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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 September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28004
MASTERING, INC.
(FORMERLY 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.)
11000 N. SCOTTSDALE RD., #260
SCOTTSDALE, ARIZONA 85254
(Address of principal executive offices) (zip code)
(602) 998-7500
(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 NOVEMBER 12, 1997
----- --------------------------------
Common Stock, $.001 par value 13,700,195 shares
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MASTERING, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
as of September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of
Operations for the Three and Nine Months
Ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash
Flows for the Nine Months Ended September 30, 1997
and 1996 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 6. Exhibits 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 49,631 $ 33,995
Accounts receivable, net 2,595 1,130
Other current assets 4,769 2,704
Net current assets of discontinued operations -- 4,268
-------- --------
Total Current Assets 56,995 42,097
Property and Equipment, net 3,840 1,397
Other Assets, net 1,278 1,065
Net long-term assets of discontinued operations -- 9,789
-------- --------
Total Assets $ 62,113 $ 54,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,467 $ 898
Accrued liabilities 3,293 2,212
Other current liabilities 2,840 1,107
Current portion of note payable and capital lease
obligations 28 36
-------- --------
Total Current Liabilities 8,628 4,253
Note Payable and Capital Lease Obligations 378 181
-------- --------
9,006 4,434
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.001 par value, 30,000,000 shares authorized; 13,622,939 and
13,356,990 shares issued and outstanding as of September 30, 1997 and
December 31, 1996, respectively 14 13
Additional Paid-In Capital 56,511 54,938
Accumulated Deficit (3,418) (5,037)
-------- --------
Total Stockholders' Equity 53,107 49,914
-------- --------
Total Liabilities and Stockholders' Equity $ 62,113 $ 54,348
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets
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MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 10,876 $ 5,747 $ 29,580 $ 12,501
Operating Expenses:
Cost of revenue 3,178 1,357 8,650 3,049
Marketing and selling 4,944 2,567 12,623 6,355
General and administrative 1,391 2,322 4,835 4,375
Depreciation and amortization 275 89 646 161
---------- ---------- ----------- ----------
Total Operating Expenses 9,788 6,335 26,754 13,940
---------- ---------- ----------- ----------
Net Operating Income (Loss) 1,088 (588) 2,826 (1,439)
Other Income 429 525 1,284 1,163
Income (Loss) from Continuing
Operations Before Tax 1,517 (63) 4,110 (276)
Tax (Provision) Benefit (531) 102 (1,466) 23
---------- ----------- ----------- ----------
Income (Loss) from Continuing
Operations 986 39 2,644 (253)
Discontinued Operations (Note 6):
Loss from operations (580) (2,875) (1,858) (3,513)
Gain on disposal 833 -- 833 198
---------- ---------- ---------- ----------
Income (loss) from discontinued
Operations, net of tax 253 (2,875) (1,025) (3,315)
---------- ----------- ---------- ----------
Net Income (Loss) $ 1,239 $ (2,836) $ 1,619 $ (3,568)
========== =========== ========== ==========
Income (Loss) from Continuing
Operations Per Common and
Common Equivalent Share $ 0.07 $ (0.00) $ 0.18 $ (0.02)
=========== ========= ========== ==========
Discontinued Operations Per Common
And Common Equivalent Share $ 0.02 $ (0.22) $ (0.07) $ (0.28)
========== ========= ========= ==========
Net Income (Loss) per Common and
Common Equivalent Share $ 0.09 $ (0.21) $ 0.11 $ (0.30)
========== ========= ========== ==========
Shares Used in Computing Net
Income (Loss) Per Common and
Common Equivalent Share 14,492,000 13,201,477 14,461,803 11,921,605
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 1,619 $(3,568)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,516 1,414
Deferred tax provision (benefit) 686 (2,664)
Deferred compensation -- 168
Loss on disposal of property and equipment -- 57
Gain on sale of assets (6,709) --
Reserve for bad debts 224 30
Changes in assets and liabilities:
Accounts receivable (296) (981)
Other assets (1,661) (2,685)
Accounts payable and accrued liabilities 3,580 649
Other liabilities 1,155 0
------- -------
Net cash provided by (used in) operating activities 1,114 (7,580)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,889) (5,480)
Proceeds from sale of assets 17,500 --
Proceeds from disposition of property and equipment 74 --
Cash paid for acquisitions -- (352)
Advances to affiliates -- (53)
------- -------
Net cash provided by (used in) investing activities 13,685 (5,885)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 1,250
Repayment of line of credit -- (1,250)
Proceeds from long-term debt 490
Repayment of long-term debt (54) (3,812)
Repayment of capital leases (222) --
Proceeds from issuance of common stock 1,113 50,669
Distribution to shareholder 0 (1,144)
------- -------
Net cash provided by financing activities 837 46,203
------- -------
Net increase in cash and cash equivalents 15,636 32,738
Cash and cash equivalents, beginning of period 33,995 2,595
------- -------
Cash and cash equivalents, end of period $49,631 $35,333
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 33 $ 168
======= =======
Cash paid for taxes $ 130 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
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MASTERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Mastering, Inc. (the "Company") is an educational services company that
provides corporate training products and services. The Company was formerly
known as Eagle River Interactive, Inc., and changed its name to Mastering, Inc.
