<PAGE> 1
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 September 30, 2000
-----------------------------------------
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
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RMI.NET, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(303) 672-0700
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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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 November 10, 2000
------------------------------ ------------------------------------------
Common Stock, $0.001 par value 25,249,793
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RMI.NET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999...........................................................................1
Consolidated Statements of Operations for the Three Months Ended
September 30, 2000 and 1999.....................................................................2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999.....................................................................3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999.....................................................................4
Notes to Consolidated Financial Statements.........................................................5
</TABLE>
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RMI.NET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 1,245,932 $ 11,238,188
Trade receivables, net of allowance for doubtful accounts ....................... 6,405,463 3,931,983
Other ........................................................................... 857,001 885,191
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Total current assets ........................................................ $ 8,508,396 $ 16,055,362
------------- -------------
PROPERTY AND EQUIPMENT, NET ........................................................ 8,738,185 10,746,914
GOODWILL, NET ...................................................................... 39,519,044 43,648,461
OTHER, NET ......................................................................... 5,997,498 268,293
------------- -------------
Total assets ................................................................ $ 62,763,123 $ 70,719,030
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 4,035,094 $ 3,312,576
Current maturities of long-term debt and capital lease obligations .............. 1,875,788 1,952,597
Deferred revenue ................................................................ 2,280,752 2,497,632
Accrued payroll and related taxes ............................................... 771,068 1,030,019
Accrued expenses ................................................................ 5,273,395 5,258,488
------------- -------------
Total current liabilities ................................................... 14,236,097 14,051,312
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS........................................ 7,348,695 2,222,373
------------- -------------
Total liabilities ........................................................... 21,584,792 16,273,685
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REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
Series B, $.001 par value; 9,600 shares authorized, 0 shares issued or
outstanding ................................................................... -- --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A Preferred Stock, $.001 par value; 750,000 shares authorized, 0
shares issued or outstanding .................................................. -- --
Common stock, $.001 par value; 100,000,000 shares authorized, 24,516,228
and 21,125,172 issued, respectively, 23,351,796 and 21,069,355
outstanding, respectively ..................................................... 23,921 21,069
Additional paid-in capital ...................................................... 107,164,645 97,101,828
Accumulated deficit ............................................................. (65,947,736) (42,583,802)
Unearned compensation ........................................................... (62,499) (93,750)
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Total stockholders' equity .................................................. 41,178,331 54,445,345
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$ 62,763,123 $ 70,719,030
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Revenue
Connectivity services .................... $ 8,996,850 $ 8,058,486
Web solutions ............................ 1,689,977 1,073,115
------------ ------------
10,686,827 9,131,601
------------ ------------
Costs and expenses
Operating expenses ....................... 5,878,079 4,925,832
Selling expenses ......................... 1,431,822 1,712,389
General and administrative expenses ...... 5,960,246 5,562,262
Depreciation and amortization ............ 4,308,226 2,275,010
------------ ------------
Total costs and expenses ............. 17,578,373 14,475,493
------------ ------------
Operating loss ..................... (6,891,546) (5,343,892)
Other income (expense)
Interest expense ......................... (274,827) (140,471)
Interest income .......................... 45,045 52,298
------------ ------------
Net loss .................................... (7,121,328) (5,432,065)
Preferred stock dividends ................... -- 21,654
------------ ------------
Net loss applicable to common stockholders .. $ (7,121,328) $ (5,453,719)
============ ============
Basic and diluted loss per common share ..... $ (0.33) $ (0.35)
============ ============
Weighted average common shares outstanding .. 21,629,000 15,471,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
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(unaudited)
<S> <C> <C>
Revenue
Connectivity services .................... $ 28,119,207 $ 17,859,424
Web solutions ............................ 6,293,157 2,923,935
------------ ------------
34,412,364 20,783,359
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Costs and expenses
Operating expenses ....................... 19,706,569 10,842,354
Selling expenses ......................... 5,074,100 3,726,203
