<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28004
EAGLE RIVER INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1320277
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11000 N. SCOTTSDALE RD., #260
SCOTTSDALE, ARIZONA 85254
(Address of principal executive offices) (zip code)
(602) 998-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
---- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT AUGUST 11, 1997
----- ------------------------------
<S> <C>
Common Stock, $.001 par value 13,597,174 shares
</TABLE>
<PAGE> 2
EAGLE RIVER INTERACTIVE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
as of June 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of
Operations for the Three and Six Months
Ended June 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash
Flows for the Six Months Ended June 30, 1997
and 1996 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 32,681 $ 33,995
Accounts receivable, net 2,423 1,130
Other current assets 4,002 2,704
Net current assets of discontinued operations 4,331 4,268
-------- --------
Total Current Assets 43,437 42,097
Property and Equipment, net 3,022 1,397
Other Assets, net 1,218 1,065
Net long-term assets of discontinued operations 10,065 9,789
-------- --------
Total Assets $ 57,742 $ 54,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,700 $ 898
Accrued liabilities 2,710 2,212
Other current liabilities 1,624 1,107
Current portion of note payable and capital lease
obligations 44 36
-------- --------
Total Current Liabilities 6,078 4,253
Note Payable and Capital Lease Obligations 312 181
-------- --------
6,390 4,434
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.001 par value, 30,000,000 shares
authorized; 13,592,999 and 13,356,990 shares issued
and outstanding as of June 30, 1997 and
December 31, 1996, respectively 14 13
Additional Paid-In Capital 55,995 54,938
Accumulated Deficit (4,657) (5,037)
-------- --------
Total Stockholders' Equity 51,352 49,914
-------- --------
Total Liabilities and Stockholders' Equity $ 57,742 $ 54,348
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets
3
<PAGE> 4
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 9,842 $ 3,999 $ 18,704 $ 6,754
Operating Expenses:
Cost of revenue 2,894 915 5,472 1,692
Marketing and selling 4,295 2,129 7,679 3,788
General and administrative 1,560 1,564 3,444 2,053
Depreciation and amortization 221 47 371 72
------------ ------------ ------------ ------------
Total Operating Expenses 8,970 4,655 16,966 7,605
------------ ------------ ------------ ------------
Net Operating Income (Loss) 872 (656) 1,738 (851)
Other Income 435 579 855 638
Income (Loss) from Continuing Operations
before tax 1,307 (77) 2,593 (213)
Tax Provision (457) (79) (935) (79)
------------ ------------ ------------ ------------
Income (Loss) from Continuing Operations 850 (156) 1,658 (292)
Discontinued Operations, Net of Taxes (Note 6) (1,477) (475) (1,278) (440)
------------ ------------ ------------ ------------
Net Income (Loss) $ (627) $ (631) $ 380 $ (732)
============ ============ ============ ============
Income (Loss) from Continuing Operations
Per Common and Common Equivalent
Share $ 0.06 $ (0.01) $ 0.11 $ (0.03)
============ ============ ============ ============
Discontinued Operations Per Common
And Common Equivalent Share $ (0.10) $ (0.04) $ (0.08) $ (0.04)
============ ============ ============ ============
Net Income (Loss) per Common and
Common Equivalent Share $ (0.04) $ (0.05) $ 0.03 $ (0.07)
============ ============ ============ ============
Shares used in Computing Net Income (Loss)
Per Common and Common
Equivalent Share 14,555,880 13,197,448 14,458,937 11,010,979
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 380 $ (732)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 856 811
Deferred tax provision (benefit) 95 (795)
Deferred compensation -- 18
Loss on disposal of property and equipment -- 54
Reserve for bad debts 112 (75)
Changes in assets and liabilities:
Accounts receivable 28 758
Other current assets (2,317) (1,750)
Other assets (208) (627)
Accounts payable and accrued liabilities 1,606 (2,069)
Other liabilities (371) 1,232
-------- --------
Net cash provided by (used in) operating activities 181 (3,175)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,462) (3,104)
Proceeds from disposition of property and equipment 74 17
Cash paid for acquisitions -- (352)
Advances to affiliates -- (53)
-------- --------
Net cash used in investing activities (2,388) (3,492)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 1,250
Repayment of line of credit -- (250)
Proceeds from long-term debt -- 490
Repayment of long-term debt (54) (3,082)
Repayment of capital leases (111) --
Proceeds from issuance of common stock 1,058 50,669
