<PAGE>
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 June 30, 1999
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------
Commission file number 001-12063
RMI.NET, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1322326
- ------------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 EIGHTEENTH STREET, SUITE 2201
DENVER, COLORADO 80202
- -------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(303) 672-0700
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Rocky Mountain Internet, Inc.
- --------------------------------------------------------------------------------
(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 August 2, 1999
- --------------------------------- -----------------------------------------
Common Stock, $0.001 par value 12,370,999
<PAGE>
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.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RMI.NET, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 1
Consolidated Statements of Operations for the Three Months Ended
June 30, 1999 and 1998 2
Consolidated Statements of Operations for the Six Months Ended
June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
<PAGE>
RMI.NET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,422,661 $ 5,729,346
Trade receivables, net of allowance for doubtful
accounts 4,686,705 1,598,479
Inventories 237,267 56,440
Other 840,272 224,629
----------------- -----------------
Total current assets 10,186,905 7,608,894
----------------- -----------------
PROPERTY AND EQUIPMENT, NET 8,269,918 3,540,400
GOODWILL, NET 21,636,797 13,101,814
OTHER 116,718 430,693
----------------- -----------------
Total assets $ 40,210,338 $ 24,681,801
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,361,130 $ 2,280,101
Current maturities of long-term debt and capital
lease obligations 1,919,198 915,211
Deferred revenue 1,076,441 513,167
Accrued payroll and related taxes 408,254 302,660
Accrued expenses 2,069,934 1,611,242
----------------- -----------------
Total current liabilities 9,834,957 5,622,381
----------------- -----------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 3,226,550 493,963
----------------- -----------------
Total liabilities 13,061,507 6,116,344
----------------- -----------------
REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
Series B, $.001 par value; 9,600 shares authorized, 5,426 and
8,000 shares issued and outstanding (liquidation preference of
$5,426,000 at June 30, 1999), respectively, net 4,594,412 6,747,843
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 100,000,000 shares
authorized, 12,307,831 and 9,446,272 issued,
respectively, 12,249,117 and 9,384,677 outstanding, respectively 12,308 9,384
Additional paid-in capital 47,496,637 29,257,415
Accumulated deficit (24,878,901) (17,449,185)
------------------ ------------------
22,554,419 11,817,614
----------------- -----------------
$ 40,210,338 $ 24,681,801
----------------- -----------------
----------------- -----------------
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Communication services $ 5,393,928 $ 1,790,433
Web solutions 994,830 371,326
------------ ------------
6,388,758 2,161,759
------------ ------------
COST OF REVENUE EARNED
Communication services 2,857,366 854,213
Web solutions 245,139 100,800
------------ ------------
3,102,505 955,013
------------ ------------
GROSS PROFIT 3,286,253 1,206,746
General, selling, and administrative expenses 5,792,242 1,624,207
Depreciation and amortization 1,461,834 249,103
------------ ------------
OPERATING LOSS (3,967,823) (666,564)
Other income (expense)
Interest expense (143,045) (66,917)
Interest income 45,946 14,436
------------ ------------
NET LOSS (4,064,922) (719,045)
Preferred stock dividends 78,607 -
------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (4,143,529) $ (719,045)
------------ ------------
------------ ------------
Basic and diluted loss per common share $ (0.39) $ (0.10)
------------ ------------
------------ ------------
Weighted average common shares outstanding 10,608,000 6,947,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Communication services $ 9,800,938 $ 3,255,377
Web solutions 1,850,820 685,667
------------ ------------
11,651,758 3,941,044
------------ ------------
Cost of revenue earned
Communication services 5,405,253 1,358,875
Web solutions 511,269 245,140
------------ ------------
5,916,522 1,604,015
------------ ------------
GROSS PROFIT 5,735,236 2,337,029
General, selling, and administrative expenses 10,222,371 3,766,662
