-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mm2W+GmPKQbhzlx67noxWG/vvb80BY5RZvFg9JJU50/u/2ppFrSPSqal/kcltnhx 61P542ZWwHelxp827AecQA== 0000912057-97-011264.txt : 19970401 0000912057-97-011264.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011264 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN INTERNET INC CENTRAL INDEX KEY: 0001003282 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841322326 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28738 FILM NUMBER: 97569984 BUSINESS ADDRESS: STREET 1: 1099 18TH STREET STREET 2: STE 3000 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036720700 MAIL ADDRESS: STREET 1: 1099 18TH STREET STREET 2: STE 3000 CITY: DENVER STATE: CO ZIP: 80202 10KSB 1 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [ X ] 15, ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] 15, TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ____________ COMMISSION FILE NUMBER: 001-12063 ROCKY MOUNTAIN INTERNET, 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 1099 18th Street, Suite 3000 DENVER COLORADO 80202 - -------------------------------------------- --------------- Address of principal executive offices Zip Code Registrant's telephone number, including area code: 303-672-0700 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $.001 per share Warrants to purchase common stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 . ----- ------ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]. State issuer's revenue for its most recent fiscal year. $3,281,579 The aggregate market value of the voting stock held by non-affiliates of the registrant on March 15, 1997, based upon the closing price of the Common Stock on the NASDAQ SmallCap Market for such date, was approximately $5,445,000. The number of outstanding shares of the registrant's Common Stock as of March 15, 1997, was approximately 4,648,565 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997 and to be used in connection with the Annual Meeting of Shareholders expected to be held June 10, 1997 are incorporated by reference in Part III of this Form 10-KSB. Only portions of the Proxy Statement which are specifically incorporated by reference are deemed filed as part of this Annual Report on Form 10-KSB. Transitional Small Business Disclosure Format (Check One): Yes No X ----- ----- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS Certain of the information contained in this Form 10-KSB, including "Description of Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", contain forward-looking statements. The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will continue to design, market and provide succesful new services, that competitive conditions will not change materially, that demand for the Company's services will continue to grow, that the Company will retain and add qualified personnel, that the Company's forecasts will accurately anticipate revenue growth and the costs of producing that growth, and that there will be no material adverse change in the Company's business. In light of the significant uncertainties inherent in the forward-looking information included in this Form 10-KSB, actual results could differ materially from the forward-looking information contained in this Form 10-KSB. Rocky Mountain Internet, Inc. (the "Company") is a regional full-service Internet access provider offering a wide range of Internet access services including dial-up access, dedicated high speed access, and other Internet related services to businesses and individuals including World Wide Web ("Web") services, data services and network frame services in the State of Colorado. The Company gives particular attention to providing exemplary customer service at competitive prices. The Company's high speed, digital telecommunications network provides subscribers with direct access to the full range of Internet applications and resources including E-mail, World Wide Web sites, USENET newsgroups and FTP software. The Company has experienced rapid growth in its subscriber base, reaching approximately 9,800 subscribers at the end of December 1996, up from 4,000 subscribers at the end of December, 1995. The Company is a Delaware corporation with its executive office located in Denver, Colorado, and an operating facility located in Colorado Springs, Colorado. The Company employs approximately 83 persons. The Company was incorporated in October 1995, and is the successor to Rocky Mountain Internet, Inc., a Colorado Corporation which was incorporated in 1994. RMI's network infrastructure is comprised of a regional telecommunications network supported by a backbone of leased, high-speed dedicated phone lines, computer hardware and software, and local access points known as points of presence ("POPs") in eleven Colorado cities providing access availability to more than 85% of the population in Colorado. The Company's strategy includes constructing additional POPs in various cities located in the Rocky Mountain West. ACQUISITIONS RMI acquired two businesses in late 1996. In November, 1996, the Company acquired assets of CompuNerd, Inc., a small Colorado Springs based Web services company. RMI acquired in that transaction approximately 35 Web hosting subscribers and 115 Internet access subscribers. In December, 1996, the Company acquired the assets of The Information Exchange, LLC., a Denver based voice messaging service company, a related party through common ownership. The Information Exchange provides voice messaging services to over 370 business 3 clients in the Denver Metropolitan area. RMI completed this acquisition with the intent to provide a multi-media service (voice messaging, email and fax) to its dial-up clients in the second half of 1997. In January, 1997, RMI acquired the dedicated high speed and dial-up subscribers from Online Network Enterprises, Inc. (O*N*E), headquartered in Boulder, Colorado, a division of VR*1, Inc. The O*N*E acquisition netted RMI approximately 47 dedicated and 732 dial-up subscribers. The total monthly revenue acquired between the three companies is approximately $45,000. INDUSTRY OVERVIEW The Internet had its origins in 1969 as a project of the Advanced Research Project Agency ("ARPA") of the U.S. Department of Defense. The network established by ARPA was designed to provide efficient connections between different types of computers separated by large geographic areas and to function even if part of the network became inoperative. Historically, the infrastructure was used by academic institutions and governmental agencies for remote access to host computers and electronic mail communications. Accordingly, the U.S. government historically provided the majority of funding for the infrastructure. However, as the modern Internet developed and became commercial, funding shifted to the private sector. Over the past year, the number of worldwide Internet users has increased significantly. In addition, the number of domains registered, which the Company believes is a forward-indicator of activity on the Internet, has increased at a rapid pace. There are several key drivers responsible for the rapid proliferation of Internet use: -- IMPROVING PERFORMANCE - There have been significant bandwidth, communications, and price/performance improvements in communications over the Internet. These developments make the Internet an increasingly attractive medium for conducting business, adding convenience, and attracting more users. -- GROWTH OF MODEM-ENABLED PCS - As the installed personal computer ("PC") base has grown, it has become increasingly common for those PCs to have a modem connection. Many new computers now have pre- installed modems, allowing connections to be made even more easily. -- IMPROVED CONTENT - As the Internet grows, new information and services available on the Internet have attracted attention and created a more widespread appeal. -- EXPANSION OF LANS AND WANS - Corporate, government, and educational local area networks ("LANs") and wide area networks ("WANs") are expanding and these installed networks enable multiple users to be connected to the Internet through a single point of contact. Therefore, the actual number of Internet users connected through these LANs and WANs greatly exceeds the number of connection points. -- EXPECTATIONS FOR ELECTRONIC COMMERCE OVER THE INTERNET - With the increased recognition of the Internet's potential as a medium for marketing and purchasing, a growing number of companies are initiating or expanding their use of the Internet for commercial purposes. 4 -- DRAMATIC INCREASE IN NAVIGATIONAL AND UTILITY TOOLS - The proliferation and improvement of software tools and browsers which facilitate Internet use have attracted more users. The World Wide Web and other user-friendly interfaces have made it easier for users to access desired information on the Internet. The convergence of these factors is creating an environment in which individuals and businesses and other organizations perceive a compelling need to establish Internet access and an Internet presence. The Company believes that its Internet access, Web service and value-added services offerings are particularly appealing to businesses for a number of reasons. For example, many businesses are accustomed to working with a vendor with a local presence and may prefer to contract with an Internet service provider such as RMI which has a local presence and the experience and reputation of providing quality and dependable service. Furthermore, many businesses have Internet requirements that go beyond the simple access that most Internet service providers offer. These Internet requirements include security, network consulting, high-bandwidth managed access and data services. THE RMI STRATEGY RMI provides a comprehensive range of Internet access options, Web production services and Web hosting services designed to meet the needs of businesses and individual subscribers. The Company's strategy is to focus on cities that have not become the primary target markets for the national access providers and long distance carriers, but have enough of a population base to provide a return on investment to justify initiatives by the Company. It is the objective of RMI to provide a "one-stop-shop" to local businesses that require not only reliable Internet access, but guidance regarding the use of the Internet and how to take full advantage of applications pertinent to their businesses. RMI plans to leverage its local presence and direct field sales force and customer service organization to provide on-site sales and support. RMI also plans to remain competitive in the individual dial-up market with reasonably priced services. RMI's network infrastructure currently allows local access for approximately 85% of the population in Colorado. RMI's strategy is to focus on cities that are not the primary target of the national access providers and long distance carriers and to provide comprehensive solutions by direct on-site sales contact with the business communities in those areas. The Company intends to continue to expand its subscriber base by providing high quality services coupled with the expertise to assist its customers with application driven solutions to their needs, RMI intends to achieve this strategy by focusing on the following key elements: FOCUS ON BUSINESS SUBSCRIBERS. The Company believes that use of the Internet by businesses will grow substantially over the next several years. The Internet has the potential to enhance productivity through improved communications, access to data, and through new ways of organizing how businesses interact, both with other commercial enterprises and with consumers. The Internet provides the potential for even small businesses to maintain a worldwide presence for marketing their products and making information about their products and services available to interested parties in ways not possible before. The Company believes that many businesses are aware, in general, that the Internet provides potential new means of conducting business, and that businesses do not have the knowledge or technical expertise required 5 to access or use the Internet. The Company believes that by offering its business customers a consultative and intensive service oriented relationship, it can position itself as an important value added supplier and thus gain a competitive advantage vis-a-vis its larger competitors which may be unwilling or unable to provide the kind of customized service that the Company intends to provide. In order to implement this strategy, the Company instituted a field sales organization in November of 1995 which makes outside calls on business customers and potential business customers. PROVIDE HIGH-BANDWIDTH, RELIABLE INFRASTRUCTURE SERVICES. In the fourth quarter of 1996, RMI instituted a frame network of Cascade switches in Denver, Colorado Springs and Boulder that are interconnected via a DS3 fiber optic network. RMI also increased its network infrastructure to include redundant T3 access to the Internet through MCI Telecommunications Corporation and ANS CO + RE Systems, Inc. with its main servers, routers and network equipment contained in a data center with extensive environmental controls including generator power backup and dual air conditioning systems. The Company has expanded its network in anticipation of increasing demand for higher bandwidth requirements such as 10 Mbps through 45 Mbps. PROVIDE VALUE-ADDED SERVICE OFFERINGS. RMI offers a range of value-added services designed to assist business customers in taking strategic advantage of opportunities offered by the Internet such as increased revenues, decreasing costs, bringing value-added services to their clientele and taking advantage of the new advances in electronic commerce. These include Web services, network consulting, security consulting, data services, commercial transaction and payment processing services, Intranet applications, and voice messaging services. PRICING STRATEGY. RMI believes that price competition will intensify as the Internet market grows and matures. RMI intends to remain competitive by pricing its services to reflect market conditions. Accordingly, the Company believes that management of its costs will be critical in increasing market share and remaining competitive. RMI has made significant investments in its hardware and network infrastructure which are designed to increase efficiency and reduce the cost of delivering its services. In general, RMI intends to price all of its services in order to remain competitive with demand, competition and market trends. It is not the intention of RMI to either be the lowest priced provider or conversely the highest priced provider. RMI continues to add value to its services through its investment in its network in order to offer the highest quality services, and through its focus on customer needs and ensuring that the Company's client base receives the highest degree of customer service and support. RMI SERVICES RMI primarily provides two high quality services which it believes are competitively priced: Internet access service and Web services. Internet access services can be divided into two basic categories: personal accounts for individuals and small businesses that connect to the Internet via a modem (referred to as "dial-up" accounts), and high speed dedicated accounts (principally for medium to large business users) that connect to the Internet via dedicated telecommunications lines. Dial-up subscribers can access the Internet by calling RMI's local POPs. RMI's dedicated accounts consist of subscribers that desire to connect internal computer networks to the Internet. The Company offers a wide variety of service options, which vary in price 6 depending upon the features included and the data rate, or bandwidth, of the connection. RMI bills its Internet access subscribers monthly, quarterly or annually in advance. A significant percentage of individual accounts are billed automatically through pre-authorized credit card accounts. RMI also provides complete installation services, sales of turnkey networking equipment, education and training services, and an efficient technical support and network monitoring support team. Web services can also be divided into two basic categories: Web hosting services and Web productions (or content). RMI designs Web pages and performs additional programming for Web sites on behalf of its business subscribers. Charges for Web page design and programming vary widely with the size and complexity of the project. RMI's Web services produce Web sites that make use of original graphic arts, interactive forms, data base queries and search engines. RMI also hosts Web pages on behalf of its customers enabling them to have a continued presence of the Internet. RMI'S VALUE-ADDED SERVICES REALAUDIO SERVER. This software package delivers live and on-demand audio over the Internet. Winner of PC Magazine's Editor's Choice Award, RealAudio allows leading Web sites, such as ESPNET SportsZone, to provide a value-added service to its audience, while enabling companies to deliver training, education, or special announcements over their Intranets. DATA CENTER SERVICES. As more people use the Internet to shop for products and services, the demands on shared server resources are increasing. RMI offers businesses the alternative of colocating their servers at RMI, thereby taking cost-effective advantage of the company's centralized Internet resources. For example, a Web developer who colocates a server at RMI can save 40% to 60% of the monthly cost of maintaining that server in-house. In addition, RMI is establishing itself as a provider's provider for Internet transportation services. The company facilitates and enables businesses that want to provide Internet transportation services, such as Hypertext Transfer Protocol (HTTP) for Web, Simple Mail Transfer Protocol (SMTP) for mail, Network News Transfer Protocol (NNTP) for news, File Transfer Protocol (FTP) for file transfer, and Internet Group Multicast Protocol (IGMP) for multimedia. ON-LINE NETWORK REPORTS. RMI developed a password-protected on-line network reporting service to allow customers to monitor the traffic and performance of both RMI's network and the client's Internet connection in 15-minute increments. The reports provide hourly, daily or weekly access to high-resolution maps, tables, and graphs detailing the availability of specific WAN links, network bandwidth, and error rates to help users prioritize their internal network activities and reduce network management expenses. TRAINING CENTER. RMI's new headquarters in downtown Denver includes a training center with 12 workstations. Customers can schedule their employees for various levels of Internet training, ranging from basic access training to HTML programming. Customized, one-on-one training is also available, either at RMI's new facility, or at the customer's site. RMI is the first local Internet service provider to implement the leading-edge E-mail system, geared toward smaller LANs with 35 or fewer personal computer users. According to a recent Dataquest survey, 75 percent of all LANs have 35 7 or fewer users. InternetFlash, developed by Dynaflo Systems, Inc., is a high-performance, cost-effective E-mail delivery system that immediately and automatically delivers E-mail directly to personal computer users within small-and medium-size local area networks (LAN). The new InternetFlash service instantly alerts each user that new E-mail was received, thus eliminating the need for users to frequently dial their E-mail system to check receipt of messages. BUSINESS RELATIONSHIPS The Company has established five joint venture agreements covering eight POP locations with unrelated parties pursuant to which the Company and the unrelated parties provide Internet services in certain rural areas and smaller population centers in Colorado. Each of the parties to these agreements is a local small business or business person who is not otherwise affiliated with the Company. These agreements provide for the local party to provide equipment and marketing services while the Company provides Internet access and administrative services. The agreements provide for most revenues from accounts in the geographic areas covered by the agreements to be split equally between the Company and the local party. These arrangements apply in specified territories outside of the main Colorado population areas and accounted for approximately $67,500 (or approximately 6%) of 1995 total revenue and approximately $354,100 (or approximately 11%) of 1996 total revenue. Each of these alliances is for an unspecified term and is terminable by the local party on three months notice, subject to certain rights of the Company to purchase the interest of the other party on termination. Although the Company may enter into additional similar business alliances in the future, management expects that revenues from such alliances will represent a proportionately smaller part of total revenues as the Company expands its operations in the future. NETWORK INFRASTRUCTURE RMI believes that its future success in the Internet access services market depends in part on its ability to enhance its current service offerings for individuals and businesses and to advance the capabilities and capacity of its telecommunications network. The Company purchased five B-STDX 9000 Cascade switches in October, 1996 in order to implement a regional backbone network. The B-STDX switch is a wide area network (WAN) switch that simultaneously supports Frame Relay, Switched Multimegabit Digital Service (SMDS), Integrated Services Digital Network (ISDN), and Asynchronous Transfer Mode (ATM) on a single platform. RMI installed these switches in various locations in the cities of Denver, Colorado Springs and Boulder. These switches are interconnected via a DS3 network supplied by the ICG Telecom Group, Inc. The Company is continuing to optimize and increase the capacity and capabilities of its telecommunications network. The Company currently is working to increase its speed, reliability, and network fault tolerance. In November, 1996 the Company built a data center which is located at the Corporate head office at 1099 18th Street, in Denver. The new data center is an environmentally controlled facility with built in network redundancies, dual air conditioning systems, an FM 200 fire protection system and generator power backup supported by an Uninterrupted Power Supply (UPS). This facility not only provides redundancies and stability to the Company's network, but also allows the Company to make this facility available to those clients that want 8 the ability to colocate their Web servers in the RMI data center and pay RMI for use of the facility as well as high bandwidth access to the Internet. OPERATIONS AND CUSTOMER SUPPORT As of December 31, 1996, the Company had 29 employees dedicated to technical dial-up support, commercial account support, network operations and customer service. The Company's Colorado Springs location facilitates the dial-up technical support group that provides phone support for dial-up subscribers. RMI also established a separate commercial support group for commercial high speed access clients which involves phone support, on-site support and installations. The Company's network support team concentrates on the performance, stability and repair of the Company's network, network equipment and servers. SALES AND MARKETING Prior to November, 1995, RMI's growth in its subscriber base was attributable to word-of-mouth referrals primarily in the individual dial-up market. In November, 1995, the Company began to staff a direct sales group in order to support a new focus on business customers. The Company believes that it can deliver high-speed Internet access solutions and Web services to business customers in its regional markets and differentiate itself through an on-site consultative approach, high-quality services and exemplary customer service. Although it is not the intention of RMI to abandon the dial-up market, RMI believes that its ability to differentiate itself from the national Internet access providers, long distance providers and regional telephone companies can best be achieved in the business market. The Company currently employs eight field sales people, seven of whom work in the Company's Denver office and one of whom works out of the Company's Colorado Springs office. RMI also employs five inside salespeople to handle incoming calls which have been primarily generated by word-of-mouth and by the local press the Company has been receiving. The Company plans to continue to expand its direct field sales force and inside sales group in order to increase its market coverage. RMI also employs a customer service group, currently comprised of four people, who concentrate on business client retention. The Company intends to continue its program of minimal advertising and to maximize the amount of local newspaper, radio and television exposure with press releases and interest articles on the Company. COMPETITION The Internet connectivity business is highly competitive and there are no substantial barriers to entry. The Company believes that competition will intensify in the future and its ability to successfully compete depends on a number of factors including market presence, the capacity, reliability, and the security of its network infrastructure, its pricing of services compared to its competitors, the timing of new products and services by the Company and its competitors, the Company's ability to react to changes in the market, and industry and economic trends. The Company's competitors consist of (1) regional Internet access providers, (2) national Internet service providers, (3) on-line services companies, (4) regional telephone companies and national long distance carriers, and (5) hardware/software companies and cable operators. 9 REGIONAL INTERNET ACCESS PROVIDERS. The Company's competitors include numerous regional Internet access providers, the largest of which are SuperNet, Inc. and Internet Express, Inc. SuperNet was formed by the Colorado Advanced Technology Institute, and is currently the largest provider in the State of Colorado with 15 POP locations. It has been in business since 1986. Internet Express, Inc. is a wholly owned subsidiary of Telephone Express, Inc., a commercial long distance provider. Internet Express currently offers service in the states of Colorado, Texas, Arizona and Washington. NATIONAL INTERNET SERVICE PROVIDERS. National Internet service providers include companies such as NETCOM, PSI, UUNET and BBN. These national competitors have established national and international networks, providing extensive coverage throughout the U.S. and select international locations. NETCOM, PSI and UUNET have recently completed large public offerings and as a result have established extensive cash resources with which they may be able to develop and expand their communications and network infrastructure more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote more resources to the marketing and sale of services, than the Company. NETCOM, PSI and BBN have targeted the individual dial-up market, while UUNET has specifically targeted the business markets. ON-LINE SERVICE COMPANIES. Other competitors include the national on-line service providers including America On-line, Inc., CompuServe (a division of H&R Block), Prodigy, Delphi Internet Services (a division of News Corp.), and Genie (a division of General Electric Information Services). Most of the established on-line services are rapidly expanding their Internet access services in order to offer more direct access to the Internet at more competitive prices. On-line service companies are focused on the individual dial-up market and are becoming direct competitors with the national Internet providers and the long distance carriers. REGIONAL TELEPHONE COMPANIES AND NATIONAL LONG DISTANCE COMPANIES. Regional telephone companies such as U S West Communications Inc. and national long distance carriers such AT&T, MCI, and Sprint Communications have recently announced Internet access services. The Company's management believes AT&T will be a significant competitor to the national Internet providers, long distance carriers, and on-line services that are targeting the individual dial-up market. HARDWARE/SOFTWARE COMPANIES AND CABLE OPERATORS. In 1995, Microsoft Corp. announced its entry into the on-line service business with "Microsoft Network", a consumer on-line service that was released as a standard integrated feature of the Windows 95 operating system. Microsoft Corp. has recently focused its significant resources on its new Web browser software called Microsoft Network Explorer and has proceeded to sign strategic distribution agreements with America On-line Inc. and AT&T. IBM's most recent version of its OS/2 operating system software includes Internet utilities, and IBM has announced plans to introduce Internet connectivity through its own private communications network. Cable operators such as Tele-Communications, Inc. have also announced their intention to utilize their cable networks to offer Internet services. Cable modems have the capacity to transmit at speeds up to 10 Megabits per second versus the normal telephone dial-up speed of 28.8 kilobits per second. Several cable companies are in the process of upgrading their systems to handle the Internet because cable services were not originally designed for the two-way nature of Internet traffic. 10 The Company is not currently subject to regulation by the Federal Communications Commission or any other agency, other than regulations applicable to businesses generally. Because the Internet is a relatively new medium, the legal obligations and First Amendment rights of participants in the Internet, including service providers such as RMI, are not well defined and continue to evolve. The Internet has not been subject to regulation by the Federal Communications Commission or other governmental agencies, as has television, and standards applicable to print publishers and television in respect of the law of defamation and obscenity are not clearly applicable to the Internet. Moreover, to the extent these issues have been considered by the courts, outcomes have not been uniform. In 1996, Congress passed a telecommunications act which, among other things, includes protection from liability for Internet providers who take steps to prevent defamatory material from being published on the Internet and also includes provisions to protect children from indecent material on the Internet. Certain provisions of that legislation regarding the imposition of criminal penalties for publication of indecent materials on the Internet were recently held to be unconstitutional by a federal district court. ITEM 2. DESCRIPTION OF PROPERTIES The Company's corporate headquarters is located in Denver, Colorado at 1099 Eighteenth Street, Suite 3000, where the executive, sales and marketing and administrative functions exist. The Company leases approximately 19,500 square feet in Denver under a lease which terminates May 8, 2002. Rental payments under that lease are approximately $15,835 per month for the first eight months and $31,670 per month for the remaining lease term. The Company is responsible for its pro rata share of related operating expenses. The Company also leases approximately 4,000 square feet in Denver at 1800 Glenarm which formerly housed the Corporate headquarters. This facility has been sub-let for the remainder of the lease term which concludes January 7, 2001. The Company recognized a loss on the subletting of this space in 1996 of approximately $58,000 which includes the broker commission plus the difference between the rate paid by the Company and the amount realized from the sublet tenant. The Company maintains an office of approximately 8,000 square feet in Colorado Springs which is leased until January, 2000 at a monthly rental of $4,474 plus a prorata share of increases in operating expenses. RMI also has leased POP locations in Loveland, Colorado Springs and Denver, Colorado. Eight additional leased POP locations in Alamosa, Burlington, Durango, Grand Junction, Hayden, Leadville, Montrose, and Pueblo, Colorado are leased by the Company's partners in joint venture arrangements. The Company does not own any real estate. ITEM 3. LEGAL PROCEEDINGS On September 6, 1996, Robert Lewis and Storefronts in Cyberspace, L.L.C., filed a complaint in Denver District Court naming the Company and the Colorado Rockies Baseball Club, Ltd., as defendants. All claims against the Company have since been dismissed except for a breach of contract claim seeking $25,000 in damages. The Company's management believes the breach of contract claim is without merit and intends to vigorously defend against it. The Company is not a party to any other litigation. 