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 June 30, 1998
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
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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 July 31, 1998, Rocky Mountain Internet, Inc. had approximately
7,812,000 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, June 30
1997 1998
(Note) (Unaudited)
Current assets
Cash and Cash equivalents $ 1,053,189 $ 761,965
Trade receivables, less allowance for
doubtful accounts 12/31/1997 - $176,000;
6/30/1998 - $221,962 672,094 635,025
Inventories 46,945 61,384
Other 112,891 112,186
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Total current assets $ 1,885,119 $ 1,570,560
------------ -------------
Property and equipment
Equipment 2,927,016 3,310,699
Computer software 218,801 229,427
Leasehold Improvements 190,235 189,234
Furniture, fixtures, and office equipment 431,814 431,814
------------ -------------
$ 3,767,866 $ 4,161,174
Less accumulated depreciation and amortization 1,118,217 1,548,923
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$ 2,649,649 $ 2,612,251
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Other assets
Goodwill - 1,323,633
Customer lists 471,096 412,727
Investments - 3,000
Deferred acquisition costs - 245,082
Deposits 76,255 76,255
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547,351 2,060,697
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$ 5,082,119 $ 6,243,508
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Note: The Consolidated Balance Sheet information as of December 31, 1997 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, June 30
1997 1998
(Note) (Unaudited)
Current liabilities
Current maturities of long-term debt and $ 609,390 $ 674,957
obligations under capital leases
Accounts payable 581,366 1,628,141
Deferred revenue 345,857 315,476
Accrued payroll and related taxes 182,569 172,932
Other accrued expense 374,940 345,337
------------ -------------
Total current liabilities $ 2,094,122 $ 3,136,843
------------ -------------
Long-term debt and obligations under capital
leases, less current maturities $ 904,627 $ 629,354
------------ -------------
Stockholders equity
Preferred stock, $.001 par value; authorized
12/31/1997 - 790,000, 6/30/1998 - 750,000
shares; issued and outstanding 12/31/1997,
40,000 shares, 6/30/1998, 0 shares $ 40 $ -
Common stock, $.001 par value; authorized 1997
- 10,000,000 shares, 6/30/1998 - 25,000,000
shares; issued 12/31/1997 - 6,736,889 shares;
6/30/1998 - 7,582,347 shares; and outstanding
12/31/1997 - 6,677,846 shares, 6/30/1998 -
7,518,267 shares 6,737 7,582
Additional paid-in capital 9,284,720 11,334,838
Accumulated deficit (6,747,050) (8,780,445)
Unearned compensation (383,077) -
------------ -------------
$ 2,161,370 $ 2,561,975
Treasury stock, at cost
Common; 12/31/1997 - 59,043 shares,
6/30/1998 - 64,080 (78,000) (84,664)
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Total stockholders' equity $ 2,083,370 $ 2,477,311
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$ 5,082,119 $ 6,243,508
------------ -------------
------------ -------------
See Notes to Consolidated Financial Statements
Page 3
ROCKY MOUNTAIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
Revenue
Internet access and services $ 1,332,071 $2,034,787 $ 2,645,785 $ 3,748,103
Equipment sales 120,342 126,972 203,586 192,941
--------------- --------------- --------------- ---------------
1,452,413 2,161,759 2,849,371 3,941,044
--------------- --------------- --------------- ---------------
Cost of revenue earned
Internet access and services 490,155 632,533 927,265 1,233,665
Equipment sales 97,263 99,394 161,128 150,350
--------------- --------------- --------------- ---------------
587,418 731,927 1,088,393 1,384,015
--------------- --------------- --------------- ---------------
Gross Profit 864,995 1,429,832 1,760,978 2,557,029
Selling, general and administrative expenses 1,908,932 2,023,842 3,617,999 4,478,171
Other operating expenses 334,371 72,552 334,112 (2,434)
--------------- --------------- --------------- ---------------
Operating (loss) income (1,378,308) (666,562) (2,191,133) (1,918,708)
Other income (expense)
Interest expense (106,988) (74,498) (185,921) (154,729)
Other income (expense) 1,211 (2,186) (9,807) (2,746)
Interest income 6,009 14,436 18,637 25,728
Finance charges 229 9,769 416 17,060
--------------- --------------- --------------- ---------------
(99,539) (52,479) (176,675) (114,687)
--------------- --------------- --------------- ---------------
Net (loss) income before income taxes (1,477,847) (719,041) (2,367,808) (2,033,395)
Income tax expense - - - -
--------------- --------------- --------------- ---------------
Net (loss) income $(1,477,847) $ (719,041) $(2,367,808) $(2,033,395)
Preferred stock dividends - - 25,000 -