General and administrative expenses ...... 19,918,989 13,770,819
Depreciation and amortization ............ 12,812,735 4,879,947
------------ ------------
Total costs and expenses ............. 57,512,393 33,219,323
------------ ------------
Operating loss ..................... (23,100,029) (12,435,964)
Other income (expense)
Interest expense ......................... (517,381) (368,968)
Interest income .......................... 253,476 120,741
------------ ------------
Net loss .................................... (23,363,934) (12,684,191)
Preferred stock dividends ................... -- 199,261
------------ ------------
Net loss applicable to common stockholders .. $(23,363,934) $(12,883,452)
============ ============
Basic and diluted loss per common share ..... $ (1.10) $ (1.09)
============ ============
Weighted average common shares outstanding .. 21,294,000 11,806,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
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(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................... $(23,363,934) $(12,684,191)
Items not requiring cash:
Depreciation .............................................................. 1,898,981 1,374,435
Amortization .............................................................. 10,913,754 3,505,512
Stock contribution to pension plan ........................................ 113,974 60,006
Stock option compensation and stock bonus ................................. 101,251 --
Changes in operating assets and liabilities net of effects from acquired
interests:
Trade receivables ......................................................... (2,307,841) (1,503,315)
Prepaid expenses and other assets ......................................... 24,614 (433,708)
Accounts payable .......................................................... 481,231 99,013
Deferred revenue .......................................................... (339,422) 720,089
Accrued payroll and related taxes ......................................... (296,637) 264,964
Accrued expenses .......................................................... (51,376) (616,331)
------------ ------------
Net cash used in operating activities ................................... (12,825,405) (9,213,526)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................................ (504,104) (2,638,466)
Cash paid for investments and acquisitions .................................. (182,464) (176,565)
Increase in deferred acquisition costs ...................................... (448,993) (109,701)
Additions to capitalized software ........................................... (1,418,157) --
------------ ------------
Net cash used in investing activities ................................... (2,553,718) (2,924,732)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from financing agreement ....................................... 6,111,172 --
Net proceeds from issuance of common stock .................................. 750,000 --
Proceeds from exercise of common stock options and warrants ................. 285,027 14,032,390
Payments on other long-term debt and capital lease obligations .............. (1,759,332) (1,410,697)
------------ ------------
Net cash provided by financing activities ............................... 5,386,867 12,621,693
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (9,992,256) 483,435
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 11,238,188 5,729,346
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 1,245,932 $ 6,212,781
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. The financial statements included herein have been prepared by
RMI.NET, Inc. (hereinafter, "RMI.NET" or "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.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs for products that
will be licensed to others in the future. Capitalization of such costs occurs
when technological feasibility is achieved and continues until the product is
available for general release. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life, and changes in software technologies. Upon the general
release of the software product to customers, capitalization ceases and such
costs are amortized (using the straight-line method) on a product-by-product
basis over the estimated life, which is generally three years. All research and
development expenditures are charged as research and development expenses in the
period incurred.
In addition, the Company also capitalizes costs of materials,
consultants, and payroll and payroll-related costs which are incurred in
developing internal-use computer software, beginning once the application
development stage is attained and continuing until the
post-implementation/operation stage is achieved. Costs incurred prior to and
after the establishment of the application development stage are charged to
general and administrative expenses.
The Company capitalized software development costs of $211,190 and
$1,418,157 for the three and nine months ended September 30, 2000, respectively.
No software development costs were capitalized in 1999.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements 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.
5
<PAGE> 8
The Company has excluded the Class B Warrants having an exercise price
of $0.01 per share from its calculation of basic loss per share. Although these
warrants became exercisable in June 2000, the shares underlying these warrants
may not be issued until the warrant holders fully dispose of their initial share
ownership in the Company.
NOTE 3. ACQUISITIONS
On March 17, 2000, the Company entered into definitive agreements to
acquire Internet Communications Corp. ("ICC"), a company that is traded on the
Nasdaq SmallCap Market under the symbol "INCC." The acquisition is subject to
approval by the shareholders of the Company and ICC. ICC is a telecommunications
integration and network services company that specializes in the design,
implementation, maintenance, and monitoring of premise and network-based
communications for wide-area networks. ICC is headquartered in Greenwood
Village, Colorado and markets its products and services to Colorado-based
businesses.