Depreciation and amortization 2,604,937 489,075
------------ ------------
OPERATING LOSS (7,092,072) (1,918,708)
Other income (expense)
Interest expense (228,484) (140,415)
Interest income 68,446 25,728
------------ ------------
NET LOSS (7,252,110) (2,033,395)
Preferred stock dividends 177,607 -
------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (7,429,717) $ (2,033,395)
------------ ------------
------------ ------------
Basic and diluted loss per common share $ (0.73) $ (0.29)
------------ ------------
------------ ------------
Weighted average common shares outstanding 10,141,000 7,073,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
(Unaudited)
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,252,110) $(2,033,395)
Items not requiring cash:
Depreciation 822,884 290,716
Amortization 1,782,053 198,359
Stock option compensation - 383,077
Stock contribution to pension plan 42,139 39,994
Changes in operating assets and liabilities net of
effects from acquired interests:
Trade receivables (1,284,521) 38,489
Inventories (114,672) (14,439)
Other current assets (214,234) (715)
Accounts payable 1,235,346 1,046,775
Deferred revenue 343,643 (30,381)
Accrued payroll and related taxes 66,362 (9,637)
Accrued expenses (331,376) (29,603)
----------- -----------
Net cash used in operating activities (4,904,486) (120,760)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,184,823) (276,834)
Purchase of interests, net of cash acquired 33,656 -
Increase in deferred acquisition costs (87,745) (248,082)
----------- -----------
Net cash used in
investing activities (2,238,912) (524,916)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options and warrants 6,531,723 687,265
Purchase of treasury stock - (18,000)
Payments on long-term debt and capital
lease obligations (695,010) (314,813)
----------- -----------
Net cash provided by financing activities 5,836,713 354,452
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,306,685) (291,224)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,729,346 1,053,189
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,422,661 $ 761,965
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
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.
COST OF REVENUE EARNED
Communication Services cost of revenue earned consists of 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. Cost of revenue earned for Web Solutions consist of
payroll costs of employees directly related to the production of customers'
web sites and outside services required for such projects. Previously, the
payroll costs of these employees were included in Selling, General and
Administrative expenses.
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. ACQUISITIONS
On June 25, 1999, the Company issued 48,387 shares (valued at approximately
$570,000) to acquire the assets of CyberDesic Communications Corporation,
Inc., an Internet service provider headquartered in Peoria, Illinois.
On June 23, 1999, the Company issued 108,790 shares (valued at approximately
$1.25 million) to acquire CommerceGate Corporation, an e-commerce software
development and consulting services firm headquartered in Seattle,
Washington. The seller is entitled to receive additional consideration, not
to exceed $1,600,000, pursuant to certain earn-out conditions defined in the
acquisition agreement.
On June 16, 1999, the Company issued 84,010 shares (valued at approximately
$980,000) to acquire Colorado Mountain Net, Inc., a web hosting and Internet
service provider headquartered in Steamboat Springs, Colorado.
On June 11, 1999, the Company issued 146,611 shares (valued at approximately
$1.74 million) to acquire IdealDial Corporation, an enhanced full-service
telecommunications provider headquartered in Denver, Colorado.
On June 10, 1999, the Company issued 123,565 shares (valued at approximately
$1.44 million) to acquire Internet Connect, Inc., an Internet service
provider headquartered in Salt lake City, Utah.
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
5
<PAGE>
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.
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.
Substantially all the purchase prices of the acquisitions was recorded as
goodwill. All of these purchases have been accounted for using the purchase
method of accounting. Results of the acquired companies have been included in
the Company's operations since the acquisition date. The allocation of the
purchase price is preliminary, subject to further evaluation of assets and
liabilities assumed.