11 ITEM 4. No matters were submitted to a vote of security holders in the fourth quarter. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company completed its initial public offering on September 5, 1996. The Company's Common Stock is traded on the NASDAQ SmallCap Market under the symbol RMII and the Company's Warrants are traded on the NASDAQ SmallCap Market under the symbol RMIIW. The following table sets forth the closing high and low bid prices of the Company's Common Stock as reported on the NASDAQ SmallCap Market. These prices are believed to be representative inter-dealer quotations, without retail markup or commissions, and may not represent prices at which actual transactions occurred. 1996 Bid High Low Quarter Ended September 30 $2.75 $2.50 Quarter Ended December 31 $1.625 $1.00 1997 First Quarter (through March 15) $2.75 $1.125 The number of record holders of the Company's $.001 par value common stock at March 15, 1997 was 54. Because many of the Company's shares of common stock are held by brokers or other institutions on behalf of stockholders, the Company is unable to estimate its total number of beneficial owners of its common stock represented by these record holders. The Company has never declared or paid any dividends on its common stock. Since the Company currently intends to retain all future earnings to finance growth, it does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's Series A Preferred Stock prohibits the payment of dividends on common stock for so long as any dividends have not been paid on the Series A Preferred Stock. Since the terms of an equipment lease to which the Company is a party prohibit payment of dividends on the Series A Preferred Stock and there are as a result accrued but unpaid dividends on the Series A Preferred Stock, the Company is currently prohibited from paying dividends on the common stock pursuant to the prohibition contained in the Series A Preferred Stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company as of the dates and for the periods indicated. The income statement data for the years ended December 31, 1995 and 1996, and the balance sheet data as of such dates have been derived from financial statements of the Company which have been included herein and which have been audited by McGladrey & Pullen, LLP. (1995) and Baird, Kurtz, and Dobson (1996), independent public accountants. These data should be read in conjunction with the Company's financial statements and related notes included elsewhere in this Form 10-KSB. 12 YEAR ENDED DECEMBER 31, 1995 1996 STATEMENT OF OPERATIONS DATA: Revenues $1,179,325 $ 3,281,579 Gross profit 858,956 2,177,912 Operating (loss) income (108,522) (2,241,194) Net (loss) income (128,794) (2,302,571) Net (loss) income per share (1) (.04) (.63) OTHER OPERATING DATA: Approximate number of subscribers at end of period 4,000 9,800 Number of POPs at end of period 9 11 BALANCE SHEET DATA: Cash and Cash Equivalents $ 274,661 $ 348,978 Investments 0 1,356,629 Working Capital (Deficit) (186,865) 370,884 Total Assets 924,603 5,540,167 Long Term debt 524,437 1,134,380 Total Stockholders' (deficit) equity (169,036) 2,317,437 (1) Loss per share computed based on 3,489,000 Shares outstanding for 1995 and 3,715,000 shares outstanding for 1996. See Note 1 to the Company's financial statements included elsewhere in this report. OVERVIEW The Company's growth strategy is to focus on commercial accounts in the high speed access, frame relay network, and Web services areas. The Company also continues to experience strong growth in dial-up access services based on quality of service and word of mouth reputation. Three acquisitions occurred in late 1996 and early 1997 pursuant to the Company's strategy to expand through acquisitions as well as internal growth. CompuNerd, Inc., a small Colorado Springs based Web services company was acquired as of November 1, 1996 for consideration consisting of $70,478 and 30,000 shares of common stock. The Information Exchange (IE), a Denver based voice messaging business was acquired effective December 1, 1996 for 52,723 shares of common stock. IE focuses on voice messaging to commercial customers. Its acquisition further expands the Company's ability to provide a full complement of services through the Internet. Several affiliates of the Company were equity holders in The Information Exchange. See Item 12, "Certain Relationships and Related Transactions." Effective January 16, 1997, the Company acquired dial-up and dedicated access subscribers from Online Network Enterprises, Inc., a Boulder, Colorado, based provider of Internet access and Web services for consideration consisting of $150,000 of cash and 116,932 shares of the Company's common stock. The Company has positioned itself for continued growth by expanding its infrastructure and employee base. In December 1996, the Company relocated its Corporate headquarters in Denver to an 19,500 square foot facility which includes a data center where Denver based operations are being consolidated. The Company's principal access servers, Web servers, ISDN routers, dial-up 13 modem facilities, and management workstations are consolidated in this facility to provide enhanced management and security. In addition to improved facilities, the Company continues to seek and hire quality sales, technical, and administrative management and staff. As a result the Company will continue to incur losses in the near term. The Company will not generate income or positive cash flow from operations unless revenues continue to increase at rates commensurate with past growth while maintaining its existing cost structure. Although the Company believes that its current investment in equipment and related infrastructure, and its current employee base (which accounts for a significant portion of selling, general and administrative expense) can support substantial growth, there can be no assurance that revenues will continue to grow at the rate they have over the past year. The Company may experience fluctuations in operating results in the future caused by various factors, some of which are outside of the Company's control, including general economic conditions, specific economic conditions in the Internet access industry, user demand for the Internet, capital expenditures and other costs relating to the expansion of operations, the timing and number of customer subscriptions, the introduction of new services by the Company or its competitors, the mix of services sold and the mix of distribution channels through which those services are sold. In addition, the Company's expenses, including but not limited to obligations under equipment leases, facilities leases, telephone access lines, and Internet access are relatively fixed in the short term, and therefore variations in the timing and amount of revenues could have a material adverse effect on the Company's results of operations. RESULTS OF OPERATIONS Revenues Revenues are generated by a variety of Internet related activities that include dial up access services, dedicated access services primarily for business customers, frame services, and Web hosting and production. Other sources of revenue include equipment sales related to dedicated access accounts, educational courses, and setup charges associated with the Company's various services. The following table provides information regarding amounts of revenues in the foregoing categories for the years ended December 31, 1995 and 1996. Years Ended December 31, 1995 1996 % Change REVENUE Dial-Up Service $ 621,475 $ 1,465,269 135% Dedicated Access Service 262,267 689,311 163% Web Services 29,110 413,592 1321% Equipment Sales 144,551 519,551 259% Other 121,922 193,856 59% ---------- ------------ Total $1,179,325 $ 3,281,579 178% The Company's revenue grew 178% from the year ended December 31, 1995 as compared to the year ended December 31, 1996. The total number of customers grew from 4,000 to 9,800 during the same periods representing an increase of 145%. Revenues exclusive of Equipment Sales grew at 167%. Revenues grew at a faster rate than customer count due to a focus on commercial customers with higher monthly billing rates and from increases in Web Production and Hosting and Equipment sales. 14 DIAL-UP SERVICE The Company's strategy is to provide an high quality service with few busy signals. In order to assure this service level the Company does not provide any unlimited access service price plans during the business day, these plans have a tendency to congest the network. The Company does provide a range of service offerings based on a set number of hours for a set rate with additional hours billed as overage. The table below shows the composite weighted average billing rate for full service Internet access by quarter for 1995 and 1996. For the Three Months Ended March June September December March June September December 1995 1995 1995 1995 1996 1996 1996 1996 $20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50 The 135% revenue growth in Dial-Up Service in 1996 over 1995 is attributable to growth in customers while maintaining average billing rates. Dial-up Service has been split approximately evenly between commercial and residential customers throughout 1995 and 1996. RMI has established business alliances with five unrelated parties for the purpose of providing Internet Services in secondary markets in the State of Colorado. These joint venture agreements provide for the local party to provide equipment and marketing services while the Company provides Internet Access and administrative services. Dial-up revenues based on these joint ventures generated $ 67,500 in revenues in 1995 and $ 354,100 in 1996 for an increase of 425%. The joint venture points of presence (POP) began in the second quarter of 1995 and grew to six locations by the end of 1995 and eight locations by the end of 1996. DEDICATED ACCESS SERVICE Dedicated access services are primarily provided to commercial customers and include a wide range of connectivity options tailored to the requirements of the customer. These services include private port (dedicated modem), Integrated Services Digital Network(ISDN) connections, 56 Kbps frame relay connections, T-1 (1.54 Mbps) frame relay connections, point to point connections, and T-3 (45 Mbps) or fractional T-3 connections. The Company also offers a colocation service in which the customer's equipment is located in the RMI data center, thereby providing access to the Internet directly through the Company's connection. The table below shows the quarterly customer count by each of the component services offered for dedicated access as of the dates indicated: Service March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 1995 1995 1995 1995 1996 1996 1996 1996 Private Port 29 30 36 35 42 47 46 54 56 Kbps 18 27 27 34 47 69 71 72 ISDN 0 0 0 2 3 13 46 80 T-1 7 10 10 11 16 25 29 30 Colocation 0 1 4 4 6 4 5 6
WEB SERVICES Web services revenues are composed of Web page hosting and Web page production. Web page hosting provides ongoing revenue from customers for whom RMI hosts a 15 Web site on Web servers in the RMI data center. All access made to these Web Sites by the customer and the Internet community as a whole are processed on the RMI servers. The advantage to customers is high speed access to sites by their targeted audiences. The following is a summary of the number of Web hosting customers as of the dates indicated: March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 1995 1995 1995 1995 1996 1996 1996 1996 1 21 45 90 157 217 242 341 Web page hosting accounted for $ 26,200 of revenue in 1995 and $239,700 of 1996 revenue for an increase of 815%. The increase resulted from increases in the direct sales force, increased server capacities and speed, and the increasing popularity of the Web as a business tool. Web page production increased from $3,770 for 1995 to $ 173,800 for 1996 for an increase of 4,510%. The Company increased the size of the Web production department as well as provided customers more complex applications. The growth in Web hosting business helped to drive this part of the business plus the activities of the Company's direct sales force. RMI did not have a direct sales force until December, 1995. EQUIPMENT SALES RMI sells hardware to its customers as an accommodation and to provide a "one stop shop" for Internet services. Equipment sales can vary from a single router for an ISDN connection to providing servers and Internet grade routers for colocations. Sales grew from $144,551 in 1995 to $519,551 in 1996 or 259%. Equipment sales are typically low margin transactions and can fluctuate dramatically depending on large server orders. RMI has established wholesale purchasing relationships with national and regional vendors in order to provide an attractively priced total Internet solution to its commercial customers. GROSS PROFIT Gross profit consists of total revenue less the direct costs of delivering services and the cost of equipment. Gross profit on Internet services (exclusive of equipment) as a percentage of sales is 81% for 1995 and 77% for 1996. The reduction in gross profit percentage is principally the result of increasing capacity for Internet access, ISDN facilities, and dial-up facilities. 16 GENERAL, SELLING AND ADMINISTRATIVE SALES AND MARKETING EXPENSES increased from $92,300 in 1995 to $776,500 in 1996 inclusive of personnel costs. The Company hired a full time direct sales staff beginning in December, 1995. Of the total 1996 sales and marketing expense, approximately $565,000 relate to personnel expenses. The Company had 6 employees at the end of 1995 and 16 employees at the end of 1996 in sales and marketing. Extensive efforts have been made to identify, hire, and train sales personnel with expertise in Internet access and in Web applications. Approximately $211,500 for 1996 was spent on advertising, developing and printing marketing and sales support materials, and trade show attendance. GENERAL AND ADMINISTRATIVE EXPENSES increased from approximately $875,200 in 1995 to $3,642,600 in 1996. General and administrative costs consist of personnel (excluding sales and marketing personnel), physical facilities, depreciation, amortization, professional services and other related administrative expenses. Significant items are discussed below. Payroll costs increased from $459,575 for the year ended December 31, 1995, to $2,138,460 for the year ended December 31, 1996. The Company had 29 employees at the end of 1995 and increased staff to 67 at the end of 1996 in all areas of the Company including administration, technical support, development, and senior management (excluding sales and marketing). Rent expense for 1995 was $82,269 and increased to $240,720 in 1996. During 1996 the Company moved its corporate headquarters and leased office space of approximately 19,500 square feet which includes a data center comprised of 1,200 square feet. The Company continues to occupy offices in Colorado Springs for staff performing Dial-In technical support, customer service, and sales functions. Additionally, the Company leases two POP's (points of presence) which contain routers, servers, and modems to provide Internet access for its customers. The Company's former offices in Denver at 1800 Glenarm have been sub leased effective March 1, 1997 for the remainder of the lease term. A one time charge of approximately $58,000 has been recorded in 1996 for commission expense on the transaction as well as the difference between the sub lease rate and the existing lease rate. The Company experienced an increase in communications expense from $58,400 for the year ended 1995 to $196,800 for the year ended 1996. These expenses included local telephone service, cellular phones and pager costs and long distance telephone expenses. The Company uses multiple "800" phone numbers to provide technical support, customer support, and sales order processing to its growing base of customers. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred losses since inception and has experienced negative operating cash flow in 1996. The Company's operations used net cash of approximately $1.5 million for the year ended December 31, 1996. The cash used by operating activities is primarily attributable to the Company's continued expansion of its facilities and employee base in anticipation of continued growth in revenues. Between December 31, 1995, and December 31, 1996, the Company's employee base increased from 35 to 83 and its total assets increased from $924,603 to $5,540,167. The increase in the Company's total assets is primarily attributable to $2,375,348 of property and equipment (net of accumulated 17 depreciation), $1,356,629 in short term investments, and $428,489 of accounts receivable. The Company has financed this growth primarily with revenues from operations, from proceeds of approximately $3.7 million resulting from completion of the Company's initial public offering in September 1996, and 1.7 million from capital lease financing. In addition, sources of cash included $490,000 in proceeds from a private placement of convertible notes (since converted into common stock) in late 1995 and early 1996, and $406,000 in net proceeds from a private placement of Series A Convertible Preferred Stock in mid-1996. During 1996 the Company acquired approximately $2.5 million in equipment, software, and leasehold improvements. Equipment consisted of Cascade switches and related equipment for the Company's frame relay network, routers, servers and computers. Of the $2.5 million expended, approximately $1.7 million was financed through capital lease transactions. The Company has a bank line of credit in the amount of $500,000 which, subsequent to December 31, 1996 was fully drawn. No amounts were outstanding as of December 31, 1996, with respect to this line of credit. The line of credit is secured by a pledge of a $300,000 treasury bill repurchase agreement and by the Company's accounts receivable. The Company's office lease is also secured by a pledge of a treasury bill of $250,000. As of December 31, 1996, the Company had working capital of $370,884. This included $348,978 of cash and cash equivalents and $1,356,629 of investments in financial instruments convertible to cash. Trade receivables as of that date were $518,827. Current liabilities as of that date were approximately $2,088,350, including $425,160 of accounts payable, $451,823 of current maturities of long-term debt and capital lease obligations, $528,160 of accrued payroll and related taxes, and $460,836 of accrued expenses attributable primarily to a payable on office furniture, deferred office rent, preferred stock dividend payable, accrual for unbilled circuit costs, and amounts due joint venture partners pending cash collections. Also included in current liabilities as of that date is $218,121 of deferred revenue, which represents differences in the timing of payments by customers and recognition of the related revenue. RMI is an Internet Service Provider (ISP) with an high growth rate (as discussed elsewhere in this document). The Company's growth is dependent on building a strong infrastructure and hiring high quality sales, technical, and administrative personnel. In order to build the infrastructure and acquire the human resources needed to maintain an high growth rate, the Company has operated with a negative cash flow from operations during 1996 and projects to continue to do so for the first half of 1997. The company's cash requirements are relatively fixed for the near term and the Company expects to generate positive operating cash flows by late 1997 if revenues continue to increase according to expectations without any significant cost increases. In the near term, the Company expects to finance negative operating cash flows from incentive programs to customers designed to increase the rate of realization of accounts receivable, and, if necessary, from reductions in operating expenses. As discussed below, the Company may conduct an equity financing which, if completed, the proceeds would be available to fund operations. In the longer term, should revenues not continue to increase according to expectations, the Company may have to seek additional financing to fund operating losses or implement additional reductions in operating expenses. Reductions in operating expenses, if effected, could adversely affect revenues and therefore not result in the expected increase in cash flow. The Company does not currently have 18 access to additional bank financing and therefore additional financing would have to result from additional issuances of equity or debt securities. The Company's common stock is traded on the NASDAQ SmallCap Market. The NASDAQ Stock Market, Inc. has recently proposed changes to the maintenance criteria for listing eligibility on the Small Cap Market, including a requirement that issuers have at least $2,000,000 in net tangible assets. As of January 31, 1997, the Company had less than $2,000,000 in net tangible assets. If the proposed changes to the SmallCap Market listing criteria are approved by the SEC and if the Company were to fail to meet such requirements, the Company's common stock would no longer trade in the SmallCap Market, which would adversely affect the liquidity and price of the Company's common stock. In anticipation of the eventual approval of the new maintenance criteria, the Company is seeking to raise $1 million to $2 million in additional equity capital in a private placement of stock, the terms and structure of which are not determined at this time. The proceeds of that offering would be used to meet the more stringent listing criteria and to improve the Company's working capital and liquidity. There can be no assurance that additional equity capital will be available to the Company or, if it is available, that it will be available on terms favorable to the Company. ITEM 7. FINANCIAL STATEMENTS 19 ROCKY MOUNTAIN INTERNET, INC. ACCOUNTANTS' REPORT AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 ROCKY MOUNTAIN INTERNET, INC. DECEMBER 31, 1995 AND 1996 TABLE OF CONTENTS Page ---- INDEPENDENT ACCOUNTANTS' REPORT 1 Baird, Kurtz, & Dobson (1996) 1 McGladrey & Pullen (1995) 2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets 3 Statements of Operations 5 Statements of Stockholders' Equity (Deficit) 6 Statements of Cash Flows 7 Notes to Financial Statements 8 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors Rocky Mountain Internet, Inc. Denver, Colorado We have audited the accompanying consolidated balance sheet of ROCKY MOUNTAIN INTERNET, INC. as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ROCKY MOUNTAIN INTERNET, INC. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BAIRD, KURTZ & DOBSON Denver, Colorado February 28, 1997 -1- INDEPENDENT AUDITOR'S REPORT To the Board of Directors Rocky Mountain Internet, Inc. Denver, Colorado We have audited the accompanying balance sheet of Rocky Mountain Internet, Inc. as of December 31, 1995 and the related statements of operations, stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Internet, Inc. as of December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Denver, Colorado February 23, 1996 -2- ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 ASSETS 1995 1996 --------- ---------- CURRENT ASSETS Cash and cash equivalents $ 274,661 $ 348,978 Investments - 1,356,629 Trade receivables, less allowance for doubtful accounts; 1995 - $5,700; 1996 - $115,000 90,338 518,827 Inventories 12,185 91,047 Other 5,153 143,753 --------- ---------- Total Current Assets 382,337 2,459,234 --------- ---------- PROPERTY AND EQUIPMENT, AT COST Equipment 555,654 2,513,944 Computer software 36,806 202,501 Leasehold improvements 4,880 127,877 Furniture, fixtures, and office equipment 15,101 413,678 --------- ---------- 612,441 3,258,000 Less accumulated depreciation and amortization 132,812 403,023 --------- ---------- 479,629 2,854,977 --------- ---------- OTHER ASSETS Customer lists, at amortized cost - 145,444 Deposits 62,637 80,512 --------- ---------- 62,637 225,956 --------- ---------- $ 924,603 $5,540,167 --------- ---------- --------- ---------- See Notes to Consolidated Financial Statements. -3- ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS (Continued) DECEMBER 31, 1995 AND 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1995 1996 ---------- ----------- CURRENT LIABILITIES Notes payable $ 19,419 $ 4,250 Current maturities of long-term debt and capital lease obligations 72,675 451,823 Accounts payable 192,985 425,160 Deferred revenue 169,645 218,121 Accrued payroll and related taxes 83,528 528,160 Accrued expenses 30,950 460,836 ---------- ----------- Total Current Liabilities 569,202 2,088,350 ---------- ----------- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 524,437 1,134,380 ---------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, $.001 par value; authorized 1,000,000 shares; issued and outstanding 1995 - 0 shares, 1996 - 250,000 shares - 250 Common stock, $.001 par value; authorized 10,000,000 shares; issued and outstanding 1995 1,868,000 shares; 1996 4,540,723 shares 1,868 4,541 Additional paid-in capital 28,847 4,839,968 Accumulated deficit (199,751) (2,527,322) ---------- ----------- Total Stockholders' Equity (Deficit) (169,036) 2,317,437 ---------- ----------- $ 924,603 $ 5,540,167 ---------- ----------- ---------- -----------
See Notes to Consolidated Financial Statements. -4- ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996 1995 1996 ---------- ---------- REVENUE Internet access and services $1,034,774 $ 2,762,028 Equipment sales 144,551 519,551 ---------- ----------- 1,179,325 3,281,579 ---------- ----------- COST OF REVENUE EARNED Internet access and services 193,875 640,880 Equipment sales 126,494 462,787 ---------- ----------- 320,369 1,103,667 ---------- ----------- GROSS PROFIT 858,956 2,177,912 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 967,478 4,419,106 ---------- ----------- OPERATING LOSS (108,522) (2,241,194) ---------- ----------- OTHER INCOME (EXPENSE) Interest expense (31,818) (157,042) Interest income 2,397 44,322 Finance charges 3,871 24,654 Other income, net 5,278 26,689 ---------- ----------- (20,272) (61,377) ---------- ----------- LOSS BEFORE INCOME TAXES (128,794) (2,302,571) INCOME TAX EXPENSE - - ---------- ----------- NET LOSS $ (128,794) $(2,302,571) ---------- ----------- ---------- ----------- PRIMARY AND FULLY DILUTED LOSS PER SHARE Net loss per share $ (.04) $ (.63) ---------- ----------- ---------- ----------- See Notes to Consolidated Financial Statements -5- ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1995 AND 1996 Preferred Stock Common Stock Additional ---------------- ------------------ Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ------- ------ --------- ------ ---------- ------------ ----------- BALANCE, DECEMBER 31, 1994 - $ - 1,188,000 $1,188 $ 26,626 $ (70,957) $ (43,143) Purchase of common stock for redemption - - (180,000) (180) (18,570) - (18,750) Issuance of common stock - - 860,000 860 1,008 - 1,868 Capital contribution - - - - 19,783 - 19,783 Net loss - - - - - (128,794) (128,794) ------- ------ --------- ------ ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995 - - 1,868,000 1,868 28,847 (199,751) (169,036) Issuance of preferred stock 250,000 250 - - 405,750 - 406,000 Issuance of common stock - - 1,365,000 1,365 3,775,887 - 3,777,252 Stock option compensation - - - - 12,807 - 12,807 Issuance of underwriters' warrants - - - - 100 - 100 Conversion of debentures into common stock - - 1,225,000 1,225 488,775 - 490,000 Dividends on preferred stock - - - - - (25,000) (25,000) Issuance of common stock for the acquisition of CompuNerd, Inc. - - 30,000 30 67,470 - 67,500 Issuance of common stock for the acquisition of the Information Exchange - - 52,723 53 60,332 - 60,385 Net loss - - - - - (2,302,571) (2,302,571) ------- ------ --------- ------ ---------- ----------- ----------- BALANCE, DECEMBER 31, 1996 250,000 $ 250 4,540,723 $4,541 $4,839,968 $(2,527,322) $ 2,317,437 ------- ------ --------- ------ ---------- ----------- ----------- ------- ------ --------- ------ ---------- ----------- -----------
