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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 JUNE 30, 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)
DELAWARE 84-1320277
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1060 WEST BEAVER CREEK BOULEVARD
AVON, COLORADO 81620
(Address of principal executive offices) (zip code)
(970) 845-8300
(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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 15, 1996
----- ------------------------------
Common Stock, $.001 par value 13,201,447 shares
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Eagle River Interactive, Inc.
FORM 10-Q
For the Quarter Ended June 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Consolidated Condensed Statements of Operations for the Three and Six Months Ended
June 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for the Three and Six Months Ended
June 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 42,783 $ 1,144
Accounts receivable, net ............................................... 2,532 3,438
Other current assets ................................................... 2,254 455
-------- --------
Total Current Assets .......................................... 47,569 5,037
-------- --------
Property and Equipment, net ................................................. 4,739 2,545
Other Assets, net ........................................................... 4,553 3,495
-------- --------
Total Assets ................................................................ $ 56,861 $ 11,077
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ....................................................... $ 540 $ 954
Accrued liabilities .................................................... 1,478 1,276
Other current liabilities .............................................. 261 1,842
Current portion of note payable and capital lease obligations .......... 589 857
-------- --------
Total Current Liabilities ..................................... 2,868 4,929
Note Payable and Capital Lease Obligations .................................. 919 3,243
-------- --------
Total Liabilities ............................................. 3,787 8,172
-------- --------
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) .............................. - 6,898
Stockholders' Equity (Deficit):
Common stock, $0.001 par value, 30,000,000 shares authorized;
12,022,448 and 3,687,448 shares issued and outstanding as of
June 30, 1996 and December 31, 1995, respectively .................. 11 3
Deferred Compensation .................................................. - (18)
Additional Paid-In Capital ............................................. 54,602 522
Accumulated Deficit .................................................... (1,539) (4,500)
-------- --------
Total Stockholders' Equity (Deficit) .......................... 53,074 (3,993)
-------- --------
Total Liabilities and Stockholders' Equity .................................. $ 56,861 $ 11,077
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue .................................................... $ 4,452 $ 2,088 $ 9,490 $ 5,547
Operating Expenses:
Cost of revenue ....................................... 3,502 1,832 6,761 4,051
Selling, general and administrative expenses .......... 2,285 785 3,772 1,427
Depreciation and amortization ......................... 407 215 739 426
------------ ------------ ------------ ------------
Total Operating Expenses ..................... 6,194 2,832 11,272 5,904
------------ ------------ ------------ ------------
Net Operating Profit (loss) ................................ (1,742) (744) (1,782) (357)
Other Income (Expense), net ................................ 621 (193) 665 (317)
------------ ------------ ------------ ------------
Loss from Continuing Operations before tax benefit ......... (1,121) (937) (1,117) (674)
Tax Benefit ................................................ 755 - 755 -
------------ ------------ ------------ ------------
Loss from Continuing Operations ............................ (366) (937) (362) (674)
Discontinued Operations .................................... 198 (557) 198 (644)
------------ ------------ ------------ ------------
Net Income (loss) ......................................... $ (168) $ (1,494) $ (164) $ (1,318)
============ ============ ============ ============
Net Loss from Continuing Operations Per Common and Common
Equivalent Share (for the Three Months and
Six Months Ended June 30, 1995 see Note 4) ............ $ (0.03) $ (0.04)
============ ============
Discontinued Operations Per Common and
Common Equivalent Share ............................... $ .02 $ .02
============ ============
Net Loss Per Common and Common Equivalent Share
(for the Three and Six Months Ended
June 30, 1995 see Note 4) ............................. $ (0.01) $ (0.02)
============ ============
Shares Used in Computing Net Income per Common
and Common Equivalent Share (for the Three and
Six Months Ended June 30, 1995 see Note 4) ............ 12,022,448 10,128,211
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................... $ (164) $ (1,318)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................................... 739 426
Reserve for bad debts ................................................. (75) --
Deferred compensation ................................................. 18 --
Deferred tax benefit .................................................. (795) --
Changes in assets and liabilities:
Accounts receivable ................................................. 981 879
Other current assets ................................................ (1,699) 474
Other assets ........................................................ (627) (46)
Accounts payable, accrued liabilities and other liabilities ......... (1,793) (826)
-------- --------
Net cash used in operating activities ............................ (3,415) (411)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................... (2,618) (917)
Advances to affiliates ................................................ (53) --
Acquisition of shares (Note 2)......................................... (352) --
-------- --------
Net cash used in investing activities ............................ (3,023) (917)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash portion of SkiView assets purchased .............................. -- 54
Proceeds from lines of credit ......................................... 250 2,182
Repayment of lines of credit .......................................... (250) (42)
Proceeds from notes payable and capital leases ........................ 490 --
Repayment of notes payable and capital leases ......................... (3,082) --
Proceeds from issuance of common stock, net............................ 50,669 --
-------- --------
Net cash provided by financing activities ........................ 48,077 2,194
-------- --------
Net increase in cash and cash equivalents ............................... 41,639 866
-------- --------
Cash and cash equivalents, beginning of period .......................... 1,144 284
Cash and cash equivalents, end of period ................................ $ 42,783 $ 1,150
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense ........................................ $ 117 $ 28
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Eagle River Interactive, Inc. (the "Company" or "ERI") 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 (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.