NOTE 4. 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 June 30 Six Months Ended June 30
(Unaudited) (Unaudited)
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES
Communication Services $ 5,393,928 $ 1,790,433 $ 9,800,938 $ 3,255,377
Web Solutions 994,830 371,326 1,850,820 685,667
Total Net Sales 6,388,758 2,161,759 11,651,758 3,941,044
COST OF GOODS SOLD
Communication Services 2,857,366 854,213 5,405,253 1,358,875
Web Solutions 245,139 100,800 511,269 245,140
Total COGS 3,102,505 955,013 5,916,522 1,604,015
SG&A
Communication Services 4,890,299 1,345,216 8,598,602 3,111,334
Web Solutions 901,943 278,991 1,623,769 655,328
Total SG&A 5,792,242 1,624,207 10,222,371 3,766,662
Operating Income (Loss) Before
Depreciation and Amortization
Communication Services (2,353,737) (408,996) (4,202,917) (1,214,832)
Web Solutions (152,252) (8,465) (284,218) (214,801)
Total Operating Income (Loss) (2,505,989) (417,461) (4,487,135) (1,429,633)
</TABLE>
NOTE 5. 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 terminated the merger
6
<PAGE>
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 has consistently stated that ICC's claims were frivolous
and without merit, and vigorously defended such action and asserted
counterclaims against ICC. On August 6, 1999, ICC agreed to dismiss with
prejudice all claims brought in their lawsuit against the Company, and
entered into a Settlement Agreement resolving all current and future claims
related to the terminated merger. Under the Settlement Agreement, the Company
made no payment of monies or anything of value to ICC as a result of the
dismissal of all claims.
As a result of the merger 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 June 30, 1999 related to this matter. At this time,
management of the Company is unable to determine the possible outcome of this
dispute.
NOTE 6. COMMON STOCK TRANSACTIONS
The increase in the Company's common stock issued and outstanding as
of June 30, 1999 is primarily a result of:
- The Company issued 226,064 shares of common upon conversion of
2,687 shares of its Series B Preferred Stock and an additional
113 shares of Series B Preferred Stock as dividends. Pursuant to
the terms of the Company's Series B Preferred Stock, the
conversion price was 91% of the arithmetic average of the lowest
three closing bid prices during the 20 consecutive trading days
immediately preceding the conversion date.
- During the second quarter of 1999, the Company exercised a call
option and issued 1,468,964 shares of common stock for aggregate
consideration of approximately $4.5 million upon exercise of
warrants issued in the Company's 1996 initial public offering.
The exercise price of the warrants was $3.07 per share.
- During the second quarter of 1999, the Company issued 362,285
shares of common stock upon exercise of warrants issued in the
Company's 1997 private placement. The exercise price of the
warrants was $2.56 per share. Proceeds from the exercise of
private placement warrants, together with an additional 310,500
shares of common stock purchased by holders of the private
placement warrants, totaled $1.2 million.
- On June 25, 1999, the Company issued 48,387 shares (valued at
approximately $570,000) to acquire the assets of CyberDesic
Communications Corporation, Inc., an Internet service provider
headquartered in Peoria, Illinois.
- On June 23, 1999, the Company issued 108,790 shares (valued at
approximately $1.25 million) to acquire CommerceGate
Corporation, an e-commerce software development and consulting
services firm headquartered in Seattle, Washington.
7
<PAGE>
- On June 16, 1999, the Company issued 84,010 shares (valued at
approximately $980,000) to acquire Colorado Mountain Net, Inc.,
a web hosting and Internet service provider headquartered in
Steamboat Springs, Colorado.
- On June 11, 1999, the Company issued 146,611 shares (valued at
approximately $1.74 million) to acquire IdealDial Corporation,
an enhanced full-service telecommunications provider
headquartered in Denver, Colorado.
- On June 10, 1999, the Company issued 123,565 shares (valued at
approximately $1.44 million) to acquire Internet Connect, Inc.,
an Internet service provider headquartered in Salt lake City,
Utah.
NOTE 7. SUBSEQUENT EVENTS
In July 1999, the Company filed its amended and restated Certificate
of Incorporation with the Secretary of State of Delaware, thereby changing
the Company's name from Rocky Mountain Internet, Inc. to RMI.NET, Inc. The
Company's common stockholders had previously approved the name change at the
1999 Annual Meeting of Stockholders.
On July 30, 1999, the Company entered into an agreement to acquire
ACES Research, Inc. ("ACES"), an Arizona corporation headquartered in Tucson,
Arizona. The Company agreed to pay approximately $2 million, payable in the
form of 174,634 shares of common stock. ACES is an Internet service provider.
