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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-12063
ROCKY MOUNTAIN INTERNET, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1322326
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 EIGHTEENTH STREET, SUITE 2201
DENVER, COLORADO 80202
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(Address of principal executive offices) (Zip Code)
(303) 672-0700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding as of May 7, 1998
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Common Stock, $0.001 par value 10,216,622
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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the information incorporated
by reference may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. In
particular, your attention is directed to Part I, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation and
Part II, Item 1. Legal Proceedings. We intend the disclosure in these
sections and throughout the Quarterly Report on Form 10-Q to be covered by
the safe harbor provisions for forward-looking statements. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are
forward-looking statements. These statements can sometimes be identified by
our use of forward-looking words such as "may," "believe," "plan," "will,"
"anticipate," "estimate," "expect," "intend" and other phrases of similar
meaning. Known and unknown risks, uncertainties and other factors could cause
the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and
was derived using numerous assumptions.
Although we believe that the expectations expressed in these
forward-looking statements are reasonable, our expectations may not turn out
to be correct. Actual results could be materially different from our
expectations, including the following:
- we may lose subscribers or fail to grow our subscriber base;
- we may not successfully integrate new subscribers or assets
obtained through acquisitions;
- we may fail to compete with existing and new competitors;
- we may not be able to sustain our current growth;
- we may not adequately respond to technological developments
impacting the Internet;
- we may fail to identify and correct a significant Year 2000
compliance problem and experience a major system failure;
- we may fail to settle outstanding litigation; and
- we may not be able to find needed financing.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors
are not intended to represent a complete list of all risks and uncertainties
inherent in our business, and should be read in conjunction with the more
detailed cautionary statements included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 under the caption "Item 1. Business
- -- Risk Factors" and in our other SEC filings and our press releases.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCKY MOUNTAIN INTERNET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 1
Condensed Consolidated Statements of Operations for the Quarters
ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the Quarters
ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
</TABLE>
ii
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ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1999 December 31, 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,039,152 $ 5,729,346
Trade receivables, net of allowance for doubtful
Accounts 2,318,173 1,598,479
Inventories 146,901 56,440
Other 630,860 224,629
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Total Current Assets 7,135,086 7,608,894
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PROPERTY AND EQUIPMENT, NET 6,111,721 3,540,400
GOODWILL, NET 16,789,835 13,101,814
Other 488,955 430,693
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Total assets $ 30,525,597 $ 24,681,801
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,198,198 $ 2,280,101
Current maturities of long-term debt and capital
lease obligations 1,543,454 915,211
Deferred revenue 776,766 513,167
Accrued payroll and related taxes 374,708 302,660
Accrued expenses 1,588,631 1,611,242
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Total Current Liabilities 8,481,757 5,622,381
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 2,818,050 493,963
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Total liabilities 11,299,807 6,116,344
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REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
Series B, $.001 par value; 9,600 shares authorized, 8,000 shares
issued and outstanding (liquidation preference of $8,000,000), net 6,747,843 6,747,843
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 25,000,000 shares
authorized, 9,667,696 and 9,446,271 issued,
respectively, 9,593,494 and 9,384,677 outstanding, respectively 9,999 9,384
Additional paid-in capital 33,204,319 29,257,415
Accumulated deficit (20,736,371) (17,449,185)
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12,477,947 11,817,614
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$ 30,525,597 $ 24,681,801
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</TABLE>
See Notes to Consolidated Financial Statements
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ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
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<S> <C> <C>
REVENUE
Communication Services $ 4,407,010 $ 1,464,944
Web Solutions 855,990 314,341
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5,263,000 1,779,285
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Cost of revenue earned
Communication Services 2,547,887 504,662
Web Solutions 6,059 147,424
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2,553,946 652,086
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GROSS PROFIT 2,709,054 1,127,199