Certain prior year balances have been reclassified to conform to the
current period presentation.
2. MERGERS
Graphic Media, Inc.
On June 21,1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger with Graphic Media, Inc. ("GM"), an Oregon corporation. As a
result of the merger, GM became a wholly owned subsidiary of the Company.
In connection with the merger, each outstanding share of GM common stock
was converted into 0.27 of a share of ERI common stock with all the outstanding
shares of GM common stock being converted into 550,000 shares of ERI common
stock. Prior to the conversion, a dissenting GM shareholder was paid
approximately $352,000 as consideration for her approximate 3% interest in GM.
The merger was accounted for as a pooling of interests, and accordingly the
historical consolidated financial statements for the two companies for periods
prior to consummation of the merger have been restated as though the companies
had been combined for all periods reported herein.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of revenues and earnings reported
by the Company to the combined amounts presented for the period indicated (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
(unaudited) (unaudited)
------------- -------------
ERI GM Total ERI GM Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues ............................. $ 6,971 $ 2,519 $ 9,490 $ 2,800 $ 2,747 $ 5,547
======= ======= ======= ======= ======= =======
Net Income ..................................... $ (14) $ (150) $ (164) $(1,472) $ 154 $(1,318)
======= ======= ======= ======= ======= =======
</TABLE>
Mastering Computers, Inc.
On July 31,1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger with Mastering Computers, Inc. ("Mastering"), an Arizona
corporation. As a result of the merger, Mastering became a wholly owned
subsidiary of the Company.
In connection with the merger, all outstanding shares of Mastering common
stock were converted into an aggregate of approximately 1,175,000 shares of
ERI common stock.
The merger will be accounted for as a pooling of interests. Merger costs,
which primarily consist of financial advisory fees, outside legal, accounting
and costs of consolidating certain operational and administrative functions of
the companies, will be expensed in 1996.
In the second quarter of 1996, pursuant to a contract entered into in May
1996 between the Company and Mastering, the Company earned $600,000 for
interactive services which it performed for Mastering in the second quarter. The
amount earned is reflected as revenue in the accompanying condensed financial
statements.
The combined pro forma revenues, net income, earnings per share and number
of shares used in computing earnings per common share, assuming the merger had
occurred June 30, 1996, are as follows (dollars in thousands except per share
amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited)
------------------------
1996 1995
---------- ---------
<S> <C> <C>
Operating Revenues.......................... $ 15,642 $ 10,780
========== =========
Net Income.................................. $ (498) $ (1,051)
========== =========
Earnings Per Common Share................... $ (.04) $ (.16)
========== =========
Number of Shares Used in
Computing Per Common Share................ 11,303,211 6,641,124
========== =========
</TABLE>
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. 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, including
$477,000 recorded in the second quarter of 1996, net proceeds to the Company
from the offering were $46,933,000. 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 at which time 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.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
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 21, 1996) have been included in the calculation on a pro
forma basis. The shares would be included as if they were outstanding through
the period ended June 30, 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 for the three and six months ended
June 30, 1995 would be 5,286,892 and 5,254,471 shares resulting in pro forma net
income from continuing operations per common and common equivalent share of
(.18) and (.13), respectively.
For the three and six months ended June 30, 1995, using the provisions of
Accounting Principles Board Opinion No. 15, weighted average shares outstanding
would be 3,625,690 and 3,593,269 shares resulting in net loss from continuing
operations per common and common equivalent share of ($0.26) and ($0.19) and net
loss per common and common equivalent share of ($0.41) and ($0.37) respectively.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
5. INCOME TAXES
Through March 31, 1996, the Company had provided a valuation allowance
to fully offset its net deferred tax asset, which consisted substantially of net
operating losses. Such net operating losses were primarily the result of the
Company's investment in infrastructure to significantly expand its interactive
business and, to a much lesser degree, losses from its outdoor media business.
