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, 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)
- -------------------------------------------------------------------------------
(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 8, 1999
- ------------------------------------ ------------------------------------------
Common Stock, $0.001 par value [18,117,947]
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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RMI.NET, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets as of September 30, 1999
and December 31,1998..........................................................................1
Consolidated Statements of Operations for the Three Months Ended
September 30, 1999 and 1998...................................................................2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998...................................................................3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998...................................................................4
Notes to Consolidated Financial Statements.......................................................5
RMI.NET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------------- -------------------
(UNAUDITED)
Current Assets
Cash and cash equivalents $ 6,212,781 $ 5,729,346
Trade receivables, net of allowance for doubtful accounts 4,681,118 1,598,479
Inventories 222,896 56,440
Other 1,123,698 224,629
---------------------- -------------------
Total current assets 12,240,493 $ 7,608,894
---------------------- -------------------
PROPERTY AND EQUIPMENT, NET 9,881,161 3,540,400
GOODWILL, NET 35,451,111 13,101,814
OTHER 547,673 430,693
---------------------- -------------------
Total assets $ 58,120,438 $ 24,681,801
====================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,479,742 $ 2,280,101
Current maturities of long-term debt and capital lease obligations 2,464,560 915,211
Deferred revenue 2,184,507 513,167
Accrued payroll and related taxes 657,188 302,660
Accrued expenses 1,931,014 1,611,242
---------------------- -------------------
Total current liabilities 10,717,011 5,622,381
---------------------- -------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 2,742,361 493,963
---------------------- -------------------
Total liabilities 13,459,372 6,116,344
---------------------- -------------------
REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
Series B, $.001 par value; 9,600 shares authorized, 2,150 and 8,000
shares issued and outstanding (liquidation preference of $2,150,000 at
September 30, 1999), respectively, net 1,928,171 6,747,843
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 100,000,000 shares authorized, 17,533,247
and 9,446,272 issued, respectively, 17,453,153 and 9,384,677
outstanding, respectively 17,533 9,384
Additional paid-in capital 73,048,000 29,257,415
Accumulated deficit (30,332,638) (17,449,185)
---------------------- -------------------
42,732,895 11,817,614
---------------------- -------------------
$ 58,120,438 $ 24,681,801
====================== ===================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
1999 1998
------------ ------------
(UNAUDITED)
REVENUE
Communication services $ 8,058,486 $ 1,922,143
Web solutions 1,073,115 643,181
------------ ------------
9,131,601 2,565,324
------------ ------------
COST OF REVENUE EARNED
Communication services 4,564,365 715,430
Web solutions 361,467 192,954
------------ ------------
4,925,832 908,384
------------ ------------
GROSS PROFIT 4,205,769 1,656,940
Selling expenses 1,712,389 474,219
General and administrative expenses 5,562,262 1,371,426
Costs related to unsuccessful merger attempt -- 4,549,301
Depreciation and amortization 2,275,010 489,625
------------ ------------
OPERATING LOSS (5,343,892) (5,227,631)
Other income (expense)
Interest expense (140,471) (85,407)
Interest income 52,298 18,074
------------ ------------
Net loss (5,432,065) (5,294,964)
Preferred stock dividends 21,654 --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (5,453,719) $ (5,294,964)
============ ============
Basic and diluted loss per common share (0.35) (0.67)
============ ============
Weighted average common shares outstanding 15,471,000 7,919,000
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
------------ ------------
(UNAUDITED)
REVENUE
Communication services $ 17,859,424 $ 5,177,518
Web solutions 2,923,935 1,328,848
------------ ------------
20,783,359 6,506,366
------------ ------------
COST OF REVENUE EARNED
Communication services 9,969,618 2,074,305
Web solutions 872,736 438,094
------------ ------------
10,842,354 2,512,399
------------ ------------
GROSS PROFIT 9,941,005 3,993,967
Selling expenses 3,726,203 1,313,781
General and administrative expenses 13,770,819 4,298,524