on October 15, 1997. Training products for information technology ("IT")
professionals are created, developed and marketed by Mastering Computers, Inc.,
a wholly owned subsidiary of the Company. Training products include
instructor-led seminars for Windows operating systems and other IT topics,
instructor-led Microsoft Certified Professional preparation courses, on-site
workshops, computer-based training media, interactive software, videos and
newsletters. The Company is located in Scottsdale, Arizona.
In addition, the Company had two business segments, custom interactive
development and outdoor media, which it sold during the third quarter of 1997
in separate transactions. As a result, the Company has accounted for these two
business segments as discontinued operations (Note 6). As a result of this
determination, the operations from the custom interactive development and
outdoor media business segments have been reflected as discontinued operations
in the accompanying consolidated condensed financial statements for all periods
presented. The custom interactive development business segment developed and
created custom interactive solutions that assisted United States and
international companies with corporate communications, marketing, and training.
The outdoor media business segment offered traditional outdoor media
advertising at United States ski resorts.
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 Form 10-K for
the fiscal year ended December 31, 1996.
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.
6
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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 $46,727,000. Upon the closing of the offering, all
1,342,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock
outstanding were converted into 4,026,000 shares of common stock.
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 $3,736,000.
3. CONTINGENT NOTE RECEIVABLE
In connection with the September 1995 Series A Preferred Stock offering, a
stockholder of the Company who is also an officer issued a contingent note (the
"Contingent Note") to the Company. This note transfers to the Company future
gains arising from the sale of the stockholder's 10.5% equity interest in
SeaVision, Inc. ("SeaVision"), a predecessor entity to Allin Communications
Corporation ("ACC"). The terms of the Contingent Note require the stockholder
to pay the Company any net proceeds in excess of $500,000 if and when he sells
his holdings in SeaVision.
In November 1996, ACC completed an initial public offering of its common stock.
The SeaVision stock owned by the stockholder was converted into 241,200 shares
of ACC common stock, all of which are subject to the terms of the Contingent
Note.
During the second quarter of 1997 the Contingent Note was amended. The
amendment defines procedures by which the Company can request the sale of the
ACC shares and defines procedures by which the stockholder may segregate and
retain a portion of the ACC shares having a market value of approximately
$500,000. As of September 30, 1997, the stockholder had not sold any of his
shares in ACC.
4. INCOME TAXES
During 1996, the Company recorded an income tax benefit created by 1995 and
1996 operating losses and as of December 31, 1996 had recorded a deferred tax
asset of approximately $2.3 million. During the first nine months of 1997, the
Company recorded an approximate $1.5 million tax provision from continuing
operations and an approximate $0.9 million tax benefit from discontinued
operations. In addition, during the first nine months of 1997, the Company
recorded a $0.5 million deferred tax asset resulting from the exercise of
non-qualified stock options by employees. At September 30, 1997, in accordance
with the provisions of SFAS 109, management has determined that it is more
likely than not that the tax asset of approximately $2.2 million as of
September 30, 1997 will be realized in the future based on taxable income
generated by current and future years' operations.