On October 18, 2000, the Company and ICC executed an Amended and
Restated Agreement and Plan of Merger between the two parties that revised
certain terms of the previously announced agreement for the Company to acquire
ICC, and extended the time to complete the merger. The Company will issue
approximately 5.1 million shares valued at approximately $11.25 million and 2.85
million warrants valued at approximately $456,000. Pursuant to the Amended and
Restated Agreement, ICC shareholders, other than Interwest Group Inc. (Interwest
Group, Inc. beneficially owns shares of ICC common stock and preferred stock
representing 67% of the voting power of ICC stock outstanding), will receive
0.55 RMI.NET common shares for each share of ICC common stock owned. Interwest
Group will receive 0.45 RMI.NET common shares for each share of ICC common stock
owned. In addition to shares of RMI.NET common stock, ICC's shareholders
(excluding Interwest Group and ICC directors) will be entitled to receive for
each share of ICC common stock owned, a warrant exercisable for one share of
RMI.NET common stock at $7.00. The warrants are cancelable on 30-days' notice by
the Company if the Company's closing share price exceeds $8.00 for five
consecutive trading days. Funds previously loaned to ICC by Interwest Group will
be converted to ICC common stock, which will be converted to RMI.NET common
stock at the 0.45 exchange ratio. In addition, Interwest Group will receive a
warrant that may become exercisable one year from the closing, which may provide
Interwest Group with additional RMI.NET shares, depending on the value of
RMI.NET common stock at that time.
The Company and ICC completed a Joint Proxy Statement/Prospectus that
was mailed to their shareholders on October 26, 2000. The Joint Proxy
Statement/Prospectus calls for each company to hold a Special Meeting of the
Shareholders in order to seek each company's shareholder approval of the
Company's proposed acquisition of ICC. The Joint Proxy Statement/Prospectus also
asks the Company's shareholders to approve a name change for the Company from
"RMI.NET" to "Internet Commerce & Communications, Inc." The Company's and ICC's
Special Meeting of the Shareholders will each be held on November 28, 2000, and
the closing of the acquisition, subject to shareholder approval, shall be
completed on or before November 30, 2000.
On September 21, 2000, the Company entered into an Asset Transfer
Agreement with LanMinds, Inc. ("LanMinds"), a California corporation
headquartered in Berkeley, California, pursuant to which the Company acquired
the assets of LanMinds. Pursuant to the terms of the LanMinds Asset Transfer
Agreement, the Company agreed to provide consideration to LanMinds in an amount
equal to approximately $6 million, payable in the form of shares of RMI.NET
common stock over the next five years. At closing, the Company provided LanMinds
consideration equal to $2 million, in the form of 916,031 shares of common
stock, with the number of shares to be issued based on the 15-day average
closing price prior to September 21, 2000 ($2.1833 per share). All 916,031
shares were issued pursuant to RMI.NET's Registration Statement on Form S-4,
which was filed with the Securities and Exchange Commission on May 24, 2000. As
partial payment of the remaining consideration due to LanMinds, RMI.NET also
agreed to issue 591,237 shares which will be held in escrow, subject to later
adjustment and release to LanMinds. The ultimate number of shares required to be
issued by RMI.NET depends on various factors set forth in the LanMinds Asset
Transfer Agreement, including the following, among
6
<PAGE> 9
others: (a) the ability of LanMinds' to generate sufficient revenues, (b)
LanMinds' liquidity, as measured by the difference between LanMinds' current
assets and current liabilities, (c) claims that may be brought against LanMinds,
and (d) the market price of RMI.NET's common stock. Due to these contingencies,
only 505,447 shares have been recorded to equity at September 30, 2000. Any
significant increase in additional shares to be issued would not occur for five
years. At that time, on the fifth anniversary of the closing, there would
theoretically be no limit to the number of shares of common stock that RMI.NET
may be required to issue if the market price of the Registrant's common stock at
that time was trading below $7.50 per share. The consideration that the
Registrant agreed to pay to LanMinds was determined through arm's length
negotiation. There was no material relationship between the Registrant and
LanMinds prior to the acquisition. LanMinds is a business-focused Internet
connectivity and web solutions provider with customers in California, Colorado
and Japan. RMI.NET intends to utilize the assets acquired from LanMinds in the
same manner that LanMinds utilized the assets prior to their acquisition by
RMI.NET.