Costs related to unsuccessful merger attempt -- 4,549,301
Depreciation and amortization 4,879,947 978,700
------------ ------------
OPERATING LOSS (12,435,964) (7,146,339)
Other income (expense)
Interest expense (368,968) (243,130)
Interest income 120,741 61,110
------------ ------------
Net loss (12,684,191) (7,328,359)
Preferred stock dividends 199,261 --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(12,883,452) $ (7,328,359)
============ ============
Basic and diluted loss per common share (1.09) (0.99)
============ ============
Weighted average common shares outstanding 11,806,000 7,402,000
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
RMI.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,684,191) $ (7,328,359)
Items not requiring cash:
Depreciation 1,374,435 185,094
Amortization 3,505,512 846,706
Issuance of warrants for services related to unsuccessful merger -- 2,765,229
Stock option compensation -- 383,077
Stock contribution to pension plan 60,006 52,419
Provision for doubtful accounts 1,117,946 177,705
Changes in operating assets and liabilities net of effects
from acquired interests:
Trade receivables (2,621,261) (384,382)
Inventories (96,764) (10,063)
Other current assets (336,944) (63,063)
Accounts payable 99,013 2,112,397
Deferred revenue 720,089 (56,490)
Accrued payroll and related taxes 264,964 (20,940)
Accrued expenses (616,331) 1,004,395
------------ ------------
Net cash used in operating activities (9,213,526) (336,275)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,638,466) (567,831)
Purchases of interests, net of cash acquired (176,565) --
Increase in deferred acquisition costs (109,701) (285,042)
------------ ------------
Net cash used in investing activities (2,924,732) (852,873)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options and warrants 14,032,390 843,497
Proceeds from issuance of notes -- 400,000
Purchase of treasury stock -- (18,000)
Payments on long-term debt and capital lease obligations (1,410,697) (358,825)
------------ ------------
Net cash provided by financing activities 12,621,693 866,672
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 483,435 (322,476)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,729,346 1,053,189
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,212,781 $ 730,713
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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 RMI.NET, Inc. (hereinafter, "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 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. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components in the financial
statements. The Company does not report any items that would qualify for
disclosure under this statement.
NOTE 4. ACQUISITIONS
On July 30, 1999, the Company agreed to issue 441,175 shares of
common stock (valued at approximately $5.3 million) in the acquisition of
Triad Resources, L.L.C., an Oklahoma limited liability company doing business
as "WebZone" and headquartered in Tulsa, Oklahoma. WebZone is an Internet
service provider.
On July 30, 1999, the Company agreed to issue 174,634 shares of
common stock (valued at approximately $1.9 million) in the acquisition of
ACES Research, Inc., an Arizona corporation headquartered in Tucson, Arizona.
ACES Research is an Internet service provider whose customer base is
comprised primarily of business customers who are dedicated Internet access
users.
5
On August 30, 1999, the Company agreed to issue 174,001 shares of
common stock (valued at approximately $1.5 million) in the acquisition of the
high-end web hosting and dedicated access service assets, serving primarily
business customers, of Novo Media Group, Inc., a California corporation
headquartered in San Francisco, California.
On August 31, 1999, the Company agreed to issue 811,687 shares of
common stock (valued at approximately $6.6 million) in the acquisition of
the assets of Wolfe Internet Access, L.L.C., a Washington limited liability
company headquartered in Seattle, Washington and doing business as
"WolfeNet." WolfeNet is an Internet service provider.
Substantially all the purchase consideration of the acquisitions was
recorded as goodwill.
NOTE 5. SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the
Company by reviewing operating results comprising two segments of the
business. As such, the Company considers each division to be an operating
segment. In making operating decisions and allocating resources, the
Company's management specifically focuses on the revenues and operating costs
generated by each operating segment, as summarized in the following tables.
Certain shared costs of the segments have been allocated to each segment
based upon its share of the consolidated revenues for the period reported.