See Notes to Consolidated Financial Statements -6- ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1996 1995 1996 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(128,794) $(2,302,571) Items not requiring (providing) cash: Depreciation 51,395 88,162 Amortization 39,030 186,044 Salaries paid with stock options - 12,807 Changes in: Trade receivables (59,621) (417,999) Inventories (12,185) (78,862) Other current assets (5,153) (138,066) Accounts payable 89,395 224,618 Deferred revenue 77,084 41,268 Accrued payroll and related taxes 83,528 443,208 Accrued expenses 30,550 429,886 --------- ---------- Net cash provided by (used in) operating activities 165,229 (1,511,505) --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (177,771) (900,235) Purchase of investments - (1,756,629) Proceeds from investments - 400,000 Payment for purchase of CompuNerd, Inc. - (70,478) Additions to deposits (60,635) (16,675) --------- ---------- Net cash used in investing activities (238,406) (2,344,017) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 1,868 3,777,252 Proceeds from sale of preferred stock - 406,000 Proceeds from notes payable 18,000 6,689 Proceeds from long-term debt 373,000 135,404 Sale of stock warrants - 100 Payment of preferred stock dividend - (25,000) Purchase of common stock for redemption (18,750) - Payments on notes payable (8,217) (26,108) Payments on long-term debt and capital leases obligations (54,533) (344,498) --------- ---------- Net cash provided by financing activities 311,368 3,929,839 --------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 238,191 74,317 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 36,470 274,661 --------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 274,661 $ 348,978 --------- ---------- --------- ---------- See Notes to Consolidated Financial Statements -7- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 1: NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is a provider of Internet access services and Web services to businesses, professionals and individuals in the state of Colorado. The Company facilitates access to the Internet by means of a regional telecommunications network comprised of a backbone of leased, high-speed dedicated phone lines, computer hardware and software and local access points known as points of presence in eleven locations. The Company's high speed, digital telecommunications network provides subscribers with direct access to the full range of Internet applications and resources. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and its wholly- owned subsidiary, Rocky Mountain Internet Subsidiary (Colorado) Inc. The operations of this subsidiary consists solely of the ownership of equipment, which it leases to the Company. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1995 and 1996, cash equivalents consisted primarily of money market accounts. COST OF REVENUE EARNED Included in Internet access and services cost of revenue earned is primarily the cost of high speed data circuits and telephone lines that allow customers access to the Company's service plus Internet access fees paid by the Company to Internet back bone carriers. -8- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued) PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment is computed using the straight line method over the estimated useful lives of the assets, ranging from five to seven years. Certain equipment obtained by capital lease obligations are amortized over the life of the lease. Improvements to leased property are amortized over the lesser of the life of the lease or life of the improvements. Major additions and improvements to property and equipment are capitalized, whereas replacements, maintenance and repairs which do not improve or extend the lives of the respective assets, are expensed. REVENUE RECOGNITION The Company charges customers (subscribers) monthly access fees to the Internet and recognizes the revenue in the month the access is provided. For certain subscribers billed in advance, the Company recognizes the revenue over the period the billing covered. Revenue for other services provided, including set-up fees charged to customers when their accounts are activated, or equipment sales, are recognized as the service is performed or the equipment is delivered to the customer. ADVERTISING The Company expenses advertising costs as incurred. During the years ended December 31, 1995 and 1996, the Company incurred $24,847 and $167,565, respectively, in advertising costs. CUSTOMER LISTS The excess of the purchase price over the fair value of net assets acquired in business acquisitions is recorded as customer lists, and is amortized on a straight line basis over five years. -9- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued) INVENTORIES Inventories consist of Internet access equipment and are valued at the lower of cost of market. Cost is determined using the first-in, first-out method. LOSS PER COMMON SHARE For the years ended December 31, 1995 and 1996, loss per share is computed based upon approximately 3,489,000 and 3,715,000, respectively, weighted average common shares outstanding for both primary and fully-diluted earnings per share. The net loss for the year ended December 31, 1996 used in the calculation was increased by the preferred stock dividends paid of $25,000. These calculations assumes all shares issued prior to the Company's initial public offering in September, 1996, were outstanding during all periods presented, including shares issuable under debenture and preferred stock conversions. It also includes shares relating to stock options, calculated using the treasury stock approach. INCOME TAXES Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. RENT EXPENSE The Company recognizes rent expense on a straight-line basis over the lease terms. Differences between expense recognized and payments made are recorded as accrued expense. -10- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued) INVESTMENTS Debt securities and marketable equity securities for which the Company has no immediate plans to sell but which may be sold in the future are classified as available-for-sale and carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. At December 31, 1996, the Company had one investment in a U.S. Treasury Note, and two repurchase agreements with a bank classified as available-for-sale. The repurchase agreements are secured by U.S. Treasury Notes. The investments mature in 1997, and the fair value of the investments approximated cost. NOTE 2: NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS The Company has a commercial line of credit with a Bank that provides for borrowing of up to $500,000 and is secured by a repurchase agreement in the amount of $300,000, plus accounts receivable of the Company. The line bears interest at the bank's prime rate plus 2% and matures September 10, 1997. At December 31, 1996, the Company had no borrowings on this line, but was fully drawn in 1997. Long-term debt and capital lease obligations at December 31, 1995 and 1996, consisted of the following: 1995 1996 ---------- ---------- Capital lease obligations payable to finance companies, due in monthly installments aggregating $62,631 including interest ranging from 9.5% to 33% through November, 2001, collateralized by equipment. An officer and shareholder of the Company has guaranteed certain of the leases and one of the leases restricts the payment of preferred stock dividends. $ 196,732 $1,586,203 Debentures (converted to common stock in 1996) 373,000 - Other 27,380 - ---------- ---------- 597,112 1,586,203 Less current maturities 72,675 451,823 ---------- ---------- $ 524,437 $1,134,380 ---------- ---------- ---------- ---------- -11- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 2: NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (continued) Subsequent to December 31, 1996, the Company borrowed $200,000 from a bank. The note is due January 3, 2000, is payable $66,660 annually plus one final principal payment with interest accrued at prime plus 2%, and is secured by furniture and fixtures. Aggregate maturities required on long-term debt and obligations under capital leases at December 31, 1996, are as follows: Amount ---------- Years ending December 31: 1997 $ 451,823 1998 482,255 1999 573,700 2000 60,322 2001 18,103 ---------- $1,586,203 ---------- ---------- The following is a schedule by years of the future minimum lease payments under the capital leases, together with the present value of the minimum lease payments as of December 31, 1996: Amount ---------- Years ending December 31: 1997 $ 751,389 1998 697,443 1999 635,526 2000 72,067 2001 21,392 ---------- Future minimum lease payments 2,177,817 Less amount representing interest 591,614 ---------- Present value of minimum lease payments $1,586,203 ---------- ---------- Equipment acquired under capital lease obligations had a cost of $248,586 and $1,976,285 and accumulated depreciation of $33,990 and $186,011 at December 31, 1995 and 1996, respectively. -12- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 3: COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases operating facilities, facilities storing Internet point of presence equipment, and certain equipment under operating lease agreements expiring through May, 2002. Certain lease agreements require the Company to pay certain operating expenses and provide for escalation of annual rentals if the landlord's operating costs increase. At December 31, 1996, the future minimum payments under these leases are as follows: Amount ---------- Years ending December 31: 1997 $ 377,874 1998 525,474 1999 501,366 2000 447,594 2001 382,501 Thereafter 126,679 ---------- $2,361,488 ---------- ---------- In February, 1997, the Company subleased one of its operating facilities. The Company accrued a loss of $58,073 as of December 31, 1996, as a result of this sublease. Minimum future rentals receivable under this noncancellable operating sublease was $178,648, covering the period through January, 2001, and is not deducted from the above future minimum payments. Rent expense was $82,269 and $240,720 for 1995 and 1996, respectively. EMPLOYEE CONTRACTS The Company currently has employment agreements with six of its officers that provide for salaries ranging from $102,000 per year to $66,000 per year, and are terminable for cause. The Company may also terminate the agreements without cause subject to the obligation to pay the terminated employee a severance payment equal to from five to eight months salary based on length of service. The employment agreements terminate in December, 1999. Employment agreements with any employees do not significantly restrict such employee's ability to compete with the Company following any termination. -13- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 3: COMMITMENTS AND CONTINGENCIES (continued) EMPLOYEE CONTRACTS (continued) In February, 1997, one of the officers' employment was terminated. The officer was also a shareholder, and in a negotiated agreement the Company has agreed to purchase 90,000 shares of the Company's common stock from the individual for $120,000. The stock will be purchased over an eighteen month period. LETTER OF CREDIT The Company had $250,000 at December 31, 1996, in an outstanding letter of credit to be used in case of default on its main operating facilities lease. The letter of credit is secured by $250,000 currently invested in a U.S. Treasury Note. OTHER CONTINGENCIES The Company has various claims and legal matters occurring in the normal course of business which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company. NOTE 4: BUSINESS ALLIANCES The Company has entered into various joint venture agreements with unrelated parties to provide Internet service to certain areas within Colorado. Under the agreements, the Company provides access to the Internet through its point of presence (POP) sites and administrative and customer support services. The other parties provide equipment at the local POP site and market the Internet service in the local area. Most revenues generated by the joint ventures are shared equally by the two parties. The agreements can be terminated with notice, the Company has the first option to purchase the local POP equipment should the other parties desire to dispose of their interest. During the years ended December 31, 1995 and 1996, the Company had revenues from the joint ventures of $67,452 and $354,565, respectively, and included in accrued expenses are payables to joint venture partners of $9,774 and $10,069 at December 31, 1995 and 1996, respectively. -14- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 5: INCOME TAXES Under the provisions of the Internal Revenue Code, the Company has available for federal income tax purposes, a net operating loss carryforward of approximately $2,238,000, which expires in the years 2010 and 2011. The tax effects of this and other temporary differences related to deferred taxes were: 1995 1996 -------- --------- Deferred tax assets: Net operating loss $ 44,000 $ 850,000 Allowance for doubtful accounts 2,000 44,000 Tax goodwill 20,000 18,000 Accrued expenses - 22,000 -------- --------- 66,000 934,000 Valuation allowance (66,000) (934,000) -------- --------- Net deferred tax asset $ - $ - -------- --------- -------- --------- The actual provisions for income taxes varied from the expected provision for income taxes (computed by applying the statutory U.S. Federal income tax rates to loss before taxes) only because the tax benefit of the net operating losses for the periods ended December 31, 1995 and 1996, is offset by the valuation allowance. NOTE 6: DEPENDENCE ON SUPPLIERS The Company depends upon third-party suppliers for its access to the Internet through leased telecommunications lines. Although this access is available from several alternative suppliers, there can be no assurance that the Company could obtain substitute services from other providers at reasonable or comparable prices or in a timely manner. The Company is also dependent upon the regional Bell operating company to provide installations of circuits and to maintain those circuits. -15- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 7: REORGANIZATION The Company was originally formed as a sole proprietorship in October, 1993 and incorporated as a Colorado corporation in March, 1994. A new Delaware corporation was formed in October, 1995. On October 31, 1995, the Delaware corporation purchased all the assets relating to the Colorado corporation's business, and assumed all of its liabilities, except for certain notes payable to shareholders. Since both parties in the transaction were under common control, the transaction has been accounted for similar to a pooling of interests, and all assets purchased and liabilities assumed were recorded by the Delaware corporation at the Colorado corporation's historical costs. These financial statements reflect the operations of both entities during the years ended December 31, 1995 and 1996. The stockholders' equity balances represent shares outstanding as if the transaction had taken place January 1, 1995. NOTE 8: PREFERRED STOCK On April 26, 1996, the Board of Directors designated 250,000 shares of Preferred Stock as Series A Convertible Preferred Stock (Series A Stock) and set the terms of the stock. The Series A Stock accrues cumulative dividends at the rate of 10% per annum. The dividends are payable quarterly to the extent permitted by applicable law. The Series A Stock may be converted into shares of Common Stock at the option of the holder at any time after May 15, 1997. The rate of conversion is the Series A Stock's liquidation value divided by the conversion price, currently set at $2.00 per share. The Series A Stock's liquidation value is equal to the price paid for the Series A Stock plus any cumulative dividends unpaid as of the conversion date. The conversion price is subject to change due to certain antidilution adjustments. The Company offered 250,000 shares of Series A Stock at $2.00 per share to accredited investors under an offering that was complete and the shares sold in June, 1996. The offering netted the Company approximately $406,000 after expenses of the offering of approximately $94,000. The Company has the authority to issue up to an additional 750,000 shares of Preferred Stock. The Board of Directors is authorized to fix the terms and preferences of the Preferred Stock prior to its being issued. -16- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 9: COMMON STOCK TRANSACTIONS On September 5, 1996, the Company completed a public offering of 1,365,000 units at an offering price of $3.50 per unit. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock at $4.375 per share for a 23-month period commencing October 5, 1997, and prior to September 5, 1999. Under certain circumstances, the Company may redeem the warrants at $.25 per warrant. Additionally, the Company sold the underwriter for $100 warrants to purchase 125,000 units. These units are exercisable through September 5, 2000, at an exercise price of $4.20 per unit (for which the accompanying warrant is exercisable at $6.5625). Costs of the offering, including a 10% commission paid to the underwriters, the underwriters nonaccountable expense allowance and professional fees, totalled $1,000,248, resulting in net proceeds from the offering of $3,777,252. In connection with the public offering completed on September 5, 1996, the Company entered into a consulting agreement retaining the underwriters as financial consultants to the Company for a twelve month period for a fee of $30,000. NOTE 10: BENEFIT PLANS MANAGEMENT BONUS PLAN The Company had a bonus plan during 1996 in which named employees were entitled to receive a cash bonus based upon achievement of specified levels of revenues by the Company for the year ended December 31, 1996. For the year ended December 31, 1996, the Company accrued $158,000 in bonuses under the plan. The Company gave employees the option of receiving their bonuses in cash or stock options. As a result, 51,230 stock options were issued in 1997 to employees at an exercise price of $1.00 per share. Additional compensation of $12,807 was recorded during the year ended December 31, 1996 as a result of these stock options being issued. The Company adopted a similar plan for 1997. If the Company achieves its targeted revenues during 1997 bonuses of $259,000 will be payable. Achieving revenues above or below the target would result in bonuses above or below this amount. -17- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 10: BENEFIT PLANS (continued) STOCK OPTION PLANS In July, 1996, the Company adopted the 1996 Employee Stock Option Plan (the Employee Plan) and the Non-Employee Directors' Stock Option Plan (the Directors' Plan). The Employee Plan provides for an authorization of 471,300 shares of Common Stock for issuance upon exercise of stock options granted under the Plan. The Employee Plan is administered by the Board of Directors, which determines the persons to whom options are granted, the type, number, vesting schedule, exercise price and term of options granted. Under this plan both incentive and non-qualified options can be granted. An aggregate of 18,000 shares of Common Stock are reserved for issuance under the Directors' Plan. All non-employee directors are automatically granted non-qualified stock options to purchase 1,500 shares initially and an additional 1,500 shares for each subsequent year that they serve up to a maximum of 6,000 shares per director. The following is a summary of the status of the Company's two stock option plans and the stock options discussed under management bonus plans at December 31, 1995 and 1996, and the changes during the years then ended: 1995 1996 ------------------------------------- ----------------------------------------- Employee Plan Employee Plan and Bonus Plan Directors' Plan and Bonus Plan Directors' Plan ----------------- ----------------- -------------------- ------------------ Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise Shares Price Shares Price Shares Price Shares Price ------ -------- ------ -------- ------- -------- ------ -------- Outstanding, beginning of year - $ - - $ - - $ - - $ - Granted during year - - - - 284,230 1.68 1,500 2.00 ----- ---- ----- ----- ------- ----- ------ ----- Outstanding, end of year - $ - - $ - 284,230 $1.68 1,500 $2.00 ----- ---- ----- ----- ------- ----- ------ ----- ----- ---- ----- ----- ------- ----- ------ ----- Options exercisable, end of year - - 25,000 1,500 ----- ----- ------- ------
-18- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 10: BENEFIT PLANS (continued) The fair value of each option granted is estimated on the date of the grant using the Black-Sholes method with the following weighted-average assumptions: Dividend per share $0.00 Risk-free interest rate 6.16% Expected life of options 5 years Weighted-Average fair value of options granted during 1996 $1.90 The following table summarized information about stock options under the plans outstanding at December 31, 1996: Options Outstanding Options Exercisable ------------------------------------ ---------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $ 0.40 25,000 5 years $ 0.40 25,000 $ 0.40 $ 1.00 51,230 5 years $ 1.00 - $ - $ 2.00 209,500 5 years $ 2.00 1,500 $ 2.00
One non-qualified stock option to purchase 25,000 shares at $.40 per share was granted under the Employee Plan. This option vested immediately. The remaining Employee Plan options above have a five year term and vest over three years with one-third vested at the end of the first year. In January, 1997, 184,000 options were issued under the Employee Plan at an exercise price of $1.50 per share, under the same terms as the remaining options described above. -19- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 10: BENEFIT PLANS (continued) The Company applies APB Opinion 25 and related Interpretations in accounting for its plans, and no compensation cost has been recognized for the plans, other than the one non-qualified option. Had compensation cost for the Plans been determined based on the fair value at the grant dates using Statement of Financial Accounting Standards No. 123, the Company's net loss would have increased by $74,258 in 1996. In addition, the Company's loss per share would have increased by $.02 in 1996. NOTE 11: ACQUISITIONS On November 1, 1996, the Company acquired the customer base and selected assets of CompuNerd, Inc. for $70,428 in cash and 30,000 shares of the Company's common stock. On December 1, 1996, the Company acquired the Information Exchange, a related party through common ownership, in exchange for 52,723 shares of the Company's common stock. The acquisitions have been accounted for as purchases by recording the assets acquired at their estimated market value at the acquisition date. The operations of the Company include the operations of the acquirees from the acquisition date. Consolidated operations would not have been significantly different for the Company had the CompuNerd, Inc. acquisition been made at the time of the periods shown below. Unaudited ProForma consolidated operations assuming the Information Exchange purchase was made at the beginning of each year are shown below: 1995 1996 ----------- ----------- Net sales $1,200,0645 $ 3,367,720 Net loss $ (214,042) $(2,337,599) Net loss per share $ (.06) $ (.64) The ProForma results are not necessarily indicative of what would have occurred had the acquisition been on these dates, nor are they necessarily indicative of future operations. In January, 1997, the Company entered into an agreement to purchase substantially all of the assets of O.N.E., an Internet service provider, including equipment, contracts and intangibles for $150,000 in cash plus 116,932 shares of the Company's common stock. The purchase also requires the Company to enter into a service agreement with VR-1, Inc., the parent company of O.N.E., in which VR-1, Inc. would have a credit of up to $175,000 for the purchase of services from the Company. This acquisition was accounted for as a purchase. -20- ROCKY MOUNTAIN INTERNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 12: ADDITIONAL CASH FLOW INFORMATION NONCASH INVESTING AND FINANCING ACTIVITIES 1995 1996 -------- ---------- Capital lease obligations incurred for equipment $211,654 $1,672,244 Capital contributions by reductions of notes payable 19,783 - Long-term debt converted to common stock - 490,000 Acquisition of CompuNerd, Inc. through issuance of common stock - 67,500 Acquisition of the Information Exchange through issuance of common stock - 60,385 ADDITIONAL CASH PAYMENTS INFORMATION Interest paid $ 22,043 $ 159,007 NOTE 13: CONTINUED OPERATIONS During the year ended December 31, 1996, the Company incurred a net loss of $2,302,571 and used $1,511,505 of net cash from operating activities. The Company's management currently has plans it believes will increase revenues in order to become profitable and generate positive cash flows from operations. However, there are no assurances that the Company's plan's for revenue growth and improved operating cash flows will be successful. It could be necessary to raise additional capital or reduce operating costs to meet liquidity requirements. Reducing operating costs could inhibit the Company's planned rate of revenue growth. -21- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On January 21, 1997, the Board of Directors of Rocky Mountain Internet, Inc. resolved to engage the accounting firm of Baird, Kurtz and Dobson as the Registrant's independent accountant for its fiscal year ending December 31, 1996. Effectively, the Registrant's former independent accountant, McGladrey & Pullen, LLP, simultaneously resigned as of January 20, 1997. The Denver office of McGladrey & Pullen was acquired by Baird, Kurtz and Dobson on June 17, 1996. Certain former audit engagement members are now with Baird, Kurtz and Dobson, and will continue to be involved with the Registrant's audit. McGladrey & Pullen's report on the financial statements for the past two years contained a going concern statement, but otherwise was not qualified or modified as to audit scope or accounting principles. During the two most recent fiscal years and interim period subsequent to December 31, 1995, there have been no disagreements with McGladrey & Pullen on matters of accounting principles or practices, financial statement disclosure, auditing scope or procedure, or any reportable events. McGladrey & Pullen has furnished Registrant with a copy of its letter addressed to the SEC stating that it agrees with the above statements. 20 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information required by Item 10 is incorporated by reference to the Company's Proxy Statement to be used in connection with its 1997 Annual Meeting of Shareholders and to be filed with the Commission not later than 120 days after December 31, 1996. ITEM 10. EXECUTIVE COMPENSATION. The information required by Item 10 is incorporated by reference to the Company's Proxy Statement to be used in connection with its 1997 Annual Meeting of Shareholders and to be filed with the Commission not later than 120 days after December 31, 1996. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is incorporated by reference to the Company's Proxy Statement to be used in connection with its 1997 Annual Meeting of Shareholders and to be filed with the Commission not later than 120 days after December 31, 1996. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 is incorporated by reference to the Company's Proxy Statement to be used in connection with its 1997 Annual Meeting of Shareholders and to be filed with the Commission not later than 120 days after December 31, 1996. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS (a) Exhibits required by Item 601 of Regulation S-B Exhibit Number Description of Exhibits 3.1 Certificate of Incorporation * 3.2 Bylaws of Rocky Mountain Internet, Inc. * 4.1 Form of Warrant Agreement dated September 5,1996 between Rocky Mountain Internet, Inc. and American Securities Transfer, Inc. * 4.2 Form of Subordinated Convertible Promissory Note * 4.3 Form of Lock-Up Agreement for Shareholders * 4.4 Form of Lock-Up Agreement for Preferred Stockholders * 4.5 Form of Lock-Up Agreement for Debenture Holders * 4.6 Form of Stock Certificate * 4.7 Form of Warrant Certificate * 10.1 Agreement of Lease between Denver-Stellar Associates Limited Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant ** 10.2 Asset Purchase Agreement - Acquisition of Compunerd, Inc. ** 10.3 Confirmation of $2.0 million lease line of credit ** 10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing the provision of professional information system 21 development services for the design and development of the MCI internal Intranet project referred to as Electronic Advice. ** 10.5 Sublease Agreement- 2/26/97 - 1800 Glenarm, Denver, Colorado 10.6 Acquisition of The Information Exchange 10.7 Asset purchase of On-Line Network Enterprises 10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive 10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive 16.1 Letter re change in certifying accountant *** 27.1 Financial Data Schedule * Incorporated by reference from the Company's registration statement on Form SB-2 filed with the Commission on August 30, 1996, registration number 333-05040C. ** Incorporated by reference from the Company's Form 10-QSB filing dated 11/14/96. *** Incorporated by reference to the Company's Form 8-K filing dated 1/28/97. (b) Reports on 8-K. State whether any reports on Form 8-K were filed during the last quarter of the period covered by this report, listing the items reported, any financial statements filed and the dates of such reports. Item 4. Changes in Registrant's Certifying Accountant - filed January 21, 1997 Item 5. Other Events. - Correction to Earnings per Share report - filed March 21, 1997. 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. Rocky Mountain Internet, Inc. Registrant March 31, 1997 By: /s/ D. Kirk Roberts -------------------------------- Chief Financial Officer By: /s/ Roy J. Dimoff -------------------------------- Chief Executive Officer and Chairman -- Board of Directors By: /s/ Christopher K. Phillips -------------------------------- Board of Directors By: /s/ Gerald Van Eeckhart -------------------------------- Board of Directors 22 EX-10.5 2 EXHIBIT 10.5 EXHIBIT 10.5 SUBLEASE AGREEMENT - 1800 GLENARM, DENVER, COLORADO DATED 2/26/97 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT is entered into this 26th day of February, 1997, by and between Rocky Mountain Internet, Inc. ("Sublessor") and T & 0 Smith & Wogrin ("Sublessee") subject to a certain lease ("Lease") dated November 24, 1995, entered into by Sheridan Realty Corporation ("Lessor") and the Sublessor as Lessee. (1) SUBLEASE PREMISES Sublessor leases to Sublessee and Sublessee leases from Sublessor upon terms and conditions set forth herein commonly known as 1800 Glenarm, Suite 1100, 4,202 rentable square feet, attached as Exhibit "A," ("Sublease Premises"), together with any rights-of-way, easements and any other rights, if any, appurtenant thereto. Exhibit "A" closely, but not exactly represents the existing floor plan of Suite 1100. (2) TERMS AND CONDITIONS OF SUBLEASE (a) TERMS. The term of this Sublease shall begin ON the 1ST day of MARCH, 1997, ("Commencement Date") and shall extend through the 7th day of January, 2001, unless terminated sooner as provided herein ("Termination Date"). (b) CONDITIONS. This Sublease Agreement is made expressly subject to all of the terms and conditions of the Lease (Attached as Exhibit "B"). If an event occurs that is not governed by the terms and provisions of this Sublease Agreement, then the terms and provisions of the Lease shall govern such event. Furthermore, the Sublessee assumes each and every covenant, duty and obligation of the Lessee and promises to faithfully observe each and every term and provision set forth in the Lease (except as may be modified by this Sublease Agreement). The Sublessee acknowledges that the Sublessor shall be deemed to be substituted for the Lessor under the Lease with respect to the rights of Landlord and the Sublessor shall be entitled to exercise all of the rights and privileges of the Lessor as defined in the Lease (except as may be modified by this Sublease Agreement). By way of illustration and not by way of limitation, the Sublessor shall be entitled to exercise any remedy provided to the Lessor under the Lease (in addition to any remedy set forth in this Sublease) in the event the Sublessee breaches any condition, provision or covenant set forth in this Sublease Agreement. Notwithstanding anything herein to the contrary, Sublessor does not assume any of the obligations of Landlord, and as between the Sublessor and Sublessee, this Sublease Agreement is not subject to the following Provisions Paragraphs 2.1, 3.1, 8.1, 9.2, 12.1, 20,1, 20.2, 20.3, Exhibits B, C, E and F and paragraphs 2 and 3 of the first Amendment. (3) RENTAL Sublessee agrees to pay to Sublessor for the full term hereof the sum of $178,147.72, payable in advance and without notice in equal monthly installments of $2,935.17 on the first day of each month from March 1, 1997 to December 31, 1997, and $4,107.46 per month from January 1, 1998 to December 31, 2000 and a final payment of $927.49 due January 1, 2001 at the following address: 1099 18th Street, 30th floor, Denver, Colorado 80202 (or at such other address as Sublessor may designate in writing from time to time) without any set-off or deduction whatsoever. Sublessee shall additionally pay Tenant's pro rata share of all Building Operating Costs as set forth in the Lease that exceed 1997 year-end building operating costs. (a) Should Sublessee's monthly rent be more than five (5) days late from the due date, Sublessor shall assess Sublessee a late fee of 5% of such unpaid portion of overdue rent. (4) USE OF SUBLEASE PREMISES Sublessee shall have the right to use and occupy the Sublease Premises for general business use. Any other use shall be permitted only with the prior written consent of Sublessor, which consent may be withheld in Sublessor's sole discretion. Throughout the term of this Sublease (and any extension thereof), Sublessee, at Sublessee's sole cost and expense, covenants to promptly comply with all laws and ordinances and the orders, rules, regulations and requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof. (5) PAYMENT OF TAXES Sublessee agrees to pay all personal property taxes, all franchise or license fees or any other charge levied against the Sublessee resulting from the operation of the Sublessee's business in the Sublease Premises. -1- (6) INSURANCE During term of this Sublease, Sublessee shall carry and maintain insurance as required under the Lease. (a) WAIVER OF SUBROGATION. The parties agree that all insurance policies obtained pursuant to this Sublease shall include a clause or endorsement which shall waive the right of subrogation on the part of the insurance carrier against both Sublessor and Sublessee. Sublessor and Sublessee hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation. (7) ASSIGNMENT AND SUBLETTING Without Sublessor's consent, which will not be unreasonably withheld, this Sublease or any interest herein may not be assigned by Sublessee, voluntarily or involuntarily, by operation of law or otherwise, and all or any part of the Sublease Premises shall not be subleased by Sublessee a merger, consolidation, sale of substantially all of the assets or sale of a substantial amount of the stock of Sublessee or a transfer of a substantial partnership interest of Sublessee, and shall constitute an assignment of this Sublease for the purposes of this paragraph. Any assignment or subletting in violation of this provision shall be null and void and is strictly subject to the consent of the Landlord and the terms of paragraph 28 of the Lease. (8) INDEMNITY PROVISIONS Sublessee agrees to exonerate, hold harmless, protect and indemnity Sublessor, or any owner of the Sublease Premises, from and against any and all