributions by the Company, if any, will be
deductible by the Company when made.
CHANGES IN CONTROL
There are no arrangements or agreements known to the Company that may
result in a change in control of the Company. See "CERTAIN TRANSACTIONS--CHANGE
IN CONTROL."
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's By-laws provide, in general, that the Company shall, to
the fullest extent permitted by the DGCL, as now or hereafter in effect,
indemnify any person who was or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether criminal,
civil, administrative, or investigative (a "Proceeding"), by reason of the fact
that he is or was a director or officer of the Company, or, by reason of the
fact that such officer or director is or was serving at the request of the
Company as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise, against all
liability and loss suffered and expenses (including attorneys' fees), judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement reasonably
incurred by him in connection with such Proceeding, including any Proceeding by
or on behalf of the Company and will advance all reasonable expenses incurred by
or on behalf of any such person in connection with any Proceeding, whether prior
to or after final disposition of such Proceeding. The By-laws also provide that
the Company may also indemnify and advance expenses to employees or agents who
are not officers or directors of the Company.
Article 8 of the Company's Certificate of Incorporation, as amended,
provide that "No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except as to liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for violations of Section 174 of the Delaware General
Corporation Law (the "DGCL") or (iv) for any transaction from which the director
derived any improper personal benefit. If the DGCL hereafter is amended to
eliminate or limit further the liability of a director, then, in addition to the
elimination and limitation of liability provided by the preceding sentence, the
liability of each director shall be eliminated or limited to the fullest extent
provided or permitted by the amended DGCL. Any repeal or modification of this
Article 8 shall not adversely affect any right or protection of a director under
this Article 8 as in effect immediately prior to such repeal or modification
with respect to any liability that would have accrued, but for this Article 8,
prior to such repeal or modification."
The Company entered into an underwriting agreement with NTB, for
itself and on behalf of all of the underwriters of the IPO, that provides for
indemnification by the underwriters under certain circumstances of directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. The Company has entered into
similar agreements with certain security holders of the Company, including Mr.
Hanson.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions contained in the Certificate of
Incorporation and By-laws of the Company, the DGCL, an underwriting agreement,
other agreements that provide for such indemnification, or otherwise, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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<PAGE>
The Company maintains a directors' and officers' liability insurance
policy that provides, within stated limits, reimbursement either to a director
or officer whose actions in his capacity as such result in liability, or to the
Company in the event it has indemnified the director or officer.
CERTAIN TRANSACTIONS
Change in Control
As of October 1, 1997, Mr. Douglas H. Hanson obtained effective
control of RMI by entering into a series of agreements, described below,
pursuant to which, among other things: (1) RMI issued and sold to Mr. Hanson
1,225,000 shares of Common Stock for a purchase price of $2,450,000, or $2.00
per share; (2) Mr. Hanson purchased 275,000 shares of Common Stock from four of
RMI's stockholders, namely, Messrs. Roy J. Dimoff, Christopher K. Phillips, Jim
D. Welch and Kevin R. Loud, for an aggregate purchase price of $550,000, or
$2.00 per share; (3) contemporaneously with the transactions described in (1)
and (2), RMI agreed to issue to Mr. Hanson the Hanson Warrants, which authorized
the holder thereof to purchase 4,000,000 shares of Common Stock for an exercise
price of $1.90 per share, subject to adjustment as described below; (4) RMI
granted Mr. Hanson incentive stock options (to purchase 222,220 shares of Common
Stock for an exercise price of $2.25 per share and non-qualified stock options
to purchase 377,780 shares of Common Stock for an exercise price of $1.00 per
share pursuant to the 1997 Plan, which Hanson Options vest one year from the
date of grant (subject to acceleration of the vesting date by the board of
directors or a committee thereof that administers the 1997 Plan) and on March
12, 1998 a committee of the board of directors amended the 1997 Plan,
retroactively to October 1, 1997, in accordance with the requirements of the
Code, to provide that the number of incentive stock options was 191,385, the
exercise price of those options was $2.6125 and the number of non-qualified
stock options was 408,615, on which date Mr. Hanson exercised all of the
non-qualified stock options and purchased 408,615 shares of Common Stock
pursuant to such exercise; (5) Mr. Hanson obtained proxies from ten stockholders
of RMI to vote their shares of Common Stock held by such stockholders; and (6)
Mr. Hanson was elected as a director and was elected the President, Chief
Executive Officer and Chairman of the board of directors of RMI. As a result of
the purchase by Mr. Hanson of the shares of Common Stock described herein and
the proxies described herein obtained by Mr. Hanson, the election of all
nominees to the board of directors and the approval by RMI's stockholders of the
proposals at the RMI Annual Meeting was assured. See "PRINCIPAL STOCKHOLDERS."
The ten stockholders from whom Mr. Hanson obtained proxies are
Messrs. Roy J. Dimoff, Christopher K. Phillips, Jim D. Welch, Kevin R. Loud,
Brian Dimoff, Paul B. Davis, Michael R. Mara, Monty Reagan, Tim Scanlon and Owen
Scanlon. Mr. Phillips was, at the time of such transactions, a director of RMI,
Mr. Loud is the Vice President--Communication Services of RMI and Mr. Roy J.
Dimoff was the President, Chief Executive Officer and a director of RMI. Mr.
Mara is the Vice President--Internet Services of RMI and Mr. Brian Dimoff was
the Vice President--Customer Support Operations of RMI.
The Nasdaq Stock Market, Inc. adopted changes to the requirements
applicable to corporations qualifying its common stock for trading on Nasdaq.
Among other changes, the required minimum net tangible assets of such
corporations was increased to $2.0 million. These changes were effective
February 23, 1998. At December 31, 1997, RMI did not meet these increased
requirements. On March 12, 1998, a committee of RMI's board of directors
accelerated the vesting period of the Hanson Options to permit the immediate
exercise thereof and Mr. Hanson exercised all of the 408,615 non-qualified
options that were exercisable for a price of $1.00 per share. On March 23, 1998,
Mr. Hanson exercised a portion of the Hanson Warrants and
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<PAGE>
acquired 50,000 shares of Common Stock. The result and purpose of the exercise
of these options and warrants was to increase RMI's net tangible assets to
satisfy the Nasdaq Stock Market, Inc.'s new requirements.
There is no agreement, arrangement, or understanding between Mr.
Hanson and the Company that requires Mr. Hanson to exercise any Hanson Options
or Hanson Warrants or to otherwise make any capital contributions to the
Company.
SUMMARY OF TRANSACTIONS.
Following is a summary and description of certain provisions of the
Stock Purchase Agreement between Douglas H. Hanson and RMI, dated as of October
1, 1997; the Stock Purchase Agreement between Douglas H. Hanson and Roy J.
Dimoff, dated as of October 1, 1997; the Stock Purchase Agreement among Douglas
H. Hanson, Christopher K. Phillips, Jim D. Welch and Kevin R. Loud, dated as of
October 1, 1997; the Warrant Agreement between RMI and Douglas H. Hanson, dated
as of October 1, 1997; the Registration Agreement between RMI and Douglas H.
Hanson, dated as of October 1, 1997; the Shareholders' Voting Agreement and
Irrevocable Proxy among Douglas H. Hanson, Christopher K. Phillips, Jim D. Welch
and Kevin R. Loud, dated as of October 1, 1997; and the Shareholders' Voting
Agreement and Irrevocable Proxy among Douglas H. Hanson, Brian Dimoff, Paul B.
Davis, Michael R. Mara, Monty Reagan, Roy J. Dimoff, Tim Scanlon and Owen
Scanlon, dated as of October 1, 1997, pursuant to which Mr. Hanson obtained
effective control of RMI. The following summaries do not purport to be complete
and are qualified in their entireties by the full text of the respective
agreements, copies of which are on file with the Commission.
STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND RMI. Pursuant
to a Stock Purchase Agreement between Mr. Hanson and RMI, dated as of October 1,
1997, RMI issued and sold to Mr. Hanson 1,225,000 shares of Common Stock for a
purchase price of $2,450,000, or $2.00 per share. In connection with the
execution of this Stock Purchase Agreement, Roy J. Dimoff resigned as the
President, Chief Executive Officer and a director of RMI and Gerald Van Eeckhout
resigned as the Chairman of the board of directors but remained as a director of
RMI until November 19, 1997. Contemporaneously, the then-existing board of
directors of RMI, in accordance with RMI's By-laws, filled three vacancies on
the board by electing Mr. Hanson, Mr. Reynaldo Ortiz and Mr. D. D. Hock to be
directors of RMI. Mr. Hanson was elected as RMI's President, Chief Executive
Officer and Chairman of the board of directors. Messrs. Ortiz and Hock were
selected by Mr. Hanson, in accordance with the terms of this Stock Purchase
Agreement, to be elected as directors of RMI. Mr. Ortiz resigned as a director
effective December 1, 1997. On January 10, 1998, Ms. Mary Beth Vitale and
Messrs. Robert W. Grabowski and Lewis H. Silverberg were appointed as directors
of RMI.
STOCK PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND ROY J. DIMOFF.
Pursuant to a Stock Purchase Agreement between Mr. Hanson and Roy J. Dimoff,
dated as of October 1, 1997, Mr. Dimoff sold to Mr. Hanson 150,000 shares of
Common Stock for a purchase price of $300,000, or $2.00 per share.
Contemporaneously with this purchase and sale, Mr. Dimoff resigned as a director
and as President and Chief Executive Officer of RMI. In addition, as discussed
below, Mr. Hanson entered into a Shareholders' Voting Agreement and Irrevocable
Proxy with Mr. Dimoff and six other stockholders pursuant to which Mr. Hanson
obtained the right to vote certain shares of Common Stock beneficially owned by
Mr. Dimoff and such other stockholders.
STOCK PURCHASE AGREEMENT AMONG DOUGLAS H. HANSON, CHRISTOPHER K.
PHILLIPS, JIM D. WELCH AND KEVIN R. LOUD. Pursuant to a Stock Purchase Agreement
among Douglas H. Hanson, Christopher K. Phillips, Jim D. Welch and Kevin R.
Loud, dated as of October 1, 1997,
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<PAGE>
Mr. Hanson purchased 50,000 shares, 50,000 shares and 25,000 shares of Common
Stock from Messrs. Phillips, Welch and Loud, respectively, for an aggregate
purchase price of $250,000, in each case for $2.00 per share. In addition, as
discussed below, Mr. Hanson entered into a Shareholders' Voting Agreement and
Irrevocable Proxy with Messrs. Phillips, Welch and Loud pursuant to which Mr.
Hanson obtained the right to vote certain shares of Common Stock beneficially
owned by them.
The source of all of the consideration for the purchase by Mr. Hanson
of the shares of Common Stock and the Hanson Warrants purchased from the Company
and the shares of Common Stock purchased from Messrs. Dimoff, Phillips, Welch
and Loud was a loan made in the ordinary course of business by a bank. The loan
bears interest at the rate of 192 basis points (i.e., 1.92%) above the London
InterBank Offered Rate and has a term of two years. One-half of the outstanding
principal and accrued interest thereon, was paid in January 1998 in accordance
with its terms and the remainder of the outstanding principal amount and accrued
interest thereon, is payable in January 1999. The loan is secured by a pledge of
all of the shares of Common Stock that Mr. Hanson purchased from RMI and from
Messrs. Dimoff, Phillips, Welch and Loud and of income anticipated to be
received by Mr. Hanson.
REGISTRATION AGREEMENT. Contemporaneously with the execution of the
agreements described above, RMI entered into an agreement with Mr. Hanson to
register with the SEC all of those shares of Common Stock (and other securities)
purchased in the above-described transactions, i.e., those shares purchased from
RMI and those purchased from Messrs. Dimoff, Phillips, Welch and Loud, the
Hanson Warrants and the shares of Common Stock that may be issued pursuant to
the exercise of the Hanson Warrants. RMI also agreed, not later than thirty days
after the closing of the transactions described above, to use its commercially
reasonable best efforts to file a registration statement with the Commission for
the registration of the shares of Common Stock purchased by Mr. Hanson
(including those shares purchased from RMI and from the individuals identified
above), the Hanson Warrants and the shares of Common Stock issuable upon
exercise of the Hanson Warrants and to maintain the effectiveness of such
registration statement for a period of one year. The Company believes that,
during the period of effectiveness of such registration statement, Mr. Hanson
may sell all or any of the shares of Common Stock or the Hanson Warrants without
restriction. This Prospectus forms a part of the registration statement on Form
S-1 pursuant to which the Hanson warrants and the shares of Common Stock
underlying the Hanson warrants were registered.
WARRANT AGREEMENT. RMI entered into a Warrant Agreement with Mr.
Hanson, dated as of October 1, 1997, pursuant to which it agreed, subject to
obtaining the approval of RMI's stockholders of an increase in the authorized
capital of RMI, to issue to Mr. Hanson the Hanson Warrants, which entitle the
holder thereof to purchase up to 4,000,000 shares of Common Stock for an
exercise price of $1.90 per share, for a period of eighteen months from the date
of issuance of such warrants. As of the date of the Warrant Agreement, RMI did
not have a sufficient number of shares of its Common Stock authorized or
reserved for issuance upon exercise of the Hanson Warrants. At the RMI Annual
Meeting, the stockholders of RMI approved an amendment to RMI's Certificate of
Incorporation to increase the number of shares of Common Stock that RMI is
authorized to issue from 10,000,000 to 25,000,000. As a result of the approval
of such amendment by RMI's stockholders at the RMI Annual Meeting, RMI issued
the Hanson Warrants to Mr. Hanson effective as of March 23, 1998.
The Hanson Warrants are subject to standard anti-dilution provisions
and adjustments in the number of shares of Common Stock that can be issued (and
the exercise price for which they can be issued) in the event of the payment by
RMI of cash or non-cash dividends, reorganizations and other extraordinary
events. See "DESCRIPTION OF CAPITAL STOCK."
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<PAGE>
SHAREHOLDERS' VOTING AGREEMENTS AND IRREVOCABLE PROXIES.
Contemporaneously with the agreements described above, Mr. Hanson entered into a
Shareholders' Voting Agreement and Irrevocable Proxy with Messrs. Phillips,
Welch and Loud pursuant to which Messrs. Phillips, Welch and Loud granted to Mr.
Hanson their proxies to vote certain shares of Common Stock owned by them as of
the date of the agreement and acquired subsequent thereto (including shares of
Common Stock of which Messrs. Phillips, Welch and Loud have the right to acquire
beneficial ownership through the exercise of warrants, options and other
rights). The proxies terminate on the earlier of (i) three years from the date
of execution; or (ii) the date upon which any shares of Common Stock owned by
the grantor of a proxy are sold, transferred, assigned, or otherwise disposed of
(except by a pledge thereof) by such stockholder to a person other than: (A) a
member of such stockholder's "immediate family," as such term is defined in Rule
16a-1(e) promulgated pursuant to the Exchange Act, 17 C.F.R. Section
240.16a-1(e), or (B) a trust for the benefit of any member of such stockholder's
immediate family; provided, however, that the termination applies only to such
shares of Common Stock as are sold, transferred, assigned, or otherwise disposed
of to persons other than members of the stockholder's "immediate family."
Mr. Hanson also entered into a Shareholders' Voting Agreement and
Irrevocable Proxy with Mr. Brian Dimoff, Mr. Paul B. Davis, Mr. Michael R. Mara,
Mr. Monty Reagan, Mr. Roy J. Dimoff, Mr. Tim Scanlon and Mr. Owen Scanlon. The
terms of such agreement were similar to those of the agreement with Messrs.
Phillips, Welch and Loud, except that the proxies granted pursuant to the
agreement with these seven stockholders expired by their terms immediately after
the RMI Annual Meeting.
PURPOSE OF THE TRANSACTIONS. Mr. Hanson's purpose in entering into
the agreements described above and acquiring the shares of Common Stock and the
Hanson Warrants was to acquire a significant equity position in RMI and to
control the management, policies and activities of RMI. In connection with such
purchases, three of Mr. Hanson's nominees, including Mr. Hanson, were elected to
the five-member board of directors of RMI as contemplated by the Stock Purchase
Agreement between Mr. Hanson and RMI. One of Mr. Hanson's nominees, Mr. Reynaldo
U. Ortiz, resigned from the board of directors in December 1997. See "--STOCK
PURCHASE AGREEMENT BETWEEN DOUGLAS H. HANSON AND RMI."
RELATED PARTY TRANSACTIONS
In February 1997, the Company entered into a negotiated agreement
with Jim D. Welch, at that time an officer and a stockholder of the Company,
pursuant to which the Company agreed to purchase 90,000 shares of the Company's
Common Stock from him for $119,000. The stock will be purchased over an eighteen
month period. As part of the agreement, Mr. Welch separated from employment with
the Company. Mr. Welch discontinued selling shares of the Company's Common Stock
after March 1, 1998, at which time the Company had purchased 72,660 shares.
Robert W. Grabowski, an Company director, has an economic interest in
and is Vice President, Finance and Administration, of Sunny Side, Inc./Temp Side
("Sunny Side"), a private employment service business. The Company has engaged
Sunny Side to provide various services and has created a web site for Sunny
Side.
After the Company entered into the Novazen Agreement, Kevin R. Loud,
an officer of the Company, purchased 38,000 shares of Novazen common stock for
$1.60 per share.
In August 1998, Douglas H. Hanson loaned $400,000 to the Company for
various working capital needs and on October 20, 1998 he loaned another $400,000
for working capital needs. Such loans have been
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consolidated and are evidenced by one promissory note. The principal amount of
the promissory note, together with interest at the rate of 11% per annum, is
payable in full 90 days after October 20, 1998.
TRANSACTIONS WITH PROMOTERS
NTB was the principal underwriter of the Company's IPO of the IPO
Units, each IPO Unit consisting of one share of Common Stock and one IPO Warrant
to purchase a share of Common Stock at a price of $4.375 (the "IPO Warrant
Exercise Price"), subject to adjustment, after October 5, 1997 and prior to
September 5, 1999. RMI sold to NTB at the closing of the IPO, for $100, warrants
(the "NTB Warrants") to purchase 136,500 units (the "NTB Units"), each of which
consists of one share of Common Stock and one warrant (the "Underlying NTB
Warrants") to purchase a share of Common Stock. The NTB Units have an exercise
price of $4.20 per unit (120% of the unit offering price to the public in the
IPO) and the Underlying NTB Warrants included in the NTB Units have an exercise
price of $6.5625 per share (150% of the IPO Warrant Exercise Price) (which price
has been decreased by certain anti-dilution adjustments) and are exercisable
until September 5, 2001. The NTB Warrants may be exercised in a cashless
transaction whereby the NTB Warrants, at the holder's option, may be used, in
whole or in part, as a portion of the purchase price for the underlying Common
Stock and NTB Warrants. In addition, the Underlying NTB Warrants included in the
NTB Units may be exercised in a cashless transaction. See "DESCRIPTION OF
CAPITAL STOCK."
NTB was the Company's placement agent in connection with the private
offering in 1997 of units of the Company's securities, each unit consisting of
two shares of the Company's Common Stock and a warrant to purchase one share of
Common Stock, for $4.00 per unit. In connection with that offering, the Company
agreed to issue to NTB warrants (the "Private Offering Unit Warrants") to
purchase 31,050 units of securities, each unit consisting of two shares of
Common Stock and a warrant (collectively, the "Private Offering NTB Warrants")
to purchase one share of Common Stock. The Private Offering Unit Warrants have
an exercise price of $4.00 each and may be exercised any time prior to June 13,
2002. The Private Offering NTB Warrants have an exercise price of $3.00 each and
may be exercised at any time prior to June 13, 2002.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
ownership of Common Stock as of October 15, 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 of 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," and (iv) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)(2)
------------------------------------------
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES OUTSTANDING
- ------------------------------------ ----------------- -------------------
<S> <C> <C>
Current Directors
Douglas H. Hanson.................................................... 6,727,040(3) 52.3%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
D. D. Hock........................................................... 1,500(4) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Robert W. Grabowski.................................................. 6,300(5) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Lewis H. Silverberg.................................................. 6,500(6) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Mary Beth Vitale..................................................... 1,500(7) *
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Named Executive Officers Who Are Not Directors
Kevin R. Loud (8).................................................... 378,800 4.7%
1099 Eighteenth Street
30th Floor
Denver, CO 80202
All Directors and Named Executive Officers as a Group
(6 persons).......................................................... 6,750,940 53.9%
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Over 5% Stockholders and Members of a "group" Who Are Not
Directors or Executive Officers(1) (2)
Christoper K. Phillips (1)(9) ....................................... 170,000 2.1%
4580 Star Ridge Drive
Colorado Springs, CO 80916
Jim D. Welch (1)(10)................................................. 86,340 1.1%
1326 Sorrento Road
Colorado Springs, CO 80910
Kennedy Capital Management, Inc. (11)................................ 375,000 4.6%
10829 Olive Boulevard
St. Louis, MO 63141
</TABLE>
* Less than 1%
(1) As set forth above under the caption "CERTAIN
TRANSACTIONS--CHANGE IN CONTROL," Mr. Hanson entered into a
Shareholders' Voting Agreement and Irrevocable Proxy with
Christopher K. Phillips, Jim D. Welch and Kevin R. Loud,
dated as of October 1, 1997 and a separate Shareholders'
Voting Agreement and Irrevocable Proxy with Brian Dimoff,
Paul B. Davis, Michael R. Mara, Monty Reagan, Roy J. Dimoff,
Tim Scanlon and Owen Scanlon, dated as of October 1, 1997.
The proxies granted to Mr. Hanson by Messrs. Brian Dimoff,
Paul B. Davis, Michael R. Mara, Monty Reagan, Roy J. Dimoff,
Tim Scanlon and Owen Scanlon expired immediately following
the adjournment of the RMI Annual Meeting. Accordingly, Mr.
Hanson and Messrs. Christopher K. Phillips, Jim D. Welch and
Kevin R. Loud may be deemed to be members of a "group" for
reporting beneficial ownership of shares of Common Stock in
the table. Unless otherwise noted, each person has sole
voting and dispositive power over the shares listed opposite
his name. For the purposes of the table, shares of other
members of the group have not been attributed to each member.
(2) Shares of Common Stock that can be acquired by any person
pursuant to any option, warrant, or other right within the
next 60 days following the dates set forth in the paragraph
appearing immediately prior to the table are deemed
outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by such person. A
person is also deemed to be the beneficial owner of any
shares as to which he has the power to vote, or to direct the
voting of, such shares. Such shares, however, are not deemed
to be outstanding for the purpose of computing the percentage
of outstanding shares beneficially owned by any other person.
All options and warrants described below have vested, except
as described in footnote 3. As of October 15, 1998, there
were 8,106,252 shares of Common Stock outstanding.
(3) Includes 1,958,615 shares beneficially owned directly by
Mr. Hanson, 3,950,000 shares issuable upon exercise of the
Hanson Warrants, 191,385 shares issuable upon exercise of
incentive stock options and 627,040 shares owned by Messrs.
Phillips, Welch and Loud as to which Mr. Hanson obtained the
rights to vote pursuant to the remaining Shareholders' Voting
Agreement and Irrevocable Proxy described above in footnote
(1) and under the caption "CERTAIN TRANSACTIONS--CHANGE IN
CONTROL."
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<PAGE>
(4) Includes options to acquire 1,500 shares of Common
Stock.
(5) Includes 4,800 shares of Common Stock and options to
acquire 1,500 shares of Common Stock.
(6) Includes 5,000 shares of Common Stock and options to
acquire 1,500 shares of Common Stock.
(7) Includes options to acquire 1,500 shares of Common
Stock.
(8) Includes 370,700 shares owned directly by Mr. Loud and
options to acquire 8,100 additional shares. Mr. Loud has
granted to Mr. Hanson an irrevocable proxy to vote all
shares currently owned by him or that may be acquired by
him pursuant to and in accordance with the terms,
provisions and limitations set forth in, a Shareholders'
Voting Agreement and Irrevocable Proxy described above in
footnote (1) and under the caption "CERTAIN
TRANSACTIONS--CHANGE IN CONTROL."
(9) All shares are owned directly by Mr. Phillips.
(10) All shares are owned directly by Mr. Welch.
(11) According to a filing made with the Commission on
February 10, 1998, Kennedy Capital Management, Inc. is an
investment advisor and had acquired, as of December 31,
1997, the shares of Common Stock indicated.
SELLING SECURITYHOLDERS
The following table assumes that each Selling Securityholder is
offering for sale securities previously issued or issuable by the Company. The
Company has agreed to pay all expenses in connection therewith (other than
brokerage commissions and fees and expenses of their respective counsel).
The following table sets forth the beneficial ownership of the
Selling Securityholder Shares by each person who is a Selling Securityholder.
The Company will not receive any proceeds from the sale of such Securities by
the Selling Security holders.
<TABLE>
<CAPTION>
Shares of Common Percentage of Common Stock
Stock or Warrants Beneficially Owned (1)
Name of Beneficial Owner Being Offered Before Offering After Offering
- ------------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Douglas H. Hanson 5,500,000 Shares 52.3% 34.2%
Douglas H. Hanson 3,950,000 Warrants
Neidiger/Tucker/Bruner, Inc. 4,000 Warrants
Neidiger/Tucker/Bruner, Inc. 8,000 Shares * *
Eugene L. Neidiger 12,700 Warrants
Eugene L. Neidiger 38,075 Shares * *
Anthony B. Petrelli 12,300 Warrants
Anthony B. Petrelli 37,050 Shares * *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Charles C. Bruner 11,800 Warrants
Charles C. Bruner 36,050 Shares * *
Robert L. Parrish 6,400 Warrants
Robert L. Parrish 17,300 Shares * *
J. Henry Morgan 7,200 Warrants
J. Henry Morgan 18,900 Shares * *
John J. Turk, Jr. 1,500 Warrants
John J. Turk, Jr. 3,000 Shares * *
Regina L. Neidiger 2,100 Warrants
Regina L. Neidiger 4,200 Shares * *
Carl A. Militello, Jr. 53,500 Warrants
Carl A. Militello, Jr. 107,000 Shares 1.5% *
James E. Tarrillion 37,500 Shares * *
Jeff Kavy 150,000 Shares 2.1% *
John E. Tarrillion 37,500 Shares * *
Jim Clausius 48,750 Shares * *
Roger Marino 75,000 Shares * *
Michael Carney 32,500 Shares * *
David Leider 99,000 Shares 1.4% *
Robert and Patricia Werts 15,000 Shares * *
Paul Davis 112,500 Shares 1.5% *
Burton Levy 82,500 Shares 1.1% *
MBM Young 37,500 Shares * *
Stephen Vento 15,000 Shares * *
Roswell and W. Monroe 15,000 Shares * *
Mark Buntzman 18,750 Shares * *
Kent Searl 7,500 Shares * *
Steven D. Brown 18,750 Shares * *
Elen Brown 9,375 Shares * *
Sarah Brown 9,375 Shares * *
Applied Telecommunications 67,500 Shares * *
Technologies, Inc.
William Preston 18,750 Shares * *
Michael Sanchez 25,125 Shares * *
Gerry and Carolyn Van Eeckhout 500 Shares * *
Kent Hultquist 12,562 Shares * *
Susan Weinkranz 10,000 Shares * *
Donald McElvaney & Migon McElvaney 12,500 Shares * *
Frank Visciano & Lorraine Visciano 12,500 Shares * *
Cambridge Holdings 6,250 Shares * *
Gregory Pusey Investments 6,250 Shares * *
Schield Management Company 12,500 Shares * *
Caribou Bridge Fund LLC 17,500 Shares * *
Stuart Fullinwider 25,000 Shares * *
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Jeremy J. Black 45,000 Shares * *
Kenneth Covell 15,000 Shares * *
John-Michael Keyes 15,000 Shares * *
Ronald Stevenson 95,075 Shares 1.3 *
Gregory A. Brown 2,291 Shares * *
Ronald Nicholl 17,182 Shares * *
Hare & Co. 24,978 Shares * *
Daffodil & Co. 152,487 Shares 2.1% *
Bear Stearns & Co. 11,000 Shares * *
Booth & Co. 9,073 Shares * *
Novazen Inc. 25,000 Shares * *
</TABLE>
(1) Assumes: (i) the issuance of all 4,000,000 of the Acquisition
Shares in one or more mergers with or acquisitions by the Company of other
businesses or assets; and (ii) the exercise of all of the Warrants. Does not
give effect to the exercise of outstanding options granted to employees or
non-employee directors of the Company pursuant to various stock option plans or
shares of Common Stock that can be issued pursuant to anti-dilution provisions
of the Warrants and other derivative securities.
Mr. Douglas H. Hanson is the President, Chief Executive Officer, and
Chairman of the Board of Directors of the Company. NTB acted as managing
underwriter in connection with the Company's IPO in 1996, and a private
placement in 1997, and Eugene L. Neidiger, Anthony B. Petrelli, Charles C.
Bruner, Robert L. Parrish, J. Henry Morgan, John L. Turk, Jr., Regina L.
Neidiger, Carl A. Militello, and Paul Davis are affiliates of, and/or employed
by, NTB. None of the other Selling Securityholders has a position, office, or
other material relationship with the Company, except that Ronald M. Stevenson
and Jeremy J. Black are the shareholders of 237,687 and 90,000 shares of Company
stock, respectively, and Advanced Telecommunications Technologies, Inc. is the
lessor of certain switches and other equipment leased by the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, $0.001 par value and 750,000 shares of Preferred Stock,
$0.001 par value. The following summary of certain provisions of the Common
Stock and Preferred Stock does not purport to be complete and is subject to and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation, as amended.
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, as amended,
the board of directors has the authority, without further action by the
Company's stockholders, to issue up to 750,000 shares of Preferred Stock in one
or more series and to fix the designations, powers, preferences, privileges and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Company's
board of directors, without the Company's stockholder approval, can issue
Preferred Stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of the Common Stock.
Preferred Stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. At present, there are no shares of Preferred Stock outstanding.
However, the Company may issue shares of Preferred Stock in connection with one
or more future financings.
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<PAGE>
Common Stock
As of October 15, 1998, there were 8,106,252 shares of Common Stock
outstanding. Another 803,164 Shares of Common Stock were reserved for issuance
pursuant to the Company's stock option plans and other stock options granted and
6,744,695 shares of Common Stock have been reserved for issuance upon exercise
of various warrants, including the IPO Warrants, the Hanson Warrants, warrants
issued to lenders in connection with the Bridge Loan commitment and shares
issuable pursuant to various anti-dilution provisions contained in the warrants
and options described above. In addition, there are 333,333 shares (assuming a
$7.50 per share price at the date of calculation) that may be issued based on
performance incentives in the terms of the acquisition of Application Methods.
Accordingly, after giving effect to the shares of Common Stock issuable pursuant
to the options and warrants described above, but not giving effect to additional
shares of Common Stock that may be issued pursuant to anti-dilution provisions
of various outstanding warrants and options, there are 3,998,754 shares of
Common Stock and 750,000 shares of Preferred Stock that may be issued in the
future at the discretion of the Company's board of directors.