On August 3, 1999, the Company entered into an agreement to acquire
WebZone, a division of Triad, L.L.C. , an Oklahoma limited liability company
headquartered in Tulsa, Oklahoma. The Company agreed to pay approximately
$5.25 million, payable in the form of 441,175 shares of common stock. WebZone
is an Internet service provider.
On August 6, 1999, Internet Communications Corporation ("ICC") agreed
to dismiss with prejudice all claims brought in their lawsuit against the
Company based on a failed 1998 merger. ICC entered into a Settlement
Agreement resolving all current and future claims related to the terminated
merger. Under the Settlement Agreement, the Company made no payment of monies
or anything of value to ICC as a result of the dismissal of all claims.
8
<PAGE>
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 RMI.NET, 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 JUNE 30, 1999 AND JUNE 30, 1998
TOTAL REVENUE
The Company's total revenues grew 196% from $2.16 million to $6.39
million for the three months ended June 30, 1999 from June 30, 1998. Revenue
growth is primarily attributable to an increase in the number of the
Company's customers as a result of more aggressive sales efforts and
customers 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 $1.79 million to $5.39 million for the three months ended June 30, 1999
from June 30, 1998. The increase is due to increasing demand for a wide range
of bandwidth options to connect customers to the Internet and the
productivity of the Company's sales department in the second half of 1998. In
addition, the Company added over 22,000 dial-up customers, over 500 dedicated
access customers and over 13,000 local and long distance customers due to
acquisitions in the fourth quarter of 1998 and the first six months of 1999.
WEB SOLUTIONS
Web Solutions revenues grew 168% from $0.37 million for the three
months ended June 30, 1998 to $0.99 million for the three months ended June
30, 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 $0.15 million of revenue in the three months ended June 30,
1998 and $0.26 million in the three months ended June 30, 1999 for an
increase of 82%. Web site production increased from $0.19 million in the
three months ended June 30, 1998 to $0.72 million in the three months ended
June 30, 1999, for an increase of 274%. 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
three months ended June 30, 1999 was $3.29 million, or 51% of revenue,
compared to $1.21 million, or 56% of revenue for the three months ended June
30, 1998. The lower gross margin ratio was due primarily to lower margins of
three recent non-ISP acquisitions. Although the Company expects the
underlying cost structure for these acquisitions to be 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 two 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 $1.62 million for the three months ended June
30, 1998 to $5.71 million for the three months ended June 30, 1999, or an
increase of 257%. This increase was primarily the result of higher payroll
costs and benefits. Payroll and
9
<PAGE>
benefits cost increased 247% from $0.99 million in the three months ended
June 30, 1998 to $3.46 million in the three months ended June 30, 1999 as a
result of increasing the Company's headcount from approximately 80 employees
in June 1998 to approximately 340 employees in June 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $0.25 million for the
three months ended June 30, 1998 to $1.46 million for the three months ended
June 30, 1999 for an increase of 487%. The increase was due to higher
goodwill amortization associated with the Company's acquisitions completed
after June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
TOTAL REVENUE
The Company's total revenues grew 192% from $3.94 million to $11.65
million for the six months ended June 30, 1999 from June 30, 1998. Revenue
growth is attributable to an increase in the number of the Company's
customers as a result of more aggressive sales efforts and customers 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 $3.26 million to $9.80 for the six months ended June 30, 1999 from June
30, 1998. The increase is due to increasing demand for a wide range of
bandwidth options to connect customers to the Internet and the productivity
of the Company's sales department. In addition, the Company added over 22,000
dial-up customers, over 500 dedicated access customers and over 13,000 local
and long distance customers due to acquisitions in the fourth quarter of 1998
and the first six months of 1999.
WEB SOLUTIONS
Web Solutions revenues grew 170% from $0.69 million for the six
months ended June 30, 1998 to $1.85 million for the six months ended June 30,
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 $0.28 million of revenue in the first six months of 1998 and
$0.54 million in the first six months of 1999 for an increase of 89%. Web
site production increased from $0.34 million in the first six months of 1998
to $1.28 million in the first six months of 1999, for an increase of 281%.