The Company bases its determination on the significant growth that has occurred
in its IT training business during 1996 and 1997. The Company's revenue
increased from $12.5 million for the nine months ended September 30, 1996 to
$29.6 million for the nine months ended September 30, 1997, representing a 137%
increase in revenue. In addition, the Company had a loss from continuing
operations before tax of $0.3 million for the nine months ended September 30,
1996 compared to income from continuing operations before tax of $4.1 million
for the nine months ended September 30, 1997. Based on its projections, the
Company's management believes that profitable operations will be sustained in
future periods. Based on the above 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
7
<PAGE> 8
at September 30, 1997 will be realized through the generation of future taxable
income.
Historically, the Company's net loss before taxes has approximated its taxable
loss. The Company's deferred income taxes result primarily from net operating
loss carryforwards ("NOLs"), the use of accelerated depreciation methods for
income tax purposes, amortization differences relating to certain intangible
assets, and certain amounts accrued for book purposes which are not deductible
for income tax purposes until paid. As of September 30, 1997, the Company had
tax NOLs totaling approximately $6.2 million, which expire in 2011.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs before they expire. Management anticipates
that taxable income during the carryforward period will arise primarily as a
result of the Company's continued growth in its IT training business and
operating efficiencies which may be gained under the Company's current
strategies.
5. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". The
purpose of SFAS No. 128 is to simplify the computation of earnings per share
("EPS") and to make the U.S. standard for computing EPS more compatible with
the EPS standards of other countries and with that of the International
Accounting Standards Committee. The effective date for the application of SFAS
No. 128 for both interim and annual periods is fiscal years ending after
December 15, 1997. Earlier application is not permitted. The Company does not
expect the application of SFAS No. 128 to have a material impact on its EPS
calculation.
6. DISCONTINUED OPERATIONS
On September 26, 1997 the Company sold the assets of its interactive business
segment for $13.5 million in cash and the right to future payments contingent
on the segment's future earnings. The Company announced its intent to sell its
interactive business segment on July 29, 1997. As a result of this transaction,
the Company has accounted for the interactive business segment as a
discontinued operation. The operations from the interactive business segment
have been reflected as a discontinued operation in the accompanying
consolidated condensed statements of operations for all periods presented.
Revenue for the interactive business segment for the nine months ended
September 30, 1996 and 1997 was approximately $11.1 million and $13.0 million,
respectively. Net loss for the interactive business segment for the nine months
ended September 30, 1996 was approximately $3.5 million. The net loss for the
interactive business segment for the nine months ended September 26, 1997 was
approximately $3.5 million. In addition, the Company incurred approximately
$1.5 million of costs related to the sale and organizational realignment of
the custom interactive development segment. The net loss for the period from
July 29, 1997 to September 26, 1997 was approximately $1.0 million.
8
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The Company sold the following interactive business segment assets and
liabilities:
<TABLE>
<CAPTION>
<S> <C>
Assets
Current Assets
Accounts receivable, net $ 3,705
Other current assets 2,296
-------
Total current assets 6,001
Property, Plant and Equipment, Net 5,055
Other Assets, Net 518
--------
Total 11,574
========
Liabilities
Current Liabilities
Accounts payable 768
Accrued liabilities 1,736
Other current liabilities 911
-------
Total current liabilities 3,415
Noncurrent liabilities 277
-------
Total liabilities 3,692
-------
Net assets sold $ 7,882
=======
</TABLE>
On September 16, 1997, the Company sold the assets of its outdoor media segment
for approximately $4.0 million in cash and approximately $0.6 million in notes
receivable of which the Company has established a reserve of approximately $0.2
million. The Company approved the disposition of the outdoor media business
segment including a plan for the Company to identify potential buyers on May
17, 1997. As a result, the Company has accounted for the segment as a
discontinued operation. As a result of this determination, the operations from
the outdoor media business segment have been reflected as a discontinued
operation in the accompanying consolidated condensed statements of operations
for all periods presented. Revenue for the outdoor media business segment for
the nine months ended September 30, 1996 and 1997 was approximately $2.6
million and $2.1 million, respectively. Net income for the outdoor segment for
the nine months ended September 30, 1996 was approximately $0.3 million. Net
loss for the outdoor segment for the nine months ended September 30, 1997 was
approximately $0.2 million, including approximately $0.2 million of costs
related to the sale. The net loss for the period from May 18, 1997 to September
16, 1997 was approximately $0.8 million.