General, Selling, and Administrative Expenses 4,690,200 2,139,371
Depreciation and Amortization 1,143,103 239,972
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OPERATING LOSS (3,124,249) (1,252,144)
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Other income (expense)
Interest expense (85,439) (80,826)
Interest income 22,500 18,620
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NET LOSS (3,187,188) (1,314,350)
PREFERRED STOCK DIVIDENDS 99,000 -
Net loss applicable to common
Stockholders $(3,286,188) $(1,314,350)
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Basic and diluted loss per common share $ (0.33) $ (0.19)
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Weighted average common shares outstanding 9,606,622 6,783,593
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</TABLE>
See Notes to Consolidated Financial Statements
2
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ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
(Unaudited)
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,187,188) $(1,314,350)
Items not requiring cash:
Depreciation 172,748 184,893
Amortization 970,355 55,079
Loss on disposal of fixed assets - -
Issuance of warrants for services related to unsuccessful merger - -
Stock option compensation - 383,077
Stock contribution to pension plan 26,398 17,664
Changes in operating assets and liabilities net of effects from acquired
interests:
Trade receivables 173,081 55,281
Inventories (49,208) (20,074)
Other current assets (207,148) (41,964)
Accounts payable 1,598,183 707,007
Deferred revenue 112,706 (5,708)
Accrued payroll and related taxes 55,265 10,593
Accrued expenses (177,416) (138,097)
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Net cash used in operating activities (512,287) (106,599)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,232,368) (129,268)
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Proceeds from investments - (3,000)
Purchase of interests, net of cash acquired - -
Increase in deferred acquisition costs 11,950 -
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Net cash used in
investing activities (1,220,418) (132,268)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and warrants 528,313 511,115
Purchase of treasury stock - (18,000)
Payments on long-term debt and capital
lease obligations (364,486) (155,017)
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Net cash provided by financing activities 42,511 338,098
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,690,194) 99,231
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,729,346 1,053,189
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CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,039,152 $ 1,152,420
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</TABLE>
See Notes to Consolidated Financial Statements
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The interim financial data are unaudited; however, in the opinion of
management, the interim data include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures included herein are adequate to make the information
presented not misleading.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 NET LOSS PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share."
SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings
per share. Basic loss per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss per share
reflects the potential dilution of securities that could share in the
earnings of an entity. As all of the Company's stock options and warrants are
antidilutive, basic and diluted loss per share is the same for all periods
presented herein.
NOTE 3 COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components in the financial
statements. The Company does not report any items, which would qualify for
disclosure under this statement.
NOTE 4 ACQUISITIONS
On February 2, 1999, the Company acquired all of the outstanding common stock
of the August 5th Corporation, d/b/a Dave's World, an Illinois corporation
headquartered in Bloomington, Illinois ("Dave's World"), pursuant to which
Dave's World merged with and into the Company. Pursuant to the terms of the
Merger Agreement, the Company provided the shareholders of Dave's World, in
the aggregate, approximately $3,000,000,payable in 214,286 shares of Common
Stock of the Company.
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On February 5, 1999, the Company acquired substantially all of the assets of
ImageWare Technologies, L.L.C., an Alabama limited liability company
("ImageWare"), and Communication Network Services, L.L.C., an Alabama limited
liability company ("CNS"), pursuant to the terms of an Asset Purchase
Agreement. Imageware and CNS were interrelated telecommunications services
companies, which provided long-distance and local telecommunications services
as well as telemarketing services. The Company purchased the assets of the
two related companies for approximately $565,000, payable in the form of
approximately 43,000 shares of restricted Common Stock of the Company, and
assumed certain liabilities of the related companies.
Substantially all the purchase prices of the acquisitions was recorded as
goodwill.
NOTE 5 SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company
by reviewing operating results comprising two segments of the business. As
such, the Company considers each division to be an operating segment. In
making operating decisions and allocating resources, the Company's management
specifically focuses on the revenues and operating costs generated by each
operating segment, as summarized in the following tables. Certain shared
costs of the segments have been allocated to each segment based upon its
share of the consolidated revenues for the period reported.
