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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 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 I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
1060 WEST BEAVER CREEK BOULEVARD
AVON, COLORADO 81620
(Address of principal executive offices) (zip code)
(970) 845-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Stock Purchase Rights
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 and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of February 20, 1997 was $73,349,952 based
upon the closing price of $13.75 per share as reported on the Nasdaq National
Market for that date.
As of February 20, 1997, there were 13,456,722 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1996. Portions of such Proxy Statement are incorporated by reference in PART III
of this report.
================================================================================
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EAGLE RIVER INTERACTIVE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 4a. Executive Officers of the Registrant........................ 7
PART II
Item 5. Market for the Company's Common Stock and Related
Shareholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure......................... 16
PART III
Item 10. Directors and Executive Officers............................ 17
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
Item 13. Certain Relationships and Related Transactions.............. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 18
............................................................
Signatures 20
</TABLE>
This report includes product names and other trade names,
trademarks and service names of Eagle River Interactive, Inc. and
its subsidiaries and of other organizations.
<PAGE> 3
PART I
Certain statements contained in this report regarding matters that are not
historical facts, such as anticipated financial performance, business prospects,
technological developments, new products, the sales and marketing program of
Eagle River Interactive, Inc. (which, together with its subsidiaries is referred
to as the "Company") and similar matters, may be deemed to be "forward-looking"
statements. A variety of factors may cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. These
factors include, but are not limited to, the risks and uncertainties described
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Future Results."
ITEM 1. BUSINESS
The Company is a business services company that provides corporate training
products for information technology (IT) professionals, and creates and develops
interactive marketing, training, and communications solutions. The Company
provides both product and custom solutions. Mastering Computers, Inc.
("Mastering Computers"), a wholly owned subsidiary of the Company, develops and
markets product solutions. These product solutions consist of corporate training
primarily for IT professionals, including leader-led Windows NT, Windows 95 and
TCP/IP operating system training seminars as well as Microsoft Certified
Professional preparation courses and on-site workshops, computer-based training
media, interactive software, videos and newsletters. Custom solutions are
developed by the Company under 3 to 9 month contracts and are delivered using
the Internet and World Wide Web, proprietary intranets, informational and
transactional kiosks, CD-ROMs, and other interactive medium. The Company also
sells traditional outdoor media advertising at ski resorts in the United States
through its SkiView subsidiary.
BUSINESS COMBINATIONS
During the year ended December 31, 1996, the Company completed three
business combinations, two in the custom solutions area and one in the product
solutions area.
In June 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 the Company's Common Stock. Prior to the conversion, a
dissenting GM shareholder was paid approximately $352,000 as consideration for
her approximate 3% interest in GM. In connection with the merger, the Company
assumed and exchanged all options to purchase GM Common Stock for options to
purchase 141,041 shares of the Company's Common Stock. The merger was accounted
for as a pooling of interests.
In August 1996, the Company completed a merger with Mastering Computers.
Pursuant to the merger, all outstanding Mastering Computers shares were
converted into 1,175,000 shares of the Company's Common Stock. The Company also
assumed and exchanged all options to purchase Mastering Computers Common Stock
for options to purchase 191,280 shares of the Company's Common Stock. The merger
was accounted for as a pooling of interests. Mastering Computers develops and
markets the Company's corporate training products, including leader-led seminars
and computer-based training.
In November 1996, SRC Localisation ("SRC"), a 99% owned subsidiary of the
Company located in Paris, France, bought the assets of Groupe SRC in a cash
transaction for approximately $242,000. The transaction was accounted for as a
purchase. SRC specializes in multimedia localization and is part of the European
Localisation Group, an alliance of localization companies with offices located
in France, Germany, the United Kingdom, Spain, and Italy. Localization involves
the translation of a product for a given country or culture. Localization
services include adaptation, artistic and technical modifications, testing and
product marketing. SRC is the Company's Paris office.
SERVICES AND PRODUCTS
The Company has three revenue sources -- Product Solutions, Custom
Solutions and Outdoor Media Advertising. See Note 18 of Notes to Consolidated
Financial Statements.
<PAGE> 4
Product Solutions
Mastering Computers, a wholly owned subsidiary of the Company, develops and
markets corporate training product solutions primarily for IT professionals,
including leader-led Windows NT, Windows 95 and TCP/IP operating system training
seminars as well as Microsoft Certified Professional preparation courses and
on-site workshops, computer-based training media, interactive software, videos
and newsletters. The Company's training products are grouped into two main
product lines: leader-led training and computer-based training.
Leader-led Training
The Company develops and markets leader-led seminars, primarily for
Microsoft operating systems, for IT professionals. The Company offers one-day
and two-day operating system training seminars as well as four-day Microsoft
Certified Professional preparation courses and on-site workshops, which it hosts
in cities across the United States. There is no fixed overhead associated with
the seminars, which are held in rented facilities. Depending on the city and the
course, seminars can be attended by over 1,500 IT professionals. The seminar
products are standardized, with the same courses being offered nationally.
Seminars are taught by instructors who are employees of the Company. When
not engaged in teaching a seminar, instructors spend their time developing the
course curriculum. Mastering Computers is a Microsoft Solutions Provider, which
gives the Company early access to alpha and beta versions of selected new and
updated Microsoft software. Course content and the seminars themselves continue
to evolve due to system software upgrades and enhancements and the introduction
to new software, giving Mastering Computers a recurring revenue stream as IT
professionals continue to take courses to stay updated on the technology they
support.
Computer-based Training
The Company is currently converting the content of Mastering Computers'
leader-led courses into interactive computer-based training (CBT) titles in
CD-ROM format which it intends to sell as a complement to the leader-led courses
and as stand-alone products.
On December 30, 1996, the Company signed a licensing agreement with NETG, a
division of National Education Group, to license NETG's CBT development engine
and over 100 of that company's existing CBT titles which cover a broad range of
information technologies. The agreement also gave the Company license to an
additional 300 titles NETG expects to introduce in the eighteen months following
the signing of the agreement. The Company expects to add content and enhance the
user interface of the licensed titles. The titles will be private-labeled under
the "Mastering Computers" brand name. Sales of titles began in the first quarter
of 1997.
The Company refunds a certain percentage of seminar fees due to
cancellations. In the past, the Company has been able to retain a certain
percentage of refunds by offering a series of video tapes in lieu of a refund
for the unattended seminar. The Company expects to increase the percentage of
refunds saved by offering CBT titles in addition to video tape. In addition, the
Company is entering into license agreements with customers by utilizing a
library rental strategy; these agreements provide customers access to the
Company's CBT library of titles for one, two or three years. This approach
offers customers flexible training solutions as well as the ability to tailor
its IT training to its specific needs.
Custom Solutions
The Company develops interactive marketing, training, and communications
solutions for Fortune 1000 companies. Custom solutions are delivered using the
Internet and World Wide Web, proprietary intranets, informational and
transactional kiosks, CD-ROMs, and other interactive media.
With the proliferation of multimedia PCs, the adoption of high bandwidth
computer networks and the commercialization of the Internet, companies are using
interactive media such as the World Wide Web,
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proprietary intranets, information and transaction kiosks, CD-ROMs and
proprietary online services to achieve specific business goals.
Companies are currently trying to measure the opportunity and determine a
return on investment from the use of new interactive media. The area of
electronic commerce alone, with its opportunities to increase distribution while
decreasing costs, offers companies incentive to explore an interactive channel
of distribution. Given that companies are aware of the opportunity the use of
new media may offer but unsure of how to use digital media and emerging
technologies effectively, the strategic ability to blend a creative marketing
and design approach with an effective use of technology has become critical to
the Company's success.
The Company offers a full range of services to support customers' new
interactive media initiatives. Professional services include consulting
services, the custom development of interactive solutions using either a
Web-based or disc-based medium, operation and maintenance of the interactive
solution, and the outsourcing of customers' new media activities to the Company.
Custom interactive development requires a combination of strategic,
creative and technical skills. The Company believes that companies competing to
develop custom interactive solutions generally are strong in only two of three
areas. Advertising agencies and design shops that provide custom interactive
development are typically strong in creative resources, have some strategic
capabilities and are relatively weak in their deployment of technology. In
contrast, system integrators which are also competing in this market space offer
strengths in strategic analysis and technology know-how. However, system
integrators find it difficult to cultivate creative resources within their more
structured environments.
A majority of the Company's interactive marketing services have been billed
on a fixed-fee basis based on the customer's defined scope of work. Unless the
scope of work changes, billings will equal the fixed-fee budget. Because the
Company's projects generally are completed in a relatively short period of time,
the Company has not experienced significant backlog. For an increasing number of
projects, the Company bills on a time-and-materials basis pursuant to which the
Company is paid for hours of service (based on standard billing rates) and
outside costs with a mark up. Project budget guidelines and "not to exceed"
parameters are agreed upon in advance of beginning work. In addition, the
Company occasionally enters into retainer fee arrangements with customers
pursuant to which the Company and the customer define the scope of work on an
annual basis and establish staffing and costs based on an estimate of the scope
of work. This type of agreement generally results in equal monthly fees.
By focusing solely on the development of interactive solutions, the Company
generally avoids category exclusivity and the exclusive relationships that
constrain advertising agencies and integrated marketing communications firms.
The Company's ability to work with multiple competing customers within the same
industry allows the Company to aggressively target prospective customers in
vertical markets more effectively.
Outdoor Media
The Company's SkiView subsidiary is a media network offering outdoor
advertising at approximately 125 ski resorts in the United States. The SkiView
network includes lift towers, skier transit systems, information centers, bar
boards and time and message centers. In addition to offering outdoor
advertising, the Company works with its customers to develop customized
promotions and events. In 1996, approximately 10% of the Company's revenue was
generated by SkiView. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
CLIENTS
In 1996, no customer accounted for 10% or more of the Company's revenue.
The five largest customers, in total, accounted for 11% of the Company's 1996
revenue.
Product Solutions
Mastering Computers has provided services for numerous Fortune 500 and
other small and mid-size businesses, universities, and the U.S. government.
During 1996, Mastering Computers trained approximately
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70,000 people. In 1996, the top fifteen organizations with the most IT
professionals attending Mastering Computers seminars were:
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AT&T Lockheed Martin
Blue Cross Blue Shield Los Alamos Labs
Boeing Company MCI Communications Corporation
Eastman Kodak Company Science Application International
Corporation
Electronic Data Systems Sprint
General Electric Company U.S. Navy
GTE Unisys
Hewlett-Packard Company
</TABLE>
Custom Solutions
The Company has developed custom interactive solutions for Fortune 1000 and
other companies that require strategic advice and interactive business
solutions. Customer relationships involve both services delivered directly to
customers and projects performed indirectly through partners, such as system
integrators and advertising agencies.
The Company has created custom interactive solutions for customers
including:
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<S> <C>
Allstate Insurance Hewlett-Packard Company
American Express Co. IBM Corporation
Apple Computer, Inc. Information Access Company, Inc.
Arthur Andersen LLP Intel Corporation
A.T. Kearney Intuit, Inc.
Baker Audio/Telecom Kaiser Permanente
Cisco Systems, Inc. Motorola
Compaq Computer Corp. Nicholas-Applegate
CompUSA, Inc. National Processing Company
Corporate Express Packard Bell NEC, Inc.
Disney Online Paging Network, Inc
Disneyland Paris Pfizer, Inc.
Eastman Kodak Company Pioneer Electronics (USA) Inc.
Electronic Data Systems, Inc. Saatchi & Saatchi Pacific (on behalf of
FirstCom Music Celebrity Cruises and Toyota Motor Corp.)
Frankel & Company Sega
(on behalf of McDonald's Corporation) Sony Development, a division of Sony
Retail
Griffin Bacal, Inc. Entertainment
(on behalf of Sharp Electronics Corp.) Sun Microsystems, Inc.
J. Walter Thompson TCI Internet Services
(on behalf of Ford Motor Company) Toshiba America Information Systems, Inc.
</TABLE>
SkiView
SkiView's four largest customers in 1996, ranked by revenue, were General
Motors (Chevrolet, GM Card, GMAC), AT&T, Heublein, Inc. (Smirnoff and Finlandia)
and The Pillsbury Company (Progresso Soups).
SALES AND MARKETING
Product Solutions
At the end of 1996, Mastering Computers employed 177 people which were
engaged in sales related activities, up from 66 at the beginning of the year.
Mastering Computers' salesforce sells all of the Company's
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training products and is also used to identify sales leads for the Company's
custom solutions to Fortune 1000 prospects.
The Mastering Computers sales effort is aided by a database of information
related to over 1.1 million IT professionals. In 1996, the salesforce called
over 4 million IT professionals.
The advance selling of seminars gives the Company visibility on potential
revenue. In addition, advance selling allows the Company to perform market
research and allows the salesforce to test new products and to gauge customer
demands prior to actual product introduction.
Custom Solutions
The Company's sales and marketing efforts for custom solutions are
organized into new business development and account management functions. The
Company develops new business opportunities through a dedicated sales force
which identifies potential customers and pursues interactive marketing
assignments with these customers. The Company believes that a systematic
proactive selling approach conducted through its dedicated sales force
distinguishes it from the traditional advertising agency approach and from many
of its competitors.
The Company uses telesales resources from its subsidiary, Mastering
Computers, to qualify new business leads. Once qualified interest is established
by telesales, a sales executive pursues the business development process with
the prospective customer.
The Company, at times, partners with a system integrator to design and
develop an interactive business solution. The Company may pursue business
jointly with a partner, subcontract a percentage of a project to such a partner,
or be contracted itself by a partner. The Company is continuing to develop
system integration skills in house.
Once the Company is engaged in a project, the Company's account management
staff seeks to ensure that the customer's needs are met and high quality
products are delivered on time and on budget. The account management staff also
identifies and pursues opportunities with existing clients for additional
projects.
The Company seeks to develop extensive knowledge of individual industries
that lend themselves to interactive business solutions and, consistent with its
contractual obligations, apply this knowledge to provide its services to various
customers within those industries. The Company believes that this strategy
differs from those of many of the Company's competitors who are seeking "agency
of record" relationships that generally mandate an exclusive relationship within
a customer's industry.
In the course of developing customized solutions for certain customers, the
Company may gain technical know-how that can generally be retained and applied
in other development efforts. This knowledge is recorded and preserved by the
Company in order to facilitate access by the entire production staff,
potentially reducing future development costs.
COMPETITION
Product Solutions
The long duration, inflexible structure, and high cost of traditional
post-secondary education does not effectively address the growing need to
quickly educate IT professionals. In response, a large number of IT training
programs are now offered by hardware/software vendors, systems integrators,
internal training departments, technology/vocational schools, and independent
trainers. Although the market remains fragmented, barriers to entry are becoming
evident, particularly in computer-based training where proprietary technologies
and specialized knowledge are critical in CBT title development.
Custom Solutions
The interactive marketing industry is in the early stages of development.
The Company faces competition from a number of sources, no one of which the
Company believes is dominant, including small multimedia
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firms, advertising agencies, direct and integrated marketing communication firms
and media production companies having internal technological expertise in the
design and implementation of interactive marketing products.
The Company believes that the principal competitive factors in the
interactive marketing category are the ability to understand the customer's
business and develop strategically sound interactive solutions, communicate
solutions in layman's terms, demonstrate breadth and depth of technical
expertise, present unique creative concepts, develop strong customer
relationships and produce high quality products. The Company believes that it
competes favorably with respect to each of these factors.
EMPLOYEES
As of December 31, 1996, the Company had a total of 463 employees,
including 230 engaged in product solutions activities, 168 engaged in custom
solutions and related support activities, 49 engaged in administrative related
activities and 16 engaged in SkiView operations.
Of the 230 product solution employees, 177 were engaged in sales
activities, 34 were engaged in operations related activities, 7 were engaged in
support related activities and 12 in CBT related activities. Of the 168 custom
solutions employees, 120 were engaged in delivery of interactive custom
solutions, 36 were engaged in sales and account service activities and 12 were
engaged in support related activities.
The Company expects hiring in 1997 to continue in connection with its
continued expansion of its businesses. The Company believes that its future
success will depend in large part upon its ability to attract and retain highly
skilled creative, technical, and strategic sales and marketing personnel and
instructors for its product solutions. Competition for such personnel is
intense. The Company provides stock options to attract and retain such
personnel.
ITEM 2. PROPERTIES
The Company's executive offices are located in Avon, Colorado and occupy
approximately 8,400 square feet. The Company leases these facilities under a
lease that expires in February 1998. In addition, the Company leases an
aggregate of 71,443 square feet in the following locations: Chicago, Illinois;
Dallas, Texas; Los Angeles, California; Mountain View, California; New York, New
York; Portland, Oregon; Salt Lake City, Utah; and Scottsdale, Arizona. The
Company's custom solutions activities are conducted primarily in the Company's
Avon, Dallas, Mountain View, New York and Portland facilities. The Company's
product solutions activities are conducted primarily in the Company's Scottsdale
and Portland offices. The other leased facilities are devoted primarily to
custom solutions sales activities.
In addition, the Company owns a 2,880 square foot production facility in
Naples, New York which is used for production activities relating to SkiView's
operations.
The Company has entered into a letter of intent to lease 54,000 square feet
in Scottsdale. This would allow the Company to move its existing staff located
in Scottsdale to a new location upon the expiration of its current lease and
allow the Company to expand its staff as necessary. The Company has also entered
into a lease in Chicago which will allow the Company to consolidate its Chicago
based administrative staff.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the Company's fiscal year ended December 31, 1996.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
Terence M. Graunke..................... 38 Chairman of the Board, President and Chief
Executive Officer
Kevin Rowe............................. 37 Executive Vice President, General Manager,
Custom Solutions Division
Thomas R. Graunke...................... 31 Executive Vice President, General Manager,
Product Solutions Division
Marc Pinto............................. 36 Executive Vice President, Chief Financial
Officer
</TABLE>
Terence M. Graunke founded Eagle River Communications, Inc., the
predecessor to the Company, in May 1994 and has served as Chairman of the Board,
President and Chief Executive Officer since that time. From December 1992 to May
1994, Mr. Graunke was President and Chief Executive Officer of Rapp Collins
Communications, a direct response advertising agency, and of DDB
Needham -- FOCUS GTE, a full service agency dedicated to GTE. From December 1990
to December 1992, Mr. Graunke served as Chairman of the Board, President and
Chief Executive Officer of US Communications Corporation, a marketing
communications agency which was sold in 1992 to Omnicom. Throughout the 1980s,
Mr. Graunke managed Unispond, a direct marketing agency, where he served as
Chief Executive Officer from 1986 to 1989. In 1990, he acquired Unispond, which
later merged operations with US Communications, a sales promotion company, to
form a marketing communications agency. The combined entity was renamed US
Communications. Mr. Graunke is also a director of U.S. Robotics Corporation. Mr.