--------------- --------------- --------------- ---------------
Net loss applicable to common stockholders $(1,477,847) $ (719,041) $(2,392,808) $(2,033,395)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Basic and diluted loss per share
Net earnings (loss) per share $ (0.31) $ (0.10) $ (0.51) $ (0.29)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
See Notes to Consolidated Financial Statements
Page 4
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------------
1997 1998
--------------- --------------
Cash Flows from Operating Activities
Net (loss) income $(2,367,808) $ (2,033,395)
Items not requiring (providing) cash:
Depreciation and amortization 413,074 489,075
Stock option compensation - 383,077
Common stock contribution to pension plan - 39,994
Changes in assets and liabilities:
Trade receivables (94,213) 38,489
Inventories 61,788 (14,439)
Other current assets 113,486 (715)
Accounts payable 1,012,478 1,046,775
Deferred revenue 38,862 (30,381)
Accrued payroll and related taxes (392,103) (9,637)
Other accrued expenses 144,879 (29,603)
--------------- --------------
Net cash used in operating activities $(1,069,557) $ (120,760)
--------------- --------------
Cash Flows from Investing Activities
Proceeds from investments 779,711 -
Acquisition of ONE,Inc. assets (150,000) -
Additions to deferred acquisition cost - (245,082)
Purchase of property and equipment (200,950) (276,834)
Additions to deposits and Investments (13,873) (3000)
--------------- --------------
Net cash provided by (used in)
investing activities $ 414,888 $ (524,916)
--------------- --------------
Cash Flows from Financing Activities
Proceeds from notes payable 495,000 -
Proceeds from long-term debt 312,582 -
Proceeds from sale of common stock 400,500 687,265
Payment of preferred stock dividend (25,000) -
Purchase of treasury stock (42,000) (18,000)
Payments on long-term debt and obligations
under capital leases (396,092) (314,813)
--------------- --------------
Net cash provided by financing activities $ 744,990 $ 354,452
--------------- --------------
Increase (decrease) in cash and cash
equivalents $ 90,321 $ (291,224)
Cash and cash equivalents
Beginning 348,978 1,053,189
--------------- --------------
Ending $ 439,299 $ 761,965
--------------- --------------
--------------- --------------
Schedule of noncash investing and financing activities
Acquisition of Infohiway by issuance of
common stock $ - $ 1,335,000
--------------- --------------
--------------- --------------
See Notes to Consolidated Financial Statements
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 EARNINGS PER SHARE
The Earnings per Share calculation is based on average shares outstanding of
7,073,479 for the six months ended June 30, 1998. All stock options and
warrants are excluded from the computation of diluted earnings per share, as
they would have an anti-dilutive effect on earnings (loss) per share. In
accordance with FASB 128 earnings per share for prior periods have been
restated in these financial statements.
NOTE 3 INCREASE IN AUTHORIZED SHARES
A stockholders' meeting was held on March 12, 1998. At this time the
stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock from 10,000,000 to 25,000,000.
NOTE 4 1998 EMPLOYEES' STOCK OPTION PLAN
On March 12, 1998, the stockholders approved an employee incentive stock
option plan. This plan reserves 266,544 shares of Common Stock for issuance
over the ten-year term of the plan.
NOTE 5 APPROVAL OF 401K PLAN
The Board of Directors has approved a 401(k) Savings and Retirement Plan that
will cover substantially all employees effective January 16, 1998. The
Company's contributions to the Plan will be determined annually by the Board
of Directors.
NOTE 6 ACQUISITIONS
On June 5, 1998, the Company acquired all of the outstanding common stock of
Infohiway Inc. pursuant to the terms of a Merger Agreement dated June 5, 1998
by and among the Company, RMI Subsidiary, Inc., Infohiway and Kenneth Covell,
John-Michael Keyes and Jeremy J. Black, the shareholders of Infohiway.
Infohiway has developed a search engine which the Company believes has unique
data searching features. For the year ended December 31, 1997, Infohiway had
gross revenues of $31,000. The acquisition was effectuated by the merger of
RMI Subsidiary, Inc., a wholly-owned subsidiary of the Company, with and into
Infohiway. As a result of the merger, Infohiway became a wholly-owned
subsidiary of the Company. Pursuant to the Merger Agreement, the shareholders
of Infohiway received an aggregate of 150,000 shares of the Company's Common
Stock valued at $1,335,000. Substantially all of the purchase price has been
allocated to goodwill that will be amortized on a straight-line basis over a
five year life. Consolidated operations of the company would not have been
significantly different had the acquisition been made January 1, 1998.