Excluded from the operating loss of the segment for 1998 is expense of
$4,549,301 related to an unsuccessful merger attempt.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
(unaudited) (unaudited)
NET SALES
Communication Services $ 8,058,486 $ 1,922,143 $ 17,859,424 $ 5,177,518
Web Solutions 1,073,115 643,181 2,923,935 1,328,848
Total Net Sales 9,131,601 2,565,324 20,783,359 6,506,366
COST OF REVENUE EARNED
Communication Services 4,564,365 715,430 9,969,618 2,074,305
Web Solutions 361,467 192,954 872,736 438,094
Total Cost of Revenue Earned 4,925,832 908,384 10,842,354 2,512,399
SELLING EXPENSES
Communication Services 1,511,934 355,322 3,201,977 1,042,930
Web Solutions 200,455 118,897 524,226 270,851
Total Selling 1,712,389 474,219 3,726,203 1,313,781
GENERAL & ADMINISTRATIVE ("G&A")
Communication Services 4,910,573 973,278 11,833,453 3,549,133
Web Solutions 651,689 398,148 1,937,366 749,391
Total G&A 5,562,262 1,371,426 13,770,819 4,298,524
6
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
(unaudited) (unaudited)
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND
AMORTIZATION
Communication Services (2,928,386) (121,887) (7,145,624) (1,488,850)
Web Solutions (140,496) (66,818) (410,393) (129,488)
Total Operating Income (Loss) (3,068,882) (188,705) (7,556,017) (1,618,338)
NOTE 6. NAME CHANGE
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.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In June 1998, the Company announced it had entered into a merger
agreement to acquire Internet Communications Corporation ("ICC"). The closing
of the acquisition was subject to various closing conditions, and the merger
agreement contained certain rights of termination. On October 13, 1998, the
Company announced that it 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 any monies or anything of value to ICC as a result of the
claims.
As a result of the merger termination and the related financing
transactions, which were not completed, the Company incurred costs, expenses
and related fees of $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 September 30, 1999 related to this matter. At this time,
management of the Company is unable to determine the possible outcome of this
dispute.
NOTE 8. COMMON STOCK TRANSACTIONS
The increase in the Company's common stock issued and outstanding as
of September 30, 1999 is primarily a result of:
- On August 13, 1999, the Company's Chief Executive Officer exercised
3,950,000 warrants to purchase the Company's common stock yielding
net proceeds to the Company of approximately $7.5 million.
7
- On July 30, 1999, the Company agreed to issue 441,175 shares of
common stock (valued at approximately $5.3 million) in the
acquisition of Triad Resources, L.L.C., an Oklahoma limited liability
company doing business as "WebZone" and headquartered in Tulsa,
Oklahoma. WebZone is an Internet service provider.
- On July 30, 1999, the Company agreed to issue 174,634 shares of
common stock (valued at approximately $1.9 million) in the
acquisition of ACES Research, Inc., an Arizona corporation
headquartered in Tucson, Arizona. ACES Research is an Internet
service provider whose customer base is comprised of business
dedicated Internet access users.
- On August 30, 1999, the Company agreed to issue 174,001 shares of
common stock (valued at approximately $1.5 million) in the
acquisition of the high-end web hosting and dedicated access service
assets of Novo Media Group, Inc., a California corporation
headquartered in San Francisco, California.
- On August 31, 1999, the Company agreed to issue 811,687 shares of
common stock (valued at approximately $6.6 million) in the
acquisition of the assets of Wolfe Internet Access, L.L.C., a
Washington limited liability company headquartered in Seattle,
Washington and doing business as "WolfeNet."
- During the quarter ended September 30, 1999, the Company issued
354,023 shares of common stock upon conversion of 3,276 shares of
its Series B Preferred Stock. Pursuant to the terms of the Company's
Series B Preferred Stock, the conversion price was 93.13% of the
arithmetic average of the lowest three closing bid prices during the
20 consecutive trading days immediately preceding the conversion
date.
NOTE 9. SUBSEQUENT EVENTS
The Company announced on November 8, 1999 that it was consolidating
its national call center operations and closing its Opelika, Alabama call
center. The Company expects to save approximately $2.5 million on an annual
basis, and reduce its overall headcount by approximately 75 employees,
through this action.
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 SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
TOTAL REVENUE
The Company's total revenues grew 256% from $2.6 million to $9.1
million for the three months ended September 30, 1999 from September 30,
1998. Revenue growth is primarily attributable to an increase in the number
of the Company's customers as a result of customers added by acquisition and
a more aggressive sales effort. 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 319%
from $1.9 million to $8.1 million for the three months ended September 30,
1999 from September 30, 1998. The increase results in part from the addition
of over 49,000
8
dial-up customers, over 1,200 dedicated access customers and over 19,500
local and long distance customers due to acquisitions in the fourth quarter
of 1998 and the first nine months of 1999. The growth in revenue is also 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 1999.