<TABLE>
<CAPTION>
Three Months Ended
March 31
(Unaudited)
1999 1998
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<S> <C> <C>
NET SALES
Communication Services $ 4,407,010 $ 1,464,944
Web Solutions 855,990 314,341
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Total Net Sales 5,263,000 1,779,285
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COST OF GOODS SOLD
Communication Services 2,547,887 504,662
Web Solutions 6,059 147,424
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Total COGS 2,553,946 652,086
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SG&A
Communication Services 3,448,209 1,760,702
Web Solutions 1,291,991 378,669
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Total SG&A 4,690,200 2,139,371
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Operating Income (Loss) Before
Depreciation and Amortization
Communication Services (1,589,086) (800,420)
Web Solutions (442,060) (211,752)
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Total Operating Income (Loss) (2,031,146) (1,012,172)
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</TABLE>
5
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NOTE 6 SUBSEQUENT EVENTS
On May 6, 1999 the Company exercised its option to call warrants that were
issued in its 1996 public offering (the "IPO Warrants"). The Company
anticipates that the call notice will result in: 1) the exercise of
substantially all remaining IPO Warrants within 30 days and 2) the issuance
of up to 1,479,000 shares of the Company's common stock for net proceeds of
up to $4,314,000.
On April 26, 1999, the Company announced that it will officially change the
name of the Company from Rocky Mountain Internet, Inc. to "RMI.NET," subject
to stockholder approval at the 1999 Annual Meeting of Stockholders.
NOTE 7 COMMITMENTS AND CONTINGENCIES
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 had 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 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 it's defense or
counterclaims.
On November 30, 1998, the Company filed an Answer to the ICC Complaint
denying their material allegations, asserting a number of affirmative
defenses, and disputing their right to any recovery from the Company on any
of the claims asserted. In addition, the Company filed a counterclaim against
ICC seeking over $175 million in damages for injuries suffered by the Company
as a result of ICC's wrongful acts that led to the failure of the proposed
high yield debt offering in 1998 and the failure of the proposed merger
agreement with ICC.
On February 24, 1999, the Denver District Court granted the motion filed by
the company, and disqualified the law firm of Holme Roberts & Owen, LLP (HRO)
from continuing to act as litigation counsel for ICC in the lawsuit. The
Court agreed with the Company that because HRO had acted as transaction
counsel for ICC in the high yield debt offering and the proposed merger, and
therefore was a potential material witness and material actor in the
underlying activities, it would be inappropriate for HRO to seek to act as
trial counsel in the same proceeding where it might be required to serve as a
witness or potentially be drawn into the proceedings in some other way.
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. As a result of the termination and
the related financing transactions, which were not completed, the Company
incurred cost, expenses and related fees between $6.1 million, a portion of
which are in dispute. Of this amount, approximately $4.2 million relates to a
non-cash item related to warrants issued by the Company. Of the $6.1 million
expensed, $0.8 million remained accrued at March 31, 1999 related to this
matter. At this time, management of the Company is unable to determine the
possible outcome of this dispute.
6
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion of the results of operations and financial
condition of Rocky Mountain Internet, Inc. (the "Company") should be read in
conjunction with the Company's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Quarterly Report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
TOTAL REVENUE
The Company's total revenues grew 196% from $1,779,000 to $5,263,000
for the three months ended March 31, 1999 from March 31, 1998. Revenue growth
performance is attributable to an increase in the number of the Company's
subscribers as a result of more aggressive sales efforts and subscribers
added by acquisition. The Company intensified its sales efforts in 1999
versus 1998 by increasing the size of the sales force and by segmenting the
sales team by product group.
COMMUNICATION SERVICES
Communication Services is comprised predominately of dial-up and
dedicated Internet access service. Communication Services revenues grew 201%
from $1,465,000 to $4,407,000 for the three months ended March 31, 1999 from
March 31, 1998. The increase is due to increasing demand for a wide range of
bandwidth options to connect customers to the Internet and the headcount
growth of the Company's sales department in the second half of 1998. In
addition, the Company added over 17,000 dial-up and 700 dedicated access
customers due to acquisitions in the fourth quarter of 1998 and the first
quarter of 1999.