Page 6
On July 1,1998 the company acquired all of the outstanding common stock of
Applications Methods, Inc. Applications Methods develops software and has
recently developed an e-commerce product. The Company issued 286,396 shares
of common stock valued at $3,239,000 the acquisition has been recorded as a
purchase. $3,211,000 of the purchase price will be allocated to goodwill. Pro
forma consolidated operations for the six-months ended June 30, 1998,
assuming the purchase was made at the beginning of 1998 is shown below:
Net Sales $ 4,655,000
Net Loss $ (1,976,000)
Net Loss per share $ (.28)
The pro forma results are not necessarily indicative of what would have
occurred had the acquisition been on these dates, nor are they necessary
indicative of future operations.
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.
Year 2000 Risks. Currently, many computer systems, hardware, and software
products are coded to accept only two digit entries in the date code field
and, consequently, cannot distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company and third parties with which the Company does
business rely on numerous computer programs in their day to day operations.
The Company has begun the process of identifying computer systems that could
be affected by the Year 2000 issue but has not estimated the costs of
addressing the Year 2000 issue as it relates to the Company's internal
hardware and software, as well as third party computer systems with which the
Company interacts. In the event that the Company acquires other assets or
businesses, the software and hardware acquired by the Company in connection
with those business combinations may be Year 2000 non-compliant. There can
be no assurance that the Year 2000 issues will be resolved in 1998 or 1999.
The Company may incur significant costs in resolving its Year 2000 issues.
If not resolved, this issue could have a significant adverse impact on the
Company's business, operating results, financial condition, and cash flow.
The Company's common stock is traded on the Nasdaq SmallCap Market.
Page 7
RECENT DEVELOPMENTS
RMI entered into an Agreement and Plan of Merger dated as of June 5, 1998 by
and among RMI, Internet Communications Corporation ("ICC") and Internet
Acquisition Corporation, a Colorado corporation and wholly-owned subsidiary
of RMI (the "ICC Merger Agreement") pursuant to which RMI agreed, subject to
the conditions set forth therein, acquire ICC. ICC is a Denver-based
telecommunications company that designs, implements, maintains and manages
communications systems and networks. Consummation of the ICC Acquisition is
subject to the satisfaction of various closing conditions, including approval
of the merger by ICC's shareholders at the shareholders' meeting scheduled
for the end of August 1998, and is expected to close shortly thereafter. The
Company currently intends, subject to market and other conditions, including
the prior consummation of the ICC Acquisition, to complete an offering (the
"Private Placement Offering") of approximately $175.0 million in a private
placement of high yield securities pursuant to Rule 144A. The securities to
be offered in the Private Placement Offering will consist of senior notes
(and may include other securities) and will not be registered under the
Securities Act of 1933 or applicable state securities laws. The Private
Placement Offering will be made only by means of an offering memorandum. The
Issuer has obtained a bridge loan commitment from lenders to fund the ICC
Acquisition if the Private Placement Offering is not completed.
On June 5, 1998, RMI acquired all of the outstanding common stock of
Infohiway Inc. ("INFOHIWAY") pursuant to the terms of a Merger Agreement
dated June 5, 1998 by and among RMI, RMI Subsidiary, Inc., Infohiway and
Kenneth Covell, John-Michael Keyes and Jeremy J. Black, the shareholders of
Infohiway (the "Infohiway Merger Agreement"). Infohiway has developed a
search engine which the Company believes has unique data searching features.
For the year ended December 31, 1997, Infohiway had gross revenues of
$31,000. The acquisition was effectuated by the merger of RMI Subsidiary,
Inc., a wholly-owned subsidiary of RMI, with and into Infohiway. As a result
of the merger, Infohiway became a wholly-owned subsidiary of RMI. Pursuant
to the Infohiway Merger Agreement, the shareholders of Infohiway received an
aggregate of 150,000 shares of RMI Common Stock.
On July 1, 1998, RMI acquired all of the outstanding common stock of
Application Methods Inc. ("Applications Methods") Based in Seattle,
Washington, Application Methods develops software and has recently developed
an e-commerce product. For the year ended December 31, 1997, Application
Methods had gross revenues of $984,000. Pursuant to the terms of a Merger
Agreement by and among RMI, RMI Acquisition Subsidiary, Inc. ("RMI
Acquisition"), a Washington corporation and wholly-owned subsidiary of RMI,
Application Methods and Ronald M. Stevenson, Gregory A. Brown and Ronald
Nicholl, the shareholders of Application Methods, Application Methods'
shareholders received an aggregate of 286,369 shares of RMI Common Stock as a
result of the merger of RMI Acquisition with and into Application Methods.