Substantially all of the purchase price was recorded as goodwill using
the purchase method of accounting. Results have been included in the Company's
operations since 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 the operating results of its two segments: Web Solutions
and Connectivity Services. The Company considers each division to be an
operating segment as they have separate management teams, offer different
products and services, and utilize different marketing strategies to target
different types of customers. Web Solutions provides Web site production,
hosting, marketing, and data center co-location services. Connectivity Services
consists of dedicated and dial-up Internet services and long distance and
related services. The Company believes that all telecommunications services
within this segment should be aggregated as the services contained therein are
offered to the same class of customer.
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.
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
NET SALES:
Connectivity Services .......... $ 8,996,850 $ 8,058,486 $ 28,119,207 $ 17,859,424
Web Solutions .................. 1,689,977 1,073,115 6,293,157 2,923,935
------------ ------------ ------------ ------------
$ 10,686,827 $ 9,131,601 $ 34,412,364 $ 20,783,359
============ ============ ============ ============
OPERATING EXPENSES:
Connectivity Services .......... $ 5,528,767 $ 4,564,365 $ 18,465,706 $ 9,969,618
Web Solutions .................. 349,312 361,467 1,240,863 872,736
------------ ------------ ------------ ------------
$ 5,878,079 $ 4,925,832 $ 19,706,569 $ 10,842,354
============ ============ ============ ============
SG&A:
Connectivity Services .......... $ 6,406,502 $ 6,422,507 $ 21,541,509 $ 15,035,430
Web Solutions .................. 985,566 852,144 3,451,580 2,461,592
------------ ------------ ------------ ------------
$ 7,392,068 $ 7,274,651 $ 24,993,089 $ 17,497,022
============ ============ ============ ============
OPERATING INCOME/(LOSS) BEFORE
DEPRECIATION AND AMORTIZATION:
Connectivity Services .......... $ (2,938,419) $ (2,928,386) $(11,888,008) $ (7,145,624)
Web Solutions .................. 355,099 (140,496) 1,600,714 (410,393)
------------ ------------ ------------ ------------
$ (2,583,320) $ (3,068,882) $(10,287,294) $ (7,556,017)
============ ============ ============ ============
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On June 7, 2000, the Company acquired assets of ImageNet, Inc. and
agreed to lend to the former owner of ImageNet, Inc., $20,000 per month for a
period of six months following the closing date. According to the agreement, the
principal amount is to be repaid within thirty (30) calendar days following the
issuance of the six-month lock-up shares.
The Company has several agreements with its service providers whereby
it is granted certain discounts on services based on anticipated volume over
specified periods with monthly minimums.
The Company has a new service agreement with Global Crossing Bandwidth,
Inc., dated July 31, 2000, for all voice and data services. The service
agreement was originally assumed as part of the Company's purchase of Idealdial
Corporation, and was renegotiated on September 29, 1999 and again on July 31,
2000. The terms of the amended agreement currently provide for an aggregate
minimum commitment of approximately $45 million subject to certain monthly
minimums. Monthly minimums escalate over the term of the agreement until the
earlier of the expiration of the agreement or when the Company has paid an
aggregate of approximately $45 million in usage charges. The Company is
currently meeting all commitments under the agreement.
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<PAGE> 11
The Company has a service agreement with WorldCom, Inc. for certain
network data services through July 2003. The terms of the agreement require the
Company to purchase a minimum of approximately $6.8 million, subject to a
monthly minimum of $250,000 beginning April 2001. The Company is in compliance
with all material terms of the agreement.
NOTE 6. COMMON STOCK TRANSACTIONS
The increase in the Company's common stock issued and outstanding for
the three months ended September 30, 2000 is primarily a result of:
o On August 1, 2000, the Company issued 8,848 shares of common stock
(valued at approximately $35,000) pursuant to an employment agreement
with two employees.
o On August 31, 2000, the Company issued an additional 583,443 shares of
common stock (valued at approximately $1.4 million) pursuant to a
purchase price adjustment for its August 31, 1999 acquisition of Wolfe
Internet Access.