losses, damages, claims, suits or actions, judgments and costs which may arise during the term of this Sublease for personal injury, loss of life or damaged property sustained in or about the Sublease Premises or the improvements and appurtenances thereto upon the Sublease Premises or upon the adjacent sidewalks and streets; and from and against all costs, counsel fees, expenses and liabilities incurred in any such claims, the investigation thereof or the defense of any action or proceeding brought thereon; and from and against any judgments, orders, decrees or liens resultant therefrom and any fines levied by any authority for any law, regulation or ordinance by virtue of the use by Sublessee of the improvements and appurtenances thereto situated upon the Sublease Premises. Sublessee shall not permit any mechanic's or materialmen's liens to be filed against the Sublease Premises and hereby indemnifies and holds Sublessor harmless from and against any liability, damage, expense or cost which may be incurred by Sublessor in connection with any mechanic's or materialmen's liens which may be filed against the Sublease Premises as a result of the provisions of this Sublease. This indemnity shall specifically include attorneys' fees and any costs incurred by Sublessor to enforce this indemnity. (9) ADA COMPLIANCE (a) DISCLOSURE. Sublessee hereby acknowledges that Sublessor and Broker have advised Sublessee that the Premises and Sublessee may be subject to the Americans With Disabilities Act (the "ADA"), a Federal law. Among other requirements of the ADA that could apply to the Premises, Title III of the ADA requires owners and tenants of "public accommodations" to remove barriers to allow access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons by certain dates. All costs incurred by Sublessee or Sublessor during the term of this Sublease (and any extension thereof) to ensure Sublessee's compliance with the ADA, including necessary alterations in or about the Sublease Premises or modifications to the access to the building of which the Premises is a part, shall be at Sublessee's sole cost and expense unless Sublessor has agreed, in writing, to pay for a portion of said costs. (b) INVESTIGATION. Sublessee hereby acknowledges that Sublessor and Broker have recommended that Sublessee prior to executing this Sublease, investigate the ADA and the regulations thereunder to determine if the ADA law and regulations would apply to Sublessee and/or to the Premises in which Sublessee is interested in occupying. Sublessee agrees that it is solely responsible, at its expense, for conducting its own independent investigation of all ADA issues prior to the execution date of this Sublease and during the primary term of this Sublease (and any extension thereof). (10) HAZARDOUS MATERIALS Sublessee shall not (either with or without negligence) cause the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials ("Hazardous Materials"). Sublessee shall not allow the storage or use of such Hazardous Materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of Hazardous Materials, nor allow to be brought into the Premises any Hazardous Materials except with -2- the prior written consent of Sublessor, which may be withheld in Sublessors sole discretion. Without limitation, Hazardous Materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 USC Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 USC Section 6901 et seq., and applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of Hazardous Materials, then the reasonable cost of testing and resulting cleanup thereof shall be reimbursed by Sublessee to Sublessor upon demand as additional charges if such requirement applies to the Premises, provided that such testing proves that Sublessee released such Hazardous Materials on the Premises. In addition, Sublessee shall execute affidavits, representations and the like from time to time at Sublessor's request concerning Sublessee's best knowledge and belief regarding the presence of Hazardous Materials on the Premises. In all events, Sublessee shall indemnify Sublessor in the manner elsewhere provided in this Sublease from any release of Hazardous Materials on the Sublease Premises occurring while Sublessee is in possession, or elsewhere if caused by Sublessee or persons acting under Sublessee. (11) DEFAULT PROVISIONS (a) The occurrence of any one or more of the following events, as well as those applicable by reason of the Lease, shall constitute a default and breach of this Sublease by Sublessee: (1) FAILURE TO PAY RENT. Sublessee failing to pay the rental herein reserved and such failure continues for five (5) days following the date when due. (2) FAILURE TO PAY OTHER COSTS. Sublessee failing to make any other payments required to be made by Sublessee when due, where such failure shall continue for a period of five (5) calendar days following written notice from Sublessor to Sublessee. (3) FAILURE TO KEEP COVENANTS. Sublessee failing to perform or keep any of the other terms, covenants and conditions herein contained for which Sublessee is responsible, and such failure continuing and not being cured for a period of five (5) calendar days after written notice or if such default is a default which cannot be cured within a 5-calendar-day period, then Sublessee's failing to commence to correct the same within said 5-calendar-day period and thereafter failing to prosecute the same to completion with reasonable diligence. (4) ABANDONMENT. Sublessee abandoning the Sublease Premises. (5) BANKRUPTCY. Sublessee being adjudicated a bankrupt or insolvent or Sublessee filing in any court a petition for bankruptcy or for reorganization or for the adoption of an arrangement under the Bankruptcy Act (as now or in the future amended) or the filing of an involuntary bankruptcy against Sublessee [unless said involuntary bankruptcy is reanimated within thirty (30) calendar days from the date of said filing], or Sublessee filing in any court for the appointment of a receiver or trustee of all or a portion of Sublessee's property or there being appointed a receiver or trustee for all or a portion of Sublessee's property, unless said receiver or trustee is terminated within thirty (30) calendar days from the date of said appointment. (6) ASSIGNMENT FOR BENEFIT OF CREDITORS. Sublessee making any general assignment or general arrangement of Sublessee's property for the benefit of Sublessee's creditors. (12) REMEDIES In the event of an occurrence of default as set forth above, Sublessor shall have the right to seek any remedies as pursuant to the Lease, as well as: (a) TERMINATE SUBLEASE. Terminate this Sublease and end the term hereof by giving to Sublessee written notice of such termination, in which event Sublessor shall be entitled to recover from Sublessee at the of such termination the present value of the excess, if any, of the amount of rent reserved in this Sublease for the then balance of the term hereof over the then reasonable rental value of the Sublease Premises for the same period. The present value shall be determined by discounting all future excess rent amounts at a rate of eight percent (8%) per annum. It is understood and agreed that the "reasonable rental value" shall be the amount of rental which Sublessor can obtain as rent for the remaining balance of the initial term or renewal term, whichever is applicable; or (b) SUE MONTHLY FOR RENTS. Without resuming possession of the Sublease Premises or terminating this Sublease to sue monthly for and recover all rents, other required payments due under this Sublease, and other sums including damages and legal fees at any time and from time to time accruing hereunder; or (c) REPOSSESS SUBLEASE PREMISES. Upon written notice to all interested parties, reenter and take possession of the Sublease Premises or any part thereof and repossess the same as of Sublessors former estate and expel Sublessee and those claiming through or under Sublessee and remove the effects of either or both (forcibly, if necessary) without being deemed guilty in any manner of trespass and without prejudice to any remedies for rent delinquencies or preceding lease defaults, in which event Sublessor may from time to time without terminating this Sublease relet the Sublease Premises or any -3- part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Sublessor may deem advisable, with the right to make alterations and repairs to the Sublease Premises, and such reentry or taking of possession of the Sublease Premises by Sublessor shall not be construed as an election on Sublessor's part to terminate this Sublease unless a written notice of termination is given to Sublessee or unless the termination thereof is decreed by a court of competent jurisdiction. In the event of Sublessor's election to proceed under this provision, then such repossession shall not relieve Sublessee of Sublessee's obligation and liability under this Sublease, all of which shall survive such repossession, and Sublessee shall pay to Sublessor as current liquidated damages the basic rental and additional rental and other sums hereinabove provided which would be payable hereunder if such repossession had not occurred, less the net proceeds (if any) of any reletting of the Sublease Premises after deducting all of Sublessor's expenses in connection with such reletting, including but without limitation all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration costs, and expenses of preparation of such reletting. Sublessee shall pay such current damages to Sublessor on the days on which the basic rental would have been payable hereunder if possession had not been retaken, and Sublessor shall be entitled to receive the same from Sublessee on each such day. (13) NOTICES All notices, demands and requests required to be given by either party to the other shall be in writing and shall either be hand delivered or sent by certified or registered mail, return receipt requested, postage prepaid, addressed to the parties at the addresses set forth below or at such other addresses as the parties may designate in writing delivered pursuant to this provision. Any notice when given as provided herein shall be deemed to have been delivered on the date personally served or two (2) calendar days subsequent to the date that said notice was deposited with the United States Postal Service. SUBLESSOR: Rocky Mountain Internet c/o Marcia White 1099 18th Street, 30th floor Denver, CO 80202 SUBLESSEE: T & 0 Smith & Wogrin c/o David Smith 1800 Glenarm, Suite 1100 Denver, CO 80202 (14) TIME OF THE ESSENCE Time is of the essence hereof. (15) QUIET ENJOYMENT Sublessor represents, covenants, and warrants that: (a) AUTHORITY. Sublessor has the right to enter into and consummate this Sublease. (b) PEACEFUL POSSESSION. Upon Sublessee's paying the rental herein reserved and upon performing all of the terms and conditions of this Sublease on Sublessee's part to be performed, Sublessee shall at all times during the term of this Sublease peacefully and quietly have, hold and enjoy the Sublease Premises. (c) OBLIGATIONS UNDER THE LEASE. Throughout the term of the Sublease, Sublessor shall maintain the Lease in good standing and promptly perform all obligations of Sublessor thereunder NOT DELEGATED TO SUBLESSEE PURSUANT TO THIS SUBLEASE. (d) INDEMNITY. Sublessor and Sublessee shall indemnify each other and hold each other harmless from and against all costs, expenses (including reasonable attorney fees), losses, claims, liabilities, obligations, and damages resulting from or arising out of a breach by Sublessor or Sublessee of its representations, covenants, and warranties contained in this Section 16. (e) NOTICE OF DEFAULT. If Sublessor is in default or breach under the Lease, Sublessor shall provide written notice of such default to Sublessee within two days of such default or breach. (16) MISCELLANEOUS (a) CHOICE OF LAW. This Sublease is entered into in the State of Colorado and shall be construed in accordance with the laws thereof. -4- (b) HEADINGS AND CAPTIONS. The headings and captions used in this Sublease are for the convenience of reference only and shall not be used in the construction or interpretation of this Sublease. (c) INUREMENT. The covenants and agreements contained herein shall be binding upon and inure to the benefit of the parties hereto, their heirs, personal representatives, administrators, successors and assigns. (d) CONSTRUCTION OF TERMS. Words of any gender used in this Sublease shall be held to include any other gender, and words in the singular shall be held to include the plural, as the identity of Sublessor or Sublessee requires. (17) NO WAIVER No waiver by Sublessor of any provisions hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Sublessee of the same or any other provision. Sublessor's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Sublessor's consent to or approval of any subsequent act by Sublessee. The acceptance of rental hereunder by Sublessor shall not be a waiver of any preceding breach by Sublessee of any provision hereof, other than the failure of Sublessee to pay the particular rental so accepted, regardless of Sublessor's knowledge of such preceding breach at the time of acceptance of such rent. (18) ATTORNEYS' FEES In case suit shall be brought to enforce any provisions of this Sublease, the prevailing party shall be awarded (in addition to the relief granted) all reasonable attorneys' fees and costs resulting from such litigation. (19) INTEREST ON PAST-DUE OBLIGATIONS Any amount due to Sublessor not paid when due shall bear interest at the rate of one percent (1%) per month from the date due; provided, however, that any such payment of interest shall not excuse or correct any default by Sublessee under this Sublease. (20) LEGAL COUNSEL By virtue of this paragraph, Broker advises and recommends that all parties hereto obtain legal counsel to represent them in connection with the examination of title, zoning of the Sublease Premises, the execution of this Sublease, tax implications of the transaction and all other aspects relative to the transaction contemplated hereby. (21) AGENCY DISCLOSURE The rules and regulations of the Colorado Real Estate Commission require that Broker (Fuller and Company) discloses its agency relationship with all parties to a transaction. Broker hereby discloses that it is acting as dual agent for and on behalf of Sublessor and Sublessee. The parties acknowledge prior timely agency disclosure and consent to said agency relationship. (22) SEVERABILITY If any sentence, paragraph or section of this Sublease is held to be illegal or invalid, this shall not affect in any manner those other portions of the Sublease not illegal or invalid and this Sublease shall continue in full force and effect as to those provisions. (23) SECURITY DEPOSIT Sublessee shall deposit with Sublessor a Security Deposit of $3,790.00 upon the execution of this Sublease. Sublessor will hold such security deposit in accordance with paragraph 7.1 of the Lease. Sublessor agrees to promptly (within thirty (30) days of the default of Sublessor, termination, or expiration of this Sublease) return the Security Deposit, less any allowed deductions, to Sublessee upon Sublessor's default under the Lease, or upon the termination or expiration of this Sublease. (25) ADDITIONAL PROVISIONS (a) Sublessee agrees to take the premises in an as is condition. -5- IN WITNESS WHEREOF, the parties have executed this Sublease Agreement the day and year first written above. SUBLESSOR: SUBLESSEE: Rocky Mountain Internet, Inc. T & O Smith & Wogrin 1099 18th Street, 30th floor 1800 Glenarm, Suite 1100 Denver, CO 80202 Denver, CO 80202 By: /s/ By: /s/ ---------------------------- ----------------------------- Its: President Its: President --------------------------- ---------------------------- Lessor hereby consents to this Sublease Agreement by signing below and Lessor grants Sublessee a Right of First Refusal to assume the Lease upon Sublessor's uncured default under the Lease. LESSOR: Sheridan Realty Corp. 1800 Glenarm, Suite 1200 Denver, CO 80202 By: /s/ ---------------------------- Its: Vice President --------------------------- -6- EXHIBIT A Legal Description and Premises [Graph] EX-10.6 3 EXHIBIT 10.6 EXHIBIT 10.6 ACQUISITION OF THE INFORMATION EXCHANGE BILL OF SALE INFORMATION EXCHANGE, L.L.C. This Bill of Sale is entered into between Rocky Mountain Internet, Inc., a Delaware corporation (the "Company") and the persons whose signature appear below (the "Owners"). Whereas, the Owners own all of the outstanding equity interests in the Information Exchange, L.L.C.. The Company and the Owners desire to exchange shares of common stock of the Company ("Common Stock") for all of Owners' equity interests in IE (the "Equity Interests") upon the terms and subject to the conditions set forth herein. Therefore, the parties agree as follows: 1. Each of the Owners hereby assigns, transfers and conveys to the Company all of such Owners Equity Interests in IE, in exchange for an aggregate of 52,723 shares of Common Stock, such shares to be issued to the owners pro rata according to their respective ownership interests in IE. 2. Each of Roy Dimoff, Brian Dimoff, Nancy Phillips and Sandra Collins represents and warrants that they own 51%, 14%, 31% and 4%, respectively, of the outstanding equity interests in IE, and that upon delivery of such Equity Interests to the Company, the Company will own 100% of the outstanding equity interests in IE, free and clear of any lien, claim or encumbrance of any kind whatsoever. 3. The Company represents and warrants that the shares of Common Stock to be issued hereunder will be validly issued, fully paid and nonassessable and free and clear of any lien, claim or encumbrance of any kind whosoever, except for restrictions on transfer imposed by applicable securities laws. Effective December 3, 1996, notwithstanding the actual date of execution. This Bill of Sale may be executed in one or more counterparts. Rocky Mountain Internet, Inc. By: /s/ D. Kirk Roberts /s/ Nancy Phillips ----------------------- ------------------------- Nancy Phillips /s/ Roy Dimoff /s/ Brian Dimoff -------------------------- ------------------------- Roy Dimoff Brian Dimoff /s/ Sandra Collins -------------------------- Sandra Collins MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF ROCKY MOUNTAIN INTERNET, INC. December 3, 1996 A special meeting of the board of directors of Rocky Mountain Internet, Inc., a Delaware corporation (the "Corporation") was held on December 3, 1996, at the executive offices of the Corporation. Present were Roy Dimoff, Chris Phillips and Gerald Van Eeckhout, all the directors of the Corporation. Also present were Marcia White and, by conference telephone, Tony Petrelli, a senior vice president with Neidiger/Tucker/Bruner, Inc., the Corporation's investment banker, and, for the initial portion of the meeting, Stephen Halasz, the Corporation's attorney. A general discussion of the proposed acquisition by the Corporation of the outstanding equity interests in the Information Exchange, LLC ("IE") was had. Mr, Dimoff, a director of the Corporation, is an equity owner in IE, as are Nancy Phillips and Brian Dimoff, employees of the Corporation. Messrs. Phillips and Van Eeckhout asked questions of Mr. Dimoff regarding the advisability, consideration to be paid and other terms of the proposed transaction, and the value of the assets to be received by the Corporation. Mr. Dimoff explained that the proposed consideration to be paid by the Corporation consisted of 52,723 shares of common stock, valued for such purpose at a 40% discount from the most recent bid prices of the common stock based on the restricted nature of the shares proposed to be issued. Such valuation resulted in a deemed purchase price for IE of $60,385, or 6.5 times current monthly revenue. Mr. Phillips and Mr. Van Eeckhout then reviewed the written opinion of Neidiger to the effect that the proposed transaction is fair to the Corporation from a financial point of view. After questioning Mr. Petrelli regarding the basis for the Neidiger opinion, Messrs. Phillips and Van Eeckhout, upon motion duly made and seconded, voted in favor of the following resolutions, with Mr. Dimoff abstaining: RESOLVED, that whenever these resolutions authorize the taking of any action by the "Proper Officers," such action may be taken by the president and any vice president of the Corporation, any one of them acting alone, or to the extent necessary for purposes of certification and attestation, any secretary or assistant secretary of the Corporation. RESOLVED, that Marcia White shall serve as secretary of the meeting and shall prepare minutes of the meeting for approval of the directors. FURTHER RESOLVED, that it is in the best interests of the Corporation to acquire IE for consideration consisting of 52,723 shares of common stock of the corporation, such shares to be issued to the holders of equity interests in IE pro rata according to their respective interests. FURTHER RESOLVED, that the Proper Officers be, and each of them hereby is, with full authority to act without the others, authorized to execute and deliver, in the name and on behalf of the Corporation, a bill of sale and all other documents, instruments, agreements and certificates to be delivered by the Corporation pursuant to or in connection with the acquisition of IE (the "Transaction Documents"), with such additions, deletions or changes therein and modifications thereof, if any, as the Proper Officer executing the same shall approve (the execution thereof by any such officer to be conclusive evidence of his or her approval of any such additions, deletions, changes or modifications) and that each of the officers of the Corporation hereby is authorized and directed to take any and all appropriate action on behalf of the Corporation to perform its obligations under the Transaction Documents. FURTHER RESOLVED, that the Secretary and Assistant Secretaries of the Corporation are hereby authorized and directed to sign any Secretary's Certificates required to be delivered pursuant to or in connection with the Transaction Documents and to make such attestations as may be required pursuant to or in connection with the Transaction Documents. FURTHER RESOLVED, that the Proper Officers of the Corporation be, and each of them hereby is, authorized and directed to take any and all actions necessary and advisable to consummate the transactions contemplated hereby, and to carry out the purpose and intent of the foregoing resolutions. FURTHER, RESOLVED, that the Proper Officers are further authorized, but shall not be required, to take any action including, without limitation, completing or conforming any document delivered by or on behalf of the Corporation with respect to the transactions described in the foregoing resolutions and to execute any other instruments, assurances, certificates, or waivers for or on behalf of the Corporation as may be necessary or advisable to consummate the transactions contemplated herein. FURTHER RESOLVED, that all acts of the Proper Officers acting on behalf of the Corporation in connection with the negotiation and execution of the transactions contemplated herein and all other necessary instruments, documents, and agreements relating thereto are approved, ratified and confirmed. FURTHER RESOLVED, that each and all of the resolutions, acts, and proceedings of the officers of the Corporation, since the last ratification of acts as evidenced by the records in the minute book of the Corporation, are hereby approved, ratified, and made the acts and deeds of the Corporation. There being no further business to come before the meeting, the meeting upon motion duly made and seconded was adjourned. Respectfully submitted, /s/ Marcia White - --------------------------- Marcia White Approved and Signed: /s/ Roy J. Dimoff ----------------------------- Roy J. Dimoff /s/ Christopher K. Phillips ----------------------------- Christopher K. Phillips /s/ Gerald Van Eeckhout ----------------------------- Gerald Van Eeckhout Being all of the directors of the Corporation August 7, 1996 To the Members The Information Exchange, Limited Liability Company 1800 Glenarm Place, 11th Floor Denver, Colorado 80202 We have compiled the accompanying statement of Assets, Liabilities, and Members' Equity--cash basis of The Information Exchange Limited Liability Company as of July 31, 1996, and the related statement of revenues and expenses--cash basis for the seven months then ended, in accordance with Statement on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. The Company has chosen under the Internal Revenue Code to be a limited liability company. In lieu of income taxes, the members of a limited liability company are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in these financial statements. Management has elected to omit substantially all of the disclosures ordinarily included in financial statements prepared on the cash basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the Company's assets, liabilities, equity, revenue and expenses. Accordingly, these financial statements are not designed for those who are not informed about such matters. Knorr & Associates, P.C. THE INFORMATION EXCHANGE Statement of Assets, Liabilities and Members' Equity--Cash Basis July 31, 1996 ASSETS Current Assets: Cash in Bank $ (3,192.) -------- TOTAL CURRENT ASSETS (3,192.) -------- Plant, Property and Equipment Telephone Equipment 71,718. -------- 71,718. Less Accumulated Depreciation (23,340.) -------- 48,378. -------- TOTAL ASSETS $ 45,186. -------- -------- LIABILITIES & MEMBERS' EQUITY Current Liabilities Accrued payroll taxes $ 1,691. Current portion of lease obligation 28,430. -------- TOTAL CURRENT LIABILITIES 30,121. -------- Long-term Liabilities Lease Obligation 43,406. Less Current Portion (28,430.) -------- Total Long-Term Debt 14,976. -------- TOTAL LIABILITIES 45,097. -------- Members' Equity Members' Equity 29,333. Current year expenses over revenue 29,244. -------- TOTAL MEMBERS' EQUITY 89. -------- TOTAL LIABILITIES & MEMBERS' EQUITY $ 45,186. -------- -------- SEE ACCOUNTANTS' COMPILATION REPORT - -------------------------------------------------------------------------------- THE INFORMATION EXCHANGE LIMITED LIABILITY COMPANY Statement of Revenues and Expenses--Cash Basis For The Seven Months Ended July 31, 1996 Rental Revenues $50,918. 100.00% ------- ------- Expenses: Auto expense 978. 1.92 Bank charges 170. .33 Commissions 616. 1.21 Contract labor 86. .17 Depreciation 12,249. 24.06 Dues & subscriptions 1,165. 2.29 Employee benefits 2,399. 4.71 Equipment maintenance 800. 1.57 Entertainment 335. .66 Insurance 424. .83 Interest expense 3,201. 6.29 Legal & accounting 760. 1.49 Miscellaneous expense 162. .32 Office supplies 1,290. 2.53 Parking 567. 1.11 Payroll taxes 3,032. 5.95 Postage & shipping 653. 1.28 Printing 467. .92 Promotion 2,020. 3.97 Rent 300. .59 Repairs 455. .89 Salaries & wages 31,494. 61.85 Sales taxes 879. 1.73 Telephone & communications 4,444. 8.73 Telephone lines & data circuits 12,040. 23.65 Travel 509. 1.00 Worker's compensation 241. .47 -------- ------- Total Operating Expenses 81,736. 160.52 -------- ------- (30,818.) (60.52) Other income 1,574. 3.09 -------- ------- Net Expenses Over Revenue $(29,244.) (57.43)% -------- ------- -------- ------- SEE ACCOUNTANTS' COMPILATION REPORT - -------------------------------------------------------------------------------- THE INFORMATION EXCHANGE LIMITED LIABILITY COMPANY Statement of Cash Flows--Cash Basis For The Seven Months Ended July 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net Expenses over Revenue $(29,244.) Noncash Expenses: Depreciation 12,249. Changes is Assets and Liabilities: Increase (Decrease) In: Accrued Payroll Taxes 877. -------- Net Cash Used by Operating Activities (16,118.) -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Equipment (16,262.) -------- Net Cash Used by Investment Activities (16,262.) -------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of Lease Obligation (8,833.) Additional Capital Lease Utilized 16,262. Contribution by Members to Equity 24,600. -------- Net Cash Provided by Financing Activities 32,029. -------- Net Decrease in Cash ( 351.) Cash Balance, January 1, 1996 (2,841.) -------- Cash Balance, July 31, 1996 $(3,192.) -------- -------- Supplemental Disclosure: Interest paid $ 3,201. -------- -------- SEE ACCOUNTANTS' COMPILATION REPORT - -------------------------------------------------------------------------------- EX-10.7 4 EXHIBIT 10.7 FORM 10-KSB EXHIBIT 10.7 ASSET PURCHASE OF ON-LINE NETWORK ENTERPRISES ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement") is made as of the 22nd day of January, 1997, by and between Rocky Mountain Internet, Inc. a Delaware corporation ("Buyer") and VR-1, Inc., a Delaware corporation ("Seller"). RECITALS Seller is engaged in the business of providing Internet connectivity services to subscribers under the service mark "O.N.E." (the "Business"). Buyer desires to purchase and Seller desires to sell certain of the assets of Seller used or useful in connection with the Business. AGREEMENT In consideration of the above recitals and the mutual agreements stated in this Agreement, the parties agree as follows: SECTION 1. DEFINITIONS. In addition to terms defined elsewhere in this Agreement, the following capitalized terms, when used in this Agreement, will have the meanings set forth below: 1.1 AFFILIATE. With respect to any Person, any other Person controlling, controlled by or under common control with such Person, with "control" for such purpose meaning the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or voting interests, by contract or otherwise. 1.2 ASSETS. All properties, privileges, rights, interests and claims, real and personal, tangible and intangible, of every type and description that are described on the attached Schedule 1.2, including Intangibles, Seller Contracts, and Equipment specified on such schedule, but excluding any Excluded Assets. 1.3 BUSINESS. The Internet connectivity business conducted by Seller on the date of this Agreement (but specifically excluding Seller's web site development and services business and Seller's software development business). 1.4 BUSINESS DAY. Any day other than Saturday, Sunday or a day on which banking institutions in Denver, Colorado are required or authorized to be closed. 1.5 CLOSING. The consummation of the transactions contemplated by this Agreement, as described in Section 8, the date of which is referred to as the Closing Date. 1.6 ENCUMBRANCE. Any mortgage, lien, security interest, security agreement, conditional sale or other title retention agreement, limitation, pledge, option, charge, assessment, restrictive agreement, restriction, encumbrance, adverse interest, restriction on transfer or any exception to or defect in title or other ownership interest (including reservations, rights of way, possibilities of reverter, encroachments, easements, rights of entry, restrictive covenants, leases and licenses). 1.7 ENVIRONMENTAL LAW. Any Legal Requirement relating to pollution or protection of public health, safety or welfare or the environment, including those relating to emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances. 1.8 EQUIPMENT. All free standing kiosks, servers, modems, electronic devices, test equipment, and other tangible personal property owned or leased by Seller for use in the Business and listed on Schedule 1.2. 1.9 GAAP. Generally accepted accounting principles as in effect from time to time in the United States of America. 1.10 GOVERNMENTAL AUTHORITY. (i) The United States of America, (ii) any state, commonwealth, territory or possession of the United States of America and any political subdivision thereof (including counties, municipalities and the like), (iii) any agency, authority or instrumentality of any of the foregoing, including any court, tribunal, department, bureau, commission or board. 1.11 GOVERNMENTAL PERMITS. All franchises, approvals, authorizations, permits, licenses, easements, registrations, qualifications, leases, variances and similar rights obtained from any Governmental Authority. 1.12 INTANGIBLES. All intangible assets listed on Schedule 1.2 including subscriber lists, rights to kiosk and dispenser placement and design, accounts receivable, claims (excluding any claims relating to Excluded Assets), Intellectual Property, and goodwill, if any, owned or leased by Seller for use in the Business. 