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 six months of 1999 was $5.74 million, or 49% of revenue, compared to
$2.34 million, or 59% of revenue for the first six months of 1998. The lower
gross margin ratio was due primarily to lower margins of three recent non-ISP
acquisitions. Although the Company expects the underlying cost structure for
these acquisitions to be 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 $3.77 million for the six months ended June 30,
1998 to $10.22 million for the six months ended June 30, 1999, or an increase
of 171%. This increase was primarily the result of higher payroll costs and
benefits. Payroll and
10
<PAGE>
benefits cost increased 175% from $2.22 million in the first six months of
1998 to $6.1 million in the first six months of 1999 as a result of
increasing the Company's headcount from approximately 80 employees in June
1998 to approximately 340 employees in June 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $0.49 million for the
six months ended June 30, 1998 to $2.60 million for the six months ended June
30, 1999 for an increase of 430%. The increase was due to higher goodwill
amortization that was associated with acquisitions completed after June 30,
1998.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, the Company's cash used in
operations was $4.90 million as compared to $0.12 million for the six months
ended June 30, 1998. The increase in cash used in operations primarily
resulted from increased operating losses and higher 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 six months ended June 30, 1999, the Company used $2.24
million in investing activities compared to $0.52 million for the same period
in 1998. This change was primarily due to increased capital expenditures in
1999.
Cash provided by financing activities increased in the six months
ended June 30, 1999 compared to the same period in 1998 due to proceeds
received from the exercise of warrants issued in conjunction with the
Company's 1996 initial public offering. The warrants were exercised after the
Company exercised its call option.
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
$8.0 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
11
<PAGE>
Company is 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. As of June 30, 1999, 2,687 shares of Series B Preferred Stock
have been converted into 226,064 shares of the Company's common stock and 113
shares of Series B Preferred Stock have been issued as dividends; 5,426
shares of Series B Preferred Stock remained outstanding. From June 30, 1999
to August 2, 1999, an additional 2,687 shares of Series B Preferred Stock
have been converted into 241,932 shares of the Company's common stock,
leaving 2,932 shares of Series B Preferred Stock outstanding.
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.
During the second quarter of 1999, the Company exercised a call
option and issued 1,468,964 shares of common stock for aggregate
consideration of approximately $4.5 million upon exercise of 1,032,480
warrants issued in the Company's 1996 initial public offering. In addition,
the Company issued 362,285 shares of common stock upon exercise of warrants
issued in the Company's 1997 private placement. The exercise price of the
warrants was $2.56 per share. Proceeds from the exercise of private placement
warrants, together with an additional 310,500 shares of common stock
purchased by holders of the private placement warrants, totaled $1.2 million.
The Company has cash and cash equivalents of $4.4 million as of June
30, 1999. Management estimates that, based upon its current expectations for
growth, the Company will require additional funding of up to $6 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) the exercise of warrants held by the
Company's Chief Executive Officer, and (3) establishing a credit facility to
finance equipment purchased and other capital expenditures for $5.0 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 unless extended. 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
RMI.NET 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
12
<PAGE>
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
RMI.NET 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 over 90% of the network elements
passed the Y2K compliance test. Of the elements that failed, and therefore
were not Y2K compliant, the Company has upgraded the majority of equipment
and software to be Year 2000 compliant. The remaining items will be replaced
no later than October 1999.
RMI.NET has acquired 15 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 has sent formal response letters
for all requests received prior to June 30, 1999. With respect to
communications with external third party vendors that provide additional
goods and services to the Company, the Company expects to complete its
issuance of requests to all those parties to provide verification of Y2K
compliance on their goods and services no later than August 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 $20,000
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.
13
<PAGE>
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 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
June 30, 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.
14
<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 has consistently stated that ICC's claims were frivolous
and without merit, and vigorously defended such action and asserted
counterclaims against ICC. On August 6, 1999, ICC agreed to dismiss with
prejudice all claims brought in their lawsuit against the Company, and
entered into a Settlement Agreement resolving all current and future claims
related to the terminated merger. Under the Settlement Agreement, the Company
made no payment of monies or anything of value to ICC as a result of the
dismissal of all claims.