o On September 21, 2000, the Company issued 916,031 shares of common
stock (valued at approximately $1.6 million) in the acquisition of the
assets of LanMinds, Inc., headquartered in Berkeley, California. The
Company also agreed to issue an additional 591,237 shares of common
stock into an escrow account (valued at approximately $1.1 million),
subject to adjustment and release depending on various factors set
forth in the Asset Transfer Agreement between LanMinds, Inc. and
RMI.NET (See Note 3). Due to these factors, only 505,447 shares of
common stock (valued at approximately $900,000) have been recorded to
equity at September 30, 2000.
o On September 29, 2000, the Company sold 488,797 shares of common stock
to CSG Systems International at a negotiated price of $750,000. CSG
Systems International provides billing services to the Company.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission Staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 must be applied to financial statements
no later than the fourth fiscal quarter of 2000. The Company has not fully
assessed whether the adoption of SAB 101 will have a material impact on its
financial position or results of operations.
NOTE 8. FINANCING AGREEMENT
On May 22, 2000, the Company entered into a financing agreement (the
"Agreement") with RFC Capital Corporation to fund general corporate purposes and
working capital needs. The Agreement allows the Company to borrow up to $20
million. The maximum amount of the loan outstanding may not exceed a specified
multiple of the Company's eligible monthly cash collections. The Company had
$6,111,172 outstanding and approximately $1.1 million available at September 30,
2000. Interest for this Agreement is equal to the greater of (i) LIBOR plus
6.15% per annum, or (ii) $3,000 per month. The Agreement expires on May 22,
2002. The Company has also issued to RFC Capital Corporation a warrant to
purchase 252,255 shares of common stock at $4.03125 per share.
NOTE 9. CORPORATE RESTRUCTURING
On June 22, 2000 the Company reduced its workforce by 108 people or 24
percent throughout all its markets across the country with the majority of the
impact in Seattle and Denver. The Company will continue to reduce operating
expenses through improved productivity, which, in part, involves centralizing
its accounting, billing, technical support, and customer service facilities.
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.
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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 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 customer
base; we may not be able to sustain our current growth or to successfully
integrate new customers or assets obtained through acquisitions; we may be
required to issue additional shares of our common stock pursuant to acquisitions
made in the past two years; we may fail to compete with existing and new
competitors; we may not adequately respond to technological developments
impacting the Internet; we may fail to implement proper security measures to
protect our network from inappropriate use, which could overload our network's
capacity and cause us to experience a major system failure; we may be required
to issue a substantial number of shares of our common stock upon exercise of
Class B Warrants, especially if the market value of our stock declines, thereby
causing significant dilution in the value of your investment; 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, 1999 under the caption "Item 1. Business - Risk Factors" and in our
other SEC filings and our press releases.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
TOTAL REVENUE
The Company's total revenues grew 17%, from $9,132,000 for the three
months ended September 30, 1999, to $10,687,000 for the three months ended
September 30, 2000. Revenue growth performance is attributable to an increase in
the number of the Company's customers through acquisitions and internal growth.
CONNECTIVITY SERVICES
Connectivity Services revenues are comprised predominately of dial-up,
dedicated access, Digital Subscriber Line ("DSL"), and telecommunication
services. The Company offers a broad range of connectivity options to its
customers including dedicated, DSL, Integrated Services Digital Network
("ISDN"), and dial-up connections as well as long distance voice services.
Connectivity customers typically pay fixed, monthly recurring service charges.
The charges vary depending on the type of
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<PAGE> 13
service, the length of the contract, and local market conditions. Amounts billed
relating to future periods are recorded as deferred revenue and amortized
monthly as the services are rendered.
Connectivity Services revenues grew 12%, from $8,058,000 for the three
months ended September 30, 1999, to $8,997,000 for the comparable three month
period in 2000. Acquisitions completed in the fourth quarter of 1999 contributed
significantly to this increase.
WEB SOLUTIONS
Web Solutions revenues are comprised of three major products: Web site
hosting and co-location, Web site production, and Web site marketing. Web
hosting customers typically pay fixed, recurring monthly service charges.
Revenue from Web site production and Web marketing customers is recognized as
the service is provided.