1.13 INTELLECTUAL PROPERTY. All of Seller's rights in and to the trademarks, copyrights, inventions (whether or not patented or patentable) and trade secrets listed on Schedule 1.2. 1.14 LEGAL REQUIREMENT. Any statute, ordinance, code, law, rule, regulation, order or other requirement, standard or procedure enacted, adopted or, to the knowledge of Seller, applied by any Governmental Authority, including judicial decisions to which Seller is a party or to the knowledge of Seller applying common law or interpreting any other Legal Requirement. 1.15 PERSON. Any natural person, corporation, partnership, trust, unincorporated organization, association, limited liability company, Governmental Authority or other entity. 1.16 STOCK CONSIDERATION. A number of shares of Common Stock equal to a quotient, the numerator of which is 250,000 and the denominator of which is the numerical average of the closing bid price of the Common Stock on the Nasdaq Smallcap market on each Friday between the date of the Company' s initial public offering and the Closing. 1.17 SUBSCRIBER. Any subscriber to the Internet access service offered by the Business, except for any subscriber who (i) is more than 60 days' delinquent in the payment of any amount in excess of $10 (in the case of Dial-up Subscribers) or $350 (in the case of Dedicated Subscribers), or (ii) was solicited during the 90 day period preceding the Closing by extraordinary promotions or offers of discounts. A "Dial-up Subscriber" is a Subscriber who receives dial-up Internet access from the Business and a "Dedicated Subscriber" is a Subscriber who receives a Internet access from the Company offering higher data transmission rates than available from dial-up access. 1.18 OTHER DEFINITIONS. The following terms are defined in the Sections indicated: TERM SECTION ---- ------- Action 11.4 Adjustments Report 3.3.1 Assumed Liabilities 4.1 Buyer Damages 11.5 Excluded Assets 4.2 Indemnified Party 11.4 Indemnifying Party 11.4 Noncompetition Payment 3.1 Seller Contracts 5.8 Seller Damages 11.6 Survival Period 11.1 Taking 7.6.2 SECTION 2. SALE OF ASSETS. 2.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions set forth in this Agreement, at the Closing, Seller will sell to Buyer, and Buyer will purchase from Seller, all of Seller's rights, titles and interests in, to and under the Assets specified on SCHEDULE 1.2. SECTION 3. CONSIDERATION. 3.1.1 CASH CONSIDERATION. Buyer will pay to Seller at the Closing in immediately available funds total cash consideration of $150,000 (subject to adjustment as provided below). The cash portion of the consideration will be allocated as follows: (i) $1,000 (the "Noncompetition Payment") will be paid on the Closing Date in consideration of Seller's covenants under the Noncompetition Agreement referred to in Section 7.9; and (ii) $149,000 (the "Base Cash Consideration") will be paid on the Closing Date in consideration of the sale of the Assets to Buyer. 3.1.2 STOCK CONSIDERATION. At Closing Buyer shall issue to Seller a number of shares of the Common Stock of Buyer equal to the Stock Consideration. 3.1.3 SERVICES AGREEMENT. At Closing, Buyer and Seller shall enter into the Services Agreement in the form attached hereto as EXHIBIT A. 3.2 ADJUSTMENTS TO BASE CASH CONSIDERATION The Base Cash Consideration will be adjusted as follows: 3.2.1 Adjustments on a pro rata basis as of the Closing Date will be made for all prepaid expenses (to the extent such prepayments may accrue to Buyer's benefit), accrued expenses (including, but not limited to, personal property taxes), and prepaid income, all as determined in accordance with GAAP consistently applied, and to reflect the principle that all expenses and income attributable to the Business for the period prior to the Closing Date are for the account of Seller, and all expenses and income attributable to the Business for the period on and after the Closing Date are for the account of Buyer. 3.2.2 All advance payments to, or funds of third parties on deposit with, Seller as of the Closing Date, relating to the Business, including advance payments and deposits by subscribers served by the Business will be retained by Seller and credited to the account of Buyer. 3.2.3 All deposits relating to the Business that are held by third parties as of the Closing Date for the account of Seller or as security for Seller's performance of its obligations (other than with respect to Excluded Assets and any other deposits the full benefit of which will not be available to Buyer following the Closing Date), including deposits on leases and deposits for utilities, will be credited to the account of Seller in their full amounts and will become the property of Buyer. 3.2.4 There shall be no assignment of or adjustments for accounts receivable as of the Closing Date. Seller shall continue to collect accounts receivable for up to 60 days following the Closing and shall retain payments made for services provided prior to the Closing Date and shall deliver to Buyer payments made for services provided after the Closing Date. Any partial payments made by a Subscriber shall be applied pro rata to the pre-Closing and post-Closing outstanding balances for such Subscriber in proportion to the relative amounts of such balances. Seller shall not make any collection efforts other than the sending of invoices in the ordinary course without the consent of Buyer, which will not be unreasonably withheld. 3.3 DETERMINATION OF ADJUSTMENTS. Adjustments to the Base Purchase Price will be determined as follows: 3.3.1 At least one day before Closing, Seller will deliver to Buyer a report (the "Adjustments Report"), showing in detail the determination of the adjustments referred to in Section 3.2, which are calculated as of the Closing Date (or as of any other date agreed by the parties) and any documents substantiating the adjustments proposed in the Adjustments Report. The Adjustments Report will include a complete list of Subscribers and a schedule setting forth advance payments and deposits made to or by Seller, as well as accounts receivable information relating to the Business (showing sums due and their respective aging as of the Closing Date). Seller also will furnish to Buyer its billing report for the most current period as of the Closing Date. 3.4 ALLOCATION OF CONSIDERATION. The consideration payable by Buyer under this Agreement, excluding the Noncompetition Payment, will be allocated among the Assets as set forth in a schedule furnished by Buyer to Seller not later than 180 days after the Closing Date (or April 1 of the year following the Closing Date if earlier). Buyer and Seller agree to be bound by the allocation and will not take any position inconsistent with such allocations and will file all returns and reports with respect to the transactions contemplated by this Agreement, including all federal, state and local tax returns, on the basis of such allocations. SECTION 4. ASSUMED LIABILITIES AND EXCLUDED ASSETS. 4.1 ASSIGNMENT AND ASSUMPTION. Seller will assign, and Buyer will assume and perform, the Assumed Liabilities, which are defined as: (a) Seller's obligations to Subscribers for (i) Subscriber deposits held by Seller as of the Closing Date and which are refundable, in the amount for which Buyer received credit under Section 3.2, (ii) Subscriber advance payments held by Seller as of the Closing Date for services to be rendered in connection with the Business after the Closing Date, in the amount for which Buyer received credit under Section 3.2 and (iii) the delivery of Internet connectivity service to Subscribers after the Closing Date; and (b) obligations accruing and relating to periods after the Closing Date under Seller Contracts included as part of the Assets. Buyer will not assume or have any responsibility for any liabilities or obligations of Seller other than the Assumed Liabilities. In no event will Buyer assume or have any responsibility for any liabilities or obligations associated with the Excluded Assets. 4.2 EXCLUDED ASSETS. The Excluded Assets, which will be retained by Seller, will consist of all assets of Seller except the Assets described on SCHEDULE 1.2. Without limiting the generality of the foregoing, Excluded Assets shall include, without limitation, the following: (a) insurance policies and rights and claims thereunder (except as otherwise provided in Section 7.6.1); (c) bonds, letters of credit, surety instruments and other similar items; (d) cash and cash equivalents; (e) Seller's rights under any agreement governing or evidencing an obligation of Seller for borrowed money; and (f) Seller's rights under any contract, license, authorization, agreement or commitment other than those creating or evidencing Assumed Liabilities. SECTION 5. SELLER'S REPRESENTATIONS AND WARRANTIES. To induce Buyer to enter into this Agreement, Seller represents and warrants to Buyer, as of the date of this Agreement and as of the Closing, as follows: 5.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and use the Assets as they are currently owned, leased and used and to conduct the Business as it is currently conducted. Seller is duly qualified or licensed to do business and is in good standing under the laws of each jurisdiction in which the character of the properties owned, leased or operated by it or the nature of the activities conducted by it makes such qualification necessary, except any such jurisdiction where the failure to be so qualified or licensed and in good standing would not have a material adverse effect on Seller or on the validity, binding effect or enforceability of this Agreement. 5.2 AUTHORITY AND VALIDITY. Seller has all requisite corporate power and authority to execute and deliver, to perform its obligations under, and to consummate the transactions contemplated by, this Agreement. The execution and delivery by Seller of, the performance by Seller of its obligations under, and the consummation by Seller of the transactions contemplated by, this Agreement have been duly authorized by all requisite corporate action of Seller. This Agreement has been duly executed and delivered by Seller and is the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except insofar as enforceability may be affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect affecting creditors' rights generally or by principles governing the availability of equitable remedies. 5.3 NO BREACH OR VIOLATION. The execution, delivery and performance of this Agreement by Seller will not: (a) violate any provision of the charter or bylaws of Seller; (b) violate any Legal Requirement; (c) require any consent, approval or authorization of, or any filing with or notice to, any Person; or (d) (i) violate, conflict with or constitute a breach of or default under, (ii) permit or result in the termination, suspension or modification of, (iii) result in the acceleration of (or give any Person the right to accelerate) the performance of Seller under, or (iv) result in the creation or imposition of any Encumbrance under, any Seller Contract or any other instrument evidencing any of the Assets or any instrument or other agreement to which Seller is a party or by which Seller or any of its assets is bound or affected, except for purposes of this clause (d) such violations, conflicts, breaches, defaults, terminations, suspensions, modifications, and accelerations as would not, individually or in the aggregate, have a material adverse effect on any of the Assets, the Business or Seller. 5.4 ASSETS. Seller has good and marketable title to (or, in the case of Assets that are leased, valid leasehold interests in) the Assets . The Assets are free and clear of all Encumbrances of any kind or nature, except Encumbrances disclosed on SCHEDULE 1.2 which will be removed and released at or prior to the Closing. Except as set forth on SCHEDULE 1.2, none of the Equipment is leased by Seller from any other Person. All the Equipment is in good operating condition and repair, ordinary wear and tear excepted and is suitable and adequate for continued use in the manner in which it is presently used. 5.5 COMPLIANCE WITH LAW. The ownership, leasing and use of the Assets as they are currently owned, leased and used and the conduct of the Business as it is currently conducted do not violate any Legal Requirement, which violation, individually or in the aggregate, would have a material adverse effect on the Business or Seller. Seller has received no notice claiming a violation by Seller or the Business of any Legal Requirement applicable to Seller or the Business as it is currently conducted and to Seller's best knowledge, there is no basis for any claim that such a violation exists. 5.6 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE 5.6, there is no judgment or order outstanding, or any action, suit, complaint, proceeding or investigation by or before any Governmental Authority or any arbitrator pending, or to Seller's best knowledge, threatened, involving or affecting all or any part of the Assets. 5.7 CUSTOMERS AND SUPPLIERS. Seller's relations with its customers and suppliers are good and there are no pending or threatened claims or controversies with any customer or supplier that is material to the Assets or the Business except as set forth on SCHEDULE 5.7. 5.8 SELLER CONTRACTS. SCHEDULE 5.8 contains a true and complete list of all contracts, agreements, arrangements or understandings (the "Seller Contracts") to which Seller is a party or by which Seller is bound or to which any of the Assets are subject, other than any which are entered into with unaffiliated third parties in the ordinary course of business which are (i) not material to the conduct of the Business, (ii) which are terminable without payment of premium or penalty at will or upon not more than 30 days' notice, which impose monetary obligations not in excess of $5,000 and which impose no material non-monetary obligations. Except as set forth on SCHEDULE 5.8, none of the Seller Contracts listed or described on SCHEDULE 5.8 has been amended nor has Seller waived any right thereunder. Seller has provided Buyer with true, complete and correct copies of each of the Seller Contracts described on SCHEDULE 5.8 that are written and true, complete and correct written summaries of the Seller Contracts listed or described on SCHEDULE 5.8 that are oral. Except as set forth on SCHEDULE 5.8, (A) Seller has performed all obligations required to be performed by it to date under the Seller Contracts, (B) neither Seller nor, to the best of Seller's knowledge, any other party to any Seller Contract has improperly terminated or is in breach or default under such Seller Contract, (C) there exists no condition or event which , after the giving of notice or lapse of time or both, would constitute any such breach, termination or default, (D) each of the Seller Contracts is in full force and effect and is a legal, binding and enforceable obligation of Seller and, to the best of Seller's knowledge, each of the other parties to the Seller Contracts, and (E) none of the Seller Contracts is presently being renegotiated, either in whole or in part. 5.9 SUBSCRIBERS. As of the Closing Date, the Business will have no fewer than 763 Dial-up Subscribers and no fewer than 35 Dedicated Subscribers. 5.10 FINDERS AND BROKERS. Seller has not employed any financial advisor, broker or finder or incurred any liability for any financial advisory, brokerage, finder's or similar fee or commission in connection with the transactions contemplated by this Agreement for which Buyer could be liable. 5.11 DISCLOSURE. No representation or warranty by Seller in this Agreement or in any Schedule or Exhibit to this Agreement, or any statement, list or certificate furnished or to be furnished by Seller pursuant to this Agreement, contains or will contain any untrue statement of material fact, or omits or will omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading in light of the circumstances in which made. 5.12 SECURITIES ACT. Seller is acquiring the Stock Consideration for investment only with no view to a distribution thereof. Seller has had an opportunity to ask questions of senior management of Buyer and has been provided copies of Buyer's Prospectus dated September 5, 1996, and its quarterly report on Form 10Q for the period ended September 30, 1996. Buyer is an accredited investor as that term is defined in Regulation D under the Securities Act of 1933, as amended (the "1933 Act"). Buyer acknowledges that the Stock consideration may not be sold or transferred without registration under the 1933 Act and applicable state law unless an exemption therefrom is available, and agrees that certificates representing the Stock Consideration may bear a legend to the foregoing effect. SECTION 6. BUYER'S REPRESENTATIONS AND WARRANTIES. To induce Seller to enter into this Agreement, Buyer represents and warrants to Seller, as of the date of this Agreement and as of the Closing, as follows: 6.1 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to carry on its business as currently conducted and to own, lease, use and operate its assets. Buyer is duly qualified or licensed to do business and is in good standing under the laws of each jurisdiction in which the character of the properties owned, leased or operated by it or the nature of the activities conducted by it makes such qualification necessary, except any such jurisdiction where the failure to be so qualified or licensed and in good standing would not have a material adverse effect on Buyer or on the validity, binding effect or enforceability of this Agreement. 6.2 AUTHORITY AND VALIDITY. Buyer has all requisite corporate power and authority to execute and deliver, to perform its obligations under, and to consummate the transactions contemplated by, this Agreement. The execution and delivery by Buyer of, the performance by Buyer of its obligations under, and the consummation by Buyer of the transactions contemplated by, this Agreement have been duly authorized by all requisite corporate action of Buyer, and this Agreement constitutes the valid and binding obligation of Buyer, enforceable in accordance with its terms, except insofar as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect affecting creditors' rights generally or by principles governing the availability of equitable remedies. 6.3 NO BREACH OR VIOLATION. The execution, delivery and performance of this Agreement by Buyer will not: (a) violate any provision of the charter or bylaws of Buyer; 9 (b) violate any Legal Requirement; (c) require any consent, approval or authorization of, or any filing with or notice to, any Person; or (d) (i) violate, conflict with or constitute a breach of or default under (without regard to requirements of notice, passage of time or elections of any Person), (ii) permit or result in the termination, suspension, modification of, (iii) result in the acceleration of (or give any Person the right to accelerate) the performance of Buyer under, or (iv) result in the creation or imposition of any Encumbrance under, any instrument or other agreement to which Buyer is a party or by which Buyer or any of its assets is bound or affected, except for purposes of this clause (d) such violations, conflicts, breaches, defaults, terminations, suspensions, modifications and accelerations as would not, individually or in the aggregate, have a material adverse effect on Buyer or on the validity, binding effect or enforceability of this Agreement. 6.4 FINDERS AND BROKERS. Buyer has not employed any financial advisor, broker or finder or incurred any liability for any financial advisory, brokerage, finder's or similar fee or commission in connection with the transactions contemplated by this Agreement for which Seller could be liable. SECTION 7. ADDITIONAL COVENANTS. 7.1 ACCESS TO PREMISES AND RECORDS. Between the date of execution and delivery of this Agreement and the Closing Date, Seller will give Buyer and its representatives full access at reasonable times to all the premises and books and records of the Business and to all the Assets and will furnish to Buyer and its representatives all information regarding the Business and the Assets as Buyer may from time to time reasonably request. Notwithstanding any investigation that Buyer may conduct of the Business and the Assets, Buyer may fully rely on Seller's representations, warranties, covenants and indemnities, which will not be waived or affected by or as a result of such investigation; provided that Buyer shall promptly notify Seller of any breach or potential breach of Seller's representations, warranties, covenants or indemnities of which Buyer has actual knowledge. 7.2 CONTINUITY AND MAINTENANCE OF OPERATIONS; FINANCIAL STATEMENTS. Except as Buyer may otherwise agree in writing, until the Closing: 7.2.1 Seller will continue to operate the Business in the ordinary course consistent with past practices and will use commercially reasonable efforts to preserve any beneficial business relationships with customers, suppliers and others having business dealings with Seller relating to the Business. Without limiting the generality of the foregoing, Seller will maintain the Assets in good condition and repair, will maintain adequate inventories of spare Equipment consistent with past practice, will maintain insurance as in effect on the date of this Agreement and will keep all of its business books, records and files in the ordinary course of business in accordance with past practices. Seller will not itself, and will not permit any of its officers, directors, shareholders, agents or employees to, pay any of Seller's subscriber accounts receivable (other than for their own residences) prior to the Closing Date. Seller will continue to implement its procedures for disconnection and discontinuance of service to subscribers whose 10 accounts are delinquent in accordance with those in effect on the date of this Agreement. 7.2.2 Seller will not, without the prior written consent of Buyer: (a) change the rate charged for Internet connectivity services; (b) sell, transfer or assign any of the Assets or permit the creation of any Encumbrance on any Asset; (c) permit the amendment or cancellation of any of the Governmental Permits, Seller Contracts or any other contract or agreement (other than those constituting Excluded Assets) which affects or is applicable to the Business; (d) enter into any contract or commitment or incur any indebtedness or other liability or obligation of any kind relating to the Business involving an expenditure in excess of $1,000; or (e) take or omit to take any action that would cause Seller to be in breach of any of its representations or warranties in this Agreement. 7.3 LEASED EQUIPMENT. Except as specified on SCHEDULE 7.3, Seller will pay the remaining balances on any leases for Equipment and deliver title to such Equipment free and clear of all Encumbrances (other than Permitted Encumbrances) to Buyer at the Closing. 7.4 NO SHOPPING. None of Seller, its shareholders or any agent or representative of any of them will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Closing or the termination of this Agreement, directly or indirectly (a) solicit or initiate the submission of proposals or offers from any Person for, (b) participate in any discussions pertaining to or (c) furnish any information to any Person other than Buyer relating to, any direct or indirect acquisition or purchase of all or any portion of the Assets. 7.5 NOTIFICATION OF CERTAIN MATTERS. Seller will promptly notify Buyer of any fact, event, circumstance or action (a) which, if known on the date of this Agreement, would have been required to be disclosed to Buyer pursuant to this Agreement or (b) the existence or occurrence of which would cause any of Seller's representations or warranties under this Agreement not to be correct and complete. 7.6 RISK OF LOSS; CONDEMNATION. 7.6.1 Seller will bear the risk of any loss or damage to the Assets resulting from fire, theft or other casualty (except reasonable wear and tear) at all times prior to the Closing. If any such loss or damage involves any material portion of the Business, Seller will immediately notify Buyer of that fact and Buyer, at any time within 10 days after receipt of such notice, may elect by written notice to Seller either (i) to waive such defect and proceed toward consummation of the acquisition of the Assets in accordance with terms of this Agreement or (ii) terminate this Agreement. If Buyer elects so to terminate this Agreement, Buyer and Seller will be discharged of any and all obligations hereunder. If Buyer elects to consummate the transactions contemplated by this Agreement notwithstanding such loss or damage and does so, there will be no adjustment in the consideration payable to Seller on account of such loss or damage but all insurance proceeds payable as a result of the occurrence of the event resulting in such loss or damage will be delivered by Seller to Buyer, or the rights to such proceeds will be 11 assigned by Seller to Buyer if not yet paid over to Seller, and Seller will pay to Buyer (or Buyer may withhold from the Base Purchase Price) an amount equal to the difference between the amount of such insurance proceeds and the full replacement cost of the damaged or lost Assets. 7.6.2 If, prior to the Closing, any part of or interest in the Assets is taken or condemned as a result of the exercise of the power of eminent domain, or if a Governmental Authority having such power informs Seller or Buyer that it intends to condemn all or any part of the Assets (such event being called, in either case, a "Taking"), then Buyer may terminate this Agreement. If Buyer does not elect to terminate this Agreement, then (a) Buyer will have the sole right, in the name of Seller, if Buyer so elects, to negotiate for, claim, contest and receive all damages with respect to the Taking, (b) Seller will be relieved of its obligation to convey to Buyer the Assets or interests that are the subject of the Taking, (c) at the Closing Seller will assign to Buyer all of Seller's rights to all damages payable with respect to such Taking and will pay to Buyer all damages previously paid to Seller with respect to the Taking and (d) following the Closing, Seller will give Buyer such further assurances of such rights and assignment with respect to the taking as Buyer may from time to time reasonably request. 7.7 TRANSFER TAXES. Seller will be responsible for the payment of any state or local sales, use, transfer, excise, documentary or license taxes or fees or any other charge (including filing fees) imposed by any Governmental Authority with respect to the transfer of any of the Assets pursuant to this Agreement. 7.8 ADDITIONAL AGREEMENTS. At the Closing, the parties will execute and deliver: a) a Services Agreement in the form of EXHIBIT A; b) a Noncompetition Agreement in the form of EXHIBIT B; c) a Registration Rights Agreement in the form of EXHIBIT C; d) a License Agreement in the form of EXHIBIT D; e) a Domain Name Assignment in the form of EXHIBIT E; f) an Assignment and Assumption of Contracts in the form of EXHIBIT F; and g) a Bill of Sale in the form of EXHIBIT G. On the day of the Closing, Seller will deliver to each Subscriber by first class U.S. mail a letter in the form EXHIBIT H. 7.9 SATISFACTION OF CONDITIONS. Each party will use its best efforts to satisfy, or to cause to be satisfied, the conditions to the obligations of the other party to consummate the transactions contemplated by this Agreement, as set forth in Section 9, provided that Buyer will not be required to agree to any increase in the amount payable with respect to, or any modification that makes more burdensome in any material respect, any of the Assumed Liabilities. 7.10 SECURITIES LAWS. Buyer covenants that it will file the reports required to be filed by it under all applicable state and federal securities laws and the rules and regulations adopted thereunder and, at all times will take such further action as Buyer may reasonably 12 request, all to the extent required from time to time to enable Seller to sell the shares issued to Seller as Stock Consideration without registration under the 1933 Act within the limitation of the exemptions provided by (a) Rule 144 of the 1933 Act, as such rule may be amended from time to time or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of Seller, Buyer will deliver to Seller a written statement as to whether it has complied with such information and requirements. 7.11 CONFIDENTIALITY. Neither party will issue any press release or make any other public announcement regarding this Agreement or the transactions contemplated hereby without the consent of the other party. Each party will hold, and will cause its employees, consultants, advisors and agents to hold, in confidence, the terms of this Agreement and any non-public information concerning the other party obtained pursuant to this Agreement. Notwithstanding the preceding, a party may disclose such information to the extent required by any Legal Requirement (including disclosure requirements under federal and state securities laws), but the party proposing to disclose such information will first notify and consult with the other party concerning the proposed disclosure, to the extent reasonably feasible. Each party also may disclose such information to employees, consultants, advisors, agents and actual or potential lenders whose knowledge is necessary to facilitate the consummation of the transactions contemplated by this Agreement. Each party's obligation to hold information in confidence will be satisfied if it exercises the same care with respect to such information as it would exercise to preserve the confidentiality of its own similar information, but not less than reasonable care. 7.12 POST-CLOSING TRANSITIONAL MATTERS. Following the Closing, Seller will provide, without additional cost to Buyer, except as provided below, such assistance as is reasonably requested by Buyer in order to effect an orderly transition in the ownership and operation of the Assets. Such assistance will include commercially reasonable efforts to provide or do the following: a) SELLER SERVICES For up to 60 days following Closing: i) Seller shall continue to provide its billing services for the Subscribers; ii) Seller shall remit to Buyer amounts collected from the previous billing cycle for access services provided after Closing, less any pro rata amounts due Seller as provided in Section 3.2.4; iii) Seller shall use commercially reasonable efforts to cooperate with Buyer in attempting to obtain roof access rights from Seller's landlord in order to install Buyer's antenna; iv) Seller shall use reasonable efforts to cooperate with Buyer in attempting to establish point of presence for wireless and direct 13 connect Subscribers; v) CIRCUIT SERVICE. Attached hereto as Schedule 7.12 is a list of all the telephone circuit service contracts used by Seller in connection with the business (the "Circuits"). Seller shall not assign the Circuits to Buyer at Closing but shall, for a period not exceeding 60 days after Closing, act as Buyer's agent with respect to maintaining the Circuits for Buyer's use. Seller's obligation to act as agent for Buyer with respect to the Circuits shall be conditioned on Buyer's prompt reimbursement to Seller of all costs and expenses of Seller associated therewith and upon a default by Buyer to promptly reimburse Seller for such costs and expenses, Seller shall have the right to terminate the Circuits if Buyer fails to cure such default within five days after Seller has provided written notice thereof. Buyer shall give Seller written notice of its intent to terminate the Circuits and shall thereafter pay Seller for all costs and expense of the Circuits from January 15, 1997 until termination of the Circuits. For up to 30 days following Closing: vi) Seller shall accompany Buyer as reasonably requested by Buyer to introduce Buyer personnel to Dedicated Subscribers and participate in on-site visits to Dedicated Subscribers in order to, inter alia, address issues related to transition of service and co-located Subscriber equipment. Such services in this subsection (vi) shall be limited to a total of 40 hours within such 30 day period. Additional assistance may be provided upon payment to Seller and mutual agreement of the parties; vii) Seller shall provide point of presence for the Business. If Buyer requires additional point of presence services from Seller, Seller shall provide such services for up to an additional 30 days at the rate of $3,000 per month, pro rated for actual days elapsed; viii) Seller shall assist Buyer with troubleshooting access issues during Seller's normal business hours and at Seller's principal place of business; For the time periods specified below: ix) Seller shall, for the first two days following Closing, continue to staff Subscriber telephone support lines from 8am to 6pm; for the next eight Business Days, Seller shall staff Subscriber telephone 14 support lines from 8am to 5pm. Upon the expiration of such period, Seller's Subscriber telephone support number shall be permanently forwarded to Buyer and Seller shall provide one of its employees at Buyer's Colorado Springs support facility for the next five Business Days from 8am to 5pm. b) WEB SITE COOPERATION. Buyer and Seller will cooperate to modify and effect the orderly transition of Seller's Web Site found at www.netone.com (the "ONE Web Site"). The front page of the Web Site will be modified to inform users regarding changes in access services and will provide links to Buyer's home page. Seller will maintain the ONE Web Site and the links that refer to Seller's web services. Once Seller has established a new name for its web services business, Seller will move web services content from the ONE Web Site to a new site and the ONE Web Site will be maintained for 60 days and will have links to Buyer for access services and links to Seller for web services. c) NO EMPLOYEE SOLICITATION. For a period of one year after Closing, without the prior written consent of Seller, Buyer shall not solicit or attempt to solicit any employee of Seller to terminate his or her employment. SECTION 8. CLOSING. The Closing will be held on a date acceptable to both Buyer and Seller that is within 15 days after all conditions to the Closing contained in this Agreement (other than those based on acts to be performed at the Closing) have been satisfied or waived. SECTION 9. CONDITIONS TO CLOSING. 