During the quarter ended June 30, 1996, as required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), the
Company reviewed the realization of its deferred tax asset, and as a result of
this review, reversed a portion of the valuation allowance totalling $795,000
including $40,000 relating to PMI discontinued operations. This reversal was
based on management's determination that the deferred tax asset will be
realized, on a more likely than not basis, as a result of the Company's future
years operations.
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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 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. For the six months ended
June 30, 1996, approximately 73% of the Company's revenue was generated by the
Company's interactive business and approximately 27% 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 as
the Company continues to focus resources on providing interactive services.
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 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 Company's Registration Statement.
Mergers
On June 21, 1996, the Company completed a merger with Graphic Media, Inc.
("GM"). Pursuant to the merger, all outstanding GM shares were converted into
550,000 shares of Eagle River Interactive, Inc. ("ERI") common stock. The merger
was accounted for as a pooling of interests, and accordingly the following
historical financial information has been restated as though ERI and GM had been
combined from inception.
On July 31, 1996, the Company completed a merger with Mastering Computers,
Inc. ("Mastering"). Pursuant to the merger, all outstanding Mastering shares
were converted into an aggregate of 1,175,000 shares of ERI common stock. Since
the merger was completed after the end of the second quarter, only the combined
ERI and GM financial results are included in this report. On a pro forma basis
combined revenue for the Company and Mastering would be approximately $15
million for the six months ended June 30, 1996, representing a 58% increase over
the Company's revenue reported for the six months ended June 30, 1996. Pro forma
net loss on a combined basis would be $(.5) million for the six months ended
June 30, 1996, compared to the Company's reported net loss of $(.2) million for
the six months ended June 30, 1996. The Company anticipates revenue growth on a
combined basis for future years. The pro forma effects of the merger on the 1996
and 1995 first six months' operating revenues, net income and earnings per share
are shown in Note 2 of Notes to Consolidated Condensed Financial Statements. The
Company has filed a report on Form 8-K with respect to the acquisition of
Mastering which indicates that historical Mastering financial statements and
proforma combined financial statements will be included by amendment to the 8-K
no later then October 8, 1996.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 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
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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 and occupancy expenses for
creative design, account management and sales personnel. 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 June 30, 1995 (the "1995 Quarter")
consisted of approximately $.5 million of outdoor media and promotion revenue
and approximately $1.6 million of interactive services revenue. Revenue for the
three months ended June 30, 1996 (the "1996 Quarter") was approximately $4.5
million, or a 113% increase over the 1995 Quarter. The 1996 Quarter consisted of
approximately $.5 million of outdoor media and promotion revenue and
approximately $4.0 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 1995 Quarter and 1996 Quarter was
approximately $1.8 million and $3.5 million, respectively, and consisted of
approximately $1.1 million and $.7 million, respectively, related to the
outdoor media and promotion business and approximately $.7 million and
$2.8 million, respectively, related to interactive services.
Cost of revenue for interactive services primarily includes labor and
related benefits for creative design and account management personnel, travel
costs and occupancy. During the 1995 Quarter, the Company was developing its
interactive business. During the first and second quarters of 1996 costs
increased in all areas of the interactive segment, particularly in labor and
related benefits, and occupancy costs. The Company anticipates increases in cost
of revenue to be less dramatic for the remainder of 1996. The Company has made
substantial investments in it's labor force and operating infrastructure and
anticipates increased capacity and production in future quarters through higher
utilization of its labor force, some of which has already taken place in the
last month of the 1996 Quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs related to sales
and marketing, legal, 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 $0.8 million during the 1995 Quarter were primarily related to the
continued early development of the Company. For the 1996 Quarter, selling,
general and administrative expenses were approximately $2.3 million, which
includes approximately $.5 million of costs related to the GM acquisition. These
acquisition expenses primarily consist of outside legal and accounting costs.
The increase from the 1995 quarter to the 1996 quarter was primarily due to the
GM acquisition and
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growth of the Company's interactive services business and the corresponding
increase in the number of executive, selling, marketing, and administrative
personnel and the number of offices. The Company anticipates increases in
selling, general and administrative to be less dramatic for the remainder of
1996. In addition, these costs as a percentage of revenue should decrease as the
administrative infrastructure is substantially in place to meet managements
anticipated capacity increases from operations.