WEB SOLUTIONS
Web Solutions revenues grew 67% from $0.6 million for the three
months ended September 30, 1998 to $1.1 million for the three months ended
September 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 $0.2 million of revenue in the three months ended
September 30, 1998 and $0.4 million in the three months ended September 30,
1999, for an increase of 121%. Web site production increased from $0.4 million
in the three months ended September 30, 1998 to $0.7 million in the three
months ended September 30, 1999, for an increase of 64%. The increase in web
site production is primarily due to the acquisition of Application Methods in
July 1998, as well as an increase in sales personnel throughout the country.
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 September 30, 1999 was $4.2 million, or 46% of revenue,
compared to $1.7 million, or 65% of revenue for the three months ended
September 30, 1998. The lower gross margin ratio was due primarily to lower
margins of three recent non-ISP acquisitions. Although the underlying cost
structure for these acquisitions is being improved to restore the Company to
higher margins, traditional telecom services historically generate lower
gross margins than the Company's other Communication Services operations. The
Company plans to transition these local and long distance telecom customers
to dial-up Internet subscribers over the next year, which may help
restore margins to historical levels.
SELLING EXPENSES
Total selling expenses increased from approximately $0.5 million for
the three months ended September 30, 1998 to $1.7 million for the three
months ended September 30, 1999, for an increase of 261%. The increase was
primarily due to the launch of a national advertising campaign in the third
quarter of 1999 to support the Company's growing national presence and
expanding line of products and services, as well as an increase in sales
personnel throughout the country.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses ("G&A") increased from
approximately $1.4 million for the three months ended September 30, 1998 to
$5.6 million for the three months ended September 30, 1999, for an increase
of 306%. This increase was partially the result of higher payroll costs and
benefits. Payroll and benefits cost increased 280% from $0.9 million in the
three months ended September 30, 1998 to $3.2 million in the three months
ended September 30, 1999 as a result of increasing the Company's headcount
from approximately 115 employees in September 1998 to approximately 425
employees in September 1999. Outside services, which includes "temporary to
hire" staff and professional services, increased 188% from $0.2 million in
the three months ended September 30, 1998 to $0.5 million in the three months
ended September 30, 1999. The Company hires many of the technical support
call center staff and the Web production staff on a "temp to hire" program,
wherein the new employee remains on the temporary employment agency's payroll
for approximately ninety days.
COSTS RELATED TO UNSUCCESSFUL MERGER ATTEMPT
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. As a result of the
termination and the related financing transactions which were not completed,
the Company incurred cost, expenses and related fees of approximately $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 total expense incurred, $4.5 million was
recognized in the third quarter of 1998. The remaining $1.6 million was
recognized in the fourth quarter of 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $0.5 million for the
three months ended September 30, 1998 to $2.3 million for the three months
ended September 30, 1999 for an increase of 365%. The increase was due to
higher goodwill amortization associated with seventeen companies that were
acquired since September 30, 1998.
9
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
TOTAL REVENUE
The Company's total revenues grew 219% from $6.5 million to $20.8
million for the nine months ended September 30, 1999 from September 30, 1998.
Revenue growth performance is attributable to an increase in the number of
the Company's customers as a result of customers added by acquisition and a
more aggressive sales effort. 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 245%
from $5.2 million to $17.9 for the nine months ended September 30, 1999 from
September 30, 1998. The increase results in part from the addition of over
49,000 dial-up customers, over 1,200 dedicated access customers and over
19,500 local and long distance customers due to acquisitions in the fourth
quarter of 1998 and the first nine months of 1999. The growth in revenue is
also 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 1999.