Graunke is the brother of Thomas R. Graunke.
Kevin Rowe has been Executive Vice President, General Manager, Custom
Solutions Division of the Company since December 1996. Prior to joining the
Company, he was Vice President and General Manager of MCI Systemhouse's Midwest
Region geographic business unit, a division of MCI Communications. Kevin spent
five years at MCI Systemhouse, which he joined as Director of Marketing & Sales.
Prior to joining MCI Systemhouse, Kevin was an associate partner with Andersen
Consulting Kevin has an MBA from Northwestern's Kellogg School and a BA from the
University of Illinois.
Thomas R. Graunke has been Executive Vice President, General Manager,
Product Solutions Division of the Company since August 1996. Prior to joining
the Company he was President of Mastering Computers, Inc., a leader-led Windows
training company, since its inception in 1988. In July 1996, Mastering Computers
merged with Eagle River Interactive to broaden its opportunity to include
computer-based training. Mr. Graunke is the brother of Terence M. Graunke.
Marc Pinto has been Executive Vice President, Chief Financial Officer of
the Company since December 1995. From July 1983 to December 1995, Mr. Pinto was
associated with Arthur Andersen LLP, where he served as a Partner from September
1995 until December 1995, as a Senior Tax Manager from September 1991 until
September 1995 and as a Tax Manager from July 1987 until September 1991.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ERIV" since March 21, 1996, the date of the Company's initial
public offering. The table below sets forth for the periods indicated the range
of high and low closing sale prices for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
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Fiscal Year Ended December 31, 1996
First Quarter (Initial Public Offering March 21, 1996).... $14 3/4 $13
Second Quarter............................................ $22 1/8 $13 1/8
Third Quarter............................................. $19 1/2 $ 8 5/8
Fourth Quarter............................................ $10 3/4 $ 5 1/2
</TABLE>
As of February 20, 1997, there were 166 holders of record of the Company's
Common Stock.
The Company has never paid a cash dividend on its Common Stock. The Company
currently intends to retain available funds from earnings, if any, for future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected financial data for the Company:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,*
------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................................... $8,326 $8,400 $11,182 $20,785 $ 39,264
Operating expenses................................ $8,233 $8,800 $11,616 $22,814 $ 46,200
Net income (loss) from continuing operations...... $ 55 $ (421) $ (548) $(2,629) $ (3,090)
Net income (loss) from continuing operations per
share(a)........................................ $ (.25)
==========
Weighted average shares outstanding at year end
(a)............................................. 12,285,782
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,*
--------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total assets..................................... $1,911 $2,938 $2,949 $13,653 $58,270
Total long-term liabilities...................... $ 103 $ 214 $1,555 $ 3,153 $ 804
Total stockholders' equity....................... $ 670 $ (4) $ (705) $(3,542) $49,914
</TABLE>
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* All historical data has been restated to reflect pooling of interests
business combinations which occurred in 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
(a) Historical income (loss) from continuing operations per share is not
presented for periods prior to 1996 as it is not considered relevant given
the Company's initial public offering in 1996, which resulted in significant
changes to the Company's capital structure.
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The following table sets forth selected financial data of SkiView, Inc.,
the predecessor entity (the "Predecessor Business") that operated the business
currently conducted by SkiView, for each of the four fiscal years ended April
30, 1994, and for the eight months ended December 31, 1994. The selected
financial data of the Predecessor Business for the fiscal years ended April 30,
1993 and 1994, and for the eight months ended December 31, 1994 have been
derived from the Predecessor Business' financial statements which appear
elsewhere in this report.
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS(1)
------------------------------------------------
EIGHT
YEARS ENDED APRIL 30, MONTHS ENDED
--------------------------------- DECEMBER 31,
1991 1992 1993 1994 1994
------ ------ ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue............................ $3,026 $3,677 $3,510 $2,811 $ 987
Operating expenses................. $2,997 $3,279 $3,378 $3,037 $1,800
Net loss........................... $ (747) $ (295) $ (438) $ (406) $ (369)
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1994
------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.................... $ 2,416 $ 2,798 $ 2,844 $ 2,366 $ 3,745
Total long-term obligations
(current and non-current
portions..................... $ 7,591 $ 8,083 $ 8,631 $ 8,775 $ 8,310
Total stockholders' (deficit)... $(5,381) $(5,678) $(6,116) $(6,522) $(6,891)
</TABLE>
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(1) Effective January 1, 1995, the Company acquired the assets and assumed
certain liabilities of the Predecessor Business. Due to the significance of
the SkiView business to the Company's operations, the financial statements
of the Predecessor Business have been included in this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
Overview
The Company is a business services company that provides corporate training
products for IT professionals and creates and develops interactive marketing,
training, and communications solutions. The Company develops both product and
custom solutions. Mastering Computers, a wholly owned subsidiary of the Company,
develops and markets product solutions. These solutions consist of corporate
training primarily for IT professionals, including leader-led Windows NT,
Windows 95 and TCP/IP operating system training seminars as well as Microsoft
Certified Professional preparation courses and on-site workshops, computer-based
training media, interactive software, videos and newsletters. Custom solutions
are delivered using the Internet and World Wide Web, proprietary intranets,
informational and transactional kiosks, CD-ROMs, and other interactive medium.
The Company also sells traditional outdoor media advertising at ski resorts in
the United States through its SkiView subsidiary. See "Business".
Mergers
In June 1996, the Company completed a merger with GM. Pursuant to the
merger, all outstanding GM shares were converted into 550,000 shares of the
Company's Common Stock. The Company also assumed and exchanged all options to
purchase GM Common Stock for options to purchase 141,041 shares of the Company's
Common Stock.
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<PAGE> 12
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 Company's
historical consolidated financial information has been restated as though ERI
and GM had been combined from inception.
In August 1996, the Company completed a merger with Mastering Computers.
Pursuant to the merger, all outstanding Mastering Computers shares were
exchanged for 1,175,000 shares of the Company's Common Stock. The Company also
assumed and exchanged all options to purchase Mastering Computers Common Stock
for options to purchase 191,280 shares of the Company's Common Stock. The merger
was accounted for as a pooling of interests, and accordingly the Company's
historical consolidated financial information has been restated as though ERI
and Mastering Computers had been combined from inception.
Acquisitions
In November 1996, SRC Localisation ("SRC"), a 99% owned subsidiary of the
Company, located in Paris, France, bought the assets of Groupe SRC in a cash
transaction for approximately $242,000. The transaction was accounted for as a
purchase. SRC specializes in multimedia localization and is the head of the
European Localisation Group, an alliance of localization companies with offices
located in France, Germany, the United Kingdom, Spain, and Italy. SRC is the
Company's Paris office and the base for its international division.
General
The Company has three revenue sources -- product solutions, custom
solutions and outdoor media advertising.
The Company generates revenue from sales of products, which consist
primarily of Windows NT, Windows 95 and TCP/IP operating systems training
seminars as well as Microsoft Certified Professional preparation courses and
on-site workshops, computer-based training media, interactive software and
videos and newsletters. Product solution revenue from seminars is generally
collected in advance and is recognized upon commencement of the seminar.
Subscription revenues are deferred and recognized over the term of the related
subscription, while other product revenue is recognized when the products are
shipped.
The Company generates revenue from custom solution services, which have
historically been provided primarily through fixed-fee contracts. The Company
anticipates an increasing number of contracts to be billed on a
time-and-materials basis during 1997. The Company's custom solution customers
generally retain the Company on a project-by-project basis. The Company has no
material contract that commits any customer to use the Company's services on a
long-term basis. Custom solution service contracts are generally completed
within three to nine months. Custom solution revenue is recognized using the
percentage of completion method on an individual contract basis. Percentage
complete is determined based upon the ratio of costs (primarily direct labor)
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.
The Company sells outdoor media at ski areas to advertisers for a specific
period of time, generally November through March, which approximates the ski
season. The Company recognizes this revenue ratably over that period. 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.
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<PAGE> 13
Costs related to product solutions 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 custom solution services
consist primarily of labor and occupancy expenses for creative design, account
management and sales personnel. 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 March ski season to coincide with the period over which related revenue is
recognized). 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.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items from
the Company's statements of operations expressed as a percentage of revenues and
percentage change in the dollar amount of such items compared to the prior year:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
PERCENTAGE OF REVENUES (DECREASE)
YEAR ENDED DECEMBER 31, YEAR TO YEAR
--------------------------- ---------------------------
1994(1) 1995(1) 1996(1) 1994:1995(1) 1995:1996(1)
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0% 85.9% 88.9%
Cost of revenue........................... 56.0% 55.9% 53.5% 85.5% 81.0%
Marketing and selling..................... 20.4% 25.7% 31.6% 133.9% 132.2%
General and administrative expenses....... 21.7% 23.1% 27.1% 98.1% 121.4%
Depreciation and amortization............. 5.8% 5.1% 5.5% 62.9% 103.3%
----- ----- -----
Operating loss............................ (3.9%) (9.8%) (17.7%)
Other (expense) income, net............... (1.0%) (2.9%) 4.0%
----- ----- -----
Loss from continuing operations before tax
benefit................................. (4.9%) (12.7%) (13.7%)
Income tax benefit........................ 0.0% 0.0% 5.8%
----- ----- -----
Loss from continuing operations........... (4.9%) (12.7%) (7.9%)
Discontinued operations................... 0.0% (3.1%) 0.5%
----- ----- -----
Net loss.................................. (4.9%) (15.8%) (7.4%)
</TABLE>
- ---------------
(1) Restated for pooling of interest business combinations which occurred in
1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue
Revenue for 1995 was approximately $20.8 million, which consisted of
approximately $10.2 million of product solutions revenue, approximately $6.7
million of custom solutions revenue and approximately $3.9 million of outdoor
media advertising. Revenue for fiscal 1996 was approximately $39.3 million, or
an 88.9% increase over 1995. 1996 revenue consisted of approximately $21.0
million of product solution revenue, approximately $14.4 million of custom
solution revenue and approximately $3.9 million of outdoor media advertising.
The growth in product solutions revenue from 1995 to 1996 was a result of the
increase in the number and types of seminars provided, the average number of
attendees per seminar and the average price charged for the seminars. The growth
in custom solution revenue from 1995 to 1996 was a result of the increase in the
number of projects from both new and existing customers. The growth in revenue
is also the result of the Company's substantial investments in labor force,
operating infrastructure, equipment and marketing made in the last quarter of
1995 and the first, second and third quarters of 1996.
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<PAGE> 14
Cost of Revenue
The Company's cost of revenue for 1995 was approximately $11.6 million,
which consisted of approximately $3.3 million related to product solutions,
approximately $5.3 million related to custom solution services and approximately
$3.0 million of outdoor media advertising. The Company's cost of revenue for
1996 was approximately $21.0 million, which consisted of approximately $4.8
million related to product solutions, approximately $13.8 million related to
custom solution services and approximately $2.4 million of outdoor media
advertising.
During 1995, the Company was developing its business. During 1996, costs
increased in all areas of the product and custom solution segments, particularly
in labor and related benefits and occupancy costs. The Company has made
substantial investments in its labor force and operating infrastructure and
anticipates increased capacity and production in future periods through higher
utilization of its labor force, some of which has already been realized by the
Company. Total employees of the Company increased from 191 at the end of 1995 to
463 at the end of 1996.
Marketing and Selling
Marketing and selling costs are primarily comprised of salaries,
commissions and benefits, travel and marketing program costs. Marketing and
selling expenses of approximately $5.3 million for 1995 were primarily related
to the continued development of the Company. For 1996 marketing and selling
expenses were approximately $12.4 million. The increase from 1995 to 1996 was
primarily due to the continued growth of the Company's business and the
corresponding increase in personnel.
General and Administrative Expenses
General and administrative expenses include costs for the accounting,
legal, information systems 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 of approximately $4.8 million during fiscal 1995 were
primarily related to the continued early development of the Company. For 1996
general and administrative expenses were approximately $10.6 million, which
includes approximately $2.2 million of transaction costs related to the
Mastering Computers and GM mergers and related organizational realignment
following the mergers. The merger expenses primarily consist of consulting,
outside legal and accounting costs. The increase in general and administrative
expense from 1995 to 1996 was primarily due to mergers and related
organizational realignment and the growth of the Company's business and the
corresponding increase in the number of executive and administrative personnel
and the number of offices. The Company anticipates that increases in general and
administrative expenses will be less dramatic in 1997. In addition, these costs,
as a percentage of revenue, should decrease as the administrative infrastructure
was substantially in place at the end of 1996 to meet anticipated growth in
operations.
Depreciation and Amortization
Depreciation and amortization expense of approximately $1.1 million during
1995 consisted of approximately $0.6 million of depreciation of equipment and
approximately $0.5 million of amortization of organization costs and goodwill
related to acquisitions. For 1996, depreciation and amortization expense of
approximately $2.1 million consisted of approximately $1.7 million of
depreciation and approximately $0.4 million of amortization. The increase in
depreciation expense reflects the significant investment the Company has made in
its computer equipment, leasehold improvements and office equipment over the
past year.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $0.6 million for 1995 primarily represents interest
expense. Other income of approximately $1.6 million for 1996 primarily
represents interest income which resulted from investing the proceeds from the
initial public offering.
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<PAGE> 15
Income Taxes
The Company recorded an income tax benefit of approximately $2.3 million.
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
resulting primarily from the Company's net operating losses will be realized
through future taxable income generated by the Company.
The Company bases its determination on the significant growth that has
occurred in its business during 1996. The Company's revenue increased from $20.8
million in 1995 to $39.3 million in 1996, representing an 89% increase in
revenue. In 1995 and the first half of 1996, the Company incurred significant
losses due to expenditures related to developing and expanding capacity for the
delivery of its custom and product solutions and services. The Company realized,
as a result of such expenditures, positive operating results for the fourth
quarter of 1996, which generated taxable income for that quarter. Further, the
Company's management continues to believe that the increases in margins achieved
by its outdoor media business in future periods will be substantially larger
than those achieved in 1995 and similar to those achieved in 1996. 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 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, 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 $4.5
million, which expire as follows: 2010 -- $0.6 million and 2011 -- $3.9 million.
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 custom and
product solutions services 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. The Company acquired PMI with the expectation of profitable
operations and potential future shared facilities and products. However, due to
management difficulties, equipment in need of substantial repair, and
significant marketing challenges, the Company determined to discontinue PMI. The
Company was required to pay the costs of discontinuing the operations. The
Company recorded a loss of $0.6 million from discontinued operations for the
year ended December 31, 1995. During 1996 the Company recorded a gain of $0.2
million from discontinued operations representing the settlement of certain
contingencies relating to the PMI business segment.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue
Revenue for 1994 was approximately $11.2 million, which consisted of
approximately $6.8 million of product solutions revenue and approximately $4.4
million of custom solutions revenue. Revenue for 1995 was approximately $20.8
million, or an 85.9% increase over 1994. 1995 revenue consisted of approximately
$10.2 million of product solution revenue, approximately $6.7 million of custom
solution revenue and approximately $3.9 million of outdoor media advertising.
The growth in product solutions revenue from 1994 to 1995 was a result of the
increase in the number of seminars provided and the average number of attendees
per seminar. The growth in custom solution revenue from 1994 to 1995 was a
result of the increase in the number of projects from both new and existing
customers. There was no outdoor media revenue in 1994 as SkiView was purchased
in 1995.
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<PAGE> 16
Cost of Revenue
The Company's cost of revenue for 1994 consisted of approximately $3.1
million related to product solutions and approximately $3.2 million related to
custom solution services. The Company's cost of revenue for 1995 consisted of
approximately $3.3 million related to product solutions, approximately $5.3
million related to custom solution services and approximately $3.0 million of
outdoor media advertising.
During 1994 and 1995, the Company was developing its business. During 1995,
costs increased in all areas of the product and custom solution segments,
particularly in labor and related benefits and occupancy costs. There was no
outdoor media cost of revenue in 1994 as SkiView was purchased in 1995. See
financial statements of Predecessor Business.
Marketing and Selling
Marketing and selling costs are primarily comprised of salaries,
commissions and benefits, travel and marketing program costs. Marketing and
selling expenses were approximately $2.3 million for 1994. For 1995 marketing
and selling expenses were approximately $5.3 million. The increase from 1994 to
1995 was primarily due to the growth of the Company's business and the
corresponding increase in personnel.
General and Administrative Expenses
General and administrative expenses include costs for the accounting,
information systems 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 $2.4 million during 1994. For 1995 general and
administrative expenses of approximately $4.8 million were primarily related to
the continued early development of the Company.
Depreciation and Amortization
Depreciation and amortization expense of approximately $0.6 million during
1994 consisted of approximately $0.2 million of depreciation of equipment and
approximately $0.4 million of amortization of organization costs and goodwill
related to acquisitions. For 1995, depreciation and amortization expense of
approximately $1.1 million consisted of approximately $0.6 million of
depreciation and approximately $0.5 million of amortization. The increase in
depreciation expense reflects the significant investment the Company made in its
computer and office equipment during 1995.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $0.1 million for 1994 primarily represents interest
expense. Other expense of approximately $0.6 million for 1995 primarily
represents interest expense.
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<PAGE> 17
QUARTERLY RESULTS (DOLLARS IN THOUSANDS)
The following table sets forth certain statement of operations data for
each of the Company's last eight quarters and, in the opinion of management of
the Company, contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation thereof.
<TABLE>
<CAPTION>
1995 -- THREE MONTHS ENDED 1996 -- THREE MONTHS ENDED
----------------------------------------- -----------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $5,818 $4,962 $4,062 $ 5,943 $7,793 $7,851 $9,913 $13,707
------ ------- ------- ------- ------ ------- ------- -------
Expenses:
Cost of revenue............. 2,978 2,791 2,367 3,479 4,036 4,417 6,559 6,007
Marketing and selling....... 1,105 1,299 1,381 1,555 2,183 2,825 3,567 3,827
General and
administrative............ 1,018 1,058 1,000 1,726 1,376 2,318(a) 4,414(b) 2,522
Depreciation and
amortization.............. 231 237 257 332 357 454 603 735
------ ------- ------- ------- ------ ------- ------- -------
Total Operating Expenses...... 5,332 5,385 5,005 7,092 7,952 10,014 15,143 13,091
------ ------- ------- ------- ------ ------- ------- -------
Income (loss) from
operations.............. 486 (423) (943) (1,149) (159) (2,163) (5,230) 616
Other income (expense)........ (118) (179) (204) (99) 59 578 525 424
------ ------- ------- ------- ------ ------- ------- -------
Income (loss) from continuing
operations before provision
for (benefit from) income
taxes....................... 368 (602) (1,147) (1,248) (100) (1,585) (4,705) 1,040
Benefit (provision) for income
tax......................... -- -- -- -- -- 755 1,869 (364)
------ ------- ------- ------- ------ ------- ------- -------
Net income (loss) from
continuing operations....... 368 (602) (1,147) (1,248) (100) (830) (2,836) 676
Discontinued operations....... (87) (557) -- -- -- 198 -- --
------ ------- ------- ------- ------ ------- ------- -------
Net income (loss)............. $ 281 $(1,159) $(1,147) $(1,248) $ (100) $ (632) $(2,836) $ 676
====== ======= ======= ======= ====== ======= ======= =======
</TABLE>
- ---------------
(a) Includes approximately $0.5 million in acquisition related costs.