Depreciation and Amortization
Depreciation and amortization expense of approximately $.2 million during
the 1995 Quarter consisted of approximately $.1 million of depreciation of
equipment and approximately $.1 million of amortization of organization costs
and goodwill related to acquisitions. For the 1996 Quarter, depreciation and
amortization expense of approximately $.4 million consisted of approximately
$.3 million of depreciation and approximately $.1 million 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.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $.2 million for the 1995 Quarter primarily represents
interest expense. Other income of approximately $.6 million for the 1996 Quarter
primarily represents interest income which was the result of investing the
proceeds from the initial public offering.
Income taxes
The Company recorded an income tax benefit of $795,000, including $40,000
relating to the PMI discontinued operations in the second quarter of 1996
resulting from a partial reversal of the valuation allowance it previously
recorded. In accordance with the provisions of SFAS 109 management of the
Company determined that it is more likely than not that the net deferred tax
asset will be realized in the foreseeable future based on future years
operations. This determination was made without regard to recent acquisitions,
and was based in part on the achieved operating margins for SkiView as well as
the substantial growth in interactive revenue.
As a result of operating efficiencies and management's operating strategies
SkiView's net operating margin increased from 11% in the 1995 Quarter to 38% in
the 1996 Quarter. The Company anticipates that SkiView's net operating margins
will continue at a consistent level in future operating years.
The Company's interactive revenue increased from $1.6 million in the 1995
Quarter to $4 million in the 1996 Quarter, representing a 150% increase in
revenue. In addition, revenue increased from $2.9 million in the first quarter
of 1996 to $4 million in the second quarter of 1996 representing a 38%
sequential increase in revenue. Based on the above operating results and
management's expectations relating to its current business model and forecasts,
it is management's belief that it is more likely than not that the net deferred
tax asset will be realized.
Historically, the Company's net income (loss) before taxes has
approximated its taxable income (loss). The Company's deferred income taxes
result primarily from the use of accelerated depreciation methods for income
tax purposes, amortization differences relating to certain intangible assets,
net operating loss carryforwards and certain amounts accrued for book purposes
which are not deductible for income tax purposes until paid. The Company has
tax net operating loss carryforwards ("NOL's") totaling $1.7 million, which
expire as follows: 2010-$.6 million and 2011-$1.1 million.
Management believes that taxable income during the carryforward period
will be sufficient to utilize fully the NOL's before they expire. Management
anticipates that increases in taxable income during the carryforward period
will arise primarily as a result of the Company's continued growth in the
interactive industry and operating efficiencies which may be gained under the
Company's current strategies.
Discontinued Operations
The Company acquired control of the assets and assumed the liabilities of
Production Masters, Inc. ("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 $.6
million from discontinued operations for the 1995 Quarter. During the 1996
quarter the Company recorded a gain of $.2 million from discontinued operations
representing the settlement of certain contingencies relating to the PMI
business segment.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenue
Revenue for the six months ended June 30, 1995 consisted of approximately
$2.7 million of outdoor media and promotion revenue and approximately $2.8
million of interactive services revenue. Revenue for the six months ended June
30, 1996 was approximately $9.5 million, or a 71% increase over the first half
of 1995. The first half of 1996 consisted of approximately $2.6 million of
outdoor media and promotion revenue and approximately $6.9 million of
interactive services revenue. The growth in interactive services revenue from
the first half of 1995 to the first half of 1996 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 first half of 1995 and first half of
1996 was approximately $4.1 million and $6.8 million, respectively, and
consisted of approximately $2.4 million and $1.6 million, respectively, related
to the outdoor media and promotion business and approximately $1.7 million and
$5.2 million, respectively, related to interactive services.
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 first half of 1995, the Company was
developing its interactive business. During the first half of 1996, costs
increased in all areas of the interactive segment, particularly in labor and
related benefits, and occupancy costs. The Company anticipates increases in cost
of revenue to be less dramatic for the remainder of 1996. The Company has made
substantial investments in its labor force and operating infrastructure and
anticipates increased capacity and production in future quarters through higher
utilization of its labor force, some of which has already taken place in the
first half of 1996.
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 $1.4 million
during the first half of 1995 were primarily related to the continued early
development of the Company. For the first half of 1996 selling, general and
administrative expenses were approximately $3.8 million, which includes
approximately $.5 million of costs related to the GM acquisition. These
acquisition primarily consist of outside legal and accounting costs. The
increase from the first half of 1995 to the first half of 1996 was primarily due
to the
13
<PAGE> 14
growth of the Company's interactive services business and the corresponding
increase in the number of executive, selling, marketing, and administrative
personnel and the number of offices. The Company anticipates increases in
selling, general and administrative to be less dramatic for the remainder of
1996. In addition, these costs, as a percentage of revenue, should decrease as
the administrative infrastructure is substantially in place to meet management's
anticipated capacity increases from operations.