Distribution to shareholder -- (1,001)
-------- --------
Net cash provided by financing activities 893 48,076
-------- --------
Net increase in cash and cash equivalents (1,314) 41,409
Cash and cash equivalents, beginning of period 33,995 2,595
-------- --------
Cash and cash equivalents, end of period $ 32,681 $ 44,004
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 31 $ 143
======== ========
Cash paid for taxes $ 120 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Eagle River Interactive, Inc. (the "Company") is an educational services company
that provides corporate training products for information technology ("IT")
professionals. Training products are created, developed and marketed by
Mastering Computers, Inc., a wholly owned subsidiary of the Company. Training
products include instructor-led Windows operating systems and other IT topics,
as well as Microsoft Certified Professional preparation courses and on-site
workshops, computer-based training media, interactive software, videos and
newsletters. The Company is located in Scottsdale, Arizona.
In addition, the Company has two business segments, custom interactive
development and outdoor media, which it is currently in negotiations to sell in
separate transactions. As a result, the Company has accounted for these two
business segments as discontinued operations (Note 6). As a result of this
determination, the operations from the custom interactive development and
outdoor media business segments have been reflected as discontinued operations
in the accompanying consolidated condensed financial statements for all periods
presented. The custom interactive development business segment develops and
creates custom interactive solutions that assist United States and international
companies with corporate communications, marketing, and training. The outdoor
media business segment offers traditional outdoor media advertising at United
States ski resorts.
BASIS OF PRESENTATION
The accompanying consolidated condensed interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying consolidated
condensed interim financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 1996.
The accompanying unaudited consolidated condensed interim financial statements
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions. Such
estimates and assumptions affect the reported amounts of assets and liabilities
as well as disclosure of contingent assets and liabilities at the date of the
accompanying consolidated condensed financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The results of operations for the interim
periods are not necessarily indicative of the results for the entire year.
Certain prior year balances have been reclassified to conform to the current
period presentation.
2. INITIAL PUBLIC OFFERING
In March 1996 the Company completed an initial public offering of 4,000,000
shares of its common stock at a price of $13.00 per share. After underwriting
discounts, commissions and other offering expenses, net proceeds to the Company
from the offering were $46,727,000. Upon the closing of the offering, all
1,342,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock
outstanding were converted into 4,026,000 shares of common stock.
In April 1996, the underwriters of the Company's initial public offering
exercised their over-allotment option and purchased an additional 309,000
shares of common stock at $13.00 per share from the Company, with net proceeds
to the Company aggregating $3,736,000.
6
<PAGE> 7
3. CONTINGENT NOTE RECEIVABLE
In connection with the September 1995 Series A Preferred Stock offering, a
stockholder of the Company who is also an officer issued a contingent note (the
"Contingent Note") to the Company. This note transfers to the Company future
gains arising from the sale of the stockholder's 10.5% equity interest in
SeaVision, Inc. ("SeaVision"), a predecessor entity to Allin Communications
Corporation ("ACC"). The terms of the Contingent Note require the stockholder
to pay the Company any net proceeds in excess of $500,000 if and when he sells
his holdings in SeaVision.
In November 1996, ACC completed an initial public offering of its common stock.
The SeaVision stock owned by the stockholder was converted into 241,200 shares
of ACC Common Stock, all of which are subject to the terms of the Contingent
Note.
During the second quarter of 1997 the Contingent Note was amended. The
amendment defines procedures by which the Company can request the sale of the
ACC shares and defines procedures by which the stockholder may segregate and
retain a portion of the ACC shares having a market value of approximately
$500,000. As of June 30, 1997, the stockholder 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.
