-----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, PhStkX/oosHRJNyBYbgDz1V9JGsD36UXPNbYyYDrzdNyF3n2tAV1HcvaLy0sz8yv EJlTLrcaBiffsMkbGp5VEw== 0001047469-97-004725.txt : 19971117 0001047469-97-004725.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004725 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-28738 FILM NUMBER: 97718706 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 10QSB 1 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to________ . COMMISSION FILE NUMBER: 001-12063 ROCKY MOUNTAIN INTERNET, INC - -------------------------------------------------------------------------- Exact name of Registrant as specified in its charter Delaware 84-1322326 - -------- ----------- State or other jurisdiction of IRS 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 ------------- Former name, former address and former fiscal year, if changed since last report: NA Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 --- ----- As of October 31, 1997, Rocky Mountain Internet, Inc. had 6,623,690.00 shares of common stock, $.001 par value, outstanding. Transitional Small Business Disclosure Format (check one) Yes [ ]No [X] Page 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
DECEMBER 31, SEPTEMBER 30, 1996 1997 (NOTE) (UNAUDITED) ------------ ------------- Current assets Cash and cash equivalents......................................................... $ 348,978 $ 287,197 Investments....................................................................... 1,356,629 276,918 Trade receivables, less allowance for doubtful accounts 12/31/1996 $115,700; 9/30/1997 $73,120............................................................... 518,827 662,737 Deferred offering costs........................................................... 43,496 Inventories....................................................................... 91,047 47,559 Other............................................................................. 143,753 15,586 ------------ ------------- $2,459,234 $ 1,333,493 ------------ ------------- Property and equipment Equipment......................................................................... 2,513,944 2,898,510 Computer software................................................................. 202,501 227,830 Leasehold improvements............................................................ 127,877 190,235 Furniture, fixtures, and office equipment......................................... 413,678 431,014 ------------ ------------- $3,258,000 $ 3,747,589 Less accumulated depreciation and amortization.................................... 403,023 967,984 ------------ ------------- $2,854,977 $ 2,779,605 ------------ ------------- Other assets Customer lists.................................................................... 145,444 500,280 Deposits.......................................................................... 80,512 94,137 ------------ ------------- $ 225,956 $ 594,417 ------------ ------------- $5,540,167 $ 4,707,515 ------------ ------------- ------------ -------------
Note: The consolidated Balance Sheet information as of December 31, 1996 has been derived from the Company's audited financial statements appearing in Form 10-KSB previously filed with the U.S. Securities and Exchange Commission See Notes to Consolidated Financial Statements Page 2 ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30, 1996 1997 (NOTE) (UNAUDITED) ------------ ------------- Current liabilities Note payable...................................................................... $ 4,250 199,250 Current maturities of long-term debt and obligations under capital leases......... 451,823 577,171 Accounts payable.................................................................. 425,160 1,314,787 Deferred revenue.................................................................. 218,121 388,550 Accrued payroll and related taxes................................................. 528,160 178,614 Other accrued expense............................................................. 460,836 623,948 Total current liabilities....................................................... $2,088,350 $ 3,282,320 ------------ ------------- Long-term debt and obligations under capital leases, less current maturities........ $1,134,380 $ 984,504 ------------ ------------- Stockholders equity Preferred stock, $.001 par value; authorized 1,000,000 shares; issued and outstanding 1996, 250,000 shares and 1997, 92,500 shares........................ $ 250 $ 93 Common stock, $.001 par value; authorized 10,000,000 shares; issued 1996 4,540,723 shares; 9/30/97 5,432,116 shares and outstanding 1996 4,540,723 shares; 9/30/1997 5,386,690 shares...................................................... 4,541 5,436 Additional paid-in capital........................................................ 4,839,968 6,264,096 Treasury stock.................................................................... (60,000) Accumulated deficit............................................................... (2,527,322) (5,768,934) ------------ ------------- Total stockholder's' equity....................................................... $2,317,437 $ 440,691 ------------ ------------- $5,540,167 $ 4,707,515 ------------ ------------- ------------ -------------