9.1 CONDITIONS TO THE OBLIGATIONS OF BUYER AND SELLER. The obligations of each party to consummate the transactions contemplated by this Agreement to take place at the Closing are subject to the satisfaction or waiver, to the extent permitted by applicable Legal Requirements, at or prior to the Closing Date of each of the following conditions: 9.1.1 No action, suit or proceeding is pending or threatened by or before any Governmental Authority and no Legal Requirement has been enacted, promulgated or issued or deemed applicable to any of the transactions contemplated by this Agreement by any Governmental Authority, which would (a) prohibit Buyer's ownership or operation of all or a material portion of the Business or the Assets, (b) compel Buyer to dispose of or separate all or a material portion of the Business or the Assets as a result of any of the transactions contemplated by this Agreement or (c) prevent or make illegal the consummation of any transactions contemplated by this Agreement. 9.2 CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations of Buyer to consummate the transactions contemplated by this Agreement to take place at the Closing are subject to the satisfaction or waiver, to the extent permitted by applicable Legal Requirements, at 15 or prior to the Closing Date, of each of the following conditions: 9.2.1 All representations and warranties of Seller contained in this Agreement are, if specifically qualified by materiality, true in all respects and, if not so qualified, are true in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date. 9.2.2 Seller in all material respects has performed and complied with each obligation, agreement, covenant and condition required by this Agreement to be performed or complied with by Seller at or prior to the Closing. 9.2.3 Seller has executed (or caused to be executed) and delivered to Buyer each of the documents required by SECTION 7.8; 9.2.4 No action, proceeding or investigation has been instituted or threatened prior to Closing which would, if determined adversely to Buyer's interest, materially impair the ability of Buyer to realize the benefits of the transactions contemplated by this Agreement; 9.2.5 Seller has delivered releases, in form satisfactory to Buyer, of all Encumbrances affecting any of the Assets; 9.2.6 Seller has delivered an Adjustment Report which is reasonably satisfactory to Buyer; and 9.2.7 Seller has delivered to Buyer: (a) a certificate, dated the Closing Date, signed by Seller's chief executive officer, stating that to his knowledge, the conditions set forth in Sections 9.2.1 and 9.2.2 are satisfied; and (b) such other documents as Buyer may reasonably request in connection with the transactions contemplated by this Agreement. 9.3 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to consummate the transactions contemplated by this Agreement to take place at the Closing are subject to the satisfaction or waiver by Seller, to the extent permitted by applicable law, at or prior to the Closing Date, of each of the following conditions: 9.3.1 All representations and warranties of Buyer contained in this Agreement are, if not specifically qualified by materiality, true and correct in all respects and, if so qualified, are true and correct in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date, except for changes permitted or contemplated by this Agreement. 9.3.2 Buyer in all material respects has performed and complied with each obligation, agreement, covenant and condition required by this Agreement to be performed or complied with by Buyer at or prior to the Closing. 16 9.3.3 Buyer has executed and delivered to Seller each of the documents required by Section 7.8. 9.3.4 Buyer has delivered to Seller the following: (a) a certificate, dated the Closing Date, signed by an executive officer of Buyer, stating that to his or her knowledge, the conditions set forth in Sections 9.3.1 and 9.3.2, are satisfied; and (b) such other documents as Seller may reasonably request in connection with the transactions contemplated by this Agreement. 9.4 WAIVER OF CONDITIONS. Any party may waive in writing any or all of the conditions to its obligations under this Agreement. SECTION 10. TERMINATION. 10.1 EVENTS OF TERMINATION. This Agreement may be terminated and the transactions contemplated by this Agreement may be abandoned at any time prior to the Closing: (a) by the mutual written consent of Buyer and Seller; (b) by either party, if the transactions contemplated by this Agreement to take place at the Closing have not been consummated by _________, 199__, for any reason other than (i) a breach or default by such party in the performance of any of its obligations under this Agreement or (ii) the failure of any representation or warranty of such party to be accurate; (c) by either party in the event of a material breach or default by the other party under this Agreement; (d) by either party if any court or governmental authority of competent jurisdiction shall have issued an order or judgment or taken any other action restraining, enjoining, or otherwise prohibiting the transactions contemplated by this Agreement. 10.2 LIABILITIES IN EVENT OF TERMINATION. The termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party prior to the date of termination with respect to any of its representations, warranties, covenants or agreements contained in this Agreement. 10.3 PROCEDURE UPON TERMINATION. In the event of the termination of this Agreement by Buyer or Seller pursuant to this Section 10, notice of such termination will promptly be given by the terminating party to the other. SECTION 11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION. 11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION. The representations and warranties and indemnification of Seller in this Agreement and in the 17 documents and instruments to be delivered by Seller pursuant to this Agreement will survive until the first anniversary of the Closing Date, except that (a) all such representations and warranties and indemnities with respect to any federal, state or local taxes will survive until the expiration of the applicable statute of limitations (including any extensions) for such federal, state or local taxes, respectively. The representations and warranties and indemnities of Buyer in this Agreement and in the documents and instruments to be delivered by Buyer pursuant to this Agreement will survive until the first anniversary of the Closing Date. The periods of survival of the representations and warranties prescribed by this Section 11.1 are referred to as the "Survival Period." The liabilities of the parties under their respective representations and warranties will expire as of the expiration of the applicable Survival Period; provided, however, that such expiration will not include, extend or apply to any representation or warranty, the breach of which has been asserted by a party in a written notice to the other party before such expiration or about which a party has given the other party written notice before such expiration indicating that facts or conditions exist that, with the passage of time or otherwise, can reasonably be expected to result in a breach (and describing such potential breach in reasonable detail). The Survival Period for a party's indemnification obligations hereunder shall not apply to the extent a claim for indemnification arises out of the other party's fraudulent or intentional acts or its gross negligence. The covenants and agreements of the parties in this Agreement and in the other documents and instruments to be delivered by Seller or Buyer pursuant to this Agreement will survive the Closing and will continue in full force and effect without limitation. 11.2 INDEMNIFICATION BY SELLER. Seller will indemnify, defend and hold harmless Buyer and its shareholders and its and their respective Affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, from and against: (a) all losses, damages, liabilities, deficiencies or obligations of or to Buyer or any such other indemnified Person resulting from or arising out of (i) any breach of any representation or warranty made by Seller in this Agreement, (ii) any breach of any covenant, agreement or obligation of Seller contained in this Agreement, (iii) any act or omission of Seller with respect to, or any event or circumstance related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurred or existed prior to or at the Closing Date, without regard to whether a claim with respect such matter is asserted before or after the Closing Date, and (iv) any claim that the transactions contemplated by this Agreement violate any bulk transfer or fraudulent conveyance laws of any applicable jurisdiction; and (b) all claims, actions, suits, proceedings, demands, judgments, assessments, fines, interest, penalties, costs and expenses (including settlement costs and reasonable legal, accounting, experts' and other fees, costs and expenses) incident or relating to or resulting from any of the foregoing. 11.3 INDEMNIFICATION BY BUYER. Buyer will indemnify, defend and hold harmless Seller and Seller's shareholders, directors, officers, employees, agents, successors and assigns, 18 from and against: (a) all losses, damages, liabilities, deficiencies or obligations of or to Seller or any such other indemnified Person resulting from or arising out of (i) any breach of any representation or warranty made by Buyer in this Agreement, (ii) the breach of any covenant, agreement or obligation of Buyer contained in this Agreement (iii) any act or omission of Buyer with respect to, or any event or circumstance related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurred or existed (other than as a result of Seller's actions) subsequent to the Closing Date, or (iv) the failure by Buyer to perform any of its obligations in respect of the Assumed Liabilities; and (b) all claims, actions, suits, proceedings, demands, judgments, assessments, fines, interest, penalties, costs and expenses (including, without limitation, settlement costs and reasonable legal, accounting, experts' and other fees, costs and expenses) incident or relating to or resulting from any of the foregoing. 11.4 THIRD PARTY CLAIMS. Promptly after the receipt by any party of notice of any claim, action, suit or proceeding by any Person who is not a party to this Agreement (collectively, an "Action"), which Action is subject to indemnification under this Agreement, such party (the "Indemnified Party") will give reasonable written notice to the party from whom indemnification is claimed (the "Indemnifying Party"). The Indemnified Party will be entitled, at the sole expense and liability of the Indemnifying Party, to exercise full control of the defense, compromise or settlement of any such Action unless the Indemnifying Party, within a reasonable time after the giving of such notice by the Indemnified Party, (a) admits in writing to the Indemnified Party the Indemnifying Party's liability to the Indemnified Party for such Action under the terms of this Section 11, (b) notifies the Indemnified Party in writing of the Indemnifying Party's intention to assume such defense, (c) provides evidence reasonably satisfactory to the Indemnified Party of the Indemnifying Party's ability to pay the amount, if any, for which the Indemnified Party may be liable as a result of such Action and (d) retains legal counsel reasonably satisfactory to the Indemnified Party to conduct the defense of such Action. The other party will cooperate with the party assuming the defense, compromise or settlement of any such Action in accordance with this Agreement in any manner that such party reasonably may request. If the Indemnifying Party so assumes the defense of any such Action, the Indemnified Party will have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement of the Action, but the fees and expenses of such counsel will be at the expense of the Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii) any relief other than the payment of money damages is sought against the Indemnified Party or (iii) the Indemnified Party will have been advised by its counsel that there may be one or more defenses available to it which are different from or additional to those available to the Indemnifying Party, and in any such case that portion of the fees and expenses of such separate counsel that are reasonably related to matters covered by the indemnity provided in this Section 11 will be paid by the Indemnifying Party. No Indemnified Party will settle or compromise any such Action for which it is entitled to indemnification under this Agreement without the prior written consent of the Indemnifying Party, unless the Indemnifying Party has 19 failed, after reasonable notice, to undertake control of such Action in the manner provided in this Section 11.4. No Indemnifying Party will settle or compromise any such Action (A) in which any relief other than the payment of money damages is sought against any Indemnified Party or (B) in the case of any Action relating to the Indemnified Party's liability for any tax, if the effect of such settlement would be an increase in the liability of the Indemnified Party for the payment of any tax for any period beginning after the Closing Date, unless the Indemnified Party consents in writing to such compromise or settlement. 11.5 LIMITATIONS ON INDEMNIFICATION - SELLER. (a) Seller will not be liable for indemnification arising solely under Section 11.2 for (a) any losses, damages, liabilities, deficiencies or obligations of or to Buyer or any other person entitled to indemnification from Seller or (b) any claims, actions, suits, proceedings, demands, judgments, assessments, fines, interest, penalties, costs and expenses (including settlement costs and reasonable legal, accounting, experts' and other fees, costs and expenses) incident or relating to or resulting from any of the foregoing (the items described in clauses (a) and (b) collectively being referred to for purposes of this Section 11.5 as "Buyer Damages") unless the amount of Buyer Damages for which Seller would, but for the provisions of this Section 11.5, be liable exceeds, on an aggregate basis, $5,000, in which case Seller will be liable for all such Buyer Damages, which will be due and payable within 15 days after Seller's receipt of a statement therefor. (b) Except for any Buyer Damages arising out of Seller's fraudulent or intentional acts or gross negligence, Seller's liability for Buyer Damages under this Agreement shall be limited to a maximum of $400,000. For any Buyer's Damages in excess of $150,000, Seller shall have the option to pay such excess by transfer to Buyer of shares of Common Stock that were issued to Seller as Stock Consideration hereunder. Seller shall receive a credit for such shares equal to the closing bid price of Buyer's Common Stock on the Nasdaq Smallcap market on the last Business Day immediately preceding the date of payment by transfer of such shares, but in no event will Seller receive a credit for such shares of less than the price per share established at Closing to calculate the Stock Consideration. Seller may elect to pay excess Buyer Damages in cash rather than stock. 11.6 LIMITATIONS ON INDEMNIFICATION - BUYER. Buyer will not be liable for indemnification arising solely under Section 11.3(a)(i) for (a) any losses, damages, liabilities, deficiencies or obligations of or to Seller or any other person entitled to indemnification from Buyer or (b) any claims, actions, suits, proceedings, demands, judgments, assessments, fines, interest, penalties, costs and expenses (including settlement costs and reasonable legal, accounting, experts' and other fees, costs and expenses) incident or relating to or resulting from any of the foregoing (the items described in clauses (a) and (b) collectively being referred to for purposes of this Section 11.6 as "Seller Damages") unless the amount of Seller Damages for which Buyer would, but for the provisions of this Section 11.6, be liable exceeds, on an aggregate basis, $5,000, in which case Buyer will be liable for all such Seller Damages, which will be due and payable within 15 days after Buyer's receipt of a statement therefor. 20 SECTION 12. MISCELLANEOUS. 12.1 PARTIES OBLIGATED AND BENEFITED. Subject to the limitations set forth below, this Agreement will be binding upon the parties and their respective assigns and successors in interest and will inure solely to the benefit of the parties and their respective assigns and successors in interest, and no other Person will be entitled to any of the benefits conferred by this Agreement. Without the prior written consent of the other parties, no party will assign any of its rights under this Agreement or delegate any of its duties under this Agreement, provided that Buyer may, without the consent of any other party, assign or delegate its rights and obligations under this Agreement to any of its Affiliates, and such assignee will be substituted for Buyer under this Agreement as though it were the original party to this Agreement; provided that Buyer shall not be released from its obligations under this Agreement upon any such assignment. 12.2 NOTICES. Any notice, request, demand, waiver or other communication required or permitted to be given under this Agreement will be in writing and will be deemed to have been duly given only if delivered in person or by first class, prepaid, registered or certified mail, or sent by courier or, if receipt is confirmed, by telecopier: To Buyer at: Rocky Mountain Internet, Inc. 1099 18th Street, 30th Floor Denver, CO 80202 Attention: Kevin Loud Telecopy: (303) 672-0711 With a copy to: Sherman & Howard L.L.C. 633 Seventeenth Street, Suite 3000 Denver, Colorado 80202 Attention: Stephen S. Halasz, Esq. Telecopy: (303) 298--940 To Seller at: VR-1, Inc. 4888 Pearl East Circle, Suite 101 Boulder, CO 80301 Attention: Vice President Telecopy: 303-444-2797 With a copy to: Holme Roberts & Owen LLP 21 1401 Pearl Street, Suite 400 Boulder, CO 80302 Attention: Patrick K. Perrin, Esq. Telecopy: (303) 444-1063 Any party may change the address to which notices are required to be sent by giving notice of such change in the manner provided in this Section 12.2. All notices will be deemed to have been received on the date of delivery or on the third Business Day after mailing in accordance with this Section, except that any notice of a change of address will be effective only upon actual receipt. 12.3 ATTORNEYS' FEES. Subject to applicable limitations in Sections 11.1, 11.5 and 11.6, in the event of any action or suit based upon or arising out of any alleged breach by any party of any representation, warranty, covenant or agreement contained in this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees and other costs of such action or suit from the other party. 12.4 RIGHT TO SPECIFIC PERFORMANCE. Seller acknowledges that the unique nature of the Assets to be purchased by Buyer pursuant to this Agreement renders money damages an inadequate remedy for the breach by Seller of its obligations under this Agreement, and Seller agrees that in the event of such breach, Buyer will upon proper action instituted by it and relief awarded to it by a court of competent jurisdiction, be entitled to a decree of specific performance of this Agreement. 12.5 WAIVER. This Agreement or any of its provisions may not be waived except in writing. The failure of any party to enforce any right arising under this Agreement on one or more occasions will not operate as a waiver of that or any other right on that or any other occasion. 12.6 CAPTIONS. The article and section captions of this Agreement are for convenience only and do not constitute a part of this Agreement. 12.7 CHOICE OF LAW. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES UNDER IT WILL BE GOVERNED BY AND CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT REGARD TO THE CONFLICTS OF LAWS RULES OF COLORADO. 12.8 TERMS. Terms used with initial capital letters will have the meanings specified, applicable to both singular and plural forms, for all purposes of this Agreement. The word "include" and derivatives of that word are used in this Agreement in an illustrative sense rather than limiting sense. 12.9 RIGHTS CUMULATIVE. All rights and remedies of each of the parties under this Agreement will be cumulative, and the exercise of one or more rights or remedies will not preclude the exercise of any other right or remedy available under this Agreement or applicable law, subject to the limitations under Sections 11.1, 11.5 and 11.6. 22 12.10 FURTHER ACTIONS. Seller and Buyer will execute and deliver to the other, from time to time at or after the Closing, for no additional consideration and at no additional cost to the requesting party, such further assignments, certificates, instruments, records, or other documents, assurances or things as may be reasonably necessary to give full effect to this Agreement and to allow each party fully to enjoy and exercise the rights accorded and acquired by it under this Agreement. 12.11 TIME. Time is of the essence under this Agreement. If the last day permitted for the giving of any notice or the performance of any act required or permitted under this Agreement falls on a day which is not a Business Day, the time for the giving of such notice or the performance of such act will be extended to the next succeeding Business Day. 12.12 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original. 12.13 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits referred to in this Agreement, which are incorporated in and constitute a part of this Agreement) contains the entire agreement of the parties and supersedes all prior oral or written agreements and understandings with respect to the subject matter. This Agreement may not be amended or modified except by a writing signed by the parties. 12.14 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable will be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining rights of the Person intended to be benefitted by such provision or any other provisions of this Agreement. 12.15 CONSTRUCTION. This Agreement has been negotiated by Buyer and Seller and their respective legal counsel, and legal or equitable principles that might require the construction of this Agreement or any provision of this Agreement against the party drafting this Agreement will not apply in any construction or interpretation of this Agreement. 12.16 EXPENSES. Except as otherwise expressly provided in this Agreement, each party will pay all of its expenses, including attorneys' and accountants' fees, in connection with the negotiation of this Agreement, the performance of its obligations and the consummation of the transactions contemplated by this Agreement. The parties have executed this Agreement as of the day and year first above written. Seller: VR-1, INC. 23 By: /s/ LARRY BECKER ----------------------------------- Name: Larry Becker Title: CEO Buyer: ROCKY MOUNTAIN INTERNET, INC. By: /s/ ROY DIMOFF -------------------------------------------- Name: Roy Dimoff Title: CEO 24 Exhibits Exhibit A Services Agreement Section 3.1.3 Exhibit B Noncompetition Agreement Section 7.8 Exhibit C Registration Rights Agreement Section 7.8 Exhibit D License Agreement Section 7.8 Exhibit E Domain Name Assignment Section 7.8 Exhibit F Assignment and Assumption of Contracts Section 7.8 Exhibit G Bill of Sale Section 7.8 Exhibit H Subscriber Letter Section 7.8 25 EXHIBIT A 26 EXHIBIT A SERVICES AGREEMENT This Services Agreement ("Agreement") is made as of January 22, 1997, by and between VR-1, Inc., a Delaware corporation ("VR-1"), and Rocky Mountain Internet, Inc., a Delaware corporation ("RMI"). RECITALS A. Pursuant to an agreement between VR-1 and RMI of even date herewith, (the "Asset Purchase Agreement"), RMI has agreed to purchase certain assets of VR-1. B. As partial consideration for the Asset Purchase Agreement, RMI has agreed to provide certain services to VR-1. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties, intending to be legally bound, agree as follows: 1. SERVICES TO BE PERFORMED. To the extent that VR-1 may reasonably request, RMI will provide to VR-1 its standard Internet access services, including dial-up accounts, dedicated accounts, software solutions and World-Wide Web services, along with such custom or special Web design services as VR-1 may reasonably request. RMI shall value its services provided to VR-1 under this Agreement at not more than the lowest prices paid for similar services by other customers. 2. RECORDS. RMI will maintain reasonably complete accounting records with respect to its provision of services pursuant to this Agreement. RMI will provide VR-1 a statement of account at least monthly. Amounts properly invoiced will, subject to paragraph 3, be due and payable thirty days after the invoice date, and will accrue interest on amounts not paid within 30 days at the rate of 14% per annum. 3. PAYMENT FOR SERVICES. VR-1 may pay RMI for services by transferring to RMI shares of RMI's Common Stock that were issued to VR-1 as Stock Consideration under the Asset Purchase Agreement (a "Stock Payment"). VR-1 shall receive a credit for such shares equal to the closing bid price of RMI's Common Stock on the Nasdaq Smallcap market on the last Business Day immediately preceding the date of payment by transfer of such shares, but in no event shall VR-1 receive a credit for such shares of less than the price per share established at Closing of the Asset Purchase Agreement to calculate the Stock Consideration. VR-1 may, at its election, pay cash for the services at any time. VR-1 may make Stock Payments no more frequently than once per month and in increments of no less than 5,000 shares (if the value of shares tendered in any Stock Payment exceeds the amount then due under this Agreement, such 27 excess will be creditied against future payments). No Stock Payments will be made in any fraction of a share. The aggregate value of all Stock Payments made hereunder may not exceed $175,000 (with each Stock Payment valued for such purposes at its valuation when made in accordance with the preceding provisions of this paragraph). 4. TERM; CONVERSION. The term of this Agreement will begin on the date of this Agreement and will continue until 5 years elapse from the date of this Agreement or until earlier terminated by written notice from VR-1 to RMI. 5. WARRANTY; LIMITATIONS. RMI REPRESENTS AND WARRANTS THAT IT WILL USE REASONABLE CARE IN THE PROVISION OF INTERNET ACCESS, EQUIPMENT, SYSTEMS OR SERVICES TO VR-1, BUT MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED (INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), WITH RESPECT TO THERETO. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, RMI WILL NOT BE LIABLE FOR ANY FAILURE TO FUNCTION OF ANY INTERNET ACCESS, EQUIPMENT, SYSTEMS OR SERVICES PROVIDED TO VR-1 IF SUCH FAILURE IS NOT ATTRIBUTABLE TO A LACK OF REASONABLE CARE ON THE PART OF RMI. IT IS EXPRESSLY AGREED THAT NEITHER VR-1 NOR RMI WILL UNDER ANY CIRCUMSTANCES BE LIABLE HEREUNDER FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES OR FOR ANY CLAIM FOR LOSS OF BUSINESS PROFITS OR GOODWILL. 6. MISCELLANEOUS. 6.1 ASSIGNMENT AND DELEGATION. No party may assign this Agreement or any right accruing hereunder, or delegate its performance hereunder in whole or in part, without the prior consent of the other, which shall not be unreasonably withheld. Notwithstanding the foregoing, (i) either party may assign this Agreement to its Affiliate or make a collateral assignment of this Agreement without the prior written consent of the other party and (ii) either party may assign this Agreement to any successor or any person that acquires all or substantially all of the assets of such party, provided that such assignment shall not relieve the assigning party of liability for any failure by the assignee to perform its obligations hereunder. 6.2 AMENDMENT. This Agreement may be amended at any time by a written instrument executed by all parties. 6.3 GOVERNING LAW. This Agreement will be governed by the laws of the State of Colorado without regard to such jurisdiction's rules regarding conflicts of laws. 6.4 ATTORNEYS' FEES. If any party commences an action because of the breach of or to enforce any of the terms of this Agreement, the prevailing party will be entitled to all costs and expenses associated with such action, including reasonable attorneys' fees. 6.5 BINDING EFFECT. Except as otherwise provided in this Agreement, this Agreement will be binding upon, and will inure to the benefit of, the parties and their respective successors and permitted assignees. 28 6.6 WAIVER. No consent or waiver, express or implied, by a party of any breach or default by the other party in the performance of its obligations under this Agreement will be deemed to be a consent to or waiver of any further or other breach or default by such other party. 6.7 NOTICES. Any notice, request, demand, waiver or other communication required or permitted to be given under this Agreement will be in writing and will be deemed to have been duly given only if delivered in person or by first class, prepaid, registered or certified mail, or sent by courier or, if receipt is confirmed, by telecopier: To RMI at: Rocky Mountain Internet, Inc. 1099 18th Street, 30th Floor Denver, CO 80202 Attention: Kevin Loud Telecopy: (303) 672-0711 With a copy to: Sherman & Howard L.L.C. 633 Seventeenth Street, Suite 3000 Denver, Colorado 80202 Attention: Stephen S. Halasz, Esq. Telecopy: (303) 298--940 To VR-1 at: VR-1, Inc. 4888 Pearl East Circle, Suite 101 Boulder, CO 80301 Attention: Vice President Telecopy: 303-444-2797 With a copy to: Holme Roberts & Owen LLP 1401 Pearl Street, Suite 400 Boulder, CO 80302 Attention: Patrick K. Perrin, Esq. Telecopy: (303) 444-1063 Any party may change the address to which notices are required to be sent by giving notice of such change in the manner provided in this Section 6.7. All notices will be deemed to have been 29 received on the date of delivery or on the third Business Day after mailing in accordance with this Section, except that any notice of a change of address will be effective only upon actual receipt. 