4. INCOME TAXES
During 1996, the Company recorded an income tax benefit created by 1995 and
1996 operating losses and as of December 31, 1996 had recorded a deferred tax
asset of approximately $2.3 million. During the first six months of 1997, the
Company recorded an approximate $.9 million tax provision from continuing
operations and an approximate $1.1 million tax benefit from discontinued
operations, including $.3 million of tax benefit which was deferred and
included in the balance sheet as a result of the anticipated gain from the sale
of the outdoor media business segment (Note 6). At June 30, 1997, in accordance
with the provisions of SFAS 109, management has determined that it is more
likely than not that the tax asset of approximately $2.5 million as of June 30,
1997 will be realized in the future based on taxable income generated by
current and future years operations.
The Company bases its determination on the significant growth that has occurred
in its IT training business during 1996 and the first and second quarters of
1997. The Company's revenue increased from $6.8 million for the six months ended
June 30, 1996 to $18.7 million for the six months ended June 30, 1997,
representing a 175% increase in revenue. In addition, the Company had a loss
from continuing operations before tax of $.2 million for the six months ended
June 30, 1996 compared to income from continuing operations before tax of $2.6
million for the six months ended June 30, 1997. Further, the Company believes
that the sale of its interactive and outdoor media business segments will result
in a taxable gain; however, there can be no assurance that a transaction will be
consummated and if consummated that it would result in a gain. Based on its
projections, the Company's management believes that profitable operations will
be sustained in future periods. Based on the above results and management's
expectations relating to its current business model and forecasts, it is
management's belief that it is more likely than not that the net deferred tax
asset at June 30, 1997 will be realized through the generation of future taxable
income.
Historically, the Company's net loss before taxes has approximated its taxable
loss. The Company's deferred income taxes result primarily from net operating
loss carryforwards ("NOLs"), the use of accelerated depreciation methods for
income tax purposes, amortization differences relating to certain intangible
assets, and certain amounts accrued for book purposes which are not deductible
for income tax purposes until paid. The Company has tax NOLs totaling
approximately $5.0 million, which expire in 2011.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs before they expire. Management anticipates
that increases in taxable income during the carryforward period will arise
primarily as a result of the Company's continued growth in its IT training
business and operating efficiencies which may be gained under the Company's
current strategies.
5. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". The
purpose of SFAS No. 128 is to simplify the computation of earnings per share
("EPS") and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries and with that of the International Accounting
Standards Committee. The effective date for the application of SFAS No. 128 for
both interim and annual periods is fiscal years ending after December 15, 1997.
Earlier application is not permitted. The Company does not expect the
application of SFAS No. 128 to have a material impact on its EPS calculation.
7
<PAGE> 8
6. DISCONTINUED OPERATIONS
Effective July 29, 1997, the Company announced its intent to sell its
interactive business segment. In July, the Company's Board of Directors approved
a formal plan to sell the segment. As a result of this decision, the Company has
accounted for the interactive business segment as a discontinued operation. The
operations from the interactive business segment have been reflected as a
discontinued operation in the accompanying consolidated condensed statements of
operations for all periods presented. The net assets and liabilities of the
interactive business segment have been classified as discontinued operations in
the accompanying consolidated condensed balanced sheets. The Company expects the
sale of this segment to close by the fourth quarter of 1997 and to result in a
gain; however, there can be no assurance that any agreement will be reached with
respect to a possible transaction or that if reached, such transaction will be
consummated and result in a gain. Revenue for the interactive business
segment for the six months ended June 30, 1996 and 1997 was approximately $6.9
million and $9.3 million, respectively. Net loss for the interactive business
segment for the six months ended June 30, 1996 and 1997 was approximately $1.1
million and $1.9 million, respectively.