The Application Methods shareholders may receive additional shares of Common
Stock, not to exceed $ 2.5 million in value, based on the satisfaction of
certain post-merger performance targets over a three-year period.
Additionally, RMI recently entered into a non-binding memorandum of
understanding regarding the possible acquisition of Internet Now Inc., an ISP
located in Phoenix, Arizona for approximately $1.5 million in cash.
The Company is implementing several new service offerings.
NATIONAL INTERNET PROVIDER Effective March 11, 1998, the Company entered
into an agreement with PSINet, Inc., whereby the Company obtains access to
PSINet's network to provide the Company's customers access to dialup and
"switched" network access in over 235 locations nationally. The agreement
allows the Company to expand service nationally to provide dial up and ISDN
services in each of the locations serviced by PSINet. Customers will receive
technical
Page 8
support, e-mail services, news services, etc., from the Company's servers,
providing a "private label" solution to the anticipated new customer base.
IP TELEPHONY The Company is expanding its communication services in order to
provide a more complete product offering to its customers. The Company has
announced its intent to provide long distance services using Internet
Protocol ("IP") telephony at $0.07 per minute within the continental United
States to customers in Denver, Boulder, and Colorado Springs, Colorado areas.
COMPETITIVE local exchange carrier On April 22, 1998, The Public Utilities
Commission of the State of Colorado granted the request by Rocky Mountain
Broadband, Inc. to become a COMPETITIVE local exchange carrier ("C-LEC").
The Company may experience fluctuations in operating results in the future
caused by various factors, some of which are outside of the Company's
control, including general economic conditions, specific economic conditions
in the Internet access industry, user demand for the Internet, capital
expenditures and other costs relating to the expansion of operations, the
timing and number of customer subscriptions, the introduction of new services
by the Company or its competitors, the mix of services sold and the mix of
distribution channels through which those services are sold. In addition,
the Company's expenses, including but not limited to obligations under
equipment leases, facilities leases, telephone access lines, and Internet
access are relatively fixed in the short term, and therefore variations in
the timing and amount of revenues could have a material adverse effect on the
Company's results of operations.
Following the completion of the Private Placement Offering (or the Bridge
Loan Commitment in the absence of completing the Private Placement Offering),
the Company will be highly leveraged. At June 30, 1998, on a pro forma,
consolidated basis after giving effect to the Private Placement Offering, the
ICC Acquisition and the acquisitions of Infohiway and Application Methods,
the Company would have had approximately $177 million of indebtedness
outstanding (including capital lease obligation). The degree to which the
Company is leveraged could have important consequences to shareholders,
including the following: (la) a substantial portion of the Company's cash
flow will be dedicated to payment of the interest on its indebtedness,
thereby reducing available funds for other purposes; (ii) the Company's
significant degree of leverage could increase it's vulnerability to changes
in general economic conditions or in the event of a downturn in its business;
(iii) the Company's flexibility in planning for or reacting to changes in the
market conditions may be limited; (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes could be impaired; and (v) the
Company may be more leveraged than certain of it's competitors, which may be
a competitive disadvantage.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
The Company's revenues grew 49% from $1,452,400 to $2,161,800 for the three
months ended June 30, 1998 as compared to the comparable period in 1997.
Revenue growth performance is attributable to increasing size of the sales
force and segmenting the sales team by product group.
Page 9
DIAL-UP SERVICE
The Company experienced a 21% revenue increase in dial-up service and at the
same time decreased its offering price per customer, from the second quarter
of 1997 as compared to the second quarter of 1998 from $571,000 to $692,900.
The increase is due to the establishment of a dial-up sales department in
1998.
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, DS-1 (1.54 Mbps) frame relay connections, point to point
connections, and DS-3 (45 Mbps) or fractional DS-3 connections. The Company
also offers a co-location 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 access service business has grown based principally on ISDN and
high speed circuits (56K, DS-1, and DS-3) growth. ISDN sales have grown from
$150,300 to $225,400 from the second quarter of 1997 to the second quarter of
1998 for an increase of 50%, while sales of high speed circuits services have
increased from $211,500 to $390,700 for the same periods, for an increase of
85%.