See Notes to Consolidated Financial Statements Page 3 ROCKY MOUNTAIN INTERNET, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ---------------------------- 1996 1997 1996 1997 ---------- ------------ ------------- ------------- Revenue Internet access and services......................... $ 705,785 $ 1,489,562 $ 1,807,933 $ 4,135,344 Equipment sales...................................... 215,252 92,857 316,469 296,442 ---------- ------------ ------------- ------------- $ 921,037 $ 1,582,419 $ 2,124,402 $ 4,431,786 ---------- ------------ ------------- ------------- Cost of revenue earned Internet access and services......................... $ 191,082 $ 327,573 $ 402,408 $ 1,254,838 Equipment sales...................................... 197,547 69,365 282,726 230,493 ---------- ------------ ------------- ------------- $ 388,629 $ 396,938 $ 685,134 $ 1,485,331 ---------- ------------ ------------- ------------- Gross Profit....................................... $ 532,408 $ 1,185,481 $ 1,439,268 $ 2,946,455 ---------- ------------ ------------- ------------- Selling, general and administrative expenses............. 1,090,606 1,834,317 2,616,387 5,451,553 Other operating expenses................................. 119,519 0 453,629 ---------- ------------ ------------- ------------- Operating (loss) income................................ $ (558,198) $ (768,355) $ (1,177,119) $ (2,958,727) Other income (expense) Interest expense..................................... (49,181) (100,722) (116,750) (297,838) Other income (expense)............................... (277) (764) Interest income...................................... 10,079 3,659 12,892 22,297 Finance charges...................................... 9,087 17,489 20,202 17,905 Other income......................................... 312 1,274 2,054 2,388 ---------- ------------ ------------- ------------- $ (29,703) $ (78,577) $ (81,602) $ (256,012) ---------- ------------ ------------- ------------- Net (loss) income before income taxes................ $ (587,901) $ (846,932) $ (1,258,721) $ (3,214,739) ---------- ------------ ------------- ------------- Income tax expense....................................... 0 0 0 0 Net (loss) income.................................... $ (587,901) $ (846,932) $ (1,258,721) $ (3,214,739) ---------- ------------ ------------- ------------- ---------- ------------ ------------- ------------- Primary and fully diluted loss per share Net loss per share................................... $ (0.152) $ (0.157) $ (0.348) $ (0.633) ---------- ------------ ------------- ------------- ---------- ------------ ------------- -------------
See Notes to Consolidated Financial Statements Page 4 ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1997 ------------- ------------- Cash Flows from Operating Activities Net (loss) income................................................................. $ (1,258,721) $ (3,214,738) Items not requiring (providing) cash: Depreciation and amortization................................................... 184,468 642,371 Changes in assets and liabilities: Trade receivables............................................................. (309,427) (143,910) Inventories................................................................... (99,859) 43,489 Other current assets.......................................................... (151,968) 128,167 Accounts payable.............................................................. 607,403 889,627 Deferred revenue.............................................................. 16,446 170,429 Accrued payroll and related taxes............................................. 156,349 (349,546) Other accrued expenses........................................................ 139,300 163,113 ------------- ------------- Net cash used in operating activities....................................... $ (716,009) $ (1,670,999) ------------- ------------- Cash Flows from Investing Activities Purchase of investments........................................................... $ (1,200,000) Proceeds from investments......................................................... $ 1,079,712 Acquisition of ONE, Inc. assets................................................... (150,000) Purchase of property and equipment................................................ (150,405) (264,471) ------------- ------------- (Additions) deletions to deposits............................. (19,389) (13,626) ------------- ------------- Net cash provided by (used in) investing activities............................. $ (1,369,794) $ 651,615 Cash Flows from Financing Activities Proceeds from notes payable....................................................... $ 88,842 $ 495,000 Proceeds from debentures / long-term debt......................................... 117,000 329,868 Proceeds from sale of preferred stock............................................. 406,000 Proceeds from sale of common stock................................................ 3,793,628 1,117,920 Additions to deffered offering cost............................................... (43,496) Payment of Preferred Stock Dividend............................................... (26,875) RMI stock purchase................................................................ (60,000) Payments on notes payable......................................................... (19,419) (300,000) ------------- ------------- Payments on long-term debt and obligations under capital leases................... (164,789) (554,814) ------------- ------------- Net cash provided by (used in) financing activities........................... $ 4,221,262 $ 957,603 Increase (decrease) in cash and cash equivalents............................ $ 2,135,458 $ (61,782) ------------- ------------- Cash and cash equivalents Beginning......................................................................... 274,661 348,978 ------------- ------------- ------------- ------------- Ending.......................................................................... $ 2,410,119 $ 287,196