Summarized balance sheet data for the custom interactive development business
segment is as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1997 1996
------- -------
<S> <C> <C>
Assets
Current Assets
Accounts receivable, net $ 3,700 $ 3,677
Other current assets 2,994 2,472
------- -------
Total current assets 6,694 6,149
Net property, Plant and Equipment 5,849 5,675
Other Assets, Net 1,019 1,182
------- -------
Total 13,562 13,006
======= =======
Liabilities
Current Liabilities
Accounts payable 1,412 705
Accrued liabilities 581 929
Other current liabilities 819 701
------- -------
Total current liabilities 2,812 2,335
Noncurrent liabilities 341 624
------- -------
Total liabilities 3,153 2,959
------- -------
Net assets of discontinued operations $10,409 $10,047
======= =======
</TABLE>
Effective May 17, 1997, the Company approved the disposition of the outdoor
media business segment including a plan for the Company to identify potential
buyers. Effective July 29, 1997, the Company announced that it is currently in
negotiations to sell its outdoor media business segment. As a result, the
Company has accounted for the segment as a discontinued operation. As a result
of this determination, the operations from the outdoor media business segment
have been reflected as a discontinued operation in the accompanying consolidated
condensed statements of operations for all periods presented. The net assets and
liabilities of the interactive business segment have been classified as
discontinued operations in the accompanying consolidated condensed balance
sheets. The Company expects that the sale of this segment will close by the
fourth quarter of 1997 and to result in a gain, however, there can be no
assurance that any agreement will be reached with respect to a possible
transaction or that if reached, such transaction will be consummated and result
in a gain. Revenue for the outdoor media business segment for the six months
ended June 30, 1996 and 1997 was approximately $2.6 million and $2.1 million,
respectively. Net income for the outdoor segment for the six months ended June
30, 1996 and 1997 was approximately $0.7 million and $0.6 million, respectively.
As the Company believes that the sale will result in a net gain, a net loss of
approximately $0.4 million for the period from May 18, 1997 to June 30, 1997 has
been deferred and is included in net current assets of discontinued operations
in the accompanying consolidated condensed balance sheets.
8
<PAGE> 9
Summarized balance sheet data for the outdoor media business segment is as
follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Accounts receivable, net $ -- $ 1,456
Other current assets 459 --
---------- ----------
Total current assets 459 1,456
Net property, Plant and Equipment 641 689
Other Assets, Net 2,897 2,866
---------- ----------
Total 3,997 5,011
Liabilities
Current Liabilities
Accounts payable 10 53
Accrued liabilities -- 46
Other current liabilities -- --
Noncurrent liabilities -- 902
---------- ----------
Total 10 1,001
---------- ----------
Net assets of discontinued operations $ 3,987 $ 4,010
========== ==========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of Eagle
River Interactive's (the "Company's") financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Condensed Financial Statements and notes thereto, and the Company's Form 10-K
for the year ended December 31, 1996.
OVERVIEW
The Company is an educational services company that provides corporate training
products for information technology ("IT") professionals. Training products are
created, developed and marketed by Mastering Computers, Inc., a wholly owned
subsidiary of the Company. These training products include instructor-led
Windows operating systems and other IT topics, as well as Microsoft Certified
Professional preparation courses and on-site workshops, computer-based training
media, interactive software, videos and newsletters.
The Company's operations are subject to certain risks and uncertainties
including, among others, management's plan for rapid growth, rapidly changing
technology, and potential competitors with greater technical and marketing
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Future Results" included in the Company's Form 10-K for
the year ended December 31, 1996.
DISCONTINUED OPERATIONS
On July 29, 1997 the Company announced its intent to sell its custom interactive
development and outdoor media business segments. As a result, the operations
from the custom interactive development and outdoor media business segments have
been reflected as discontinued operations in the consolidated historical
financial information.