WEB SERVICES
Web services revenues are comprised of web site hosting, web site production
and web site marketing. Web site 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 Company's servers. The advantage
to customers is high speed access to sites by their targeted audiences
Web site hosting accounted for $114,700 of revenue in the second quarter of
1997 and $161,100 in the second quarter of 1998 for an increase of 40%.
Web site production increased from $136,700 for second quarter 1997 to
$197,700 for second quarter 1998, for an increase of 45%.
The Company added a new service, web site marketing, to customers in late
1997. For the second quarter of 1998, revenues of $31,800 were recognized for
this service. Web site marketing offers the customer a service wherein the
Company optimizes the position in web search engines for a customer's site
based on queries by selected key words. This service is intended to result
in a significant increase in the level of traffic for a web site.
Page 10
OTHER REVENUE
Other revenue includes training revenue ($9,000 decreased to $4,400), and
consulting ($12,200 decreased to $9,100). The reduction in consulting revenue
occurred due to a large consulting contract in the first six months of 1997
which was concluded and no similar consulting arrangement occurred in the
first six months of 1998. Other revenue also includes sales from the
Information Exchange L.L.C., a voice messaging subsidiary which (decreased
from $27,200 to $27,100). The Information Exchange L.L.C. was acquired in a
stock transaction in late 1996. IP Telephony also generated $400 in revenue
for the three months ended June 30.1998, this service was not available in
1997.
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 63% of
revenues from that segment for the three months ended June 30, 1997 and 69%
for the same period in 1998. Gross profits on equipment sales decreased to
19% for three months ended June 30, 1997 from 22% for the same period in
1998. Sale of equipment is provided as an accommodation to the Company's
customers and the gross profit margin may vary considerably based on the mix
of products sold.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses ("S G & A") increased from
approximately $1,909,000 in the second quarter of 1997 to approximately
$2,023,800 in the second quarter of 1998 or an increase of 6%.
Payroll costs and benefits decreased 8% from $1,084,300 to $998,600 for the
three months periods ended June 30, 1997 and 1998, respectively.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders fees, decreased from $81,600
for three months ending June 30, 1997 to $31,900 for the same period in 1998,
for a decrease of 61%.
Facilities rent expense decreased by 6% from $115,600 to $109,100 for the
second quarter of 1997 to the second quarter 1998. The Company has
headquarters in downtown Denver, Colorado with additional office facilities
in Colorado Springs, Colorado.
The Company experienced a decrease in communications expense from $72,900 for
the quarter ended June 30, 1997 to $60,100 for the quarter ended June 30,
1998, or a decrease of 18%. These expenses included local telephone service,
cellular phones and pager costs and long distance telephone expenses. The
Company uses multiple "800" phone numbers to provide technical support,
customer support, and sales order processing to its growing base of customers.
Legal and accounting expenses increased from $51,400 in the second quarter of
1997 to $163,400 in the second quarter of 1998 or an increase of 218%. This
increase resulted from legal work in the preparation of a registration
statement on Form S-1 which is discussed elsewhere in this document, legal
expense incurred in relation to the lawsuit referenced in Part II, Item 1 of
this document, and work performed in connection with acquisitions.
Outside services, which includes temporary to hire staff and professional
services increased 51% from $97,000 to $147,000 from the second quarter of
1997 to the same period in 1998. The Company hires many of the technical
support call center staff and the Web production staff on a "temp to hire"
program wherein the new employee remains on the temporary employment agency's
payroll for approximately ninety days. This allows the staff to be fully
evaluated prior to becoming a full time Company employee.
Page 11
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
The Company's revenues grew 38% from $2,849,400 to $3,941,000 for the six
months ended June 30, 1998 as compared to the comparable period in 1997.
Revenue growth performance is attributable to increasing size of the sales
force and segmenting the sales team by product group.
Dial-Up Service
Revenues increased from $1,166,700 to $1,258,200 or 8% from the six months
ending June 30, 1997 to the six months ending June 30, 1998. Dial-up customer
count increased from 10,300 to 13,600 or 32% from the six months ending June
30, 1997 to the six months ending June 30, 1998. As a result of the
re-structure of the dial-up product, the Company experienced a reduction in
revenue growth while making greater gains in its customer base.
Dedicated Access Service
The Company assigned a direct sales team for dedicated access service and
with that focus has received the benefit of higher revenue growth. As a
result, dedicated access service business has grown based principally on ISDN
and High Speed circuit growth. ISDN sales have grown from $258,200 to
$435,400 from the first half of 1997 to the first half of 1998 for an
increase of 69%, while sales of high speed circuits services have increased
from $387,000 to $717,000 for the same periods for an increase of 85%.