(b) Includes approximately $1.7 million in acquisition and other one-time costs.
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, capital expenditures, the hiring or
loss of personnel, the opening or closing of offices, fluctuations in the number
of seminars or the number of persons attending seminars due to holidays and
other factors that are outside the Company's control. The Company experiences a
moderate amount of seasonality, primarily related to national holidays and
vacations taken in conjunction with the holidays. In addition, the Company has
experienced seasonality in its business due to the operations of SkiView, which
historically has earned substantially all of its revenues during the months of
November through March. 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.
During the first and second quarters of 1996 and for part of the third
quarter of 1996, costs increased in all areas of the custom and product solution
segments, particularly in labor and related benefits and occupancy costs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities was approximately $1.0
million for 1995 primarily due to the Company's payment and fulfillment of
obligations acquired from the predecessor to SkiView and cash expenditures made
in the early development of the Company. For 1996, approximately $8.0 million of
cash was used in operations. Cash used in operations for 1996 largely reflects
the investment made by the Company to grow its operating infrastructure. Cash
used in investing activities was approximately $3.3 million and $6.2 million for
1995 and 1996, respectively, related primarily to purchases of property and
equipment in both years and to the rapid staffing growth and related office
space expansion in 1996. Cash flows from
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<PAGE> 18
financing activities were approximately $6.0 million and $45.6 million in 1995
and 1996, respectively. In 1995, the Company financed its operations, acquired
equipment and met its working capital requirements through a preferred stock
issuance and borrowings under lines of credit issued by certain affiliates. The
cash inflow from financing activities for 1996 reflects the completion of the
initial public offering of Common Stock.
As of December 31, 1996, the Company had approximately $34.0 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.
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, 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, changing economic conditions, 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. Certain of these risks and uncertainties are described
more fully under the heading "Risk Factors" in the Company's Prospectus dated
March 21, 1996 included in the Company's Registration Statement on Form S-1
(File No. 333-702).
The Company's product solutions business is subject to certain additional
risks and uncertainties, including the need to anticipate changes in technology
to create product solutions 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 product solutions and protect the
Company's proprietary rights, and the risk that states may seek to regulate the
Company's product solutions as educational programs.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Financial Statements of the Company are listed in the Index to
Financial Statements on page F-1 of this report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The response to this item is incorporated herein by reference to the
information in the Company's 1997 Annual Meeting Proxy Statement under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," and the information set forth under Item 4a of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference to the
information in the Company's 1997 Annual Meeting Proxy Statement under the
caption, "Executive Compensation," except the Compensation Committee's Report on
Executive Compensation and the stock performance graph which are not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference to the
information in the Company's 1997 Annual Meeting Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference to the
information in the Company's 1997 Annual Meeting Proxy Statement under the
caption "Certain Relationships and Related Transactions."
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<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
Eagle River Interactive and Subsidiaries Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets As of December 31, 1995 and 1996
Consolidated Statements of Operations For the Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows For the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statements
SkiView, Inc. Financial Statements (Predecessor Business)
Report of Independent Public Accountants
Balance Sheets As of April 30, 1993 and 1994, and December 31, 1994
Statements of Operations and Accumulated Deficit For the Years Ended April
30, 1993 and 1994 and For the Eight-Month Period Ended December 31, 1994
Statements of Cash Flows For the Years Ended April 30, 1993 and 1994 and
For the Eight-Month Period Ended December 31, 1994
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are not applicable,
not required or because the required information is included in the Company's
Consolidated Financial Statements and Notes thereto.
(3) EXHIBITS
(a) The following exhibits are filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 -- Certificate of Incorporation of the Registrant(1)
3.2 -- Bylaws of the Registrant(1)
3.3 -- Certificate of Designation, Preferences and Rights of
Series B Preferred Stock(1)
4.1 -- Specimen Certificate for Common Stock(1)
4.2 -- Rights Agreement between the Registrant and Harris Trust
and Savings Bank, as Rights Agent(1)
10.1 -- Registrant's 1995 Executive Stock Option Plan(1)(2)
10.2 -- Form of Stock Option Agreement under Registrant's 1995
Executive Stock Option Plan(1)(2)
10.3 -- Registrant's 1995 Employee Stock Option Plan(1)
10.4 -- Form of Stock Option Agreement under Registrant's 1995
Employee Stock Option Plan(1)
10.5 -- Amended and Restated Employment Agreement with Terence M.
Graunke(1)(2)
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.6 -- Employment Agreement with Marc Pinto(1)(2)
10.7 -- Form of Directorship Agreement between the Registrant and
each director(1)
10.8 -- Registrant's 401(k) Plan(1)(2)
10.9 -- Trust Agreement between the Registrant and the Charles
Schwab Trust Company relating to the Registrant's 401(k)
Plan(1)(2)
10.10 -- Registrant's Employee Stock Purchase Plan(1)(2)
10.11 -- Registrant's Performance Bonus Plan(1)(2)
10.12 -- Registration Rights Agreement between the Registrant and
the holders of the Registrant's Series A Preferred Stock,
as amended(1)
10.13 -- Asset Purchase Agreement by and among SkiView, Inc.,
SkiView Acquisition Corp. and Allegheny Media(1)
10.14 -- Secured Promissory Note of SkiView, Inc. in favor of
Oldview, Inc.(1)
10.15 -- Security Agreement between SkiView, Inc. and Oldview,
Inc. and U.S. Communications Corporation(1)
10.16 -- Agreement and Plan of Merger dated June 21, 1996 among
Eagle River Interactive, Inc., Sushi Acquisition Corp.,
Graphic Media, Inc. And Stockholders thereof(3)
10.17 -- Stock Pledge Agreement dated June 21, 1996 by and among
Lee Jacobson, Philip Meurer, E. Michael Loftus and Joseph
Parker and Eagle River Interactive, Inc.(3)
10.18 -- Registration Agreement dated June 21, 1996 between Eagle
River Interactive, Inc., Philip Meurer, Joseph Parker,
Lee J. Jacobson and E. Michael Loftus(3)
10.19 -- Employment and Noncompetition Agreement dated June 21,
1996 between Graphic Media, Inc. And Philip Meurer(3)(2)
10.20 -- Agreement and Plan of Merger dated as of July 31, 1996 by
and among Eagle River Interactive, Inc., Ute Creek
Acquisition Corp. And Mastering Computers, Inc.(4)
10.21 -- Supplemental Agreement dated as of July 31, 1996 by and
among Eagle River Interactive, Inc., Ute Creek
Acquisition Corp., Mastering Computers, Inc. and Thomas
R. Graunke(4)
10.22 -- Stock Pledge Agreement dated as of July 31, 1996 between
Eagle River Interactive, Inc. and Thomas R. Graunke(4)
10.23 -- Registration Rights Agreement dated as of July 31, 1996
between Eagle River Interactive, Inc. and Thomas R.
Graunke(4)
10.24 -- Employment and Noncompetition Agreement dated as of July
31, 1996 between Eagle River Interactive, Inc. and Thomas
R. Graunke(4)(2)
10.25 -- Employment and Noncompetition Agreement dated as of
December 9, 1996 between Eagle River Interactive, Inc.
and Kevin J. Rowe(2)
11 -- Statement regarding computation of per share earnings
22 -- Subsidiaries of Registrant
23 -- Consent of Arthur Andersen LLP
24 -- Power of Attorney (contained on signature pages hereto)
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-702)
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the exhibits to the Company's Current Report on
Form 8-K dated June 21, 1996.
(4) Incorporated by reference to the exhibits to the Company's Current Report on
Form 8-K dated July 31, 1996.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EAGLE RIVER INTERACTIVE, INC.
(Registrant)
Date: By: /s/ MARC PINTO
----------------------------------
Marc Pinto
Executive Vice President,
Chief Financial Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Terence M. Graunke and Marc Pinto, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TERENCE M. GRAUNKE Chairman of the Board, President March 28, 1997
- ----------------------------------------------------- and Chief Executive Officer
Terence M. Graunke (principal executive officer)
/s/ MARC PINTO Executive Vice President, Chief March 28, 1997
- ----------------------------------------------------- Financial Officer (principal
Marc Pinto financial officer)
/s/ STEVE KRELL Director of Accounting (principal March 28, 1997
- ----------------------------------------------------- accounting officer)
Steve Krell
/s/ PAUL D. CARBERY Director March 28, 1997
- -----------------------------------------------------
Paul D. Carbery
/s/ CASEY COWELL Director March 28, 1997
- -----------------------------------------------------
Casey G. Cowell
/s/ ANDREW J. FILIPOWSKI Director March 28, 1997
- -----------------------------------------------------
Andrew J. Filipowski
/s/ Director
- -----------------------------------------------------
Rodney L. Goldstein
/s/ PETER MASON Director March 28, 1997
- -----------------------------------------------------
Peter I. Mason
/s/ Director
- -----------------------------------------------------
Steven Ness
</TABLE>
20
<PAGE> 23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets As of December 31, 1995 and
1996................................................... F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1994, 1995 and 1996....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1994, 1995 and 1996... F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1994, 1995 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
SKIVIEW, INC. FINANCIAL STATEMENTS (PREDECESSOR BUSINESS)(1)
Report of Independent Public Accountants.................. F-26
Balance Sheets As of April 30, 1993 and 1994, and December
31, 1994............................................... F-27
Statements of Operations and Accumulated Deficit for the
Years Ended April 30, 1993 and 1994 and for the
Eight-Month Period Ended December 31, 1994............. F-28
Statements of Cash Flows for the Years Ended April 30,
1993 and 1994 and For the Eight-Month Period Ended
December 31, 1994...................................... F-29
Notes to Financial Statements............................. F-30
</TABLE>
- ---------------
(1) The financial statements of SkiView, Inc. have been included in this
document pursuant to the Securities and Exchange Commission's rules.
SkiView, Inc., the predecessor entity (the "Predecessor Business") that
operated the business currently conducted by SkiView, Inc. (a wholly-owned
subsidiary of the Company), is considered to be a predecessor entity for
purposes of presenting financial statement data. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes to Consolidated Financial Statements regarding the lack of
comparability between the results of operations and financial positions of
the two entities.
F-1
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of Eagle River
Interactive, Inc., (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eagle River Interactive,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 5, 1997.
F-2
<PAGE> 25
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS
1995 1996
------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,595 $33,995
Accounts receivable, net of allowance for doubtful
accounts of $210 and $331, respectively (including $66
and $186 due from related parties at December 31, 1995
and 1996, respectively, -- Note 8)..................... 3,606 6,262
Costs and estimated earnings in excess of billings........ 28 2,123
Deferred tax asset, current............................... -- 1,592
Other current assets (including $186 and $233 relating to
related parties at December 31, 1995 and 1996,
respectively -- Note 8)................................ 1,104 1,424
------- -------
Total Current Assets.............................. 7,333 45,396
------- -------
Property and Equipment:
Land...................................................... 25 25
Buildings................................................. 135 135
Furniture, fixtures and equipment......................... 3,317 9,510
Leasehold improvements.................................... 569 1,056
------- -------
4,046 10,726
Less -- accumulated depreciation.......................... (1,221) (2,965)
------- -------
Net Property and Equipment........................ 2,825 7,761
------- -------
Non-current assets:
Organizational costs, net of accumulated amortization of
$19 and $25, respectively.............................. 34 28
Goodwill, net of accumulated amortization of $359 and
$755, respectively..................................... 3,403 3,455
Deferred tax asset, non-current........................... -- 704
Other (including $302 relating to related parties at
December 31, 1996)..................................... 58 926
------- -------
Total Other Assets................................ 3,495 5,113
------- -------
Total Assets...................................... $13,653 $58,270
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 1,473 $ 1,656
Accrued liabilities (including $41 and $90 due to related
parties at December 31, 1995 and 1996,
respectively -- Note 8)................................ 2,159 3,151
Billings in excess of costs and estimated earnings........ 373 310
Revenue billed in advance................................. 2,208 1,996
Current portion of note payable to related party (Note
7)..................................................... 600 --
Current portion of long-term debt and capital lease
obligations............................................ 236 331
Other current liabilities................................. 95 108
------- -------
Total Current Liabilities......................... 7,144 7,552
Non-Current Liabilities:
Note payable to related party (Note 7).................... 2,400 --
Long-term debt and capital lease obligations, net of
current portion........................................ 481 539
Other long-term liabilities................................. 272 265
------- -------
Total Liabilities................................. 10,297 8,356
------- -------
Commitments and Contingencies (Note 17)
Series A Mandatorily Redeemable, Convertible Preferred Stock
(Note 10): $0.001 par value; 1,342,000 shares authorized,
issued and outstanding at December 31, 1995 (including
accrued dividends of $188)................................ 6,898 --
Stockholders' Equity (Deficit) (Note 9):
Common Stock $0.001 par value; 30,000,000 shares
authorized; 4,862,448 and 13,356,990 shares issued and
outstanding as of December 31, 1995 and 1996,
respectively........................................... 5 13
Deferred compensation..................................... (18) --
Additional paid-in capital................................ 736 54,938
Accumulated deficit....................................... (4,265) (5,037)
------- -------
Total Stockholders' Equity (Deficit).............. (3,542) 49,914
------- -------
Total Liabilities and Stockholders' Equity
(Deficit)......................................... $13,653 $58,270
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 26
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
Revenue (including revenue from related parties of $128,
$129 and $50 during 1994, 1995 and 1996, respectively)... $11,182 $20,785 $ 39,264
------- ------- -----------
Operating Expenses:
Cost of revenue.......................................... 6,261 11,615 21,018
Marketing and selling expenses........................... 2,283 5,341 12,403
General and administrative expenses (including
approximately $949, $1,373 and $1,795 of expenses
during 1994, 1995 and 1996, respectively, resulting
from transactions with related parties) (Note 8)...... 2,423 4,801 10,630
Depreciation and amortization............................ 649 1,057 2,149
------- ------- -----------
Total Operating Expenses......................... 11,616 22,814 46,200
------- ------- -----------
Net Operating Loss......................................... (434) (2,029) (6,936)
Other Income (Expense), net................................ (114) (600) 1,586
------- ------- -----------
Loss from Continuing Operations before Tax Benefit......... (548) (2,629) (5,350)
Tax Benefit................................................ -- -- 2,260
------- ------- -----------
Loss from Continuing Operations............................ (548) (2,629) (3,090)
Discontinued Operations (Note 6):
Loss from operations..................................... -- (294) --
Gain (loss) on disposal, net of taxes of $40 in 1996..... -- (350) 198
------- ------- -----------
Income (loss) from discontinued operations............... -- (644) 198
------- ------- -----------
Net Loss................................................... $ (548) $(3,273) $ (2,892)
======= ======= ===========
Unaudited, Pro Forma Loss from Continuing Operations per
Common and Common Equivalent Share (Note 1).............. $ (0.25)
===========
Unaudited, Pro Forma Income (Loss) from Discontinued
Operations per Common and Common Equivalent Share (Note
1)....................................................... $ 0.01
===========
Unaudited, Pro Forma Net Loss Per Common and Common
Equivalent Share (Note 1)................................ $ (0.24)
===========
Shares Used in Computing Unaudited, Pro Forma Net Loss per
Common and Common Equivalent Share (Note 1).............. 12,285,782
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 27
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A
MANDATORILY STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE, -----------------------------------------------------------------------
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADD'L STOCKHOLDERS'
-------------------- ---------------- DEFERRED PAID-IN ACCUMULATED EQUITY
SHARES $ SHARES $ COMPENSATION CAPITAL DEFICIT (DEFICIT)
---------- ------- ---------- --- ------------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993.... -- $ -- 3,297,520 $ 3 $ -- $ 22 $ (29) $ (4)
Repurchase of founder shares... -- -- (1,697,776) (2) -- (5) (59) (66)
Shareholder S Corporation
distributions................ -- -- -- -- -- -- (87) (87)
Net loss....................... -- -- -- -- -- -- (548) (548)
---------- ------- ---------- --- ---- ------- ------- -------
Balances, December 31, 1994.... -- -- 1,599,744 1 -- 17 (723) (705)
Issuance of shares upon
conversion of debt........... -- -- 30 -- -- 566 -- 566
Exchange ERC for ERI shares.... -- -- 3,122,118 3 -- (3) -- --
Issuance of Series A Preferred
Stock net of issuance
costs........................ 1,342,000 6,710 -- -- -- (114) -- (114)
Issuance of Common Stock....... -- -- 15,000 -- -- 19 -- 19
Issuance of stock options...... -- -- -- -- (49) 297 -- 248
Amortization of deferred
compensation................. -- -- -- -- 31 -- -- 31
Issuance of stock for
technology................... -- -- 125,556 1 -- 142 -- 143
Shareholder S Corporation
distribution................. -- -- -- -- -- -- (269) (269)
Net loss....................... -- -- -- -- -- -- (3,273) (3,273)
Dividends accrued on Series A
Preferred Stock.............. -- 188 -- -- -- (188) -- (188)
---------- ------- ---------- --- ---- ------- ------- -------
Balances, December 31, 1995.... 1,342,000 6,898 4,862,448 5 (18) 736 (4,265) (3,542)
Undistributed losses
reclassified to additional
paid-in capital due to
termination of S corporation
status....................... -- -- -- -- -- (3,126) 3,126 --
Dividends accrued on Series A
Preferred Stock.............. -- 178 -- -- -- (178) -- (178)
Conversion of Series A
Preferred Stock.............. (1,342,000) (7,076) 4,026,000 4 -- 7,072 -- 7,076
Proceeds from initial public
offering, net of underwriter
commissions and $1,632 of
offering costs............... -- -- 4,309,000 4 -- 50,459 -- 50,463
Amortization of deferred
compensation................. -- -- -- -- 18 -- -- 18
Acquisition and retirement of
shares from GM shareholder
(Note 2)..................... -- -- -- -- -- (352) -- (352)
Shareholder S Corporation
distributions................ -- -- -- -- -- (138) (1,006) (1,144)
Issuance of Common Stock
pursuant to employee stock
purchase plan................ -- -- 10,673 -- -- 54 -- 54
Issuance of Common Stock upon
exercise of stock options.... -- -- 148,869 -- -- 261 -- 261
Issuance of stock options...... -- -- -- -- -- 150 -- 150
Net loss....................... -- -- -- -- -- -- (2,892) (2,892)
---------- ------- ---------- --- ---- ------- ------- -------
Balances, December 31, 1996.... -- $ -- 13,356,990 $13 $ -- $54,938 $(5,037) $49,914
========== ======= ========== === ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 28
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(548) $(3,273) $(2,892)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 649 1,057 2,149
Write-off product technology.............................. -- 241 --
Deferred tax benefit...................................... -- -- (2,296)
Loss on disposal of property and equipment................ 15 23 66
Compensation from issuance of stock options............... -- 200 150
Amortization of deferred compensation..................... -- 31 18
Reserve for bad debts..................................... -- 150 165
Reserve for uncollectable advances to affiliates.......... -- 262 (262)
Changes in assets and liabilities:
Accounts receivable.................................... (6) (1,530) (2,801)
Costs and estimated earnings in excess of billings..... -- (28) (2,095)
Other current assets................................... (107) (107) (320)
Other assets........................................... -- (44) (623)
Accounts payable and accrued liabilities............... (261) 1,880 1,031
Billings in excess of costs and estimated earnings..... 122 218 (63)
Revenue billed in advance.............................. 103 (61) (212)
----- ------- -------
Net cash used in operating activities............. (33) (981) (7,985)
----- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (290) (1,740) (5,982)
Proceeds from disposition of property and equipment....... 24 -- 18
Purchase of product rights................................ -- (50) --
Cash paid for acquisitions................................ -- (1,230) (242)
Advances to affiliates.................................... -- (262) --
Other..................................................... 25 (4) --
----- ------- -------
Net cash used in investing activities.................. (241) (3,286) (6,206)
----- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit.............................. 650 2,850 1,905
Repayment of line of credit............................... -- (2,988) (1,905)
Proceeds from long-term debt.............................. 550 250 350
Repayments of long-term debt.............................. (679) (360) (3,737)
Repayment of capital leases............................... (12) (47) (208)
Repayment of non-compete obligation....................... (48) (96) (96)
Distributions to S Corporation shareholder................ (87) (269) (1,144)
Acquisition of shares from GM shareholder................. -- -- (352)
Proceeds from issuance of Series A Preferred Stock........ -- 6,710 --
Series A Preferred Stock issuance costs................... -- (114) --
Proceeds from IPO, net of offering costs.................. -- -- 50,463
Proceeds from issuance of Common Stock.................... -- 19 315
----- ------- -------
Net cash provided by financing activities......... 374 5,955 45,591
----- ------- -------
Net increase in cash and cash equivalents................... 100 1,688 31,400
Cash and cash equivalents, beginning of period.............. 807 907 2,595
----- ------- -------
Cash and cash equivalents, end of period.................... $ 907 $ 2,595 $33,995
===== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 74 $ 697 $ 269
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 29
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Eagle River Interactive, Inc. ("ERI"), a Delaware corporation, was
incorporated on September 28, 1995, and became the parent company of Eagle River
Communications, Inc. ("ERC"), SkiView, Inc. ("SkiView"), and Eagle River
Production, Inc. ("ERP"). During 1996, the Company completed mergers with
Graphic Media, Inc. ("GM") and Mastering Computers, Inc. ("Mastering
Computers"), which have been accounted for as poolings of interests. In
addition, during 1996 the Company formed SRC Localisation, ("SRC"), a 99% owned
subsidiary, which is located in Paris, France. Collectively ERI, ERC, SkiView,
ERP, GM and Mastering Computers, all of which are wholly-owned subsidiaries, and
SRC, are referred to as the "Company".