Depreciation and Amortization
Depreciation and amortization expense of approximately $.4 million during the
first half of 1995 consisted of approximately .2 million of depreciation of
equipment and approximately .2 million of amortization of organization costs and
goodwill related to acquisitions. For the first half of 1996, depreciation and
amortization expense of approximately $.7 million consisted of approximately $.5
million of depreciation and approximately $.2 million 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.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $.3 million for the first half of 1995 primarily
represents interest expense. Other income of approximately $.7 million for the
first half of 1996 primarily represents interest income which was primarily the
result of investing the proceeds from the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities was approximately $.4
million for the first half of 1995 primarily due to the Company's payment and
fulfillment of obligations acquired from the predecessor to SkiView. For the
first half of 1996, approximately $3.4 million of cash was used in operations.
Cash used in operations for the first half of 1996 largely reflects the
investment made by the Company to grow its operating infrastructure. Cash used
in investment activities was approximately $.9 million and $3.0 million for the
first half of 1995 and 1996, 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
$2 million and $48 million in the first half of 1995 and 1996, respectively. In
the first half of 1995, 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 first half of 1996 reflects the
completion of the initial public offering of common stock.
The Company believes that 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.
14
<PAGE> 15
FUTURE RESULTS
This report may be deemed to contain forward-looking statements which are
subject to risks and uncertainties that could cause actual results to vary
materially, including, but not limited to, the Company's limited operating
history and substantial operating losses, risks associated with the expansion
of the Company's business and the management of growth, dependence on key
personnel, potential fluctuations in quarterly operating results, absence of
long-term contracts, the rapidly evolving market for interactive services,
uncertain demand and market acceptance for interactive solutions, rapidly
changing technology and the competitive environment. These risks and
uncertainties are described more fully under the heading ("Risks Factors") in
the Company's Prospectus dated March 21, 1996 included in the Registration
Statement.
15
<PAGE> 16
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
10 -- Employment and non-competition agreement dated June 21,
1996 between Graphic Media and Phil Meurer incorporated by
reference herein included as exhibit 4 to the current 8-K
with respect to the Graphic Media acquisition
11 -- Computation of Net Income per Common and Common Equivalent
Share
27 -- Financial Data Schedule
(b) Current report on Form 8-K filed on July 8, 1996 reporting the
acquisition of Graphic Media on June 21, 1996.
16
<PAGE> 17
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: August 14, 1996
/s/ TERENCE M. GRAUNKE
Terence M. Graunke
Chairman, President and Chief
Executive Officer
Date: August 14, 1996
/s/ MARC PINTO
Marc Pinto
Executive Vice President,
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ----------- -------------
<S> <C> <C>
10 Employment and non-competition agreement dated
June 21, 1996 between Graphic Media and Phil
Meurer incorporated by reference herein included
as exhibit 4 to the current 8-K with respect to
the Graphic Media acquisition
11 Computation of Net Income per Common and Common
Equivalent Share
27 Financial Data Schedule
</TABLE>
18
<PAGE> 1
EXHIBIT 11
EAGLE RIVER INTERACTIVE, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1996 1996
---------- -------------
<S> <C> <C>
Net Loss ................................................. $ (168,000) $ (164,000)
---------- ------------
Shares used in computation
Common Stock shares outstanding (weighted
average) .............................................. 12,022,448 10,128,212
---------- ------------
Net loss per common and equivalent share .................. $ (0.01) $ (0.02)
========== ============
</TABLE>
19
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 42,783,000
<SECURITIES> 0
<RECEIVABLES> 2,632,000
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 47,569,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,861,000
<CURRENT-LIABILITIES> 2,868,000
<BONDS> 919,000
<COMMON> 11,000
0
0
<OTHER-SE> 53,063,000
<TOTAL-LIABILITY-AND-EQUITY> 56,861,000
<SALES> 0
<TOTAL-REVENUES> 9,490,000
<CGS> 0
<TOTAL-COSTS> 11,272,000
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> (75,000)
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> (1,117,000)
<INCOME-TAX> 755,000
<INCOME-CONTINUING> (362,000)
<DISCONTINUED> 198,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (164,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