Web Services
Web site hosting accounted for $218,300 of revenue in the six months ending
June 30 1997 and $298,800 for the same period in 1998 for an increase of 37%.
The increase resulted from increases in the direct sales force, increased
server capacities and speed, and the increasing popularity of the web as a
business tool.
Web site production increased from $249,600 to $330,400 or 32% for the first
six months of 1997 as compared to the same period in 1998. 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 Services
Other revenue includes training revenue ($16,900 decreased to $9,000),
consulting ($121,500 decreased to $13,300) and sales from the Information
Exchange L.L.C. ($64,000 decreased to $53,400). IP Telephony generated $400
in revenue for the six months ended June 30, 1998; this service was not
available in 1997.
Page 12
Gross Profit
Gross profit consists of total revenue less the cost of delivering services
and equipment. The gross profit (exclusive of equipment sales) was 65% for
the six months ended June 30, 1997 and 67% for the same period in 1998.
Gross profits on equipment sales were 21% and 22% for the six months ending
June 30, 1997 and 1998, respectively. Sale of equipment is provided as an
accommodation to the Company's customers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("S G & A") increased from
$3,618,000 in the six months ended 1997 to $4,478,200 in the six months ended
1998 or 23%. Exclusive of option compensation expense, discussed in the
following paragraph, S G & A increased 13% from the six months ended 1997 to
the six months ended 1998. Significant items are discussed below.
Payroll costs and benefits increased 21% from $2,042,200 to $2,464,400 for
the six months ended 1997 and 1998, respectively. Payroll costs included a
non-cash charge to compensation for the first quarter of 1998 in the amount
of $383,100 for the exercise of employee stock options. Exclusive of this
amount, payroll costs and related benefits increased 2%.
Sales and marketing expenses, consisting of advertising, promotion,
attendance at trade shows, printing, and finders fees, decreased from
$129,300 for the six months ending 1997 to $81,200 for the same period in
1998 for a decrease of 37%.
Facilities rent expense decreased by 1% from $225,200 to $222,000 for the six
months ended 1997 to the six months ended 1998. The Company has headquarters
in downtown Denver, Colorado with additional office facilities in Colorado
Springs, Colorado.
The Company experienced a decrease in communications expenses from $147,100
for the six months ended 1997 to $121,300 for the six months ended 1998 or
18%. These expenses included local telephone service, cellular phones and
pager costs and long distance telephone expenses. The Company uses multiple
"800" phone numbers to provide technical support, customer support, and sales
order processing to its growing base of customers.
Legal and accounting expenses increased from $120,000 in the six months ended
1997 to $380,200 in the six months ended 1998 or an increase of 217%. This
increase resulted from legal and accounting work required in preparation of
the Company's proxy statement for the Shareholder meeting held on March 12,
1998, legal work in the preparation of a registration statement on Form S-1,
which is discussed elsewhere in this document, legal expense incurred in
relation to the lawsuit referenced in Part II, Item 1 of this document, and
due diligence work performed in regards to potential acquisitions.
Other outside services, which includes temporary to hire staff and
professional services, decreased 20% from $195,600 to $235,000 from the six
months ended 1997 to the same period in 1998. The Company hires many of the
technical support call center staff and the Web production staff on a "temp
to hire" program wherein the new employee remains on the temporary employment
agency's payroll for approximately ninety days. This allows the staff to be
fully evaluated prior to becoming a full time Company employee.
Page 13
Liquidity and Capital Resources
In addition to the October 1, 1997 investment of $2,398,600 by Mr. Hanson, he
invested an additional $503,600 in March 1998 by exercising purchased
warrants and options that were granted in October 1997, at the time of his
initial investment.
The company currently intends, subject to market and other conditions,
including the prior consummation of the ICC Acquisition, to complete a
Private Placement Offering to raise approximately $175.0 million in a private
placement of high yield securities pursuant to Rule 144A. The securities to
be offered in the Private Placement Offering will consist of senior notes
(and may include other securities) and will not be registered under the
Securities Act of 1933 or applicable state securities laws. The Private
Placement Offering will be made only by means of an offering memorandum. The
Issuer has obtained a bridge loan commitment from lenders to fund the ICC
Acquisition if the Private Placement Offering is not completed.