WEB SOLUTIONS
Web Solutions revenues grew 120% from $1.3 million for the nine
months ended September 30, 1998 to $2.9 million for the nine months ended
September 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 $0.4 million of revenue in the first nine months
of 1998 and $0.9 million in the first nine months of 1999, for an increase of
101%. Web site production increased from $0.8 million in the first nine
months of 1998 to $2.0 million in the first nine months of 1999, for an
increase of 159%. The increase in web site production is primarily due to the
acquisition of Application Methods in July 1998, as well as an increase in
sales personnel throughout the country.
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 nine months of 1999 was $9.9 million, or 48% of revenue, compared to
$4.0 million, or 61% of revenue for the first nine months of 1998. The lower
gross margin ratio was due primarily to lower margins of three recent non-ISP
acquisitions. Although the underlying cost structure for these acquisitions
is being improved to restore the Company to higher margins, traditional
telecom services historically generate lower gross margins than the Company's
other Communication Services operations. The Company plans to transition
these local and long distance telecom customers to dial-up Internet
subscribers over the next year, which may help restore margins to historical
levels.
SELLING EXPENSES
Total selling expenses increased from approximately $1.3 million for
the nine months ended September 30, 1998 to $3.7 million for the nine months
ended September 30, 1999, for an increase of 184%. The increase was primarily
due to the launch of a national advertising campaign in the third quarter of
1999 to support the Company's growing national presence and expanding line of
products and services.
10
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses ("G&A") increased from
approximately $4.3 million for the nine months ended September 30, 1998 to
$13.8 million for the nine months ended September 30, 1999, for an increase of
220%. This increase was partially the result of higher payroll costs and
benefits. Payroll and benefits cost increased 187% from $2.4 million in the
first nine months of 1998 to $8.0 million in the first nine months of 1999
as a result of increasing the Company's headcount from approximately 115
employees in September 1998 to approximately 425 employees in September 1999.
Outside services, which includes "temporary to hire" staff and professional
services increased 123% from $0.8 million in the first nine months of 1998 to
$1.8 million in the first nine months of 1999. The Company hires many of the
technical support call center staff and the Web production staff on a "temp
to hire" program, wherein the new employee remains on the temporary
employment agency's payroll for approximately ninety days.
COSTS RELATED TO UNSUCCESSFUL MERGER ATTEMPT
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. As a result of the
termination and the related financing transactions which were not completed,
the Company incurred cost, expenses and related fees of approximately $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 total expense incurred, $4.5 million was
recognized in the third quarter of 1998. The remaining $1.6 million was
recognized in the fourth quarter of 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $1.0 million for the
nine months ended September 30, 1998 to $4.9 million for the nine months
ended September 30, 1999, for an increase of 399%. The increase was due to
higher goodwill amortization that was associated with acquisitions completed
subsequent to September 30, 1998.
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, 1999, the Company's cash
used in operations was $9.2 million as compared to $0.3 million for the nine
months ended September 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 nine months ended September 30, 1999, the Company used $2.9
million in investing activities compared to $0.9 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 nine months
ended September 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. In addition, on August 13, 1999, the
Company's Chief Executive Officer exercised 3,950,000 warrants to purchase
the Company's common stock yielding net proceeds to the Company of
approximately $7.5 million.
11
Since its inception, the Company has funded its operations and
working capital needs primarily through the public and private placement of
the Company's equity securities. In addition, a significant portion of the
Company's capital expenditures has been financed through capital lease
obligations payable to finance companies. The Company has also borrowed
amounts from its Chief Executive Officer in order to fund working capital
requirements.