WEB SOLUTIONS
Web Solutions revenues grew 172% from $314,000 for the three months
ended March 31, 1998 to $856,000 for the three months ended March 31, 1999.
Web Solutions revenues are comprised of three major products: web site
hosting, web site production and web site marketing. Web site hosting
accounted for $139,000 of revenue in the first quarter of 1998 and $281,000
in the first quarter of 1999 for an increase of 102% due to an increase in
the number of hosted web sites as a result of the addition of sales
personnel. Web site production increased from $145,000 in the first quarter
of 1998 to $565,000 in the first quarter of 1999, for an increase of 290%.
The increase in web site production is primarily due to the acquisition of
Application Methods in July 1998.
GROSS PROFIT
Gross profit consists of total revenue less the direct cost of
delivering services and equipment. These costs include costs for circuit and
local line charges to provide service to customers. Gross margin for the
first quarter of 1999 was $2.7 million, or 51% of revenue, compared to $1.1
million, or 63% of revenue for the first quarter of 1998. The lower gross
margin ratio was due primarily to lower margins of two recent acquisitions,
DataXchange and CNS. Although the underlying cost structure for these
acquisitions is being improved to restore the Company to higher margins,
traditional telecom services historically generate lower gross margins than
the Company's other Communication Services operations. The Company plans to
transition these local and long distance telecom customers to dial-up
Internet subscribers over the next three quarters, which may help restore
margins to historical levels.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Total selling, general, and administrative expenses ("SG&A")
increased from approximately $2,139,000 for the three months ended March
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31, 1998 to $4,690,000 for the three months ended March 31, 1999, or an
increase of 119%. This increase was partially the result of higher payroll
costs and benefits. Payroll and benefits cost increased 92% from $1,466,000
in the first quarter of 1998 to $2,812,000 in the first quarter of 1999 as a
result of increasing the Company's headcount from approximately 80 employees
in March 1998 to approximately 290 employees in March 1999. Outside services,
which includes "temporary to hire" staff and professional services increased
95% from $305,000 in the first quarter of 1998 to $594,000 in the first
quarter of 1999. 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $240,000 for the three
months ended March 31, 1998 to $1,143,000 for the three months ended March
31, 1999 for an increase of 376%. The increase was due to higher goodwill
amortization associated with six companies that were acquired during the
latter half of 1998.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company's cash used
in operations was $0.5 million as compared to $0.1 million for the three
months ended March 31, 1998. The increase in cash used in operations
primarily resulted from increased operating losses, partially offset by lower
working capital requirements in 1999. The Company expects to continue to have
operating cash flow deficiencies for the near future as it develops and
expands its business.
For the three months ended March 31, 1999, the Company used $1.2
million in investing activities compared to $0.1 million for the same period
in 1998. This change was primarily due to increased capital expenditures in
1999.
Cash provided by financing activities decreased in the three months
ended March 31, 1999 compared to the same period in 1998 due to payments made
in 1999 to extinguish debt.
Since its inception, the Company has funded its operations and
working capital needs primarily through the public and private placement of
the Company's equity securities. In addition, a significant portion of the
Company's capital expenditures has been financed through capital lease
obligations payable to finance companies. The Company has also borrowed
amounts from its Chief Executive Officer in order to fund working capital
requirements.
The Company also issued 8,000 shares of its Series B Redeemable,
Convertible Preferred Stock ("Series B Preferred Stock") through a private
placement, which was completed on December 10, 1998. The Company received $8
million in gross proceeds from the issuance of the Series B Preferred Stock,
which was sold to two institutional investors. The Series B Preferred Stock
is convertible, subject to certain restrictions, into shares of the Company's
common stock at a variable rate, based on a formula linked to the market
price at the time of conversion. The terms of the Series B Preferred Stock
also includes restrictions on conversion depending on certain market
conditions, restrictions against short sales and other hedging transactions
by the investors and a conversion rate which may be up to a 20% premium to
the market price or a discount to the market price depending on the time of
conversion. The Series B Preferred Stock may be redeemed by the Company at
any time if the Company is in compliance with certain covenants at a minimum
redemption price equal to 115% times the outstanding face amount plus accrued
but unpaid dividends and interest. In addition, the Series B Preferred Stock
may be redeemed at the option of the holders if the Company's common stock
ceases to be traded on either the NASDAQ, NASDAQ Small Cap, NYSE or the AMEX
stock exchanges, if the Company is
8
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unable to convert the shares into common stock upon a requested conversion or
if the Company is merged into another entity where the Company's voting
stockholders do not collectively own greater than 51% of the merged entity.