Web Solutions revenues grew 58%, from $1,073,000 for the three months
ended September 30, 1999, to $1,690,000 for the comparable three month period in
2000. Web site hosting and co-location revenue accounted for $520,000 in 1999
and $1,047,000 in 2000, for an increase of 101%. This increase is due to an
increase in the number of hosted Web sites. Web site production decreased from
$711,000 in 1999 to $556,000 in 2000, for a decrease of 22%. The decrease was
due to the nature of the Web site production product, as revenue may fluctuate
quarter to quarter based on the size and nature of single, high dollar value
contracts. Web site production revenue for the nine month period ended September
30, 2000 increased 46% over the same period of 1999.
OPERATING EXPENSES
Operating expenses related to Connectivity Services customers consist
primarily of costs for circuit and local line charges to provide service to the
Company's customers. The operating expenses related to Web Solutions customers
consist primarily of payroll expense related to Web site design services and
sub-contracting costs.
Operating expenses increased 19%, from $4,926,000 for the three months
ended September 30, 1999, to $5,878,000 for the comparable period in 2000,
primarily due to acquisitions. In addition, the operating expenses as a percent
of revenue increased from 54% in 1999 to 55% in 2000. Operating expenses as a
percent of revenues increased as consolidation efficiencies have not been fully
recognized. However, actions, such as supplier contract renegotiations and the
Company's recent restructuring, are expected to improve the situation in future
periods.
SELLING EXPENSES
Selling expenses consist primarily of salaries, commission,
advertising, and marketing. Selling expenses decreased 16%, from $1,712,000 for
the three months ended September 30, 1999, to $1,432,000 for the comparable
period in 2000. The decrease in selling expenses is primarily due to a decrease
in advertising by the Company during the three months ended September 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("G & A") consist primarily of
salaries and related benefits, and include the expenses of general management,
engineering, customer service, technical support, accounting, billing, and
office facilities. G & A expenses increased 7%, from $5,562,000 for the three
months ended September 30, 1999, to $5,960,000 for the comparable period in
2000. This increase is due to higher payroll and benefits costs related to
acquisitions and higher office rent expense.
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<PAGE> 14
DEPRECIATION AND AMORTIZATION
Depreciation is provided for over the estimated useful lives of assets
ranging from three to seven years using the straight-line method. The excess of
cost over the fair value of net assets acquired, or goodwill, is amortized using
the straight-line method over a five-year period. Depreciation and amortization
increased 89%, from $2,275,000 for the three months ended September 30, 1999, to
$4,308,000 for the comparable period in 2000. The increase was due to higher
goodwill amortization associated with acquisitions made during 1999 and 2000.
Additional acquisitions and investments may cause depreciation and goodwill
amortization to increase in the future.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
TOTAL REVENUE
The Company's total revenues grew 66%, from $20,783,000 for the nine
months ended September 30, 1999, to $34,412,000 for the nine months ended
September 30, 2000. Revenue growth is attributable to sales activities and
acquisitions made during 1999 and 2000.
CONNECTIVITY SERVICES
Connectivity Services revenues grew 57%, from $17,859,000 for the nine
months ended September 30, 1999, to $28,119,000 for the comparable nine month
period in 2000. Acquisitions completed in 1999 and 2000 contributed
significantly to this increase, as did increased sales of DSL services.
WEB SOLUTIONS
Web Solutions revenues grew 115%, from $2,924,000 for the nine months
ended September 30, 1999, to $6,293,000 for the comparable nine month period in
2000. Web site hosting and co-location revenue accounted for $1,214,000 of
revenue in 1999 and $3,039,000 in 2000, for an increase of 150%. This increase
is due to an increase in the number of hosted Web sites. Web site production
increased from $1,994,000 in 1999 to $2,915,000 in 2000, for an increase of 46%.
The increase in Web production revenue is primarily due to Web Solutions'
increased sales efforts in regions where acquisitions occurred.
OPERATING EXPENSES
Operating expenses increased 82%, from $10,842,000 for the nine months
ended September 30, 1999, to $19,707,000 for the comparable period in 2000,
primarily due to an inability to quickly assimilate acquisitions. In addition,
the operating expenses as a percent of revenue increased from 52% in the nine
months ended September 30, 1999 to 57% in the nine months ended September 30,
2000. Operating expenses as a percent of revenues increased for the nine months
ended September 30, 2000 relative to the comparable period of 1999 as
consolidation efficiencies have not been fully recognized.