9
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The Company sold the following outdoor media segment assets and liabilities:
<TABLE>
<CAPTION>
<S> <C>
Assets
Current Assets
Accounts receivable, net $ 233
Other current assets 49
-------
Total current assets 282
Property, Plant and Equipment, Net 656
Other Assets, Net 2,871
-------
Total 3,809
Liabilities
Current Liabilities
Accounts payable 10
Accrued liabilities 28
Other current liabilities 237
-------
Total 275
-------
Net assets sold $ 3,534
=======
</TABLE>
10
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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
Mastering, Inc.'s (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 and the Company's Form 10-K
for the year ended December 31, 1996.
OVERVIEW
The Company is an educational services company that provides corporate training
products and services. Training products for information technology ("IT")
professionals are created, developed and marketed by Mastering Computers, Inc.,
a wholly owned subsidiary of the Company. Training products include
instructor-led seminars on Microsoft Windows operating systems and other IT
topics, instructor-led Microsoft Certified Professional preparation courses and
on-site workshops, computer-based training media, interactive software, videos
and newsletters.
The Company's operations are subject to certain risks and uncertainties
including, among others, management's plan for rapid growth, rapidly changing
technology, and potential competitors with greater technical and marketing
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Future Results" included in the Company's Form 10-K for
the fiscal year ended December 31, 1996.
DISCONTINUED OPERATIONS
In September, 1997 the Company sold its custom interactive development and
outdoor media business segments. As a result, the operations from the custom
interactive development and outdoor media business segments have been reflected
as discontinued operations in the consolidated historical financial
information.
RESULTS OF CONTINUING OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1996
AND 1997
GENERAL
The Company generates revenue from sales of training products and services,
which consist primarily of instructor-led seminars on Microsoft Windows
operating systems and other IT topics, instructor-led Microsoft Certified
Professional preparation courses and on-site workshops, computer-based training
media, interactive software and videos and newsletters. Revenue from seminars
is generally collected in advance and deferred and is recognized upon
commencement of a seminar or of a series of seminars in a given city. In
connection with certain seminar offerings, the Company also provides its
customers with course materials in advance of a seminar, in which case it
recognizes revenue for the value of the materials upon providing the material.
Subscription revenues are deferred and recognized over the term of the related
subscription, while other product revenue is recognized when the products are
shipped.
Costs related to training seminars consist primarily of labor and related
benefits for speakers and seminar personnel, rental of seminar facilities and
the cost of materials provided to seminar participants, some of which is
deferred until seminar commencement. Costs related to computer based training
products include royalties paid to a third party licensor. 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.
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REVENUE
Revenue for the three months ended September 30, 1996 (the "1996 Quarter") was
approximately $5.7 million. Revenue for the three months ended September 30,
1997 (the "1997 Quarter") was approximately $10.9 million, or an 89% increase
over the 1996 Quarter. The growth in revenue from the 1996 Quarter to the 1997
Quarter was primarily the result of the increase in the average price of
seminars offered, the number and types of seminars provided and the number of
attendees, along with the introduction in 1997 of computer-based training
products. The number of customers trained through seminars and computer-based
training media increased from approximately 18,400 in the 1996 Quarter to
approximately 25,400 in the 1997 Quarter.
COST OF REVENUE
The Company's cost of revenue for the 1996 Quarter was approximately $1.4
million. The Company's cost of revenue for the 1997 Quarter was approximately
$3.2 million. During 1997, costs increased for labor and related benefits,
seminar facilities and seminar travel primarily due to the continued growth of
the Company's business and corresponding increase in personnel.