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Holders of
Common Stock may not cumulate votes in elections of Directors. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the board of directors out of funds legally available
for the payment of dividends. In the event of a liquidation, dissolution, or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and liquidation
preferences of any outstanding shares of preferred stock. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of common stock are fully paid and non-assessable. There are
no preemptive, subscription, conversion, or redemption rights applicable to the
Common Stock.
Certain Anti-Takeover Effects of Provisions of Delaware Law
The Company is subject to Section 203 of the DGCL ("Section 203")
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stock, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder of the corporation becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders and not by written
consent, by the affirmative vote of at least 66-2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combination to include (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
87
<PAGE>
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Warrants
IPO WARRANTS. The IPO Warrants were issued as a component of the
units of securities offered and sold in connection with the Company's IPO in
1996. Each IPO Warrant entitles the holder thereof to purchase one share of
Common Stock at a purchase price of $4.375 per share, subject to adjustment in
the event that, at any time after the date of the issuance of the IPO Warrants,
the Company (i) sells shares of Common Stock for a consideration per share less
than the exercise price in effect immediately prior to such issuance (or sells
options, rights, or warrants to subscribe for shares of Common Stock or issues
any securities convertible into or exchangeable for shares of Common Stock at
such lower price); or (ii) issues Common Stock as a dividend to the holders of
Common Stock; or (iii) subdivides or combines the outstanding Common Stock into
a greater or lesser number of shares.
IPO WARRANTS ISSUED TO REPRESENTATIVE OF UNDERWRITERS. In connection
with the Company's IPO, the Company issued to NTB certain Warrants to purchase
units of the Company's securities, each unit consisting of one share of Common
Stock and one additional warrant. The terms and conditions of these issuances
are described above under the caption "CERTAIN TRANSACTIONS -- TRANSACTIONS WITH
PROMOTERS."
HANSON WARRANTS. The Company issued warrants to Mr. Hanson entitling
him to purchase 4,000,000 shares of Common Stock. The terms and conditions of
these warrants are described above under the caption "CERTAIN TRANSACTIONS --
CHANGE IN CONTROL."
PRIVATE OFFERING WARRANTS ISSUED TO SALES AGENT. As described above
under the caption "CERTAIN TRANSACTIONS -- TRANSACTIONS WITH PROMOTERS," the
Company conducted a private offering of units of securities in 1997. In
connection with that offering, the Company issued warrants to purchase units to
NTB.
BRIDGE LOAN WARRANTS. In connection with the Bridge Loan commitment,
the Company agreed to issue warrants to the proposed lenders to acquire a total
of 560,000 shares of Common Stock. Warrants to acquire 220,833 shares have an
exercise price of approximately $9.01 per share and warrants to acquire the
remaining 339,167 shares have an exercise price of $.01. A total of 200,288 of
the shares of Common Stock underlying these warrants are being offered pursuant
to this Prospectus. See "RECENT DEVELOPMENTS."
The transfer agent and registrar for the Common Stock and warrant
agent for the IPO Warrants is American Securities Transfer, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202-1817.
PLAN OF DISTRIBUTION
The Company may offer and sell, from time to time, the Acquisition
Shares in connection with one or more mergers, acquisitions, or business
combinations. The Company anticipates that any Acquisition Shares will be
valued at prices reasonably related to market prices current either at the
time that mergers or acquisitions are agreed upon or at or about the time of
delivery of the shares. No underwriting discounts or commissions will be
paid, although finder's fees may be paid from time to time with respect to
specific mergers or acquisitions. Any person receiving any such fees may be
deemed to be an underwriter within the meaning of the Securities Act
The Selling Securityholder Shares and 4,061,500 Warrants subject
hereto are being offered for sale by the Selling Securityholders.
Consequently, the Selling Securityholders will receive the proceeds from the
sale
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<PAGE>
of such Securities by the Selling Securityholders pursuant to this
Prospectus. This Prospectus also relates to the sale and issuance by the
Company of shares of Common Stock to holders of the Warrants (other than the
Selling Securityholders) upon the exercise of those Warrants. The Selling
Securityholder Shares and up to 4,061,500 Warrants may be sold to purchasers
from time to time in privately negotiated transactions directly by and
subject to the discretion of the Selling Securityholders. The Selling
Securityholders may from time to time offer their respective Securities for
sale through underwriters, dealers, or agents, who may receive compensation
in the form of underwriting discounts, concessions, or commissions from the
Selling Securityholders and/or the purchasers of such securities for whom
they may act as agents. The Selling Securityholders and any underwriter,
dealer, or agent who participates in the distribution of such Selling
Securityholders' Securities may be deemed to be "underwriters" under the
Securities Act and any profit on the sale of such securities by any of them
and any discounts, commissions, or concessions received by any such
underwriters, dealers, or agents may be deemed to be underwriting
compensation under the Securities Act. Selling Securityholders may also sell
the Securities owned by them pursuant to Rule 144 under the Securities Act,
if such rule is available for such resales.
With the consent of the Company, this Prospectus may also be used
by persons or entities who have received or will receive from the Company
shares of Common Stock, including the Acquisition Shares, in connection with
mergers or acquisitions and who may wish to sell such shares of Common Stock
under circumstances requiring or making desirable the use of this Prospectus
and by certain transferees of such persons. The Company's consent to such use
may be conditioned upon such persons or entities agreeing not to offer more
than a specified number of shares following amendments to this Prospectus,
which the Company may agree to use its best efforts to prepare and file at
certain intervals. The Company may require that any such offering be effected
in an organized manner through securities dealers.
This Prospectus may also be used by donees, pledgees, and other
transferees of up to 3,950,000 shares of Common Stock who receive such shares as
gifts, as security for loans, and similar transactions and who may wish to sell
such shares under circumstances requiring or making desirable the use of this
Prospectus and who may wish to sell such stock under circumstances requiring or
making desirable use of this Prospectus and by certain transferees of such
persons or entities.
This Prospectus also relates the DataXchange Warrants that may be
offered and issued by the Company in connection with the proposed acquisition
by the Company of all of the issued and outstanding common stock of
DataXchange. This Prospectus also relates to the offer and sale of up to
535,000 shares of Common Stock that can be issued upon the exercise of the
DataXchange Warrants. This Prospectus may also be used by persons or entities
who are anticipated to receive the DataXchange Warrants and the shares of
Common Stock underlying the DataXchange Warrants and who may wish to sell
such warrants and/or shares of Common Stock under circumstances requiring or
making desirable the use of this Prospectus and by certain transferees of
such persons.
At the time a particular offer of the Selling Securityholder Shares
and Warrants is made by or on the behalf of a Selling Securityholder, a
Prospectus and a Prospectus Supplement, to the extent required, will be
distributed which will set forth the number of securities being offered and the
terms of the offering, including the name or names of any underwriters, dealers,
or agents, the purchase price paid by any underwriter for such securities
purchased from the Selling Securityholders, any discounts, commissions, and
other items constituting compensation from the Selling Securityholders, any
discounts, commissions, or concessions allowed, reallowed or paid to dealers,
and the proposed selling price to the public.
In connection with its IPO, the Company agreed with NTB, the
representative of the underwriters for the IPO, that it would pay to NTB a
commission equal to 5% of the gross proceeds of any of the IPO Warrants that are
exercised under certain conditions. See "DESCRIPTION OF CAPITAL STOCK." The
Company also agreed with NTB that it would pay to NTB a commission equal to 5%
of the gross proceeds of any exercise of the Warrants that were issued in the
Company's private offering of units in 1997.
The Selling Securityholder Shares and up to 4,061,500 of the
Warrants may be sold from time to time in one or more transactions: (i) at an
offering price which is fixed or which may vary from transaction to
transaction depending upon the time of sale, or (ii) at prices otherwise
negotiated at the time of sale. Such prices will be determined by the Selling
Securityholders or by agreement between the Selling Securityholders and their
underwriter.
In order to comply with the applicable securities laws, if any, of
certain states, the Securities may be offered or sold in such states through
registered or licensed brokers or dealers in those states. In addition, in
certain states, such securities may not be offered or sold unless they have been
registered or qualified for sale in such states or an exemption from such
registration or qualification requirement is available and is complied with.
Under applicable rules and regulations promulgated under the Exchange
Act, any person engaged in a distribution of securities may not simultaneously
bid for or purchase securities of the same class for a period of two business
days prior to the commencement of such distribution. In addition and without
limiting the foregoing, the Selling Security holders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-5 and Regulation M, in
connection with transactions in the Selling Securityholder Shares and Warrants
during effectiveness of the registration statement of which this Prospectus is a
part. All of the foregoing may affect the marketability of such Securities.
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The Company has agreed to pay all of the expenses incident to the
registration of the foregoing securities (including registration pursuant to the
securities laws of certain states) other than: (i) any fees or expenses of any
counsel retained by any Selling Securityholder and any out-of-pocket expenses
incurred by any Selling Securityholder or any person retained by any Selling
Securityholder in connection with registration of the Selling Securityholder
Shares and Warrants and (ii) commissions, expenses, reimbursements, and
discounts of underwriters, dealers, or agents, if any.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 21, 1997, the board of directors of RMI resolved to engage
the accounting firm of Baird, Kurtz & Dobson as the Company's independent
accountant for its fiscal year ending December 31, 1996. Effectively, the
Company's former independent accountant, McGladrey & Pullen, LLP, simultaneously
resigned as of January 20, 1997. The Denver office of McGladrey & Pullen, LLP
was acquired by Baird, Kurtz and Dobson on June 17, 1996. Certain former audit
engagement members are now with Baird, Kurtz and Dobson, and will continue to be
involved with the Company's audit.
During the two most recent fiscal years and prior to December 31,
1995, there have been no disagreements with McGladrey & Pullen, LLP on matters
of accounting principles or practices, financial statement disclosure, auditing
scope or procedure, or any reportable events. There have been no disagreements
with Baird, Kurtz and Dobson on matters of accounting principles or practices,
financial statement disclosure, auditing scope or procedure, or any reportable
events.
McGladrey & Pullen, LLP has furnished the Company with a copy of its
letter addressed to the Commission stating that it agrees with the above
statements.
LEGAL MATTERS
Certain legal matters regarding this offering will be passed upon for
the Company by Hall & Evans, L.L.C., Denver, Colorado, special counsel to the
Company.
EXPERTS
The consolidated financial statements of Rocky Mountain Internet,
Inc. as of December 31, 1997 and 1996 and the years then ended, have been
included herein and in the registration statement in reliance upon the report of
Baird, Kurtz & Dobson, independent certified public accountants, appearing
elsewhere herein, given upon the authority of said firm as experts in accounting
and auditing.
The consolidated statements of operations, stockholder's equity
(deficit) and cash flows of Rocky Mountain Internet, Inc. for the year ended
December 31, 1995, have been included herein in reliance upon the report of
McGladrey & Pullen, LLP, independent certified public accountants, appearing
elsewhere herein, given upon the authority of said firm as experts in accounting
and auditing.
The combined financial statements of Applications Methods, Inc. and
e-SELL Commerce Systems, Inc. as of December 31, 1997 and the year then ended
have been included herein in reliance upon the report of PETERSON SULLIVAN PLLC,
independent certified public accountants, appearing elsewhere herein, given upon
the authority of said firm as experts in accounting and auditing.
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The financial statements of Application Methods, Inc. as of December
31, 1996 and the year then ended have been included herein in reliance upon the
report of PETERSON SULLIVAN PLLC, independent certified public accountants,
appearing elsewhere herein, given upon the authority of said firm as experts in
accounting and auditing.
The financial statements of DataXchange Network, Inc. as of July 31,
1998 and the year then ended have been included herein in reliance upon the
report of Aidman, Piser & Company, P.A., independent certified public
accountants, appearing elsewhere herein, given upon the authority of said firm
as experts in accounting and auditing.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
ROCKY MOUNTAIN INTERNET, INC.--CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Accountants' Reports:
Baird, Kurtz & Dobson ................................................................................................... F-3
McGladrey & Pullen, LLP ................................................................................................. F-4
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited) ................................ F-5
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 and for the Six Months Ended
June 30, 1997 (unaudited) and June 30, 1998 (unaudited) ................................................................. F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1996 and 1997 and for the
Six Months Ended June 30, 1998 (unaudited) .............................................................................. F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for the Six Months Ended
June 30, 1997 (unaudited) and June 30, 1998 (unaudited) ................................................................. F-9
Notes to Consolidated Financial Statements ................................................................................ F-10
APPLICATION METHODS, INC./ E-SELL COMMERCE SYSTEMS, INC.--COMBINED FINANCIAL REPORT:
UNAUDITED FINANCIAL STATEMENTS:
Combined Balance Sheet as of June 30, 1998 and 1997...................................................................... F-23
Combined Statement of Operations and Retained Earnings for the Six Months Ended June 30, 1998 and 1997................... F-24
Combined Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1997......................................... F-25
Notes to Combined Financial Statements .................................................................................. F-26
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--Peterson Sullivan PLLC .................................................................... F-29
Combined Balance Sheet as of December 31, 1997 .......................................................................... F-30
Combined Statement of Operations and Retained Earnings for the Year Ended December 31, 1997 ............................. F-31
Combined Statement of Cash Flows for the Year Ended December 31, 1997 ................................................... F-32
Notes to Combined Financial Statements .................................................................................. F-33
APPLICATION METHODS, INC.--FINANCIAL REPORT:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--Peterson Sullivan PLLC .................................................................... F-35
Balance Sheet as of December 31, 1996 ................................................................................... F-36
Statement of Operations and Retained Earnings for the Year Ended December 31, 1996 ...................................... F-37
Statement of Cash Flows for the Year Ended December 31, 1996 ............................................................ F-38
Notes to Financial Statements ........................................................................................... F-39
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
DATAXCHANGE NETWORK, INC.--FINANCIAL STATEMENTS:
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report--Aidman, Piser & Company, P.A. ............................................................ F-41
Balance Sheets as of July 31, 1998 and 1997............................................................................. F-42
Statements of Operations for the Years Ended July 31, 1998, 1997 and 1996............................................... F-43
Statements of Stockholders' Equity for the Years Ended July 31, 1998, 1997, and 1996.................................... F-44
Statements of Cash Flows for the Years Ended July 31, 1998, 1997 and 1996............................................... F-45
Notes to Financial Statements........................................................................................... F-47
</TABLE>
F-2
<PAGE>
Independent Accountants' Report
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado.
We have audited the accompanying consolidated balance sheets of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of ROCKY
MOUNTAIN INTERNET, INC. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 27, 1998
F-3
<PAGE>
Independent Accountants' Report
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We have audited the accompanying consolidated statements of
operations, stockholders' equity (deficit), and cash flows of ROCKY MOUNTAIN
INTERNET, INC. for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of ROCKY MOUNTAIN INTERNET, INC. for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ MCGLADREY & PULLEN, LLP
Denver, Colorado
February 23, 1996
F-4
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1996 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 348,978 $1,053,189 $ 761,965
Investments ........................................................................... 1,356,629 -- --
Trade receivables, less allowance for doubtful accounts;
1996--$115,000, 1997--$176,000, 6/30/1998 - $221,962 .................................. 518,827 672,094 635,025
Inventories ............................................................................ 91,047 46,945 61,384
Other .................................................................................. 143,753 112,891 112,186
----------- ----------- -----------
Total Current Assets .................................................................. 2,459,234 1,885,119 1,570,560
----------- ----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Equipment ............................................................................. 2,513,944 2,927,016 3,310,699
Computer software ..................................................................... 202,501 218,801 229,427
Leasehold improvements ................................................................ 127,877 190,235 189,234
Furniture, fixtures, and office equipment ............................................. 413,678 431,814 431,814
----------- ----------- -----------
3,258,000 3,767,866 4,161,174
Less accumulated depreciation and amortization ........................................ 403,023 1,118,217 1,548,923
----------- ----------- -----------
2,854,977 2,649,649 2,612,251
----------- ----------- -----------
OTHER ASSETS
Goodwill .............................................................................. -- -- 1,323,633
Customer lists, at amortized cost, less accumulated amortization;
1996--$2,094, 1997--$108,689, 1998--$167,058 .......................................... 145,444 471,096 412,727
Investments ........................................................................... -- -- 3,000
Deferred Acquisition Costs ............................................................. -- -- 245,082
Deposits and other .................................................................... 80,512 76,255 76,255
----------- ----------- -----------
225,956 547,351 2,060,697
----------- ----------- -----------
$5,540,167 $5,082,119 $6,243,508
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1996 1997 1998
--------------- ------------- ------------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable .............................................................. $ 4,250 $ -- $ --
Current maturities of long-term debt and capital lease obligations ......... 451,823 609,390 674,957
Accounts payable ........................................................... 425,160 581,366 1,628,141
Deferred revenue ........................................................... 218,121 345,857 315,476
Accrued payroll and related taxes .......................................... 528,160 182,569 172,932
Accrued rent ............................................................... 44,659 136,182 137,953
Accrued severance expenses ................................................. -- 138,472 52,899
Accrued bonus .............................................................. 157,642 -- --
Other accrued expenses ..................................................... 258,535 100,286 154,485
--------------- ------------- ------------------
Total Current Liabilities .................................................. 2,088,350 2,094,122 3,136,843
--------------- ------------- ------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ................................ 1,134,380 904,627 629,354
--------------- ------------- ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized 1996--1,000,000, 1997--790,000
shares, 1998--750,000 shares; issued and outstanding 1996--250,000 shares,
1997--40,000 shares, 1998--0 shares ...................................... 250 40 --
Common stock, $.001 par value; authorized 1996 and 1997--10,000,000 shares,
1998--25,000,000 shares; issued 1996--4,540,723 shares, 1997--6,736,889
shares, 1998--7,582,347 shares; outstanding 1996--4,540,723 shares,
1997--6,677,846 shares, June 30, 1998--7,518,267 shares .................. 4,541 6,737 7,582
Additional paid-in capital ................................................. 4,879,968 9,284,720 11,334,838
Accumulated deficit ........................................................ (2,567,322) (6,747,050) (8,780,445)
Unearned compensation ...................................................... -- (383,077) --
--------------- ------------- ------------------
2,317,437 2,161,370 2,561,975
Treasury stock, at cost
Common; 1996--0 shares, 1997--59,043 shares,
June 30, 1998,--64,080 shares ............................................... -- (78,000) (84,664)
--------------- ------------- ------------------
2,317,437 2,083,370 2,477,311
--------------- ------------- ------------------
$ 5,540,167 $ 5,082,119 $ 6,243,508
--------------- ------------- ------------------
--------------- ------------- ------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------ ----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Internet access and services....................... $ 1,034,774 $ 2,762,028 $ 5,740,044 $ 2,645,785 $ 3,748,103
Equipment sales .................................... 144,551 519,551 387,067 203,586 192,941
------------ ----------- ------------ ------------ ------------
1,179,325 3,281,579 6,127,111 2,849,371 3,941,044
------------ ----------- ------------ ------------ ------------
COST OF REVENUE EARNED
Internet access and Services ...................... 193,875 640,880 1,760,262 927,265 1,233,665
Equipment sales .................................... 126,494 462,787 300,053 161,128 150,350
------------ ----------- ------------ ------------ ------------
320,369 1,103,667 2,060,315 1,088,393 1,384,015
------------ ----------- ------------ ------------ ------------
GROSS PROFIT ........................................ 858,956 2,177,912 4,066,796 1,760,978 2,557,029
GENERAL, SELLING, AND
ADMINISTRATIVE EXPENSES ............................ 967,478 4,459,106 7,867,502 3,951,608 4,475,737
------------ ----------- ------------ ------------ ------------
OPERATING LOSS ...................................... (108,522) (2,281,194) (3,800,706) (2,190,630) (1,918,708)
------------ ----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense ................................... (31,818) (157,042) (402,086) (191,477) (154,729)
Interest income .................................... 2,397 44,322 54,461 18,637 25,728
Other income (expense), net ........................ 9,149 51,343 (4,522) (4,338) 14,314
------------ ----------- ------------ ------------ ------------
(20,272) (61,377) (352,147) (177,178) (114,687)
------------ ----------- ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ............................ (128,794) (2,342,571) (4,152,853) (2,367,808) (2,033,395)
INCOME TAX EXPENSE .................................. -- -- -- -- --
------------ ----------- ------------ ------------ ------------
NET LOSS ............................................ (128,794) (2,342,571) (4,152,853) (2,367,808) (2,033,395)
PREFERRED STOCK DIVIDENDS ........................... -- 25,000 26,875 25,000 --
------------ ----------- ------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS ............................... $ (128,794) $(2,367,571) $(4,179,728) $(2,392,808) $(2,033,395)
------------ ----------- ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------
BASIC AND DILUTED LOSS PER SHARE
Net loss per share ................................. $ (.07) $ (1.03) $ (.79) $ (.51) $ (.29)
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ --------------------------
Shares Amount Shares Amount
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance December 31, 1994 ..... -- $-- 1,188,000 $ 1,188
Purchase of common stock for
Redemption .................... -- -- (180,000) (180)
Issuance of common stock ...... -- -- 860,000 860
Capital contribution .......... -- -- -- --
Net loss ...................... -- -- -- --
--------- --------- ----------- -------------
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
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
Conversion of preferred to
common stock (unaudited) ...... (40,000) (40) 40,150 40
Stock option compensation
(unaudited) .................. -- -- -- --
Stock options and warrants
exercised (unaudited) ........ -- -- 655,308 655
Issue of Common Stock for the
Acquisition of Infohiway, Inc. -- -- 150,000 150
Purchase of treasury stock
(unaudited) .................. -- -- -- --
Common stock contributed to
pension plan (unaudited) .... -- -- -- --
Net loss (unaudited) .......... -- -- -- --
--------- --------- ----------- -------------
Balance, June 30, 1998 -
(unaudited) ................... -- -- 7,582,347 $ 7,582
--------- --------- ----------- -------------
--------- --------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Unearned Treasury
Capital Deficit Compensation Stock Total
------------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 ..... $ 26,626 $ (70,957) $ -- $ -- $ (43,143)
Purchase of common stock for
Redemption .................... (18,570) -- -- -- (18,750)
Issuance of common stock ...... 1,008 -- -- -- 1,868
Capital contribution .......... 19,783 -- -- -- 19,783
Net loss ...................... -- (128,794) -- -- (128,794)
------------- ------------- ------------ ---------- -------------
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
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
Conversion of preferred to
common stock (unaudited) ...... -- -- -- -- --
Stock option compensation
(unaudited) .................. -- -- 383,077 -- 383,077
Stock options and warrants
exercised (unaudited) ........ 690,237 -- -- -- 690,892
Issue of Common Stock for the
Acquisition of Infohiway, Inc. 1,334,850 -- -- -- 1,335,000
Purchase of treasury stock
(unaudited) .................. -- -- -- (18,000) (18,000)
Common stock contributed to
pension plan (unaudited) .... 25,031 -- -- 11,336 36,367
Net loss (unaudited) .......... -- (2,033,395) -- -- (2,033,395)
------------- ------------- ------------ ---------- -------------
Balance, June 30, 1998 -
(unaudited) ................... $ 11,334,838 $(8,780,445) $ -- $(84,664) $ 2,477,311
------------- ------------- ------------ ---------- -------------
------------- ------------- ------------ ---------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss........................................ $ (128,794) $(2,342,571) $(4,152,853) $(2,367,808) $(2,033,395)
Items not requiring (providing) cash:
Depreciation .................................... 51,395 88,162 196,491 84,464 116,963
Amortization .................................... 39,030 186,044 690,794 328,610 372,112
Loss on disposal of fixed assets ................ -- -- 13,128 -- --
Stock option compensation ....................... -- 52,807 168,117 -- 383,077
Common stock contributed to pension plan ........ -- -- -- -- 36,367
Provision for doubtful accounts ................. (17,369) (112,458) (188,452) (58,506) (114,128)
Changes in:
Trade receivables ............................... (42,252) (305,541) 48,385 (35,707) 151,197
Inventories ..................................... (12,185) (78,862) 44,102 61,788 (14,439)
Other current assets ............................ (5,153) (138,066) 30,862 113,486 705
Accounts payable ................................ 89,395 224,618 156,206 1,012,478 1,046,775
Deferred revenue ................................ 77,084 41,268 127,736 38,862 (30,381)
Accrued payroll and related taxes ............... 83,528 443,208 (345,591) (392,103) (9,637)
Accrued expenses ................................ 30,550 429,886 (85,896) 144,879 (29,603)
------------ ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
Activities ..................................... $ 165,229 $(1,511,505) $(3,296,971) $(1,069,557) $ (124,387)
------------ ------------- ------------- ------------- -------------
Cash Flows From Investing Activities
Purchases of property and equipment ............. (177,771) (900,235) (287,931) (200,950) (276,834)
Purchase of investments ......................... -- (1,756,629) -- -- --
Proceeds from Investments ....................... -- 400,000 1,356,629 779,711 --
Payment for Deferred Acquisition Cost ........... -- -- -- -- (245,082)
Payment for purchase of acquisitions ............ -- (70,478) (150,000) (150,000) --
(Increase) decrease in deposits ................. (60,635) (16,675) 2,257 (13,873) (3,000)
------------ ------------- ------------- ------------- -------------
Net cash (used in) provided by investing
Activities ..................................... (238,406) (2,344,017) 920,955 414,888 (524,916)
------------ ------------- ------------- ------------- -------------
Cash Flows From Financing Activities
Proceeds from sale of common stock
and warrants .................................... 1,868 3,777,252 3,535,397 400,500 690,892
Proceeds from sale of preferred stock ........... -- 406,000 -- -- --
Proceeds from notes payable ..................... 18,000 6,689 500,000 495,000 --
Proceeds from long-term debt .................... 373,000 135,404 200,000 312,582 --
Sale of stock warrants .......................... -- 100 -- -- --
Payment of preferred stock dividend ............. -- (25,000) (26,875) (25,000) --
Purchase of common/treasury stock ............... (18,750) -- (78,000) (42,000) (18,000)
Payments on notes payable ....................... (8,217) (26,108) (504,250) -- --
Payments on long-term debt and capital lease
Obligations ..................................... (54,533) (344,498) (546,045) (396,092) (314,813)
------------ ------------- ------------- ------------- -------------
Net cash provided by financing activities ........ 311,368 3,929,839 3,080,227 744,990 358,079
------------ ------------- ------------- ------------- -------------
Increase In Cash and Cash Equivalents ............ 238,191 74,317 704,211 90,321 (291,224)
Cash and Cash Equivalents, Beginning
of Period ........................................ 36,470 274,661 348,978 348,978 1,053,189
------------ ------------- ------------- ------------- -------------
Cash and Cash Equivalents, End of Period ......... $ 274,661 $ 348,978 $ 1,053,189 $ 439,299 $ 761,965
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
F-9
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Rocky Mountain Internet, Inc. (the Company) is a provider of Internet
access services and Web services to businesses, professionals, and individuals
in the state of Colorado. The Company facilitates access to the Internet by
means of a regional telecommunications network comprised of a backbone of
leased, high-speed dedicated phone lines, computer hardware and software, and
local access points known as points of presence. The Company's high-speed,
digital telecommunications network provides subscribers with direct access to
the full range of Internet applications and resources.
Unaudited Interim Information
Information with respect to June 30, 1998, and the periods ended June
30, 1998 and 1997, is unaudited and not covered by the independent auditors'
reports. In the opinion of management, the unaudited financial statements
reflect all adjustments, consisting only of normal adjustments, necessary to
present fairly the financial position of the Company at June 30, 1998, and the
results of operations and cash flows for the six months ended June 30, 1998 and
1997, in conformity with generally accepted accounting principles.
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiary, Rocky Mountain Internet Subsidiary (Colorado) Inc. The
operations of this subsidiary consist solely of the ownership of equipment,
which it leases to the Company. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1996 and 1997,
cash equivalents consisted primarily of money market accounts.
Cost of Revenue Earned
Included in Internet access and services cost of revenue earned is
primarily the cost of high-speed data circuits and telephone lines that allow
customers access to the Company's service plus Internet access fees paid by the
Company to Internet backbone carriers.
F-10
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and Equipment
Depreciation and amortization of property and equipment are computed using the
straight-line method over the estimated useful lives of the assets, ranging from
five to seven years. Certain equipment obtained through capital lease
obligations are amortized over the life of the lease. Improvements to leased
property are amortized over the lesser of the life of the lease or life of the
improvements.
Major additions and improvements to property and equipment are
capitalized, whereas replacements, maintenance, and repairs which do not improve
or extend the lives of the respective assets, are expensed.
Revenue Recognition
The Company charges customers (subscribers) monthly access fees to
the Internet and recognizes the revenue in the month the access is provided. For
certain subscribers billed in advance, the Company recognizes the revenue over
the period the billing covers. Revenue for other services provided, including
set-up fees charged to customers when their accounts are activated, or equipment
sales, are recognized as the service is performed or the equipment is delivered
to the customer.
Advertising
The Company expenses advertising costs as incurred. During the years
ended December 31, 1995, 1996, and 1997, the Company incurred $24,847, $167,565,
and $274,726, respectively, in advertising costs.
Customer Lists
The excess of the purchase price over the fair value of net assets
acquired in business acquisitions is recorded as customer lists or goodwill and
is being amortized on a straight-line basis over five years.
Inventories
Inventories consist of Internet access equipment and are valued at
the lower of cost of market. Cost is determined using the first-in, first-out
(FIFO) method.
Loss Per Common Share
For the years ended December 31, 1995, 1996, and 1997, loss per share
is computed based upon approximately 1,868,000, 2,295,000, and 5,268,000,
respectively, weighted average common shares outstanding for both basic and
diluted earnings per share. The net loss for the years ended December 31, 1996
and 1997 used in the calculation was increased by the preferred stock dividends
paid of $25,000 and $26,875, respectively. All stock options and warrants are
excluded from the computation of diluted earnings per share as they would have
an antidilutive effect on earnings per share during the years ended December 31,
1995, 1996 and 1997. During 1997 the Company adopted SFAS No. 128 "Earnings Per
Share." In accordance with that statement the loss per share for the years ended
December 31, 1995 and 1996 have been restated.
F-11
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes
Deferred tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the
lease terms. Differences between expense recognized and payments made are
recorded as accrued expenses.
Investments
Debt securities and marketable equity securities for which the
Company has no immediate plans to sell but which may be sold in the future are
classified as available-for-sale and carried at fair value. Any unrealized gains
and losses are recorded, net of related income tax effects, in stockholders'
equity. At December 31, 1996, the Company had one U.S. Treasury Note, and two
repurchase agreements with a bank classified as available-for-sale. The
repurchase agreements were secured by U.S. Treasury Notes. Fair value of the
investments approximated cost as of December 31, 1996, the investments matured
in 1997.
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31, 1996 and
1997, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Capital lease obligations payable to finance companies, due in monthly
installments aggregating $73,562 including interest ranging from 9.5% to 33%
through December 2001, collateralized by equipment.