As a result of the merger 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 June 30, 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 June 30, 1999, the Company issued
and/or sold the following unregistered securities:
- The Company issued 226,064 shares of common upon conversion of
2,687 shares of its Series B Preferred Stock and an additional
113 shares of Series B Preferred Stock as dividends. Pursuant to
the terms of the Company's Series B Preferred Stock, the
conversion price was 91% of the arithmetic average of the lowest
three closing bid prices during the 20 consecutive trading days
immediately preceding the conversion date.
15
<PAGE>
- During the second quarter of 1999, the Company exercised a call
option and issued 1,468,964 shares of common stock for aggregate
consideration of approximately $4.5 million upon exercise of
warrants issued in the Company's 1996 initial public offering.
The exercise price of the warrants, as adjusted for dilution,
was $3.07 per share.
- During the second quarter of 1999, the Company issued 362,285
shares of common stock upon exercise of warrants issued in the
Company's 1997 private placement. The exercise price of the
warrants, as adjusted for dilution, was $2.56 per share. Proceeds
from the exercise of private placement warrants, together with an
additional 310,500 shares of common stock purchased by holders of
the private placement warrants, totaled $1.2 million.
- On June 28, 1999, the Company issued 48,387 shares (valued at
approximately $570,000) to acquire the assets of CyberDesic
Communications Corporation, Inc., an Internet service provider
headquartered in Peoria, Illinois.
- On June 23, 1999, the Company issued 108,790 shares (valued at
approximately $1.25 million) to acquire CommerceGate
Corporation, an e-commerce software development and consulting
services firm headquartered in Seattle, Washington.
- On June 16, 1999, the Company issued 84,010 shares (valued at
approximately $980,000) to acquire Colorado Mountain Net, Inc.,
a web hosting and Internet service provider headquartered in
Steamboat Springs, Colorado.
- On June 11, 1999, the Company issued 146,611 shares (valued at
approximately $1.74 million) to acquire IdealDial Corporation,
an enhanced full-service telecommunications provider
headquartered in Denver, Colorado.
- On June 10, 1999, the Company issued 123,565 shares (valued at
approximately $1.44 million) to acquire Internet Connect, Inc.,
an Internet service provider headquartered in Salt lake City,
Utah.
Each of the above transactions was exempt from registration under Section
4(2) or Section 3(a)(9) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders
at the 1999 annual Meeting of Stockholders held on June 24, 1999:
1. Election of five directors to the Board of Directors of the Company for a
one-year term. The following votes were cast in the election of directors:
<TABLE>
<CAPTION>
Director For Withhold Authority
---------------------- ------------------- -----------------------
<S> <C> <C>
Douglas H. Hanson 8,015,124 22,201
D. D. Hock 8,011,636 25,689
Robert W. Grabowski 8,013,661 23,664
Lewis H. Silverberg 8,010,941 26,384
Mary Beth Vitale 8,014,174 23,151
</TABLE>
2. Proposed amendment to Article 1 of the Company's Amended and Restated
Certificate of Incorporation to change the name of the Company from Rocky
Mountain Internet, Inc. to "RMI.NET, Inc." There were 8,013,414 votes cast
for approval of the amendment, 17,707 votes cast against approval of the
amendment and 6,204 abstentions.
3. Proposed amendment to Article 4 of the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
the Company's common stock, as described in the proxy statement dated May
28, 1999. There were 7,551,509 votes cast for approval of the amendment,
463,370 votes cast against approval of the amendment and 22,446
abstentions.
16
<PAGE>
4. Proposed amendment to the Company's 1998 Employees' Option Plan, as
amended, to increase the number of shares of common stock that the Company
may issue thereunder, as described in the proxy statement dated May 28,
1999. There were 3,648,454 votes cast for approval of the amendment,
141,328 votes cast against approval of the amendment and 31,420
abstentions.
5. Proposed ratification of issuance of all shares of common stock that the
Company would be entitled to issue upon conversion of the Company's
Convertible Series B Preferred Stock, as described in the proxy statement
dated May 28, 1999. There were 3,543,354 votes cast for ratification,
259,291 votes cast against ratification and 18,557 abstentions.