Page 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.--REPRESENTATION OF MANAGEMENT The interim financial data are unaudited; however, in the opinion of management, the interim data include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. NOTE 2.--INVESTMENT The Company has invested in a US Treasury Note as follows;
Description Maturity Date Investment - ----------------------------- ----------------------------- ----------------------------- US TreasuryNote Oct. 31, 1997 $276,918
This U.S. Treasury Note is pledged against a letter of credit securing the Company's office lease. NOTE 3.--LINE OF CREDIT The Company has established a line of credit for $500,000 effective September 18, 1996 with a maturity of September 10, 1997. The line of credit was secured by pledge of a $300,000 Master Repurchase Agreement of a US Treasury Note held with the lender and by accounts receivable. Additionally, as part of the acquisition of the Information Exchange, the Company has an additional $4,250 drawn against another line of credit. The two credit lines have been consolidated and then reduced by applying the $300,000 Master Repurchase Agreement to the outstanding balance. The remaining balance at September 30, 1997 was $199,250. This balance was retired in October 1997. NOTE 4. ACQUISITION OF ONLINE NETWORK ENTERPRISES, INC. In January, 1997, the Company acquired the dedicated high speed and dial-up subscribers from Online Network Enterprises, Inc. (ONE), headquartered in Boulder, Colorado, a division of VR*1, Inc. The ONE acquisition netted RMI approximately 47 dedicated and 732 dial-up subscribers and equipment valued at approximately $24,700. The Company paid $150,000 cash and issued 116,932 shares of the Company's common stock for the assets acquired from ONE. NOTE 5. PRIVATE PLACEMENT The Company prepared a Private Placement Memorandum dated June 13, 1997 for the sale of 600,000 units. Each unit is sold for $4.00 and consists of two shares of Common Stock, $.001 par value per share, and one Warrant. The $4.00 per Unit purchase price is allocated $1.90 to each share of Common Stock and $.20 to the Warrant. Each Warrant entitles the registered holder to purchase one share of Common Stock at an exercise price of $3.00 per share. This offering closed on September 14, 1997. As of 9/30/97, the final gross proceeds from the offering were $1,242,000 or 310,500 Units. Refer to Exhibit 10.11--Private Placement Memorandum for additional information. Page 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain information contained in this Form 10-QSB, including "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 successful 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-QSB, actual results could differ materially from the forward-looking information contained in this Form 10-QSB. On October 1, 1997, Mr. Douglas H. Hanson obtained effective control of Rocky Mountain Internet, Inc., by entering into a series of agreements wherein he invested $2,450,000 in the Company in exchange for 1,225,000 shares of common stock at a price of $2.00 per share in addition to acquiring warrants, options, and voting rights from certain shareholders. The details of this transaction are contained in a current report on Form 8-K filed with the U.S. Securities and Exchange Commission on October 6, 1997. The following is a Proforma Balance Sheet reflecting the effect of the $2,450,000 investment as of the funding date of October 3, 1997. Page 7 ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
SEP. 30, PROFORMA 1997 INVESTMENT OCT. 3, 1997 (UNAUDITED) OCT. 3, 1997 (UNAUDITED) ------------ ------------ ------------ Current assets Cash and cash equivalents............................................ $ 287,197 $ 2,450,000 $ 2,737,197 Investments.......................................................... 276,918 276,918 Trade receivables, less allowance for doubtful accounts; 9/30/1997 $73,120............................................................ 662,737 662,737 Deferred offering costs.............................................. 43,496 (43,496) 0 Inventories.......................................................... 47,559 47,559 Other................................................................ 15,586 15,586 ------------ ------------ ------------ $1,333,493 $ 2,406,504 $ 3,739,997 Property and equipment Equipment............................................................ 2,898,510 2,898,510 Computer software.................................................... 227,830 227,830 Leasehold improvements............................................... 190,235 190,235 Furniture, fixtures, and office equipment............................ 431,014 431,014 ------------ ------------ ------------ $3,747,589 $ -- $ 3,747,589 Less accumulated depreciation and amortization....................... 967,984 967,984 ------------ ------------ ------------ $2,779,605 $ -- $ 2,779,605 Other assets Customer lists....................................................... 500,280 500,280 Deposits............................................................. 94,137 94,137 ------------ ------------ ------------ $ 594,417 $ -- $ 594,417 ------------ ------------ ------------ $4,707,515 $ 2,406,504 $ 7,114,019 ------------ ------------ ------------ ------------ ------------ ------------