On July 20, 1998 and July 24,1998, the Company filed with the U.S. Securities
and Exchange Commission separate amendments to a registration statement on
Form S-1 (originally filed on May 15,1998) in order to register the shares
underlying the warrants issued during the Company's initial public offering
on September 5, 1996 along with other securities which the company has
committed to register under various agreements. The Warrants are currently
traded on the Nasdaq SmallCap Market under the symbol "RMIIW." Upon the
effectiveness of this registration statement, and related "Blue Sky" filings
with various states, the Company will have the right to call 1,365,000
warrants for $0.25 each, and the warrant holder will have a thirty day period
to exercise the warrant at a price of $3.07 per underlying share. 1,942,336
common shares are underlying the warrants. If all of the shares underlying
these Warrants are exercised, the Company would realize proceeds of
approximately $5,670,000. The Company has not announced plans to call these
Warrants, but may elect to do so upon the completion of the registration
statement and as funds are needed.
The Company has received a loan commitment from Phoenix Leasing Incorporated
wherein the Company will have available a financing line available for
acquisition of fixed assets in the amount of $352,000 to be used in four
increments of $88,000. The financing will be secured by the assets purchased
and by an Equipment Loan Bond provided by Amwest Surety Insurance Company.
The Company has submitted the appropriate paperwork to draw 3 of the funding
increments. Funding is expected by August 30, 1998.
RMI is an Internet Service Provider ("ISP") with a high growth rate (as
discussed elsewhere in this document). The Company's growth is dependent on
continuing to build a strong infrastructure and hiring quality sales,
technical, and administrative personnel. In order to build the
infrastructure and acquire the human resources needed to maintain a high
growth rate, the Company has operated with a negative cash flow from
operations during 1996 and 1997. The Company's cash requirements are
relatively fixed for the near term and the Company expects to continue to
improve operating cash flow if revenue continues to increase according to
expectations without any significant cost increases. Should revenues not
continue to increase according to expectations, the Company may have to seek
additional financing to fund operating losses or implement reductions in
operating expenses. Reductions in operating expenses, if effected, could
adversely affect revenues and therefore not result in the expected increase
in cash flow. The Company does not currently have access to additional bank
financing and therefore should the Company not conclude its private placement
offering of $175 million, financing would have to result from
additional issuances of equity or debt securities.
Page 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company filed a Form S-1 Registration Statement with the U.S. Securities
and Exchange Commission on May 15, 1998 and amended the filing on July 20 and
July 24, 1998, requesting the registration of Common Stock underlying the
warrants issued during the Initial Public Offering of September 5, 1996 along
with other securities for which the Company has committed to register under
various agreements. The warrants are currently traded on the Nasdaq stock
exchange under the symbol "RMIIW". Upon the successful completion of this
registration, the Company will have the right to call 1,365,000 warrants for
redemption for $0.25 each, and the warrant holder will have a thirty day
period to exercise the warrant at an exercise price of $3.07 per underlying
share. 1,942,336 common shares are underlying the warrants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Stockholder Meeting was held on March 12, 1998, for the following purposes:
1. To elect five members to the Board of Directors to serve for the
ensuing year and until their successors are duly elected and
qualified;
2. To approve the Rocky Mountain Internet, Inc. 1997 Stock Option Plan;
3. To approve the Rocky Mountain Internet, Inc. 1998 Employees' Stock
Option Plan;
4. To approve the Rocky Mountain Internet, Inc. 1998 Non-Employee
Directors Stock Option Plan;
5. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's common
stock from 10,000,000 to 25,000,000;
6. To approve an amendment to the Company's Certificate of Incorporation
to decrease the number of votes required for action on a matter by the
stockholders of the Company at a meeting thereof from a majority of
the shares of common stock outstanding to a majority of the shares
present in person or represented by proxy at a meeting and entitled to
vote on the matter;
7. To approve an amendment to the Company's Certificate of Incorporation
to implement a reverse split of the Company's Common Stock of up to
one-for-ten, in the event the Board of Directors determines that a
reverse stock split is desirable at any time within one year from the
date of the March 12, 1998 meeting, with the exact size of the reverse
stock split to be determined by the Board of Directors;
8. To consider and act upon a proposal to ratify the appointment of
Baird, Kurtz & Dobson, Certified Public Accountants, as the Company's
independent public accountants for the fiscal years ending December
31, 1997 and 1998.
All of the persons who were nominated to become directors of the Company were
elected, and all of the above listed proposals were approved by the
stockholders. Please reference the Definitive Proxy Statement as filed with
the Securities and Exchange Commission Schedule 14A on February 13, 1998 for
additional information.
