<PAGE>
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(NOTE) (UNAUDITED)
------------ -------------
<S> <C> <C>
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
------------ -------------
------------ -------------
</TABLE>
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
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(NOTE) (UNAUDITED)
------------ -------------
<S> <C> <C>
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
------------ -------------
------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------------
1996 1997 1996 1997
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
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)
---------- ------------ ------------- -------------
---------- ------------ ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
<S> <C> <C>
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
</TABLE>
Page 5
<PAGE>
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;
<TABLE>
<CAPTION>
Description Maturity Date Investment
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
US TreasuryNote Oct. 31, 1997 $276,918
</TABLE>
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
<PAGE>
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
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEP. 30, PROFORMA
1997 INVESTMENT OCT. 3, 1997
(UNAUDITED) OCT. 3, 1997 (UNAUDITED)
------------ ------------ ------------
<S> <C> <C> <C>
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
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Page 8
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PROFORMA
SEP. 30, 1997 INVESTMENT OCT. 3, 1997
(UNAUDITED) OCT. 3, 1997 (UNAUDITED)
------------- ------------- -------------
<S> <C> <C> <C>
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Page 9
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1996 1997 % CHANGE
---------- ------------ -------------
<S> <C> <C> <C>
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%
---------- ------------ ---
---------- ------------ ---
</TABLE>
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
<TABLE>
<CAPTION>
MAR JUN SEP DEC MAR JUN SEP DEC
1995 1995 1995 1995 1996 1996 1996 1996
- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$20.52.... $ 20.42 $ 20.88 $ 21.02 $ 20.97 $ 20.33 $ 20.41 $ 20.50
</TABLE>
<TABLE>
<CAPTION>
MAR JUN SEP
1997 1997 1997
- --------- --------- ---------
<S> <C> <C>
$20.10.... $ 20.04 $ 19.65
</TABLE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------- --------- ----------- ----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
MAR 31 JUN 30 SEP 30
SERVICE 1997 1997 1997
- ------------------------------------ --------- ----------- -----------
<S> <C> <C> <C>
Private Port........................ 50 41 36
56 Kbps............................. 78 72 65
ISDN................................ 168 193 211
T-1................................. 65 84 99
Colocation.......................... 11 12 11
</TABLE>
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:
<TABLE>
<CAPTION>
MAR JUN SEP DEC MAR JUN SEP DEC
1995 1995 1995 1995 1996 1996 1996 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 21 45 90 157 217 242 341
</TABLE>
<TABLE>
<CAPTION>
MAR JUN SEP
1997 1997 1997
----- ----- -----
<S> <C> <C>
418 424 417
</TABLE>
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
<PAGE>
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
<PAGE>
period in 1996. Listed below is a breakdown of the revenue billing categories.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997 % CHANGE
------------ ------------ -------------
<S> <C> <C> <C>
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%
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 287,197
<SECURITIES> 576,918
<RECEIVABLES> 735,858
<ALLOWANCES> (73,120)
<INVENTORY> 47,559
<CURRENT-ASSETS> 1,333,493
<PP&E> 3,747,589
<DEPRECIATION> (967,984)
<TOTAL-ASSETS> 5,137,030
<CURRENT-LIABILITIES> 3,174,098
<BONDS> 0
0
93
<COMMON> 5,436
<OTHER-SE> 543,384
<TOTAL-LIABILITY-AND-EQUITY> 4,707,515
<SALES> 296,442
<TOTAL-REVENUES> 4,431,786
<CGS> 230,493
<TOTAL-COSTS> 1,254,838
<OTHER-EXPENSES> 5,905,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,838
<INCOME-PRETAX> (3,214,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,214,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,214,739)
<EPS-PRIMARY> (0.633)
<EPS-DILUTED> (0.633)
</TABLE>