Page 8 ROCKY MOUNTAIN INTERNET, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
PROFORMA SEP. 30, 1997 INVESTMENT OCT. 3, 1997 (UNAUDITED) OCT. 3, 1997 (UNAUDITED) ------------- ------------- ------------- Current liabilities Note payable....................................................... 199,250 199,250 Current maturities of long-term debt and obligations under capital leases........................................................... 577,171 577,171 Accounts payable................................................... 1,314,787 1,314,787 Deferred revenue................................................... 388,550 388,550 Accrued payroll and related taxes.................................. 178,614 178,614 Other accrued expense.............................................. 623,948 623,948 ------------- ------------- ------------- Total current liabilities.......................................... $3,282,320 $ -- $ 3,282,320 Long-term debt and obligations under capital leases, less current maturities......................................................... $984,504 $ -- $ 984,504 ------------- ------------- ------------- Stockholders equity Preferred stock, $.001 par value; authorized 1,000,000 shares; issued and outstanding 9/30/97 and 10/3/97, 92,500 shares........ $ 93 $ 93 Common stock, $.001 par value; authorized 10,000,000 shares; issued; 9/30/97 5,432,116; 10/3/97 6,657,116 shares and outstanding 9/30/1997 5,386,690 shares 10/3/97 6,611,690 shares........................................................... 5,436 1,225 6,661 Additional paid-in capital......................................... 6,264,096 2,448,775 (43,496) 8,669,375 Treasury Stock..................................................... (60,000) (60,000) Accumulated deficit................................................ (5,768,934) (5,768,934) ------------- ------------- ------------- Total Stockholder's' Equity........................................ $ 440,691 $ 2,406,504 $ 2,847,195 ------------- ------------- ------------- $4,707,515 $ 2,406,504 $ 7,114,019 ------------- ------------- ------------- ------------- ------------- -------------
Page 9 This investment brings the Company into compliance with the Nasdaq SmallCap Market listing requirements as of October 3, 1997. See Liquidity and Capital Resources below for additional discussion of this matter. Effective January 16, 1997, the Company acquired dial-up and dedicated access subscribers from Online Network Enterprises, Inc. (ONE), 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 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 pricing alternatives, 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. Effective November 4, 1997, the Company introduced a flat rate Dial Up service offering in the Denver, Colorado and Boulder, Colorado markets. Introduction is also under consideration into the other market area served by the Company. This offering provides unlimited access to dial up services for a flat monthly rate of $24.95. As part of the new service offering, the Company is also introducing enhanced data communication rates using the K 56 Flex technology. TERMINATION AGREEMENT--JOINT VENTURE WITH ZERO ERROR NETWORKS The Company and Zero Error Networks (ZEN), a Joint Venture partner signed a "Termination Agreement" effective July 3, 1997, which affects four points of presence (POP) located in Pueblo, Hayden, Leadville, and Alamosa, Colorado. These POP's have been operated under a revenue and expense sharing agreement between the two parties. The Termination Agreement calls for ZEN to operate the Hayden, Leadville, and Alamosa, Colorado locations and receive the rights to the customer base currently existing in those locations while the Company will operate and maintain the customer base in Pueblo and surrounding areas. The transition is in progress with Alamosa and Leadville completed. The Hayden location is still pending due to problems with installation of circuits. The Company has contracted for a location (POP site) in Pueblo and installed approximately $35,000 of equipment therein. The Termination Agreement includes a limited non-compete clause wherein neither party may directly solicit the existing customer base of the other for a period of one year. The net effect of the Termination Agreement on net income is expected to be neutral in the shortrun and have a positive long term result. The Pueblo revenues are expected to grow at a faster rate than the other three POP's combined and the Company plans to focus additional effort to selling dedicated access in the Pueblo market. However, there can be no assurance that the Company's efforts will be successful or that the long-term effects of the termination agreement on net income Page 10 will be positive. See Exhibit 10.10 for specific terms and conditions of the agreement. RESULTS OF OPERATIONS Three Months Ended September 30, 1996 and 1997 The Company's revenues grew 72% from $921,037 to $1,582,420 for the three months ended September 30, 1997 as compared to the comparable period in 1996. Listed below is a breakdown of the revenue billing categories.
