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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28004
EAGLE RIVER INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1320277
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1060 WEST BEAVER CREEK BOULEVARD
AVON, COLORADO 81620
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(970) 845-8300
</TABLE>
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MAY 15, 1996
----- ---------------------------
<S> <C>
Common Stock, $.001 par value 11,472,448 shares
</TABLE>
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Eagle River Interactive, Inc.
FORM 10-Q
For the Quarter Ended March 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 1996 and
December 31, 1995..................................................... 3
Consolidated Condensed Statements of Operations for the Three Months
Ended March 31, 1996 and 1995............................................ 4
Consolidated Condensed Statement of Stockholders' Equity for the Three
Months Ended March 31, 1996.............................................. 5
Consolidated Condensed Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995............................................ 6
Notes to Consolidated Condensed Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................... 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1996 1995
----------- -----------
<S> <C> <C>
(UNAUDITED)
Current Assets:
Cash and cash equivalents....................................... $47,720,270 $ 1,122,999
Accounts receivable, net........................................ 2,027,520 2,582,771
Other current assets............................................ 779,953 442,354
---------- ----------
Total Current Assets.................................... 50,527,743 4,148,124
---------- ----------
Property and Equipment, net....................................... 2,651,765 2,071,204
Other Assets, net................................................. 3,461,998 3,480,834
---------- ----------
Total Assets............................................ $56,641,506 $ 9,700,162
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................................................ $ 1,338,550 $ 736,935
Accrued liabilities............................................. 1,209,896 1,119,954
Other current liabilities....................................... 648,204 1,731,612
Current portion of note payable and capital lease obligations... 665,166 664,952
---------- ----------
Total Current Liabilities............................... 3,861,816 4,253,453
Note payable and capital lease obligations........................ 2,328,663 2,495,924
---------- ----------
Total Liabilities....................................... 6,190,479 6,749,377
---------- ----------
Mandatory Redeemable Convertible Series A Preferred Stock
$0.001 par value, 1,342,000 shares authorized, issued and
outstanding at December 31,1995 (Note 2)..................... -- 6,897,654
Stockholders' Equity (Deficit):
Common stock, $0.001 par value, 30,000,000 shares authorized;
11,163,448 and 3,137,448 shares issued and outstanding as of
March 31, 1996 and December 31, 1995, respectively........... 11,163 3,137
Additional paid-in capital........................................ 51,454,432 280,758
Accumulated deficit............................................... (1,014,568) (4,230,764)
---------- ----------
Total Stockholders' Equity (Deficit).................... 50,451,027 (3,946,869)
---------- ----------
Total Liabilities and Stockholders' Equity........................ $56,641,506 $ 9,700,162
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenue............................................................. $3,772,207 $2,257,517
---------- ----------
Operating Expenses:
Cost of revenue................................................... 2,314,223 1,332,330
Selling, general and administrative expenses...................... 1,164,579 410,821
Depreciation and amortization..................................... 259,546 137,026
---------- ----------
Total Operating Expenses.................................. 3,738,348 1,880,177
---------- ----------
Net Operating Profit................................................ 33,859 377,340
Other income (expense), net......................................... 56,383 (137,480)
---------- ----------
Income from Continuing Operations................................... 90,242 239,860
---------- ----------
Discontinued Operation.............................................. -- (86,953)
---------- ----------
Net Income.......................................................... $ 90,242 $ 152,907
========== ==========
Net Income Per Common and Common Equivalent Share (for the Three
Months Ended March 31, 1995 see Note 5)........................... $ 0.01
==========
Shares Used in Computing Net Income per Common and Common Equivalent
Share (for the Three Months Ended March 31, 1995 see Note 5)...... 8,728,633
==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES A MANDATORILY STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
REDEEMABLE, CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------ -------------------- PAID-IN ACCUMULATED EQUITY
SHARES $ SHARES $ CAPITAL DEFICIT (DEFICIT)
---------- ----------- ----------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995........ 1,342,000 $ 6,897,654 3,137,448 3,137 $ 280,758 $(4,230,764) $(3,946,869 )
Undistributed losses reclassified
to additional paid-in capital due
to termination of Subchapter S
status........................... -- -- -- -- (3,125,954) 3,125,954 --
Dividends accrued on Series A
Preferred Stock.................. -- 178,688 -- -- (178,688) -- (178,688 )
Conversion of Series A Preferred
Stock............................ (1,342,000) (7,076,342) 4,026,000 4,026 7,072,316 -- 7,076,342