An officer and shareholder of the Company has guaranteed certain
of the leases and one of the leases restricts the payment of
preferred stock dividends $ 1,586,203 $ 1,375,123
Notes payable to bank, due in monthly installments of $5,555 plus
interest at 2% over the Bank's index rate (10.5% at December 31,
1997) collateralized by furniture and fixtures....................................... -- 138,894
-------------- --------------
1,586,203 1,514,017
Less current maturities...................... 451,823 609,390
-------------- --------------
$ 1,134,380 $ 904,627
-------------- --------------
-------------- --------------
</TABLE>
F-12
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
Aggregate maturities required on long-term debt and obligations under
capital leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Years ending December 31:
1998 ................................... $ 609,390
1999 ................................... 722,287
2000 ................................... 142,138
2001 ................................... 40,202
----------
$1,514,017
----------
----------
</TABLE>
The following is a schedule by years of the future minimum lease
payments under the capital leases, together with the present value of the
minimum lease payments as of December 31, 1997:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Years ending December 31:
1998................................... $ 813,364
1999................................... 785,416
2000................................... 166,707
2001................................... 43,667
--------------
Future minimum lease payments........... 1,809,154
Less amount representing interest....... (434,031)
--------------
Present value of minimum lease payments. $ 1,375,123
--------------
--------------
</TABLE>
Equipment acquired under capital lease obligations had a cost of
$1,976,285 and $2,291,092 and accumulated depreciation of $186,011 and $681,597
at December 31, 1996 and 1997, respectively.
NOTE 3: COMMITMENTS
Lease Commitments
The Company leases operating facilities, and equipment under
operating lease agreements expiring through May 2002. Certain of these lease
agreements require the Company to pay operating expenses and provide for
escalation of annual rentals if the lessor's operating costs increase.
F-13
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: COMMITMENTS (CONTINUED)
At December 31, 1997, the future minimum payments under these leases,
exclusive of sublease payments, are as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Years ending December 31:
1998................................... $ 556,072
1999................................... 531,964
2000................................... 454,268
2001................................... 380,036
2002................................... 126,680
-----------
$2,049,020
-----------
-----------
</TABLE>
In February 1997, the Company subleased one of its operating
facilities. The Company accrued a loss of $58,073 as of December 31, 1996, as a
result of this sublease. Minimum future rentals receivable under this
noncancellable operating sublease are $148,796, covering the period through
January 2001, which have not been deducted from in the above future minimum
payments.
Rent expense was $82,269, $240,720, and $538,625 for 1995, 1996, and
1997, respectively.
Employee Contracts
The Company currently has employment agreements with two of its
officers that provide for salaries ranging from $90,000 per year to $70,000 per
year. The Company may terminate the agreements for cause, or without cause
subject to the obligation to pay the terminated employee a severance payment
ranging from five to eight months salary based on length of service. The
employment agreements terminate in December 1999. The agreements do not
significantly restrict such employee's ability to compete with the Company
following any termination.
Letter of Credit
At December 31, 1997, the Company had an outstanding letter of credit
in the amount of $150,000 to be used in case of default on its main operating
facilities lease. The letter of credit was secured by $170,000 currently
invested in a money market account.
Registration Requirements
The Company has agreed to file a registration statement with the
Securities and Exchange Commission to register the shares issued in its 1997
private placement and the shares issued/acquired pursuant to the stock purchase
agreement discussed in Note 8, including the shares issuable 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
F-14
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: BUSINESS ALLIANCES (Continued)
pays a portion of the revenues (generally 50%) generated through the use of
unrelated parties' equipment. The contracts can be cancelled with notice and if
cancelled by the other party the Company has the right, but not the obligation,
to acquire the equipment owned by the unrelated parties. The revenues to the
Company related to these arrangements amounted to $67,452, $354,565, and
$480,951 for the years ended December 31, 1995, 1996, and 1997, respectively,
and are included in "Internet access and services" revenues in the accompanying
consolidated statements of operations. The payables to the unrelated entities
for their portion of the aforementioned revenues of $10,069 and $48,089 at
December 31, 1996 and 1997, respectively, are included in accrued expenses in
the accompanying balance sheets.
NOTE 5: INCOME TAXES
Under the provisions of the Internal Revenue Code, the Company has available for
federal income tax purposes, a net operating loss carryforward of approximately
$6,212,000, which expires in the years 2010, 2011, and 2012. The tax effects of
this and other temporary differences related to deferred taxes were:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss ............................. $ 850,000 2,317,000
Allowance for doubtful accounts ................ 44,000 66,000
Tax goodwill ................................... 18,000 15,000
Accrued expenses ............................... 22,000 108,000
Amortization of customer lists ................. -- 27,000
934,000 2,533,000
------------ ------------
Deferred tax liabilities:
Accumulated depreciation ....................... -- (101,000)
------------ ------------
Net deferred tax asset before valuation allowance 934,000 2,432,000
Valuation allowance ............................. (934,000) (2,432,000)
------------ ------------
Net deferred tax asset .......................... $ -- $ --
------------ ------------
------------ ------------
</TABLE>
The actual provisions (credits) for income taxes varied from the
expected provision (computed by applying the statutory U.S. federal income tax
rates to loss before taxes) because the tax benefits of the net operating losses
for the periods ended December 31, 1995, 1996, and 1997, are offset by the
valuation allowance.
NOTE 6: REORGANIZATION
The Company was originally formed as a sole proprietorship in October
1993, and incorporated as a Colorado corporation in March 1994. A new Delaware
corporation was formed in October 1995. On October 31, 1995, the Delaware
corporation purchased all the assets relating to the Colorado corporation's
business, and assumed all of its liabilities, except for certain notes payable
to shareholders. Since both parties in the transaction were under common
control, the transaction has been accounted for similar to a pooling of
interests, and all assets purchased and liabilities assumed were recorded by the
Delaware corporation at the Colorado corporation's historical costs. These
financial statements reflect the operations
F-15
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6: REORGANIZATION (Continued)
of both entities during the years ended December 31, 1995, 1996, and 1997. The
stockholders' equity balances represent shares outstanding as if the transaction
had taken place January 1, 1995.
NOTE 7: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles requires disclosures of
certain significant estimates and current vulnerability due to certain
concentrations. Those matters include the following:
Dependence on Suppliers
The Company depends upon third-party suppliers for its access to the
Internet through leased telecommunications lines. Although this access is
available from several alternative suppliers, there can be no assurance that the
Company could obtain substitute services from other providers at reasonable or
comparable prices or in a timely manner. The Company is also dependent upon the
regional Bell operating company to provide installations of circuits and to
maintain those circuits.
Year 2000
Like all entities, the Company is exposed to risks associated with
the Year 2000 issue, which affects computer software and hardware; transactions
with customers, vendors and other entities; and equipment dependent on
microchips. The Company has begun but not yet completed the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of the Year 2000 issue on third parties with which
the Company does business. If remediation efforts of the Company or third
parties with which it does business are not successful, the Year 2000 problem
could have negative effects on the Company's financial condition and results of
operations in the near term.
NOTE 8: PREFERRED STOCK
On April 26, 1996, the Board of Directors designated 250,000 shares
of Preferred Stock as Series A Convertible Preferred Stock (Series A Stock) and
set the terms of the stock. The Series A Stock accrues cumulative dividends at
the rate of 10% per annum. The dividends are payable quarterly to the extent
permitted by applicable law. The Series A Preferred Stock may be converted into
shares of Common Stock at the option of the holder at any time after May 15,
1997. The rate of conversion is the Series A Stock's liquidation value divided
by the conversion price, currently set at $2.00 per share. The Series A Stock's
liquidation value is equal to the price paid for the Series A Stock plus any
cumulative dividends unpaid as of the conversion date. The conversion price is
subject to change due to certain anti-dilution adjustments.
The Company has the authority to issue up to an additional 750,000
shares of Preferred Stock. The Board of Directors is authorized to determine
terms and preferences of the Preferred Stock prior to issuance.
NOTE 9: COMMON STOCK TRANSACTIONS
Public Offering
On September 5, 1996, the Company completed a public offering of 1,365,000 units
at an offering price of $3.50 per unit. Each unit consisted of one share of
common stock and one warrant to purchase one share of common stock at $4.375 per
share for a 23-month period commencing October 5, 1997, and prior to September
5, 1999. Under certain circumstances, the Company may redeem the warrants at
$.25 per
F-16
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9: COMMON STOCK TRANSACTIONS (Continued)
warrant. Additionally, the Company sold the underwriter for $100 warrants to
purchase 125,000 units. These underwriter warrants to purchase units are
exercisable through September 5, 2000, at an exercise price of $4.20 per unit
(for which the accompanying warrant to purchase a share of common stock is
exercisable at $6.5625). Costs of the offering, including a 10% commission paid
to the underwriters, the underwriter's nonaccountable expense allowance, and
professional fees, amounted to $1,000,248, resulting in net proceeds from the
offering of $3,777,252.
Private Placement
On September 14, 1997, the Company completed a private placement of
units consisting of two shares of common stock and a warrant to purchase one
share of common stock. The per unit price was $4.00 and was allocated $1.90 to
each share of common stock and $0.20 to the warrant to purchase a share of
common stock. The warrants entitle the holder to purchase a share of common
stock for $3.00 and expire on June 13, 2000. The net proceeds to the Company
from the sale of 310,500 units amounted to $1,117,920 after deducting offering
expenses of $124,080. The terms of the offering requires the issuance of
additional shares of common stock in the event the Company sells common stock in
the future at a cash price, net of discounts and commissions of less than $1.80
per share, exclusive of shares issued upon the exercise of employee stock
options. The number of shares issuable under this provision would equate to the
number of shares by which purchasers would have been diluted if shares are sold
at net price of less than $1.80.
In connection with that offering, the Company agreed to issue to the
placement agent, warrants ("Agent's Private Offering Warrants") to purchase
units of securities, each unit consisting of two shares of Common Stock and one
common stock purchase warrant. The Company anticipates that it will issue to the
placement agent, for nominal consideration, 31,050 Agent's Private Offering
Warrants. The Warrants will be exercisable for $4.00 per unit (consisting of two
shares of common stock and one warrant to purchase one share of common stock for
$3.00) and will be exercisable for five years.
Stock Purchase Agreement
On October 1, 1997, the Current President (Current President) of the
Company acquired directly from the Company 1,225,000 shares of the Company's
Common Stock and a warrant to purchase 4,000,000 shares of the Company's Common
Stock for $2,450,000. The warrant is exercisable, in whole or in part for an 18
month period, at $1.90 per share. At December 31, 1997, the Company lacked
sufficient authorized shares to accommodate the issuance of all of the shares
underlying the warrant. The Company intends to amend its Certificate of
Incorporation to increase the authorized common shares from 10,000,000 to
25,000,000 shares.
In connection with the execution of this Stock Purchase Agreement,
the former president resigned as the President, Chief Executive Officer, and a
director of the Company. Contemporaneously, the Current President was elected as
the Company's President, Chief Executive Officer, and Chairman of the Board of
Directors.
The Current President also purchased 275,000 shares of Common Stock
from the former president and former members of the Board of Directors for
$550,000, or $2.00 per share.
F-17
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10: BENEFIT PLANS
Management Bonus Plan
The Company had a bonus plan during 1996 which entitled certain
employees to receive a cash bonus based upon achievement of specified levels of
revenues by the Company for the year ended December 31, 1996. The Company
accrued $158,000 in bonuses under the plan in 1996. The Company gave employees
the option of receiving their bonuses in cash or stock options. As a result,
40,425 stock options were issued in 1997 to employees at an exercise price of
$1.00 per share. The Company adopted a similar plan for 1997, however, no
bonuses were earned under the 1997 Plan.
Stock Option Plans
In July 1996, the Company adopted the 1996 Employee Stock Option Plan
(the Employee Plan) and the Non-Employee Directors' Stock Option Plan (the
Directors' Plan). The Employee Plan provides for an authorization of 471,300
shares of Common Stock for issuance upon exercise of stock options granted under
the Plan. The Employee Plan is administered by the Board of Directors, which
determines the persons to whom options are granted, the type, number, vesting
schedule, exercise price, and term of options granted. Under this plan both
incentive and nonqualified options can be granted.
An aggregate of 18,000 shares of Common Stock are reserved for
issuance under the Directors' Plan. All nonemployee directors are automatically
granted nonqualified stock options to purchase 1,500 shares initially and
additional 1,500 shares for each subsequent year that they serve up to a maximum
of 6,000 shares per director.
In September 1997, the Company adopted the 1997 Stock Option Plan
(1997 Plan). The 1997 Plan provides for an authorization of 50,000 shares of
Common Stock for issuance upon exercise of stock options granted under the Plan.
The 1997 Plan was established to issue the stock options discussed under
Management Bonus Plan.
In October 1997, the Company granted the current president (see Note
8) incentive stock options to purchase 191,385 shares of Common Stock at $2.6125
per share and nonqualified stock options to purchase 408,615 shares of Common
Stock at $1.00 per share, subject to approval by the stockholders. The options
vest one year from the date of grant. Compensation of $168,117 relating to the
nonqualified stock options was recorded to compensation expense during the year
ended December 31, 1997.
The Board of Directors has approved the 1998 Employees' Stock Option
Plan, subject to approval by the stockholders. This plan reserves 266,544 shares
of Common Stock for issuance over the ten-year term of the plan.
F-18
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10: BENEFIT PLANS (Continued)
The following is a summary of the status of the Company's stock
option plans at December 31, 1996 and 1997, and the changes during the years
then ended:
<TABLE>
<CAPTION>
1996 1997
--------------------- ------------------- -------------------- ---------------------
Employees' Plans Directors' Plan Employees' Plans Directors' Plan
--------------------- ------------------- --------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
--------- ---------- -------- ----------- ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year -- $ -- -- $ -- 284,230 $ 1.68 1,500 $ 2.00
Options granted ................ 284,230 1.68 1,500 2.00 896,400 1.68 4,500 2.42
Options expired ................ -- -- -- -- (73,860) 1.81 -- --
Options exercised .............. -- -- -- -- (23,100) 1.65 -- --
--------- ---------- -------- ----------- ---------- ----------- ------- -----------
Outstanding, end of year ....... 284,230 $ 1.68 1,500 $ 2.00 1,083,670 $ 1.67 6,000 $ 2.31
--------- ---------- -------- ----------- ---------- ----------- ------- -----------
--------- ---------- -------- ----------- ---------- ----------- ------- -----------
Options exercisable, end of
year .......................... 25,000 1,500 483,670 6,000
--------- -------- ---------- -------
</TABLE>
The fair value of each option granted is estimated on the date of the
grant using the Black-Sholes method with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dividend per share................................................................. $ 0.00 $ 0.00
Risk-free interest rate............................................................ 6.16% 6.0%
Expected life of options........................................................... 5 years 5 years
Weighted-average fair value of options granted..................................... $ 1.90 $ 1.29
</TABLE>
The following table summarized information about stock options under
the plans outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
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
F-19
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10: BENEFIT PLANS (Continued)
recorded to compensation expense. The remaining Employee Plan options above have
a five year term and vested fully during 1997 due to a change in control of the
Company (see Note 9).
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans, and $52,807 and $168,117 in compensation costs have
been recognized in December 31, 1996 and 1997, respectively. Had compensation
cost for the Plans been determined based on the fair value at the grant dates
using Statement of Financial Accounting Standards No. 123, the Company's net
loss would have increased by $74,258 and $768,647 in 1996 and 1997,
respectively. In addition, the Company's loss per share would have increased by
$.02 and $.14 in 1996 and 1997, respectively.
401(k) Plan
The Board of Directors has approved a 401(k) Savings and Retirement
Plan that will cover substantially all employees effective March 1, 1998. The
Company's contributions to the Plan will be determined annually by the Board of
Directors.
NOTE 11: ACQUISITIONS
On November 1, 1997, the Company acquired the customer base and
selected assets of CompuNerd, Inc. for $70,478 in cash and 30,000 shares of the
Company's common stock valued at $67,500. On December 1, 1996, the Company
acquired the Information Exchange, a related party through common ownership, in
exchange for 52,723 shares of the Company's common stock valued at $60,385. On
January 22, 1997, the Company acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (O.N.E). The O.N.E.
acquisition netted the Company approximately 50 dedicated and 725 dial-up
subscribers and equipment valued at approximately $24,700. The Company paid
$150,000 cash and issued 116,932 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 pro forma consolidated operations for the
years ended December 31, 1995 and 1996, assuming the Information Exchange
purchase was made at the beginning of each year is shown below:
<TABLE>
<CAPTION>
1995 1996
------------------ -----------------
<S> <C> <C>
Net sales.................................. $ 1,200,645 $ 3,367,720
Net loss................................... $ (214,042) $ (2,377,599)
Net loss per share......................... $ (.06) $ (.65)
</TABLE>
The pro forma results are not necessarily indicative of what would
have occurred had the acquisition been on these dates, nor are they necessarily
indicative of future operations.
F-20
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: ACQUISITIONS (Continued)
The purchase price for the above acquisitions were allocated as
follows:
<TABLE>
<CAPTION>
CompuNerd, Information
Inc. Exchange O.N.E. Total
------------ -------------- --------------- -------------
<S> <C> <C> <C> <C>
Equipment...................................... $ 48,265 $ 2,560 $ 24,700 $ 75,525
Customer lists................................. 89,713 57,825 432,247 579,785
------------- ------------- -------------- ------------
$ 137,978 $ 60,385 $ 456,947 $ 655,310
------------- ------------- -------------- ------------
------------- ------------- -------------- ------------
</TABLE>
On June 5, 1998, the Company acquired all the outstanding
common stock of Infohiway, Inc. for 150,000 shares of the common stock valued at
$1,335,000. Substantially all of the purchase price was allocated to goodwill.
Infohiway, Inc. and developed a search engine. Consolidated operations of the
Company would not have been significantly different had the acquisition been
made on January 1, 1998.
On July 1, 1998, the Company acquired all of the
outstanding common stock of Application Methods, Inc. and e-Sell Commerce, Inc.,
collectively referred to as Application Methods. The Company paid 286,396 shares
of common stock valued at $3,239,000, and the acquisition has been recorded as a
purchase. $3,211,000 of the purchase price will be allocated to goodwill.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Noncash Investing and Financing Activities 1995 1996 1997
- --------------------------------------------------------------------------- ------------ ------------- ----------
<S> <C> <C> <C>
Capital lease obligations incurred for equipment................................$ 211,654 $1,672,244 $273,859
Capital contributed by reductions of notes payable .............................. 19,783 -- --
Long-term debt converted to common stock ........................................ -- 490,000 --
Preferred stock converted to common stock ....................................... -- -- 210
Acquisition of CompuNerd, Inc. through issuance of common stock ................. -- 67,500 --
Acquisition of the Information Exchange through
issuance of common stock ...................................................... -- 60,385 --
Acquisition of the Online Network Exchange, Inc.
through issuance of common stock .............................................. -- -- 306,947
Other ........................................................................... -- -- 32,100
Additional Cash Payments Information
Interest paid...................................................................$ 22,043 $ 159,007 $396,731
</TABLE>
NOTE 13: CONTINUED OPERATIONS
During the years ended December 31, 1996 and 1997, the Company
incurred net losses of $2,342,571 and $4,152,853, respectively, used $1,511,505
and $3,296,971, respectively, of net cash from operating activities. The
Company's President has plans to contribute approximately $500,000 in additional
capital in 1998. In addition, the Company's management currently has plans it
believes will increase revenues in order to become profitable and generate
positive cash flows from operations. However, there are no assurances that the
Company's plans for revenue growth and improved operating cash flows will be
successful. It could be
F-21
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
necessary to raise additional capital or reduce operating costs to meet
liquidity requirements. Reducing operating costs could inhibit the Company's
planned rate of revenue growth.
NOTE 14: RESTATEMENT
The 1996 financial statements have been restated to correct the
recording of a nonqualified stock option. The effect of this change was to
increase additional paid-in capital, accumulated deficit and net loss by
$40,000 and to increase basic and diluted loss per share by $.01.
NOTE 15: FUTURE CHANGES IN ACCOUNTING PRINCIPLE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to
owners. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes that the adoption of this
Statement will not have a material effect on the Company's consolidated results
of operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires disclosure of selected
information about operating segments in interim financial reports. The Statement
is effective for financial statements for periods beginning after December 15,
1997. Management believes that the adoption of this Statement will not have a
material effect on the Company's consolidated results of operations or financial
position.
F-22
<PAGE>
APPLICATION METHODS, INC.
(COMBINED WITH E-SELL COMMERCE SYSTEMS, INC. AT JUNE 30, 1998)
BALANCE SHEETS
(Unaudited)
June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS
Current Assets 1998 1997
--------- --------
<S> <C> <C>
Cash ................................................. $ 6,512 $ 19,985
Accounts receivable .................................. 192,083 181,889
Refundable income tax ................................ 4,943
Advances to shareholder .............................. 45,323
--------- --------
Total current assets ....................... 243,918 206,817
Furniture and Equipment, at cost, less accumulated
depreciation of $52,731 at June 30, 1998,
and $47,774 at June 30, 1997 ............... 6,066 11,023
--------- --------
$249,984 $217,840
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ..................................... $ 33,475 $ 26,303
Notes payable ........................................ 132,166 97,500
Loan from shareholder ................................ 7,738
Deferred income taxes ................................ 10,952 8,039
-------- --------
Total current liabilities .................. 176,593 139,580
Stockholders' Equity
Common stock, $.10 par value; 60,000 shares
authorized, (50,000 for Application Methods, Inc. ..
and 10,000 for e-SELL Commerce Systems, Inc.)
2,000 shares issued and outstanding at June 30, 1998
(1,000 for each company); 50,000 shares authorized,
1,000 shares issued and outstanding at June 30, 1997 200 100
Retained Earnings ............................................... 73,191 78,160
--------- --------
73,391 78,260
--------- --------
$249,984 $217,840
--------- --------
--------- --------
</TABLE>
See Notes to Financial Statements
F-23
<PAGE>
APPLICATION METHODS, INC.
(COMBINSED WITH E-SELL COMMERCE SYSTEMS, INC. FOR
THE SIX MONTHS ENDED JUNE 30, 1998)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Revenues ................................ $679,672 $ 437,948
Sales and service revenue ......... 41,345 8,188
-------- ---------
721,017 446,136
Expenses
Labor and benefits ................ 407,336 349,873
Selling, general and administrative 235,473 135,968
-------- ---------
642,809 485,841
-------- ---------
Income (loss) before interest tax . 78,208 (39,705)
Interest expense ........................ 8,284 4,981
-------- ---------
Income (loss) before income tax ... 69,924 (44,686)
Deferred income tax expense (recovery) .. 10,952 (6,703)
-------- ---------
Net income (loss) .. 58,972 (37,983)
Retained earnings, beginning of period .. 14,219 116,143
-------- ---------
Retained earnings, end of period ........ $ 73,191 $ 78,160
-------- ---------
-------- ---------
</TABLE>
See Notes to Financial Statements
F-24
<PAGE>
APPLICATION METHODS, INC.
(COMBINED WITH E-SELL COMMERCE SYSTEMS, INC. FOR
THE SIX MONTHS ENDED JUNE 30, 1998)
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ............................... $ 58,972 $(37,983)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization ................... 2,209 2,748
Changes in operating assets and liabilities
Receivables ................................... (113,976) (67,353)
Advances to and from shareholder .............. (3,122) 67,100
Accounts payable .............................. (30,303) 10,046
Deferred income taxes ......................... 10,952 (6,703)
--------- --------
Cash used in operating activities (75,268) (32,145)
Cash Flows From Financing Activities
Increase in notes payable ....................... 51,144 32,500
--------- --------
Net increase (decrease) in cash .. (24,124) 355
Cash, beginning of period ............................. 30,636 19,630
--------- --------
Cash, end of period ................................... $ 6,512 $ 19,985
--------- --------
--------- --------
</TABLE>
See Notes to Financial Statements
F-25
<PAGE>
APPLICATION METHODS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Organization
Application Methods, Inc. ("Application Methods") develops computer software for
its clients on a custom basis. In addition, it sells certain computer software
products it internally develops.
e-SELL Commerce Systems, Inc. ("e-SELL") was established in late 1997 to sell
certain software created by Application Methods.
As of June 30, 1998, these financial statements are the combination of these two
companies. Combination is appropriate because the two companies have the same
stock ownership.
During the six months ended June 30, 1998, sales and service revenue from three
customers accounted for 31% of total sales and service revenue. Accounts
receivable for five customers accounted for 58% of total accounts receivable at
June 30, 1998. During the six months ended June 30, 1997, sales and service
revenue from one customer accounted for 11% of total sales and service revenue.
Accounts receivable for five customers accounted for 65% of total accounts
receivable at June 30, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ from the estimates that were used.
Software Development Costs
Software development costs are expensed as incurred.
Cash
Cash includes cash balances held at a bank. Cash balances are occasionally in
excess of amounts insured by the Federal Deposit Insurance Corporation.
Cash payments for interest were $8,284 and $4,981 during the six months ended
June 30, 1998 and 1997, respectively. No cash payments for income taxes were
made during the six months ended June 30, 1998 or 1997.
F-26
<PAGE>
Note 1. (Continued)
Accounts Receivable
Application Methods and e-SELL use the allowance method for recognizing bad
debts. Management believes no allowance is necessary at June 30, 1998 or 1997.
Furniture and Equipment
Furniture and equipment are depreciated using accelerated methods over the
estimated useful lives of the related assets.
Taxes on Income
Application Methods and e-SELL account for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. In estimating future tax
consequences, Application Methods and e-Sell generally consider all expected
future events other than enactments of changes in the tax laws or rates.
Note 2. Notes Payable
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Line of credit to a bank, bearing interest at 11.5%, due
November 20, 1998, secured by receivables ........................... $ 95,000 $ 65,000
Other ............................................................... 37,166 32,500
------------- -------------
$ 132,166 $ 97,500
------------- -------------
------------- -------------
</TABLE>
Note 3. Leases
Application Methods and e-SELL lease an office under an operating lease expiring
January 31, 2002. In addition, Application Methods leases certain computer
equipment. The following are the future minimum rental payments required under
the lease for the years ending December 31:
<TABLE>
<S> <C>
1998 $ 125,723
1999 99,394
2000 98,764
2001 92,434
2002 7,703
---------------
$ 424,018
---------------
---------------
</TABLE>
Note 3. (Continued)
Rent expense was $65,086 and $38,856 for the six months ended June 30, 1998 and
1997, respectively.
F-27
<PAGE>
Note 4. Deferred Income Taxes
The temporary differences causing the deferred tax effects results from using
the cash basis of accounting for income tax purposes and the accrual basis for
financial reporting purposes.
At June 30, 1998, Application Methods and e-SELL have unused net operating tax
losses of $66,150 which expire through 2013. An asset of $9,920 was established
for this net operating tax loss which has been used to offset the deferred tax
liability. At June 30, 1997, unused net operating tax losses resulted in an
asset of $15,300 which was also used to reduce the deferred tax liability.
Each of the Companies filed their own separate income tax returns. This does not
have a material effect on the income tax provision.
Note 5. Subsequent Event
Effective July 1, 1998, Application Methods and e-SELL agreed to sell the
Companies to a company that is an internet service provider. The value of the
assets and liabilities have not been adjusted for this anticipated sale.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Application Methods, Inc./
e-SELL Commerce Systems, Inc.
Seattle, Washington.
We have audited the accompanying combined balance sheet of
Application Methods, Inc. and e-SELL Commerce Systems, Inc. as of December 31,
1997, and the related combined statements of operations and retained earnings,
and combined cash flows for the year then ended. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Application Methods, Inc. and e-SELL Commerce Systems, Inc. as of December 31,
1997, and the results of its combined operations and its combined cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ PETERSON SULLIVAN PLLC
May 14, 1998
Seattle, Washington
F-29
<PAGE>
APPLICATION METHODS, INC./e-SELL COMMERCE SYSTEMS, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
ASSETS
Current Assets
Cash................................................................................................. $ 30,636
Accounts receivable ................................................................................. 78,107
Advances to shareholder ............................................................................. 42,201
--------
Total current assets ................................................................................ 150,944
Furniture and Equipment, at cost, less accumulated depreciation of $50,610 ........................... 8,275
--------
$159,219
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................................................... $ 63,778
Notes payable ....................................................................................... 81,022
--------
Total current liabilities ........................................................................... 144,800
Stockholders' Equity
Common stock, $.10 par value; 60,000 shares authorized (50,000 for Application
Methods, Inc. and 10,000 for E-SELL Commerce Systems, Inc.), 2,000 shares
issued and outstanding (1,000 for each Company) ..................................................... 200
Retained earnings ................................................................................... 14,219
--------
14,419
--------
$159,219
--------
--------
</TABLE>
See Notes to Combined Financial Statements
F-30
<PAGE>
APPLICATION METHODS, INC./E-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenues
Sales and service revenue................................................... $ 962,895
Other income................................................................ 21,061
------------
983,956
Expenses
Labor and benefits.......................................................... 653,670
Selling, general and administrative......................................... 434,935
------------
1,088,605
------------
Loss before interest expense................................................ (104,649)
Interest expense............................................................. (12,016)
------------
Loss before deferred income taxes........................................... (116,665)
Recovery of deferred income taxes............................................ 14,742
------------
Net loss.................................................................... (101,923)
Retained earnings, beginning of year......................................... 116,142
------------
Retained earnings, end of year............................................... $ 14,219
------------
------------
</TABLE>
See Notes to Combined Financial Statements
F-31
<PAGE>
APPLICATION METHODS, INC./e-SELL COMMERCE SYSTEMS, INC.
COMBINED STATEMENT OF CASH FLOWS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows From Operating Activities
Net loss......................................................................................................... $(101,923)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization.................................................................................... 5,495
Changes in operating assets and liabilities
Accounts receivable.............................................................................................. 58,533
Accounts payable................................................................................................. 47,521
Deferred income tax.............................................................................................. (14,742)
-----------
Cash used in operating activities............................................................................... (5,116)
Cash Flows From Financing Activities
Increase in notes payable........................................................................................ 16,022
Issuance of common stock (1,000 shares of e-SELL issued in December 1997)........................................ 100
-----------
Cash provided by financing activities........................................................................... 16,122
-----------
Net increase in cash............................................................................................ 11,006
Cash, beginning of year........................................................................................... 19,630
-----------
Cash, end of year................................................................................................. $ 30,636
-----------
-----------
</TABLE>
See Notes to Combined Financial Statements
F-32
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Organization And Significant Accounting Policies
Organization
Application Methods, Inc. ("Application Methods") develops computer
software for its clients on a custom basis. In addition, it sells certain
computer software products it internally develops. During 1997, sales and
service revenue from one customer accounted for 13% of total sales and service
revenue. Accounts receivable for three customers account for 50% of total
accounts receivable.
e-SELL Commerce Systems, Inc. ("e-SELL") was established to sell
certain software created by Application Methods. At December 31, 1997, there had
been no sales and no other operations.