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1996 1997 % CHANGE ---------- ------------ ------------- Revenue Dial-Up Service........................................................... $ 355,867 $ 568,707 60% Dedicated access Service.................................................. 191,615 556,329 190% Web Services.............................................................. 107,850 323,569 200% Equipment................................................................. 215,252 92,857 (57%) Other..................................................................... 50,453 40,957 (19%) ---------- ------------ --- Total................................................................... $ 921,037 $ 1,582,419 72% ---------- ------------ --- ---------- ------------ ---
DIAL-UP SERVICE The Company's strategy is to provide an high quality service with few busy signals. In the past the Company was not prepared to offer flat rate pricing for unlimited access service, however, on November 4, 1997, the Company announced a flat rate offering to the Denver, Colorado and Boulder Colorado markets. This offering has become more economically attractive than in the past due to lower costs for circuits and a lower cost per port for dial up access. The new offering includes higher speed modem access using K 56 Flex technology. The table below shows the composite weighted average billing rate for full service Internet access by quarter for 1995, 1996, and 1997. The reduction in the average rate for September 1997 is the result of a change in the joint venture locations average rates resulting from the termination of Alamosa and Leadville joint ventures. The remaining joint ventures have an higher percentage of lower rate services. FOR THE THREE MONTHS ENDED
MAR JUN SEP DEC MAR JUN SEP DEC 1995 1995 1995 1995 1996 1996 1996 1996 - --------- --------- --------- --------- --------- --------- --------- --------- $20.52.... $ 20.42 $ 20.88 $ 21.02 $ 20.97 $ 20.33 $ 20.41 $ 20.50
MAR JUN SEP 1997 1997 1997 - --------- --------- --------- $20.10.... $ 20.04 $ 19.65
The Dial-up business continued to experience growth based on reputation, trade show attendance, and marketing by joint venture partners in outlying areas of Colorado. Dial-up Service has been split approximately evenly between commercial and residential customers throughout 1995, Page 11 1996, and 1997 based on customer count. Based on revenue the split between commercial and residential customers is 35% to 65% respectively. Dial-Up revenues increased from $355,867 to $568,708 or 60% from the three months ending September 30, 1996 to the three months ending September 30, 1997. RMI has established business alliances with five, locally-based unrelated parties for the purpose of providing Internet services in secondary markets in the State of Colorado. Each of these joint ventures is conducted under a written agreement that provides for the locally-based party to provide equipment and marketing services while RMI provides Internet access and administrative services. Dial-up revenues based on these joint ventures generated $ 92,071 in revenues for the three month period ending September 30, 1996 and $ 99,594 for the same period in 1997, for an increase of 8%. 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. Effective July 3, 1997, the joint venture relationship with Zero Error Networks (ZEN) was terminated. Under the termination agreement, the Company will operate the Pueblo POP as a Company only location and ZEN will operate Alamosa, Leadville, and Hayden locations. The Joint Venture in Grand Junction, Colorado was terminated by the Company effective April 30, 1997. The marketing efforts by the locally-based joint venture partner in this location were minimal and sales were less than $1,000 per month. The Company is pursuing options to operate this facility and add dedicated as well as Dial-Up customers. 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. Dedicated business has grown based principally on ISDN and high speed circuits (56K, DS-1, and DS-3) growth. ISDN sales have grown from $25,989 to $177,792 from third quarter 1996 to third quarter 1997 for an increase of 584%, while high speed circuits have increased from $116,272 to $240,730 for the same periods for an increase of 107%. The table below shows the quarterly customer count by each of the component services offered for dedicated access as of the dates indicated: Page 12
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 SERVICE 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
MAR 31 JUN 30 SEP 30 SERVICE 1997 1997 1997 - ------------------------------------ --------- ----------- ----------- Private Port........................ 50 41 36 56 Kbps............................. 78 72 65 ISDN................................ 168 193 211 T-1................................. 65 84 99 Colocation.......................... 11 12 11
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 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:
MAR JUN SEP DEC MAR JUN SEP DEC 1995 1995 1995 1995 1996 1996 1996 1996 ----- ----- ----- ----- ----- ----- ----- ----- 1 21 45 90 157 217 242 341
MAR JUN SEP 1997 1997 1997 ----- ----- ----- 418 424 417