Proceeds from initial public stock
offering, net of underwriter
commissions and $950,000 of
offering costs................... -- -- 4,000,00 4,000 47,406,000 -- 47,410,000
Net income......................... -- -- -- -- -- 90,242 90,242
---------- ----------- ---------- ------- ----------- ----------- -----------
Balances, March 31, 1996
(unaudited)...................... -- $ -- 11,163,448 $11,163 $51,454,432 $(1,014,568) $50,451,027
========== =========== ========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
5
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 90,242 $ 152,907
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................ 259,546 137,026
Reserve for bad debts........................................ (25,000) --
Changes in assets and liabilities:
Accounts receivable........................................ 580,251 215,125
Other current assets....................................... (337,599) 441,144
Other assets............................................... (15,382) (21,355)
Accounts payable, accrued liabilities and other
liabilities............................................... (391,851) (1,089,970)
----------- -----------
Net cash provided by (used in) operating activities..... 160,207 (165,123)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................. (752,639) (192,571)
Advances to affiliates.......................................... (53,250) --
----------- -----------
Net cash used in investing activities................... (805,889) (192,571)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates........................................ -- 337,376
Cash portion of SkiView assets purchased........................ -- 53,900
Proceeds from lines of credit................................... 250,000 469,250
Repayment of lines of credit.................................... (250,000) --
Repayment of notes payable and capital leases................... (167,047) --
Proceeds from issuance of common stock, net..................... 47,410,000 --
----------- -----------
Net cash provided by financing activities............... 47,242,953 860,526
----------- -----------
Net increase in cash and cash equivalents......................... 46,597,271 502,832
Cash and cash equivalents, beginning of period.................... 1,122,999 267,235
----------- -----------
Cash and cash equivalents, end of period.......................... $47,720,270 $ 770,067
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense.................................. $ 91,726 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Eagle River Interactive, Inc. (the "Company") creates, develops and deploys
interactive solutions to assist a variety of United States companies in
communicating effectively with their targeted audiences. The Company creates
these solutions by combining its knowledge of leading technologies with its
creative expertise and strategic marketing experience.
Basis of Presentation
The accompanying consolidated condensed interim financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying
consolidated condensed interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (No. 333-702), as amended, filed
with the Commission on January 29, 1996 (the "Registration Statement").
The accompanying unaudited consolidated condensed interim financial
statements reflect, in the opinion of management, all adjustments, which are of
a normal and recurring nature, necessary for a fair presentation of the
financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the accompanying consolidated condensed financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
year.
For purposes of the March 31, 1995 Consolidated Condensed Statement of
Operations, selling costs were reclassified from cost of revenue to selling,
general and administrative.
2. INITIAL PUBLIC OFFERING
In March 1996 the Company completed an initial public offering of 4,000,000
shares of its common stock at a price of $13.00 per share. After underwriting
discounts, commissions and other offering expenses, net proceeds to the Company
from the offering were $47,410,000. Upon the closing of the offering, all
1,342,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock
("Series A Preferred Stock") outstanding were converted into 4,026,000 shares of
common stock.
In addition, the terms of the Series A Preferred Stock provided that
accrued dividends were not payable upon conversion of the Series A Preferred
Stock if the market price of the common stock at the time of such conversion
exceeded $5.00 per share. At the conversion date $336,342 in Series A Preferred
Stock dividends had been accrued. These accrued dividends were restored to
additional paid-in capital upon the closing of the initial public offering as
the market price of the common stock on the date of conversion was the initial
public offering price of $13.00 per share.
In April 1996, the underwriters of the Company's initial public offering
exercised their over-allotment option and purchased an additional 309,000 shares
of common stock at $13.00 per share from the Company, with net proceeds to the
Company aggregating $3,735,810.
7
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the initial public offering, the Company effected a
three-for-one split of the Company's common stock. All common stock amounts,
equivalent share amounts and per share amounts have been adjusted retroactively
to give effect to the stock split.
Also in connection with the initial public offering, the Company's
Certificate of Incorporation was amended to increase the number of authorized
shares of common stock to 30,000,000 shares, to increase the number of
authorized shares of preferred stock to 2,000,000 shares and to remove
references to the Series A Preferred Stock, which was converted into common
stock in connection with the offering.