In addition, the Company issued warrants to purchase 155,000 shares
of common stock with an exercise price equal to 130% of the closing day
market price, exercisable at any time over the next five years, to the
purchasers of the Series B Preferred Stock and warrants to purchase 100,000
shares of common stock with an exercise price equal to 120% of the closing
day market price, exercisable over the next five years, to certain brokers in
connection with the transaction. The Company has agreed to register the
common stock issuable upon conversion of the Series B Preferred Stock and the
exercise of the warrants pursuant to registration rights agreements.
The Company has cash and cash equivalents of $4.0 million as of
March 31, 1999. Management estimates that, based upon its current
expectations for growth, the Company will require additional funding of up to
$20 million through the end of 1999 for the execution of its current business
plan including the financing of its anticipated capital expenditures and
operating losses. In addition to increasing cash flow from operations, the
Company intends to obtain this funding from one or more of the following
sources: (1) a commitment, subject to certain conditions, from one of the
institutional investors who purchased the Series B Preferred Stock in
December 1998 to purchase an additional $5 million of preferred stock with
the same terms as the Series B Preferred Stock, (2) calling the remaining
warrants that were initially issued in conjunction with the Company's 1996
initial public offering on May 6, 1999, and could yield up to $4,314,000 in
net proceeds, (3) the exercise of warrants related to the Company's September
1997 private placement, and (4) establishing a credit facility to finance
equipment purchased and other capital expenditures for $11.0 million.
Management believes its current operating funds, along with these additional
financing sources, will be sufficient to fund its cash requirements for at
least the next 12 months.
The Company issued warrants to its Chief Executive Officer to
purchase 4,000,000 shares of the Company's common stock at an exercise price
of $1.90 per share, subject to adjustment, in October 1997. These warrants
are scheduled to expire on September 22, 1999 if not exercised earlier. The
Chief Executive Officer exercised a portion of these warrants in March 1998
to purchase 50,000 shares of the Company's common stock and in January 1999
to purchase 25,000 shares of the Company's common stock.
The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. In addition, the
Company will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services, and technologies, and the
repurchase and retirement of debt, which might impact the Company's liquidity
requirements or cause the Company to issue additional equity or debt
securities. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. Should the Company
be unsuccessful in its efforts to raise capital it may be required to modify
or curtail its plans for growth.
YEAR 2000 ISSUES
Rocky Mountain Internet is preparing its systems and applications
for the Year 2000 (Y2K). Various problems may result from the improper
processing of dates and date-sensitive calculations by computers and other
machinery as the year 2000 is approached and reached. These problems arise
from the fact that most of the world's computer hardware and software have
historically used only two digits to identify the year in a date. If the
computer systems cannot distinguish between the year 1900 and 2000, system
failures or other computer errors could result.
STATE OF READINESS
The Company has established a Y2K Committee to coordinate
appropriate activity and a reporting structure to the Board of Directors on a
monthly basis with regard to the Year 2000 issue. This committee has outlined
a comprehensive plan and is currently implementing the tasks associated for
the Company to become Y2K ready. Preliminary indications are that, since
Rocky Mountain
9
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Internet is a relatively new Company (founded in 1993), most hardware and
software systems, as well as software programs used by the Company, will not
be impacted by the Year 2000 issues. All of the Company's MIS user equipment
is based on Microsoft Windows 95, 98, or NT. Microsoft has issued or is
issuing patches that will make this software compliant by year-end. Internal
MIS systems that handle accounting and customer care are being replaced due
to growth needs. All future software that will be purchased will be Y2K
compliant. All internally written software is currently being checked to
ensure Y2K compliance and will be completed no later than October 1999. Users
have been briefed on the necessity for them to check any special, non-mission
critical software that they have purchased for their departments to ensure
that it is Y2K compliant.