Web page hosting accounted for $58,391 of revenue in the third quarter of 1996 and $122,489 in the third quarter of 1997 for an increase of 110%. Web page production increased from $43,533 for the third quarter 1996 to $189,763 for the third quarter 1997 for an increase of 336%. The Company increased the size of the Web production department as well as provided customers more complex applications. The growth in Web hosting business plus the activities of the Company's direct sales force helped to drive this part of the business. The Company did not have a direct sales force until December, 1995. OTHER REVENUE Other revenue includes training revenue ($1,800 increased to $4,025), network consulting ($25,469 decreased to $11,376)and sales from the Information Exchange, a voice messaging subsidiary ($0 increased to $25,366). The Information Exchange was acquired in a stock transaction in late 1996. GROSS PROFIT Page 13 Gross profit consists of total revenue less the cost of delivering services and equipment. The gross profit from Internet access and services was 73% of revenues from that segment for the three months ended September 30, 1996 and 78% of revenues from that segment for the same period in 1997. The higher gross profit for the third quarter 1997 resulted due to credits received from US West relating to circuit overcharges in excess of $100,000. In late December, 1996, the Company implemented a frame relay network using Cascade switches. The switches are connected with a DS-3 fiber optic network to provide a high speed and highly reliable connection. The implementation of this network has provided very high capacities for connections and has resulted in a short term erosion of gross margin while the capacity is sold. Future circuits sold on this network should have high yields because the capacity is in place. Gross profits on equipment sales were 8% and 25% for the 3 month periods ending September 30, 1996 and 1997 respectively. Sale of equipment is provided as an accommodation to the Company's customers and gross profit margin will vary considerably based on the mix of products sold. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by 68% from the three months ended September 30, 1997 over the same period of 1996. This increase resulted from the overall expansion of the business and is in keeping with the strategy of building an organization capable of handling rapid growth and expansion. Administrative expenses increased by 88% from $132,367 to $248,637 from the three months ended September 30, 1996 to the same period of 1997. Compensation and related personnel costs increased from $683,913 to $961,552 or 41% from the three month period in 1996 to 1997. Personnel were added in all areas to expand the Company's sales efforts, technical support, and administrative capabilities. The Company believes that future revenue growth will not require a proportional increase in personnel expense as the Company believes that it is positioned to experience economies of scale. Advertising, trade shows, and marketing expenses increased from $46,593 to $65,995 or 42% for the three months ended September 30, 1996 as compared to the same period for 1997. Outside services expense increased from $72,787 to $214,753 or 195% for the second quarter of 1967 over the second quarter of 1996. The Company has used "temporary to hire" programs for Web production staff and technical support to identify for hiring qualified personnel. Depreciation and amortization in regards to equipment, software, furnishings, and capital leases increased from $72,592 to $229,296 or 216% due to establishing a "state of the art" data center, implementing the frame relay network with Cascade switches, expansion of equipment for dial up connections, plus equipment for administrative use. Communication expense in the form of 800 number lines, long distance, and general administration decreased to $54,112 from $59,281 for the three months ended September 30, 1997 to the same period in 1996. Nine Months Ended September 30, 1996 and 1997 The Company's revenues grew 109% from $2,124,402 to $4,431,787 for the nine months ended September 30, 1997 as compared to the comparable Page 14 period in 1996. Listed below is a breakdown of the revenue billing categories.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1996 1997 % CHANGE ------------ ------------ ------------- Revenue Dial-Up Service............................ $ 1,048,792 $ 1,735,386 65% Dedicated access Service................... 440,917 1,365,158 210% Web Services............................... 254,945 791,455 210% Equipment.................................. 316,469 296,442 (6%) Other...................................... 63,279 243,346 285% ------------ ------------ --- Total...................................... $ 2,124,402 $ 4,431,787 109% ------------ ------------ ------------- ------------ ------------ -------------
DIAL-UP SERVICE The Dial up business continued to experience growth based on reputation, trade show attendance, and marketing by joint venture partners in outlying areas of Colorado. Revenues increased from $1,048,792 to $1,735,386 or 65% from the nine months ending September 30, 1996 to the nine months ending September 30, 1997. RMI 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 $230,366 in revenues for the nine month period ending September 1996 and $376,745 for the same period in 1997 for an increase of 64%. 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. Effective July 3, 1997, the joint venture relationship with Zero Error Networks (ZEN) was terminated. Under the termination agreement, the Company will operate the Pueblo POP as a Company only location and ZEN will operate Alamosa, Leadville, and Hayden locations. The Joint Venture in Grand Junction, Colorado was terminated by the Company effective April 30, 1997. The marketing efforts by the locally-based joint venture partner in this location were minimal and sales were less than $1,000 per month. The Company is pursuing options to operate this facility and add dedicated as well as Dial-Up customers. DEDICATED ACCESS SERVICE Dedicated business has grown based principally on ISDN and high speed circuit growth. ISDN sales have grown from $35,833 to $436,012 from the first nine months of 1996 to the first nine months of 1997 for an increase of 1,117%, while high speed circuits have increased from $296,389 to $627,731 for the same periods for an increase of 112%. Page 15 WEB SERVICES Web page hosting accounted for $133,160 of revenue in the nine months ending September 30, 1996 and $316,446 for the same period in 1997 for an increase of 138%. Web page production increased from $108,440 to $437,182 