The Company creates and develops interactive solutions that assist United
States and international companies in sales, marketing, training and corporate
communications. The Company develops these business solutions through the use of
product and custom solutions. Product solutions consist of corporate training
primarily for IT professionals, including leader-led Windows NT, Windows 95 and
TCP/IP operating system training seminars as well as Microsoft Certified
Professional preparation courses and on-site workshops, computer-based training
media, interactive software, videos and newsletters. Custom solutions are
developed by the Company under three to nine month contracts and are delivered
using the Internet and World Wide Web, proprietary intranets, informational and
transactional kiosks, CD-ROMs and other interactive medium. The Company also
offers traditional outdoor media advertising at ski resorts in the United
States. The Company's primary locations are in Avon, Colorado and Scottsdale,
Arizona. The Company also has offices in Mountain View, California; Portland,
Oregon; New York, New York; Dallas, Texas; Los Angeles, California; Chicago,
Illinois; and Paris, France.
ERC is the predecessor to ERI. ERC, formerly known as Hawthorne Media
Group, Inc., was incorporated as a Pennsylvania corporation on May 25, 1994. In
September 1994, all of the stock of ERC (300 shares) was acquired by Terence M.
Graunke ("Mr. Graunke"). In September 1995, Mr. Graunke converted $566,000 of
principal and interest payable to him by ERC under the terms of the Subordinated
Line of Credit (Note 7) into 30 shares of ERC common stock. The 330 shares of
ERC common stock owned by Mr. Graunke were then exchanged for 3,122,448 shares
of ERI common stock, and ERC became a wholly owned subsidiary of ERI. The
acquisition of ERC and SkiView (Note 3) by ERI was accounted for as a
reorganization of entities under common control and their assets and liabilities
are included in the consolidated financial statements at their historical costs.
The Company has completed several mergers and acquisitions since the
inception of ERI's predecessor, ERC, on May 25, 1994 (Note 2). Certain of these
business combinations have been accounted for as poolings of interests.
Accordingly, the accompanying consolidated financial statements reflect the
combined financial position and operating results for the Company, GM and
Mastering Computers for all periods presented. In addition, the consolidated
financial statements include the accounts of businesses acquired under the
purchase method of accounting from the effective date of the purchase
transaction.
Stock Split
Effective January 24, 1996, the Company approved a three share for one
share common stock split. Common stock amounts, equivalent share amounts and
per-share amounts have been adjusted retroactively to give effect to the stock
split.
F-7
<PAGE> 30
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned, except SRC, which is 99%
owned. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity 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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Basis for Recording Purchase-Method Acquisitions
The purchase method of accounting was applied in the accompanying
consolidated balance sheets as of December 31, 1995 and 1996 to reflect the
Company's purchase price for certain acquisitions made during 1995 and 1996
(Note 3). As a result, the related assets and liabilities from such acquisitions
have been adjusted to reflect their estimated fair market values on the
effective dates of their acquisition. The use of the purchase method of
accounting results in increased amortization and depreciation to be reported by
the Company. Accordingly, the financial statements of the Predecessor Business
to SkiView, purchased in 1995, which appear elsewhere in this document, and the
consolidated financial statements of the Company are not comparable in all
material respects, since such financial statements report financial position,
results of operations and cash flows of these two separate and distinct
entities.
Pro Forma Loss Per Common Share and Equivalent (Unaudited)
Historical loss per share is not considered relevant as it would differ
materially from pro forma loss per common and common equivalent share given the
changes in the capital structure of the Company, which occurred on March 21,
1996 (the date of the Company's initial public offering). Pro forma loss from
continuing operations per common share and equivalents is computed using the sum
of the weighted average number of shares of Common Stock, assuming conversion of
the Preferred Stock had occurred on the date of its issuance.
As a portion of the proceeds of the Company's initial public offering were
used to repay the SkiView note payable (Note 7), the following pro forma
information for the year ended December 31, 1996, is presented:
<TABLE>
<S> <C>
Audited net loss from continuing operations................. $(3,090,000)
Pro forma adjustment to reflect repayment of $3,000,000
notes payable from proceeds on January 1, 1995............ 59,000
-----------
Pro forma net loss from continuing operations............... $(3,031,000)
===========
Pro forma weighted average shares outstanding............... 12,286,000
Add: Additional pro forma shares required to retire SkiView
notes payable (assuming $13 per share).................... 58,000
-----------
Total pro forma shares............................ 12,344,000
===========
Pro forma loss per share.................................... $ (0.25)
===========
</TABLE>
F-8
<PAGE> 31
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
cash and highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Effective January 1, 1995, the Company acquired the following assets and
assumed the following liabilities of the predecessor entity ("the Predecessor
Business") that operated the business currently conducted by SkiView, Inc. (Note
3). The Company incurred approximately $35,000 of acquisition costs.
<TABLE>
<S> <C> <C>
Assets Acquired:
Cash...................................................... $ 54,000
Accounts receivable....................................... 1,497,000
Other current assets...................................... 536,000
Property and equipment.................................... 700,000
Goodwill.................................................. 3,535,000
----------
$6,322,000
Liabilities Assumed:
Accounts payable and accrued liabilities.................. $1,062,000
Revenue billed in advance................................. 1,203,000
Related party debt assumed................................ 557,000
Notes payable............................................. 3,000,000
----------
5,822,000
----------
Cash paid at closing...................................... $ 500,000
==========
</TABLE>
Effective November 1996, the Company acquired the following assets and
assumed the following liabilities of SRC. The Company incurred approximately
$107,000 of acquisition costs.
<TABLE>
<S> <C> <C>
Assets Acquired:
Accounts receivable....................................... $ 6,000
Property and equipment.................................... 14,000
Goodwill.................................................. 448,000
----------
$ 468,000
Liabilities Assumed:
Accounts payable.......................................... $ 144,000
Long term debt............................................ 82,000
----------
226,000
----------
Cash paid at closing...................................... $ 242,000
==========
</TABLE>
Effective January 1, 1995, the Company acquired assets and assumed certain
liabilities of Production Masters, Inc. As discussed in Note 6, this entity was
liquidated effective June 1995.
During 1996 and 1995, the Company acquired approximately $769,000 and
$171,000, respectively, of equipment under capital leases.
In September 1995, Mr. Graunke converted $512,000 of debt and $54,000 of
accrued interest payable to him into Common Stock.
F-9
<PAGE> 32
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 21, 1996, the effective date of the Company's initial public
offering, holders of 1,342,000 shares of the Company's Series A Preferred Stock
converted their shares into 4,026,000 shares of the Company's Common Stock (Note
10).
In March 1996, upon the Company's initial public offering, $3,126,000 of
accumulated deficit was reclassified to additional paid-in capital to reflect
the Company's change in tax status from an S-corporation to a C-Corporation for
tax purposes.
Investments
As of December 31, 1996, the Company had invested $24,963,000 in United
States Government securities which are reported as cash equivalents. The Company
has the positive intent and ability to hold all of its investment securities to
maturity and not to engage in trading or sales activities. These investments are
classified as held to maturity in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and are recorded at amortized cost which
approximates their fair value. At December 31, 1996, total investment securities
had an amortized cost of $24,963,000, a fair value of $24,960,000, and reflect
unrealized losses of $3,000. The weighted average contractual maturities of the
debt securities at December 31, 1996 was 10 days.
Concentration of Credit Risk
The Company has no significant off-balance sheet concentrations of credit
risk such as foreign exchange contracts, options contracts or other foreign
hedging arrangements. The Company maintains the majority of its cash balances
with two financial institutions in the form of demand deposits and money market
accounts.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for estimated credit losses. Its accounts receivable balances are
primarily domestic. In 1995 and 1996, no single customer accounted for 10% or
more of total revenue.
Fair Value of Financial Instruments
As of December 31, 1995 and 1996, the Company's financial instruments
consisted of cash, short-term trade receivables and payables. In addition, as of
December 31, 1995 the Company's financial instruments also consisted of
long-term debt. The carrying values of cash and short-term trade receivables and
payables approximate fair value. The fair value of long-term debt is estimated
based on current rates available for similar debt with similar maturities and
securities, and at December 31, 1995, approximated the carrying value.
Depreciation
The Company depreciates its assets using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 39 years
Furniture, fixtures and equipment........................... 3 to 7 years
Leasehold improvements...................................... Term of the lease
</TABLE>
Assets purchased under capital leases are depreciated over the lesser of
their estimated useful lives or the term of the lease.
F-10
<PAGE> 33
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Liabilities
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Accrued Consulting......................................... $ 457,000 $ 663,000
Accrued Salaries and Wages................................. 553,000 1,024,000
Accrued Sales Taxes........................................ 425,000 566,000
Accrued Interest........................................... 90,000 --
Other Accrued Expenses..................................... 634,000 898,000
---------- ----------
Totals........................................... $2,159,000 $3,151,000
========== ==========
</TABLE>
Product License and Software Development Costs
Software development costs incurred subsequent to establishing a software
product's technological feasibility are capitalized until such product is
available for general release to customers in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Capitalized software costs
are amortized on a product-by-product basis. Amortization is recorded based on
the greater of (a) the estimated economic life of the software (generally three
years or less) or (b) the ratio of current gross revenue for each product to the
total of current and anticipated gross revenues for each product, commencing
when such product is available for general release. All other software product
costs are expensed as incurred. As of December 31, 1996 the Company had
capitalized $329,000 of software development costs, net of $51,000 of
amortization.
Certain contracts require the Company to pay royalties on product sales.
Royalties are generally based upon a percentage of net Company revenues from the
related product and are generally accrued as products are sold.
Goodwill
Goodwill represents the excess of the purchase price paid and liabilities
assumed by the Company over the fair market value of identifiable assets
acquired by the Company and results primarily from the 1995 acquisition of the
SkiView business. Goodwill is being amortized, using the straight-line method,
over estimated economic lives of ten years. The Company reviews its recorded
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable and provides
currently for any indicated impairment.
Revenue Recognition
The Company has three revenue sources -- product solutions, custom solution
services and outdoor media advertising. The Company generates revenue from sales
of product solutions, which consist primarily of Windows NT and Windows 95
operating systems training seminars and workshops, computer-based training
media, interactive training software and videos, and newsletters. Product
solution revenue from seminars is recognized upon commencement of the seminar.
Subscription revenues are deferred and recognized over the term of the related
subscription while other product revenue is recognized when the products are
shipped.
The Company generates revenue from custom solution services, primarily
through fixed-fee contracts. The Company's custom solution customers generally
retain the Company on a project-by-project basis. The Company has no material
contract that commits any customer to use the Company's services on a long-term
basis. Custom solution service contracts are generally completed within three to
nine months. Custom solution revenue is recognized using the percentage of
completion method on an individual contract basis. Percentage
F-11
<PAGE> 34
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complete is determined based upon the ratio of costs incurred, primarily direct
labor, 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.
The Company sells outdoor media at ski areas to advertisers for a specific
period of time, generally November through March, which approximates the ski
season. Billings for outdoor media are typically made in advance of 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.
Costs related to product solutions 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 completion. Costs related to custom solution services
consist primarily of labor and occupancy expenses for creative design, account
management and sales personnel. 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 March ski season to coincide with the period over which related revenue is
recognized).
The asset "Costs and estimated earnings in excess of billings" represents
custom solutions revenue recognized on individual contracts in progress in
excess of amounts billed. The liability "Billings in excess of costs and
estimated earnings" represents billings in excess of revenue recognized.
Income Taxes
The Company provides for income taxes using the asset and liability method
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred income tax assets and
liabilities are recognized for the expected future income tax consequences,
based on enacted tax laws, of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities and
carryforwards.
SFAS No. 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits which,
more likely than not based on current circumstances, are not expected to be
realized (Note 16).
Foreign Currency Translation
Balance sheet accounts of SRC are translated using the year-end exchange
rate, and statement of operations items are translated at the average exchange
rate for the period. Any resulting translation adjustments are reflected in a
separate component of stockholders' equity. Transactions denominated in foreign
currencies result in realized and unrealized translation gains and losses, which
are included in the determination of net income. Translation gains and losses
for the year ended December 31, 1996 were immaterial.
F-12
<PAGE> 35
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGERS AND BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS
On June 21, 1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger of a wholly owned subsidiary with GM, an Oregon corporation.
As a result of the merger, GM became a wholly owned subsidiary of the Company.
The business combination was accounted for as a pooling of interests. In
connection with the GM merger, each outstanding share of GM Common Stock was
converted into 0.27 shares of ERI Common Stock with all the outstanding shares
of GM Common Stock being exchanged for 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. In addition, the Company
assumed and exchanged all options to purchase GM Common Stock for options to
purchase 141,041 shares of ERI Common Stock.
On August 1, 1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger of a wholly owned subsidiary with Mastering Computers, Inc.,
an Arizona corporation. As a result of the merger, Mastering Computers became a
wholly owned subsidiary of the Company. This business combination was accounted
for as a pooling of interests. In connection with the Mastering Computers
merger, all outstanding shares of Mastering Computers Common Stock were
exchanged for 1,175,000 shares of the Company's Common Stock. The Company also
assumed and exchanged all options to purchase Mastering Computers Common Stock
for options to purchase 191,280 shares of the Company's Common Stock.
The mergers were accounted for as poolings of interests, and, accordingly,
the historical consolidated financial statements for the two companies for
periods prior to consummation of the mergers have been restated as though the
companies had been combined for all periods reported herein.
The following table provides a reconciliation of revenues and earnings
reported by the Company to the combined amounts presented for, or included in
the period indicated:
SIX MONTHS ENDED
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MASTERING PRO FORMA
ERI GM COMPUTERS ADJUSTMENT TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues....................... $6,971,000 $2,519,000 $6,754,000 $(600,000)(a) $15,644,000
========== ========== ========== ========= ===========
Net Loss....................... $ (14,000) $ (150,000) $ (568,000) $ -- $ (732,000)
========== ========== ========== ========= ===========
</TABLE>
- ---------------
(a) Pro forma adjustment to eliminate revenue recorded by ERI for consulting
services provided to Mastering Computers by ERI under a contract entered
into in May 1996.
YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
MASTERING
ERI GM COMPUTERS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................ $ 5,273,000 $5,345,000 $10,167,000 $20,785,000
=========== ========== =========== ===========
Net (Loss) Income....................... $(3,869,000) $ (43,000) $ 639,000 $(3,273,000)
=========== ========== =========== ===========
</TABLE>
F-13
<PAGE> 36
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MASTERING
ERI GM COMPUTERS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................ $ 128,000 $4,267,000 $ 6,787,000 $11,182,000
=========== ========== =========== ===========
Net (Loss) Income....................... $ (362,000) $ (446,000) $ 260,000 $ (548,000)
=========== ========== =========== ===========
</TABLE>
3. ACQUISITIONS
On January 1, 1995, under the terms of an operating agreement, the Company
acquired the assets and liabilities (except certain specified indebtedness) of
the predecessor entity (the "Predecessor Business") that operated the business
currently conducted by SkiView. The Predecessor Business is affiliated with The
Hawthorne Group, Inc. ("Hawthorne"), a related party (Note 8). This agreement
transferred all of the risks and rewards of ownership of the outdoor media and
promotions business to the Company effective January 1, 1995, and, accordingly,
has been accounted for as an acquisition effective on that date. SkiView's
operations have been consolidated in the accompanying consolidated financial
statements since that date. In accordance with the terms of the purchase
agreement, finalized in September 1995, the purchase price for the SkiView
assets was $500,000 paid in cash at closing, $3,000,000 via the issuance of a
promissory note (Note 7), and the assumption of liabilities totaling
approximately $2,820,000. This transaction resulted in $3,570,000 of goodwill
(including $35,000 of acquisition costs), which is being amortized over its
estimated useful life of ten years. During 1995, cash payments totaling
approximately $1,057,000 were made related to this acquisition, including
$500,000 cash at closing and approximately $557,000 for payments of existing
related party debt.
Also effective January 1, 1995, under the terms of an operating agreement,
the Company acquired the assets and liabilities (except certain specified
indebtedness) of Production Masters, Inc. ("PMI") from Hawthorne. PMI operated
an audio and video post-production studio. Similar to the SkiView agreement,
this agreement transferred all of the risks and rewards of ownership of PMI to
the Company, and accordingly, has been accounted for as an acquisition effective
January 1, 1995. PMI operations have been consolidated in the accompanying
consolidated financial statements since that date. In accordance with the
operating agreement, the PMI purchase price was $1 million and the assumption of
liabilities totaled $186,000. This transaction resulted in $94,000 of goodwill,
all of which was written off in 1995. The Company discontinued the operations of
PMI effective June 30, 1995 (Note 6). Prior to the discontinuance of PMI, the
Company paid $90,000 to Hawthorne in accordance with the terms of the operating
agreement, which is included in discontinued operations in the accompanying
consolidated financial statements. No other cash payments for the acquisition of
PMI were made.
The terms of the operating agreements, including the amount determined as
the value of the respective companies, was determined based on negotiations with
the Company and Hawthorne, a related party (Notes 7 and 8), on behalf of the
Predecessor Business and PMI. In each case, the respective operating agreement
specifically provided that the Company was granted the right to operate the
business, including without limitation all of the assets owned by PMI and the
Predecessor Business, in exchange for the assumption of liabilities (with
specified exclusions) and the payment of specified amounts. As a result of these
assumptions and payments, the Company is entitled under each agreement to
receive the economic benefits of the operation of each business.
In October 1995, ERI purchased certain interactive marketing assets and
contracts in progress from a division of West End Post, Inc., a Texas
corporation, for $200,000 in cash. This transaction resulted in goodwill of
approximately $191,000 (which includes $15,000 of acquisition costs), which is
being amortized over ten years.
F-14
<PAGE> 37
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1996, the Company formed SRC. Concurrent with the formation,
SRC entered into an asset purchase agreement for the purchase of certain assets
from Group SRC. The assets were purchased in a cash transaction for
approximately $242,000. This transaction resulted in goodwill of approximately
$448,000 (including $107,000 of acquisition costs), which will be amortized over
ten years.
4. SEAVISION AND CONTINGENT NOTE RECEIVABLE
As of December 31, 1995 and 1996, the Company had advanced SeaVision, Inc.
("SeaVision") approximately $262,000 and $302,000, respectively. Certain members
of Hawthorne are also stockholders in SeaVision. These advances bear interest at
15% per annum, compounded quarterly, and mature three years from the date of
each funding. As of December 31, 1995, the Company had established a reserve for
$262,000 of this receivable. During 1996, the Company reversed the reserve,
based on the initial public offering of Allin Communications Corporation ("ACC")
(which was formed by the combination of SeaVision and other companies). The net
advance is included in other assets in the accompanying consolidated balance
sheets.
In connection with the September 1995 Series A Preferred Stock offering,
Mr. Graunke issued a contingent note (the "Contingent Note") to the Company.
This note transfers to the Company future gains arising from the sale of Mr.
Graunke's 10.5% equity interest in SeaVision, a predecessor entity to ACC. The
terms of the Contingent Note require Mr. Graunke to pay the Company any net
proceeds in excess of $500,000 if and when he sells his holdings in SeaVision.
This Contingent Note had an estimated fair value of zero at September 1995. At
that time, SeaVision was a development stage entity with significant liquidity
issues.
In November 1996, ACC completed an initial public offering of its common
stock. The SeaVision stock owned by Mr. Graunke was converted into 241,200
shares of ACC Common Stock, all of which are subject to the terms of the
Contingent Note. As of December 31, 1996, Mr. Graunke had not sold any of his
shares in ACC. Those shares are subject to an underwriter-imposed lock-up and
therefore cannot be sold until November 1997.
5. 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 ("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, $366,000 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 $3,736,000.
6. DISCONTINUED OPERATIONS
Effective June 30, 1995, the Company elected to discontinue the operations
of PMI. As a result of this decision, Hawthorne agreed to release the Company
from the terms of the operating agreement, including the amount recorded as
payable to Hawthorne related to the $1 million purchase option, and cancel the
F-15
<PAGE> 38
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement. As a component of this arrangement, the Company was responsible,
however, for liquidating PMI and funding the cost of discontinuing the PMI
operations. The assets were sold to a third party for approximately $700,000 and
all proceeds from the liquidation of the assets were paid to Hawthorne. As a
result of this discontinuance and liquidation, the operations of PMI from its
acquisition through its disposition have been reflected as discontinued
operations in the accompanying consolidated statement of operations for the
years ended December 31, 1995 and 1996. The Company recorded a loss on the
disposal of this segment of $350,000, composed of approximately $58,000 to write
down the segment's assets and $292,000 of payroll and other operating costs
incurred from the measurement date through the date of final disposition. In
addition, during 1995 the Company recorded approximately $294,000 for losses
from PMI operations prior to the measurement date. During 1996 the Company
recorded a gain of $198,000 from discontinued operations representing the
settlement of certain contingencies relating to the PMI business segment.
7. DEBT
Senior Secured Line of Credit
On December 1, 1994, the Company entered into an agreement with individual
partners (the "Hawthorne Partners") of Hawthorne, under which the Company could
borrow up to $2 million for a term of three years. The borrowings required
interest at the option of the lender at a rate of 12% or the prime rate of a
bank plus one percent (12% at December 31, 1994). The note was collateralized by
a security interest in personal property and fixtures and the assignment of a $3
million life insurance policy covering Mr. Graunke. Further, Mr. Graunke
guaranteed the repayment of 50% of the outstanding borrowings, up to $1 million,
plus accrued interest. The note was paid in full ($2 million) and canceled on
September 29, 1995.
As additional consideration for the senior secured line of credit, the
Company issued to the Hawthorne Partners a warrant exercisable into shares of
the Company's Common Stock. The warrants were canceled on September 29, 1995.
Subordinated Line of Credit
On December 1, 1994, the Company entered into an agreement with Mr. Graunke
and the Hawthorne Partners under which the Company could borrow up to $1.5
million for a term of three years. The borrowings bore interest at a rate of
15%. The note was collateralized by a security interest in personal property and
fixtures and the assignment of a $3 million life insurance policy covering Mr.
Graunke. All rights under the subordinated line of credit were junior to claims
under the senior secured line of credit. On September 28, 1995, Mr. Graunke
converted all of the principal ($512,000) and interest ($54,000) payable to him
under this facility (totaling $566,000) into 30 shares of ERC Common Stock. The
remaining $988,000 balance of the subordinated line was paid in full and the
borrowing agreement was canceled on September 29, 1995.
Certain individuals associated with Hawthorne were stockholders of ERC
until September 1, 1994, at which time their shares were purchased by Mr.
Graunke. These individuals served as directors of the Company until September
29, 1995. Certain individuals associated with Hawthorne were creditors of the
Company as a result of their participation in the Senior Secured Line of Credit
and Subordinated Line of Credit. Amounts paid to these individuals under these
debt agreements totaled $3,149,000, including interest of $162,000 in 1995.
SkiView Note
In connection with the purchase of the SkiView business, the Company issued
a note payable to the Predecessor Business, which is controlled by Hawthorne.
Because the purchase was effective on January 1, 1995, the amount of debt
recorded at that date was $3.5 million. The formalization of the purchase on
F-16
<PAGE> 39
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 29, 1995 resulted in a $500,000 cash payment and a $3 million note
payable to Hawthorne. The note bears interest at 12%, and was paid in full
during 1996.
Lines of Credit
During 1996, the Company obtained and subsequently canceled a line of
credit facility from a bank. The line of credit was secured by accounts
receivable and allowed for borrowings up to $1.5 million. Borrowings and
repayments under this line of credit during 1996 were $250,000.
8. OTHER RELATED PARTY TRANSACTIONS
In addition to the related party transactions discussed above, the Company
had the following related party transactions:
- The Company uses an aircraft owned by an entity in which Mr. Graunke is
the primary member. Costs incurred to rent the aircraft totaled
approximately $149,000 and $280,000 for the years ended December 31, 1995
and 1996, respectively, which is recorded as offering costs in the
accompanying consolidated statement of shareholders' equity, and general
and administrative expense in the accompanying consolidated statements of
operations. Rental rates charged to the Company for the aircraft
approximate first class commercial rates for similar flights. As of
December 31, 1996, the Company had prepaid $186,000 to this entity, which
is recorded in the accompanying consolidated balance sheet.
- The Company leases office space from an entity owned by several members
of the board of directors. Related expense totaled approximately $81,000
in 1996. The lease rate per square foot charged to the Company is the
same as that paid by the Company for a similar facility leased from a
third party in the same general location.
- The Company paid or accrued approximately $280,000 and $800,000
(including $505,000 of offering costs) to a law firm for legal services
performed during 1995 and 1996, respectively. A partner in this law firm
is a director and a stockholder. At December 31, 1996, approximately
$90,000 of this amount is included in accrued expenses in the
accompanying consolidated balance sheets.
- Mastering Computers incurred approximately $949,000, $641,000 and
$1,327,000 in 1994, 1995 and 1996, respectively, for printing, film work,
data processing, marketing and mailing related to Mastering Computers'
ongoing direct-mail campaigns and newsletter printing and mailing, all of
which involved approximately 2,840,000, 2,988,000 and 4,345,000
direct-mail pieces in 1994, 1995 and 1996, respectively. These amounts
were paid to two companies owned by family members of the Company's
President. Amounts billed by related party companies include a fee to
manage all aspects of the direct-mail campaign and newsletter printing
and mailing, and an amount to pay third-party vendors contracted with to
provide such services. During 1994 and 1995, services provided by related
party companies were on an informal basis. During 1996, Mastering
Computers arranged with the related party Company to have the fee be 15%
of all submitted third-party vendor invoices. At December 31, 1995 and
1996, approximately $186,000 and $233,000, respectively, of costs were
reflected as prepaid expenses, and are included in other current assets
in the accompanying consolidated balance sheets. Management believes that
the amounts paid for these services are comparable to those that would be
paid to unaffiliated companies.
- During 1995, prior to the Company's merger with Mastering Computers in
August 1996, Mastering Computers entered into an agreement to expand
certain products available to seminar customers with a company owned by a
family member of the Company's President. The Company had approximately
$41,000 payable to this individual included in accrued expenses at
December 31, 1995 relating to the agreement. This agreement was
terminated in 1996.
F-17
<PAGE> 40
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- During 1996, the Company paid approximately $185,000 for consulting
services to a family member of the Company's President, primarily under
an agreement entered into by Mastering Computers, prior to the Company's
merger with Mastering Computers in August 1996. This agreement was
terminated in 1996.
9. STOCKHOLDERS' EQUITY (DEFICIT)
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 five times the offering price per share of the Company's
common stock established by the initial public offering of such common stock.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1995 the Company sold 1,342,000 shares of Series A Preferred Stock
("Preferred Stock"), $0.001 par value, at $5.00 per share for gross proceeds of
$6,710,000. The Company used the funds for repayment of the Senior Secured and
Subordinated Lines of Credit, as well as for other working capital and
investment purposes.
As of December 31, 1995, dividends of $188,000 were accrued on the
Preferred Stock. During 1996, additional dividends of $178,000 were accrued on
the Preferred Stock. On March 21, 1996, the holders of 1,342,000 shares of
Preferred Stock converted their shares of Preferred Stock into 4,026,000 shares
of the Company's common stock. However, dividends were not paid upon conversion
of the Preferred Stock as the market price of the Company's common stock
exceeded $5.00 on the date of conversion, which was the maximum conversion rate
at which dividends were to be paid.
11. 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 Executive Option Plan allows issuance of incentive stock options
and nonqualified options. The Executive Option Plan is administered by the
Compensation Committee of the Board of Directors (the "Committee"). The exercise
price of incentive stock options shall not be less than the stock's fair market
value on the date of grant. The Committee may grant options to purchase up to an
aggregate of 3,000,000 shares under the Executive Option Plan of which 2,012,400
are considered Standard Options and 987,600 are considered Special Options. The
Standard Options become exercisable in four equal annual installments beginning
12 months after the date of grant. The terms of the Special Options provided
that such Special Options vest at the end of four years from the date of grant;
however, vesting could be accelerated based upon the Company achieving certain
performance measures, which primarily related to the fair market value of the
Company's common stock. In 1996, the Company met such performance measures, and
the Special Options vested in full.
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
Employee Option Plan allows issuance of incentive stock options and
non-qualified options, and is administered by the Committee. The Committee may
grant
F-18
<PAGE> 41
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
beginning 12 months after the date of grant.
Mastering Computers Stock Options
Mastering Computers had granted to certain key employees options to
purchase shares of common stock of Mastering Computers. A portion of the options
vested immediately at the grant date with the remaining options vesting upon the
change of control resulting from Mastering Computers' merger with the Company.
All outstanding Mastering Computers options were exchanged for ERI options (Note
2). The difference between the exercise price for certain options and the fair
value of the underlying stock on the date of grant has been recorded as
compensation expense in the accompanying consolidated statements of operations
and recorded in common stock.
Employee Stock Purchase Plan
In January 1996, the Board of Directors adopted, and the Company's
stockholders approved, the Employee Stock Purchase Plan which qualifies under
Section 423 of the Internal Revenue Code. Under the Employee Stock Purchase
Plan, employees meeting certain eligibility requirements are entitled to
purchase common stock through payroll deductions or lump-sum deposits made
during periods established by the plan's administrative committee. Participants
generally may purchase common stock at a price equal to 85% of the fair market
value of the common stock on certain specified dates. The Company has reserved
150,000 shares of common stock for issuance under the Employee Stock Purchase
Plan. Under the plan, the Company issued 10,673 shares during 1996.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a
fair-value-based method of accounting for employee stock options or similar
equity instruments. However, SFAS 123 allows the continued measurement of
compensation cost for such plans using the intrinsic-value-based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), provided that pro forma disclosures are made of net income or loss
and net income or loss per share, assuming the fair value based method of SFAS
123 had been applied. The Company has elected to account for its stock-based
compensation plans under APB 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during 1995 and 1996 using the Black-Scholes pricing model and
the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate..................................... 5.91% 6.02%
Expected dividend yield..................................... 0% 0%
Expected lives outstanding.................................. 4 years 4 years
Expected volatility......................................... 104.14% 104.14%
</TABLE>
To estimate lives of options for this valuation, it was assumed options
will be exercised upon becoming fully vested and that the Company had completed
its initial public offering. All options are initially assumed to vest.
Cumulative compensation cost recognized in pro forma net income or loss with
respect to options that are forfeited prior to vesting is adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
F-19
<PAGE> 42
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's pro forma net loss and pro forma net
loss per common share would have been reported as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C> <C>
Net loss:.................................... As reported $(3,273,000) $(2,892,000)
Pro forma $(4,292,000) $(6,093,000)
Unaudited pro forma net loss per common and
common equivalent share.................... As reported $ (.24)
Pro forma $ (.50)
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 1. Historical net loss per common share are not
presented for periods prior to 1996 as it is not considered relevant given the
Company's initial public offering in 1996, which resulted in significant changes
in the Company's capital structure.
A summary of stock options as of December 31, 1995 and 1996 and changes
during the years then ended is presented below:
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..................... -- $ -- 2,096,713 $2.74
Granted............................................ 2,096,713 2.74 2,536,925 9.87
Canceled........................................... -- -- (397,100) 7.62
Exercised.......................................... -- -- (148,869) 1.70
--------- ---------
Outstanding at end of year........................... 2,096,713 $2.74 4,087,669 $6.73
========= =========
Options exercisable at end of year................... 207,296 $1.23 1,344,949 $3.13
========= =========
Weighted average grant date fair value of options
granted............................................ $ 2.11 $ 7.17
========= =========
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
------------------------ ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$.01 - $1.46.................... 598,473 8.58 years $ 1.24 147,680 $1.06
$3.75 - $9.00.................... 2,686,069 9.32 years $ 5.42 1,006,164 $3.75
$9.50 - $22.13................... 803,127 9.58 years $15.19 -- $ --
--------- ---------
$.01 - $22.13................... 4,087,669 9.26 years $ 6.73 1,153,844 $3.41
========= =========
</TABLE>
12. BONUS PLANS
In 1995, the Company adopted the 1996 Executive Bonus Plan ("Bonus Plan")
to provide a performance-based incentive for the Company's executive officers
and key employees. The Compensation Committee administers the Bonus Plan and
determines which employees are eligible for participation. Bonuses are based on
the Company's results of operations and, in certain cases, revenue for the
applicable period. Bonuses may be awarded under the Bonus Plan through the end
of 1996.
F-20
<PAGE> 43
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain employees of the Company are eligible for bonuses under various
employment agreements. Bonuses are primarily awarded based on the Company's
results of operations. Bonuses of $42,000, $495,000 and $490,000 were recorded
in 1994, 1995 and 1996, respectively, under the Bonus Plan and employment
agreements.
13. PURCHASED TECHNOLOGY
In May 1995, GM acquired certain office training application products in
exchange for $50,000 in cash, a note payable of $50,000, a royalty commitment,
125,556 shares of common stock, options to purchase 43,320 shares of the
Company's Common Stock with a value of $142,000 and payment of related legal
costs for a total value of $337,500. The difference between the fair value of
the options and their exercise price is treated as additional consideration of
$49,000. The recorded costs are being amortized pro rata based upon actual and
projected revenues to be generated from sales of the products. The Company
recognized amortization expense associated with the training application
products of approximately $332,000 and $5,500 in 1995 and 1996, respectively.
14. CAPITAL LEASES
The Company leases equipment under non-cancelable capital lease
obligations. Accordingly, the fair value of the equipment has been capitalized
and the related obligation recorded. The average implicit interest rate on these
leases was 6.8% at December 31, 1996. Interest is charged to expense at a level
rate applied to declining principal over the period of the obligation.