RESULTS OF CONTINUING OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 1996 AND 1997
GENERAL
The Company generates revenue from sales of training product services, which
consist primarily of instructor-lead Windows operating systems and other IT
topics, as well as Microsoft Certified Professional preparation courses and
on-site workshops, computer-based training media, interactive software and
videos and newsletters. Training products revenue from seminars is generally
collected in advance and is recognized upon commencement of a seminar or of a
series of seminars in a given city. Subscription revenues are deferred and
recognized over the term of the related subscription, while other product
revenue is recognized when the products are shipped.
Costs related to training products 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. Failure to expand any of the foregoing
areas in an efficient manner could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that the Company's revenues will continue to grow at
a rate that will support its increasing expense levels.
REVENUE
Revenue for the three months ended June 30, 1996 (the "1996 Quarter") was
approximately $4.0 million. Revenue for the three months ended June 30, 1997
(the "1997 Quarter") was approximately $ 9.8 million, or a 145% increase over
the 1996 Quarter. The growth in revenue from the 1996 Quarter to the 1997
Quarter was primarily the result of the increase in the average price of
seminars offered, the number and types of seminars provided and the number of
attendees. During the 1997 Quarter, the Company introduced computer based
training ("CBT"), and the Company added new seminars. In addition, the Company
introduced its MCSE Gold Plan, which bundles multiple Microsoft Certified
Professional preparation courses and CBT as one product offering. The number of
customers trained increased from approximately 16,000 in the 1996 Quarter to
approximately 22,000 in the 1997 Quarter.
10
<PAGE> 11
COST OF REVENUE
The Company's cost of revenue for the 1996 Quarter was approximately $.9
million. The Company's cost of revenue for the 1997 Quarter was approximately
$2.9 million. During 1997, costs increased for labor and related benefits,
seminar facilities and seminar travel primarily due to the continued growth of
the Company's business and corresponding increase in personnel.
MARKETING AND SELLING
Marketing and selling costs are primarily comprised of salaries, commissions and
benefits, travel and marketing program costs. Marketing and selling expenses of
approximately $2.1 million for the 1996 Quarter were primarily related to the
continued development of the Company. For the 1997 Quarter marketing and selling
expenses were approximately $4.3 million. The increase from 1996 to 1997 was
primarily due to the continued growth of the Company's telesales division and
the corresponding increase in marketing and selling personnel and costs
associated with direct mail campaigns. Marketing and selling headcount increased
from 110 in the 1996 Quarter to 280 in the 1997 Quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include costs for the accounting, legal,
information systems, investor relations and human resource functions, as well
as costs related to some senior executives of the Company. These costs are
primarily comprised of salaries and benefits, travel and occupancy costs.
General and administrative expenses were approximately $1.6 million during the
1996 and 1997 Quarters. The Company expects these costs, as a percentage of
revenue, to decrease in future quarters; however, there can be no assurance
that the percentages will continue to decrease.
DEPRECIATION
Depreciation and amortization was approximately $.05 million during the 1996
Quarter. For the 1997 Quarter, depreciation and amortization expense was
approximately $.2 million. The increase in depreciation and amortization
expense reflects the significant investment the Company has made in its
computer equipment, telephone systems and office equipment over the past year.
OTHER INCOME
Interest income and expense are included in other income. Other income of
approximately $.6 million for the 1996 Quarter and approximately $.4 million
for the 1997 Quarter primarily represents interest income which was the result
of investing the proceeds from the Company's initial public offering.
RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
REVENUE
Revenue for the six months ended June 30, 1996 was approximately $6.8 million.
Revenue for the six months ended June 30, 1997 was approximately $18.7 million,
or a 175% increase over the first half of 1996. The growth in training products
revenue from the first six months of 1996 to the first six months of 1997 was
primarily the result of the increase in the average price of seminars offered,
the number and types of seminars provided and the number of attendees. During
the first six months of 1997 the Company added new seminars and introduced its
MCSE Gold Plan which bundles multiple Microsoft Certified Professional courses
and CBT as one product offering. The number of customers trained increased from
approximately 28,000 in the first six months of 1996 to 41,000 in the first six
months of 1997.