6.8 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby and supersedes all prior agreements, arrangements and understandings relating to its subject matter. 6.9 SEVERABILITY. Each provision of this Agreement will be considered severable. If for any reason any provision of this Agreement is determined to be invalid, such invalidity will not impair the operation or affect the other provisions of the Agreement, and the remainder of this Agreement will continue in effect. 6.10 COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, and all of such counterparts, when taken together, will be deemed to constitute the original of this Agreement. 6.11 HEADINGS. The section and other headings contained in this Agreement are inserted only as a matter of convenience and in no way affect the scope or meaning of this Agreement. 6.12 NO THIRD-PARTY BENEFICIARIES. This Agreement is not intended to, and will not be construed to, create any right enforceable by any Person not a party to this Agreement, including any creditor or employee of a party, except as specifically referenced. This Agreement is signed by the parties as of the date first written above. VR-1, INC. ROCKY MOUNTAIN INTERNET, INC. a Delaware corporation a Delaware corporation By: /s/ Larry Becker By: /s/ Kevin Loud -------------------------- ----------------------------- Name: Larry Becker Name: Kevin Loud Title: CEO Title: Vice President 30 EXHIBIT B 31 EXHIBIT B NON-COMPETITION AGREEMENT This Non-Competition Agreement (this "Agreement") dated January 22, 1997, is between Rocky Mountain Internet, Inc. a Delaware corporation ("Buyer") and VR-1, Inc., a Delaware corporation ("Seller"). RECITALS A. Seller and Buyer are parties to an Asset Purchase Agreement dated as of January 22, 1997 (the "Asset Purchase Agreement"), pursuant to which Buyer is purchasing, contemporaneously with the execution and delivery of this Agreement, certain assets owned or leased by Seller in connection with the Internet services business operated by Seller. The Asset Purchase Agreement requires the execution and delivery of this Agreement in connection with the closing of the transactions contemplated by the Asset Purchase Agreement. AGREEMENT In consideration of the foregoing recitals and to induce Buyer to enter into the Asset Purchase Agreement, Buyer and Seller agree as follows: 1. DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, whenever used in this Agreement the following terms shall have the meanings set forth below: (a) "AFFILIATE" means, with respect to any person, (i) any other person controlling, controlled by or under common control with such person, and (ii) any director or executive officer of such person. For purposes of this Agreement, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or voting interests, by contract or otherwise. (b) "BUSINESS" means the Internet connectivity business conducted by Seller on the date of this Agreement (but specifically excluding Seller's web site development and services business and Seller's software development business). (c) "BUSINESS AREA" means the State of Colorado. (d) "PERSON" means any natural person, corporation, trust, partnership, limited liability company, joint venture, unincorporated organization, government (including any governmental department, body or agency) or other legal entity. Capitalized terms not defined in this Agreement shall have the meaning ascribed to them in the Asset Purchase Agreement. 32 2. REPRESENTATIONS. Seller represents that it is not subject to any agreement, restriction, lien, encumbrance, or assignment of any right, title or interest to any person, limiting in any way the scope of this Agreement or in any way inconsistent with this Agreement, and will not after the date of this Agreement enter into or grant to any person any of the same. 3. RESTRICTIONS. Seller acknowledges that upon the consummation of the transactions contemplated by the Asset Purchase Agreement, Buyer intends to conduct the Business and shall own the Assets, both tangible and intangible (including goodwill), used in and incident to the conduct of the Business. Accordingly, and in consideration of the execution, delivery and performance of the Asset Purchase Agreement by Buyer, Seller agrees that: (a) For a period of five years after the date of this Agreement, neither Seller nor its Affiliates will, within any part of the Business Area, engage, directly or indirectly, as partner, proprietor, stockholder or other owner of a voting, equity or profits interest (including without limitation any option or right to acquire such voting, equity or profits interest), director, officer, employee, consultant, agent or in any other representative or individual capacity, or as the owner of indebtedness, in any business that is competitive with the Business; provided however that nothing in this Agreement shall prohibit the Seller or its Affiliates from "beneficially owning" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "1934 Act")) equity securities or interests of or in another corporation, partnership, joint venture, business trust or other business organization or association engaged in an activity that, if engaged in by the Seller or its Affiliates, would be prohibited by the first clause of this sentence, so long as the equity securities or interests so owned in the aggregate by Seller and its Affiliates do not represent, in the aggregate, more than 15% of the aggregate voting power of all outstanding equity securities or interests of the issuer thereof. (b) So long as any of the restrictions set forth in Section 3(a) apply, without the prior written consent of Buyer, Seller will not solicit or attempt to solicit any employee of Buyer or any Affiliate of Buyer to terminate his or her employment. (c) For a period of twelve months following the date of this Agreement, Seller shall not communicate with any Subscriber (as defined in the Asset Purchase Agreement) regarding the transactions contemplated by the Asset Purchase Agreement, nor will Seller directly solicit any Subscriber to purchase web services from Seller without Buyer's prior written consent. The foregoing restrictions (i) shall not prohibit Seller from providing web services to any Subscriber if such transaction is solicited by the Subscriber and (ii) shall not apply to any current web service customers of Seller. During such 12 month period, Buyer shall not directly solicit any of Seller's web service customers, as identified on Exhibit A attached hereto, to use or change to Buyer's web services, however, Buyer shall be permitted to provide web services to any current web service customer of Seller if such services are solicited solely by the customer. Notwithstanding this Section 3(c), Seller shall be permitted to contact Dedicated Subscribers by letter to inform them of the new name of Seller's web service business. The form and content of such letter shall be subject to the prior approval of Buyer, which approval shall not be unreasonably withheld or delayed. 33 (d) The parties agree that the restrictions on the Seller's activities imposed under Section 3 of this Agreement are reasonable with respect to their duration and geographical area and with respect to the nature and scope of the activities so restricted. 4. SUCCESSOR AND ASSIGNS; THIRD-PARTY BENEFICIARIES. This Agreement will inure to the benefit of and will be binding upon the parties and their respective successors and assigns. Any Affiliate of Buyer will be a third-party beneficiary of all of the covenants and agreements made by Seller in this Agreement. The obligations of Seller under this Agreement will be personal and not assignable or delegable. Buyer retains the unrestricted right to assign all or any portion of its rights under this Agreement to any Affiliate of Buyer or any other person who has or may hereafter acquire the Business. 5. REMEDIES. The parties acknowledge and agree that the subject matter of this Agreement is unique and that any party (or any third-party beneficiary referred to in Section 4) will have, in addition to all other remedies, the right to enforce specific performance of the provisions of this Agreement by a suit in equity or otherwise and to seek and obtain temporary, preliminary or permanent injunctive relief, with respect to which no bond or other security will be required. All rights and remedies of each of the parties under this Agreement will be cumulative, and the exercise of one or more rights or remedies will not preclude the exercise of any other right or remedy available under this Agreement or applicable law. Seller expressly and knowingly waives any claim or defense that any adequate remedy at law might exist for any breach by Seller of any term or provision of this Agreement. 6. CHOICE OF LAW; JURISDICTION. This Agreement and the rights and obligations created by this Agreement will be governed by and interpreted in accordance with the internal law of Colorado, without regard to the conflicts of laws rules thereof. Seller submits to the jurisdiction of any state or federal court sitting in Denver, Colorado in any action or proceeding arising out of or relating to this Agreement, agrees that all claims in respect of the action or proceeding may be heard and determined in any such court and agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. The parties agree that a final judgment in any action or proceeding so brought will be conclusive and may be enforced by suit on the judgment or in any other manner provided by law. 7. SEVERABILITY; INTERPRETATION. If any provision of this Agreement is held to be invalid, illegal or unenforceable under applicable law in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality or unenforceability without invalidating the remainder of such provision or the other provisions of this Agreement; provided however, that if a court having jurisdiction shall find that any of the covenants and agreements contained in Section 3 of this Agreement are not reasonable, such court will have the power to modify the duration of such covenant or agreement or the geographical area or the nature or scope of the activities within or to which such covenant or agreement applies, so as to make such covenant or agreement valid, legal and enforceable to the maximum extent permitted by law. This Agreement constitutes a fully negotiated agreement between commercially sophisticated parties, each assisted 34 by legal counsel, and will be construed and interpreted without regard to which party was the drafter of this Agreement. 8. INTEGRATION; AMENDMENT AND WAIVER. This Agreement constitutes the entire agreement and understanding between Buyer and Seller and supersedes all prior oral or written agreements and understandings relating to the subject matter of this Agreement. No modification, amendment or waiver of any of the terms of this Agreement will be binding upon the parties unless made in writing after the date of this Agreement and duly executed by the party or parties intended to be bound or affected thereby. 9. FAILURE TO ACT NOT A WAIVER. The failure to enforce any right arising under this Agreement on one or more occasions shall not operate as a waiver of that or any other right on the same occasion or any other occasion. 10. EXTENSION OF NON-COMPETITION PERIOD. The five-year period of time set forth in Section 3(a) will be extended by the length of time during which any party is in breach of the terms of this Agreement as determined by a court of competent jurisdiction. 11. CAPTIONS. The titles and captions of this Agreement are for convenience of reference only and do not constitute a part of this Agreement. 12. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which will be deemed an original. 13. ATTORNEYS' FEES. In the event of any action or suit based upon or arising out of any alleged breach by any party of any representation, warranty, covenant or agreement contained in this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees and other costs and expenses of such action or suit from the other party. 14. NOTICES. All notices and other communications given under this Agreement must be in writing and will be deemed to have been duly given when delivered in person or by first class prepaid, registered or certified mail, by prepaid courier or by facsimile transmission addressed to the parties as follows: If to Buyer: Rocky Mountain Internet, Inc. 1099 18th Street, 30th floor Denver, CO 80202 Attention: Kevin Loud Telecopy: (303) 672-0711 If to Seller: 35 VR-1, Inc. 4888 Pearl East Circle, Suite 101 Boulder, CO 80301 Attention: Steve Weaver Telecopy: 303-444-2797 or to such other address as either of them by written notice may from time to time designate. VR-1, Inc. By: /s/ LARRY BECKER ------------------------------ Name: Larry Becker Title: CEO Rocky Mountain Internet, Inc. By: /s/ ROY DIMOFF ------------------------------- Name: Roy Dimoff Title: CEO 36 EXHIBIT A TO NON-COMPETE 37 EXHIBIT A TO NON-COMPETE Adcast Advergence Astarte Fiber Networks, Inc. Augusta Software Design Benefits Communication Corp. Benefit Secure Bidcast Bujin Design CareerTrack Case Logic, Inc. Cosmosnet Information Internet Services Crowder Mortgage Data Storage Marketing, Inc. DDx Decisioneering, Inc. Digital Camera Network Dot Systems Euphonics Fisher Imaging Corp. Globalkey Great American Cigar Club Holme Roberts & Owens Honda Hawke Infinite Pictures International Titanium Association Jason's Publishing Ltd. Ken Johnson Lance Ltd. LCM, Ltd. LLC Leopard Communications Les Mendelson & Associates LISI Macedon Mediatures Mathemaesthetics, Inc. McBabies, Inc. McGuckin Hardware Micro Solutions Tech, inc. Mountain Solutions National Career Search Net Dining Optimum Soft Parascript Pentax Technologies Corp. Performance Enhancements, Inc. Premier Concepts, Inc. Rocky Mountain Trad (RMTAAC) SkyConnect Specialty Products Company Sun Mountain Villas The Protector Corp. 38 The Troubleshooter (Tom Martino) Turquoise Reef Group Votelink Voyager Company Wildwasser 39 EXHIBIT C 40 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of January 22, 1997 (this "Agreement"), by and between Rocky Mountain Internet, Inc., a Delaware corporation ("RMI"), /fsand VR-1, Inc., a Delaware corporation ("Investor"). WHEREAS, pursuant to the terms of an Asset Purchase Agreement dated as of January 22, 1997 (the "Purchase Agreement"), RMI has agreed to purchase assets of Investor comprising its Internet access business. Pursuant to the Purchase Agreement, RMI will issue to Investor shares of common stock, par value $.001 per share ("Common Stock" or "Shares"). In order to induce Investor to enter into the Purchase Agreement, RMI has agreed to provide the registration rights set forth herein. Therefore, in consideration of the premises and of the mutual covenants herein contained, the parties agree as follows: 1. INCIDENTAL REGISTRATIONS. (a) Each time that RMI proposes to register any of its equity securities under the Securities Act of 1933, as amended, (the "Securities Act") (other than a registration effected solely to implement an employee benefit or stock option plan or to sell shares obtained under any employee benefit or stock option plan or a transaction to which Rule 145 or any other similar rule under the Securities Act is applicable) RMI will give written notice to the Investor of its intention to do so. The Investor and each other Selling Stockholder (as defined below) may give RMI a written request to register all or some of the Common Stock issued to it pursuant to the Purchase Agreement ("Registrable Shares") in the registration described in the written notice from RMI as set forth in the foregoing sentence, provided that such written request is given within 20 days after receipt of any such notice from RMI (with such request stating (i) the amount of Registrable Shares to be disposed of and the intended method of disposition of such Registrable Shares and (ii) any other information reasonably requested by RMI to properly effect the registration of such Registrable Shares). As used in this Agreement, a "Selling Stockholder" is the Investor and any other person to whom the Investor has transferred Registrable Shares in compliance with applicable federal and state securities laws and who has agreed to be bound by this Agreement by signing a counterpart hereof. Upon receipt of such request, RMI will use its reasonable efforts to cause promptly all such Registrable Shares intended to be disposed of to be registered under the Securities Act so as to permit their sale or other disposition (in accordance with the intended methods set forth in the request for registration), unless the sale is a firmly underwritten public offering and the managing underwriter thereof determines reasonably and in good faith in writing that the inclusion of such securities 41 would materially adversely affect the offering, in which case the number of shares to be offered for the accounts of the Selling Stockholders shall be reduced or limited (an "Underwriter Cutback") in proportion to the number of shares owned by such Selling Stockholders to the extent necessary to reduce the total number of shares to be included in such offering to the amount recommended by such managing underwriter; provided, that if securities are being offered for the account of other persons or entities as well as RMI, such reduction shall be made pro rata from the securities intended to be offered by such persons and from the Selling Stockholders. RMI's obligations under this Section 1 shall apply to a registration to be effected for securities to be sold for the account of RMI as well as a registration statement which includes securities to be offered for the account of other holders of RMI equity securities. RMI represents and warrants that the only registration rights granted by it as of the date of this Agreement (other than those contained in this Agreement) are as set forth on 2. Schedule 1 to this Agreement. (b) Anything in the foregoing paragraph 1(a) to the contrary notwithstanding, (i) any Registrable Shares included pursuant to paragraph 1(a) in any registration of the common stock issuable upon exercise of warrants distributed to the public by RMI in connection with its initial public offering in September, 1996, will not be subject to any Underwriter Cutback, and (ii) to the extent any Registrable Shares are excluded from any other registration pursuant to any Underwriter Cutback, RMI (x) will cause a registration statement to be filed under the Securities Act with respect to the Registrable Shares which were excluded pursuant to such Underwriter Cutback within 180 days after the effective date of the registration under the Securities Act as to which the Registrable Shares were subject to such Underwriter Cutback or (y) purchase such Registrable Shares which were excluded pursuant to such Underwriter Cutback at a price equal to the selling price of the Registrable Shares which were sold pursuant to such registration. 2. EXPENSES OF REGISTRATION. RMI shall pay all costs and expenses incurred in connection with the registration of the Registrable Shares pursuant hereto, including all registration and filing fees, printing expenses, fees and disbursements of counsel and accountants of RMI and fees and disbursements (not exceeding $2500) of counsel to VR-1 as the Selling Stockholder ("Investor's Counsel"). Notwithstanding the foregoing, all fees and disbursements of the Selling Stockholders' counsel (other than fees and disbursements of up to $2500 for Investor's Counsel) transfer taxes, brokerage commissions and underwriters' discounts attributable to the Registrable Shares being offered and sold by such Selling Stockholders shall be for the account of the Selling Stockholders. 3. LIMITATIONS ON REGISTRATION RIGHTS. Notwithstanding the provisions of Section 1 hereof, RMI shall not be required to effect any registration pursuant to Section 1 (a) after the third anniversary of the date hereof; (b) if the request or requests for registration cover an aggregate number of Registrable Shares having a Market Value of less than $25,000 as of the date of the last of such requests; or (c) in the opinion of counsel for the RMI, each Selling 42 Stockholder could sell in a single transaction under Rule 144 promulgated under the Securities Act or any successor rule the number of Registrable Shares such Selling Stockholder proposes to have registered pursuant to this Agreement. "Market Value" as used in this Agreement shall mean, as to each Registrable Share at any date, the average of the daily closing prices for the Common Stock for the 10 consecutive trading days before the day in question. The closing price for shares of such class for each day shall be the last reported sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on which such shares of such class are listed or admitted to trading, or if they are not listed or admitted to trading on any such exchange, the closing sale price (or the average of the quoted closing bid and asked prices if no sale is reported) as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any comparable system, or if the shares of such class are not quoted on NASDAQ, or any comparable system, the average of the closing bid and asked prices as furnished by any market maker in the securities of such class who is a member of the National Association of Securities Dealers, Inc. 4. OBLIGATIONS WITH RESPECT TO REGISTRATION. (a) If and whenever RMI is obligated by the provisions of this Agreement to effect the registration of any Registrable Shares under the Securities Act, RMI shall: (i) prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement and any amendments and supplements to the registration statement in which the Registrable Shares are included and to the prospectus used in connection therewith (a "Registration Statement") as may be necessary to keep the Registration Statement effective and to comply with the provisions of the Securities Act and the rules and regulations promulgated thereunder with respect to the disposition of all Registrable Shares covered by the Registration Statement for the period required to effect the distribution of such Shares, but in no event shall RMI be required to do so for a period of more than 90 days following the effective date of the Registration Statement; (ii) notify the Selling Stockholders and confirm such advice in writing, (A) when a Registration Statement becomes effective, (B) when any post-effective amendment to a Registration Statement becomes effective, and (C) of any request by the Commission for any amendment of or supplement to a Registration Statement or any prospectus relating thereto or for additional information; (iii) furnish at RMI's expense to the Selling Stockholders such number of copies of a preliminary, final, supplemental or amended prospectus, in conformity with the requirements of the Securities Act and the rules and regulations promulgated thereunder, as may reasonably be required in order to facilitate the disposition of the Registrable Shares covered by a Registration Statement, but only while RMI is required under the provisions hereof to cause a Registration Statement to remain effective; (iv) register or qualify the Registrable Shares covered by a Registration Statement under the securities or blue sky laws of such jurisdictions in the United States as the Selling Stockholders shall reasonably request, and do any and all other acts and things which may be necessary to enable each Selling Stockholder whose Registrable Shares are covered by such Registration Statement to consummate the disposition in such jurisdictions of such Registrable Shares; provided, however, that RMI shall in no event be required to qualify to 43 do business as a foreign corporation or a dealer in any jurisdiction where it is not so qualified, to conform the composition of its assets at the time to the securities or blue sky laws of such jurisdiction, to execute or file any general consent to service of process under the laws of any jurisdiction, to take any action that would subject it to service of process in suits other than those arising out of the offer and sale of the Registrable Shares covered by the Registration Statement, or to subject itself to taxation in any jurisdiction where it has not theretofore done so; and (v) cause such Registrable Shares covered by a Registration Statement to be listed on the principal exchange or exchanges on which the Common Stock is then listed upon the sale of such Registrable Shares pursuant to such Registration Statement. (b) RMI's obligations under this Agreement with respect to a Selling Stockholder shall be conditioned upon such Selling Stockholder's compliance with the following: Such Selling Stockholder shall reasonably cooperate with RMI in connection with the preparation of the Registration Statement, and for so long as RMI is obligated to file and keep effective the Registration Statement, shall provide to RMI, in writing, for use in the Registration Statement, all such information regarding the Selling Stockholder and its plan of distribution of the Registrable Shares as may be necessary to enable RMI to prepare the Registration Statement and prospectus covering the Registrable Shares, to maintain the currency and effectiveness thereof and otherwise to comply with all applicable requirements of law in connection therewith. During such time as RMI or such Selling Stockholder may be engaged in a distribution of the Registrable Shares, RMI and such Selling Stockholder shall comply with Rules 10b-6 and 10b-7 promulgated under the Exchange Act and pursuant thereto it shall, among other things: (i) not engage in any stabilization activity in connection with the securities of RMI in contravention of such rules; (ii) distribute the Registrable Shares solely in the manner described in the Registration Statement; (iii) cause to be furnished to each broker through whom the Registrable Shares may be offered, or to the offeree if an offer is not made through a broker, such copies of the prospectus covering the Registrable Shares and any amendment or supplement thereto and documents incorporated by reference therein as may be required by law; and (iv) not bid for or purchase any securities of RMI or attempt to induce any person to purchase any securities of RMI other than as permitted under the Exchange Act. 5. INDEMNIFICATION. (a) BY RMI. Except as set forth in the last sentence of this Section 5(a), RMI agrees to indemnify and hold harmless each Selling Stockholder, its officers and directors and each person who controls such Selling Stockholder (within the meaning of the Securities Act) and any underwriter thereof against all losses, claims, damages, liabilities and expenses ("Losses") relating to any untrue or alleged untrue statement of a material fact contained in any Registration Statement or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, except insofar as the same are caused by or contained in any information with respect to such Selling Stockholder or underwriter, if any, furnished in writing to RMI by such Selling Stockholder or underwriter expressly for use therein. In connection with an underwritten offering, RMI will indemnify the underwriters thereof, their 44 officers and directors and each person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Shares. RMI will promptly as incurred reimburse each such indemnified party for all legal or other expenses reasonably incurred by such party in connection with investigating or defending any such claims, including, subject to such indemnified party's compliance with the provisions of the last sentence of subsection (c) of this Section 5, any amounts paid in settlement of any litigation, commenced or threatened. RMI shall not be obligated to indemnify any person hereunder to the extent that any such Losses arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary or summary prospectus if a copy of the final prospectus was delivered by the Company to the Selling Stockholder (as amended or supplemented) and the Selling Stockholder failed to deliver such final prospectus to the person alleging Losses at or prior to the written confirmation of the sale of such Registrable Shares to such person and the untrue statement or omission had been corrected in such final prospectus. (b) BY THE SELLING STOCKHOLDERS. In connection with any registration statement in which a Selling Stockholder is participating, each such Selling Stockholder agrees to indemnify and hold harmless RMI, the directors and officers of RMI and each person who controls RMI (within the meaning of the Securities Act) against any Losses relating to any untrue or alleged untrue statement of a material fact or any omission or alleged omission of a material fact required to be stated in the Registration Statement or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information with respect to such Selling Stockholder so furnished in writing by such Selling Stockholder expressly for use in the registration statement, provided that the liability of such Selling Stockholder pursuant to this Section 5(b) shall not exceed an amount equal to the proceeds of the sale of Registrable Shares sold pursuant to such registration statement that are received by or for the benefit of such Selling Stockholder. RMI shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or registration statement. The Selling Stockholders shall promptly as incurred reimburse each such indemnified party for all legal or other expenses reasonably incurred by such party in connection with investigating or defending any such claim, including, subject to such indemnified party's compliance with the provisions of the last sentence of subsection (c) of this Section 5, any amounts paid in settlement of any litigation, commenced or threatened. (c) THIRD PARTY CLAIMS. Promptly after the receipt by any party hereto of notice of any claim, action, suit or proceeding by any person who is not a party to this Agreement (collectively, an "Action") which is subject to indemnification hereunder, such party (the "Indemnified Party") shall give reasonable written notice to the party from whom indemnification is claimed (the "Indemnifying Party"). The Indemnified Party shall be entitled, at the sole expense and liability of the Indemnifying Party, to exercise full control of the defense, compromise or settlement of any such Action unless the Indemnifying Party, within a reasonable time after the 45 giving of such notice by the Indemnified Party, shall: (i) admit in writing to the Indemnified Party, the Indemnifying Party's liability to the Indemnified Party for such Action under the terms of this Section 5, (ii) notify the Indemnified Party in writing of the Indemnifying Party's intention to assume the defense thereof, and (iii) retain legal counsel reasonably satisfactory to the Indemnified Party to conduct the defense of such Action. The Indemnified Party and the Indemnifying Party shall cooperate with the party assuming the defense, compromise or settlement of any such Action in accordance herewith in any manner that such party reasonably may request. If the Indemnifying Party so assumes the defense of any such Action, the Indemnified Party shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise, or settlement thereof, but the fees and expenses of such counsel shall be the expense of the Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expense, (ii) any relief other than the payment of money damages is sought against the Indemnified Party or (iii) the Indemnified Party shall have been advised by its counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party, and in any such case the fees and expenses of such separate counsel shall be borne by the Indemnifying Party. No Indemnifying Party shall settle or compromise any such Action in which any relief other than the payment of money damages is sought against any Indemnified Party unless the Indemnified Party consents in writing to such compromise or settlement. No Indemnified Party shall settle or compromise any such Action for which it is entitled to indemnification hereunder without the prior written consent of the Indemnifying Party, unless the Indemnifying Party shall have failed, after reasonable notice thereof, to undertake control of such Action in the manner provided above in this Section 5. (d) CONTRIBUTION. If the indemnification provided for in subsections (a) or (b) of this Section 5 is unavailable to or insufficient to hold the indemnified party harmless under subsections (a) or (b) above in respect of any Losses referred to therein for any reason other than as specified therein, then the Indemnifying Party shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other in connection with the statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by (or omitted to be supplied by) RMI or the Selling Stockholder (or underwriter) and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by an Indemnified Party as a result of the Losses referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 6. MISCELLANEOUS. 