Future minimum lease payments under the capital leases as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
1997........................................................ $ 375,000
1998........................................................ 333,000
1999........................................................ 157,000
2000........................................................ 62,000
2001........................................................ 27,000
---------
Total minimum lease payments................................ 954,000
Less-amount representing interest........................... (84,000)
---------
Obligations under capital leases............................ 870,000
Less-current portion........................................ (331,000)
---------
Obligations under capital leases -- non-current............. $ 539,000
=========
</TABLE>
Interest expense on the outstanding obligations under such leases was
$3,000, $15,000 and $48,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
15. RETIREMENT AND PROFIT SHARING PLANS
The Company has adopted a 401(k) retirement savings plan, effective January
1996. All of the Company's employees are eligible to participate and may elect
to contribute up to 15% of their annual compensation to the plan. The Company
will provide a matching contribution of 50% of the employee's contribution up to
an annual maximum of 4% of the employee's annual compensation and a maximum
annual match limit of $2,500. The Company's matching contributions vest over a
four-year period. During 1996, the Company contributed approximately $272,000 to
the plan.
F-21
<PAGE> 44
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mastering Computers has a profit sharing plan. Contributions consist of an
annual discretionary contribution. Mastering Computers 1994 annual contributions
were $71,000. There were no 1995 or 1996 annual contributions.
16. INCOME TAXES
ERI was an S corporation for federal and state income tax purposes until
September 29, 1995. Accordingly, ERI was not subject to income tax, as all
taxable income or loss of ERI was reported in the tax return of its shareholders
for the period from inception through September 29, 1995. Upon the establishment
of ERI as a C corporation, a net deferred tax asset of approximately $502,000
was recorded by the Company which was fully reserved for by a valuation
allowance as of December 31, 1995.
GM and Mastering Computers were S corporations for federal and state income
tax purposes prior to merging with ERI on June 21, 1996 and August 1, 1996,
respectively. Accordingly, GM and Mastering Computers were not subject to income
tax prior to those dates, as all taxable income or loss of GM and Mastering
Computers was reported in the tax returns of their shareholders for the period
from inception through their respective merger dates. Upon merger with the
Company, net deferred tax assets of $30,000 and $125,000 relating to GM and
Mastering, respectively, were recorded by the Company.
Through December 31, 1995, the Company provided a valuation allowance to
fully offset its net deferred tax asset, which consisted primarily of the
benefit of net operating losses. Such net operating losses were primarily the
result of the Company's investment in infrastructure to significantly expand its
business and, to a much lesser degree, losses from its outdoor media business.
During 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. This reversal was based on management's determination
that the related deferred tax asset will be realized, on a more likely than not
basis, as a result of the Company's future years operations.
During 1996, the Company recorded an income tax benefit for the deferred
income tax asset created by 1996 operating losses. At December 31, 1996, in
accordance with the provisions of SFAS 109, management has determined that it is
more likely than not that the tax asset of approximately $2.3 million as of
December 31, 1996 will be realized in the foreseeable future based on taxable
income generated by future years operations.
The Company bases its determination on the significant growth that has
occurred in its business during 1996. The Company's revenue increased from $20.8
million in 1995 to $39.3 million in 1996, representing an 89% increase in
revenue. In addition, such revenue increased from $7.8 million in the first
quarter of 1996 to $13.7 million in the fourth quarter of 1996, representing a
76% increase in revenue. In 1995 and the first half of 1996, the Company
incurred significant losses due to expenditures related to developing and
expanding capacity for the delivery of its custom and product solutions and
services. The Company realized, as a result of such expenditures, positive
operating results for the fourth quarter of 1996, which generated taxable income
for that quarter. Further, the Company's management continues to believe that
the increases in margins achieved by its outdoor media business in 1996 over
1995 will continue. Based on its projections, the Company's management believes
that profitable operations will be sustained in future periods and that the
losses incurred by the Company in establishing and growing its infrastructure
will not recur. 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 at December 31, 1996 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 the use
of accelerated depreciation methods for income tax purposes, amortization
differences relating to certain intangible assets, net operating loss
carryforwards
F-22
<PAGE> 45
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("NOLs") and certain amounts accrued for book purposes which are not deductible
for income tax purposes until paid. The Company has tax NOLs totaling $4.5
million, which expire as follows: 2010-$.6 million and 2011-$3.9 million.
Management believes that taxable income during the carryforward period will
be sufficient to fully use 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 custom and product solutions
services and operating efficiencies which may be gained under the Company's
current strategies. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the Company's loss carryforward period are reduced.
The components of the net deferred income tax assets at December 31, 1995
and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........ $ 229,000 $1,724,000
Depreciation and amortization........... 514,000 602,000
Allowance for bad debts................. 57,000 127,000
Non-deductible accruals................. 108,000 155,000
Compensation related to options granted
below fair market value............... -- 130,000
Other................................... 10,000 (18,000)
Less -- valuation allowance............. (918,000) (424,000)
--------- ----------
$ -- $2,296,000
========= ==========
</TABLE>
A reconciliation of income tax benefit at the statutory rate to the
Company's effective rate is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computed at the expected statutory
rate.................................. (34%) (34%)
Non-deductible expenses................. -- 2%
State income tax benefit................ (2%) (4%)
Change in valuation allowance........... 16% (9%)
Loss from S Corporation................. 20% 4%
Other................................... -- (1%)
---- ----
Income tax benefit -- effective rate.... -- (42%)
==== ====
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
Non-Compete Agreement
In connection with a June 1994 redemption of 1,697,776 shares of Common
Stock from a GM founder and shareholder, GM entered into a non-compete agreement
with the former shareholder. Under the agreement, the former shareholder agreed
not to engage in certain business activities in exchange for a non-interest
bearing note from GM in the amount of $512,000. The value of the non-compete
agreement was recorded in other assets on the December 31, 1995 balance sheet
and was being amortized over two years. The Company recognized amortization
expense of $384,000, $118,000 and $10,000 in 1994, 1995 and 1996, respectively.
The Company is required to make monthly payments of $8,000 on the note through
September 1999. As of December 31, 1995 and 1996, the Company's total
obligations under the agreement were $352,000 and $256,000, respectively.
F-23
<PAGE> 46
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Licensing Agreement
On December 30, 1996, the Company signed a licensing agreement with NETG, a
division of National Education Group, to license NETG's software development
engine and over 100 existing computer based training titles, as well as over 300
titles to be developed in the eighteen months following the signing of the
agreement. The Company is committed to paying NETG future minimum royalties and
license fees of $600,000 in 1997 and $400,000 in 1998 as well as royalties for
each computer-based training title sale beyond the amount required to fulfill
the minimum royalty obligation.
Employment Agreement
The Company has entered into employment agreements with certain key
employees. Such employment agreements provide for severance benefits in certain
circumstances, as well as for bonus payments upon the attainment of certain
criteria, primarily related to operating income.
Operating Leases
The Company has entered into operating leases for outdoor media space,
office space and equipment. As of December 31, 1996, the Company had
approximately $600,000 of cash restricted as to payment of such leases. The
Company has subleased certain office space and accounts for the sublease as a
reduction of rent expense. As of December 31, 1996, future minimum lease
payments required under such operating leases are as follows:
<TABLE>
<CAPTION>
NET FUTURE
YEAR ENDED FUTURE MINIMUM FUTURE MINIMUM MINIMUM LEASE
DECEMBER 31, LEASE PAYMENTS LEASE INCOME PAYMENTS
- ------------ -------------- -------------- -------------
<S> <C> <C> <C>
1997............................................ $1,671,000 $(245,000) $1,426,000
1998............................................ 993,000 (225,000) 768,000
1999............................................ 893,000 -- 893,000
2000............................................ 898,000 -- 898,000
2001............................................ 424,000 -- 424,000
Thereafter...................................... 22,000 -- 22,000
---------- --------- ----------
Total................................. $4,901,000 $(470,000) $4,431,000
========== ========= ==========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$491,000, $1,130,000 and $2,123,000, respectively.
F-24
<PAGE> 47
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. INDUSTRY SEGMENTS
The relative contributions to revenue, income from continuing operations
and identifiable assets of the Company's three industry segments for the years
ended December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales to Unaffiliated Customers:
Product Solutions................................. $ 6,787,000 $10,167,000 $21,018,000
Custom Solutions.................................. 4,395,000 6,659,000 14,339,000
Outdoor Media Advertising......................... -- 3,959,000 3,907,000
----------- ----------- -----------
$11,182,000 $20,785,000 $39,264,000
=========== =========== ===========
Net Loss From Continuing Operations Before Tax
Benefit:
Product Solutions................................. $ 260,000 $ 639,000 $ 2,295,000
Custom Solutions(3)............................... (319,000) (1,153,000) (4,568,273)
Outdoor Media Advertising......................... -- (614,000) (396,727)
Corporate and Other(1)............................ (489,000) (1,501,000) (2,680,000)
----------- ----------- -----------
$ (548,000) $(2,629,000) $(5,350,000)
=========== =========== ===========
Identifiable Assets(2):
Product Solutions................................. $ 1,410,000 $ 280,000 $ 1,312,000
Custom Solutions.................................. 1,168,000 5,113,000 15,704,000
Outdoor Media Advertising......................... -- 6,081,000 4,977,000
Corporate and Other............................... 371,000 2,179,000 36,277,000
----------- ----------- -----------
$ 2,949,000 $13,653,000 $58,270,000
=========== =========== ===========
Capital Expenditures:
Product Solutions................................. $ 171,000 $ 129,000 $ 1,376,000
Custom Solutions.................................. 71,000 511,000 3,730,000
Outdoor Media Advertising......................... -- 108,000 177,000
Corporate and Other............................... 48,000 992,000 699,000
----------- ----------- -----------
$ 290,000 $ 1,740,000 $ 5,982,000
=========== =========== ===========
Depreciation and Amortization
Product Solutions................................. $ 62,000 $ 51,000 $ 253,000
Custom Solutions.................................. 581,000 475,000 1,096,000
Outdoor Media Advertising......................... -- 435,000 435,000
Corporate and Other............................... 6,000 96,000 365,000
----------- ----------- -----------
$ 649,000 $ 1,057,000 $ 2,149,000
=========== =========== ===========
</TABLE>
- ---------------
(1) Corporate and other includes corporate general and administrative expenses
(including such expenses that the Company believes are not reasonably
allocated to the industry segments), interest income and depreciation and
amortization expenses related to identified assets for corporate and other.
(2) Identifiable assets by industry segment include cash, accounts receivable,
other current assets, property and equipment, and goodwill.
(3) Includes approximately $1,056,000 of sales to affiliates in 1996.
F-25
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SkiView, Inc.:
We have audited the accompanying balance sheets of SkiView, Inc. as of
April 30, 1993 and 1994, and December 31, 1994, and the related statements of
operations and accumulated deficit and cash flows for the years ended April 30,
1993 and 1994, and the eight-month period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkiView, Inc. as of April
30, 1993 and 1994, and December 31, 1994, and the results of its operations and
its cash flows for the periods then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
January 24, 1996
F-26
<PAGE> 49
SKIVIEW, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
------------------------- DECEMBER 31,
1993 1994 1994
----------- ----------- ------------
<S> <C> <C> <C>
Current Assets:
Cash................................................ $ 58,365 $ 386,824 $ 53,901
Accounts receivable................................. 210,081 148,844 1,497,326
Other receivables................................... 17,061 78,038 34,804
Other current assets................................ 56,440 76,833 500,970
Related party receivable............................ 725,000 5,283 --
----------- ----------- -----------
Total Current Assets........................ 1,066,947 695,822 2,087,001
----------- ----------- -----------
Property, Plant and Equipment:
Land................................................ 19,300 19,300 19,300
Building and building improvements.................. 147,831 147,831 150,377
Advertising displays................................ 775,783 811,395 909,336
Equipment, furniture and fixtures................... 347,106 357,564 381,108
----------- ----------- -----------
1,290,020 1,336,090 1,460,121
Less -- Accumulated depreciation.................... (775,479) (868,682) (978,883)
----------- ----------- -----------
514,541 467,408 481,238
----------- ----------- -----------
Intangible Assets, net................................ 1,242,898 1,203,020 1,176,435
Other Asset........................................... 20,000 -- --
----------- ----------- -----------
Total Assets................................ $ 2,844,386 $ 2,366,250 $ 3,744,674
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt................ $ 5,925 $ 12,495 $ 32,375
Working capital loan................................ -- -- 436,000
Accounts payable.................................... 81,530 90,536 193,298
Accrued liabilities................................. 247,815 22,794 493,132
Revenue billed in advance........................... -- -- 1,202,958
----------- ----------- -----------
Total Current Liabilities................... 335,270 125,825 2,357,763
----------- ----------- -----------
Long-Term Debt, Net of Current Maturities............. 8,624,807 8,762,094 8,278,158
----------- ----------- -----------
Commitments
Stockholders' Equity (Deficit):
Common Stock........................................ 1,000 1,000 1,000
Preferred Stock..................................... 750,000 750,000 750,000
Additional paid-in capital.......................... 999,000 999,000 999,000
Treasury stock, 50 shares at cost................... -- (50) (50)
Accumulated deficit................................. (7,865,691) (8,271,619) (8,641,197)
----------- ----------- -----------
(6,115,691) (6,521,669) (6,891,247)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity
(Deficit)................................. $ 2,844,386 $ 2,366,250 $ 3,744,674
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 50
SKIVIEW, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE
EIGHT-MONTH
FOR THE YEARS ENDED APRIL 30, PERIOD ENDED
------------------------------ DECEMBER 31,
1993 1994 1994
------------- ------------- ------------
<S> <C> <C> <C>
Revenue............................................. $ 3,510,174 $ 2,810,550 $ 986,588
----------- ----------- -----------
Operating Expenses:
Costs and operating expenses...................... 1,512,457 1,364,852 469,064
General and administrative expenses............... 1,683,676 1,516,433 1,190,455
Depreciation and amortization..................... 182,378 155,556 140,922
----------- ----------- -----------
3,378,511 3,036,841 1,800,441
----------- ----------- -----------
Income (Loss) from operations..................... 131,663 (226,291) (813,853)
Interest Expense, net............................... (569,850) (571,710) (461,689)
----------- ----------- -----------
Net loss before extraordinary item........ (438,187) (798,001) (1,275,542)
Extraordinary Item:
Gain on Debt Restructuring........................ -- 392,073 905,964
----------- ----------- -----------
Net loss.................................. (438,187) (405,928) (369,578)
Accumulated Deficit, Beginning of Period............ (7,427,504) (7,865,691) (8,271,619)
----------- ----------- -----------
Accumulated Deficit, End of Period.................. $(7,865,691) $(8,271,619) $(8,641,197)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 51
SKIVIEW, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED EIGHT-MONTH
APRIL 30, PERIOD ENDED
---------------------- DECEMBER 31,
1993 1994 1994
--------- --------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(438,187) $(405,928) $ (369,578)
Adjustments to reconcile net loss to net cash flows from
operating activities --
Depreciation and amortization........................... 182,378 155,556 140,922
Extraordinary item: gain on debt restructuring.......... -- (392,073) (905,964)
Accrued interest........................................ 552,921 561,781 446,119
Changes in assets and liabilities --
Accounts receivable..................................... 86,436 61,237 (2,113,872)
Other receivables....................................... 705 (60,977) 43,234
Other current assets.................................... 32,668 (20,393) (424,137)
Related party receivable................................ (307,337) 719,717 5,283
Other assets............................................ -- 20,000 --
Accounts payable........................................ 3,262 9,006 102,762
Accrued liabilities..................................... (66,458) (225,021) 470,538
Revenue billed in advance............................... -- -- 1,968,348
--------- --------- -----------
Net cash flows from operating activities................ 46,388 422,905 (636,345)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment, net....... (123,387) (68,545) (128,167)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under working capital loan................. -- -- 436,000
Principal payments on long-term debt.................. (5,363) (25,851) (4,411)
Acquisition of treasury stock......................... -- (50) --
--------- --------- -----------
Net cash flows from financing activities........... (5,363) (25,901) 431,589
--------- --------- -----------
Net change in cash................................. (82,362) 328,459 (332,923)
CASH, beginning of period............................... 140,727 58,365 386,824
--------- --------- -----------
CASH, end of period..................................... $ 58,365 $ 386,824 $ 53,901
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 17,100 $ 8,400 $ 1,500
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 52
SKIVIEW, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DISPOSAL OF PRINCIPAL BUSINESS
Ski View, Inc. (the "Company"), a Delaware corporation, was formed in July
1984 primarily for the purpose of acquiring and managing outdoor advertising
businesses in ski resort areas.
Effective January 1, 1995, Eagle River Communications ("ERC"), which
subsequently became a wholly owned subsidiary of Eagle River Interactive, Inc.,
was granted a license by the Company to operate the Company's business. ERC was
required to pay the Company a monthly license fee of $35,000. In exchange, ERC
was given control of all the Company's assets, was required to pay all of its
liabilities (excluding debt of $8,310,533 as of December 31, 1994), and was
entitled to all of the economic benefit, if any, from operation of the Company's
business. The license also gave ERC the option to purchase the net assets it
controlled for $3,500,000. ERC exercised that option on September 29, 1995, by
paying the Company cash of $500,000 and delivering to the Company a note payable
for $3,000,000, bearing interest at 12% per annum and due in quarterly
installments of $150,000 plus accrued interest, commencing January 1, 1996.
Consequently, the Company's operations subsequent to December 31, 1994,
have been limited principally to collecting the license fees from ERC (through
September 1995) and closing the sale of its business as described above. In
effect, its business was assigned/sold to ERC on January 1, 1995. The then
present value of the consideration received (equating license payments to
interest) was approximately $3,500,000. That amount exceeds the carrying values,
as of December 31, 1994, of the net assets sold to ERC by approximately
$2,100,000; however, the sale transaction will not provide sufficient funds to
satisfy Company indebtedness not assumed by ERC, most of which is due the
Company's principal shareholder. (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies reflect practices common to the outdoor
advertising industry and are summarized below.
Accounts Receivable
Substantially all of the Company's revenues and resultant accounts
receivable are derived from charges for outdoor media space at ski resorts
throughout the United States.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Cost, for assets
initially acquired by the Company, was based upon the fair market values of
those assets at the date of acquisition as determined by an appraisal.
Depreciation is provided using accelerated and straight-line methods over the
estimated useful lives of the related assets ranging from three to seven years.