These financial statements are the combination of these two companies
("the Companies"). Combination is appropriate because the two companies have the
same stock ownership.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Accordingly, actual results could differ from the estimates that were
used.
Advertising Costs
Advertising costs are expensed as incurred and totaled $6,787 for the
year ended December 31, 1997.
Software Development Costs
Software development costs are expensed as incurred.
Cash
Cash includes cash balances held at a bank. Cash balances are
occasionally in excess of amounts insured by the Federal Deposit Insurance
Corporation.
Cash payments for interest were $12,016 during the year ended
December 31, 1997. No cash payments for income taxes were made during the year
ended December 31, 1997.
Accounts Receivable
The Companies use the allowance method for recognizing bad debts.
Management believes no allowance is necessary at December 31, 1997.
Furniture And Equipment
Furniture and equipment are depreciated using accelerated methods
over the estimated useful lives of the related assets.
Taxes On Income
The Companies account for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in
financial statements or tax returns. In estimating future tax consequences, the
Companies generally consider all expected future events other than enactments of
changes in the tax laws or rates.
F-33
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2. Notes Payable
<TABLE>
<S> <C>
Note payable to bank bearing interest at 11.5% due November 20,
1998, secured by receivables....................................................................... $ 65,000
Note payable--revolving line of credit agreement with a bank
bearing interest at 15.4%, unsecured. Maximum borrowings under
the line of credit are $25,000..................................................................... 8,481
Note payable--revolving line of credit agreement with a bank
bearing interest at 13.25%, unsecured. Maximum borrowings under
the line of credit are $11,000..................................................................... 7,541
-----------
$ 81,022
-----------
-----------
</TABLE>
Note 3. Leases
The Companies lease an office under an operating lease expiring
January 31, 2002. In addition, the Companies lease certain computer equipment.
The following are the future minimum rental payments required under the lease
for the years ending December 31:
<TABLE>
<S> <C>
1998................................................................. $125,723
1999................................................................. 99,394
2000................................................................. 98,764
2001................................................................. 92,434
2002................................................................. 7,703
-----------
Total................................................................ $424,018
-----------
-----------
</TABLE>
Rent expense was $84,605 for the year ended December 31, 1997.
Note 4. Deferred Income Taxes
The temporary differences causing the deferred tax effects results
from using the cash basis of accounting for income tax purposes and the accrual
basis for financial reporting purposes.
Application Methods has an unused net operating tax loss of $15,100
which expires in 2012. An asset of $2,265 was established for this net operating
tax loss which has been fully reserved.
Note 5. Contracts
Application Methods has contracts for consulting with customers
totaling $90,169 at December 31, 1997. These contracts start in 1998. These
amounts have not been recorded on the balance sheet or included in revenue.
Note 6. Subsequent Event
Subsequent to December 31, 1997, Application Methods and E-SELL
signed a letter of intent to sell the Companies to a company that is an internet
service provider. The value of the assets and liabilities have not been adjusted
for this anticipated sale.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Application Methods, Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Application
Methods, Inc. as of December 31, 1996, and the related statements of operations
and retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Application Methods,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Peterson Sullivan PLLC
June 5, 1998 Seattle, Washington
F-35
<PAGE>
APPLICATION METHODS, INC.
BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash............................................................................................................... $ 19,630
Accounts receivable................................................................................................ 114,536
Refundable income tax.............................................................................................. 4,943
------------
Total current assets............................................................................................... 139,109
Advances to shareholder............................................................................................. 59,362
Furniture and Equipment, at cost, less accumulated depreciation of $45,026.......................................... 13,771
------------
$ 212,242
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................................................... $ 16,257
Notes payable...................................................................................................... 65,000
Deferred income taxes.............................................................................................. 14,742
------------
Total current liabilities 95,999
Stockholders' Equity
Common stock, $.10 par value; 50,000 shares authorized, 1,000 shares issued and
Outstanding........................................................................................................ 100
Retained earnings.................................................................................................. 116,143
------------
116,243
------------
$ 212,242
------------
------------
</TABLE>
See Notes to Financial Statements
F-36
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31, 1996
<TABLE>
<S> <C>
Revenues
Sales and service revenue..................................................................................... $ 784,635
Other income.................................................................................................. 3,676
------------
788,311
Expenses
Labor and benefits............................................................................................ 488,293
Selling, general and administrative........................................................................... 268,981
------------
757,274
------------
Income before interest expense................................................................................ 31,037
Interest expense............................................................................................... 2,178
------------
Income before income taxes.................................................................................... 28,859
Provision for income taxes..................................................................................... 5,107
------------
Net income.................................................................................................... 23,752
Retained earnings, beginning of year........................................................................... 92,391
------------
Retained earnings, end of year................................................................................. $ 116,143
------------
------------
</TABLE>
See Notes to Financial Statements
F-37
<PAGE>
APPLICATION METHODS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
<S> <C>
Cash Flows From Operating Activities
Net income.......................................................................................... $ 23,752
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization....................................................................... 5,774
Changes in operating assets and liabilities
Accounts receivable................................................................................. (82,819)
Refundable income tax............................................................................... (4,943)
Accounts payable.................................................................................... 16,257
Deferred income tax................................................................................. 10,050
----------
Cash used in operating activities.................................................................. (31,929)
Cash Flows From Investing Activities
Purchase of equipment............................................................................... (12,689)
Cash Flows From Financing Activities
Increase in notes payable........................................................................... 61,078
----------
Net increase in cash............................................................................... 16,460
Cash, beginning of year.............................................................................. 3,170
----------
Cash, end of year.................................................................................... $ 19,630
----------
----------
</TABLE>
See Notes to Financial Statements
F-38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization And Significant Accounting Policies
Organization
Application Methods, Inc. ("Application Methods") develops computer
software for its clients on a custom basis. In addition, it sells certain
computer software products it internally develops. During 1996, sales and
service revenue from two customers accounted for 54% of total sales and service
revenue. Accounts receivable for two customers account for 55% of total accounts
receivable.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Accordingly, actual results could differ from the estimates that were
used.
Advertising Costs
Advertising costs are expensed as incurred and totaled $13,648 for
the year ended December 31, 1996.
Software Development Costs
Software development costs are expensed as incurred.
Cash
Cash includes cash balances held at a bank. Cash balances are
occasionally in excess of amounts insured by the Federal Deposit Insurance
Corporation.
Cash payments for interest were $2,178 during the year ended December
31, 1996. No cash payments for income taxes were made during the year ended
December 31, 1996.
Accounts Receivable
Application Methods uses the allowance method for recognizing bad
debts. Management believes no allowance is necessary at December 31, 1996.
Furniture And Equipment
Furniture and equipment are depreciated using accelerated methods
over the estimated useful lives of the related assets.
Taxes On Income
Application Methods accounts for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for expected future tax consequences of events that have been
recognized in Application Methods' financial statements or tax returns. In
estimating future tax consequences, Application Methods generally considers all
expected future events other than enactments of changes in the tax laws or
rates.
F-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 2. Notes Payable
Application Methods has a line of credit for $65,000 bearing interest
at 11.5%, due November 20, 1998, secured by receivables.
Note 3. Leases
Application Methods leases an office under an operating lease
expiring January 31, 2002. In addition, Application Methods leases certain
computer equipment. The following are the future minimum rental payments
required under the lease for the years ending December 31:
<TABLE>
<S> <C>
1997.............................................. $ 138,628
1998.............................................. 125,723
1999.............................................. 99,394
2000.............................................. 98,764
2001.............................................. 92,434
Thereafter........................................ 7,703
-----------
Total............................................. $ 562,646
-----------
-----------
</TABLE>
Rent expense was $28,781 for the year ended December 31, 1996.
Note 4. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current........................................... $ (4,943)
Deferred.......................................... 10,050
-----------
$ 5,107
-----------
-----------
</TABLE>
The temporary difference causing the deferred tax liability results
from using the cash basis of accounting for income tax purposes and the accrual
basis for financial reporting purposes.
Note 5. Subsequent Event
In 1998, Application Methods signed a letter of intent to sell the
Company and a related company (e-SELL) to a company that is an internet service
provider. The value of the assets and liabilities have not been adjusted for
this anticipated sale.
F-40
<PAGE>
Independent Auditors' Report
To the Board of Directors
DataXchange Network, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of DataXchange Network, Inc.
(the "Company") as of July 31, 1998 and 1997 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended July 31, 1998. The 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 financial statements referred to above present fairly in all
material respects, the financial position of the Company, as of July 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
years in the three-year period ended July 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Aidman, Piser &
Company, P.A.
September 30, 1998
Tampa, Florida
F-41
<PAGE>
DATAXCHANGE NETWORK, INC.
BALANCE SHEETS
JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................... $ 225,911 $ 177,971
Receivables:
Trade, less allowance for doubtful accounts
(1998, $58,000; 1997, $35,000) .................................................... 152,678 183,031
Other ............................................................................. 2,800 6,553
Inventory ........................................................................... 39,954 58,122
Contract bid deposits ............................................................... 63,327 --
Prepaid expenses and other current assets ........................................... 30,995 28,272
------------- -----------
Total current assets .......................................................... 515,665 453,949
Furniture and network equipment, net ................................................ 171,165 271,439
Deposits ............................................................................ 6,109 7,680
------------- -----------
$ 692,939 $ 733,068
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 253,472 $ 195,510
Accrued expenses .................................................................... 11,285 8,354
Customer deposits ................................................................... 192,432 152,540
------------- -----------
Total current liabilities ........................................................ 457,189 356,404
------------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock; $.01 par value; 20,000,000 shares
authorized; shares issued and outstanding,
1,228,464 (1998), 1,153,143 (1997) ................................................ 12,285 11,530
Additional paid-in capital .......................................................... 1,917,715 1,273,470
Stock subscriptions receivable ...................................................... (40,000) (40,000)
Accumulated deficit ................................................................. (1,654,250) (868,336)
------------- -----------
235,750 376,664
------------- -----------
$ 692,939 $ 733,068
------------- -----------
------------- -----------
</TABLE>
See notes to financial statements.
F-42
<PAGE>
DATAXCHANGE NETWORK, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenue: .......................... $ 1,898,242 $ 1,568,339 $ 1,201,824
Internet access and services .... 118,270 127,881 208,557
----------- ----------- -----------
Equipment sales ................. 2,016,512 1,696,220 1,410,381
----------- ----------- -----------
Cost of sales:
Internet access and services .... 1,828,886 1,536,178 855,172
Equipment sales ................. 120,477 139,936 130,135
----------- ----------- -----------
1,949,363 1,676,114 985,307
----------- ----------- -----------
Gross profit ...................... 67,149 20,106 425,074
General and administrative expenses 750,720 663,375 440,347
Depreciation ...................... 107,481 158,829 79,944
----------- ----------- -----------
Loss from operations .............. (791,052) (802,098) (95,217)
Interest income ................... 6,038 18,388 14,933
----------- ----------- -----------
Loss before income taxes .......... (785,014) (783,710) (80,284)
Income tax expense ................ 900 900 800
----------- ----------- -----------
Net loss .......................... $ (785,914) $ (784,610) $ (81,084)
------------ ------------ -----------
------------ ------------ -----------
Loss per common shares ............ $ (.67) $ (.68) $ (.07)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See notes to financial statements.
F-43
<PAGE>
DATAXCHANGE NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-in Accumulated Subscription
Shares Amount Capital Deficit Receivable Total
----------- --------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, August 1, 1995 3,567 $ 357 $ 559,643 $ (2,642) $(460,000) $ 97,358
Common stock split
(300:1) ................. 1,066,433 10,343 (10,343) -- -- --
Issuance of common
stock ($8.72 per share) . 83,143 830 724,170 -- -- 725,000
Collection of stock
subscriptions receivable -- -- -- -- 420,000 420,000
Net loss ................ -- -- -- (81,084) -- 81,084
----------- --------- ------------ -------------- ------------ -----------
Balances, July 31, 1996 . 1,153,143 11,530 1,273,470 (83,726) (40,000) 1,161,274
Net loss ................ -- -- -- (784,610) -- (784,610)
----------- --------- ------------ -------------- ------------ -----------
Balances, July 31, 1997 . 1,153,143 11,530 1,273,470 (868,336) (40,000) 376,664
Issuance of common stock
(8.72 per share) ........ 22,936 230 199,770 -- -- 200,000
Issuance of common stock
($7.50 per share) ....... 30,000 300 224,700 -- -- 225,000
Notes converted to common
stock ................... 22,385 225 219,775 -- -- 220,000
Net loss ................ -- -- -- (785,914) -- (785,914)
----------- --------- ------------ -------------- ------------ -----------
Balances, July 31, 1998 . 1,228,464 $12,285 $ 1,917,715 $(1,654,250) $ (40,000) $ 235,750
----------- --------- ------------ -------------- ------------ -----------
----------- --------- ------------ -------------- ------------ -----------
</TABLE>
See notes to financial statements
F-44
<PAGE>
DATAXCHANGE NETWORK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................. $(785,914) $(784,610) $ (81,084)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation ...................... 107,481 158,829 79,944
Increase(decrease) in cash due to
changes in:
Accounts receivable ........... 34,106 (65,169) (31,557)
Inventory ..................... 18,168 (20,418) (37,704)
Prepaid expenses and other
current assets .............. (66,050) (11,610) (16,662)
Deposits ...................... 1,571 (6,180) (1,500)
Accounts payable .............. 57,961 129,863 47,435
Accrued expenses .............. 2,932 4,942 (14,099)
Customer deposits ............. 39,892 27,736 65,299
---------- ---------- ------------
Net cash provided by (used in)
operating activities ................ (589,853) (566,617) 10,072
---------- ---------- ------------
Cash flows from investing activities:
Acquisition of furniture and equipment (7,207) (58,008) (407,312)
---------- ---------- ------------
Net cash used in investing activities .. (7,207) (58,008) (407,312)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from sale of common stock
and collection of stock subscriptions
receivable ........................... 425,000 -- 1,145,000
Proceeds from issuance of
convertible notes .................... 220,000 -- --
---------- ---------- ------------
Net cash provided by financing
activities ........................... 645,000 -- 1,145,000
---------- ---------- ------------
Net change in cash ..................... 47,940 (624,625) 747,760
Cash at beginning of year .............. 177,971 802,596 54,836
---------- ---------- ------------
Cash at end of year .................... $ 225,911 $ 177,971 $ 802,596
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
(Continued)
F-45
<PAGE>
DATAXCHANGE NETWORK, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Income taxes paid were $900, $900 and $800 for the years ended July 31, 1998,
1997 and 1996, respectively.
Interest paid was $5,950 during the year ended July 31, 1998.
Non-cash financing activities:
During the year ended July 31, 1998, $220,000 of convertible notes were
converted to common stock at a conversion rate of approximately $10 per share.
F-46
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. Nature of business and summary of significant accounting policies:
Nature of business:
DataXchange Network, Inc. (the "Company") is a national provider
of internet access services to approximately 200 local or regional
Internet Service Providers (ISP's). The Company also directly
provides internet access to approximately 75 corporations. The
Company facilitates access to the Internet by means of a
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
approximately 325 locations. The Company's high speed, digital
telecommunications network provides subscribers with direct access
to the full range of internet applications and resources.
Cash equivalents:
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents. At July 31, 1998 and
1997, cash equivalents consisted principally of money market
accounts.
Inventory:
Inventory consists primarily of purchased computer network equipment
and is stated at the lower of cost or market. Cost is determined
generally on a first-in, first-out basis.
Furniture and equipment:
Furniture and equipment are stated at cost. Depreciation is provided
on accelerated methods over the estimated useful lives of the related
assets.
Advertising cost:
The Company charges the costs of advertising to operations as such
costs are incurred. Advertising expense was approximately $13,000,
$32,000 and $8,000 for the years ending July 31, 1998, 1997 and 1996.
F-47
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. Nature of business and summary of significant accounting policies
(continued):
Income taxes:
Deferred tax assets and liabilities 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
deferred tax assets will not be recognized.
Dependence on suppliers:
The Company depends upon third-party suppliers for access to the
internet through leased telecommunication lines. Although this access
is available from several alternate 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 phone
companies to provide installations or circuits and to maintain those
circuits.
Revenue recognition:
The Company charges customers monthly access fees to the internet
and recognizes the revenue in the month the access is provided.
Revenue for other services provided, including installation fees
or equipment sales, is recognized as the service is performed or
the equipment is delivered to the customer.
Cost of sales:
Included in cost of sales for internet access and services is
principally the cost of high speed data circuits and telephone lines
that allow customers access to the Company's service.
New accounting pronouncements:
In 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Both of
these standards will be effective for the Company's 1999 fiscal
year. Future adoption of these new accounting standards are not
expected to have a significant effect on the Company's financial
position or results of operations.
F-48
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. Nature of business and summary of significant accounting policies
(continued):
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals 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
income and expenses during the reporting period. Actual results could
differ from those estimates.
Net loss per share:
Basic net loss per common share has been determined by dividing net
loss by the weighted average number of shares outstanding during each
period. Diluted net loss per common share is the same as basic net
loss per common share.
2. Liquidity and capital resources:
Since the Company's inception in 1994, the Company has incurred
significant operating losses that have been funded by proceeds from
the sale of common stock. The Company's continuation as a going
concern is dependent upon additional capital infusions until such
time as the Company achieves revenue levels sufficient to cover its
costs, including increased working capital and infrastructure
requirements that may result from any increase in business volume.
The Company's current net cash loss approximates $50,000 per month
(unaudited). It is the management's intention to fund operations
through additional equity and/or debt offerings.
Insofar as those efforts are insufficient, the Company's two
principal stockholders have agreed to provide funding sufficient to
support the Company's operations through at least December 31, 1999.
F-49
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
3. Financial instruments:
Fair value of financial instruments:
The carrying values of cash and cash equivalents, accounts
receivable, customer deposits and accounts payable approximated fair
value due to the short-term maturates of these instruments.
Concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable and are limited due to the large numbers of customers
comprising the Company's customer base, which is dispersed across the
United States. The Company controls credit risk associated with its
receivables through credit checks and approvals, and monitoring
procedures. Generally, the Company requires deposits equal to one
month's recurring charges from its customers.
The Company maintains its cash and cash equivalents with high
quality, credit worthy financial institutions. The Company has not
experienced any losses on its cash or cash equivalents. Approximately
$117,000 of the Company's $225,911 cash and cash equivalents balance
at July 31, 1998 is insured.
4. Furniture and equipment:
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Computer equipment .......... $501,059 $493,853
Furniture and fixtures ...... 27,583 27,582
-------- --------
528,642 521,435
Less accumulated depreciation 357,477 249,996
-------- --------
$171,165 $271,439
-------- --------
-------- --------
</TABLE>
5. Stockholders' equity:
During July 1994, the founding stockholders executed common stock
subscription agreements for an aggregate of 3,566.67 shares at
subscription prices of from $150 to $300 per share. Collection of
those subscriptions receivable have occurred as the Company required
cash to fund operations.
F-50
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
5. Stockholders' equity (continued):
During 1996, the company effected a 300 for 1 common stock split for
all issued and outstanding shares, including those still subject to
subscriptions receivable agreements. Accordingly, the subscription
receivable price per share was similarly reduced to $.50 to $`1.00
per share.
During 1996 and 1998, the Company completed a private placement of
106,079 shares of common stock at $8.72 per share which generated net
proceeds of $925,000 to the Company.
During 1998, the Company completed a private placement of 30,000
shares of common stock at $7.50 per share which generated net
proceeds of $225,000 to the Company.
During the year ended July 31, 1998, the Company issued $220,000
unsecured notes payable to certain shareholders bearing interest at
7% that were convertible into approximately 22,000 shares of common
stock. Interest was payable quarterly. All of these notes were
subsequently converted to common stock during 1998. Interest expense
associated with these converted notes was $5,950 during the year
ended July 31, 1998.
6. Income taxes:
Income tax expense consists of the following
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ......................... $ -- $ -- $ --
State ........................... (900) (900) (800)
--------- --------- --------
(900) (900) (800)
--------- --------- --------
Deferred:
Tax benefits of net operating loss
carryforward ................... 286,000 291,000 21,000
Allowance for doubtful accounts .. 9,000 3,000 9,000
Change in valuation allowance .... (295,000) (294,000) (30,000)
--------- --------- --------
-- -- --
--------- --------- --------
$ (900) $ (900) $ (800)
--------- --------- --------
--------- --------- --------
</TABLE>
F-51
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
6. Income taxes (continued):
The difference between income tax expense as provided in the
financial statements and that as determined by applying the statutory
tax rate to pre-tax accounting income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Benefit at federal statutory rate ............................... 34% 34% 34%
State income tax benefit, net ................................... 3 3 2
Deferred tax asset valuation allowance .......................... (37) ( 37) (37)
------- ------- ------
( --%) ( --%) ( 1%)
------- ------- ------
------- ------- ------
</TABLE>
Deferred tax assets at July 31, 1998 and 1997 consist of the
following:
<TABLE>
<S> <C> <C>
Tax benefits of net operating .................... $ 598,000 $ 312,000
loss carryforward
Allowance for doubtful accounts .................. 22,000 13,000
------------- ------------
$ 620,000 $ 325,000
Less valuation allowance ......................... ( 620,000) ( 325,000)
------------ ------------
$ -- $
------------ ------------
------------ ------------
</TABLE>
At July 31, 1998, the Company had a net operating loss carryforward
for tax purposes of approximately $1,650,000 (expiring from 2009
through 2013) available to offset future taxable income.
7. Commitments and contingency:
Lease arrangements:
The Company leases office space under non-concelable operating
leases. Future minimum lease payments required under these agreements
with remaining terms in excess of one year as of July 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year ending July 31,
--------------------
<S> <C>
1999 ............................ $ 10,833
2000 ............................ 3,667
--------------
$ 14,500
--------------
--------------
</TABLE>
F-52
<PAGE>
DATAXCHANGE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
7. Commitments and contingency (continued):
Leasing arrangements (continued):
Total rent expense from all operating leases was approximately
$46,000, $37,000 and $11,000 during the years ending July 31, 1998,
1997 and 1996, respectively.
Contingent liability:
The Company has an unresolved dispute with a vendor who claims the
Company owes them approximately $51,000 more than the Company
believes is the case. Management does not believe that the resolution
of this dispute will have a material impact on the Company's
financial position or results of operations. None of the disputed
amount has been recorded in the accompanying financial statements.
F-53
<PAGE>
DATAXCHANGE NETWORK, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Charged Balance
beginning to cost or Deductions at end of
of period expense (describe) period
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Year ended July 31, 1998
Allowance for doubtful
accounts ........... $35,000 $50,500(1) $(27,500) $58,000
Year ended July 31, 1997
Allowance for doubtful
accounts .......... $28,000 $33,900(1) $(26,900) $35,000
Year ended July 31, 1996
Allowance for doubtful
accounts .......... $ 4,000 $46,800(1) $(22,800) $28,000
</TABLE>
(1) Bad Debt write-offs
F-54
<PAGE>
GLOSSARY
Access charges The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on the LECs'
local networks.
ATM (Asynchronous
Transfer Mode) An information transfer standard that is one of a
general class of packet technologies that relay traffic by
way of an address contained within the first five bytes of a
standard fifty-three-byte-long packet or cell. The ATM
format can be used by many different information systems,
including local area networks, to deliver traffic at varying
rates, permitting a mix of voice, data and video
(multimedia).
AT&T AT&T Corp.
Backbone The through-portions of a transmission network, as opposed
to spurs which branch off the through-portions.
Band A range of frequencies between two defined limits.
Bandwidth The relative range of analog frequencies or digital signals
that can be passed through a transmission medium, such as
glass fibers, without distortion. The greater the bandwidth,
the greater the information carrying capacity. Bandwidth is
measured in Hertz (analog) or Bits Per Second (digital).
Bit Error Rate A measure of transmission quality stated as the expected
probability of error per bit transmitted.
Capacity Refers to transmission.
Carrier A provider of communications transmission services by fiber,
wire or radio.
C-LEC (Competitive
Local Exchange
Carrier) A company that competes with LECs in the local services
market.
Common Carrier A government-defined group of private companies
offering telecommunications services or facilities to the
general public on a non-discriminatory basis.
Dark Fiber Fiber that lacks the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Digital Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the
G-1
<PAGE>
binary digits 0 and 1. Digital transmission/switching
technologies employ a sequence of discrete, distinct pulses
to represent information, as opposed to the continuously
variable analog signal.
DWDM (Dense Wave
Division
Multiplexing) A technique for transmitting 8 or more different light wave
frequencies on a single fiber to increase the information
carrying capacity.
e-commerce Electronic commerce utilizing the Internet.
Equal access The basis upon which customers of IXCs are able to
obtain access to their Primary Interexchange Carriers' (PIC)
long distance telephone network by dialing "1", thus
eliminating the need to dial additional digits and an
authorization code to obtain such access.
FBCs (Facilities Based
Carriers) Facilities based carriers that own and operate their own
network and equipment.
FCC Federal Communications Commission.
Frame Relay A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56 kilobits
per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not
presently well suited for voice and video applications due
to the variable delays which can occur. Frame Relay was
designed to operate at high-speeds on modern fiber optic
networks.
Gbps Gigabits per second, which is a measurement of speed for
digital signal transmission expressed in billions of bits
per second.
GTE GTE Intelligent Network Services Incorporated.
Hertz The unit for measuring the frequency with which an
electromagnetic signal cycles through the zero-value state
between lowest and highest states. One Hz (Hertz) equals one
cycle per second. kHz (kilohertz) stands for thousands of
Hertz; MHZ (megahertz) stands for millions of Hertz.
IDC International Data Corporation, a market research firm.
IP Internet Protocol.
ISP (Internet Service
Provider) A company that provides businesses and individuals with
access to the Internet.
10XXX Service The ability for a user to access any carrier's long distance
network by dialing the carrier's Carrier Identification Code
(CIC) which is a 1 plus 0 plus three
G-2
<PAGE>
specifically assigned digits, thereby bypassing the user's
primary interexchange carrier.
Interconnect Connection of a telecommunications device or service to the
PSTN.
IXC or Interexchange
carrier A company providing inter-LATA or long distance services
between LATAs on an intrastate or interstate basis.
Kbps Kilobits per second, which is a measurement of speed for
digital signal transmission expressed in thousands of bits
per second.
LATAs (Local Access
and Transport
Areas) The approximately 200 geographic areas that define the areas
between which the RBOCs currently are prohibited from
providing long distance services.
LEC (Local Exchange
Carrier) A company historically providing local telephone services.
Lit fiber Fiber activated or equipped with the requisite electronic
and optronic equipment necessary to use the fiber for
transmission.
Local loop A circuit that connects an end user to the LECcentral office
within a LATA.
Long-haul circuit A dedicated telecommunications circuit generally between
locations in different LATAs.
Mbps Megabits per second, which is a measurement of speed for
digital signal transmission expressed in millions of bits
per second.
MCI Worldcom MCIWorldCom Inc.
MOU Minutes of use of long distance service.
Multiplexing An electronic or optical process that combines a large
number of lower speed transmission lines into one high-speed
line by splitting the total available bandwidth into
narrower bands (frequency division), or by allotting a
common channel to several different transmitting devices,
one at a time in sequence (time division).
OC-3, OC-12,
OC-48 and OC-192 OC is a measure of SONET transmission optical carrier
level, which is equal to the corresponding number of DS-3s
(e.g. OC-3 is equal to 3 DS-3s and OC-48 is equal to
48 DS-3s).
RBOCs (Regional
Bell Operating
Companies) The seven local telephone companies (formerly part of AT&T)
established as a result of the AT&T Divestiture Decree.
Regeneration/
amplifier Devices which automatically re-transmit or boost signals on
an out-bound
G-3
<PAGE>
circuit.
Reseller A carrier that does not own transmission facilities, but
obtains communications services from another carrier for
resale to the public.
SONET
(Synchronous
Optical Network
Technology) An electronics and network architecture for
variable-bandwidth products which enables transmission of
voice, data and video (multimedia) at very high speeds.
SONET ring A network architecture which provides for instantaneous
restoration of service in the event of a fiber cut by
automatically rerouting traffic the other direction around
the ring. This occurs so rapidly (in 50 milliseconds) it is
virtually undetectable to the user.
Spectrum A term generally applied to radio frequencies.
Sprint Sprint Corporation
Switch A device that selects the paths or circuits to be used for
transmission of information and establishes a connection.
Switching is the process of interconnecting circuits to form
a transmission path between users and it also captures
information for billing purposes.
Switched service
carriers A carrier that sells switched long distance service and
generally refers to a carrier that owns its switch.
Switchless
resellers A carrier that does not own facilities or switches, but
purchases minutes in high volumes from other carriers and
resells those minutes.
T-0, T-1, T-3 Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). T-0 service has a
bit rate of 64 kilobits per second and typically transmits
only once voice conversation at a time. T-1 service has a
bit rate of 1.544 megabits per second and typically
transmits 24 simultaneous voice conversations. T-3 service
has a bit rate of 45 megabits per second and typically
transmits 672 simultaneous voice conversations.
T-3 miles A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in
T-3's multiplied by the length of the path in miles.
Terabits A trillion bits of transmission capacity.
Trunk A communications channel between two switches. "Trunking"
calls reduces the likelihood of traffic blockage due to
network congestion. A trunked system combines multiple
channels with unrestricted access in such a manner that user
demands for channels are automatically "queued" and then
allocated to the first available channel.
G-4
<PAGE>
WorldCom WorldCom, Inc.
G-5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD LOOKING STATEMENTS ....................................................................... 3
AVAILABLE INFORMATION ............................................................................ 3
PROSPECTUS SUMMARY ............................................................................... 4
RECENT DEVELOPMENTS .............................................................................. 14
RISK FACTORS ..................................................................................... 17
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY ................................................. 30
CAPITALIZATION ................................................................................... 31
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA ............................................. 31
USE OF PROCEEDS .................................................................................. 36
SELECTED HISTORICAL FINANCIAL DATA ............................................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................................................... 39
BUSINESS ......................................................................................... 52
LEGAL PROCEEDINGS ................................................................................ 63
REGULATION ....................................................................................... 64
MANAGEMENT ....................................................................................... 67
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE .......................................... 72
EXECUTIVE COMPENSATION ........................................................................... 73
CHANGES IN CONTROL ............................................................................... 76
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS .............................................. 76
CERTAIN TRANSACTIONS ............................................................................. 77
PRINCIPAL STOCKHOLDERS ........................................................................... 82
SELLING SECURITYHOLDERS .......................................................................... 84
DESCRIPTION OF CAPITAL STOCK ..................................................................... 86
PLAN OF DISTRIBUTION ............................................................................. 88
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...................................................................... 90
LEGAL MATTERS ................................................................................... 90
EXPERTS ......................................................................................... 90
INDEX TO FINANCIAL STATEMENTS ................................................................... F-1
GLOSSARY ........................................................................................ G-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee ............................................................... $ 39,629
Nasdaq listing fee ................................................................. $ 7,500
Printing and engraving expenses .................................................... $ 120,500
Legal fees and expenses ............................................................ $ 60,000
Blue Sky fees and expenses ......................................................... $ 30,000
Accounting fees and expenses ....................................................... $ 10,000
Miscellaneous ...................................................................... $ 3,000
Total ................................................................................ $ 270,629
</TABLE>
Item 14. Indemnification of Directors and Officers.