Page 15
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Description of Exhibits
3.1 Certificate of Incorporation (1)
3.2 Bylaws of Rocky Mountain Internet, Inc. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of Rocky
Mountain Internet, Inc. (13)
4.1 Form of Warrant Agreement dated September 5,1996 between Rocky
Mountain Internet, Inc. and American Securities Transfer, Inc.
(1)
4.2 Form of Subordinated Convertible Promissory Note (1)
4.3 Form of Lock-Up Agreement for Shareholders (1)
4.4 Form of Lock-Up Agreement for Preferred Stockholders (1)
4.5 Form of Lock-Up Agreement for Debenture Holders (1)
4.6 Form of Stock Certificate (1)
4.7 Form of Warrant Certificate (1)
4.8 Warrant Agreement between Rocky Mountain Internet, Inc. and
Douglas H. Hanson dated October 1, 1997 (8)
4.9 1996 Employees' Stock Option Plan(6)
4.10 1996 Non-Employee Directors' Stock Option Plan (6)
4.11 Rocky Mountain Internet Inc. 1997 Non-Qualified Stock Option Plan
(7)
4.12 1997 Stock Option Plan (9)
4.12.1 First Amendment to Non-Qualified Stock Option Agreement pursuant
to the Rocky Mountain Internet, Inc. 1997 Stock Option Plan (13)
4.12.2 First Amendment to Incentive Stock Option Agreement pursuant to
the Rocky Mountain Internet, Inc. 1997 Stock Option Plan (13)
4.13 Rocky Mountain Internet, Inc. 1998 Employees' Stock Option Plan
(10)
4.14 Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock
Option Plan (11)
10.1 Agreement of Lease between Denver-Stellar Associates Limited
Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant
(2)
10.2 Asset Purchase Agreement - Acquisition of CompuNerd, Inc. (2)
10.3 Confirmation of $2.0 million lease line of credit (2)
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. (2)
10.5 Sublease Agreement-February 26, 1997-1800 Glenarm, Denver, Co.(4)
10.6 Acquisition of The Information Exchange (4)
10.7 Asset purchase of On-Line Network Enterprises (4)
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain
Internet, Inc. and Zero Error Networks, Inc. (5)
10.11 Private Placement Memorandum (5)
10.12 Carrier Services Switchless Agreement Between Frontier
Communications of the West, Inc. and Rocky Mountain Broadband,
Inc. (12)
10.13 Wholesale Usage Agreement Between PSINet Inc. and Rocky Mountain
Internet, Inc. (12)
10.14 PacNetReseller Agreement (12)
10.16 Operating Agreement of the Mountain Area Exchange LLC (12)
16.1 Letter re: change in certifying accountant (3)
27.1 Financial Data Schedule
Page 16
(1) 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.
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-QSB filing dated September 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form
8-K filing dated January 28, 1997
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB dated December 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB dated June 30, 1997.
(6) Incorporated by reference to the Company's documents filed with
Initial Public Offering.
(7) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on September 26, 1997.
(8) Incorporated by reference to the Company's Current Report on Form
8-K dated October 6, 1997.
(9) Incorporated by reference to the Definitive Proxy Statement
(Appendix A) filed on Schedule 14A on February 13, 1998.
(10) Incorporated by reference to the Definitive Proxy Statement
(Appendix B) filed on Schedule 14A on February 13, 1998.
(11) Incorporated by reference to the Definitive Proxy Statement
(Appendix C) filed on Schedule 14A on February 13, 1998.
(12) Incorporated by reference to the Company's Form S-1 filed on May
15, 1998.
(13) Incorporated by reference to the Company's Form 10-KSB filed on
March 31, 1998.
(14) Incorporated by reference to the Company's Form 10-KSB filed on
March 31, 1998, filed as amended on June 1, 1998
(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.
Form 8-K; Item 2: Acquisition or Disposition of Assets was filed on June
11,1998. Infohiway acquired effective June 5,1998, and has become a wholly
owned subsidiary.
Form 8-K; Item 2: Acquisition and Dispositions of Assets was filed on July
14,1998. Applications Methods was acquired effectively July 1, 1998, and
has become a wholly owned subsidiary.
Page 17
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.
/S/ Peter J. Kushar August 14, 1998
------------------------- ----------------
Peter J. Kushar Date
Chief Financial Officer
/S/ Douglas H. Hanson August 14, 1998
------------------------- ----------------
Douglas H. Hanson Date
Chairman, Chief Executive
Officer, and President
Page 18