COST OF REVENUE
The Company's cost of revenue for the first six months of 1996 was approximately
$1.7 million. The Company's cost of revenue for the first six months of 1997 was
approximately $5.5 million. During 1997, costs increased particularly in labor
and related benefits, seminar facilities and seminar travel primarily due to the
continued growth of the Company's business and corresponding increase in
personnel.
MARKETING AND SELLING
Marketing and selling costs are primarily comprised of salaries, commissions
and benefits, travel and marketing program costs. Marketing and selling
expenses of approximately $3.8 million for the first six months of 1996 were
primarily related to the continued development of the Company. For the first
six months of 1997 marketing and selling expenses were approximately
11
<PAGE> 12
$7.7 million. The increase from 1996 to 1997 was primarily due to the continued
growth of the Company's telesales division and the corresponding increase
in personnel and for costs associated with direct mail campaigns.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include costs for the accounting, legal,
information systems, customer service and human resource functions, as well as
costs related to some senior executives of the Company. These costs are
primarily comprised of salaries and benefits, travel and occupancy costs.
General and administrative expenses of approximately $2.1 million during the
first six months of 1996 were primarily related to the continued early
development of the Company.
During the first six months of 1997, general and administrative expenses were
approximately $3.4 million. The increase in general and administrative expenses
from the first six months of 1996 to the first six months of 1997 were
primarily due to the growth of the Company's business and the corresponding
increase in the number of executive and administrative personnel and the number
of offices. The Company expects these costs, as a percentage of revenue, to
decrease in future quarters; however, there can be no assurance that the
percentages will continue to decrease.
DEPRECIATION
Depreciation and amortization expense was approximately $.1 million during the
first six months of 1996. For the first six months of 1997, depreciation and
amortization expense was approximately $.4 million. The increase in
depreciation and amortization expense reflects the significant investment the
Company has made in its computer equipment, telephone systems and office
equipment over the past year.
OTHER INCOME
Interest income and expense are included in other income. Other income of
approximately $.6 million for the first six months of 1996 and approximately
$.9 million for the first six months of 1997 primarily represents interest
income which was the result of investing the proceeds from the Company's
initial public offering.
DISCONTINUED OPERATIONS
Effective July 29, 1997, the Company announced a formal plan to sell its custom
interactive development business segment. As a result, the operations from the
interactive segment have been accounted for as a discontinued operation. The
custom interactive development business segment develops and creates interactive
solutions that assist companies with corporate communications. Revenue for the
interactive business segment for the six months ended June 30, 1996 and 1997 was
approximately $6.9 million and $9.3 million, respectively. Net loss for the
interactive business segment for the six months ended June 30, 1996 and 1997 was
approximately $1.1 million and $1.9 million, respectively. The net loss for the
six months ended June 30, 1996 includes approximately $.5 million of costs
relating to the Graphic Media, Inc. merger. The net loss for the six months
ended June 30, 1997 includes approximately $.5 million of costs related to
organizational realignment of the custom interactive development segment. The
Company expects the sale of this segment to close by the fourth quarter of 1997;
however, there can be no assurance that any agreement will be reached with
respect to a possible transaction or that if reached, such transaction will be
consummated.
Effective May 17, 1997, the Company approved the disposition of the outdoor
media business segment including a plan for the Company to identify potential
buyers. Effective July 29, 1997, the Company announced that it is currently in
negotiations to sell its outdoor media business segment. As a result, the
operations from the outdoor media segment have been accounted for as a
discontinued operation. The outdoor media business section offers traditional
outdoor media advertising at United States ski resorts. Revenue for the outdoor
media business segment for the six months ended June 30, 1996 and 1997 was
approximately $2.6 million and $2.1 million, respectively. Net income for the
outdoor segment for the six months ended June 30, 1996 and 1997 was
approximately $.7 million and $.6 million, respectively. The Company believes
that the transaction will result in a net gain and as a result net loss of
approximately $.4 million for the period from May 18, 1997 to June 30, 1997 has
been deferred. The Company expects the sale of this segment to close by the
fourth quarter of 1997; however, there can be no assurance that any agreement
will be reached with respect to a possible transaction or that if reached, such
transaction will be consummated.