Article 8 of the Company's Certificate of Incorporation, as amended
provides
"No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except as to liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for violations of Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law hereafter is
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated or
limited to the fullest extent provided or permitted by the amended Delaware
General Corporation Law. Any repeal or modification of this Article 8 shall not
adversely affect any right or protection of a director under this Article 8 as
in effect immediately prior to such repeal or modification with respect to any
liability that would have accrued, but for this Article 8, prior to such repeal
or modification."
Section 5.1 of the Company's By-Laws provides, in general, that the
Company shall, to the fullest extent permitted by the DGCL, as now or hereafter
in effect, indemnify any person who was or is threatened
II-1
<PAGE>
to be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether criminal, civil, administrative, or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company, or, by reason of the fact that such officer or director is or was
serving at the request of the Company as a director, office, employee, or agent
of another corporation, partnership, joint venture, trust, association, or other
enterprise, against all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement reasonably incurred by him in connection with such
Proceeding, including any Proceeding by or on behalf of the Company and will
advance all reasonable expenses incurred by or on behalf of any such person in
connection with any Proceeding, whether prior to or after final disposition of
such Proceeding. Section 5.8 of the bylaws also provide that the Company may
also indemnify and advance expenses to employees or agents who are not officers
or directors of the Company.
The Company has purchased a directors' and officers' liability
insurance contract that provides, within stated limits, reimbursement either to
a director or officer whose actions in his capacity result in liability, or to
the Registrant, in the event it has indemnified the director or officer.
Item 15. Recent Sales of Unregistered Securities.
The Company was organized in October of 1995 in connection with the
transfer by its predecessor corporation, Rocky Mountain Internet, Inc., a
Colorado corporation (the "Predecessor"), of substantially all of its assets to
the Company in consideration of the assumption by the Company of substantially
all of the liabilities of the Predecessor. In connection with its formation, the
Company issued 1,868,000 shares of Common Stock to Messrs. Welch, Phillips, Loud
and Dimoff and one other shareholder (who was a shareholder in the Predecessor)
for cash consideration equal to the par value thereof, or an aggregate of
$1,868. That transaction was effected only with persons familiar with the
business of the Predecessor without general solicitation or advertising and was
exempt under Section 4(2) of the Securities Act of 1933, as amended (the "Act").
The Company effected an offering of convertible debentures commencing
in October, 1995, with sales to 33 persons in an aggregate amount of $490,000
(the "Debenture Private Placement Offering"). The last sale of debentures
occurred February 2, 1996. The debentures are convertible into common stock at
the election of the debenture holders at a conversion price of $0.40 in
principal amount per share. The debentures bear interest at the rate of 12% per
annum, payable quarterly, and are prepayable by RMI at any time without premium
or penalty. No general solicitation or advertising was conducted in connection
with the sale, and most purchasers are family and friends of officers, directors
and shareholders of RMI. All of the purchasers were given unaudited financial
statements of the Company and a disclosure document describing the Company and
its business. Each purchaser signed a subscription agreement in which such
person represented that he or she was acquiring the debentures for investment
and without a view to distribution, that he or she had knowledge and experience
in financial matters, and that he or she had been given an opportunity to have
access to information about, and to ask questions of officers of, the Company.
The Company filed a Form D in respect of the offering, specifying Rule 504 as
the applicable exemption. The Company is of the view that the Debenture Private
Placement Offering was also exempt from the registration requirements of the Act
under Section 4(2).
On or about June 10, 1996, the Company sold 250,000 shares of Series
A Convertible Preferred Stock to a group of approximately 26 persons (counting
spouses holding jointly separately for such purpose) at a price of $2.00 per
share ($500,000 in the aggregate). The Series A Preferred Stock is convertible
into Common Stock, but not until May 15, 1997. All purchasers in the offering
executed subscription agreements pursuant to which, among other things, each
warranted as to his status as an accredited investor and as to his
II-2
<PAGE>
investment intent. No general solicitation or advertising was used in connection
with the offering or sale of the Series A Preferred Stock. NTB, the
Representative in connection with the offering under this Registration
Statement, acted as placement agent in connection with the sale of the Series A
Preferred Stock and received a commission of 10% of the proceeds of such sale.
All investors received a disclosure document including audited financial
statements of the Company prior to their purchase and the Company filed a Form D
in respect of that offering. The Company believes that the sale of the Series A
Preferred Stock was exempt from the registration requirements of the Act
pursuant to Rule 506 of Regulation D and Sections 4(6) and 4(2) of the Act.
The Predecessor, in connection with its formation in March of 1994,
issued 248,000 shares of common stock to Christopher K. Phillips and 254,000
shares of common stock to Jim D. Welch, both of whom were directors and officers
in the Predecessor. The purchase price paid was $0.0057 cash per share by Mr.
Phillips and $0.0099 per share by Mr. Welch. The Company understands that this
transaction was exempt from registration under the Act pursuant to Sections 4(6)
and 4(2) thereof.
The Predecessor also issued 12,000 common shares to an investment
banker in consideration of the promise by such person to provide financial
advice and investment banking services. The Company understands that such
transaction was exempt under Section 4(2) of the Act.
The Predecessor sold 60,000 common shares to each of three persons in
August 1994, at a cash price of $0.08 per share. The Predecessor also sold 6,000
common shares to a fourth person in August 1994, at a price of $0.83 per share.
The Company understands that this transaction was exempt under Section 4(2) of
the Act. All of the foregoing persons except the latter and Messrs. Welch,
Phillips and Scott Puryear, ceased to be shareholders of the Predecessor prior
to the Reincorporation Transaction and are not shareholders of the Company.
Between June 13, 1997, and approximately September 15, 1997, the
Company sold 310,500 units of securities to a group of approximately 17 persons
(counting spouses holding jointly as one person for such purpose) at a price of
$4.00 per unit ($1,242,000 in the aggregate, before offering costs). Each unit
consists of two shares of Common Stock and one warrant to purchase a share of
Common Stock for a price of $3.00 per share until June 13, 2000. No general
solicitation or advertising was used in connection with the offering or sale of
the units. NTB, the representative of the underwriters in connection with the
Company's IPO, acted as placement agent in connection with the sale of the units
and received a commission of 10% of the proceeds of such sale. NTB also received
an option to purchase 31,050 of the units. The terms, including the exercise
price, of the warrants included in the units that NTB received an option to
purchase are identical to the terms of the warrants included in the units
purchased by the investors in this offering. All investors received a private
placement memorandum, a copy of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996, and a copy of the Company's Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1997, and the Company filed a
Form D in respect of that offering. The Company believes that the sale of the
units was exempt from the registration requirements of the Act pursuant to Rule
506 of Regulation D and Section 4(2) of the Securities Act.
As disclosed under the caption "CERTAIN TRANSACTIONS--CHANGE IN
CONTROL" in the Prospectus that forms a part of this registration statement, the
Company issued 1,225,000 shares of Common Stock to Mr. Douglas H. Hanson in
connection with his acquisition of control of the Company as of October 1, 1997.
Contemporaneously with this transaction, the Company also agreed to issue to Mr.
Hanson warrants to purchase 4,000,000 shares of Common Stock, subject to the
approval of the Company's shareholders of an amendment to the Company's
certificate of incorporation to increase the number of shares of Common Stock
that the Company is authorized to issue. The offer and sale were made in
reliance on the exemption
II-3
<PAGE>
from registration afforded by Section 4(2) of the Securities Act and Regulation
D promulgated thereunder. Mr. Hanson was represented by counsel in connection
with his investment and conducted a thorough "due diligence" investigation of
the Company prior to closing the transaction. Mr. Hanson "ha[d] access to the
same kind of information that the [Securities] Act would make available in the
form of a registration statement," SECURITIES AND EXCHANGE COMMISSION V. RALSTON
PURINA CO., 346 U.S. 981 (1953).
As disclosed under the caption "RECENT DEVELOPMENTS--ACQUISITIONS AND
PROPOSED ACQUISITIONS" in the Prospectus that forms a part of this registration
statement, the Company issued an aggregate of 150,000 shares of the Common Stock
on June 5, 1998 to the shareholders of Infohiway pursuant to the terms of the
Infohiway Merger Agreement. The sale of these shares was made in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act. The
shareholders of the Infohiway were represented by counsel in the transaction and
received copies of all reports and statements filed by the Company under the
Exchange Act during the period of approximately one year prior to the
acquisition. Accordingly, the Company believes that such shareholders "ha[d]
access to the same kind of information that the [Securities] Act would make
available in the form of a registration statement."
As disclosed under the caption "RECENT DEVELOPMENTS--ACQUISITIONS AND
PROPOSED ACQUISITIONS" in the Prospectus that forms a part of this registration
statement, the Company issued an aggregate of 286,369 shares of Common Stock on
July 1, 1998 to the shareholders of Application Methods pursuant to the terms of
the Application Methods Merger Agreement. The sale of these shares was made in
reliance on the exemption from registration afforded by Section 4(2) of the
Securities Act. The shareholders of Application Methods were represented by
counsel in the transaction and received copies of all reports and statements
filed by the Company under the Exchange Act during the period of approximately
one year prior to the acquisition. Accordingly, the Company believes that such
shareholders "ha[d] access to the same kind of information that the [Securities]
Act would make available in the form of a registration statement."
As disclosed under the caption "RECENT DEVELOPMENTS--ACQUISITIONS AND
PROPOSED ACQUISITIONS" in the Prospectus that forms a part of this registration
statement, in September 1998, the Company issued to Novazen 25,000 shares of its
Common Stock as partial consideration for the Novazen Agreement. The sale of
these shares was made in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act. The shareholders of Novazen were represented
by counsel in the transaction and received copies of all reports and statements
filed by the Company under the Exchange Act during the period of approximately
one year prior to the acquisition. Accordingly, the Company believes that such
shareholders "ha[d] access to the same kind of information that the [Securities]
Act would make available in the form of a registration statement."
Item 16. Exhibits and Financial Statement Schedules.
a) Exhibits
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. (12)
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)
II-4
<PAGE>
4.11 Rocky Mountain Internet Inc. 1997 Non-Qualified Stock Option Plan
(7)
4.12 1997 Stock Option Plan (9)
4.12.1 First Amendment to Non-Qualified Stock Option Agreement pursuant to
the Rocky Mountain Internet, Inc. 1997 Stock Option Plan (12)
4.12.2 First Amendment to Incentive Stock Option Agreement pursuant to the
Rocky Mountain Internet, Inc. 1997 Stock Option Plan) (12)
4.13 Rocky Mountain Internet, Inc. 1998 Employees' Stock Option Plan (10)
4.14 Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock
Option Plan (11)
5.2 Opinion and Consent of Hall & Evans, L.L.C. as to legality of
securities being registered
10.1 Agreement of Lease between Denver-Stellar Associates Limited
Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant (2)
10.2 Asset Purchase Agreement - Acquisition of CompuNerd, Inc. (2)
10.3 Confirmation of $2.0 million lease line of credit (2)
10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing
the provision of professional information system development
services for the design and development of the MCI internal Intranet
project referred to as Electronic Advice. (2)
10.5 Sublease Agreement-February 26, 1997-1800 Glenarm, Denver, Co.(4)
10.6 Acquisition of The Information Exchange (4)
10.7 Asset purchase of On-Line Network Enterprises (4)
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive(4)
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive(4)
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain
Internet, Inc. and Zero Error Networks, Inc. (5)
10.11 Private Placement Memorandum (5)
10.12 Carrier Services Switchless Agreement Between Frontier
Communications of the West, Inc. and Rocky Mountain Broadband, Inc.*
10.13 Wholesale Usage Agreement Between PSINet Inc. and Rocky Mountain
Internet, Inc.*
10.14 PacNet Reseller Agreement between PacNet Inc. and Rocky Mountain
Internet, Inc.*
10.15 Operating Agreement of The Mountain Area EXchange LLC (12)
10.16 Software License and Consulting Services Agreement Between Rocky
Mountain Internet, Inc. and Novazen Inc.*
10.17 Promissory note Dated October 20, 1998 payable to Douglas H.
Hanson
16.1 Letter re change in certifying accountant (3)
23.1 Consent of Baird, Kurtz & Dobson
23.2 Consent of McGladrey & Pullen, LLP
23.5 Consent of Peterson Sullivan PLLP
23.7 Consent of Aidman, Piser & Company, P.A.
27.1 Financial Data Schedule
* Portions of these documents have been omitted pursuant to a request for
confidential treatment.
II-5
<PAGE>
(1) Incorporated by reference from the Company's registration
statement on Form SB-2 filed with the Commission on August 30, 1996,
registration number 333-05040C.
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-QSB filing dated September 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form
8-K filing dated January 28, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB dated December 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB dated June 30, 1997. (6) Incorporated by reference to the
Company's documents filed with Initial Public Offering.
(7) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on September 26, 1997.
(8) Incorporated by reference to the Company's Current Report on Form
8-K dated October 6, 1997.
(9) Incorporated by reference to the Definitive Proxy Statement
(Appendix A) filed on Schedule 14A on February 13, 1998.
(10) Incorporated by reference to the Definitive Proxy Statement
(Appendix B) filed on Schedule 14A on February 13, 1998.
(11) Incorporated by reference to the Definitive Proxy Statement
(Appendix C) filed on Schedule 14A on February 13, 1998.
(12) Previously filed.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City and County of
Denver, State of Colorado, on November 6, 1998.
ROCKY MOUNTAIN INTERNET, INC.
By: /s/ Douglas H. Hanson
------------------------------------------------------
Douglas H. Hanson, President, Chief Executive Officer,
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Douglas H. Hanson Principal Executive Officer and November 5, 1998
- --------------------- Chairman of the Board of Directors
Douglas H. Hanson
/s/ Peter J. Kushar Chief Financial Officer, Secretary, November 5, 1998
- ------------------- Treasurer, and Principal Accounting Officer
Peter J. Kushar
/s/ D. D. Hock Director November 5, 1998
D. D. Hock
/s/ Robert W. Grabowski Director November 5, 1998
- -----------------------
Robert W. Grabowski
/s/ Lewis H. Silverberg Director November 5, 1998
- -----------------------
Lewis H. Silverberg
/s/ Mary Beth Vitale Director November 5, 1998
- --------------------
Mary Beth Vitale
</TABLE>
<PAGE>
Exhibit 5.2
[HALL & EVANS LETTERHEAD] 1200 17th Street, Suite 1700
Denver, Colorado 80202
Phone: 303/628-3300
Fax: 303/628-3368
Internet: www.hallevans.com
Jeffrey A. Bartholomew
E-Mail: [email protected]
Direct: (303) 628-3367
Fax: (303) 628-3368
November 4, 1998
Board of Directors
Rocky Mountain Internet, Inc.
1099 18th Street
30th Floor
Denver, CO 80202
Gentlemen:
We have served as your counsel in connection with the preparation and
filing with the United States Securities and Exchange Commission of a
Registration Statement on Form S-1 of Rocky Mountain Internet, Inc. (the
"Company"), SEC File No. 333-52731 and amendments thereto (collectively, the
"Registration Statement"). You have asked this law firm to render an opinion
as to certain matters listed below.
In connection with this opinion, we have made such investigations and
examined such records, including the Company's Articles of Incorporation, as
amended, and corporate minutes, as we deemed necessary to the performance of our
services and to give this opinion. We have also examined and are familiar with
the originals or copies, certified or otherwise identified to our satisfaction,
of such other documents, corporate records and other instruments as we have
deemed necessary for the preparation of this opinion. In expressing this opinion
we have relied, as to any questions of fact upon which our opinion is
predicated, upon representations and certificates of the officers of the
Company. We are not qualified to practice law in any jurisdiction other than the
State of Colorado.
In giving this opinion we have assumed:
(a) the genuineness of all signatures and the authenticity and
completeness of all documents submitted to us as originals;
(b) the conformity to originals and the authenticity of all documents
supplied to us as certified, photocopies, conformed or facsimile copies and
the authenticity and completeness of the originals of any such documents;
(c) the proper, genuine and due execution and delivery of all documents
by all parties to them and that there has been no breach of the terms
thereof; and
(d) that the performance of any obligation under any documents in any
jurisdiction outside the United States will not be illegal or ineffective
under the laws of that jurisdiction.
<PAGE>
Board of Directors
Rocky Mountain Internet, Inc.
November 4, 1998
Page 2
Based upon the foregoing and subject to the qualifications set forth above,
we are of the opinion that:
1. All necessary corporate proceedings of the Company have been duly
taken to authorize the filing of the above-referenced Registration Statement
and the proposed public offering of the securities noted above in accordance
with the terms of that Registration Statement.
2. The securities to be issued upon the effectiveness of the Registration
Statement will, upon the purchase, receipt of full payments, issuance and
delivery thereof in accordance with the terms of the offering described in the
Registration Statement, be duly and validly authorized, legally issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name in the Prospectus included as
part of the Registration Statement in connection with the matters referred to
under the caption "Legal Matters."
Sincerely,
/s/ HALL & EVANS, L.L.C.
HALL & EVANS, L.L.C.
<PAGE>
Exhibit 10.12
Note: Certain material, indicated by three asterisks (***), has been omitted
from this document pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission. The omitted
material has been filed separately with the Securities and Exchange
Commission.
CARRIER SERVICES SWITCHLESS AGREEMENT
BETWEEN
FRONTIER COMMUNICATIONS OF THE WEST, INC.
AND
ROCKY MOUNTAIN BROADBAND, INC.
<PAGE>
TABLE OF CONTENTS
Section
- --------
1. Services
2. Term Of The Agreement
3. Billing And Payment
4. Billing Disputes
5. Termination Rights
6. Taxes And Assessments
7. Warranties And Limitation Of Liability
8. Indemnification
9. Representation
10. Force Majeure
11. Waivers
12. Assignment
13. Confidentiality
14. Integration
15. Construction
16. Governing Law
17. Notices
18. Counterparts
19. Compliance With Laws
20. Third Parties
21. Survival Of Provisions
22. Unenforceable Provisions
Exhibits
- --------
Exhibit A General And Service Definitions
Exhibit B Ancillary Fee Schedule
Exhibit C Call Detail Records; Order Processing Procedures;
Letter Of Agency Requirements
Exhibit D Dedicated Carrier Termination Schedule
Exhibit D(a) Carrier Domestic Termination Service
Exhibit D(b) Carrier Termination International Service
Exhibit D(c) Carrier Directory Assistance
Exhibit D(d) Carrier 800 Transport Service
Exhibit E Network Interconnection Schedule
Exhibit F National Origination Service (1+)
Exhibit G National Origination Service (800 Switched & Dedicated)
Exhibit H National Origination Service (Dedicated)
Exhibit I National Origination Service - (Switched International)
Exhibit I(a) National Origination Service - (Dedicated International)
Exhibit J Interlink Calling Card Service Schedule
Exhibit J(a) Interlink Calling Card Service
Exhibit J(b) Interlink Originating International Service
Exhibit J(c) Interlink Terminating International Service
Exhibit K Cashguard Schedule
Exhibit K(a) Cashguard
Exhibit K(b) Cashguard International
Exhibit L 800 PIN Service Schedule
Exhibit M -(a) SONET Private Line
2 Initials ______
Initials ______
<PAGE>
CARRIER SERVICE AGREEMENT
(Switchless)
This Carrier Service Agreement ("Agreement") is entered into between the
provider of service, Frontier Communications of the West, Inc. f/k/a West Coast
Telecommunications, Inc. on behalf of itself and its affiliates ("Frontier"), a
California corporation located at 135 East Ortega Street, Santa Barbara, CA
93101 and Rocky Mountain Broadband, Inc. ("RMBI"" or "Purchaser"), a Colorado
corporation with its principal place of business located at 1099 18th Street,
30th Floor, Denver, Colorado 80202 (hereinafter, Frontier and RMBI may be
referred to in the aggregate as "Parties", and each singularly as a "Party".)
PURPOSE
The Parties are telecommunications carriers subject to the Communications Act of
1934, as amended, as well as the Telecommunications Act of 1996. RMBI desires to
purchase network transport and other telecommunication services from Frontier
for RMBI's resale to its business and residential customers. The Parties agree
as follows:
1. SERVICES:
(a) Frontier shall, in accordance with this Agreement, provide to
RMBI those services RMBI subscribes to hereunder as defined
and identified herein and on exhibits, schedules and other
attachments appended hereto and made a part of this Agreement
from time-to-time by the Parties (collectively, the
"Schedules"). All such services being provided under the
Schedules are collectively referred to as the "Services".
(b) RMBI shall provide Frontier with a forecast covering a good
faith estimate based on historical information (if available)
of the monthly traffic volume and geographic distribution for
an ordered Service. The estimate will be for the 3 calendar
month period following the desired activation date in a format
supplied or approved by Frontier. Frontier may request updated
forecasts on a reasonable basis. Forecasts do not constitute a
binding commitment on the part of RMBI. Provision of Services
is contingent on availability of Frontier facilities.
(c) Orders for Services will be transmitted and processed in
accordance with the procedures set out in Exhibit C attached
hereto and made a part hereof as the same may be modified from
time to time by Frontier upon written notice to RMBI.
2. TERM OF THE AGREEMENT:
(a) INITIAL TERM: This Agreement is effective and the Parties'
obligations commence upon the date of execution by Frontier
("Effective Date") and continues in effect for a period of
three (3) years ("Initial Term") from either the day Service
is first utilized by RMBI (as determined by Frontier's
records), or the 90th day after the Effective Date, whichever
date occurs first, such date known as the "Start of Service
Date".
(b) AUTOMATIC RENEWAL: This Agreement renews automatically for a 1
year period at the expiration of the Initial Term, unless
canceled in accordance with the termination provisions of this
Agreement ("Subsequent Term"). Each Subsequent Term renews
automatically for a 1 year period upon its expiration, unless
canceled in accordance with the termination provisions of this
Agreement.
(c) CANCELLATION: Either Party may terminate this Agreement upon
expiration of a term upon written notice given at least 90
days prior to expiration of the then current term.
3. BILLING AND PAYMENT: RMBI shall pay Frontier for the Services at the
rates and charges set out in the applicable Schedules. If RMBI is
required to pay an initial cash deposit or provide other assurance of
payment, then Frontier is not obligated to begin accepting orders or
providing Service until the deposit or other assurance of payment is
received.
3 Initials ______
Initials ______
<PAGE>
(a) RMBI shall provide Frontier security in the form of a
corporate guaranty from RMBI's parent, Rocky Mountain
Internet, Inc., in an amount of *** for a one (1) year period,
commencing with the Start of Service Date. At the end of the
one year period Frontier will re-evaluate RMBI's payment
history and financial condition. After such review, Frontier
may at it sole discretion either (i) require additional
security from RMBI, or (ii) require an extension and an
increase in Rocky Mountain Internet, Inc.'s corporate
guaranty, in accordance with subparagraph 3 (e).
(b) Frontier shall invoice RMBI via facsimile, with a follow-up
copy sent via regular U.S. mail or overnight delivery service,
on or about the fifth Business Day after the close of each
Billing Cycle for the Services and for any other sums due
Frontier ("Invoice"). Each Invoice details: (i) the amount due
Frontier, or the credit due RMBI, after a reconciliation
between the actual charges for the Services for the prior
Billing Cycle, and (ii) any other sums due Frontier.
(c) Each Invoice shall be paid by RMBI in immediately available
U.S. funds so that the payment is received by Frontier no
later than thirty (30) calendar days from the date of the
Invoice (the "Due Date"). Frontier agrees that (i) the Invoice
date will be the same day the Invoice is faxed to RMBI, and
(ii) the Invoice will be faxed on a Business Day. Any Invoice
not paid by the Due Date shall bear late payment fees at the
rate of 1-1/2% per month (or such lower amount as maybe
required by law) until paid.
(d) The RMBI facsimile number and contact for purposes of this
Section 3. are 303-672-0711, Attention: Kirk Roberts. RMBI may
change the facsimile number and contact upon written notice to
Frontier.
(e) If RMBI is delinquent in payment of an Invoice and Frontier
does not have security from RMBI equal to RMBI's prior month's
usage charges, RMBI shall provide such additional security as
Frontier may reasonably request in writing.
(f) FRAUDULENT USAGE: Subject to the fraudulent usage provisions
of the Frontier InterLink Calling Card Services Schedule if
applicable, Frontier is not responsible for any fraudulent use
of Service. RMBI is solely responsible for all Services'
usage, fraudulent or otherwise. Claims of fraudulent usage
shall not constitute a valid basis for dispute of an Invoice.
Frontier will monitor End-User call activity for suspected
fraudulent use using the same procedures Frontier uses for its
own customers (except Frontier will contact RMBI in lieu of
the End-User when investigating suspected fraudulent use).
(g) RMBI agrees to pay to Frontier any and all local exchange
carrier ("LEC") assessed charges (other than access or other
LEC charges otherwise included under this Agreement) and
governmentally imposed charges levied upon Frontier as a
result of Services provided to RMBI, such as but not limited
to:
(i) primary Interexchange carrier ("PIC") change and
slamming related charges under Exhibit C, Section
III;
(ii) assessments by the National Exchange Carrier's
Association, Inc. (NECA) including but not limited
to, the Universal Service Fund/Lifeline Assistance
(USF/LA), the Telecommunications Relay Service (TRS)
Fund, and other assessments as may be assessed by
NECA in the future relative to the Services; (RMBI
understands that NECA charges are assessed on a per
ANI basis for Presubscribed End-User ANIs, whether
such ANIs are active or not);
(iii) assessments by regulatory agencies, including but not
limited to, the Federal Communications Commission
(FCC) and state Public Utility/Service Commissions;
(iv) charges or costs incurred by Frontier for FCC/PUC
mandated initiatives under the Telecommunications Act
of 1996, or otherwise, such as the "access reform"
and
4 Initials ______
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<PAGE>
"payphone dial-around compensation" initiatives,
plus a reasonable fee for administration of those
initiatives applicable to the Services provided to
RMBI;
(v) when Frontier is acting as the RespOrg, National
Administrative Services Center assessments (including
any monthly recurring charges) for "800"/"888"
service installation;
(vi) applicable charges set out in the Schedule of
Ancillary Fees attached hereto as Exhibit B and made
a part hereof as the same may be modified from time
to time by Frontier upon written notice to RMBI.
(h) Beginning with RMBI's Billing Cycle that commences in the
tenth (10th) calendar month following the Start of Service
Date, RMBI is liable for an overall monthly minimum usage
charge for all Services *** "Minimum Charge"). At such time as
RMBI has paid an aggregate of *** in Services' usage charges
under this Agreement (inclusive of any paid Minimum Charge
shortfalls) the Minimum Charge shall be canceled for the
remaining term of this Agreement and, nothwithstanding the
provisions of Section 2., the Initial Term and any Subsequent
Term shall be deemed to have expired and either party may
thereafter terminate this Agreement upon 90 days prior written
notice. For example: assume a Start of Service Date of 3/28
with a seventh calendar month commencement; then, the Minimum
Charge would be effective with RMBI's October (April being the
first calendar month following the Start of Service Date and
October being the seventh such calendar month) into November
Billing Cycle. If the Start of Service Date is the first day
of a calendar month, then such calendar month shall be deemed
the first calendar month following the Start of Service Date
for purposes of this sub-paragraph. If RMBI's net charges
(after any discounts or credits) for the Services are less
than the Minimum Charge in any month, RMBI shall pay the
shortfall. If this Agreement is terminated prior to the time
the Minimum Charge becomes effective (other than termination
by RMBI for an uncured breach by Frontier), RMBI shall be
liable for the liquidated damages described in Section 5.(d).
(i) Frontier may revise the rates and monthly recurring and other
charges in this Agreement and the Schedules at any time upon
written notice to RMBI. Unless otherwise stated in the notice,
domestic rates are effective within thirty days and
international/offshore rates are effective within seven days
of the date of Frontier's written notice. If the effective
rate for a specific international country is increased
pursuant to this paragraph, then RMBI may cancel Service to
such country upon written notice to Frontier given within 30
days after RMBI's receipt of the rate increase notice.
Cancellation of Service to a country under this paragraph
includes a pro-rata reduction in the Minimum Charge to adjust
for the country to the extent severable by Frontier. The
pro-rata reduction in the Minimum Charge shall be calculated
by reducing the same in an amount equal to the charges to RMBI
for Services to the country being canceled in the month prior
to the month in which RMBI provides notice to Frontier of
cancellation. If there are no charges for Service to such
country in such prior month then the parties agree to in good
faith negotiate a reduced Minimum Charge which is reasonable
under the circumstances.
(j) RMBI agrees that any make up to minimum charges, shortfall
charges and surcharges for which it is liable under this
Agreement are based on agreed upon minimum commitments on its
part and corresponding rate concessions on Frontier's part,
and are not penalties or consequential or other damages under
Section 7.(b).
4. BILLING DISPUTES: The Parties agree that time is of the essence for
payment of all Invoices. RMBI shall provide written notice and
supporting documentation for any good-faith dispute it may have with an
Invoice ("Dispute") within 60 Business Days after RMBI's receipt. If
RMBI does not report a Dispute within the 60 Business Day period, RMBI
shall have waived its dispute rights for that Invoice. RMBI shall pay
disputed amounts, subject to resolution of the Dispute. Frontier will
use reasonable efforts to resolve timely Disputes within 30 Business
Days after its receipt of the Dispute notice. If a Dispute is not
resolved within the 30 Business Day period to RMBI's satisfaction, then
at RMBI's request the Dispute will be referred to an executive officer
of Frontier. If the Dispute is not resolved within 15 Business Days
after the referral, then either Party may commence an action in
accordance with Section 16., provided that the prevailing Party in such
action shall be entitled to payment of its reasonable attorney fees and
costs by the other Party.
5 Initials ______
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<PAGE>
5. TERMINATION RIGHTS:
(a) REGULATORY CHANGES: If the FCC, a state PUC or a court of
competent jurisdiction issues a rule, regulation, law or order
which has the effect of canceling, changing, or superseding
any material term or provision of this Agreement
(collectively, "Regulatory Requirement"), then this Agreement
shall be deemed modified in such a way as the Parties mutually
agree is consistent with the form, intent and purpose of this
Agreement and is necessary to comply with such Regulatory
Requirement. Should the Parties not be able to agree on
modifications necessary to comply with a Regulatory
Requirement within 30 days after the Regulatory Requirement is
effective, then upon written notice either Party may, to the
extent practicable, terminate that portion of this Agreement
impacted by the Regulatory Requirement.