3. DEBT
Secured Line of Credit
In March 1996, the Company obtained a line of credit facility from a bank,
secured by accounts receivable, allowing borrowings up to $1.5 million. The
Company borrowed $250,000 under this line in March 1996, which was repaid in
full.
SkiView Note
In connection with the purchase of SkiView, Inc., the Company issued a note
payable. The Company repaid the note on April 3, 1996 except for approximately
$252,000 which the Company believes may be subject to adjustment.
4. STOCKHOLDERS' EQUITY
Rights Agreement
The Board of Directors of the Company declared a dividend distribution of
one preferred share purchase right (a "Right") for each outstanding share of
common stock. Upon certain events, including events which could result in a
change in control of the Company, each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series B Preferred
Stock at a price of $65 per share.
5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
As of March 31, 1995, using the provisions of Accounting Principles Board
Opinion No. 15, weighted average shares outstanding would be 3,122,448 shares
resulting in net income from continuing operations per common and common
equivalent share of $0.08 and net income per common and common equivalent share
of $0.05.
Consistent with the Registration Statement, the Company has utilized the
provisions of the Commission's Staff Accounting Bulletin No. 83. Common stock
and common stock equivalent shares issued by the Company at prices significantly
below the public offering price during the twelve month period prior to the
offering date (March 20, 1996) would be included in the calculation on a pro
forma basis. The shares would be included as if they were outstanding through
the quarter ended March 31, 1995 using the treasury stock method at a price of
$13.00 per share, the initial public offering price. Using these provisions, the
pro forma weighted average shares outstanding as of March 31, 1995 would be
4,483,254 shares resulting in pro forma net income from continuing operations
per common and common equivalent share of $0.05.
6. OPTION PLANS
1995 Executive Stock Option Plan
In 1995, the Company adopted the 1995 Executive Stock Option Plan (the
"Executive Option Plan") whereby certain eligible executives may be granted
options. The Company has granted options to purchase an
8
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of 1,913,700 shares under the Executive Option Plan, 987,600 of which
have been designated as "Special Options". All of the Special Options became
fully vested and exercisable in April 1996 at an exercise price of $3.75 per
share. The remaining options granted under the Executive Option Plan become
exercisable in four equal annual installments.
Employee Option Plan
In 1995, the Company adopted the 1995 Employee Option Plan (the "Employee
Option Plan"), whereby certain eligible employees may be granted options. The
Compensation Committee of the Board of Directors may grant options to purchase
up to an aggregate of 600,000 shares under the Employee Option Plan. The options
become exercisable in four equal annual installments. During the 1996 quarter,
options to purchase 372,210 shares were granted under the Employee Option Plan
at exercise prices ranging from $7.00 to $13.00.
7. INCOME TAXES
The Company was an S corporation for federal and state income tax purposes
until September 29, 1995. Accordingly, the Company was not subject to income
tax, as all taxable income or loss of the Company was reported in the tax return
of its shareholders for the period from inception (May 25, 1994) through
September 29, 1995. Upon the establishment of the Company as a C corporation, a
net deferred tax asset of approximately $160,000 was recorded by the Company
which has been fully reserved for by a valuation allowance. In addition,
pursuant to the Commission's Staff Accounting Bulletin No.4B, $3,125,954 of
undistributed losses as of September 29, 1995 were reclassified to additional
paid-in capital upon termination of the company's S corporation status.
The Company has provided a valuation allowance to fully offset its net
deferred tax asset primarily due to its limited history of operations and
post operating losses.
8. COMMITMENTS AND CONTINGENCIES
The Company had estimated and recorded an accrual in the amount of $375,000
at December 31, 1995 for the potential liability assumed by the Company relating
to certain claims filed by the founder of SkiView, Inc. The Company settled the
case in March 1996 for an amount less than the accrual. The excess accrual from
December 31, 1995 has been included in other income in the accompanying
consolidated condensed interim financial statements at March 31, 1996, net of
legal costs incurred related to the case.
The Company has entered into operating leases for outdoor media space,
office space and equipment. As of March 31, 1996, future minimum lease payments
required under such operating leases are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
MARCH 31,
-------------
<S> <C>
1997........................................ $ 1,316,794
1998........................................ 879,605
1999........................................ 655,594
2000........................................ 619,660
2001........................................ 601,058
Thereafter.................................. 155,054
-----------
Total............................. $ 4,227,765
===========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Condensed Financial Statements and
notes thereto.