The Company also issued 8,000 shares of its Series B Redeemable,
Convertible Preferred Stock ("Series B Preferred Stock") through a private
placement, which was completed on December 10, 1998. The Company received $8
million in gross proceeds from the issuance of the Series B Preferred Stock,
which was sold to two institutional investors. The Series B Preferred Stock
is convertible, subject to certain restrictions, into shares of the Company's
common stock at a variable rate, based on a formula linked to the market
price at the time of conversion. The terms of the Series B Preferred Stock
also includes restrictions on conversion depending on certain market
conditions, restrictions against short sales and other hedging transactions
by the investors and a conversion rate which may be up to a 20% premium to
the market price or a discount to the market price depending on the time of
conversion. The Series B Preferred Stock may be redeemed by the Company at
any time if the Company is in compliance with certain covenants at a minimum
redemption price equal to 115% times the outstanding face amount plus accrued
but unpaid dividends and interest. In addition, the Series B Preferred Stock
may be redeemed at the option of the holders if the Company's common stock
ceases to be traded on either the NASDAQ, NASDAQ Small Cap, NYSE or the AMEX
stock exchanges, if the Company is 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 September 30, 1999, 5,963 shares
of Series B Preferred Stock have been converted into 580,087 shares of the
Company's common stock and 113 shares of Series B Preferred Stock have been
issued as dividends; 2,150 shares of Series B Preferred Stock remained
outstanding. From October 1, 1999 to November 8, 1999, an additional 2,086
shares of Series B Preferred Stock have been converted into 372,270 shares of
the Company's common stock, leaving 64 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 cash and cash equivalents of $6.2 million as of
September 30, 1999. Management estimates that, based upon its current
expectations for growth, the Company will not require additional funding
through the end of 1999. However, in order to execute its current business
plan over the next 12 months, including financing of its anticipated capital
expenditures and operating losses, the Company will require additional
funding of up to $10 million. 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 $5.0 million of
preferred stock with the same terms as the Series B Preferred Stock, (2)
establish master lease agreements with certain communications equipment and
computer hardware manufacturers for $10.0 million, (3) establish a credit
facility to finance equipment purchased and other capital expenditures for
$5.0 million, and (4) placement of $10.0 million of additional equity or
convertible debt securities with certain institutional investors. 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 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.
The Company announced on November 8, 1999 that it was consolidating
its national call center operations and closing its Opelika, Alabama call
center. The Company expects to save approximately $2.5 million on an annual
basis, and reduce its overall headcount by approximately 75 employees,
through this action.
YEAR 2000 ISSUES
12
The following disclosure is a "Year 2000 Statement" and a "Year 2000
Readiness Disclosure," as defined in the Year 2000 Information and Readiness
Disclosure Act, signed into law by President Clinton on October 19, 1998
(Pub. L. 105-271, 112 Stat. 2386).
The Company is preparing its systems and applications for the Year
2000 ("Y2K"). Various problems may result from the improper processing of
dates and date-sensitive calculations by computers and other machinery as the
year 2000 is approached and reached. These problems arise from the fact that
most of the world's computer hardware and software have historically used
only two digits to identify the year in a date. If the computer systems
cannot distinguish between the year 1900 and 2000, system failures or other
computer errors could result.
STATE OF READINESS
The Company has established a Y2K Committee to coordinate
appropriate activity and a reporting structure to the Board of Directors on a
monthly basis with regard to the Year 2000 issue. This committee has outlined
a comprehensive plan and is currently implementing the tasks associated for
the Company to become Y2K ready. 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 has been checked to ensure Y2K compliance. 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 November 1999.
The Company has acquired 19 companies since June 1998. The Company is
currently working very closely with each acquired company to determine its
state of readiness. Overall, the Company believes that the majority of the
acquired companies are Y2K compliant from a hardware and software
perspective. The Company is still testing the remaining acquired companies.
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 October 31, 1999. On or before November
15, 1999, the Company expects to complete its final issuance of requests to
all external third party vendors that provide additional goods and services
to the Company.
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 $200,000 to $250,000.
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 and approximately $180,000 thus far on
alternative power costs, in connection with assessing the Y2K issues. Due to
the Company's headquarters and data center move
13
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 believes such
costs will not have a material effect on the Company's financial condition,
liquidity or results of operation.
RISK ASSESSMENT
The failure by the Company to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Presently, however, the Company perceives that its
most likely worst case scenario related to the Year 2000 is associated with
potential concerns with third party services or products. The Company is
dependent on a significant number of third party vendors to provide network
services and equipment. A significant Year 2000-related disruption of the
network services or equipment provided to the Company by third party vendors
could cause customers to consider seeking alternate providers or cause an
unmanageable burden on 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
September 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
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 any monies or anything of value to ICC as a result of the
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 of $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 September 30, 1999 related to this matter. At this time,
management of the Company is unable to determine the possible outcome of this
remaining dispute.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 1999, the Company
issued, committed to issue, and/or sold the following securities:
- During the quarter ended September 30, 1999, the Company
issued 354,023 shares of common upon conversion of 3,276
shares of its Series B Preferred Stock. Pursuant to the
terms of the Company's Series B Preferred Stock, the
conversion price was 93.13% of the arithmetic average of the
lowest three closing bid prices during the 20 consecutive
trading days immediately preceding the conversion date.