SELLING EXPENSES
Selling expenses increased 36%, from $3,726,000 for the nine months
ended September 30, 1999, to $5,074,000 for the comparable period in 2000. The
increase in selling expenses is due primarily to the increase in the size of the
sales force.
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<PAGE> 15
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("G & A") consist primarily of
salaries and related benefits, and include the expenses of general management,
engineering, customer service, technical support, accounting, billing, and
office facilities. G & A expenses increased 45%, from $13,771,000 for the nine
months ended September 30, 1999, to $19,919,000 for the comparable period in
2000. This increase was partially the result of higher payroll costs and
benefits primarily related to the acquisitions during 1999. Payroll and benefits
cost increased 47%, from $10,234,000 in 1999, to $15,007,000 in 2000, as a
result of acquisitions and the resulting increase in the number of employees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is provided for over the estimated useful
lives of assets ranging from three to seven years using the straight-line
method. The excess of cost over the fair value of net assets acquired, or
goodwill, is amortized using the straight-line method over a five-year period.
Depreciation and amortization increased 163%, from $4,880,000 for the nine
months ended September 30, 1999, to $12,813,000 for the comparable period in
2000. The increase was due to higher goodwill amortization associated with
acquisitions made during 1999 and 2000.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, the Company used
$12,825,000 in operations, as compared to $9,214,000 for the nine months ended
September 30, 1999. The increase in cash used in operations resulted primarily
from a net loss of $23,364,000. In addition, the trade receivable balance
increased $2,308,000, primarily due to Web Solutions revenue attributable to one
customer of approximately $1,200,000. The Company expects to continue to have
operating cash flow deficiencies for the near future as it develops and expands
its business.
For the nine months ended September 30, 2000, the Company used
$2,554,000 in investing activities, as compared to $2,925,000 for the nine
months ended September 30, 1999. The Company capitalized approximately
$1,418,000 of development costs for a software platform to reduce costs related
to the Company's future production of commerce-enabled Web sites for customers
and certain software being developed for future sale.
For the nine months ended September 30, 2000, the Company received net
cash of $5,387,000 from financing activities, as compared to net cash of
$12,622,000 for the nine months ended September 30, 1999. Cash provided from
financing activities during the period was primarily the result of receiving
borrowings under the revolving credit facility with RFC Capital, offset by
increased payments on debt and capital lease obligations. The Company also
raised $750,000 through the sale of common stock to CSG Systems International,
under the equity shelf registration, and received a commitment to purchase an
additional $250,000 of common stock.
Under the RFC revolving credit facility, the maximum amount of the loan
outstanding may not exceed a specified multiple of the Company's eligible
monthly cash collections. The borrowing available to the Company will fluctuate
based on cash collections. The Company had $6,111,172 outstanding and
approximately $1.1 million available at September 30, 2000. However, the Company
has had an average of $2.5 million available borrowing over the prior 30 days.
Upon a successful closing of the Company's acquisition of Internet
Communications Corporation in November 2000, the available borrowing to the
Company under the facility will increase. Interest for this Agreement shall be
at a rate equal to the greater of (i) LIBOR plus 6.15% per annum, or (ii) $3,000
per month. The Agreement shall continue until May 22, 2002. The Company has also
issued to RFC Capital Corporation a warrant to purchase 252,255 shares of common
stock at $4.03125 per share.
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<PAGE> 16
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 have been financed through capital lease obligations
payable to finance companies.
In the Company's December 1999 private placement, the Company sold the
following securities to two institutional investors, Advantage Fund II Ltd. and
Koch Investment Group Limited, for aggregate consideration of $10 million:
o 761,610 shares of common stock;
o Class A Warrants to purchase 182,786 shares of common stock; and
o Class B Warrants to purchase a potentially unlimited number of shares
of common stock.
The outstanding Class B Warrants carry certain risks, including the potential
for:
o substantial dilution;
o a detrimental effect on the Company's ability to raise additional
funds; and
o a decline in the market value of the Company's common stock as a result
of the exercise of the Class B Warrants and subsequent sales of the
common stock.