Overview
The Company was formed in September 1995 to act as a parent company for its
two principal subsidiaries -- Eagle River Communications, Inc. ("Eagle River
Communications") and Ski View, Inc. ("SkiView"). Eagle River Communications was
organized in May 1994 and, until June 1995, its activities were limited to
start-up activities, including raising capital, recruiting key operating
personnel and pursuing acquisitions of other companies. In September 1995, Eagle
River Communications became a subsidiary of the Company. Eagle River
Communications has recently been merged into the Company.
The Company creates, develops and deploys interactive solutions that assist
companies in communicating effectively with their targeted audiences. The
Company also offers traditional outdoor media advertising at ski resorts in the
United States. The Company did not generate significant revenue from its
interactive services until the second half of 1995 and has yet to generate
operating income from such services. In the quarter ended March 31, 1996 (the
"1996 Quarter"), approximately 45% of the Company's revenue was generated by the
Company's interactive business and approximately 55% of the Company's revenue
was generated by the sale of outdoor media advertising through its SkiView
subsidiary. The Company expects that its revenue mix will continue to shift
significantly as the Company continues to focus resources on providing
interactive services.
In September 1995, the Company purchased the assets of the SkiView business
and assumed certain liabilities related thereto. From January 1, 1995 through
the date of purchase, Eagle River Communications operated the SkiView business
pursuant to an operating agreement that allocated to the Company substantially
all of the economic benefits and risks associated with the operations of the
SkiView business. For financial reporting purposes, the Company has accounted
for the SkiView acquisition as a purchase, and the Company has included the
operations of the SkiView business, effective January 1, 1995, in these
consolidated condensed financial statements. Eagle River Communications also had
entered into a similar operating agreement effective January 1, 1995, in these
consolidated condensed financial statements. Eagle River Communications also had
entered into a similar operating agreement effective January 1, 1995 with
respect to the audio and video production business of Production Masters, Inc.
("PMI"). Effective July 31, 1995, the operating agreement related to the
business of PMI was terminated and PMI was subsequently liquidated. PMI is
reflected in the Company's unaudited Consolidated Condensed Financial Statements
as a discontinued operation in 1995.
The market for interactive services has only recently begun to develop and
is evolving rapidly. Demand and market acceptance for the Company's recently
introduced products and services are subject to a high level of uncertainty. If
the market for interactive solutions fails to develop, or develops more slowly
than expected, or if the Company's products and services do not achieve market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected. See "Risk Factors -- Risks Related to the
Interactive Marketing Services Industry -- Developing Market for Interactive
Marketing Solutions; Unproven Acceptance of the Company's Products" included in
the Registration Statement.
Prior to 1996, the Company had on an annual basis incurred losses since its
inception and had an accumulated deficit of $4,230,764 at December 31, 1995. At
March 31, 1996, the Company had an accumulated deficit of $1,014,568, which
reflects a reclassification of $3,125,954 of accumulated deficit to additional
paid-in capital upon the Company's conversion from an S corporation in September
1995. The Company's operations are subject to certain risks and uncertainties
including, among others, a limited operating history, substantial operating
losses, management's plan for rapid growth and expansion (particularly in its
interactive marketing services business), rapidly changing technology, and
potential competitors with greater financial, technical and marketing resources.
See "Risk Factors -- Risks Relating to the Company -- Limited Operating
History; Net Losses; Accumulated Deficit," "Management of Growth; Risks
Associated with Expansion" and "Certain Transactions" included in the
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Company's Registration Statement.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
General
The Company has two revenue sources -- outdoor media advertising and
interactive services. The Company sells outdoor media at ski areas to
advertisers for a specific period of time, generally November through April,
which approximates the ski season. The Company recognizes this revenue ratably
over the period the media are provided to the customer. In some cases, the
Company produces the advertising content in addition to selling the media to its
customers. In such cases, the production revenue is recognized when the
production work is completed. In addition, the Company provides promotional
services related to events sponsored by various advertisers throughout the ski
season. Promotion revenue is recognized as the events are held, primarily in
January through March.