- On July 30, 1999, the Company agreed to issue 441,175 shares
of common stock (valued at approximately $5.3 million) in the
acquisition of Triad Resources, L.L.C., an Oklahoma limited
liability company doing business as "WebZone" and
headquartered in Tulsa, Oklahoma. WebZone is an Internet
service provider.
- On July 30, 1999, the Company agreed to issue 174,634 shares
of common stock (valued at approximately $1.9 million) in the
acquisition of ACES Research, Inc., an Arizona corporation
headquartered in Tucson, Arizona. ACES Research is an Internet
service provider whose customer base is comprised of dedicated
Internet access users.
- On August 13, 1999, the Company issued 3,950,000 shares of
common stock to Douglas H. Hanson pursuant to his exercise of
warrants granted under the warrant agreement of October 1997
between Rocky Mountain Internet, Inc. (now known as RMI.Net,
Inc.) and Mr. Hanson.
15
- On August 30, 1999, the Company agreed to issue 174,001 shares
of common stock (valued at approximately $1.5 million) in the
acquisition of the high-end web hosting and dedicated access
service assets of Novo Media Group, Inc., a California
corporation headquartered in San Francisco, California.
- On August 31, 1999, the Company agreed to issue 811,687 shares
of common stock (valued at approximately $6.6 million) in the
acquisition of the assets of Wolfe Internet Access, L.L.C., a
Washington limited liability company headquartered in Seattle,
Washington and doing business as "WolfeNet."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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
(b) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------- ---------------------------------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
1) On July 8, 1999, the Registrant filed a Current Report on Form
8-K to report a change in the Registrant's name from Rocky
Mountain Internet, Inc. to RMI.NET, Inc. The Registrant's
common stockholders approved the name change at the 1999
Annual Meeting of Stockholders, which was held on June 24,
1999.
2) On July 8, 1999, the Registrant filed a Current Report on Form
8-K to report the Registrant's acquisition of CommerceGate
Corporation, a Washington corporation.
3) On July 12, 1999, the Registrant filed an amended Current
Report on Form 8-K (initially filed on July 8, 1999) to report
the acquisition of CommerceGate Corporation, a Washington
corporation, and to file the acquisition agreement as an
exhibit.
4) On July 19, 1999, the Registrant filed a Current Report on
Form 8-K to report the Registrant's acquisition of CyberDesic
Communications Corporation, Inc., an Illinois corporation.
5) On August 4, 1999, the Registrant filed an amended Current
Report on Form 8-K (initially filed on June 28, 1999) to
report the Registrant's acquisition of IdealDial
16
Corporation, an Illinois corporation, and to provide financial
statements and pro forma financial information regarding the
acquisition.
6) On August 26, 1999, the Registrant filed a Current Report on
Form 8-K to report the Registrant's acquisition of Triad
Resources, L.L.C., an Oklahoma limited liability company, in
order to provide financial statements and pro forma financial
information regarding the acquisition. The acquisition was
initially reported in the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Securities and Exchange Commission on August 9, 1999.
7) On August 30, 1999, the Registrant filed a Current Report on
Form 8-K to report the Registrant's acquisition of ACES
Research, Inc., an Arizona corporation, in order to provide
financial statements and pro forma financial information
regarding the acquisition. The acquisition was initially
reported in the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, as filed with the Securities
and Exchange Commission on August 9, 1999.
8) On September 14, 1999, the Registrant filed a Current Report
on Form 8-K to report the Registrant's acquisition of the
high-end web hosting and dedicated access service assets of
Novo Media Group, Inc., a California corporation.
9) On September 15, 1999, the Registrant filed a Current Report
on Form 8-K to report the Registrant's acquisition of Wolfe
Internet Access, L.L.C., a Washington limited liability
company.
17
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 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)
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------- --------------------------------------------------
27.1 Financial Data Schedule.
19