The number of shares that the Company may issue to holders of RMI.NET's Class B
Warrants is based on the market price of the Company's common stock from May
2000 through November 2002. In effect, the holders of the Class B Warrants have
the opportunity to profit from a rise in the market price of the Company's
common stock, if any, without assuming the risk of loss from a decline in the
stock price. If the market price of the Company's common stock decreases, the
Company may issue a greater number of shares upon conversion of the Class B
Warrants. There is theoretically no limit on the number of shares of common
stock that the Company may be required to issue upon conversion of the Class B
Warrants. A stockholder's percentage ownership could be diluted substantially.
Moreover, because the exercise price of the Class B Warrants is only $0.01 per
share, the Company will not receive material cash proceeds from the exercise of
the Class B Warrants.
The Company has cash and cash equivalents of $1,246,000 at September
30, 2000. Management estimates that, based upon its current expectations for
growth, the Company will require additional funding of up to $4 million through
the end of 2000 for the execution of its current business plan, including the
financing of its anticipated capital expenditures and operating losses. In
addition to increased cash flow from operations resulting from actions such as
supplier contract renegotiations and the Company's recent restructuring, the
Company intends to obtain this funding from one or more of the following
sources:
1. A commitment from one of the institutional investors who purchased
common stock and warrants in December 1999 to purchase an additional
$7.5 million of common stock and warrants.
2. Increased borrowings under the credit facility with RFC Capital to
finance working capital and capital expenditures for up to $20 million.
The Company had $6,111,172 outstanding as of September 30, 2000.
3. An issuance of common stock, preferred stock, or other securities under
the recently filed "shelf" registration statement, which was originally
filed in the amount of $30 million.
Management believes its current operating funds, along with those additional
financing sources, will be sufficient to fund its cash requirements for at least
the next twelve months.
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
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<PAGE> 17
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
September 30, 2000. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although the Company resolved a prior dispute with Internet
Communications Corp. ("ICC"), and in March 2000 the Company agreed again to
acquire ICC, claims by third parties unrelated to ICC allegedly arising from the
terminated 1998 merger remain outstanding. As a result of the 1998 merger
attempt and the related financing transaction, the Company incurred costs,
expenses, and related fees of $6.1 million, a portion of which are in dispute.
Of the $6.1 million expense, approximately $4.2 million relates to a non-cash
item regarding warrants that the Company issued. Related to this dispute,
certain third parties filed suit on June 12, 2000 in New York state court
claiming they were entitled to approximately $770,000 in fees. The Company filed
an answer and counterclaim on July 13, 2000, disputing all such claims. At this
time, the Company is unable to determine the possible outcome of this remaining
dispute.
On September 28, 2000, the Company received a Demand for Arbitration
and Statement of Claim by Roger L. Penner, a former employee of the Company. Mr.
Penner was terminated for cause by the Company on June 12, 2000. Mr. Penner is
the former owner of CommerceGate Corporation, which was acquired by the Company
on June 24, 1999 pursuant to a merger agreement. The Penner demand asserts a
claim that he was terminated without cause, and that the Company breached the
merger agreement. The Penner demand seeks damages, in the form of Company common
stock and monies, in excess of $2 million. The Company filed an answer and
counterclaim on October 27, 2000, disputing all claims set forth in the Penner
Demand, and asserting claims that Penner was terminated for cause, that Penner
breached the merger agreement, and that Penner though fraud and willful
misconduct caused material damage to the Company. The Company's counterclaim
seeks damages from Penner in excess of $4 million. The matter is currently in
arbitration. At this time, the Company is unable to determine the possible
outcome of this remaining dispute.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER EVENTS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
1) On July 7, 2000, the Registrant filed a Current Report on Form 8-K
to report (i) the Company's June 22, 2000 reduction of its work
force by 24%; (ii) the hiring of Alex Burney as Vice President of
Sales and Marketing; and, (iii) the extension of a $12 million
revolving line of credit facility to the Company by RFC Capital
Corporation.
2) On September 21, 2000, the Registrant filed a Current Report on
Form 8-K announcing that the Company renegotiated the terms of the
previously announced acquisition agreement with Internet
Communications Corporation, as discussed in its News Release dated
September 11, 2000.
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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: November 14, 2000.
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 and
Principal Financial and Accounting
Officer)
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