MARKETING AND SELLING
Marketing and selling costs are primarily comprised of salaries, commissions
and benefits, travel and direct mail costs. Marketing and selling expenses of
approximately $2.6 million for the 1996 Quarter were primarily related to the
continued development of the Company. For the 1997 Quarter marketing and
selling expenses were approximately $4.9 million. The increase from 1996 to
1997 was primarily due to the continued growth of the Company's telesales
division and the corresponding increase in marketing and selling personnel and
costs associated with direct mail campaigns. Marketing and selling headcount
increased from 130 in the 1996 Quarter to 277 in the 1997 Quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include costs for the accounting, legal,
information systems, investor relations and human resource functions, as well
as costs related to some senior executives of the Company. These costs are
primarily comprised of salaries and benefits, travel and occupancy costs.
General and administrative expenses were approximately $2.3 million during the
1996 Quarter, including approximately $0.7 million of costs related to the
Mastering Computers merger and related organizational realignment. For the 1997
Quarter general and administrative expenses were approximately $1.4 million.
DEPRECIATION
Depreciation and amortization was approximately $0.1 million during the 1996
Quarter. For the 1997 Quarter, depreciation and amortization expense was
approximately $0.3 million. The increase in depreciation and amortization
expense reflects the significant investment the Company has made in its
computer equipment, telephone systems and office equipment over the past year.
OTHER INCOME
Interest income and expense are included in other income. Other income of
approximately $0.5 million for the 1996 Quarter and approximately $0.4 million
for the 1997 Quarter primarily represents interest income which was the result
of investing the proceeds from the Company's initial public offering.
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RESULTS OF CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997
REVENUE
Revenue for the nine months ended September 30, 1996 was approximately $12.5
million. Revenue for the nine months ended September 30, 1997 was approximately
$29.6 million, or a 137% increase over the nine months ended September 30,
1996. The growth in training products revenue from the first nine months of
1996 to the first nine months of 1997 was primarily the result of the increase
in the average price of seminars offered, the number and types of seminars
provided and the number of attendees. The number of customers trained through
seminars and computer-based training media increased from approximately 47,000
in the first nine months of 1996 to 73,000 in the first nine months of 1997.
COST OF REVENUE
The Company's cost of revenue for the first nine months of 1996 was
approximately $3.0 million. The Company's cost of revenue for the first nine
months of 1997 was approximately $8.7 million. During 1997, costs increased
particularly in labor and related benefits, seminar facilities and seminar
travel primarily due to the continued growth of the Company's business and
corresponding increase in personnel.
MARKETING AND SELLING
Marketing and selling costs are primarily comprised of salaries, commissions
and benefits, travel and direct mail costs. Marketing and selling expenses
of approximately $6.4 million for the first nine months of 1996 were primarily
related to the continued development of the Company. For the first nine months
of 1997 marketing and selling expenses were approximately $12.6 million. The
increase from 1996 to 1997 was primarily due to the continued growth of the
Company's telesales division and the corresponding increase in personnel and
for costs associated with direct mail campaigns.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include costs for the accounting, legal,
information systems, customer service and human resource functions, as well as
costs related to some senior executives of the Company. These costs are
primarily comprised of salaries and benefits, travel and occupancy costs. For
the nine months ended September 30, 1996, general and administrative expenses
were approximately $4.4 million including approximately $0.7 million of costs
related to the Mastering Computers merger and related organizational
realignment.
During the first nine months of 1997, general and administrative expenses were
approximately $4.8 million. The increase in general and administrative expenses
from the first nine months of 1996 to the first nine months of 1997 was
primarily due to the growth of the Company's business and the corresponding
increase in the number of executive and administrative personnel and the number
of offices.
DEPRECIATION
Depreciation and amortization expense was approximately $0.2 million during the
first nine months of 1996. For the first nine months of 1997, depreciation and
amortization expense was approximately $0.6 million. The increase in
depreciation and amortization expense reflects the significant investment the
Company has made in its computer equipment, telephone systems and office
equipment over the past year.