The Company also generates revenue from interactive services, primarily
through fixed-fee contracts. The Company's interactive customers generally
retain the Company on a project-by-project basis. The Company has no material
contract that commits any interactive customer to use the Company's services on
a long-term basis. Interactive services contracts are generally completed within
three to nine months. Interactive service revenue is recognized using the
percentage of completion method on an individual contract basis. Percentage
complete is determined based upon the ratio of costs incurred to total estimated
costs. The Company's use of the percentage of completion method of revenue
recognition requires estimates of the degree of project completion. To the
extent these estimates prove to be inaccurate, the revenues and gross profits,
if any, reported for periods during which work on the project is ongoing may not
accurately reflect the final results of the project, which can only be
determined upon project completion. Provisions for any estimated losses on
uncompleted contracts are made in the period in which such losses are
determinable.
Costs related to the Company's outdoor media sales include primarily sales
and operating expenses, sign installation and maintenance costs (which are
recognized as incurred on an accrual basis) and tower and transit rental costs
(which are recognized ratably over the November to April ski season to coincide
with the period over which related revenue is recognized). Costs related to
interactive services consist primarily of labor expenses for creative design,
account management and sales personnel. The Company is currently increasing its
expense levels to accommodate the growth anticipated by the Company in its
interactive services as a result of a number of factors, including substantially
increasing the number of employees, opening new offices and investing in
equipment. Failure to expand any of the foregoing areas in an efficient manner
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, there can be no assurance that the
Company's revenues will continue to grow at a rate that will support its
increasing expense levels.
Revenue
Revenue for the three months ended March 31, 1995 (the "1995 Quarter")
consisted of approximately $2.2 million of outdoor media and promotion revenue
and approximately $27,000 of interactive consulting services revenue provided by
the Company to Sea Vision Inc. ("Sea Vision"), an affiliate of the Company.
Revenue for the 1996 Quarter was approximately $3.8 million, or a 70% increase
over the 1995 Quarter. The 1996 Quarter consisted of approximately $2.1 million
of outdoor media and promotion revenue and approximately $1.7 million of
interactive services revenue. The growth in interactive services revenue from
the 1995 Quarter to the 1996 Quarter was a result of the increase in the number
of interactive projects from both new and existing customers.
Cost of Revenue
The Company's cost of revenue for the 1996 Quarter and 1995 Quarter was
approximately $2.3 million and $1.3 million, respectively, and consisted of
approximately $0.9 million and $1.3 million, respectively,
11
<PAGE> 12
related to the outdoor media and promotion business and approximately $1.4
million and $60,000, respectively, related to interactive services.
During the 1996 Quarter, the Company provided outdoor media and promotion
at approximately 125 ski resorts. Cost of revenue for outdoor media and
promotion includes the wages of operating personnel, related travel expenses,
and signage materials and maintenance. The Company achieved significant cost
savings in the 1996 Quarter over the 1995 Quarter in the outdoor media business
due to operating efficiencies and a reduced staffing level. The Company
anticipates that the cost of revenue related to outdoor media and promotion
should remain relatively stable as a percentage of media revenue.
Cost of revenue for interactive services primarily includes labor and
related benefits for creative design and account management personnel, direct
travel costs and occupancy. During the 1995 Quarter the Company was beginning to
develop its interactive business. Interactive services revenue during that
period related to consulting services provided by Terence M. Graunke, the
Company's Chief Executive Officer, to SeaVision, a related party. Direct
consulting revenue costs were not significant. By the 1996 Quarter the Company
had expanded its Avon and Dallas operations and opened an office in Palo Alto,
California as well as several smaller offices. As a result, costs increased
significantly in all areas of the interactive segment, particularly in labor and
related benefits and occupancy costs. The Company anticipates that the cost of
revenue related to interactive services will increase significantly in the
remainder of 1996 in anticipation of revenue growth.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs related to
senior executives of the Company, as well as costs for the sales and marketing,
accounting, information systems and human resource functions. These costs are
primarily comprised of salaries and benefits, travel and occupancy costs.
Selling, general and administrative expenses of approximately $0.4 million
during the 1995 Quarter were primarily related to the continued early
development of the Company. See Note 1 to Consolidated Condensed Financial
Statements. For the 1996 Quarter, selling, general and administrative expenses
were approximately $1.2 million. This increase was primarily due to the growth
of the Company's interactive services business and the corresponding increase in
the number of executive, marketing, and administrative personnel and the
number of offices. The Company expects selling, general and administrative
expenses to increase during the remainder of 1996 as it continues
to build its infrastructure and sales force.