(b) Either Party may terminate this Agreement upon the other
Party's insolvency, dissolution or cessation of business
operations. Frontier may, upon 10 days prior written notice,
immediately terminate this Agreement for RMBI's failure to pay
any delinquent Invoice not properly disputed under Section 4,
or to maintain any other assurance of payment that may be
required hereunder.
(c) In the event of a breach of any material term or condition of
this Agreement by a Party (other than a failure to pay which
is covered under (b) above), the other Party may terminate
this Agreement upon 30 days written notice, unless the
breaching Party cures the breach during the 30 day period. A
breach that cannot be reasonably cured within a 30 day period
may be addressed by a written waiver of this paragraph signed
by the Parties.
(d) Upon any material breach by RMBI not cured after expiration of
all applicable notice and cure periods, Frontier may at its
sole option do any or all of the following:
(i) cease accepting or processing orders for Service and
suspend Service;
(ii) cease all electronically and manually generated
information and reports (including any CDR not paid
for by RMBI);
(iii) draw on any letter of credit, security deposit or
other assurance of payment and enforce any security
interest provided by RMBI;
(iv) terminate this Agreement and Service without
liability to Frontier;
(v) collect from RMBI as liquidated damages an amount
equal to the Minimum Charge times the number of
months remaining on the unexpired term of this
Agreement; and ,
(vi) pursue such other legal or equitable remedy or relief
as may be appropriate.
6. TAXES AND ASSESSMENTS:
RMBI is responsible for the collection and remittance of all
governmental assessments, surcharges and fees pertaining to
its resale of the Services (other than taxes on Frontier's net
income) (collectively, "Taxes"). RMBI shall provide Frontier
with, and maintain, valid and properly executed certificate(s)
of exemption for the Taxes, as applicable.
7. WARRANTIES AND LIMITATION OF LIABILITY:
(a) Service shall be provided by Frontier in accordance with the
applicable technical standards established for call transport
by the telecommunications industry. Frontier shall provide
Service in a quality and diligent manner consistent with
service Frontier provides to its other customers via a digital
fiber optic network with SS7 signaling (where available).
FRONTIER MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO TRANSMISSION, EQUIPMENT OR SERVICE PROVIDED
HEREUNDER, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR
FUNCTION.
6 Initials ______
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<PAGE>
(b) In no event shall either Party be liable to the other Party
for incidental and consequential damages, loss of goodwill,
anticipated profit, or other claims for indirect damages in
any manner related to this Agreement or the Services.
8. INDEMNIFICATION:
Each Party shall defend and indemnify the other Party and its
directors, officers, employees, representatives and agents from any and
all claims, taxes, penalties, interest, expenses, damages, lawsuits or
other liabilities (including without limitation, reasonable attorney
fees and court costs) relating to or arising out of (i) acts or
omissions in the operation of its business, and (ii) its breach of this
Agreement; provided, however, Frontier shall not be liable and shall
not be obligated to indemnify RMBI, and RMBI shall defend and indemnify
Frontier hereunder, for any claims by any third party, including
End-Users, with respect to services provided by RMBI which may
incorporate any of Frontier's services, except that RMBI shall not be
obligated to indemnify Frontier for any third party claims arising out
of Frontier's gross negligence or willful misconduct.
9. REPRESENTATION:
The Parties acknowledge and agree that the relationship between them is
solely that of independent contractors. Neither Party, nor their
respective employees, agents or representatives, has any right, power
or authority to act or create any obligation, express or implied, on
behalf of the other Party.
10. FORCE MAJEURE:
Other than with respect to failure to make payments due hereunder,
neither Party shall be liable under this Agreement for delays, failures
to perform, damages, losses or destruction, or malfunction of any
equipment, or any consequence thereof, caused or occasioned by, or due
to fire, earthquake, flood, water, the elements, labor disputes or
shortages, utility curtailments, power failures, explosions, civil
disturbances, governmental actions, shortages of equipment or supplies,
unavailability of transportation, acts or omissions of third parties,
or any other cause beyond its reasonable control.
11. WAIVERS:
Failure of either Party to enforce or insist upon compliance with the
provisions of this Agreement shall not be construed as a general waiver
or relinquishment of any provision or right under this Agreement.
12. ASSIGNMENT:
Neither Party may assign or transfer its rights or obligations under
this Agreement without the other Party's written consent, which consent
may not be unreasonably withheld, except that Frontier may assign this
Agreement to its parent, successor in interest, or an affiliate or
subsidiary without RMBI's consent. Any assignment or transfer without
the required consent is void.
13. CONFIDENTIALITY:
(a) Each Party agrees that all information furnished to it by the
other Party, or to which it has access under this Agreement,
shall be deemed the confidential and proprietary information
or trade secrets (collectively referred to as "Proprietary
Information") of the Disclosing Party and shall remain the
sole and exclusive property of the Disclosing Party (the Party
furnishing the Proprietary Information referred to as the
"Disclosing Party" and the other Party referred to as the
"Receiving Party"). Each Party shall treat the Proprietary
Information and the contents of this Agreement in a
confidential manner and, except to the extent necessary in
connection with the performance of its obligations under this
Agreement, neither Party may directly or indirectly disclose
the same to anyone other than its employees on a need to know
basis and who agree to be bound by the terms of this Section,
without the written consent of the Disclosing Party.
7 Initials ______
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<PAGE>
(b) The confidentiality of obligations of this Section do not
apply to any portion of the Proprietary Information which is
(i) or becomes public knowledge through no fault of the
Receiving Party; (ii) in the lawful possession of Receiving
Party prior to disclosure to it by the Disclosing Party (as
confirmed by the Receiving Party's records); (iii) disclosed
to the Receiving Party without restriction on disclosure by a
person who has the lawful right to disclose the information;
or (iv) disclosed pursuant to the lawful requirements or
formal request of a governmental agency. If the Receiving
Party is requested or legally compelled by a governmental
agency to disclose any of the Proprietary Information of the
Disclosing Party, the Receiving Party agrees that it will
provide the Disclosing Party with prompt written notice of
such requests so that the Disclosing Party has the opportunity
to pursue its legal and equitable remedies regarding potential
disclosure.
(c) Each Party acknowledges that its breach or threatened breach
of this Section may cause the Disclosing Party irreparable
harm which would not be adequately compensated by monetary
damages. Accordingly, in the event of any such breach or
threatened breach, the Receiving Party agrees that equitable
relief, including temporary or permanent injunctions, is an
available remedy in addition to any legal remedies to which
the Disclosing Party may be entitled.
(d) Neither Party may use the name, logo, trade name, service
marks, trade marks, or printed materials of the other Party,
in any promotional or advertising material, statement,
document, press release or broadcast without the prior written
consent of the other Party, which consent may be granted or
withheld at the other Party's sole discretion.
(e) Notwithstanding the restrictions set forth in this Section,
Frontier may use End-User Information in furtherance of its
rights under Section 5.
14. INTEGRATION:
This Agreement and all Exhibits, Schedules and other attachments
incorporated herein, represent the entire agreement between the Parties
with respect to the subject matter hereof and supersede and merge all
prior agreements, promises, understandings, statements,
representations, warranties, indemnities and inducements to the making
of this Agreement relied upon by either Party, whether written or oral.
15. CONSTRUCTION:
The language used in this Agreement is deemed the language chosen by
the Parties to express their mutual intent. No rule of strict
construction shall be applied against either Party.
16. GOVERNING LAW:
This Agreement is subject the laws of New York, excluding its choice of
law principles. The Parties agree that any action to enforce or
interpret the terms of this Agreement shall be instituted and
maintained only in the Federal Court for the Western District of New
York, or if jurisdiction is not available in the Federal Court, then a
state court located in Rochester, New York. RMBI hereby consents to the
jurisdiction and venue of such courts and waives any right to object to
such jurisdiction and venue.
17. NOTICES:
All notices, including but not limited to, demands, requests and other
communications required or pemitted hereunder (not including Invoices)
shall be in writing and shall be deemed to be delivered when actually
received, whether upon personal delivery or if sent by facsimile, mail
or overnight delivery. All notices shall be addressed as follows, or to
such other address as each of the Parties hereto may notify the other:
<TABLE>
<S> <C>
Frontier Communications of the West, Inc. Rocky Mountain Broadband, Inc.
ATTN: Peggy L. Palak, Mgr. Contract Svcs. ATTN: Kevin Loud, Vice President Operations
Brian V. Fitzpatrick, VP Carrier Svcs.
135 E. Ortega Street 1099 18th Street, 30th Floor
Santa Barbara, CA 93101 Denver, CO 80202
</TABLE>
8 Initials ______
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<PAGE>
<TABLE>
<S> <C>
Facsimile #800-689-2395 Facsimile #303-672-0711
</TABLE>
18. COUNTERPARTS:
This Agreement may be executed in several counterparts, each of which
shall constitute an original, but all of which shall constitute one and
the same instrument.
19. COMPLIANCE WITH LAWS:
During the term of this Agreement, the Parties shall comply with all
local, state and federal laws and regulations applicable to this
Agreement and to their respective businesses. Further, each Party shall
obtain, file and maintain any tariffs, permits, certifications,
authorizations, licenses or similar documentation as may be required by
the FCC, a state Public Utility or Service Commission, or any other
governmental body or agency having jurisdiction over its business. Upon
request, a Party will supply copies of such permits, certifications,
authorizations, licenses and similar documentation.
20. THIRD PARTIES:
The provisions of this Agreement and the rights and obligations created
hereunder are intended for the sole benefit of Frontier and RMBI, and
do not create any right, claim or benefit on the part of any person not
a Party to this Agreement, including End-Users.
21. SURVIVAL OF PROVISIONS:
Any obligations of the Parties relating to monies owed, as well as
those provisions relating to confidentiality, assurances of payment,
limitations on liability and indemnification, survive termination of
this Agreement.
22. UNENFORCEABILITY OF PROVISIONS:
The illegality or unenforceability of any provision of this Agreement
does not affect the legality or enforceability of any other provision
or portion. If any provision or portion of this Agreement is deemed
illegal or unenforceable for any reason, there shall be deemed to be
made such minimum change in such provision or portion as is necessary
to make it valid and enforceable as so modified. This Agreement is
voidable by Frontier if modified by RMBI without the written or
initialed consent of a Frontier Vice President.
By its signature below, each Party acknowledges and agrees that sufficient
allowance has been made for review of this Agreement by respective counsel and
that each Party has been advised as to its legal rights, duties and obligations
under this Agreement.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ROCKY MOUNTAIN BROADBAND, INC.
By: By:
------------------------------------- ---------------------------------
Brian V. Fitzpatrick, Vice President Douglas H. Hanson, President & CEO
Frontier Carrier Services Group
Date: Date:
------------------------------------- ---------------------------------
9 Initials ______
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<PAGE>
Exhibit 10.13
Note: Certain material, indicated by three asterisks (***), has been omitted
from this document pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission. The omitted
material has been filed separately with the Securities and Exchange
Commission.
[LOGO]
WHOLESALE USAGE AGREEMENT
PSINet Inc. Purchaser: Rocky Mountain
510 Huntmar Park Drive Address: Internet, Inc.
Herndon, VA 20170 1099 18th St.
Suite 3000
Denver, CO 80202
Phone:703.904.4100 Phone: 303. 672.0706
Facsimile:703.397.5318 Facsimile: 303. 672.0711
[email protected] Electronic Mail: [email protected]
Business Contact: Julie Gillespie Business Contact: Kevin Loud
Title: Regional Sales Manager Title: VP, Operations
Phone: 703.904.4100 x1375
Technical Contact: Bob Conant Technical Contact: Richard Dingess
Title: ISP Support Engineer
Phone: 518.283.8860 Title: Vice President
Phone: 303. 672.0727
Fax 303. 672.0711
- --------------------------------------------------------------------------------
THIS AGREEMENT is made by and between PSINet Inc., a corporation incorporated
under the laws of the State of New York, ("PSINet") and Rocky Mountain Internet,
Inc. ("Retailer") in order for Retailer to obtain from PSINet access to the
PSINet's network and the Internet for the benefit of Retailer's individual
customers desiring dialup or "switched" network access ("Access") as further
described below. In consideration of the mutual promises and covenants contained
herein, the parties agree, intending to be legally bound, as follows:
1. Definitions. The following terms shall have the following meanings for
purposes of this Agreement:
1.1 "Authorized User" shall mean any person authorized by a Subscriber to
have an account on a Host. Retailer may not permit any person or entity
other than an Authorized User to Access to the Network, except with the
written consent of PSINet. No person may be authorized to use the Network by
means of a connection between a Host owned or leased by a Subscriber and a
Host owned or leased by a person other than a Subscriber.
1.2 "Effective Date" of this Agreement is the date accompanying the last
party to sign's signature.
1.3 "Forecast" shall be the four (4) month rolling forecast Retailer
provides to PSINet on a monthly basis of the estimated number of Subscribers
that will be served by each POP.
1.4 "Host" shall mean a computer with a network (or IP) address.
1.5 "Mark" is any name, logo, trade name, trademark, copyright, service mark
or other intellectual property right owned by PSINet or its Retailer.
1.6 "Network" shall mean the combination of computer hardware, computer
software programs and data transmission facilities operated by PSINet (or
its duly authorized subcontractors) which will permit computers operated by
Subscribers to communicate with computers at remote locations which are
operated by others via the TCP/IP communications protocol and to provide
access to Internet.
1.7 "POP" shall mean a Network point-of-presence where PSINet equipment will
be located and these POPs will be positioned throughout the world in order
to provide Authorized Users Access via telephone calls.
<PAGE>
1.8 "Subscriber" shall mean any individual person authorized by Retailer to
have Access to the Network, although this Access is not to be used with
Local Area Network (LAN) applications. Retailer may not permit any entity
other than a Subscriber to have Access to the Network, except with the
written consent of PSINet.
2. PSINet Obligations.
2.1 General. PSINet agrees to provide Retailer with Access for Subscribers
to the Network and the Internet. The fees to be paid by Retailer to PSINet
for such Access services are set forth below in Section 4.
2.2 Provision of Access. Throughout the term of this Agreement, PSINet shall
provide Subscribers with Access at the levels then provided and supported by
PSINet. A recent estimated listing of Network POPs can be retrieved through
access to PSINet's world-wide web site at 'http://www.psi.net'. PSINet
reserves the right to install new POPs and/or to close existing POPs as it,
in its sole discretion, deems appropriate. In the event PSINet deems it
necessary to close an existing POP, PSINet shall provide Retailer with sixty
(60) days written notice thereof. Retailer may order such Access on behalf
of its present or future Subscribers and there shall be no limit on the
number of Subscribers who may use the Network; provided, however, that
PSINet may refuse service to Retailer because there is insufficient capacity
on the Network or in the POP to provide the Access amount requested. In the
event PSINet determines there to be such lack of capacity, then the
provisions of Section 4.10 herein do not apply to the effected POP during
any month for which such insufficient capacity occurs.
2.3 ISDN Service. PSINet shall also make ISDN 64k and 128k Internet
connection services available to Retailer for Subscribers. The fees to be
paid by Retailer for such services are set forth below.
2.4 Quality of Service. PSINet shall provide to Retailer (for its
Subscribers) Internet connection services that meet reasonable commercial
standards, including, but not limited to, accessibility, latency, packet
loss, and throughput. PSINet shall keep and maintain its Network in good
condition and repair. The Network shall be properly maintained, serviced and
upgraded by PSINet as it, in its sole discretion, shall determine is
necessary in order to ensure connectivity to Subscribers. ***
2.5 Reports and Information Regarding Service.
2.5.1 Access to Network Monitoring Systems. PSINet shall provide
Retailer with read-only access to all applicable network monitoring
systems used by PSINet to monitor the Network.
2.5.2 PSINet Network Outages. PSINet shall provide to Retailer prompt
notification of any Network outages that affect Subscribers. When
possible, at least three days in advance notice of planned outages shall
be given to Retailer so that Subscribers may be alerted.
2.6 PSINet Technical Support. PSINet agrees to provide Retailer, at no
additional charge, reasonable back-end technical support and problem
escalation support for Access and Network problems. However, PSINet is not
obligated to provide technical support and problem escalation support to
Subscribers.
2.7 Termination of Access. PSINet shall terminate the Access rights of any
Subscriber as soon as is reasonably practicable upon written notice from
Retailer to do so or upon mutually agreed upon electronic process with
receipt confirmed, but shall have no liability in connection therewith.
Further, Retailer and its Subscribers are required to comply with PSINet's
Net-Abuse Policy ("Policy") as currently set forth on PSINet's Web site
(http://www.psi.net) and as the Policy may be modified by PSINet in its sole
discretion from time to time. Any content, material, message, or data made
available or transmitted through the Network, wherever it is sent from,
viewed, received, or retrieved, that is in violation of (i) any local,
state, federal or international law, regulation or treaty; (ii) the Policy;
or (iii) any community standard or accepted Internet policy is prohibited.
In the event of violation of the foregoing by any Subscriber, PSINet will
advise Retailer accordingly, and PSINet reserves the right, in its sole
discretion, to terminate such Subscribers Access immediately with written
notice to Retailer. In the event of violation of the foregoing by Retailer,
PSINet may deem such violation a material breach of this Agreement and may,
in its sole discretion, terminate this Agreement with written notice to
Retailer, but without the cure period specified in Section 5 below.
3. Retailer Obligations.
3.1 Retailer Responsibility for Its Subscribers. Retailer shall be
responsible for all customer support, pricing and service plans, billing and
collections with respect to its own Subscribers.
3.2 Retailer Connection to the Network. Retailer shall provide, at its own
expense, the telecommunications circuit for its connection to the Network
which shall run between the best suited PSINet POP (as determined by
<PAGE>
PSINet) and the Retailer's operations center (which includes the local
telephone company or Competitive Access Provider circuits). In addition,
Retailer shall provide an estimate of the traffic it anticipates between
Retailer's network and PSINet's Network.
3.3 Subscriber Equipment. PSINet shall not be responsible for the
installation, operation or maintenance of any computer equipment or computer
software programs provided by Retailer or any Subscriber.
3.4 Optional Peering. In addition to the connection of Retailer's network
and PSINet's Network as set forth in Section 3.2, Retailer may, but shall
not be obligated to, provide telecommunications circuits interconnecting
Retailer's network with the Network at a location or locations agreed upon
by the parties. ***
3.5 Use of Marks. Neither party is authorized through this Agreement to use
the other party's Marks in connection with their sales, advertisements and
promotion of its services to Subscribers, except in materials either
provided or approved by the authorized user of the mark prior to it's use.
Each party shall send to the other party a copy of any printed material
using the other party's Mark or other copyrighted material, and the
authorized party shall have the right to disapprove such use (although
approval shall not be unreasonably withheld). Upon termination of this
Agreement, each party shall cease to use any of such Marks or copyrighted
material and shall, within a reasonable time agreeable to the authorized
party, remove any reference to authorized party from its advertising and
promotional material.
3.6 Traffic Forecast. Retailer shall work closely with their distributors
and PSINet to make their best efforts in predicting product demand in their
geographic markets and implement a forecasting model based on trending and
previous sales for the purpose of allowing PSINet to adequately provide
facilities for the increased demand. ***
4. Price and Pricing Terms.
Advanced Payment. Retailer agrees to pay to PSINet in advance of Retailer's
first Subscriber subscribing to the Network a one-time, non-refundable fee of
***. This fee shall be applied to future, monthly Base Charge payments after the
third full month following the Effective Date of this Agreement.
4.2 Base Charge. Upon the Effective Date, and on the first day of each month
thereafter throughout the initial or any successive terms of this Agreement,
Retailer agrees to pay PSINet for each Subscriber who is then or was at any
time during the immediately preceding month authorized to use the Network a
Base Charge pursuant to the following schedule and subject to adjustments as
provided below:
<TABLE>
<CAPTION>
Total # of Subscribers Applicable Base Charge
---------------------- ----------------------
using the Network
----------------------
<S> <C>
***
150,001 or more Additional Adjustment
</TABLE>
<TABLE>
<CAPTION>
Additional ISDN Charges:
------------------------
<S> <C>
***
</TABLE>
* in one-minute increments rounded upwards
**ISDN pricing will be in addition to the applicable Base Charges
The applicable Base Charge above is to be applied to all Subscribers
irrespective of the rate that previously was applied to that group of
Subscribers. For example, if there are a sufficient number of Subscribers to
satisfy the second-tier pricing requirement, the applicable Base Charge shall
apply to all Subscriber Base Charges. Should the amount of Subscribers
subsequently fall below such tier, incurring a higher Base Charge, the
applicable Base Charge shall be adjusted to the higher Base Charge for all
Subscribers as indicated in this section.
The payment to be made for the initial month of Access for any Subscriber shall
include (i) an amount equal to the applicable Base Charge for such initial
month, prorated in the case of a partial month, and (ii) an amount equal to such
Base Charge as payment in advance for the next month of Access. If one of the
Subscribers cancels service within any month, there will either be no charge or
a pro-rated charge depending upon the time of that Subscriber's service
cancellation within that month.
4.3 Adjustments to Base Charge.
4.3.1 International Charges. Retailer and its Subscribers may also have
Access from any PSINet POP in Canada for an additional fee of *** US per
hour added to the Base Charge (calculated in one minute increments
<PAGE>
rounded upward), and from any PSINet POP outside of the US and Canada for an
additional fee of *** US per hour added to the Base Charge (calculated in
one minute increments rounded upward).
4.3.2 "Toll-Free" Charges. Retailer and its Subscribers may also access the
Network using a "toll free" PSINet POP (for example, using an 800 or 888
number) within the contiguous 48 states of the United States for an
additional fee of *** US per hour added to the Base Charge (calculated in
one minute increments rounded upward).
4.3.3 Additional Adjustment. Once the number of Subscribers using the
Network exceeds 150,000, the parties will negotiate in good faith to agree
upon an appropriate adjustment to the applicable Base Charge.
4.4 Minimum Commitment.
4.4.1 Ramp Period. The initial ***months from the Effective Date hereinafter
defines the "Ramp Period". The minimum number of Subscribers on a monthly
basis during the Ramp Period shall be projected as follows:
***
PSINet and Retailer agree that these numbers will serve as a gauge of the
success of the program during the Ramp Period.
4.4.2 Minimum Amounts. The minimum monthly revenue from Retailer for Access
provided by PSINet for Subscribers pursuant to this Agreement shall be ***
US after the Ramp Period mentioned above. In the event PSINet's gross
revenues from Retailer in any month thereafter shall be less than the
required minimum, Retailer, at its discretion, shall either promptly (i)
remit to PSINet an amount equal to the difference between the aforesaid
minimum monthly revenue amount and such gross revenues; or (ii) give PSINet
the right of first refusal to purchase from Retailer all its Subscribers who
receive Access to the Network pursuant to the terms of this Agreement at the
lower of (i) the lowest rate offered by any bona fide third party purchaser
; or (ii) ***.
In the event that PSINet chooses not to purchase the Subscribers and
Retailer chooses not to remit to PSINet the amount stated above in
subparagraph (a), this Agreement shall be terminated; provided, however,
that PSINet shall continue to service, and Retailer shall continue to pay
for, the Subscribers at the highest Base Charge specified in Section 4.2
hereof for a period of *** following such failure by Retailer to provide the
minimum monthly revenue payment in order to assure a smooth transition for
said Subscribers.
4.5 Taxes. Retailer shall be liable for and shall reimburse PSINet for all
taxes and related charges however designated resulting from the transactions
contemplated hereby (except those relating to PSINet's gross income),
including federal, state, provincial or local sales, use or value-added
taxes (VAT) and excise taxes, imposed in connection with or arising from the
provision of Access.
4.6 Invoices. PSINet shall invoice Retailer monthly in advance for all
charges under this Agreement. All invoices will be payable within thirty
(30) days of date of invoice. Invoices not paid by their due date shall be
subject to a 1.5% per month interest fee, or the maximum extent allowed by
applicable laws, whichever is less, on all past-due
<PAGE>
balances. In the event PSINet incurs additional fees as a result of any
collection activity, such as collection agencies or legal fees, Retailer
shall reimburse PSINet for all such fees. In the event Retailer shall fail
to pay PSINet any amount due under this Agreement, PSINet, in addition to
charging applicable delinquency fees, may discontinue providing Access to
Retailer and its Subscribers upon ten (10) days prior written notice by
overnight courier or certified mail to Retailer and chance to cure. PSINet
shall resume providing Access immediately upon receipt of such payment, and
in such event Retailer shall pay PSINet a reasonable reconnection fee.
4.7 Subscriber Charges. Retailer is solely responsible for establishing and
collecting its Subscriber charges for services it offers its Subscribers
through the Network and for preparing and mailing invoices to its
Subscribers. Retailer is responsible for payment of the total amounts
invoiced it by PSINet (except for any amounts disputed by Retailer in good
faith) regardless of whether Retailer is paid by its Subscribers.
5. Term/Extensions/Termination. The term of this Agreement shall be three (3)
years, commencing on the last day of the Ramp Period as defined above, and,
unless either party notifies the other in writing not less than one-hundred
eighty (180 days) prior to the end of the initial term or any extension thereof,
this Agreement shall be automatically renewed annually thereafter for a period
of one year.
Either party may terminate this Agreement if such other party has materially
breached this Agreement and has failed to cure such breach within thirty (30)
days after receiving written notice clearly specifying such breach; provided,
however, that this notice period shall not apply to a termination by PSINet in
accordance with the provisions of Section 2.7, 4.4.2 and/or 4.6.
6. Warranties Excluded. EXCEPT AS EXPRESSLY PROVIDED HEREIN, PSINET MAKES NO
WARRANTIES IN CONNECTION WITH ITS NETWORK OR THE PROVISION OF ACCESS AS
CONTEMPLATED HEREIN, WHETHER WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION THE WARRANTY OF MERCHANTABILITY, THE WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE OR USE AND NON-INFRINGEMENT OF THIRD PARTY
RIGHTS. RETAILER'S SOLE AND EXCLUSIVE REMEDY SHALL BE PSINET'S OBLIGATION TO
ADJUST THE FEES PAYABLE BY RETAILER AS SET FORTH ELSEWHERE HEREIN.
7. Limitation of Liability. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT
TO THE CONTRARY, THE PARTIES AGREE THAT PSINET SHALL IN NO EVENT BE LIABLE TO
RETAILER, ITS SUBSCRIBERS OR ANY OTHER PERSON FOR ANY ACTUAL, DIRECT, INDIRECT,
CONSEQUENTIAL, SPECIAL, INCIDENTAL, RELIANCE, PUNITIVE OR ANY OTHER DAMAGES OF
ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR THE
LOSS OF DATA, GOODWILL OR PROFITS) REGARDLESS OF THE FORESEEABILITY THEREOF,
ARISING OUT OF THE PROVISION OF ACCESS OR IN ANY WAY ARISING OUT OF THIS
AGREEMENT, WHETHER IN AN ACTION ARISING OUT OF BREACH OF CONTRACT, BREACH OF
WARRANTY, DELAY, NEGLIGENCE, STRICT TORT LIABILITY, PATENT MATTERS OR ANY OTHER
THEORY. NO ACTION OR PROCEEDING AGAINST PSINET MAY BE COMMENCED MORE THAN TWO
YEARS AFTER THE SERVICES ARE RENDERED. THIS CLAUSE SHALL SURVIVE FAILURE OF AN
EXCLUSIVE REMEDY. PSINET'S TOTAL LIABILITY FOR GROSS NEGLIGENCE DURING THE
LIFETIME OF THIS AGREEMENT SHALL IN NO EVENT EXCEED ONE HUNDRED TWENTY-FIVE
THOUSAND DOLLARS ($125,000) IN THE AGGREGATE.
8. Indemnification of PSINet. RETAILER SHALL INDEMNIFY AND HOLD HARMLESS PSINET
AND PSINET'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND ADVISORS FROM AND
AGAINST ANY AND ALL CLAIMS OF OTHER PERSONS OR ENTITIES ARISING OUT OF MATERIAL,
DATA, INFORMATION OR OTHER CONTENT TRANSMITTED BY SUBSCRIBERS OR OTHER ACTS OR
OMISSIONS OF RETAILER AND/OR ITS SUBSCRIBERS.
9. Confidential Information. The provisions in the Bilateral Nondisclosure
Agreement executed between the parties shall apply to the terms of this
Agreement ands shall survive the execution and termination of this Agreement for
any reason.
10. Miscellaneous.
10.1 Independent Parties/No Agency. The relationship of PSINet and Retailer
shall be that of independent third parties. Except as otherwise expressly
provided in this Agreement, this Agreement does not constitute either party
as the agent or legal representative of the other party and does not create
a partnership or joint venture between the parties. Except as otherwise
expressly provided in this Agreement, neither party shall have any authority
to contract for or bind any other party in any manner whatsoever. This
Agreement confers no rights of any kind upon any third party.
<PAGE>
10.2 Force Majeure. PSINet shall not be liable for failure to fulfill its
obligations hereunder if such failure is due to causes beyond its reasonable
control, including, without limitation, actions or failures to act of
Retailer or any Subscriber, acts of God, fire, catastrophe, governmental
prohibitions or regulations, viruses which did not result from the acts or
omissions of PSINet, its employees or agents, national emergencies,
insurrections, riots or wars, or strikes, lockouts, work stoppages or other
labor difficulties. The time for any performance required hereunder shall be
extended by the delay incurred as a result of such act of force majeure, and
PSINet shall act with diligence to correct such force majeure.
10.3 Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to a party under this Agreement shall impair any such
right, power or remedy of such party nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or
in any similar breach or default thereafter occurring; nor shall any waiver
of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of either party of any breach
or default under this Agreement, or any waiver on the part of either party
of any provisions or conditions of this Agreement must be made in writing
and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to a party, shall be cumulative and not alternative.
10.4 Benefit and Assignment. No party hereto shall assign this Agreement, in
whole or in part, whether by operation of law or otherwise, without the
prior written consent of the other parties hereto (which consent shall not
be unreasonably delayed or withheld); and any purported assignment in
violation of the foregoing shall be void. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns as permitted hereunder. No person or
entity other than the parties hereto is or shall be entitled to bring any
action to enforce any provision of this Agreement against any of the parties
hereto, and the covenants and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns as permitted hereunder.
10.5 Additional Actions, Documents and Information. Each of the parties
hereto agrees that it will, at any time, prior to, at or after the date
hereof, take or cause to be taken such further actions, and execute, deliver
and file or cause to be executed, delivered and filed such further documents
and instruments and obtain such consents, as may be reasonably requested in
order to fully effectuate the purposes, terms and conditions of this
Agreement.
10.6 Notices.
(a) All notices and other communications required or permitted hereunder
shall be in writing and shall be mailed by certified or registered mail
(return receipt requested), express air courier, charges prepaid, or
facsimile addressed as follows:
To Retailer: as specified above.
To PSINet:
PSINet Inc. with copy to: PSINet Inc.