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OTHER INCOME
Interest income and expense are included in other income. Other income of
approximately $1.2 million for the first nine months of 1996 and approximately
$1.3 million for the first nine months of 1997 primarily represents interest
income which was the result of investing the proceeds from the Company's
initial public offering.
DISCONTINUED OPERATIONS
On September 26, 1997, the Company sold the assets of its interactive business
segment for $13.5 million in cash and the right to future payments contingent
on the segment's future earnings. As a result, the operations from the
interactive segment have been accounted for as a discontinued operation. The
custom interactive development business segment developed and created
interactive solutions that assist companies with corporate communications.
Revenue for the interactive business segment for the nine months ended
September 30, 1996 and 1997 was approximately $11.1 million and $13.0 million,
respectively. Net loss for the interactive business segment for the nine months
ended September 30, 1996 and 1997 was approximately $3.5 million and $5.0
million, respectively. The net loss for the nine months ended September 30,
1996 includes approximately $.5 million of costs relating to the Graphic Media,
Inc. merger. The net loss for the nine months ended September 30, 1997 includes
approximately $1.5 million of costs related to the sale and organizational
realignment of the custom interactive development segment.
On September 16, 1997, the Company sold the assets of its outdoor media segment
for approximately $4.0 million in cash and approximately $0.6 million in notes
receivable of which the Company has established a reserve of approximately $0.2
million. As a result, the operations from the outdoor media segment have been
accounted for as a discontinued operation. The outdoor media business segment
offers traditional outdoor media advertising at United States ski resorts.
Revenue for the outdoor media business segment for the nine months ended
September 30, 1996 and 1997 was approximately $2.6 million and $2.1 million,
respectively. Net income for the outdoor segment for the nine months ended
September 30, 1996 was approximately $0.3 million. Net loss for the outdoor
segment for the nine months ended September 30, 1997 was approximately $0.2
million, including approximately $0.2 million of costs related to the sale.
INCOME TAXES
During 1996, the Company recorded an income tax benefit created by 1995 and
1996 operating losses and as of December 31, 1996 had recorded a deferred tax
asset of approximately $2.3 million. During the first nine months of 1997, the
Company recorded an approximate $1.5 million tax provision from continuing
operations and an approximate $0.9 million tax benefit from discontinued
operations. In addition, during the first nine months of 1997, the Company
recorded a $0.5 million deferred tax asset resulting from the exercise of
non-qualified stock options by employees. At September 30, 1997, in accordance
with the provisions of SFAS 109, management has determined that it is more
likely than not that the deferred tax asset of approximately $2.2 million will
be realized in the future based on taxable income generated by current and
future years operations.
The Company bases its determination on the significant growth that has occurred
in its IT training business during 1996 and 1997. The Company's revenue from
continuing operations increased from $12.5 million for the nine months ended
September 30, 1996 to $29.6 million for the nine months ended September 30,
1997, representing a 137% increase in revenue. In addition, the Company had
loss from continuing operations before tax of $0.3 million for the nine months
ended September 30, 1996 compared to income from continuing operations before
tax of $4.1 million for the nine months ended September 30, 1997. Based on its
projections, the Company's management believes that profitable operations will
be sustained in future periods. Based on the above results and management's
expectations relating to its current business model and
14
<PAGE> 15
forecasts, it is management's belief that it is more likely than not that the
net deferred tax asset at September 30, 1997 will be realized through the
generation of future taxable income.
Historically, the Company's net loss before taxes has approximated its taxable
loss. The Company's deferred income taxes result primarily from net operating
loss carryforwards ("NOLs"), the use of accelerated depreciation methods for
income tax purposes, amortization differences relating to certain intangible
assets, and certain amounts accrued for book purposes which are not deductible
for income tax purposes until paid. The Company has tax NOLs totaling
approximately $6.2 million, which expire in 2011.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs 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 its IT training
business and operating efficiencies which may be gained under the Company's
current strategies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by the Company's operating activities was approximately $7.6
million for the first nine months of 1996. For the first nine months of 1997,
approximately $1.1 million of cash was provided by operations. Cash used in
investment activities was approximately $5.9 million for the first nine months
of 1996 related primarily to purchases of property and equipment and to the
staffing growth and office space expansion. Cash provided by investment
activities was approximately $13.7 million for the first nine months of 1997,
related primarily to the sale of the outdoor media and interactive business
segment assets. Cash flows from financing activities were approximately $46.2
million and $.8 million in the first nine months of 1996 and the first nine
months of 1997, respectively. The cash inflow from financing activities for the
first nine months of 1996 reflects the completion of the Company's initial
public offering of common stock. Discontinued operations have not been
segregated in the cash flow information included in the consolidated historical
financial information.