Depreciation and Amortization
Depreciation and amortization expense of approximately $137,000 during the
1995 Quarter consisted of approximately $44,000 of depreciation of equipment and
approximately $93,000 of amortization of organization costs and goodwill related
to acquisitions. For the 1996 Quarter, depreciation and amortization expense of
approximately $260,000 consisted of approximately $172,000 of depreciation and
approximately $87,000 of amortization. The increase in depreciation expense
reflects the significant investment the Company has made in its computer and
office equipment over the past year. The Company expects depreciation and
amortization to increase in absolute dollar terms, particularly as the Company
occupies its new office space in Mountain View, California and Chicago, Illinois
in the second and third quarters of the year and as it continues to add computer
equipment. The Company expects this item as a percentage of sales to decline
over time.
Other Income (Expense)
Other income (expense) in the 1996 Quarter of approximately $56,000
increased approximately $194,000 from the 1955 Quarter. The increase is
primarily attributed to the favorable settlement of the Kohler litigation.
Interest income and expense is also included in other income (expense). Interest
income has not been a material contributing factor in net income for either the
1995 Quarter or the 1996 Quarter, but the Company expects interest income to
increase significantly, at least through 1996, as a result of investing the
proceeds from the initial public offering. Interest expense for both the 1995
and 1996 quarters included expense for the SkiView, Inc. note payable. The
Company repaid the note subsequent to the 1996 Quarter and will not incur
interest expense related to the SkiView note going forward.
12
<PAGE> 13
Income taxes
The Company did not record any income tax benefit in the periods presented
in 1995 and 1996 as the realization of available tax losses was not assured.
Loss from Discontinued Operations
The Company acquired control of the assets and assumed the liabilities of
PMI as of January 1, 1995 under an operating agreement. In July 1995, the
Company elected to terminate the operating agreement and discontinue the
operations of PMI. The Company was required to pay the costs of discontinuing
the operations. The Company recorded a loss of $86,953 from discontinued
operations for the 1995 Quarter.
Quarterly Operating Results in General/Seasonality
The Company's quarterly operating results may fluctuate due to a variety of
factors, including the completion or cancellation of a major project, a
reduction in the scope of services to be performed under a major project, the
addition or loss of a major customer, the relative mix of higher and lower
margin projects, changes in pricing strategies, costs relating to the expansion
of operations, the costs of acquisitions, if any, capital expenditures, the
hiring or loss of personnel, the opening or closing of offices, and other
factors that are outside the Company's control. In addition, the Company has
experienced seasonality in its business due to the operations of the outdoor
media business, which historically has earned substantially all of its revenues
during the months of November through April. As a result of the foregoing and
other factors, the Company anticipates that it may experience material
fluctuations in operating results on a quarterly basis, which may contribute to
volatility in the market price of the common stock. See Risk Factors -- "Risks
Relating to the Company -- Limited Operating History; Net Losses; Accumulated
Deficit," "Dependence on Key Personnel," "Absence of Long-Term Contracts,"
"Dependence on Key Accounts," "Management of Growth," "Risks Associated with
Expansion," "Exposure to Fixed-Fee Projects," "Potential Fluctuations in
Quarterly Operating Results; Seasonality of SkiView Operations; Potential
Adverse Effect of Litigation" included in the Registration Statement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities was approximately
$165,000 for the 1995 Quarter primarily due to the Company's payment and
fulfillment of obligations acquired from the predecessor to SkiView. For the
1996 Quarter approximately $160,000 of cash was generated by operations. Cash
used in investment activities was approximately $193,000 and $806,000 for the
1995 and 1996 Quarters, respectively, related primarily to purchases of property
and equipment in both years and to the rapid staffing growth and office space
expansion in 1996. Cash flows from financing activities were approximately
$861,000 and $47,243,000 in the 1995 and 1996 Quarters, respectively. In the
1995 Quarter, the Company financed its operations, acquired equipment and met
its working capital requirements through borrowings under lines of credit issued
by certain affiliates. These lines have been terminated. The cash inflow from
financing activities for the 1996 Quarter reflects the completion of the initial
public offering of common stock.
The Company purchases computer equipment for employees. The cost to provide
a fully functional workstation for a typical employee ranges from $12,000 to
$20,000 and in some cases even higher depending upon the capacity of the
equipment installed. As a result of the Company's plans for growth, it will
continue to be required to make substantial investments in computer equipment.