or 303% for the first nine months of 1996 as compared to the same period in 1997. The Company increased the size of the Web production department as well as provided customers more complex applications. The growth in Web hosting business plus the activities of the Company's direct sales force helped to drive this part of the business. OTHER REVENUE Other revenue includes training revenue ($14,575 increased to $20,881), consulting ($25,519 increased to $132,854)and sales from the Information Exchange ($0 increased to $89,005), a voice messaging subsidiary. The Information Exchange was acquired in a stock transaction in late 1996. GROSS PROFIT Gross profit consists of total revenue less the cost of delivering services and equipment. The gross profit from Internet access and services was 78% of revenues from that segment for the nine months ended September 30, 1996 and 70% of revenues from that segment for the same period in 1997. In late December, 1996, the Company implemented a frame relay network using Cascade switches. The switches are connected with a DS-3 fiber optic network to provide a high speed and highly reliable connection. The implementation of this network has provided very high capacities for connections and has resulted in a short term erosion of gross margin while the capacity is sold. Future circuits sold on this network should have high yields because the capacity is in place. The gross profit percentage for the nine months ending September 30, 1997, was enhanced due to credits received from US West relating to circuit overcharges in excess of $100,000. Gross profits on equipment sales were 11% and 22% for the nine month periods ending September 30, 1996 and 1997 respectively. Sale of equipment is provided as an accommodation to the Company's customers. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased from $2,616,387 to $5,451,553 or by 108% from the nine months ended September 30, 1996 to the same period of 1997. This increase resulted from the overall expansion of the business and is in keeping with the strategy of building an organization capable of handling rapid growth and expansion. Administrative expenses increased by 82% from $343,473 to $624,668 from the nine months ended September 30, 1996 to the same period of 1997. Compensation and related personnel costs increased from $1,616,212 to $3,003,797 or 86% from the nine month period in 1996 to the same period in 1997. Personnel were added in all areas to expand the Company's sales efforts, technical support, and administrative capabilities. The Company believes that future revenue growth will not require a proportional increase in personnel expense as the Company believes it is positioned to experience Page 16 economies of scale. Advertising, trade shows, and marketing expenses increased from $153,442 to $195,291 or 27% for the nine months ended September 30, 1996 as compared to the same period for 1997. Outside services expense increased from $116,888 to $530,304 or 354% for the first nine months of 1996 over the first nine months of 1997. The largest components of the increase are professional services for consultants ($144,915), legal expenses ($99,735), accounting services for the year end audit and SEC reporting assistance ($62,397), and clerical accounting staff, Web production staff, and customer technical support staff hired on a temporary to permanent basis ($223,257). Depreciation and amortization in regards to equipment, software, furnishings, and capital leases increased from $184,467 to $646,308 or 250% due to establishing a state of the art data center, implementing the frame relay network with Cascade switches, expansion of equipment for dial up connections, plus equipment for administrative use and amortization of customer lists from acquisitions. Communication expense in the form of 800 number lines, long distance, and general administration increased from $140,810 to $201,219 or 43% for the nine months ended September 30, 1997 to the same period in 1997. This increase is reflective of the companies growth plus the increase of toll free 800 technical support service offered for dial in customers. OTHER OPERATING EXPENSE During the second and third quarters of 1997, the Company incurred one time expenses for: a write-off of Joint Venture project costs in Grand Junction and Burlington, Colorado in the amount of $45,113, a write down of inventory for sale in the amount of $23,031, and expense of $267,216 relating to termination of employees, and $107,233 of legal expenses relating to the terminations and defense of the lawsuit referenced in Part II, Item 1 of this document. LIQUIDITY AND CAPITAL RESOURCES The initial public offering was completed on September 5, 1996. Operating cash flow and earnings for the remainder of 1997 are projected to be negative. The Company continues to build infrastructure and human resources to position itself to be a prominent Internet provider in the regional market. The Company will utilize lease financing, as available, for capital acquisitions. The Company raised $1,117,920 net funds from a Private Placement by issuing 310,500 units. Each unit is composed of two shares of common stock and one warrant to buy one share of common stock at $3.00 per share. The Company has incurred losses since inception and has experienced negative operating cash flow in the first nine months of 1997. The Company's operations used net cash of approximately $1,670,999 for this period. 