46 (a) NOTICES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or mailed, certified or registered mail with postage prepaid, or sent by telex, telegram or telecopier, as follows: if to RMI: Rocky Mountain Internet, Inc. 1099 18th Street, 30th floor Denver, CO 80202 Attention: Kevin Loud Telecopy: (303) 672-0711 with a copy to: Sherman & Howard L.L.C. 633 Seventeenth Street , Suite 3000 Denver, Colorado 80202 Attention: Stephen S. Halasz, Esq. Telecopy: (303) 298-0940 if to Investor: VR-1, Inc. 4888 Pearl East Circle, Suite 101 Boulder, CO 80301 Attention: Steve Weaver Telecopy: (303) 444-2797 with a copy to: VR-1, Inc. 4888 Pearl East Circle, Suite 101 Boulder, CO 80301 Attention: Leslie Woodard, Esq. Facsimile: (303) 444-2797 or to such other person or address as any party shall specify by notice in writing to the other party. Notice of a change of address shall be effective only upon actual receipt thereof. (b) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. (c) BINDING EFFECT; BENEFIT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in 47 this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, other than rights conferred upon indemnified persons under Section 6 and rights conferred upon Permitted Transferees. (d) AMENDMENT AND MODIFICATION. This Agreement may be amended or modified only by an instrument in writing signed by or on behalf of each party and any other person then a Stockholder. Any term or provision of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof. (e) SECTION HEADINGS. The section headings contained in this Agreement are inserted for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (f) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. (g) APPLICABLE LAW. This Agreement and the legal relations between the parties hereto shall be governed by and construed in accordance with the laws of the State of Colorado, without regard to the conflict of laws rules thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ROCKY MOUNTAIN INTERNET, INC. By: /s/ KEVIN LOUD ---------------------------- Its: VICE PRESIDENT ---------------------------- VR-1, INC. By: /s/ LARRY BECKER ---------------------------- Its: CEO ---------------------------- 48 SCHEDULE 1 OUTSTANDING REGISTRATION RIGHTS ROCKY MOUNTAIN INTERNET, INC. 49 SCHEDULE 1 OUTSTANDING REGISTRATION RIGHTS ROCKY MOUNTAIN INTERNET, INC. As of January 22, 1997, Rocky Mountain Internet, Inc. (the "Company"), had outstanding the following registration rights. 1. WARRANTS. The Company issued 1,365,000 warrants in its public offering in September, 1996. The warrants become exercisable in October, 1997, at a price of $4.375 per share (subject to adjustment). The Company is required to register common stock issuable on exercise of the warrants. 2. UNDERWRITER'S WARRANTS. The underwriter in the Company's initial public offering received 136,500 warrants to purchase Units (i.e. one share of common stock and one warrant) at an exercise price of $4.20 per Unit and $6.5625 per underlying warrant. These warrants are exercisable beginning in September, 1997, and the underwriter has been granted registration rights in connection with the exercise thereof. 3. CONVERTIBLE PREFERRED STOCK. Prior to its initial public offering the Company issued 250,000 shares of convertible preferred stock which are convertible into common stock at a 1:1 ratio (subject to adjustment). The preferred stock is convertible at any time after May 15, 1997, and the holders thereof have a single demand registration right in connection therewith exercisable on or after May 15, 1997. 50 EXHIBIT D 51 Exhibit D LICENSE AGREEMENT This License Agreement ("License") is dated effective January 22, 1997 by and between VR-1, Inc., a Delaware corporation ("Licensor"), and Rocky Mountain Internet, Inc., a Delaware corporation ("Licensee"). RECITALS Licensor and Licensee are parties to that certain Asset Purchase Agreement dated January 22, 1997. The execution and delivery of this License is a condition to the consummation of the transactions contemplated by the Asset Purchase Agreement. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. A. SOFTWARE means the on-line client and server registration software known as "ONE Soft-TM- Version 6.0". B. SUPPORT MATERIALS means any human-readable program listings, flow charts, logic diagrams, input and output forms, manuals, specifications, instructions and other materials, and any copies of any of the foregoing, in any medium, related to the Software and delivered to Licensee under this License. C. TRADEMARKS means the trademarks and/or service marks (i) ONE Soft-TM- and (ii) ONE and Design, a copy of which is attached hereto as Exhibit A. 2. GRANT OF RIGHTS. A. LICENSE. Licensor grants Licensee and its Affiliates a nonexclusive, world-wide, royalty-free right to (i) reproduce and distribute the client portion of the Software to Licensee's subscribers and potential subscribers, (ii) use the Software in connection with Licensee's Internet access services, provided that Licensee shall have no right to distribute or sublicense the server or Unix portion of the Software, (iii) create derivative works of the Software, (iv) use the ONE Soft mark to identify the Software and Derivative Works and (v) use the ONE and Design mark to market, promote and identify Licensee's Internet access services (including but not limited to in connection with the NETONE.COM Internet domain name); all of the foregoing in accordance with the terms of this Agreement. 52 B. COPIES. Licensee may make copies of the written documentation which accompanies the Software in support of Licensee's authorized use of the Software. Licensee may also make such copies of the Software as are necessary for Licensee and its Affiliates to use the Software under this License. C. TRANSFER RESTRICTIONS. No party will, without the consent of the other (which shall not be unreasonably withheld), assign any of its rights or delegate any of its duties under this License, provided that (i) either party may assign this License to its Affiliate or make a collateral assignment of this Agreement and (ii) either party may assign this Agreement to any successor or any person that acquires all or substantially all of the assets of such party, provided that such assignment shall not relieve the assigning party of liability for any failure by the assignee to perform its obligations hereunder. D. MODIFICATIONS BY LICENSEE. Licensee may modify any machine-readable form of the Software for use by Licensee and merge it into other program material to form an updated work ("Derivative Work") without the prior written consent of Licensor. The source code for each Derivative Work shall contain internal comments delineating the independent program material. Licensee shall own such Derivative Works. E. TITLE. Title and all ownership and proprietary rights to the Trademarks and Software shall remain in Licensor, and Licensee shall take no action inconsistent with such title, ownership and proprietary rights. F. REVIEW OF QUALITY. Licensor shall have the right, but not the obligation, to review services rendered, or goods provided, under the Trademarks to ensure that they are of a good quality. Licensor shall promptly notify Licensee of any defects in quality of goods or services denoted by the Trademarks, and Licensee and Licensor shall work together to remedy any such defects. 3. DELIVERY, INSTALLATION, TRAINING AND MAINTENANCE. A. DELIVERY. Licensor will furnish the Software to Licensee in machine- readable form and provide Support Materials containing detailed specifications for operation and use of the Software. Licensor will also provide Licensee a copy of all source code related to the Software. B. INSTALLATION AND TRAINING. Licensor shall provide Licensee an aggregate total of 40 hours of the following services without additional charge hereunder: (i) software programming; (ii) assistance in installing and rendering operable the Software at Licensee's designated site; and (iii), if requested by Licensee, training for Licensee's employees in the use of the Software. 53 C. CONFIDENTIALITY. Licensee shall keep the source code for the Software strictly confidential and shall not disclose the source code to any third party without the prior written consent of Licensor. 4. TERM AND TERMINATION A. TERM AND TERMINATION. This License shall become effective upon execution by Licensor and Licensee and shall terminate (a) as to the ONE and Design mark, two years following the execution hereof at which time Licensee shall cease all use of the ONE and Design mark and (b) as to the Software and the ONE Soft Mark, by mutual written agreement of the parties or on the tenth day following written notice by Licensee of its desire to terminate this License. B. EFFECT OF TERMINATION. Upon termination of this License for any reason, Licensee's rights under this License shall cease. Licensee shall immediately return all items bearing either of the Trademarks, and all information relating to the Software, except the Derivative Works, including any copies, updates, or Support Materials, however embodied, to Licensor. 5. REPRESENTATIONS AND WARRANTY A. WARRANTY. Licensor warrants that (1) the Software will, when delivered and installed by Licensor, be in good working order and will conform to the program specifications in the accompanying documentation when used without material alteration in accordance with the instructions set forth in the documentation; and (2) any service rendered by Licensor will be performed in a professional manner by qualified personnel. B. REPRESENTATIONS. Licensor warrants and represents to Licensee that: i. it is duly organized, validly existing and in good standing under the laws of each jurisdiction in which its activities require such qualification; ii. the execution, delivery and performance of this License have been duly authorized by all necessary corporate action and this License constitutes the legal, valid and binding obligation of Licensor, enforceable in accordance with its terms against Licensor except as such enforceability may be affected by bankruptcy, reorganization, insolvency, moratorium or laws affecting creditors' rights generally or by general principles of equity; iii. it has full corporate power and authority to enter into this License and to perform its obligations hereunder; 54 iv. the Software and Support Materials are original works of authorship; v. it is the sole owner of the Trademarks and Software or otherwise has authority to grant the rights hereunder to Licensee; vi. the use of the Trademarks, Software and Support Materials by Licensee hereunder will not violate or infringe any intellectual property or proprietary right of any other person, including the licensors of any licensed software contained in the Software; vii. the execution and delivery of this License, and the performance by Licensor of its obligations hereunder, will not violate, breach, conflict with or cause a default under any law, rule, regulation, order, or material agreement or instrument to which Licensor is a party or by which it is bound, or of Licensor's constituent documents; viii. no consent, approval or authorization of any person is needed in order for Licensor to perform its obligations pursuant to this License; and ix. there are no lawsuits, proceedings or claims pending, or to the knowledge of Licensor, asserted with respect to the Trademarks, Software, the Support Materials, or any portion thereof which could materially affect Licensor's ability to perform its obligations under this License or which could materially affect the utility to Licensee thereof, and Licensor promptly will notify Licensee if any such suit or proceeding is instituted or claim asserted. 6. INDEMNIFICATION. A. Licensor shall defend or settle at its sole expense any action brought against Licensee by third parties to the extent that such action is based on or arises out of an allegation or adjudication that the Licensee's permitted use of the Trademarks, or the manufacture, use, sale, reproduction or distribution of the Software or any portion thereof in accordance with the terms of this Agreement, constitutes an infringement of any United States patent, trademark, copyright or other proprietary right. Licensee shall cooperate fully in the defense of the claim or suit, and may appear at its own expense through counsel of its choice. B. Licensee shall indemnify Licensor against all claims, liabilities and costs, including reasonable attorney fees, of defending any claim or suit, other than for infringement of intellectual property rights as provided above, arising out of its use of the Trademarks and Software provided under this License. 7. NOTICE. All notices, requests, demands and other communications called for or contemplated hereunder will be in writing and will be deemed to have been duly given if delivered 55 when deposited in the United States mail, first class postage prepaid, addressed as follows, or to any other address of which a party gives notice to the other: If to Licensor to: With a copy to: Steve Weaver, Vice President Patrick K. Perrin, Esq. VR-1, Inc. Holme Roberts & Owen LLP 4888 Pearl East Circle, Suite 101 1401 Pearl Street, Suite 400 Boulder, CO 80301 Boulder, CO 80302 If to Licensee to: With a copy to: Kevin Loud, Vice President Stephen S. Halasz, Esq. Rocky Mountain Internet, Inc. Sherman & Howard L.L.C. 1099 Eighteenth Street, Suite 3000 633 17th Street, Suite 3000 Denver, CO 80202-1930 Denver, CO 80202 8. MISCELLANEOUS A. MODIFICATION. This License may not be modified other than by a written amendment executed by each of the parties hereto. B. WAIVER. No consent or waiver, express or implied, by a party of any breach or default by the other party in the performance of its obligations under this License will be deemed to be a consent to or waiver of any further or other breach or default by such other party. C. GOVERNING LAW. This License will be construed in accordance with, and be governed by, the internal laws of the State of Colorado without reference to any conflict of laws principles. D. SEVERABILITY. If any provision or part thereof in this License is held invalid, illegal or unenforceable for any reason, the remainder of this License will nonetheless remain in full force and effect. E. BINDING AGREEMENT. This License will benefit and be binding upon the parties hereto and their respective heirs, representatives, successors and permitted assigns. F. COUNTERPARTS. This License may be executed in two or more identical counterparts, and all of such counterparts, when taken together, will be deemed to constitute the original of this License. G. HEADINGS. The headings in this License are for purpose of reference only and shall not be construed as part of this License. 56 H. ATTORNEYS' FEES. If any party commences an action because of the breach of or to enforce any of the terms of this License, the prevailing party will be entitled to all 57 costs and expenses associated with such action, including reasonable attorneys' fees. I. ENTIRE AGREEMENT. This License constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter covered in it and supersedes all prior agreements and understandings, written or oral, among any of the parties with respect to such subject matter. The parties have executed this License as of the date first above written. LICENSOR: LICENSEE: VR-1, INC. ROCKY MOUNTAIN INTERNET, INC. a Delaware corporation a Delaware corporation By: /s/ LARRY BECKER By: /s/ KEVIN LOUD ------------------------- ------------------------- Name: LARRY BECKER Name: KEVIN LOUD Title: CEO Title: VICE PRESIDENT 58 EXHIBIT E 59 Exhibit E ASSIGNMENT OF DOMAIN NAME WHEREAS, VR-1, Inc., a Delaware corporation, f/k/a On-line Network Enterprises, having an office and principal place of business at 4888 Pearl East Circle, Suite 101, Boulder, Colorado 80301, is the owner of a domain name "NETONE.COM" and the registration thereof with InterNIC; and WHEREAS, VR-1, Inc. wishes to assign to Rocky Mountain Internet, Inc., a Delaware corporation, having an office and principal place of business at 1099 18th Street, 30th Floor, Denver, CO 80202, the entire right, title and interest in and to such domain name, any registrations obtained thereon and all rights of renewal thereof, together with the goodwill of the Internet access business associated with and symbolized by such domain name; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, VR-1, Inc. sells, assigns and sets over unto Rocky Mountain Internet, Inc., its successors and assigns, the entire right, title and interest of VR-1, Inc., in and to such domain name, any registrations obtained thereon, and all rights of renewal thereof together with the goodwill of the Internet access business associated with and symbolized by such domain name. VR-1, Inc. agrees to take all necessary actions to effect the transfer of the domain name with InterNIC or any future registrar of the domain name "NETONE.COM." VR-1, INC., f/k/a On-line Network Enterprises By /s/ Larry Becker ----------------------------------------- Larry Becker, chief executive officer STATE OF COLORADO ) ) ss. COUNTY OF BOULDER ) The foregoing instrument was acknowledged before me this ____ day of __________, 1997, by Larry Becker as chief executive officer of VR-1, Inc. My commission expires: -------------------------- --------------------------- Notary Public [SEAL] 60 EXHIBIT F 61 EXHIBIT F ASSIGNMENT AND ASSUMPTION AGREEMENT For value received, the receipt and sufficiency of which are acknowledged, VR-1, Inc., a Delaware corporation ("Seller") hereby assigns and transfers to Rocky Mountain Internet, Inc., a Delaware corporation ("Buyer") all of Seller's right, title and interest in and to each of the contracts ("Assumed Contracts") included on Schedule 5.8 to the Asset Purchase Agreement dated January 22, 1997, between Seller and Buyer (the "Asset Purchase Agreement") except for receivables due for services performed prior to the date of the Asset Purchase Agreement. Buyer assumes and agrees to discharge, in accordance with terms thereof, all obligations under the Assumed Contracts arising on and after the date hereof to the extent that such liabilities and obligations relate to periods beginning on or after the date hereof and to be bound by such contracts as fully as if Buyer had executed each as a party thereto. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute the original of this Agreement. Dated as of January 22, 1997 Rocky Mountain Internet VR-1, Inc. By: /s/ Roy Dimoff By: /s/ Larry Becker --------------------------- ---------------------------- 62 EXHIBIT G 63 Exhibit G BILL OF SALE VR-1, Inc., a Delaware corporation ("Seller") for $10.00 and other valuable consideration in hand paid by Rocky Mountain Internet, Inc., a Delaware corporation ("Buyer"), receipt of which is acknowledged, hereby sells, grants, transfers and conveys to Buyer all of the Seller's rights to the assets set forth on Schedule 1.2 to the Asset Purchase Agreement dated as of January 22, 1997, between Seller and Buyer. Dated as of January 22, 1997. Rocky Mountain Internet, Inc. VR-1, Inc. By: /s/ Roy Dimoff By: /s/ Larry Becker -------------------------- -------------------------------- 64 EXHIBIT H 65 EXHIBIT H LETTERS TO SUBSCRIBERS Dear O.N.E. Customer, We are pleased to announce that Online Network Enterprises has sold the dial-up and dedicated Internet access division of our company to Rocky Mountain Internet (RMI) effective x/x/97. This change will allow us to focus on our Web and online game development divisions. RMI is a Colorado based company and is a leading provider of quality Internet services. RMI has recently invested over $2 million into its network! The results of RMI's investment has resulted in a carrier class network including redundant T-3 access to the Internet, a state of the art Data Center including generator backup, and a fully redundant sonnet based DS3 network interconnecting its switches and services. It has been our pleasure to serve you, and hope that we have exceeded your expectations. We are working closely with RMI to ensure a smooth and seamless transition. At this time, you will not be required to make any changes to your system in order to access the Internet or send and receive E-mail. In addition, RMI will be honoring O.N.E.'s existing rate structure. Again, thank you for the opportunity to serve you. We have enjoyed providing your access to the Internet. Sincerely, Lisa Mouscher Vice President of Customer Service Online Network Enterprises Letter to dedicated customers 66 JANUARY 22, 1997 XXXXXX XXXXX O.N.E. AND RMII DEAR CUSTOMER, On January 23, 1997 Online Network Enterprises announced the sales of our Internet access business (dial up and dedicated) to Rocky Mountain Internet Inc, (RMII). O.N.E.'S WEB DEVELOPMENT AND HOSTING BUSINESS REMAINS UNCHANGED - BOTH IN OWNERSHIP AND IN OUR RESOURCES. This letter is to briefly explain the benefits to you, our customer, regarding this change of Internet Access to RMII, and the renewed focus of O.N.E.'s * business as a leading edge Web Development studio. RMII is a leading Colorado Internet Service Provider, offering economies of scale and specialization in this industry that will guarantee that your Internet access service is of the highest industry standards. The transition of your access to RMII should be seamless and almost invisible. O.N.E., as part of its parent Company VR-1, has made this change to allow us to focus purely on high level content creation for the Web. We've renewed our focus as a leading web development partner for your business, offering excellence in both web design and high level database development. O.N.E. will also continue to offer full, high quality web hosting, web site marketing and consulting services. *AS PART OF THIS NEW FOCUS WE ARE RE-EVALUATING OUR STUDIO NAME AND PLAN TO LAUNCH A NEW LOGO AND IDENTITY IN THE NEXT TWO MONTHS. WE WILL BE BACK IN TOUCH. Meanwhile, if you have any questions over our Web Development service do not hesitate to contact your sales representative XXX at (303) 444-2522. Yours sincerely, Mike Moniz PRESIDENT ONLINE NETWORK ENTERPRISES/VR-1 INC. 67 VR-1, INC. CLOSING CERTIFICATE This certificate is delivered pursuant to Section 9.2.7 of the Asset Purchase Agreement (the "Agreement") dated as of January 22, 1997 by and between VR-1, Inc., a Delaware corporation (the "Company") and Rocky Mountain Internet, Inc. a Delaware corporation ("RMI"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Agreement. The undersigned does hereby certify to RMI that, to his knowledge: 1. All representations and warranties of the Company contained in the Agreement are, if specifically qualified by materiality, true in all respects and, if not so qualified, true and correct in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date, subject to such disclosures and exceptions specifically described on the Schedules attached to the Agreement. 2. The Company has performed and complied in all material respects with each obligation, agreement, covenant and condition required by the Agreement to be performed or complied with by the Company at or prior to the date of Closing. EXECUTED as of the 22nd day of January, 1997. VR-1, INC., a Delaware corporation By:/S/ LARRY BECKER ------------------------------- Larry Becker Chief Executive Officer 68 ROCKY MOUNTAIN INTERNET, INC. CLOSING CERTIFICATE ------------------- This certificate is delivered pursuant to Section 9.3.4 of the Asset Purchase Agreement (the "Agreement") dated as of January 22, 1997 by and between VR-1, Inc., a Delaware corporation ("VR-1") and Rocky Mountain Internet, Inc. a Delaware corporation (the "Company"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Agreement. The undersigned does hereby certify to VR-1 that, to his knowledge: 1. All representations and warranties of the Company contained in the Agreement are, if specifically qualified by materiality, true in all respects and, if not so qualified, true and correct in all material respects, in each case on and as of the Closing Date with the same effect as if made on and as of the Closing Date, subject to such disclosures and exceptions specifically described on the Schedules attached to the Agreement. 2. The Company has performed and complied in all material respects with each obligation, agreement, covenant and condition required by the Agreement to be performed or complied with by the Company at or prior to the date of Closing. EXECUTED as of the 22nd day of January, 1997. ROCKY MOUNTAIN INTERNET, INC., a Delaware corporation By:/S/ KEVIN LOUD ------------------------- Kevin Loud Vice President 69 SCHEDULE 1.2 SELLER CONTRACTS - 823 dial up accounts - 47 dedicated accounts - Seller contracts listed in Schedule 5.8 EQUIPMENT - Ascend Madx 4000 with 6 modem cards - 3 kiosks and - 10 dispensers (Hermans) INTANGIBLES - the rights to placement and design of kiosks (see Schedule 5.8 for description). - the rights to design of Hermans dispensers. - netone.com domain name - Control of O.N.E. CIDR block ranges identified as 206.83.96.0 through 206.83.127.255 and 206.246.0.0 through 206.246.31.255 leaving the range 206.246.32.0 through 206.246.63.255 for O.N.E./VR-1 control. The customers on the existing Sprint CIDR will be moved by O.N.E. As soon as routing (BGP$) is established between O.N.E. and RMI, the two CIDR block ranges will be transferred to RMI. 70 SCHEDULE 5.6 LEGAL PROCEEDINGS None 71 SCHEDULE 5.7 CUSTOMERS AND SUPPLIERS EXCEPTIONS See Customer lists attached to Schedule 1.2 for subscribers who are late in paying as disclosed therein. There are no Supplier Exceptions 72 SCHEDULE 5.8 SELLER'S CONTRACTS AND EXCEPTIONS DEDICATED SUBSCRIBERS - --------------------- All dedicated subscribers contracts delivered at closing. See Dedicated Customer List attachment to Schedule 1.2 for payment status DIAL UP SUBSCRIBERS - ------------------- Attached is the text of the Seller Service Agreement TCG SERVICE CONTRACT - -------------------- Attached service agreement between Seller and TCG dated 7/28/96 and consent of assignment. Buyer's obligation to assume the TCG Service Contract is conditioned upon TCG agreement to move the circuit to 910 15th Street, Denver, Colorado 80202. KIOSK PLACEMENT - --------------- Three kiosks which distribute the ONEsoft software on a speculative basis have been placed, one each, at Elek-Tek in Aurora, McGuckin Hardware in Boulder and Media Play in downtown Denver. ELEK-TEK - -------- The longest placement has been Elek-Tek. The first two kiosks for Elek-Tek were installed in late November 1995 there was a written agreement for 6 months. That agreement has expired. The kiosk resides at Elek-Tek based on their continued desire to have Internet access from a device on the floor. Seller provides Elek-Tek free access over a 64k frame relay circuit (Elek-Tek pays US West for the frame circuit) along with mailboxes and a special rate for dialup access to their employees. VR-1 Adtran 56/64 CSU/DSU, and Cisco 1005D Router. Elek-Tek provides the hub, computer, monitor, speakers, and keyboard for the kiosk. All equipment owned by Seller must be replaced by RMI equipment within 30 days of closing. MCGUCKIN HARDWARE McGuckin Hardware in Boulder is the location for the second Kiosk. Seller trades out a 56k dedicated access account for the kiosk placement. McGuckin Hardware pays for both DSUs and the US West 56k DSS circuit. There is no written agreement stating this trade out. One of Seller's former customer support personnel is a key member of the McGuckin hardware systems group. Thus the relationship has been a strong one. The DSS service is not used at the kiosk. Rather it uses a modem connection to facilitate access to the Internet. All computer equipment including the CPU, monitor, keyboard, modem, speakers, power supplies belong to Seller and must be replaced within 30 days of closing. 73 MEDIA PLAY Media Play was installed in October of 1996 pursuant to the attached letter from Media Play dated September 13, 1996. Seller has paid $300 each month for months November and December. Seller will be responsible for the fees accrued to Media Play prior to closing and Buyer will be responsible for fees accrued to Media Play after closing. Internet access is facilitated through a modem connection. All computer equipment including the CPU, monitor, keyboard, modem, speakers, power supplies belong to Seller and must be replaced within 30 days of closing. The POTS circuit is paid for by Seller RMI will begin paying for this circuit as of January 15th, 1997. See circuit list. DISCUSSION OF TRADE OUT SERVICES - -------------------------------- Seller provides free Internet access service to the following two customers. FREEWAVE TECHNOLOGIES is the developer of the wireless modems we use for IGS, Euyphonics and product Knowledge. We assisted with testing these modems the summer of 95. The test proved successful so we traded Freewave Internet access and 5 mailboxes for two of their modems. These modems are currently in use by IGS. IGS is moving to a TCG circuit and will be returning the modems as soon as that circuit is up and running. This gives RMI the ability to sell another wireless access customer or use the modems as you see fit. The term of the Freewave agreement was for one year. It should expire in the May 97 time frame. LITTLETON COMMUNITY NETWORK (LCN) is a frame relay trade out for marketing of the O.N.E. services at different events in Littleton. LCN is a non-profit organization with the mission of automating the delivery of civic events and information. The circuit is paid for by LCN. We have participated in a number of Internet seminars held at the Littleton library. We have the ability to place dispensers with disks at the library and at community events where LCN has participation. A quick look at the customer list shows 32 active dial up accounts coming from Littleton. The contract will expire the end of March 1997. Contract is attached. 74 SCHEDULE 7.3 Ascend Max 4000 with 6 8 port cards. The above equipment is leased through Charter Financial, Inc. and will be paid off and a UCC Termination Statement will be provided within 30 days of closing. 75 SCHEDULE 7.12 USWEST SERVICES - --------------- TELEPORT COMMUNICATIONS GROUP (TCG) SERVICES - -------------------------------------------- LDDS WORLDCOMM - -------------- 76 EX-10.8 5 EXHIBIT 10.8 EXHIBIT 10.8 1996 INCENTIVE COMPENSATION PLAN - ANNUAL BONUS INCENTIVE Bonuses for 1996 are based on achieving 81% of the revenue objective. Roy J. Dimoff President and CEO $ 20,250 Christopher K Phillips Vice President 8,100 Nancy Phillips Vice President 8,100 Kevin Loud Vice President 16,200 D. Kirk Roberts Chief Financial Officer 11,340 Employees 95,547 Total $ 159,537 EX-10.9 6 EXHIBIT 10.9 EXHIBIT 10.9 1997 INCENTIVE COMPENSATION PLAN - ANNUAL BONUS INCENTIVE 1997 Total Annual Revenue Bonus X Factor not continuous $ 8,500,000 0.25 $ 9,000,000 0.50 $ 9,500,000 0.75 $10,000,000 1.00 $10,500,000 1.30 $11,000,000 1.60 $11,500,000 1.90 $12,000,000 2.20 $12,500,000 2.50 not continuous Bonus Amounts for Executives based on Bonus Factor of 1.00 Roy J. Dimoff President and CEO $ 30,000 Christopher K Phillips Vice President 20,000 Nancy Phillips Vice President 20,000 Kevin Loud Vice President 20,000 D. Kirk Roberts Chief Financial Officer 16,000 Employees 153,000 Total $ 259,000 EX-27 7 EXHIBIT 27 -- FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATION FOR THE PERIOD END 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001003282 ROCKY MOUNTAIN INTERNET YEAR DEC-31-1996 DEC-31-1996 348,978 1,356,629 633,827 115,000 91,047 2,459,234 3,258,000 403,023 5,540,167 2,088,350 0 250 0 4,541 2,312,646 5,540,167 519,551 3,281,579 462,787 1,103,667 4,480,483 0 157,042 (2,302,571) 0 (2,302,571) 0 0 0 (2,302,571) (.63) (.63)
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