Revenue and Expense Recognition
The Company's business is cyclical in nature in that the advertising
contracted for by its customers is only displayed during the ski season
(November-April). The Company recognizes income attributable to this advertising
during the periods when the advertising is in place. Accordingly, revenue from
customer advertising is recognized evenly over the contractual period. Amounts
billed in advance of this contractual period are deferred and recognized as such
amounts are earned.
Operating expenses and sign installation costs are recognized as incurred
on an accrual basis. Tower and transit rental costs are recognized on a pro rata
basis over the ski season to coincide with the period over which the related
advertising revenues are recognized.
F-30
<PAGE> 53
SKIVIEW, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
In August 1984, the Company acquired all of the advertising displays,
signs, leases and licenses, advertising contracts and other assets from a third
party. The excess of purchase cost over the fair value of the assets acquired,
as determined by an independent appraiser, has been classified as intangible
assets in the accompanying balance sheets and is amortizable over a 40-year
period. Included in the accompanying statements of operations and accumulated
deficit is amortization expense of approximately $40,000 for each year ended
April 30, 1993 and 1994, and $27,000 for the eight-month period ended December
31, 1994.
3. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------- DECEMBER 31,
1993 1994 1994
---------- ---------- ------------
<S> <C> <C> <C>
Senior secured shareholder indebtedness,
interest at prime plus 1% (9.5% as of December
31, 1994), secured by the assets of the
Company --
Note payable.................................. $4,945,690 $4,945,690 $4,945,690
Accrued interest.............................. 2,251,479 2,659,054 2,739,317
Working capital loan facility................. 526,000 526,000 526,000
Subordinated notes payable to previous owners,
interest at prime (8.5% as of December 31,
1994) repayable in annual installments of
$32,375 plus interest through September
1996.......................................... 900,000 642,544 99,526
Other indebtedness.............................. 7,563 1,301 --
---------- ---------- ----------
8,630,732 8,774,589 8,310,533
Less -- Current maturities...................... 5,925 12,495 32,375
---------- ---------- ----------
$8,624,807 $8,762,094 $8,278,158
========== ========== ==========
</TABLE>
Stockholder indebtedness represents borrowings from the majority
shareholder via a note payable and a working capital loan facility. The note
payable was acquired by the majority shareholder from a bank effective May 15,
1990. The loan agreement which provides for these borrowings includes
restrictive covenants which, among other things, require that the Company:
-- Maintain Key Man life insurance on an executive of the Company
-- Limit payments made to affiliates
-- Restrict dividend payments
-- Maintain certain financial ratios
The Company was in violation of certain of these covenants, to which the
shareholder waived its rights and remedies to principal acceleration in
accordance with the loan agreement.
F-31
<PAGE> 54
SKIVIEW, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The subordinated notes payable to the previous owners originally
represented notes related to the acquisition of the Company. The Company and the
previous owners have reached agreements whereby the original notes and shares of
common stock were acquired by the Company in exchange for cash and new notes as
follows:
<TABLE>
<CAPTION>
EIGHT-MONTH
YEAR ENDED PERIOD ENDED
APRIL 30, DECEMBER 31,
1994 1994
---------- ------------
<S> <C> <C>
Old Notes:
Principal................................................. $279,844 $620,156
Accrued interest.......................................... 154,156 365,237
Common Stock.............................................. 50 --
-------- --------
434,050 985,393
Cash and new notes........................................ 41,977 79,429
-------- --------
Gain on debt restructuring................................ $392,073 $905,964
-------- --------
</TABLE>
Payments of accrued interest under the stockholder indebtedness and the
original notes payable to the previous owners have been suspended. As a result,
the amounts due related to these obligations have been reflected with long-term
debt in the accompanying balance sheets.
4. STOCKHOLDERS' EQUITY:
As of April 30, 1993 and 1994, and December 31, 1994, the status of the
Company's capital stock was as follows:
<TABLE>
<CAPTION>
PAR VALUE AUTHORIZED ISSUED
--------- ---------- ------
<S> <C> <C> <C>
Preferred Series A....................................... $100 10,000 7,500
Common................................................... $ 1 1,000 1,000
</TABLE>
The Series A shares represent cumulative redeemable preferred stock with no
voting rights. The cumulative dividends of 25% are payable quarterly. The
stockholder loan agreement restricts any dividend distributions by the Company
until all amounts under this agreement have been satisfied. Accordingly, no
dividends have been accrued or paid as of December 31, 1994.
The preferred stock is redeemable through September 30, 1997. The Company
may redeem up to 1,000 shares per year at a stated redemption price of $100 per
share plus any unpaid dividends as of the last dividend period.
5. COMMITMENTS:
The Company leases ski towers and transit displays under noncancelable
operating leases which expire on various dates through 1999. These lease
agreements provide that the Company incurs no lease obligation unless
advertising is displayed on the leased facility. Rental expense under these
arrangements for the years ended April 30, 1993 and 1994, and the eight-month
period ended December 31, 1994, was approximately $583,000, $464,000 and
$184,000, respectively.
6. RELATED PARTY TRANSACTIONS:
The Company has a working capital loan with the majority stockholder which
provides for borrowings not to exceed $750,000. These borrowings bear interest
at 15% and are due on demand. Interest expense under this
F-32
<PAGE> 55
SKIVIEW, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
arrangement, was approximately $20,000 and $12,000 for the years ended April 30,
1993 and 1994, and $11,000 for the eight-month period ended December 31, 1994,
respectively.
Prior to the acquisition of the Company, the Company reached a separation
agreement with one of its officers. This agreement provides for installment
payments totaling $380,000, of which $360,000 is included with accrued
liabilities in the accompanying balance sheet as of December 31, 1994.
The Company invests certain excess cash balances jointly with a stockholder
in an interest-bearing account held by the shareholder. The Company's portion of
such investments is included with the related party receivable in the
accompanying balance sheets.
The Company has a contractual arrangement with a stockholder to provide
services relative to obtaining advertising contracts with the Company. Expenses
under these agreements were approximately $250,000 for each of the years ended
April 30, 1993 and 1994, and $133,000 for the eight-month period ended December
31, 1994.
A stockholder of the Company provides management assistance to the Company.
Management fee expenses were approximately $50,000 for each of the years ended
April 30, 1993 and 1994, and $33,000 for the eight-month period ended December
31, 1994.
7. INCOME TAXES:
The Company has incurred net operating losses since inception. Accordingly,
no provision for income taxes has been made in the accompanying financial
statements. The forgiveness of debt discussed in Note 3 was treated as a
reduction of net operating loss carryforwards for income tax purposes. There are
no other significant differences between the accumulated loss for financial
reporting purposes and income tax purposes. The Company's net operating loss
carryforwards are approximately $7,700,000 as of December 31, 1994, and may be
used to reduce future federal taxable income, if any, and expire between 1999
and 2010. These operating losses are subject to limitations upon certain events,
including certain ownership changes.
F-33
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 -- Certificate of Incorporation of the Registrant(1)
3.2 -- Bylaws of the Registrant(1)
3.3 -- Certificate of Designation, Preferences and Rights of
Series B Preferred Stock(1)
4.1 -- Specimen Certificate for Common Stock(1)
4.2 -- Rights Agreement between the Registrant and Harris Trust
and Savings Bank, as Rights Agent(1)
10.1 -- Registrant's 1995 Executive Stock Option Plan(1)(2)
10.2 -- Form of Stock Option Agreement under Registrant's 1995
Executive Stock Option Plan(1)(2)
10.3 -- Registrant's 1995 Employee Stock Option Plan(1)
10.4 -- Form of Stock Option Agreement under Registrant's 1995
Employee Stock Option Plan(1)
10.5 -- Amended and Restated Employment Agreement with Terence M.
Graunke(1)(2)
10.6 -- Employment Agreement with Marc Pinto(1)(2)
10.7 -- Form of Directorship Agreement between the Registrant and
each director(1)
10.8 -- Registrant's 401(k) Plan(1)(2)
10.9 -- Trust Agreement between the Registrant and the Charles
Schwab Trust Company relating to the Registrant's 401(k)
Plan(1)(2)
10.10 -- Registrant's Employee Stock Purchase Plan(1)(2)
10.11 -- Registrant's Performance Bonus Plan(1)(2)
10.12 -- Registration Rights Agreement between the Registrant and
the holders of the Registrant's Series A Preferred Stock,
as amended(1)
10.13 -- Asset Purchase Agreement by and among SkiView, Inc.,
SkiView Acquisition Corp. and Allegheny Media(1)
10.14 -- Secured Promissory Note of SkiView, Inc. in favor of
Oldview, Inc.(1)
10.15 -- Security Agreement between SkiView, Inc. and Oldview,
Inc. and U.S. Communications Corporation(1)
10.16 -- Agreement and Plan of Merger dated June 21, 1996 among
Eagle River Interactive, Inc., Sushi Acquisition Corp.,
Graphic Media, Inc. And Stockholders thereof(3)
10.17 -- Stock Pledge Agreement dated June 21, 1996 by and among
Lee Jacobson, Philip Meurer, E. Michael Loftus and Joseph
Parker and Eagle River Interactive, Inc.(3)
10.18 -- Registration Agreement dated June 21, 1996 between Eagle
River Interactive, Inc., Philip Meurer, Joseph Parker,
Lee J. Jacobson and E. Michael Loftus(3)
10.19 -- Employment and Noncompetition Agreement dated June 21,
1996 between Graphic Media, Inc. And Philip Meurer(3)(2)
10.20 -- Agreement and Plan of Merger dated as of July 31, 1996 by
and among Eagle River Interactive, Inc., Ute Creek
Acquisition Corp. And Mastering Computers, Inc.(4)
10.21 -- Supplemental Agreement dated as of July 31, 1996 by and
among Eagle River Interactive, Inc., Ute Creek
Acquisition Corp., Mastering Computers, Inc. and Thomas
R. Graunke(4)
10.22 -- Stock Pledge Agreement dated as of July 31, 1996 between
Eagle River Interactive, Inc. and Thomas R. Graunke(4)
10.23 -- Registration Rights Agreement dated as of July 31, 1996
between Eagle River Interactive, Inc. and Thomas R.
Graunke(4)
10.24 -- Employment and Noncompetition Agreement dated as of July
31, 1996 between Eagle River Interactive, Inc. and Thomas
R. Graunke(4)(2)
10.25 -- Employment and Noncompetition Agreement dated as of
December 9, 1996 between Eagle River Interactive, Inc.
and Kevin J. Rowe(2)
11 -- Statement regarding computation of per share earnings
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
22 -- Subsidiaries of Registrant
23 -- Consent of Arthur Andersen LLP
24 -- Power of Attorney (contained on signature pages hereto)
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-702)
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the exhibits to the Company's Current Report on
Form 8-K dated June 21, 1996.
(4) Incorporated by reference to the exhibits to the Company's Current Report on
Form 8-K dated July 31, 1996.
<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of
December 9, 1996 (the "Effective Date"), by and between EAGLE RIVER
INTERACTIVE, INC., a Delaware corporation (the "Company"), and KEVIN ROWE (the
"Executive").
RECITALS:
A. The Company desires to obtain the benefit of the Executive's
knowledge, skills and experience and assure itself of the ongoing right to
Executive's services, beginning on the Effective Date, and is willing to do so
on the terms and conditions set forth in this Agreement; and
B. The Executive is willing and able to render services to the
Company, beginning on the Effective Date, on the terms and conditions set forth
in this Agreement;
AGREEMENTS:
In consideration of the mutual agreements, provisions and covenants
contained in this Agreement, the Company and Executive hereby agree as follows:
1. EMPLOYMENT.
(a) Title and Duties of Executive. Subject to all of the terms
and conditions provided in this Agreement, the Company hereby employs Executive
as Executive Vice President, and Executive hereby accepts employment with the
Company. Executive shall report to the Chairman, President and Chief Executive
Officer of the Company (the "Reporting Officer"), or such other person as may
be designated by the Reporting Officer. Executive's initial area of
responsibility shall be to lead the interactive development division of the
Company. Executive's duties together with his title are subject to
modification by the Reporting Officer, provided that any such modification
shall be consistent with Executive's skills and experience and in the best
interests of the Company. Executive shall at all times be subject to and shall
observe and carry out such reasonable rules, regulations, policies, directions
and restrictions as may be established from time to time by the Company.
(b) Performance. Throughout the period of Executive's employment
hereunder, Executive shall devote his full business time, attention, knowledge
and skills, faithfully, diligently and to the best of Executive's ability, to
the active performance of his duties hereunder, and do such traveling as may
reasonably be required in connection with the performance of such duties.
2. TERM OF EMPLOYMENT.
Unless terminated as provided in Section 5 hereof, the term of this
Agreement shall be for a period of four years, commencing on the Effective Date
and continuing through and including the day immediately preceding the fourth
anniversary of the Effective Date (the "Employment Period").
3. COMPENSATION AND BENEFITS.
(a) Base Salary. As compensation for the services to be rendered
by Executive hereunder, the Company shall pay to Executive a base salary of
$200,000 per year (the annual base salary payable hereunder, as the same may be
adjusted from time to time, is referred to herein as the "Base Salary"),
payable in periodic installments (but in no event less frequently than monthly)
in accordance with the standard payroll practices of the Company in effect from
time to time, less income tax withholdings and other required employee
deductions. Executive's Base Salary shall be reviewed on a merit basis on the
first
<PAGE> 2
anniversary date of this Agreement.
(b) Bonus. For each fiscal year during the Employment Term, the
Company will set a target bonus for Executive equal to $200,000 through
Executive's participation in the Company's Performance Bonus Plan for its
senior executive officers and senior management officers, as implemented by the
Compensation Committee of the Company. The amount of the bonus actually paid,
if any, will be determined by the Company based upon the financial objectives
as set forth in such Performance Bonus Plan. If Executive's employment has
been terminated prior to the end of any fiscal year by Company without cause,
Executive shall be entitled to receive a portion of the bonus which would have
been payable to him under the Performance Bonus Plan with respect to such
Fiscal Year, if any, such amount to be determined by the Compensation Committee
of the Company in good faith.
(c) Business Expenses; Car Allowance. In accordance with the
Company's policies established from time to time, the Company will pay or
reimburse Executive for all reasonable and necessary out-of-pocket expenses
incurred by him in the performance of his duties under this Agreement, subject
to the presentation by Executive of appropriate receipts and vouchers. The
Company shall pay to Executive an automobile allowance in the amount of $650
per month.
(d) Stock Options. Forthwith following the Effective Date,
Executive shall be granted an option to purchase 300,000 shares of the common
stock of the Company (the "Stock Option"). The Stock Option shall vest and
become exercisable in four annual installments of 75,000 shares, beginning on
the day immediately preceding the first anniversary of the Effective Date, at
the exercise price per share equal to the per share fair market value of the
common stock of the Company determined as of the last trading day prior to the
option grant date. The Stock Option shall be granted under the Company's 1995
Executive Stock Option Plan, and shall be subject to the terms and conditions
of such plan and the Stock Option Agreement, to be executed by the Executive
and the Company in the form attached hereto as Exhibit A. Notwithstanding the
foregoing, the grant of the Stock Options to the Executive will ratably lapse
(based on all option grants in excess of the number of shares authorized under
the Executive Stock Option Plan) if, at the next annual meeting of
Stockholders, the Stockholders of the Company do not approve an increase in the
number of shares authorized under the Executive Stock Option Plan so as to
sufficiently cover all grants of Stock Options outstanding at the time of such
Stockholder's approval. In the event, some or all of the Stock Options granted
to Executive lapse as a result of the failure of the Company's stockholders to
approve a sufficient increase in the number of shares authorized under the
Executive Stock Option Plan, the Company shall in good faith offer the
Executive stock appreciation rights, a bonus, or other form of compensation in
order to compensate the Executive for any loss of the economic benefit of the
such lapsed Stock Options.
(e) Fringe Benefits. The Company shall make available to
Executive, throughout the period of employment hereunder, such benefits and
perquisites as are generally provided by the Company to its executive
employees. Without limiting the foregoing, the Company shall make available to
Executive any benefits payable following a change in control of the Company,
including severance benefits, as are generally provided by the Company to its
executive employees subject to any terms and conditions which are generally
applicable to such executive officers. Furthermore, without limiting the
foregoing, Executive shall be eligible to participate in the pension plan,
group life, health or accident insurance, or other such plan or policy which
may presently be in effect or which may hereafter be adopted by the Company for
the benefit of its executive employees generally, in each case subject to the
terms and conditions of any such plan or policy.
(f) Severance Pay. In consideration of his employment and the
covenants and agreements accepted by the Executive hereunder, including without
limitation, Executive's covenants set forth in Section 8 hereof, the Company
shall pay to the Executive severance compensation in accordance with the
provisions of this Section 3(f). In the event Executive's employment with the
Company is terminated by the Company without cause pursuant to Section 5(d)
herein, or if Executive resigns from employment with the Company for Good
Reason (as defined below), and the effective date of such termination or
resignation
<PAGE> 3
is during the initial Employment Period, the Company shall pay to the Executive
severance pay an aggregate amount equal to (i) 75% of the Base Salary that he
was receiving immediately before his termination if such termination or
resignation is effective at any time prior to the third anniversary of this
Agreement, or (ii) 50% of the Base Salary that he was receiving immediately
before his termination if such termination or resignation is effective at any
time on or after the third anniversary of this Agreement (in either case, the
"Severance Amount"). The Severance Amount shall be payable in periodic
installments subject to the terms of Section 3(a), less income tax withholdings
and other required employee deductions. For purposes of this Agreement, "Good
Reason" means that the Executive is required as a condition of his employment
to relocate his office more than 40 miles from the present location of the
Company's Chicago office, the Company changes Executive's duties such that
Executive's job responsibilities and working conditions are materially and
adversely affected without the consent of the Executive, or the amount of
Executive's Base Salary is reduced below the initial Base Salary set forth in
Section 3(a) above without the consent of the Executive.
4. VACATION.
Throughout the period of Executive's employment hereunder, Executive
shall be entitled to take, from time to time, on an annual basis, four weeks of
vacation with pay, at such times as shall be mutually convenient to Executive
and the Company.
5. TERMINATION.
(a) Cause. At any time during the term of Agreement, the Company
may, without any further liability hereunder, forthwith terminate the term of
Executive's employment under this Agreement at any time "for cause."