The Company has inventoried the externally purchased network
elements including routers, router software, router redundancy options,
processor cards, and switches. The Company has verified 100% completion of
testing, in cooperation with the external vendors, that the products
associated with the network elements are Y2K compliant. After testing and
certification, the Company learned that 86% of the network elements passed
the Y2K compliance test, while 14% failed. Of the 14% of elements that
failed, and therefore were not Y2K compliant, the Company has upgraded all
but one piece of equipment to be Year 2000 compliant. The remaining piece
will be replaced no later than October 1999.
Rocky Mountain Internet has acquired eight companies since June
1998. The Company is currently working very closely with each company to
determine their state of readiness. Overall, the companies are approximately
85% Y2K compliant from a hardware and software perspective. The Company
believes that the remaining 15% non-compliance is a result primarily of not
yet being able to complete testing of those components.
With respect to communications from external third parties
requesting that the Company provide verification of Y2K compliance on the
Company's goods and services, the Company expects to have formal response
letters sent no later than May 15, 1999. With respect to communications with
external third party vendors that provide additional goods and services to
the Company, the Company expects to issue requests to all those parties to
provide verification of Y2K compliance on their goods and services no later
than May 15, 1999.
Subsequent testing will indicate what modifications or replacements
will be necessary for the Company to be internally Year 2000 ready.
The Company is continuing to evaluate the financial impact for Y2K
compliance and expects that total costs will not exceed $150,000 to $200,000.
The estimates for the costs of the Year 2000 Program are based upon
management's best estimates and may be updated or revised as additional
information becomes available. The Company has incurred approximately $5,000
thus far on administrative costs in connection with assessing the Year 2000
issues. Due to the Company's headquarters and data center move during the
first quarter of 1999, the Company estimates no more than $50,000 was spent
for the data center move and to ensure non-Y2K compliant equipment was
replaced with equipment that met Y2K standards. The Company is assessing
whether or not they will hire an external consultant to assess the state of
readiness of all systems, which could be affected by the Year 2000 issue. The
Company believes such costs will not have a material effect on the Company's
financial condition, liquidity or results of operation.
RISK ASSESSMENT
The failure by the Company to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Presently, however, the Company perceives that its
most likely worst case scenario related to the Year 2000 is associated with
potential concerns with third party services or products. The Company is
dependent on a significant number of third party vendors to provide network
services and equipment. A significant Year 2000-related disruption of the
network services or equipment provided to the Company by third party vendors
could cause customers to consider seeking alternate providers or cause an
unmanageable burden on
10
<PAGE>
customer service and technical support, which in turn could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. Although the Company believes that internal Y2K compliance will be
achieved by December 31, 1999, there can be no assurance that the Y2K problem
will not have a material adverse affect on the Company's business, financial
condition and results of operations as a result of third party failures.
CONTINGENCY PLANS
Due to the current phase of the Company's Year 2000 analysis, the
Company is currently unable to fully assess its risk and determine what
contingency plans, if any, need to be implemented by the Company. The
Company's primary concern, at this point, is with its third party
communications providers. These service providers are conducting their own
assessments of their Year 2000 readiness. The Company expects that these
third party vendors will be Year 2000 ready. However, any failure by third
party vendors to resolve Year 2000 issues on a timely basis or in a manner
that is compatible with the Company's systems could have a material adverse
effect on the Company. Preliminary indications are, however, that the
Company's third-party providers are, or will be, Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
March 31, 1999. The Company's interest income and expense are sensitive to
changes in the general level of interest rates. In this regard, changes in
interest rates can affect the interest earned on the Company's cash
equivalents. The Company's long-term debt has fixed interest rates and the
fair value of these instruments is affected by changes in market interest
rates. To mitigate the impact of fluctuations in interest rates, the Company
generally enters into fixed rate investing and borrowing arrangements. As a
result, the Company believes that the market risk arising from holding of its
financial instruments is not material.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 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 it's defense or
counterclaims.