INCOME TAXES
During 1996, the Company recorded an income tax benefit created by 1995 and
1996 operating losses and as of December 31, 1996 had recorded a deferred tax
asset of approximately $2.3 million. During the first six months of 1997, the
Company recorded an approximate $.9 million tax provision from continuing
operations and an approximate $1.1 million tax benefit from discontinued
operations, including $.3 million of tax benefit which was deferred and
included in the balance sheet as a result of the anticipated gain from the sale
of the outdoor media business segment (Note 6). At June 30, 1997, in accordance
with the provisions of SFAS 109, management has determined that it is more
likely than not that the tax asset of approximately $2.5
12
<PAGE> 13
million as of June 30, 1997 will be realized in the future based on taxable
income generated by current and future years operations.
The Company bases its determination on the significant growth that has occurred
in its IT training business during 1996 and the first and second quarters of
1997. The Company's revenue from continuing operations increased from $6.8
million for the six months ended June 30, 1996 to $18.7 million for the six
months ended June 30, 1997, representing an 175% increase in revenue. In
addition, the Company had loss from continuing operations before tax of $.2
million for the six months ended June 30, 1996 compared to income from
continuing operations before tax of $2.6 million for the six months ended June
30, 1997. Further, the Company believes that the sale of its custom interactive
development and outdoor media business segments will result in a taxable gain;
however, there can be no assurance that a transaction will be consummated and if
consummated that it would result in a gain. Based on its projections, the
Company's management believes that profitable operations will be sustained in
future periods. Based on the above results and management's expectations
relating to its current business model and forecasts, it is management's belief
that it is more likely than not that the net deferred tax asset at June 30, 1997
will be realized through the generation of future taxable income.
Historically, the Company's net loss before taxes has approximated its taxable
loss. The Company's deferred income taxes result primarily from net operating
loss carryforwards ("NOLs"), the use of accelerated depreciation methods for
income tax purposes, amortization differences relating to certain intangible
assets, and certain amounts accrued for book purposes which are not deductible
for income tax purposes until paid. The Company has tax NOLs totaling
approximately $5.0 million, which expire in 2011.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs before they expire. Management anticipates
that increases in taxable income during the carryforward period will arise
primarily as a result of the Company's continued growth in its IT training
business and operating efficiencies which may be gained under the Company's
current strategies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by the Company's operating activities was approximately $3.2
million for the first six months of 1996. For the first six months of 1997,
approximately $.2 million of cash was provided by operations. Cash used in
investment activities was approximately $3.5 million and $2.4 million for the
first six months of 1996 and the first six months of 1997, respectively,
related primarily to purchases of property and equipment in both years and to
the staffing growth and office space expansion. Cash flows from financing
activities were approximately $48.1 million and $.9 million in the first six
months of 1996 and the first six months of 1997, respectively. The cash inflow
from financing activities for the first six months of 1996 reflects the
completion of the initial public offering of common stock. Discontinued
operations have not been segregated in the cash flow information included in
the consolidated historical financial information.
As of June 30, 1997, the Company had approximately $32.7 million of cash and
cash equivalents which the Company believes will be sufficient to meet its
currently anticipated cash needs for working capital, capital expenditures and
funds required to make acquisitions, if any, for the next twelve months and the
foreseeable future. During the 1997 quarter, the Company entered into a lease
for approximately 54,000 square feet in a building being constructed in
Scottsdale, Arizona. This new space will allow the Company to consolidate its
existing staff currently located in two buildings in Scottsdale to one new
location and will allow the Company to expand its staff as necessary. The
Company expects to complete its move by the first quarter of 1998.