Termination "for cause" shall mean termination by action of the Board of
Directors (or an officer designated by the Board) because of any one or more of
the following: (i) the Executive's conviction of, or plea of nolo contendere
to, a felony; (ii) the Executive's breach of any legal duty of loyalty to the
Company, misappropriation of the Company's funds, or dishonest, fraudulent,
illegal or unethical business conduct; (iii) the failure of Executive to
perform the duties provided in Section 1 or comply with the reasonable rules,
regulations, policies, directions and restrictions generally applicable to
employees in similar positions as may be established from time to time by the
Company, which failure to so perform or comply shall continue after notice from
the Company; (iv) the Executive's breach of the obligations provided in
Sections 6, 7, 8 and 9 of this Agreement; (v) the Executive's illegal use of
controlled substances; or (vi) any material breach of this Agreement by the
Executive (other than one identified above) which shall continue after notice
from the Company. Termination "for cause" shall be effective immediately for
those events described in subparagraphs (i), (ii), (iv), and (v). Termination
"for cause" shall be effective immediately upon the giving of written notice by
the Company to Executive of the continuance of Executive's failure to perform
or comply with respect to the items described in subparagraph (iii) above or
the continuance of a breach described in subparagraph (vi) above. In the event
that the Executive is purportedly terminated for cause and a court, arbitration
panel or other tribunal having jurisdiction determines that "cause" as defined
herein was not present, then such purported termination for cause shall be
deemed a termination without cause pursuant to Section 5(d) and the Executive's
rights and remedies will be governed by Section 3(f) hereof, in full
satisfaction and in lieu of any and all other or further remedies the Executive
may have.
(b) Death of Executive. This Agreement shall terminate
automatically upon the death of Executive.
(c) Disability. This Agreement shall terminate upon a
determination by the Board of Directors that the Executive is unable to perform
the essential functions of his employment position, due to a disability of
Executive that cannot be reasonably accommodated by the Company, the
effectiveness of such termination to be the date on which Executive becomes
eligible to receive benefits under the long term disability plan of the Company
in effect on the date of such termination, or such later date as determined by
the Board of Directors.
<PAGE> 4
(d) Termination Without Cause. This Agreement may be terminated
by either party without cause, or by the Executive for Good Reason (as defined
in Section 3(f) above), by giving written notice of termination at least two
weeks prior to the effective date of such termination.
6. CONFIDENTIAL INFORMATION.
(a) Disclosure and Use. Executive shall not disclose or use at
any time, either during or after Executive's employment with the Company or any
other direct or indirect subsidiary of the Company (collectively referred to
herein as the "Company"), any trade secrets or other confidential information,
whether patentable or not, of the Company, including but not limited to,
technical or non-technical data, a formula, pattern, compilation, program,
device, method, technique, drawing, process, financial data, or list of actual
or potential customers or suppliers, of which Executive is or becomes informed
or aware during said employment, whether or not developed by Executive, except
(i) as may be required for Executive to perform his employment duties with the
Company; (ii) to the extent such information has been disclosed to Executive by
a third party who is not subject to restriction on the dissemination of such
information or becomes generally available to the public other than as a result
of a disclosure by a party who is not subject to restriction on the
dissemination of such information; (iii) information which must be disclosed as
a result of a subpoena or other legal process, after the Company has had the
opportunity to request a suitable protective order for such information, or
(iv) unless Executive shall first secure the Company's prior written
authorization. This covenant shall survive the termination of Executive's
employment with the Company, and shall remain in effect and be enforceable
against Executive for so long as any such Company secret or confidential
information retains economic value, whether actual or potential, from not being
generally known to other persons who can obtain economic value from its
disclosure or use. Executive shall execute such reasonable further agreements
of Executive's obligations to the Company concerning non-disclosure of Company
trade secrets and confidential information as the Company may require from time
to time.
(b) Return of Materials. Upon termination of his employment with
the Company, Executive shall promptly deliver to the Company all customer
lists, specifications, drawings, listings, documentation, manuals, letters,
notes, note books, reports, and copies thereof, and all other materials of a
secret or confidential nature relating to the Company's business, which are in
the possession or under the control of Executive.
7. INVENTIONS AND DISCOVERIES.
Executive hereby assigns to the Company all of Executive's rights,
title and interest in and to all inventions, discoveries, processes, designs
and other intellectual property (hereinafter referred to collectively as the
"Inventions"), and all improvements on existing Inventions made or discovered
by Executive during the term of Executive's employment by the Company.
Promptly upon the development or making of any such Invention or improvement
thereon, Executive shall disclose the same to the Company and shall execute and
deliver to the Company such reasonable documents as the Company may request to
confirm the assignment of Executive's rights therein and, if requested by the
Company, shall assist the Company in applying for and prosecuting any patents
which may be available in respect thereof. The Company acknowledges and hereby
notifies Executive that this Section 7 does not apply to an Invention for which
no equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on Executive's own time, unless (a) the
Invention relates to (i) the business of the Company, or (ii) the Company's
actual or demonstrably anticipated research or development, or (b) the
Invention results from any work performed by Executive for the Company.
8. RESTRICTIVE COVENANT. As conditions of his employment and in
consideration of his employment, Executive covenants and agrees as follows:
(a) during his employment with the Company, and for a
period of 12 months
<PAGE> 5
thereafter, he will not, without the prior written consent of the Board of
Directors of the Company, directly or indirectly, as a stockholder (except as a
stockholder owning beneficially or of record less than 5% of the outstanding
shares of any class of publicly traded stock of any issuer), or as an officer,
director, employee, partner, joint venturer, proprietor or otherwise, engage
in, become interested in, consult with, lend to or borrow from, advise or
negotiate for or on behalf of, any business which is competitive with any
business in which the Company is engaged during the one year period immediately
preceding the termination of Executive's employment with the Company and which
is conducting such competitive business in the United States or any other
jurisdiction in which the Company is doing business during the one year period
immediately preceding the termination of Executive's employment with the
Company (a "Competitive Company"); provided, however, that notwithstanding the
foregoing, but subject to the other provisions of this Section 8, the Executive
shall be permitted to become an employee of a Competitive Company if: (i) the
Competitive Company's competitive line of business does not constitute a
principal business activity of such company; (ii) Executive's activities with
respect to the Competitive Company are unrelated in any material respect to the
competitive business during the effective period of this Section 8(a); (iii)
the Executive provides the Company reasonable evidence of his compliance with
this Section 8(a) and Section 8(d) below; and (iv) the Competitive Company
acknowledges to the Company in writing that it will not take any action the
effect of which would be to cause or otherwise allow the Executive to violate
his obligations under this Section 8.
(b) during his employment with the Company, and for a
period of 12 months thereafter, he will not solicit (or employ or cause to be
employed other than by the Company) other employees of the Company or any
affiliate or subsidiary of the Company, directly or indirectly, for the purpose
of enticing them to leave their employment with the Company or any affiliate or
subsidiary of the Company;
(c) during his employment with the Company, and for a
period of 12 months thereafter, he will not attempt in any manner to solicit
from any client of the Company at any time during the Employment Period any
business of the type performed by the Company or to persuade any such client to
cease doing business, or to reduce the amount of business which such client has
customarily done or contemplates doing, with the Company, whether or not the
relationship between the Company and such client was originally established in
whole or in part through his efforts;
(d) during his employment with the Company, and for a
period of 12 months thereafter, he will make full and complete disclosure of
the existence of this Agreement and the content of this Section 8 to all
prospective employers with whom he may discuss possible employment;
(e) he will refrain from any disparagement, whether
direct or indirect, through innuendo or otherwise, of the Company or any of its
employees, agents, officers, directors, shareholders or affiliates, it being
acknowledged that this provision shall not be deemed to limit the expression by
the Executive of his honest and fair opinion given to the Company's directors,
officers, or employees in the course of the performance of Executive's
employment;
(f) during his employment with the Company, he will not,
without the prior written consent in each case of the President and Chief
Executive Officer or Board of Directors of the Company: (i) participate
actively in any other business interests or investments which would conflict
with his responsibilities under this Agreement or (ii) borrow money from, or
lend to, customers (except those commercial institutions whose business it is
to lend money) or individuals or firms from which the Company, or any affiliate
or subsidiary of the Company, buys services, materials, equipment or supplies,
or with whom the Company, or any affiliate or subsidiary of the Company, does
business;
(g) that, during his employment with the Company, he will
not, without the prior written consent in each case of the President and Chief
Executive Officer or Board of Directors of the Company: (i) exchange goods,
products or services of the Company in return for goods, products or services
of any individual or firm or (ii) accept gifts or favors from any outside
organization or agency
<PAGE> 6
which, individually or collectively, may cause undue influence in his selection
of goods, products or services for the Company;
(h) that, after the termination of his employment with
the Company, he will not secure, or attempt to secure, from any employee or
former employee of the Company or any affiliate or subsidiary of the Company,
any information relating to the Company or any affiliate or subsidiary of the
Company or its business operations; and
(i) that, he will promptly and voluntarily advise the
President and Chief Executive Officer or Board of Directors of the Company of
any activities which might result in a conflict of interest with his duties to
the Company hereunder. Executive represents and warrants to the Company that,
notwithstanding the operation of the covenants contained in this Section 8,
upon the termination of his employment hereunder, Executive will be able to
obtain employment for the purpose of earning a livelihood.
9. AGREEMENTS REGARDING PRIOR EMPLOYMENT.
(a) As used in this Section 9 the following terms have
the following meanings.
"Trade Secret" means the whole or any portion of the
property of a person (the "Owner") consisting of any information,
pattern, compilation, data, list, document, memorandum, process,
program, device, method, technique, formula or improvement, whether
patentable or not, relating to the business of the Owner (i) of which
Executive became aware as a consequence of or through his relationship
with the Owner; (ii) which derives independent economic value, actual
or potential, from not being generally known to the public or to other
persons who can obtain economic value from its disclosure or use; and
(iii) which is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. Assuming these three criteria
are met, Trade Secrets shall include information relating to the
financial affairs, customers, employees, employees' compensation,
research, development, inventions, existing and future products and
services, plans and designs, and marketing of the Owner. Trade
Secrets shall not include any data or information that has been
voluntarily disclosed to the public by the Owner or become generally
known to the public.
"Former Employer" means, collectively, Systemhouse,
Inc. and Andersen Consulting, as well as any parent, subsidiary, and
affiliate corporations of either of them.
(b) To induce the Company to enter into this Agreement,
Executive represents to the Company that the following statements are true and
correct:
(i) Executive has not delivered to the Company,
directly or indirectly, any document, writing or other physical
manifestation containing or disclosing any Trade Secret of a Former
Employer;
(ii) Executive has not, to the best of his
knowledge, orally disclosed to the Company, directly or indirectly,
any Trade Secret of a Former Employer;
(iii) Executive has delivered all documents which
set forth Executive's obligations to any Former Employer with respect
to the nondisclosure of information, competition, or the solicitation
of the employees or customers;
(iv) No Former Employer has asserted that
Executive has misappropriated, wrongfully disseminated or otherwise
improperly used any of their respective Trade Secrets;
(v) Executive has not threatened or otherwise
expressed an intent to disclose to any person any Trade Secret of any
Former Employer;
<PAGE> 7
(vi) Executive does not believe that the
performance of his duties and responsibilities arising from this
Agreement will require his reliance on, use of or disclosure of any
Trade Secret of any Former Employer.
(c) Executive and the Company make the following
covenants to each other:
(i) Neither the Company nor Executive intends to
obtain, learn, disclose or use any Trade Secret of a Former Employer;
(ii) Executive will not disclose to the Company
any Trade Secret of a Former Employer, and the Company will not
request Executive to make any such disclosure.
10. SEVERABILITY.
If any provision of this Agreement is held invalid or unenforceable,
either in its entirety or by virtue of its scope or application to given
circumstances, such provision shall thereupon be deemed modified only to the
extent necessary to render the same valid, or not applicable to the given
circumstances, or excised from this Agreement, as the situation may require,
and this Agreement shall be construed and enforced as if such provision had
been included herein as so modified in scope or application, or had not been
included herein, as the case may be. Should this Agreement, or any one or more
of its provisions hereof, be held to be invalid, illegal or unenforceable
within any governmental jurisdiction or subdivision thereof, the Agreement or
any such provision or provisions shall not as a consequence thereof be deemed
to be invalid, illegal or unenforceable in any other governmental jurisdiction
or subdivision thereof. The existence of any claim or cause of action which
Executive may have against the Company shall not constitute a defense or bar to
the enforcement of any of the provisions of this Agreement and shall be pursued
through separate court action by the Executive.
11. LEGAL REMEDIES.
Executive hereby acknowledges that the Company would suffer
irreparable injury if the provisions of paragraphs 6, 7, 8, and 9 above, which
shall survive the termination of the Agreement, were breached and that the
Company's remedies at law would be inadequate in the event of such breach.
Accordingly, Executive hereby agrees that any such breach or threatened breach
may, in addition to any and all other available remedies, be preliminarily
enjoined by the Company without bond or other security and without having to
prove the inadequacy of the available remedies at law. In the event of
litigation under this Agreement, each of the Company and Executive shall pay
its own attorneys' fees and expenses.
12. NON-ASSIGNABILITY.
In light of the unique personal services to be performed by Executive
hereunder, it is acknowledged and agreed that any purported or attempted
assignment or transfer by Executive of this Agreement or any of Executive's
duties, responsibilities or obligations hereunder shall be void. This
Agreement may be assigned by the Company to any subsidiary or affiliate of the
Company without the prior written consent of Executive.
13. NOTICES.
Any notice, request, demand or other communication required or
permitted under this Agreement shall be in writing and shall be deemed to have
been given when delivered personally or when mailed by certified mail, return
receipt requested, addressed as follows:
<PAGE> 8
If to the Company:
Eagle River Interactive, Inc.
400 West Erie
Suite 504
Chicago, IL 60610
Attention: President
with a copy to:
Mr. Fred D. McCallister
Eagle River Interactive, Inc.
1701 N. Market Street, Suite 400
Dallas, Texas 75202
If to Executive:
Kevin Rowe
21788 Chapel Hill Road
Barrington, IL 60010
or to such other address or addresses as may be specified from time to time by
notice; provided, however, that any notice of change of address shall not be
effective until its receipt by the party to be charged therewith.
14. GENERAL.
(a) Amendments. Neither this Agreement nor any of the terms or
conditions hereof may be waived, amended or modified except by means of a
written instrument duly executed by the party to be charged therewith.
(b) Captions and Headings. The captions and paragraph headings
used in this Agreement are for convenience of reference only, and shall not
affect the construction or interpretation of this Agreement or any of the
provisions hereof.
(c) Assumption of Obligations. The Company agrees that it shall
not enter into any merger, reorganization, sale of substantially all its assets
or other similar agreement or transaction without specifically providing that
any successor entity shall assume the obligations of the Company hereunder.
Executive agrees that the Company may assign its rights hereunder to such
successor entity provided that such assignment shall not offset, reduce, or
diminish any rights which shall accrue to Executive as a result of any Change
in Control (as defined in the 1995 Executive Stock Option Plan of Eagle River
Interactive, Inc.) which may thereby occur. Except as set forth in this
Section, neither the Company nor Executive shall assign their rights under this
Agreement without the consent of the other party.
(d) Successors and Assigns. Subject to Section 14(c), this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, administrators, personal
representatives, successors and assigns.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all
of which together shall constitute one and the same instrument.
(f) Entire Agreement. Except as otherwise set forth or referred
to in this Agreement, this Agreement constitutes the sole and entire agreement
and understanding between the parties hereto as to the
<PAGE> 9
subject matter hereof, and supersedes all prior discussions, agreements and
understandings of every kind and nature between them as to such subject matter.
(g) Reliance by Third Parties. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns, and no other person or entity shall have any right to rely on this
Agreement or to claim or derive any benefit therefrom absent the express
written consent of the party to be charged with such reliance or benefit.
(h) Governing Law. This Agreement shall be construed in
accordance with and governed in all respects by the laws of the State of
Illinois (without giving effect to the conflicts of laws provisions thereof).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the date first set forth above.
EAGLE RIVER INTERACTIVE, INC.
By: /s/ Terence M. Graunke
-------------------------------------
Terence M. Graunke, President
/s/ Kevin Rowe
----------------------------------------
Kevin Rowe
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF PRO FORMA
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE
<TABLE>
<CAPTION>
Average Shares Outstanding
As of December 31,
Shares --------------------------
Issued Issue Date 1996
--------- ----------- -----------
<S> <C> <C> <C>
Common Stock 3,122,448 (a) 3,122,448
Common Stock 15,000 10/3/95 15,000
Common Stock 3,600,000 9/29/95 (b) 3,600,000
Common Stock 426,000 12/12/95 (b) 426,000
Common Stock 4,000,000 3/22/96 (c) 3,123,288
Common Stock 309,000 3/22/96 (d) 241,274
Common Stock 148,869 (e) 28,808
Common Stock 10,673 (f) 3,964
Common Stock 424,444 (g) 424,444
Common Stock 125,556 (g) 125,556
Common Stock 1,175,000 (g) 1,175,000
-----------
12,285,782
===========
</TABLE>
Method Used For Calculation
(a) Represents Common Stock issued in connection with the recapitalization of
Eagle River Interactive, Inc. in 1995.
(b) Originally issued as Series A Preferred Stock and converted to Common Stock
in 1996. Calculation assumes conversion on the date of issuance.
(c) Shares issued in conjunction with the Company's initial public offering.
(d) Shares issued to the underwriters in conjunction with the Company's initial
public offering.
(e) Shares issued upon exercise of stock options at various dates throughout
1996.
(f) Shares issued pursuant to the Employee Stock Purchase Plan at various dates
throughout 1996.
(g) Shares issued in connection with the GM and Mastering Computers mergers (see
footnote 2 in the financial statements)
<PAGE> 1
EXHIBIT 22
EAGLE RIVER INTERACTIVE, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION
- ------------------------------- ------------
<S> <C>
SkiView, Inc. Delaware
Eagle River Productions, Inc. Delaware
Graphic Media, Inc. Oregon
Mastering Computers, Inc. Arizona
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Eagle River Interactive, Inc.'s
previously filed Registration Statement File No. 333-07133.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 28, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-k
FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,995,000
<SECURITIES> 0
<RECEIVABLES> 6,593,000
<ALLOWANCES> 331,000
<INVENTORY> 0
<CURRENT-ASSETS> 45,396,000
<PP&E> 10,726,000
<DEPRECIATION> 2,965,000
<TOTAL-ASSETS> 58,270,000
<CURRENT-LIABILITIES> 7,552,000
<BONDS> 804,000
0
0
<COMMON> 14,000
<OTHER-SE> 49,900,000
<TOTAL-LIABILITY-AND-EQUITY> 58,270,000
<SALES> 0
<TOTAL-REVENUES> 39,264,000
<CGS> 0
<TOTAL-COSTS> 46,200,000
<OTHER-EXPENSES> 107,000
<LOSS-PROVISION> (97,000)
<INTEREST-EXPENSE> 93,000
<INCOME-PRETAX> (5,350,000)
<INCOME-TAX> 2,260,000
<INCOME-CONTINUING> (3,090,000)
<DISCONTINUED> 198,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,892,000)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