On November 30, 1998, the Company filed an Answer to the ICC Complaint
denying their material allegations, asserting a number of affirmative
defenses, and disputing their right to any recovery from the Company on any
of the claims asserted. In addition, the Company filed a counterclaim against
ICC seeking over $175 in damages for injuries suffered by the Company as a
result of ICC's wrongful acts that led to the failure of the proposed high
yield debt offering in 1998 and the failure of the proposed merger agreement
with ICC.
On February 24, 1999, the Denver District Court granted the motion filed by
the company, and disqualified the law firm of Holme Roberts & Owen, LLP (HRO)
from continuing to act as litigation counsel for ICC in the lawsuit. The
Court agreed with the Company that because HRO had acted as transaction
counsel for ICC in the high yield debt offering and the proposed merger, and
therefore was a potential material witness and material actor in the
underlying activities, it would be inappropriate for HRO to seek to act as
trial counsel in the same proceeding where it might be required to serve as a
witness or potentially be drawn into the proceedings in some other way.
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. As a result of the
termination and the related financing transactions, which were not completed,
the Company incurred cost, expenses and related fees between $6.1 million, a
portion of which are in dispute. Of this amount, approximately $4.2 million
relates to a non-cash item related to warrants issued by the Company. Of the
$6.1 million expensed, $0.8 million remained accrued at March 31, 1999
related to this matter. At this time, management of the Company is unable to
determine the possible outcome of this dispute.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 1999, the Company issued
and/or sold the following unregistered securities:
- On January 12, 1999, the Company issued 25,000 shares of
common stock to Douglas H. Hanson for aggregate
consideration of $47,500 upon Mr. Hanson's exercise of
outstanding warrants;
- On February 5, 1999, the Company issued 42,578 shares
(valued at $565,000) to acquire substantially all of the
assets of Communication Network Services, Inc. and
ImageWare Technologies;
12
<PAGE>
- On February 25, 1999, the Company issued 73,125 shares of
common stock to two accredited investors for aggregate
consideration of $187,500 upon their exercise of
outstanding warrants;
- On March 9, 1999, the Company issued 71,150 shares of
common stock to two accredited investors for aggregate
consideration of $218,430 upon their exercise of
outstanding warrants.
Each of the above transactions was exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
<TABLE>
<S> <C>
1) On February 17, 1999, the Company filed a Current Report on
Form 8-K to report the Company's acquisition of August 5th
Corporation, d/b/a Dave's World, an Illinois corporation, and
the Company's acquisition of substantially all of the assets
of ImageWare Technologies, L.L.C. and Communication Network
Technologies, L.L.C., two Alabama limited liability companies.
2) On January 8, 1999, the Company filed an amended Current
Report on Form 8-K (initially filed on December 22, 1998) to
report the Company's acquisition of substantially all of the
assets of DataXchange Network, Inc. and to provide financial
statements and pro forma financial information regarding the
acquisition.
3) On January 8, 1999, the Company filed a Current Report on Form
8-K to report the Company's private placement on December
19,1998 of Series B Convertible Preferred Stock for gross
proceeds of $8,000,000, before associated costs, fees and
expenses.
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: May 14, 1999.
ROCKY MOUNTAIN INTERNET, INC.
a Delaware corporation
By: /s/ Douglas H. Hanson
-------------------------------
Name: Douglas H. Hanson
Title: Chairman of the Board, Chief
Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Peter J. Kushar
-------------------------------
Name: Peter J. Kushar
Title: Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
14
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,039,152
<SECURITIES> 0
<RECEIVABLES> 2,564,173
<ALLOWANCES> 246,000
<INVENTORY> 146,901
<CURRENT-ASSETS> 7,135,086
<PP&E> 8,934,365
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