6. Proposed ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1999. There were 8,021,129 votes cast for ratification, 11,965 votes cast
against ratification and 4,231 abstentions.
ITEM 5. OTHER EVENTS
In July 1999, the Company filed its amended and restated Articles of
Incorporation with the Secretary of State of Delaware, thereby changing the
Company's name from Rocky Mountain Internet, Inc. to RMI.NET, Inc. The
Registrant's common stockholders had previously approved the name change at
the 1999 Annual Meeting of Stockholders, as discussed under "Item 4.
Submission of Matters to a Vote of Security Holders."
On July 30, 1999, the Company entered into an agreement to acquire
ACES Research, Inc. ("ACES"), an Arizona corporation headquartered in Tucson,
Arizona. The Company agreed to pay approximately $2 million, payable in the
form of 174,634 shares of common stock. The consideration that the Company
agreed to pay ACES was determined through arm's length negotiation. There was
no material relationship between the Company and ACES prior to the
acquisition. ACES is an Internet service provider. The Company intends to
utilize the assets acquired from ACES in the same manner that ACES utilized
the assets.
On August 3, 1999, the Company entered into an agreement to acquire
WebZone a division of Triad, L.L.C., an Oklahoma limited liability company
headquartered in Tulsa, Oklahoma. The Company agreed to pay approximately
$5.25 million, payable in the form of 441,175 shares of common stock. The
consideration that the Company agreed to pay WebZone was determined through
arm's length negotiation. There was no material relationship between the
Company and WebZone prior to the acquisition. WebZone is an Internet service
provider. The Company intends to utilize the assets acquired from WebZone in
the same manner that WebZone utilized the assets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------- --------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
1) On June 28, 1999, the Company filed a Current Report on Form
8-K to report the Company's acquisitions of IdealDial
Corporation, a Colorado corporation, and Internet Connect,
Inc., a Utah corporation.
17
<PAGE>
2) On April 19, 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.
Pursuant to Item 7 of Form 8-K, the Form 8-K contained
financial information concerning the Dave's World acquisition.
18
<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: August 9, 1999.
RMI.NET, 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/ Michael D. Dingman, Jr.
-----------------------------------------------
Name: Michael D. Dingman, Jr.
Title: Treasurer (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------- --------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.
27.1 Financial Data Schedule.
</TABLE>
19
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ROCKY MOUNTAIN INTERNET, INC.
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is ROCKY MOUNTAIN INTERNET, INC., which is the name under which
the corporation was originally incorporated; and the date of filing the original
certificate of incorporation of the corporation with the Secretary of State of
Delaware is October 16, 1995.
2. The Amended and Restated Certificate of Incorporation restates
and ingrates and further amends the Certificate of this Corporation as more
particularly set forth in EXHIBIT A.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is restated as more particularly set forth on EXHIBIT A.
4. The amendments and the restatement of the certificate of
incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware
5. The Amended and Restated Certificate of Incorporation shall be
effective on the 1st day of July, 1999.
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
RMI.NET, INC.
ARTICLE 1
The name of the corporation is RMI.NET, INC.
ARTICLE 2
<PAGE>
The address of the corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805-1297. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE 3
The purposes for which this corporation is organized are to engage in
any business and in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law and to possess and employ
all powers and privileges now or hereafter granted or available under the laws
of the State of Delaware to such corporations.
ARTICLE 4
(a) AUTHORIZED SHARES. The aggregate number of shares which the
corporation has authority to issue 100,750,000. The authorized shares consisting
of 100,000,000 shares of Common Stock with a par value of $.0001 per share
("Common Stock"), and 750,000 shares of Preferred Stock with a par value of
$.0001 per share ("Preferred Stock").
(b) COMMON STOCK. The common stock shall have unlimited voting
rights, subject to the voting rights of any shares of preferred stock. The
common stock shall be entitled to receive the net assets of the corporation upon
dissolution, subject to the rights of any shares of preferred stock to receive
distributions upon dissolution. The affirmative vote of a majority of all
outstanding shares of the corporation's common stock shall be required for the
stockholders to act.