As of September 30, 1997, the Company had approximately $49.6 million of cash
and cash equivalents which the Company believes will be sufficient to meet its
currently anticipated cash needs for working capital, capital expenditures and
funds required to make acquisitions, if any, for the next twelve months and the
foreseeable future. During 1997, the Company entered into a lease for
approximately 54,000 square feet in a building being constructed in Scottsdale,
Arizona. This new space will allow the Company to consolidate its existing
staff currently located in two buildings in Scottsdale to one new location and
will allow the Company to expand its staff as necessary. The Company expects to
complete its move by the first quarter of 1998. In October 1997, the Company
purchased a parcel of land for approximately $1.4 million located adjacent to
the new building. In addition, the Company expects to purchase approximately
$4.5 million of software and equipment in the fourth quarter of 1997 and first
and second quarters of 1998 relating to a new sales force automation system.
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 differ
materially from those anticipated, including, but not limited to, 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 need to anticipate
changes in technology to create training products on a timely basis,
competition from other companies with substantially greater financial,
technical and other resources, relatively low barriers to entry, the growth in
CBT courses offered by others, the need to restrict unauthorized use of the
Company's training products and protect the Company's proprietary rights, and
the risk that states may seek to regulate the Company's training products as
educational programs. These risks and uncertainties are described more fully
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of
15
<PAGE> 16
Operations - Future Results" in the Company's Form 10-K for the year ended
December 31, 1996.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(A) Exhibits
11 -- Statement Regarding Computation of Per Share Earnings
27 -- Financial Data Schedule
17
<PAGE> 18
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: November 14, 1997
/s/ TERENCE M. GRAUNKE
-----------------------------
Terence M. Graunke
Chairman, President and Chief
Executive Officer
Date: November 14, 1997
/s/ MARC PINTO
-----------------------------
Marc Pinto
Executive Vice President,
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF PRO FORMA
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE
<TABLE>
<CAPTION>
AVERAGE SHARES
OUTSTANDING
FOR THE NINE MONTHS
SHARES ENDED SEPTEMBER 30,
ISSUED ISSUE DATE 1997
------ ---------- ----
<S> <C> <C> <C>
Common Stock 13,356,990 (a) 13,356,990
Common Stock 232,603 (b) 134,211
Common Stock 33,178 (c) 23,528
Options N/A (d) 947,074
----------
14,461,803
----------
</TABLE>
METHOD USED FOR CALCULATION
(a) Represents Common Stock issued and outstanding as of December 31, 1996.
(b) Shares issued upon exercise of stock options at various dates
throughout 1997.
(c) Shares issued pursuant to the Employee Stock Purchase Plan at various
dates throughout 1997.
(d) Common stock equivalent shares calculated using the treasury method.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCED TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 49,631,000
<SECURITIES> 0
<RECEIVABLES> 2,793,000
<ALLOWANCES> (198,000)
<INVENTORY> 0
<CURRENT-ASSETS> 56,995,000
<PP&E> 4,955,000
<DEPRECIATION> (1,115,000)
<TOTAL-ASSETS> 62,113,000
<CURRENT-LIABILITIES> 8,628,000
<BONDS> 0
0
0
<COMMON> 14,000
<OTHER-SE> 53,095,000
<TOTAL-LIABILITY-AND-EQUITY> 62,113,000
<SALES> 0
<TOTAL-REVENUES> 29,560,000
<CGS> 0
<TOTAL-COSTS> 26,754,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> 4,110,000
<INCOME-TAX> 1,466,000
<INCOME-CONTINUING> 2,644,000
<DISCONTINUED> (1,025,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,619,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