The Company believes that its operating cash flow, combined with the net
proceeds from its initial public offering, will be sufficient to meet its
currently anticipated cash needs for working capital, capital expenditures and
any funds required to make acquisitions, if any, for the foreseeable future.
To guard against the risk of a short-term cash shortage prior to the
completion of the initial public offering, the Company obtained a line of credit
from Harris Trust and Savings Bank for additional liquidity. The Company
borrowed $250,000 under this line of credit in March 1996 and repaid the
borrowing in full on
13
<PAGE> 14
March 26, 1996 with a portion of the net proceeds of the offering. The Company
canceled the line of credit in the 1996 Quarter.
In connection with the purchase of SkiView, the Company issued a note
payable to former shareholders. The Company repaid the note on April 3, 1996
except for approximately $252,000 which the Company believes may be subject to
adjustment.
Facilities
The Company's executive offices are located in Avon, Colorado. The Company
also has interactive production offices in Dallas, Texas, and Palo Alto,
California, has sales executives and account executives in New York, New York,
Manhattan Beach, California, and Chicago, Illinois, and has SkiView operations
offices in Naples, New York and Park City, Utah. In addition, the Company
recently leased additional office space in Dallas and Chicago and is currently
in the final stage of negotiating a lease for office space in Mountain View,
California to replace the Palo Alto space. All of these facilities are for use
in the Company's interactive operations. The annual occupancy costs relating to
the Dallas, Chicago and Mountain View facilities is expected to be approximately
$615,000. The Company is currently investigating additional space alternatives
in New York City to allow the Company to expand its staff as necessary.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1995, the predecessor entity to SkiView filed a lawsuit in the
United States District Court for the State of Colorado against Target Media
International, Inc. ("TMI") and Joseph J. Kohler III ("Kohler") which sought a
declaratory judgment and damages under a consulting contract between TMI/Kohler
and SkiView's predecessor. TMI and Kohler filed counterclaims against SkiView
seeking damages and declamatory relief. In connection with the Company's
purchase of the SkiView business, the Company assumed the liability, if any,
related to the litigation, and the Company accrued $375,000 as its estimated
liability under this litigation. The litigation was settled on April 4, 1996, by
payments to TMI/Kohler aggregating less than the Company's reserves for
litigation, in exchange for a full release of all claims by TMI/Kohler against
SkiView and a covenant by TMI/Kohler not to interfere with SkiView's then
existing customer relationships. The lawsuit was dismissed with prejudice on
April 6, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 -- Computation of Net Income per Common and Common Equivalent Share
27 -- Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the period
covered by this report.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE RIVER INTERACTIVE, INC.
Date: May 15, 1996 /s/ TERENCE M. GRAUNKE
----------------------------------
Terence M. Graunke
Chairman, President and Chief
Executive Officer
Date: May 15, 1996 /s/ MARC PINTO
----------------------------------
Marc Pinto
Executive Vice President,
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- - - ----------- ----------- -------------
<S> <C> <C>
11 Computation of Net Income per
Common and Common Equivalent Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
Eagle River Interactive, Inc.
Computation of Net Income per Common and Common Equivalent Share
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996
------------
<S> <C>
Net Income $ 90,242
----------
Shares used in computation
Common Stock shares outstanding (weighted
average) 3,192,243
Common Stock issued upon conversion of
Preferred Stock (weighted average) 4,026,000
Treasury stock effect of Common Stock
and equivalents 1,510,390
----------
Shares used in computation 8,728,633
----------
Net income per common and equivalent share $ 0.01
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 47,720,270
<SECURITIES> 0
<RECEIVABLES> 2,152,520
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 50,527,743
<PP&E> 3,115,416
<DEPRECIATION> 463,651
<TOTAL-ASSETS> 56,641,506
<CURRENT-LIABILITIES> 3,861,816
<BONDS> 2,328,663
<COMMON> 11,163
0
0
<OTHER-SE> 50,439,864
<TOTAL-LIABILITY-AND-EQUITY> 56,641,506
<SALES> 0
<TOTAL-REVENUES> 3,772,207
<CGS> 0
<TOTAL-COSTS> 3,738,348
<OTHER-EXPENSES> 87,776
<LOSS-PROVISION> (25,000)
<INTEREST-EXPENSE> 87,776
<INCOME-PRETAX> 90,242
<INCOME-TAX> 0
<INCOME-CONTINUING> 90,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,242
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