(c) PREFERRED STOCK: Prior to the issuance of any shares of
preferred stock, the board of directors shall amend these Articles to prescribe
the preferences, limitations and relative rights of such shares. For that
purpose, the board of directors may divide the preferred stock into series, each
having a distinguishing designation, with such preferences, limitations and
relative rights as the board of directors may prescribe. The board of directors
shall have complete discretion in prescribing the preferences, limitations and
relative rights of the preferred stock or any series thereof, subject only to
the restriction, if any, imposed by Delaware law.
ARTICLE 5
The name and mailing address of the incorporator:
Stephen S. Halasz
633 17th Street, Suite 3000
Denver, Colorado 80202
<PAGE>
ARTICLE 6
The powers of the incorporator shall terminate upon filing this
certificate of incorporation in the office of the Secretary of State of the
State of Delaware. The names and mailing addresses of the persons who are to
serve as the directors of corporation until their successors are elected and
qualified or their earlier resignation or removal is:
NAME MAILING ADDRESS
Jim D. Welch 2860 South Circle Drive, Suite 2202
Colorado Springs, Colorado 80902
Christopher K. Phillips 2860 South Circle Drive, Suite 2202
Colorado Springs, Colorado 80902
Roy Dimoff 2860 South Circle Drive, Suite 2202
Colorado Springs, Colorado 80902
The number of directors of the corporation shall be fixed from time to
time in the manner provided in the bylaws and may be increased or decreased from
time to time in the manner provided in the bylaws. Election of directors need
not be by written ballot except and to the extent provided in the bylaws of the
corporation.
The affirmative vote of a majority of all directors constituting the
board of directors shall be required for the board of directors to act.
ARTICLE 7
The board of directors of the corporation is expressly authorized to
make, alter or repeal the bylaws of the corporation, but such authorization
shall not divest the stockholders of the power, nor limit their power, to adopt,
amend or repeal bylaws.
ARTICLE 8
No director of the corporation shall be personally liable to the
corporation or its stock holders 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
<PAGE>
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.
ARTICLE 9
The corporation shall have authority, to the fullest extent now or
hereafter permitted by the Delaware General Corporation Law, or by any other
applicable law, to enter into any contract or transaction with one or more of
its directors or officers, or with any corporation, partnership, joint venture,
trust, association or other entity in which one or more of its directors or
officers are directors or officers or have a financial interest, notwithstanding
such relationships and notwithstanding the fact that the director or officer is
present at or participates in the meeting of the board of directors or committee
thereof which authorizes the contract or transaction.
<PAGE>
IN WITNESS WHEREOF, Rocky Mountain Internet, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed and acknowledged by its Chief
Executive Officer and Chairman of the Board and attested by its Secretary on
this 30th day of June, 1999.
ROCKY MOUNTAIN INTERNET, INC. a
Delaware corporation
By: /s/ Douglas H. Hanson
---------------------------------------
Name: Douglas H. Hanson
Its: Chief Executive Officer and Chairman
of the Board
ATTEST:
By: /s/ Christopher J. Melcher
----------------------------------
Christopher J. Melcher, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,422,661
<SECURITIES> 0
<RECEIVABLES> 5,409,705
<ALLOWANCES> 723,000
<INVENTORY> 237,267
<CURRENT-ASSETS> 10,186,905
<PP&E> 11,035,934
<DEPRECIATION> 2,766,016
<TOTAL-ASSETS> 40,210,338
<CURRENT-LIABILITIES> 9,834,957
<BONDS> 0
4,594,412
0
<COMMON> 12,308
<OTHER-SE> 22,542,111
<TOTAL-LIABILITY-AND-EQUITY> 40,210,338
<SALES> 0
<TOTAL-REVENUES> 11,651,758
<CGS> 0
<TOTAL-COSTS> 5,916,522
<OTHER-EXPENSES> 12,214,891
<LOSS-PROVISION> 612,417
<INTEREST-EXPENSE> 228,484
<INCOME-PRETAX> (7,252,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,252,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,429,717)
<EPS-BASIC> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