FUTURE RESULTS
This report may be deemed to contain forward-looking statements which are
subject to risks and uncertainties that could cause actual results to differ
materially from those anticipated, including, but not limited to, risks
associated with the expansion of the Company's business and the management of
growth, dependence on key personnel, potential fluctuations in quarterly
operating results, absence of long-term contracts, the need to anticipate
changes in technology to create training products on a timely basis,
competition from other companies with substantially greater financial,
technical and other resources, relatively low barriers to entry, the growth in
CBT courses offered by others, the need to restrict unauthorized use of the
Company's training products and protect the Company's proprietary rights, and
the risk that states may seek to regulate the Company's training products as
educational programs. These risks and uncertainties are described more fully
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Future Results" in the Company's Form 10-K for the
year ended December 31, 1996.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Stockholders (the "Annual Meeting") was
held on May 29, 1997. At the Annual Meeting:
1. Mr. Andrew J. Filipowski was elected to serve as a director of the Company
for a term of three years. The vote was: [12,345,611] for and [0] against,
with [16,358] abstentions and [0] broker non-votes.
2. Mr. Peter I. Mason was elected to serve as a director of the Company for a
term of three years. The vote was: [12,346,196] for and [0] against, with
[15,773] abstentions and [0] broker non-votes.
3. The stockholders of the Company approved an amendment to the Company's 1995
Executive Stock Option Plan to increase the number of shares reserved for
issuance thereunder by 1,500,000 shares. The vote was : [$10,111,475] for
and [1,205,675] against, with [44,605] abstentions and [1,000,214] broker
non-votes.
4. The stockholders of the Company approved an amendment to the Company's 1995
Employee Stock Option Plan to increase the number of shares reserved for
issuance thereunder by 900,000 shares. The vote was: [10,779,274] for and
[588,028] against, with [2,950] abstentions and [991,717] broker non-votes.
5. The stockholders of the Company ratified the appointment of Arthur Andersen
LLP to serve as the Company's independent public accountants for the year
ending December 31, 1997. The vote was: [12,356,291] for and [4,181]
against, with [1,497] abstentions and [0] broker non-votes.
ITEM 6. EXHIBITS
(A) Exhibits
11 -- Statement Regarding Computation of Per Share Earnings
27 -- Financial Data Schedule
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE RIVER INTERACTIVE, INC.
Date: August 14, 1997
/s/ TERENCE M. GRAUNKE
Terence M. Graunke
Chairman, President and Chief
Executive Officer
Date: August 14, 1997
/s/ MARC PINTO
Marc Pinto
Executive Vice President,
Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF PRO FORMA
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE
<TABLE>
<CAPTION>
AVERAGE SHARES
OUTSTANDING
FOR THE SIX MONTHS
SHARES ENDED JUNE 30,
ISSUED ISSUE DATE 1997
------ ---------- ----
<S> <C> <C> <C>
Common Stock 13,356,990 (a) 13,356,990
Common Stock 210,943 (b) 87,267
Common Stock 25,066 (c) 18,572
Options N/A (d) 996,108
----------
14,458,937
</TABLE> ==========
METHOD USED FOR CALCULATION
(a) Represents Common Stock issued and outstanding as of December 31, 1996.
(b) Shares issued upon exercise of stock options at various dates
throughout 1997.
(c) Shares issued pursuant to the Employee Stock Purchase Plan at various
dates throughout 1997.
(d) Common stock equivalent shares calculated using the treasury method.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 32,681,000
<SECURITIES> 0
<RECEIVABLES> 2,582,000
<ALLOWANCES> 159,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,437,000
<PP&E> 3,748,000
<DEPRECIATION> 726,000
<TOTAL-ASSETS> 57,742,000
<CURRENT-LIABILITIES> 6,078,000
<BONDS> 0
0
0
<COMMON> 14,000
<OTHER-SE> 51,338,000
<TOTAL-LIABILITY-AND-EQUITY> 57,742,000
<SALES> 0
<TOTAL-REVENUES> 18,704,000
<CGS> 0
<TOTAL-COSTS> 16,966,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> 2,593,000
<INCOME-TAX> 935,000
<INCOME-CONTINUING> 1,658,000
<DISCONTINUED> (1,278,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