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. The Company acquired $489,590 of property and equipment during the first nine months of 1997 primarily to complete the Operations Data Center and for various other needs. Additionally, the Company acquired the dedicated high speed and dial-up subscribers and certain equipment from ONE, Inc. for a combination of stock and cash. The cash portion was $150,000 of which, $24,700 was allocated to equipment acquisition. Page 17 The Company has a bank line of credit in the amount of $200,000 of which $199,250 is drawn at September 30, 1997. This credit line was paid off in early October, 1997 and has not been renewed. The Company's office lease is secured by a pledge of a treasury note of $250,000. As of September 30, 1997, the Company had negative working capital of $1,840,605. This included $287,196 of cash and cash equivalents and $276,918 of investments in financial instruments convertible to cash. Trade receivables as of that date were $662,737. Current liabilities as of that date were 3,174,098, including $1,314,787 of accounts payable, $577,172 of current maturities of long-term debt and capital lease obligations, $178,614 of accrued payroll and related taxes, and $485,819 of accrued expenses attributable primarily to 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 $388,550 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 through 1997. The Company's cash requirements are relatively fixed for the near term and the Company expects to generate positive operating cash flows at a point in 1998 if revenues continue to increase according to expectations without any significant cost increases. Effective October 1, 1997, (with funding on October 3, 1997), Mr. Douglas H. Hanson purchased 1,225,000 common shares at $2.00 per share for a total purchase price of $2,450,000. Additionally, he acquired warrants to purchase 4,000,000 additional shares at $1.90, which warrants are exercisable for eighteen months. The complete details of the transaction are reported in a current report on Form 8K filed with the U.S. Securities and Exchange Commission on October 6, 1997. These funds along with cash flow from operations are expected to be sufficient to fund working capital until cash flows turn positive. There can be no assurance however that this will occur. The Company's common stock is traded on the Nasdaq SmallCap Market. The Directors of The Nasdaq Stock Market, Inc. changed Nasdaq Listing Requirements. A minimum maintenance standard of two million dollars in net tangible assets is included in the new listing requirements. Assuming the Company's revenue and expense trends continue and no additional equity funds are infused into the Company by December 31, 1997, the Company expects it will fall below the minimum Nasdaq SmallCap Market listing requirement for tangible net worth. However, the Company anticipates any deficiency will be correct by an additional equity investment. Nevertheless, there is no assurance that the Company will obtain the funds necessary to meet these listing requirements. Page 18 PART II. OTHER INFORMATION ITEM 1. 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. Page 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (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 development services for the design and development of the MCI internal Intranet project referred to as Electronic Advice. ** 10.5 Sublease Agreement--Febuary 26, 1997--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 **** 10.10 Termination Agreement of joint venture between Rocky Mountain Internet, Inc. and Zero Error Networks, Inc. ***** 10.11 Private Placement Memorandum ***** 16.1 Letter re change in certifying accountant *** 23.1 Consent of McGladrey & Pullen, LLP **** 23.2 Consent of Baird Kurtz & Dobson **** 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 November 14, 1996. *** Incorporated by reference to the Company's Form 8-K filing dated January 28, 1997. ****Incorporated by reference to the Company's Form 10-KSB dated March 31, 1997. *****Incorporated by reference to the Company's Form 10-QSB dated June 30, 1997. (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. Page 20 Item 5--Other Events, filed on August 21, 1997. The Nasdaq Stock Market, Inc. ("Nasdaq") notified the Company that the Company's capital and surplus was less than the $1,000,000 required to maintain listing on the Nasdaq SmallCap market and, that in light of such circumstances, the Company's common shares were subject to delisting from the market effective as of August 29, 1997. Item 5--Other Events, filed on October 1, 1997. The Company signed a non-binding letter of intent with a third party investor on September 17, 1997 under the terms of which the Company would sell to the investor newly-issued common shares of the Company representing 13 percent of the outstanding common shares of the Company (as such percentage is determined on a fully diluted basis after the issuance of shares to the investor and giving effect to the dilution resulting from the exercise or conversion of any warrants, options, convertible preferred shares or other similar interests in the Company outstanding on the date hereof) for a cash purchase price of approximately $2,450,000. Item 1--Changes in Control of Registrant, filed on October 6, 1997. On October 1, 1997, Mr. Douglas H. Hanson obtained effective control of Rocky Mountain Internet, Inc., by entering into a series of agreements wherein he invested $2,450,000 in the Company in exchange for 1,225,000 shares of common stock at a price of $2.00 per share in addition to acquiring warrants, options, and voting rights from certain shareholders. Item 7. Financial Statements and Exhibits as related to the change in control. In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. Date: November 13, 1997 By: /S/ DAVID L. EVANS --------------------------- David L. Evans Chief Financial Officer and Executive Vice President /S/ DOUGLAS H. HANSON --------------------------- Douglas H. Hanson Chairman, Chief Executive Officer, and President Page 21 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 SEP-30-1997 287,197 576,918 735,858 (73,120) 47,559 1,333,493 3,747,589 (967,984) 5,137,030 3,174,098 0 0 93 5,436 543,384 4,707,515 296,442 4,431,786 230,493 1,254,838 5,905,182 0 297,838 (3,214,739) 0 (3,214,739) 0 0 0 (3,214,739) (0.633) (0.633)
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