510 Huntmar Park Drive 510 Huntmar Park Drive
Herndon, Virginia 20170 Herndon, Virginia 20170
Facsimile: 703.397.5318 Facsimile: 703.904.4200
Attn: John Kraft, Vice President, Attn: General Counsel
Carrier & ISP Services
or to such other address as either party shall have furnished to the other
in writing.
(b) If a notice is given by either party by certified or registered mail, it
will be deemed received by the other party on the third business day
following the date on which it is deposited for mailing. If a notice is
given by either party by air express courier, it will be deemed received by
the other party on the next business day following the date on which it is
provided to the air express courier. If a notice is given by facsimile, it
will be deemed received by the other party after confirmation of receipt.
Notwithstanding the foregoing, any payments made under this Agreement shall
be deemed received only when actually received.
10.7 Compliance with Law. Retailer is responsible for complying with all
applicable rules, regulations, statutes, codes, ordinances and other
requirements, whether federal, state, provincial, local, international or
otherwise in connection with the matters contemplated by this Agreement.
10.8 Severability/Survival/Waivers. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, such provision shall be
construed so as to render it enforceable and effective to the maximum
<PAGE>
extent possible in order to effectuate the intention of this Agreement; and
if such provision shall be wholly invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby. The parties' rights and
obligations that, by their nature, would continue beyond the termination,
cancellation, or expiration of this Agreement, shall survive such
termination, cancellation or termination. The waiver or failure of either
party to exercise in any respect any right provided for in this Agreement
shall not be deemed a waiver of any further right under this Agreement.
10.9 Titles and Subtitles. The titles of the Sections of this Agreement are
for convenience of reference only and are not to be considered in construing
this Agreement.
10.10 Governing Law and Venue. Customer agrees to the non-exclusive
jurisdiction of the federal and state courts of the Commonwealth of Virginia
for any action or proceeding arising out of or in relation to this
Agreement. This Agreement shall be governed by the substantive law of the
Commonwealth of Virginia.
10.11 Entire Agreement/Amendments. This Agreement represents the complete
agreement and understanding of the parties with respect to the subject
matter herein, and supersedes any other agreement or understanding, written
or oral. In the event of any conflict arising between Customer's purchase
order terms and this Agreement, this Agreement shall take precedence. This
Agreement may be modified only in writing signed by both parties.
Both PARTIES REPRESENT AND WARRANT THAT THEY HAVE FULL CORPORATE POWER AND
AUTHORITY TO EXECUTE AND DELIVER THIS AGREEMENT AND TO PERFORM THEIR OBLIGATIONS
HEREUNDER, AND THAT THE PERSON WHOSE SIGNATURE APPEARS BELOW IS DULY AUTHORIZED
TO ENTER INTO THIS AGREEMENT ON BEHALF OF THE PARTY.
IN WITNESS WHEREOF, THE PARTIES HAVE ENTERED INTO THIS AGREEMENT AS OF THE DATE
SET FORTH:
- --------------------------------------------------------------------------------
Authorized Retailer Representative/Title (please type or print)
- --------------------------------------------------------------------------------
Retailer Signature Date
- --------------------------------------------------------------------------------
Authorized PSINet Representative (please type or print)
- --------------------------------------------------------------------------------
PSINet Representative Signature Date
<PAGE>
Exhibit 10.14
Note: Certain material, indicated by three asterisks (***), has been omitted
from this document pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission. The omitted
material has been filed separately with the Securities and Exchange
Commission.
PACNET RESELLER AGREEMENT
THIS AGREEMENT is made and entered into this 30th day of May, 1997, by and
between PacNet Inc., a Washington corporation with its principal office located
at 1111 Third Avenue, Seattle, Washington 98101 (hereinafter "CARRIER"), and
Rocky Mountain Internet, Inc., a Delaware corporation, with its principal office
located at 1099 Eighteenth Street, Suite 3000, Denver, Colorado 80202
(hereinafter "RESELLER") for the purpose of establishing a sales representation
relationship between them.
WHEREAS, CARRIER is in the business of providing data communications services in
certain geographic market areas; and
WHEREAS, RESELLER has applied to CARRIER for the right to market, sell, and
distribute CARRIER's services to the general public; and
WHEREAS, both CARRIER and RESELLER recognize the compatible nature of their
individual goals in expanding competition in the services offered by CARRIER as
well as any services to be offered by RESELLER and the benefits which will
accrue to the public through the Parties' cooperation; and
WHEREAS, CARRIER has agreed to engage RESELLER pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
warranties which appear below, and intending to be legally bound thereby, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, as hereinafter defined, the following terms
shall have the respective meanings given to them in this Article I, unless the
context requires otherwise. Said terms also shall have the said meanings when
used in any exhibit, schedule, attachment or addendum hereto or in any document
made or otherwise delivered pursuant to this Agreement, unless the context
otherwise requires. Each said term defined in this Article I shall be deemed to
refer to the singular, plural, masculine, feminine or neuter as the context
required.
1.1 "Agreement" means this Agreement, as originally executed and as the
same may be amended, modified and supplemented from time to time by
exhibits, schedules, attachments or addendum executed in accordance
herewith.
1.2 "Assignment" means a sale, exchange, transfer or other disposition of
all or any portion of Party's rights and obligations hereunder.
1.3 "Affiliate" means any person who directly or indirectly, through one or
more intermediaries, controls, is controlled by or is under common
control with such specific
<PAGE>
person. A person shall be deemed to control another person when such
controlling person has the power, directly or indirectly to cause the
direction of the management or policies of such person, whether through
the ownership of voting securities, by contact, agency or otherwise.
This term shall also include any person who, directly or indirectly,
through one or more intermediaries, has the contractual right or option
to acquire or vote more than ten percent of the voting interest of a
specific person.
1.4 "Business Day" means a day other than Saturdays, Sundays and legal
holidays.
1.5 "Customer" means an end-user of CARRIER's Services.
1.6 "Effective Date" means the date of last necessary signature hereto.
1.7 "FCC" refers to the Federal Communications Commission.
1.8 "Final Order" means an action by any applicable federal or state agency
or court as to which (i) no request for stay by the federal or state
agency or court of the action is pending, no such stay is in effect,
and if any deadline for filing any such request is designated by
statute or regulation, it has passed; (ii) no petition for rehearing or
reconsideration of the action is pending and the item for filing any
such petition has passed; (iii) the federal or state agency or court
does not have the action under reconsideration on its own motion and
the time for such reconsideration has passed, and (iv) no appeal to a
court, or request for stay by a court, or the federal or state agency's
or court's action is pending or in effect, and if any deadlines for
filing such appeal or request is designated by statute or rule, it has
passed.
1.9 "Host Connection" refers to connections from CARRIER network through to
the network of RESELLER.
1.10 "Party" refers to one or both of the parties to this Agreement, CARRIER
or RESELLER, as the context indicates.
1.11 "Person" means any general partnership, limited partnership,
corporation, joint venue, trust, business trust, governmental agency,
cooperative, association, individual or other entity, and the heirs,
executors, administrators, legal representatives, successors and
assigns of such person as the context may require.
1.12 "Proprietary Information" means information relating to the present or
future business activities and operations of CARRIER, RESELLER or their
respective subsidiaries, Affiliates, clients and consultants which is
marked as "Proprietary" or "Confidential". Proprietary Information
shall include, but not be limited to, all technical, marketing and
financial information relating thereto, any information relating to
other pricing methods, processes, financial data, lists, apparatus,
statistics, programs, research, development or related information, or
the results of the provision of Services performed by RESELLER under
this Agreement. Proprietary Information needs to be also marked as
"Proprietary
<PAGE>
or Confidential" information.
1.13 "Services" or "CARRIER Services" refers to the data communications
services delineated in Schedule A hereto, to be resold hereunder by
RESELLER to the general public in certain geographic market areas.
ARTICLE II
UNDERTAKING OF THE PARTIES
2.1 Scope. RESELLER and CARRIER wish to set forth a standard of general
terms and conditions which will facilitate RESELLER's ability to
market, sell and distribute the Services within certain geographic
market areas.
2.2 Formation. CARRIER hereby agrees to provide RESELLER, and RESELLER
hereby agrees to accept use of certain CARRIER Services. The Services
are as set forth in Schedule A hereto and in any applicable tariffs.
The Schedule may be revised from time to time by CARRIER in accordance
with generally applicable changes in CARRIER's service offerings.
Services are provided pursuant to the PacNet Services Agreement to be
entered into by the parties, the terms of which are incorporated into
this Agreement by reference.
2.3 Authority of RESELLER. CARRIER hereby grants to RESELLER the
non-exclusive right to solicit orders from and enter into contracts
with Customers for the Services. This Agreement constitutes RESELLER as
a nonexclusive independent contractor only and not as CARRIER's general
or specific agent and does not create a joint venture or apply to
confer any status, power or authority upon RESELLER other than
expressly set forth herein. The scope of the RESELLER's authority is
specifically limited to the minimum authority necessary to perform the
duties accepted pursuant to this Agreement and RESELLER shall, to the
maximum extent not inconsistent with the provision hereof, control the
means, details, manner and method of allotment associated therewith.
RESELLER shall make no representations as to the policies and
procedures of CARRIER other than as specifically authorized by CARRIER
and shall be liable for any misrepresentation made by RESELLER with
regard to CARRIER's Services. RESELLER shall have no right to enter
into a contract on CARRIER's account or to bind CARRIER in any manner.
2.4 RESELLER's Authorizations. RESELLER shall secure and maintain at its
sole expense all licenses and permits required by federal, state or
municipal law or regulation for it and its employees, agents or other
representatives to ensure RESELLER's lawful performance of this
Agreement.
ARTICLE III
PAYMENT AND COLLECTION TERMS
3.1 Rates for Services. Subject to the following Sections of this Article
III, RESELLER will
<PAGE>
be charged pursuant to Schedule B hereto for Frame Relay Services and
pursuant to Schedule C hereto for Private Line Services and pursuant to
Schedule D hereto for Internet Services. Schedules B, C & D may be
changed from time to time by CARRIER in accordance with these changes
in CARRIER's applicable tariffs, if any, or generally applicable
schedule of rates. In the event that the underlying carrier or provider
increases its rates for services used by CARRIER in providing Service
hereunder, CARRIER shall have the option to increase rates to RESELLER
upon 30 days prior written notice.
3.2 Minimum Commitment Periods. RESELLER understands and agrees that the
rates for Service are based upon an expected usage level and that,
absent this minimum usage CARRIER would be unable to offer the Services
at the rates given to RESELLER herein. In view thereof, RESELLER shall
have certain Minimum Commitment Levels for Service hereunder. RESELLER
shall have a six (6) month period, commencing on the Effective Date of
this Agreement, during which no Minimum Commitment Level shall apply.
Commencing on the seventh (7th) month after the Effective Date of this
Agreement and continuing thereafter, RESELLER's total monthly usage
revenue attributable to its Customer accounts shall equal or exceed a
Minimum Commitment Level of *** per month. CARRIER will have at its
sole option the right to terminate this Agreement under section 4.4 and
4.5.1 of this Agreement in the Minimum Commitment Level is not met as
specified herein.
3.3 Late Payment, Billing Disputes. Payment and billing disputes shall be
tendered in accordance with the provisions of the PacNet Services
Agreement to be entered into between the CARRIER and the RESELLER.
3.4 Creditworthiness. In addition to any other remedies available to
CARRIER, CARRIER may elect with ten (10) days prior written notice, in
its sole discretion, to cause start of service for Services applicable
to a Customer to be withheld or decline to accept a Customer if there
is a material change in RESELLER's creditworthiness or CARRIER may
condition the provision of Services on assurance of payment by RESELLER
or Customer which shall take the form of a deposit or similar assurance
as specified by CARRIER.
3.5 Sales Forecast. RESELLER will forecast quarterly sales objectives.
These objectives will not be considered by CARRIER as RESELLER's
contractual agreements.
ARTICLE IV
TERMS OF AGREEMENT
4.1 Effective Date; Renewal. This Agreement shall become effective upon the
Effective Date, and shall remain in effect for a period of three (3)
years unless otherwise terminated in accordance herewith. This
Agreement shall be automatically renewed thereafter for successive
periods of one (1) year or as otherwise agreed by the Parties. This
Agreement thereupon shall be terminated by either Party at the end of
the initial or then current renewal term upon written notice ninety
(90) days prior to the end of the then current
<PAGE>
term.
4.2 Insolvency. Either Party may terminate this Agreement upon ninety (90)
days written notice to the other Party in the event of an admission by
the other Party of an inability to pay its debts, the entering in to by
the other Party of a composition or other arrangement with its
creditors, the appointment of a trustee or receiver, with or without
consent, for the other Party of all or any substantial portion of its
property, or the filing of a petition for relief by or against the
other Party under the Bankruptcy Code of any similar federal or state
statute (including moratorium laws); provided, however, that in the
case of an involuntary petition, there shall be no right of
cancellation hereunder unless such petition remains undismissed sixty
(60) days after the filing thereof.
4.3 Loss or Suspension of Operating Authority. This Agreement shall
terminate automatically and without liability or further obligation on
the part of either party to the other if, by Final Order, CARRIER loses
its authority to provide the Services as contemplated hereunder. If
such authority is suspended, this Agreement shall not terminate, but
shall be suspended until such time as CARRIER regains such authority.
If such authority is lost or suspended with regard to a portion of the
Services or service areas, then this Agreement shall terminate
automatically (in the case of lost authority) or be suspended (in the
case of suspended authority) with regard only to the Services or
service area concerned. The provisions of this Section 4.3 shall not be
construed to affect any liabilities which arise prior to the
termination or suspension hereunder, or which may later arise from the
Parties' activities during the term of this Agreement.
4.4 Events of Default. Aside from any other events of default set forth in
this Agreement, the following shall constitute an event of default
hereunder: (i) the failure by RESELLER to make any payments due to
CARRIER hereunder and continue failure to cure such default within a
period of ten (10) days after receiving written notice of such fault;
(ii) the violation by either Party hereto of any material term or
provision of this Agreement or the failure of either party hereto to
perform any of its material obligations hereunder and continued failure
to cure such default within thirty (30) days after receiving written
notice of such default; (iii) the misapplication by RESELLER of
CARRIER's services and continued failure to cure such default within
thirty (30) days after receiving written notice of such default; (iv) a
consistently poor payment record or other evidence of lack of financial
ability to perform and continued failure to cure such default within
thirty (30) days after receiving written notice of such default; (v)
any action that violates applicable federal or state law or regulation
or other unlawful act and continued failure to cure such default within
thirty (30) days after receiving written notice of such default; (vi)
the failure of RESELLER to abide by the terms of Sections 3.2, 3.3,
5.1, 5.2 and 7.4 hereof and continued failure to cure such default
within thirty (30) days after receiving written notice of such default;
or (vii) the willful or intentional violation by either Party hereto of
any term or provision of this Agreement.
4.5 Remedies.
<PAGE>
4.5.1 Termination. Upon the occurrence of an event of default, as
defined in Section 4.4, the non-defaulting Party shall have
the right to terminate this Agreement upon thirty (30) days
written notice.
4.5.2 Customer Contracts. If RESELLER defaults in its performance
hereunder, as defined in Section 4.4, then CARRIER may, at its
option, and as consideration for CARRIER capital expenditures
in providing Service to RESELLER's Customers hereunder, enter
into direct contracts with Customers obtained hereunder and
bill such Customers directly, with no compensation being due
to RESELLER therefor.
4.5.3 Specific Performance. CARRIER shall have the right to enforce
the provisions of this Article IV by obtaining an injunction
or specific performance from any court of competent
jurisdiction.
4.5.4. Alternative Remedies. The remedies set forth herein are
cumulative and in addition to, and not in limitation of, other
remedies available at law or in equity. None of the remedies
specified in this Article IV for any default of breach of this
Agreement shall be exclusive.
ARTICLE V
CORPORATE IDENTITY
5.1 Trade Names and Trademarks. All trade names, trademarks and service
marks owned or employed by CARRIER, RESELLER or their respective
subsidiaries or Affiliates, shall remain the sole and exclusive
property of such Party, subsidiary or Affiliate, and such trade names,
trademarks and service marks shall not be used by the other Party
without the prior written consent of such Party, subsidiary or
Affiliate. The breaching Party shall immediately discontinue any use of
such marks and names upon Notice of such breach.
5.2 Advertising. CARRIER shall establish standards for all advertising,
promotional and customer training materials used or distributed by
RESELLER which relate to CARRIER's services. RESELLER may refer to
itself as an authorized reseller of CARRIER Services whenever it refers
to the services in promotional, advertising, or other materials. In
addition, RESELLER shall provide to CARRIER for its prior review and
written approval, all promotional, advertising, or other materials or
activity using or displaying CARRIER's name, Services or referring to
RESELLER as an authorized reseller of CARRIER services. Such review and
standards will be limited to factual matters, pertain to services
furnished by CARRIER and use of CARRIER's marks and name. RESELLER
agrees to change or correct, at RESELLER's expense, any such material
or activity which CARRIER, in its sole judgment, determines to be
inaccurate, misleading or otherwise objectionable.
ARTICLE VI
<PAGE>
OPERATING DUTIES OF THE PARTIES
6.1 Customer Subscription and Service. RESELLER shall provide Customers
with applications for Services using pre-printed forms provided or
approved by the CARRIER. Such applications shall then be forwarded by
RESELLER to CARRIER within no more than three (3) business days after
execution. RESELLER agrees to comply with all of CARRIER's customer
service procedures regarding CARRIER's Services hereunder. CARRIER
reserves the right in its full discretion to decline to accept a
Customer contract solicited by RESELLER pursuant to its generally
applicable business criteria.
6.2 RESELLER's Representation; Contracts. RESELLER shall make no
representations, warranties, promises, understandings or agreements
concerning CARRIER and CARRIER's Services not approved in advance by
CARRIER. RESELLER may represent itself as a RESELLER of CARRIER's
Services.
6.3 Conduct of RESELLER.
6.4 CARRIER Responsibilities.
ARTICLE VII
LIABILITY AND INDEMNIFICATION
7.1 RESELLER's Employees. All persons employed by RESELLER to perform
RESELLER's duties under this Agreement are employees and agents of
RESELLER. RESELLER shall be solely responsible for the acts and
omissions of its employees and agents and shall have sole
responsibility for their supervision, direction and control. RESELLER
shall comply with all applicable laws regarding withholding and payment
of all income taxes, social security taxes, unemployment insurance and
worker's compensation and disability benefits as well as those
regarding equal employment opportunities and safety of the workplace
insofar as such concerns the subject matter hereof.
7.2 Right to Conduct Other Business. Each Party hereto understands and
acknowledges that this Agreement is non-exclusive and that the Parties,
their Affiliates, their representatives and other entities with whom
they may contact may compete with the other Party hereto in the
business subject in CARRIER's geographic market areas. This Agreement
shall not in any way limit CARRIER's power and right to contract with
other Persons concerning the subject matter hereof on such terms as
CARRIER sees fit even though such Persons, as a result, compete with
RESELLER. This Agreement also shall not in any way limit RESELLER's
power and right to contract with other Persons concerning the subject
matter hereof, either during the term hereof or thereafter, on such
<PAGE>
terms as RESELLER sees fit even though such persons, as a result,
compete with CARRIER.
7.3 Insurance. RESELLER shall, at its sole expense, be insured at all times
during the term of this Agreement, and any extension of renewal
thereof, under a comprehensive liability insurance policy against
claims for bodily and personal injury, death and property damage caused
by or occurring in conjunction with RESELLER's activities hereunder.
Such insurance coverage shall be maintained under one or more policies
of insurance issued by insurance companies qualified to do business in
the states where RESELLER performs its duties hereunder, and shall be
in amounts not less than one million dollars ($1,000,000) per
occurrence for bodily and personal injury and death, five hundred
thousand dollars ($500,000) per occurrence for property damage and five
hundred thousand dollars ($500,000) per occurrence for general
liability arising out of RESELLER's conduct hereunder. RESELLER shall
provide CARRIER with copies of said policies upon written notice and
shall provide for not less than thirty (30) days prior written notice
of any modification, cancellation, or non-renewal thereof. RESELLER's
insurance coverage hereunder is only for the purpose of assuring
CARRIER that Customers being solicited for CARRIER's Services shall
receive good service. It does not and shall not be construed to give
CARRIER any control over or interest in any enterprise of RESELLER
other than the solicitation of Customers for CARRIER's Services.
7.4 Indemnification. Notwithstanding any of the provisions of this
Agreement which may be construed to the contrary, RESELLER and CARRIER
will indemnify each other and their respective directors, officers,
employees, agents and representatives ("Indemnified Parties") and save
them harmless from and against any and all claims, actions, damages,
liabilities and expenses (collectively, "Losses") occasioned by any
willful or negligent act or omission of the other Party, its directors,
officers, employees, agents or representatives ("Indemnifying Party"),
relating to the performance of its obligations hereunder. If any
Indemnified Party shall, without fault on its part, be made a party to
any litigation commenced by or against such Indemnified Party, then
Indemnifying Party shall protect and hold such Indemnified Party
harmless, and shall pay all costs, expenses, losses and reasonable
attorney's fees incurred or paid by such Indemnified Party in
connection with said litigation.
7.5 Quality of Service. CARRIER will make every reasonable effort to
provide continuous and uninterrupted service hereunder in accordance
with generally applicable industry standards. EXCEPT FOR ANY EXPRESS
WARRANTIES STATED IN THIS AGREEMENT, CARRIER DISCLAIMS ALL WARRANTIES,
INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS AND OF FITNESS FOR A PARTICULAR PURPOSE,
WHETHER SUCH WARRANTIES ARE MADE BEFORE OR AFTER THE EXECUTION HEREOF.
THE STATED WARRANTIES ARE IN LIEU OF ALL OBLIGATIONS OR LIABILITIES ON
THE PART OF THE CARRIER FOR DAMAGES INCLUDING, BUT NOT LIMITED TO
SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THE
<PAGE>
USE OR PERFORMANCE OF CARRIER'S SERVICES. IT IS EXPRESSLY UNDERSTOOD
THAT THE SOLE REMEDY OF RESELLER FOR BREACH OF THIS AGREEMENT BY
CARRIER OR FOR ANY DAMAGE TO RESELLER OR OTHER PERSON CLAIMED TO HAVE
RESULTED FROM RESELLER'S RESALE HEREUNDER OR FROM THE USE OF CARRIER'S
SERVICES IS CREDIT FOR NETWORK OUTAGES AS SET FORTH IN THE ASSOCIATED
PACENET SERVICES AGREEMENT.
7.6 Taxes. RESELLER shall be solely responsible to pay all applicable
local, state and federal taxes, including sales and uses taxes, excise,
access, bypass or other local, state and federal taxes or charges
imposed based upon the provision, sales or use of the Services provided
hereunder. RESELLER also shall pay any applicable gross receipts taxes
with regard to said Services, including surcharges. Such taxes will be
billed by CARRIER to RESELLER and will be separately stated on
RESELLER's invoice, provided, however, that CARRIER will not bill to
RESELLER such taxes as may be exempted by a tax exemption or resale
certificate for operations in any state for which RESELLER obtains such
a certificate.
ARTICLE VIII
CONFIDENTIALITY
8.1
ARTICLE IX
MISCELLANEOUS
9.1 Force Majeure. Neither Party shall be liable to the other Party for any
delay or failure to perform hereunder due to causes beyond the control
of said Party, including, but not limited to: acts of God; acts of the
public enemy; acts of the United States of America, or any state,
territory or political subdivision thereof or of the District of
Columbia; fires; floods; epidemics; quarantine restrictions; or strikes
or freight embargoes.
9.1.1 Notwithstanding the foregoing provisions, in every case the
delay or failure to perform must be beyond the control and
without the fault or negligence of the Party claiming
excusable delay.
9.1.2 Performance times under this Agreement shall be considered
extended for a period of time equivalent to the time lost
because of any delay or failure to perform which is excusable
hereunder; provided however, that is any such delay or failure
shall, in the aggregate, last for a period of more than thirty
(30) days, the Party not relying on the excusable delay or
failure, at it option, may terminate this
<PAGE>
Agreement.
9.2 Succession. This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective heirs, executors,
administrators, legal representatives, successors, and assigns,
provided, however, that RESELLER may not assign its rights, nor may it
delegate its duties hereunder, except with CARRIER's prior written
consent. Any such attempted transfer shall be void and shall constitute
a breach of this Agreement.
9.3 Notices. All notices pursuant to this Agreement shall be in writing and
shall be sent by overnight mail.
If to CARRIER, to:
PacNet, Inc.
Carrier Sales
1111 3rd Avenue
Suite 1600
Seattle, WA 98101
If to RESELLER, to:
Rocky Mountain Internet, Inc.
Chief Financial Officer
1099 Eighteenth Street
Suite 3000
Denver, CO 80202
9.4 Entire Agreement. This Agreement represents the entire agreement and
understanding between CARRIER and RESELLER as to the subject matter
hereof. No waiver, alteration, or modification of any of the provisions
of this Agreement shall be binding unless in writing and signed by duly
authorized representative of the Party against which enforcement of
such waiver, alteration or modification is sought.
9.5 Savings Clause. If any term, covenant or condition of circumstance
shall to any extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to
person or circumstances other than those as to which it is held invalid
or unenforceable, shall not be affected thereby and each term, covenant
or condition of the Agreement shall be valid and be enforced to the
fullest extent permitted by law. All obligations and duties which by
their nature extend beyond the expiration or termination of this
Agreement shall survive and remain in effect beyond any expiration or
termination.
9.6 Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of Washington.
9.7 Arbitration. Any dispute between CARRIER and RESELLER arising under
this Agreement shall be subject to arbitration in the City of Seattle,
State of Washington,
<PAGE>
pursuant to the rules then in effect of the American Arbitration
Association (or any other place or under any form of arbitration
mutually acceptable to the Parties). The decision rendered by the
arbitrator shall be final and conclusive upon the Parties and a
judgment thereon may be entered in the highest court of the forum
having jurisdiction of the matter.
9.8 Attorney Fees and Costs. In the event of any legal dispute between the
Parties relating to this Agreement, including arbitration provided for
in Section 9.7, the most prevailing party shall be entitled to all
costs and legal expenses, including, but not limited to reasonable,
ordinary and necessary attorney fees, accounting fees, court costs,
expert witness expenses and investigation expenses.
9.9 Regulatory Approval. This Agreement shall be subject to and governed by
any applicable state and federal regulatory agencies having
jurisdiction over the subject matter hereof. Should any approval or
authority be required for any acts, duties or obligations to be
performed hereunder, the Parties will cooperate in securing the same.
9.10 Authority to Contract. RESELLER warrants that it has full authority to
enter into this Agreement and that such action has been duly authorized
in accordance with RESELLER's articles of incorporation, bylaws or
other applicable organizational documents and procedures.
9.11 Captions. Captions contained herein are inserted only as a matter of
convenience and in no way define, limit or extend the scope or intent
of any provision hereof and have been duly authorized to do so in
accordance with RESELLER's corporate or other organizational documents
and procedures.
9.12 Independent Business Judgment. The Parties hereby acknowledge and agree
that RESELLER is an independent business sufficiently sophisticated to
exercise and exercising its own business judgment. The Parties hereby
further acknowledge and agree that CARRIER has made no recommendations
or representations regarding any aspect of RESELLER's business,
including, but not limited to, any representations with regard to
RESELLER's profits therefrom.
9.13 Waiver. Failure or delay on the part of either Party to exercise any
right, power or privilege hereunder shall not operate as a waiver of
any other obligation. Waiver by CARRIER or RESELLER of a breach of any
provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the other Party.
9.14 Counterparts. This Agreement may be executed in counterparts, each of
which shall, for all purposes, be deemed to be an original and all of
which together shall be deemed the same agreement.
9.15 Opportunity to Participate in Drafting. The Parties have been furnished
an equal opportunity to participate in the drafting of this Agreement
and any exhibits or schedules
<PAGE>
attached hereto. No ambiguity shall be construed against any Party
based upon a claim that that Party drafted the applicable language.
9.16 Authority to Execute. Each person executing this Agreement on behalf of
another person or organization represents and warrants to the other
Party that he or she is fully authorized to execute and deliver this
Agreement on behalf of such person or organization.
9.17 Non-Solicitations. During the term of this Agreement and for a period
of one (1) year thereafter, CARRIER agrees not to aggressively solicit
the customers of RESELLER, with any products or services that directly
compete with those the RESELLER is offering the customers.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized officers as of the day and year first above written.
CARRIER: PacNet, Inc. RESELLER: Rocky Mountain Internet, Inc.
By: By:
------------------------------ ---------------------------------
Name: Name:
---------------------------- -------------------------------
Title: Title:
--------------------------- -------------------------------
Date: Date:
---------------------------- -------------------------------
<PAGE>
Exhibit 10.16
Note: Certain material, indicated by three asterisks (***), has been omitted
from this document pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission. The omitted
material has been filed separately with the Securities and Exchange
Commission.
SOFTWARE LICENSE AND CONSULTING SERVICES AGREEMENT
This Software License and Consulting Services Agreement ("Agreement") is
between Novazen Inc. ("Novazen") and Rocky Mountain Internet ("Rocky Mountain
Internet"). The Terms of this Agreement shall apply to the Program License
granted to Rocky Mountain Internet and to all consulting services provided by
Novazen under this Agreement.
A. DEFINITIONS
A.1 "Program" means the software in object code form, capable of performing
the functions identified in Schedule A as defined at Major Milestone P,
and the media, and Documentation.
A.2 "Documentation" means the user guides and manuals for installation and
use of the Program. Documentation will be provided electronically, in
HTML or similar printable format.
A.3 "Maintenance Release" means a subsequent release of the Program, which
Novazen generally makes available for Program licensees at no
additional license fee other than media and handling charges. A
Maintenance Release shall not include any release, option or future
product that Novazen licenses separately.
A.4 "Designated System" means the Rocky Mountain Internet computer
hardware, software, Rocky Mountain Internet operating system, and Rocky
Mountain Internet customer platforms or functional equivalents
designated in Schedule E.
A.5 "Commencement Date" of the Program License means the earlier of the two
following dates:
(a) the date on which the final functional component is accepted
by Rocky Mountain Internet as set forth in Schedule B-1 (Major
Milestone P)
(b) 30 days after the final component is delivered to Rocky
Mountain Internet as set forth in Schedule B-1 (Major
Milestone M).
A.6 "Intellectual Property" refers to all Intellectual Property now or
later owned by Novazen, including patents, trade secrets, copyrights
and trademarks.
A.7 "Bug" means a Program software, media, or documentation error. Bugs can
be either "material" or "non-material." Material Bugs cause software
functions to not be performed as designed. Non-material Bugs are
cosmetic in nature and do not prevent software functions from
performing as desired.
A.8 "Invoiced Account" means an individual, business, association, company,
or organization that would receive a bill, regardless of media, from
the Program. This includes sub-accounts that may be established under a
single major account. For example, The Acme Company may choose to be
the major account while its East Coast, West Coast, and mid-west
offices are established as sub-accounts and invoiced seperately. For
the purposes of this definition, this arrangement equals three (3)
Invoiced Accounts.
<PAGE>
A.9 "Functional Upgrade" means a new release of the Program, as specified
in Schedule A, within 12 months from the commencement date.
B. THE SOFTWARE PROGRAM LICENSE
B.1 Rights Granted
(a) Novazen grants to Rocky Mountain Internet a non-exclusive,
perpetual license to use the Program specified under this
Agreement, as follows:
i. to use the Program solely for Rocky Mountain
Internet's operations on the Designated System
consistent with the use as defined in Schedule A
(limitations specified or referenced in this
Agreement, or the Documentation). Rocky Mountain
Internet has the right to use the license for the
fees paid for a maximum of *** Invoiced Accounts.
Additional Invoiced Accounts can only be added for an
additional license fee. Rocky Mountain Internet would
receive most favored customer pricing in establishing
this additional fee. Most favored customer pricing is
defined as the best price for a Novazen Program sold
within the prior six months, exclusive of this
Agreement. If no Novazen Programs have been sold
within that period, the fee will be established
according to the then outstanding Novazen price list.
The purpose of the Invoiced Account cap is to ensure
Novazen's economic rights should Rocky Mountain
Internet be acquired by a major company.
ii. Rocky Mountain Internet may not relicense, rent or
lease the Program or use the Program for third-party
training, commercial time-sharing or service bureau
use.
iii. Rocky Mountain Internet may only transfer the license
to an affiliate or wholly-owned or controlled
subsidiary or parent company by giving written notice
of such transfer to Novazen. The *** Invoiced Account
limit will also apply in the case of a transfer.
a. In the event the new organization (i.e., the
transferee) is an affiliate or wholly-owned or
controlled subsidiary, the new organization has
the right to use the license for the fees paid
for a maximum of 1,000,000 Invoiced Accounts.
Additional Invoice Accounts can only be added
for an additional license fee. The fee will be
established according to most favored customer
pricing. Most favored customer pricing is
defined as the best price for a Novazen Program
sold within the prior six months, exclusive of
this Agreement. If no Novazen Programs have
been sold within that period, the fee will be
established according to the then outstanding
Novazen price list.
b. In the event the new organization (i.e., the
transferee) is a parent company, the new
organization has the right to use the license
for the fees paid for a maximum of *** Invoiced
Accounts. Additional Invoiced Accounts can only
be added for an additional license fee.
2
<PAGE>
The fee will be established according to the
then outstanding Novazen price list.
iv. to use the Documentation provided with the Program in
support of Rocky Mountain Internet authorized use of
the Program;
v. to copy the Program only for archival or backup
purposes. All titles, trademarks, and copyright and
restricted rights notices shall be reproduced in such
copies;
vi. Rocky Mountain Internet shall not copy or use the
Program (including the documentation) except as
specified in this Agreement.
(b) Rocky Mountain Internet may not cause or permit the reverse
engineering, disassembly or decompilation of the Program.
(c) Novazen shall retain all title, copyright and other property
rights in the Program and its Intellectual Property. Except as
specified herein, Rocky Mountain Internet does not acquire any
rights, express or implied, in the Program or in the software
created pursuant to the Consulting Services Section of this
Agreement, or in the Intellectual Property.
(d) Novazen shall place a copy of the application source code with
the law firm of Lee, Fishman, and Issac in Boulder, Colorado
as escrow agent. The escrow agent shall hold the code for five
years. If, at any time in the five year period, Novazen
declares bankruptcy, or is involuntarily bankrupt, upon notice
from Rocky Mountain Internet, the escrow agent will transfer
the source code to Rocky Mountain Internet. Possession of the
source code does not give Rocky Mountain Internet any rights
superior to those included in this license.
(e) Rocky Mountain Internet may make non-compiled HTML changes to
the Program only as these changes relate to the "look and
feel" of the Program (i.e., cosmetic changes). Novazen neither
warrants nor indemnifies Rocky Mountain Internet against
infringement for any non-compiled HTML changes that Rocky
Mountain Internet makes.
(f) The fee for the purchase of the Program source code is set at
*** should Rocky Mountain Internet choose to purchase the
source code in the future. Rocky Mountain Internet is awarded
the right to purchase the Program source code at any time in
the future subject to the terms of this Agreement.
B.2 Verification.
At Novazen's written request, not more frequently than semi-annually,
Rocky Mountain Internet shall furnish Novazen with a signed certification
verifying that the Program is being used pursuant to the provisions of
this Agreement.
Novazen may audit Rocky Mountain Internet's use of the Program, not more
frequently than semi-annually. Any such audit shall be conducted, with
reasonable advance notice, during regular business hours at Rocky
Mountain Internet's facilities and shall not unreasonably interfere with
Rocky Mountain Internet's business activities.
3
<PAGE>
This audit will include examination of the online and hardcopy
statistical reports generated by the Program. Novazen agrees that any
additional audit information needed will be presented to Rocky Mountain
Internet in writing for their approval. Novazen shall be responsible for
all costs, both labor and expenses, incurred by Novazen employees in
conducting this audit.
INDEMNITY, WARRANTIES, REMEDIES
B.3 Infringement Indemnity.
Novazen will defend and indemnify Rocky Mountain Internet against a claim
that the Program, or any subsequent modification or Bug-fix performed by
Novazen, infringes a copyright or patent or other intellectual property
right, provided that: (a) Rocky Mountain Internet notifies Novazen in
writing within 30 days of the claim; (b) Novazen has sole control of the
defense and all related settlement negotiations; and (c) Rocky Mountain
Internet provides Novazen with the assistance, information and authority
necessary to perform Novazen obligations under this Section.
If the Program, or any subsequent modification or Bug-fix performed by
Novazen, is held or is believed by Novazen to infringe, Novazen shall
have the option, at its expense, to (a) modify the Program to be
noninfringing; or (b) obtain for Rocky Mountain Internet a license to
continue using the Program, or if options (a) and (b) are not reasonably
available, then (c) Novazen may terminate the license for the infringing
Program and refund the license fees paid for the Program pursuant to
Schedule C. This Section B.3 states Novazen's entire liability and Rocky
Mountain Internet's exclusive remedy for infringement.
B.4 Warranties and Disclaimers
(a) Program Warranty: Novazen warrants for a period of 1 year from
the Commencement Date that the Program will perform the
functions described in Schedule A, subject to B.4(c).
(b) Media Warranty: Novazen warrants that the delivered tapes,
diskettes or other media will be free of defects in materials
and workmanship under normal use for 90 days from the
Commencement Date.
(c) Disclaimers
i. THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
ii. The Program, as warranted under this Agreement, is
both Year 2000 and leap year compliant.
iii. Novazen does not warrant that the Program will
operate other than as specified in the Schedules
hereto or that the operation of the Program will be
4
<PAGE>
uninterrupted or error-free or that the Program will
run, in combination with other programs or inputs
free from problems caused by the year 2000 event.
iv. Rocky Mountain Internet acknowledges that Novazen is
installing the software for the first time in the
Rocky Mountain Internet operations center or in the
Rocky Mountain Internet contracted service bureau
operations center and that Bugs (as defined in A.7)
are common in complex, commercial software.
B.5 Exclusive remedies for any breach of the warranties contained in
Section B.4, above, Rocky Mountain Internet's exclusive remedy, and
Novazen's entire liability, shall be:
(a) For the Software Program
The correction of Program errors that cause breach of the
Program warranty in B.4(a), or if Novazen is unable to make
the Program operate as warranted in B.4(a), Rocky Mountain
Internet shall be entitled to terminate the Program license
and recover the fees paid to Novazen for the Program license,
which are more fully described in Schedule C. Rocky Mountain
Internet acknowledges that all software has Bugs and Novazen
is not required to correct non-material Bugs in the Program.
The determination of whether a Bug exists, whether that Bug is
material or non-material, and the severity of the Bug will be
determined by the Change Management process as set forth in
memorandum NO-0009_v1_MEM.
If Rocky Mountain Internet is entitled to terminate and does
terminate the Program license within 30 days after the
Commencement Date, Rocky Mountain Internet is entitled to a
refund of all software license fees as well as consulting fees
associated with the customization of software for Rocky
Mountain Internet, subject to the terms of Schedule C.
(b) For Media
The replacement of defective media returned within 90 days of
the Commencement Date.
B.6 Limitation of Liability for Any Breach of the License Section of this
Agreement
In no event shall Novazen be liable for any indirect, incidental,
special or consequential damages, or Rocky Mountain Internet's expenses
incurred in installing or operating the Program, damages for Rocky
Mountain Internet's loss of business profits, lost revenue, lost
customers, lost data or lost uses, incurred by Rocky Mountain Internet
or any third party, whether in an action in contract or tort, even if
Novazen has been advised of the possibility of such damages.
Novazen's liability for damages hereunder shall in no event exceed the
amount of fees paid by Rocky Mountain Internet under this Agreement,
with refunds only as set forth in B.5(a) above.
5
<PAGE>
B.7 The provisions of this Agreement totally allocate the risks between
Novazen and Rocky Mountain Internet. Novazen pricing reflects this
allocation of risk and the limitation of liability specified herein.
C. CONSULTING SERVICES.
C.1 Novazen will provide to Rocky Mountain Internet the Consulting Services
specified in Schedules B and B-1.
C.2 The consulting services shall be performed over the period of time
specified in Schedule B and B-1. Novazen will provide formal, written
notification when each milestone is complete. Each milestone will be
deemed to be complete when Rocky Mountain Internet provides a signed
Agreement that it has been properly satisfied.
C.3 Intellectual Property Created by Consulting Services. Novazen does not
grant Rocky Mountain Internet any ownership, security or other interest
in any of the Intellectual Property created by Novazen's consulting
engineers, nor does Novazen grant Rocky Mountain Internet any right to
grant a sublicense of any kind to any other party. Rocky Mountain
Internet will have full intellectual property rights to any ideas,
concepts, or software created principally by Rocky Mountain Internet
personnel in connection with their work on non-Program software and
independent of the Consulting Services identified in this Agreement
C.4 Novazen will own all patents, trade secrets, copyrights and trademarks
and other Intellectual Property created by Novazen's consulting
engineers alone or jointly with Rocky Mountain Internet personnel in
connection with Novazen's work in performing its consulting services
with respect to the Program. Rocky Mountain Internet will own all
patents, trade secrets, copyrights, and trademarks and other
intellectual property created principally by Rocky Mountain Internet
personnel in connection with their work on non-Program software and
independent of the Consulting Services identified in this Agreement.
C.5 Rocky Mountain Internet assigns to Novazen all right, title, and
interest in and to all patents, trade secrets, copyrights and
trademarks and other intellectual property created by Rocky Mountain
Internet in connection with Novazen in its work performing its
consulting services with respect to the Program. Rocky Mountain
Internet will have full intellectual property rights to any ideas,
concepts, or software that they introduce, independent of the
Consulting Services identified in this Agreement, for the purpose of
implementing the non-Program software at Rocky Mountain Internet.
C.6 At the other party's request, each party will execute all assignments
and other documents necessary to perfect each party's rights in its
intellectual property, and will otherwise assist Novazen as needed in
perfecting the other party's right in this intellectual property.
C.7 Target Dates. Novazen has set forth a description of Consulting
Services and a "Milestone Chart" in Schedules B and B-1. The "target
dates" in the Milestone Chart are targets only. Should Novazen fail to
complete the services or goals set forth in the
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<PAGE>
Milestone Chart by the target date, that failure shall not constitute a
breach of this Agreement.
C.8 Rocky Mountain Internet reserves the right to terminate this Agreement
prior to the conclusion of the Requirements Definition approval phase
(Major Milestone E) should Rocky Mountain Internet conclude that the
requirements as defined by Novazen do not meet their business needs. In
case of such termination, Rocky Mountain Internet is entitled to a
refund of all software license fees as well as consulting fees
associated with the customization of the Program for Rocky Mountain
Internet, subject to the terms in Schedule C. Furthermore, Rocky
Mountain Internet shall own all requirements documentation received to
date.
Novazen and Rocky Mountain Internet agree to make all reasonable
efforts to ensure that all Requirements Definition documents leading to
the fulfillment of Major Milestone E are delivered according to
Schedule B-1.
C.9 Final Delivery Date. Novazen agrees to deliver all functional
components to Rocky Mountain Internet, as per Schedules A, B, and B-1,
no later than April 30, 1999. In the event that Novazen fails to
deliver the final functional component by April 30, 1999,and Novazen is
principally responsible for such delays, Rocky Mountain Internet shall
have the right to terminate this Agreement and therefore is entitled to
a refund of all software license fees as well as consulting fees
associated with the customization of the Program for Rocky Mountain
Internet, subject to the terms in Schedule C. This final delivery date
may be adjusted as specified in section C.10.
C.10 Cooperation. If events that Novazen is not responsible for causes
Novazen delays that cause Novazen to miss a milestone, the dates in the
Milestone Chart (Schedule B-1) shall be adjusted to reflect those
delays. In the event that Novazen is not responsible for delays to the
project that cause Novazen to miss a milestone, Novazen must provide
written notice immediately (within 3 business days) after missing the
milestone. The parties shall meet and discuss the alleged deficiencies
within 2 days of the receipt of notice. If the parties are thereafter
unable to agree whether Rocky Mountain Internet has missed a milestone,
Rocky Mountain Internet has the option of seeking arbitration on any
disputed delay and to continue work under this Agreement until a
decision is reached by the Arbitrator. As described in C.2, Novazen
shall notify Rocky Mountain Internet in writing when each milestone is
completed. All Rocky Mountain Internet challenges or complaints that
Novazen has not met milestone targets must be provided to Novazen in
writing and reviewed and discussed by both parties: for Novazen,
Director of Consulting Services; for Rocky Mountain Internet, Vice
President of Operations. Rocky Mountain Internet must provide such
written notice immediately (within 3 business days) after learning of
the event (an event is defined as the missing of a milestone as
specified on Schedule B-1). The parties shall meet and discuss the
alleged deficiencies within 2 business days of the receipt of notice.
If the parties are thereafter unable to agree whether Novazen has
missed a milestone, or whether Rocky Mountain Internet is entitled to
terminate this agreement, Novazen shall have the option to seek
arbitration and to continue work under this Agreement until a decision
is reached by the Arbitrator.
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<PAGE>
C.11 After Rocky Mountain Internet accepts delivery and acknowledges
completion of the tasks in the Milestone Chart by signing off on each
notice that the milestone in Schedule B-1 has been met, Rocky Mountain
Internet's sole remedy for Novazen's failure to meet any of the
requirements of Schedule B-1 for a period of 1 year will be correction
by Novazen of defects in the work performed under this Consulting
Services section of the Agreement. Such defects in the Consulting
Services work must be identified in writing by Rocky Mountain Internet.
During that first year, Novazen will correct material defects (which
are not cosmetic changes) as part of the original price. Rocky Mountain
Internet again acknowledges that all software has Bugs and Novazen is
not required to correct non-material Bugs in the software created
pursuant to the consulting services. After 1 year, Rocky Mountain
Internet must pay the agreed upon maintenance fees for any requested
changes or remediation to correct defects created in the performance of
consulting services.
C.12 NO CONSEQUENTIAL DAMAGES: In no event will Novazen be liable for
damages of any kind arising out of its work under this Consulting
Services section of the Agreement in whole or in part, including (a)
indirect, incidental, special or consequential damages, or (b) Rocky
Mountain Internet's expenses incurred in installing or operating the
software created pursuant to the consulting services, (c) damages for
loss of business profits, lost revenues, costs of employees engaged in
the project or (d) costs otherwise incurred, business interruption,
loss of business information, Rocky Mountain Internet's loss of
customers, or (e) other pecuniary loss incurred by Rocky Mountain
Internet or any third party whether the claim is brought in an action
for contract or tort, even if Novazen has been advised of the
possibility of those damages.
C.13 The provisions of this Agreement totally allocate the risks between
Novazen and Rocky Mountain Internet. Novazen pricing reflects this
allocation of risk and the limitation of liability specified herein.
C.14 Warranties. Novazen disclaims all warranties expressed or implied with
respect to its work under this Consulting Services section of this
Agreement in whole or in part; this disclaimer includes but is not
limited to implied warranties of title, non-infringement,
merchantability, and fitness for any purpose, whether arising by law,
by reason of custom or usage in the trade, or by course of dealing.
C.15 Novazen indemnifies and holds Rocky Mountain Internet harmless from and
against all liability, costs, and expenses for bodily injury, including
death, and property damage resulting from the wrongful or negligent
acts of Novazen employees while present on the RMI site. All Novazen
employees shall follow the rules and regulations established by RMI
while present at RMI facilities.
C.16 Termination. This Consulting Services section of the Agreement will
terminate immediately if Rocky Mountain Internet becomes insolvent,
admits to a general inability to pay its debts, files a petition in
bankruptcy, or is the subject of an involuntary petition in bankruptcy
that is not dismissed within 30 days after its effective filing date.
8
<PAGE>
D. PAYMENT PROVISIONS FOR THE SOFTWARE LICENSE AND CONSULTING SERVICES.
D.1 Payment. For the Program license and for the Consulting Services
provided under this Software License and Consulting Services Agreement,
Rocky Mountain Internet will pay Novazen in accordance with the terms
and conditions contained in Schedule C hereof. Any amounts payable by
Rocky Mountain Internet hereunder which remain unpaid *** days after
the invoice date shall be subject to a late charge equal to *** per
month from the invoice date until such amount is paid.
D.2 Payment for Consulting Services, as set forth in Schedule C, does not
include any expenses incurred by Novazen consulting engineers during
the performance of consulting services, including, but not limited to,
travel, lodging, and meals. These expenses will be billed separately.
D.3 Taxes. The fees listed in this Agreement do not include taxes; if
Novazen is required to pay sales, use, property, value-added or other
taxes based on the licenses or services granted in this Agreement or on
Rocky Mountain Internet's use of Program or services, then such taxes
shall be billed to Rocky Mountain Internet and paid by Novazen. Rocky
Mountain Internet shall pay any taxes due in cash. This Section shall
not apply to taxes based on Novazen income. As per this Agreement,
Rocky Mountain Internet reserves the right to dispute any levied taxes
provided that Novazen's tax status or credit rating is not affected
Rocky Mountain Internet will pay Novazen for all taxes levied while it
dispute such taxes. All expenses incurred in such a dispute are the
sole responsibility of Rocky Mountain Internet.
E. GENERAL TERMS.
E.1 Nondisclosure. By virtue of their activities under this Agreement, each
party may have access to confidential information of the other
("Confidential Information"). Confidential Information shall be limited
to the Program including the Documentation, the results of any
benchmark tests of the Program, the terms and pricing under this
Agreement, and all information clearly identified as confidential.
A party's Confidential Information shall not include information that:
(a) is or becomes a part of the public domain through no act or
omission of the other party; (b) was in the other party's lawful
possession prior to the disclosure and had not been obtained by the
other party either directly or indirectly from the disclosing party;
(c) is lawfully disclosed to the other party by a third party without
restriction on disclosure or (d) is independently developed by the
other party.
The parties agree to hold each other's Confidential Information in
confidence during the term of this Agreement and for a period of two
years after termination of this Agreement. The parties agree, unless
required by law, not to make each other's Confidential Information
available in any form to any third party for any purpose other than the
implementation of this Agreement. Each party agrees to take all
9
<PAGE>
reasonable steps to ensure that Confidential Information is not
disclosed or distributed by its employees or agents in violation of the
terms of this Agreement.
E.2 Severability. If any provision of this Agreement is held to be invalid
or unenforceable, the remaining provisions of this Agreement will
remain in full force.
E.3 Waiver. The waiver by either party of any default or breach of this
Agreement shall not constitute a waiver of any other or subsequent
default or breach. Except for actions for nonpayment or infringement of
Novazen's Intellectual Property, no action, regardless of form, arising
out of this Agreement may be brought by either party more than one year
after the cause of action has occurred.
E.4 Export Administration. Rocky Mountain Internet agrees to comply fully
with all relevant export taxes and regulations of the United States
("Export Laws").
E.5 Entire Agreement. This Agreement constitutes the complete Agreement
between the parties and supersedes all prior contemporaneous Agreements
or representations, written or oral, concerning the subject matter of
this Agreement. This Agreement may not be modified or amended except in
a writing signed by a duly authorized representative of each party; no
other act, document, usage or custom shall be deemed to amend or modify
this Agreement. All material changes to Schedules A, B, B-1, and C of
this Agreement shall be made in accordance with the Change Management
process memo NO_0009_v1_MEM.
It is expressly agreed that the terms of this Agreement shall supersede
the terms in any documents previously presented to Rocky Mountain
Internet or in written or oral presentations made by Novazen to Rocky
Mountain Internet.
Rocky Mountain Internet acknowledges and agrees it has not, in
executing this Agreement, relied upon any Novazen oral or documentary
representations other than those contained in this Agreement. E.6
Notice. Written notice under this Agreement shall be sent to a party by
overnight courier (signature for receipt required) or certified mail at
the applicable address specified below.
Novazen's designated address and telephone numbers are as follows:
Until September 30, 1998
Novazen, Inc.
1800 38th Street, Suite 200
Boulder, Colorado 80301
Tel: (303) 583-3100
Fax: (303) 939-8742
ATTN: Vincent T. Jordan
After September 30, 1998
10
<PAGE>
Novazen, Inc.
6328 Monarch Park Place
Niwot, Colorado 80501
E.7 Rocky Mountain Internet's designated address and telephone numbers are
as follows:
Until notification by Rocky Mountain Internet of name change
Rocky Mountain Internet
ATTN: VP of Operations
1099 18th Street
30th Floor
Denver, Colorado 80202
After notification by Rocky Mountain Internet of name change
Internet Communications Company
ATTN: VP of Operations
1099 18th Street
30th Floor
Denver, Colorado 80202
E.8 Any written notice will be deemed effective on the date actually
received.
E.9 The Consulting Services section of the Agreement does not create any
relationship of employment, partnership, or joint venture between the
parties.
E.10 Neither party will make any use of any of the other's trademarks,
service marks, trade names, or trade dress without written consent.
E.11 The failure of a party to require performance by the other party of any
provision of this Agreement will not diminish the right of that party
later to require performance of that provision.
E.12 Arbitration.
(a) Any and all disputes arising out of or in connection with this
Agreement shall be referred to and finally resolved by
arbitration under the Rules of the American Arbitration
Association. There shall be one arbitrator. The law governing
this Agreement is the law of Colorado, excluding its conflict
of laws. The venue of the arbitration shall be Denver,
Colorado. The arbitrator shall not have the authority or power
to impose punitive damages.
(b) In the event that both parties enter into separate contracts
with CyberCash Inc, if any claims arise under or in connection
with this Agreement and either party to this Agreement raises
a claim or defense involving CyberCash, then each party hereto
consents to arbitrate any such related claim or defense with
CyberCash.
11
<PAGE>
It is the intention of both parties to hereby consent to third
party arbitration with CyberCash. Both parties also consent
to:
i. allowing the sole arbitrator appointed in the venue
where the original demand is filed by any one of the
three parties (Novazen, Rocky Mountain Internet and
CyberCash) to determine whether a claims is related,
and
ii. to determine any and all issues relating to venue.
The arbitrator shall not have the authority or power
to impose punitive damages.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in duplicate copies by their authorized representatives on the dates
specified below:
Novazen, Inc. Rocky Mountain Internet
By: By:
--------------------------- ------------------------------
Title: Title:
------------------------ ---------------------------
Date: Date:
------------------------- ----------------------------
13
<PAGE>
Exhibit 10.17
PROMISSORY NOTE
$800,000.00 October 20, 1998
Denver, Colorado
FOR VALUE RECEIVED, the undersigned (the "Maker") hereby promises to pay to
the order of Douglas H. Hanson (referred to, together with any subsequent holder
of this note, as "Holder"), at 1099 18th Street, Suite 3000, Denver, Colorado
80202 or at such other address as may be specified by Holder, the principal sum
of EIGHT HUNDRED THOUSAND DOLLARS ($800,000.00), together with simple interest
at the rate of 11% per annum. The principal balance of this promissory note (the
"Note") and all accrued and unpaid interest thereon shall be due and payable in
full ninety (90) days from the date of this Note.
This Note may be prepaid in whole or in part, at any time and from time to
time, without notice, fee or premium. All payments on this Note shall be applied
first to the payment of any costs, fees, late charges or other charges incurred
in connection with the indebtedness evidence hereby, next to the payment of
accrued interest and then to the reduction of the principal balance.
Make and all parties now or hereafter liable for payment of this Note,
primarily or secondarily, directly or indirectly, and whether as endorser,
guarantor, surety or otherwise, hereby severally (a) waive presentment, demand,
protect, notice of protest, notice of dishonor and all other notices and demands
whatever, (b) agree that Holder's consent to extensions of time for payment, and
acceptance of late or partial payments before, at or after maturity will not
constitute a waiver of any of Holder's rights to enforce timely payment of this
Note, (c) agree that Holder's acceptance of one or more partial payments after
acceleration of the maturity of this Note will not constitute a waiver of such
acceleration, regardless of any contrary notice or statement of condition which
may accompany any such partial payment, and (d) agree to pay all costs and
expenses, including, without limitation, reasonable attorneys' fees, which may
be incurred by Holder in collecting this Note.
The provisions of this Note and of all agreements now or hereafter existing
between Marker and Holder are hereby expressly limited so that in no contingency
or event whatsoever whether by acceleration of the maturity of this Note or
otherwise, shall the amount paid or agreed to be paid to Holder for the use,
forbearance or detention of the sums evidenced by this Note exceed the maximum
amount permissible under Colorado law. If, from any circumstances whatsoever,
the performance or fulfillment of any provision of this Note, or of any other
agreement between Maker and Holder, at the time performance of such provision
shall be due, shall exceed the limit of validity prescribed by law, then ipso
facto, the obligation to be performed or fulfilled shall be reduced to the limit
of such validity, and, if from any such circumstance Holder shall ever receive
anything of value which is deemed to be interest by Colorado law which would
exceed the highest lawful rate, an amount equal to any excessive interest shall
be applied to the reduction of principal amount of this Note or on account of
any other principal indebtedness of Maker to Holder and to the payment of
interest thereon or, if such
<PAGE>
excessive interest exceeds the unpaid balance of principal of this Note and such
other indebtedness, such excess shall be refunded to Maker.
This Note shall be binding upon Maker and its successors and assigns and
shall inure to the benefit of Holder and its successors and assigns. Wherever
possible, each provision of this Note shall be interpreted so as to be effective
and valid under applicable law. If any provision of this Note is, for any reason
and to any extent, invalid or unenforceable, then neither the remainder of this
Note, nor any other document referred to in this Note, nor the application of
the provision to other persons or in other circumstances, shall be affected by
such invalidity of unenforceability.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF COLORADO. MAKER HEREBY CONSENTS TO THE EXERCISE OF JURISDICTION
OVER IT BY ANY FEDERAL COURT SITTING IN COLORADO OR ANY COLORADO DISTRICT COURT
SELECTED BY HOLDER, FOR THE PURPOSES OF ANY AND ALL LEGAL PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS NOTE. MAKER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOR OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT, ANY CLAIM BASED ON
THE CONSOLIDATION OF PROCEEDINGS IN SUCH COURTS IN WHICH PROPER VENUE MAY LIE IN
DIVERGENT JURISDICTIONS, AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
MAKER:
ATTEST: ROCKY MOUNTAIN INTERNET, INC.
By: /s/Raymond Peterson By:/s/ Peter J. Kushar
-------------------------- -----------------------------
Peter J. Kushar,
Chief Financial Officer
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this registration statement of Rocky Mountain
Internet, Inc. on Amendment No. 3 to Form S-1 of our report dated February 27,
1998, with respect to the balance sheets of Rocky Mountain Internet, Inc. as of
December 31, 1997 and 1996, and the related statements of income, stockholders'
equity (deficit), and cash flows for the years then ended. We also consent to
the reference to us under the heading "Experts" in such registration statement.
BAIRD, KURTZ & DOBSON
Denver, Colorado
November 4, 1998
<PAGE>
Exhibit 23.2
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form S-1 of our report dated February 23, 1996 relating to the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows of Rocky Mountain Internet, Inc. for the year ended December 31, 1995.
We also consent to the reference to our firm under the captions "Experts", and
"Summary Historical Financial Data" in such Registration Statement.
/s/ McGLADREY & PULLEN, LLP
Charlotte, North Carolina
November 4, 1998
<PAGE>
Exhibit 23.5
The Board of Directors
Application Methods, Inc. and
e-SELL Commerce Systems, Inc.:
We consent to the inclusion in the registration statement (No. 333-52731) on
Form S-1, amendment No. 3, of Rocky Mountain Internet, Inc. of our report dated
May 14, 1998 with respect to the combined balance sheet of Application Methods,
Inc. and e-SELL Commerce Systems, Inc. as of December 31, 1997, and the related
combined statements of operations and retained earnings, and combined cash flows
for the year then ended.
We also consent to the inclusion in the registration statement (No. 333-52731)
on Form S-1, amendment No. 3, of Rocky Mountain Internet, Inc. of our report
dated June 5, 1998 with respect to the balance sheet of Application Methods,
Inc. as of December 31, 1996, and the related statements of operations and
retained earnings, and cash flows for the year then ended.
In addition, we consent to the reference to our firm under the heading "Experts"
in the registration statement.
PETERSON SULLIVAN PLLC
Seattle, Washington
November 4, 1998
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Rocky Mountain Internet, Inc.
Denver, Colorado
As independent certified public accountants for DataXchange Network, Inc., we
hereby consent to the use in this Form S-1 Registration Statement for
DataXchange Network, Inc. of our report included herein, which has a date of
September 30, 1998, relating to the balance sheets of DataXchange Network,
Inc. as of July 31, 1996 and 1997 and the related statements of operations,
cash flows, and stockholders' equity for each of the three years in the
period ended July 31, 1998 and to the reference to our firm under the caption
"Experts" in the Prospectus.
/s/ Aidman, Piser & Company, P.A.
---------------------------------
Aidman, Piser & Company, P.A.
Tampa, Florida
November 4, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET DATED JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 FOR ROCKY MOUNTAIN INTERNET, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 761,965
<SECURITIES> 0
<RECEIVABLES> 856,987
<ALLOWANCES> 221,962
<INVENTORY> 61,384
<CURRENT-ASSETS> 1,570,560
<PP&E> 4,161,174
<DEPRECIATION> 1,548,923
<TOTAL-ASSETS> 6,243,508
<CURRENT-LIABILITIES> 3,136,843
<BONDS> 0
0
0
<COMMON> 7,582
<OTHER-SE> 2,554,393
<TOTAL-LIABILITY-AND-EQUITY> 6,243,508
<SALES> 192,941
<TOTAL-REVENUES> 3,941,044
<CGS> 150,350
<TOTAL-COSTS> 1,384,015
<OTHER-EXPENSES> 4,475,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,729
<INCOME-PRETAX> (2,033,395)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,033,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,033,395)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
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