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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, 1997.
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
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Mastering, Inc.
(Formerly Eagle River Interactive, Inc.)
(Exact name of Registrant as specified in its charter)
Delaware 84-1320277
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9201 East Mountain View Rd., Suite 200
Scottsdale, AZ 85258
(Address of principal executive offices) (zip code)
(602) 657-4000
(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
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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 19, 1998 was $66,761,801 based
upon the closing price of $11 1/2 per share as reported on the Nasdaq National
Market for that date.
As of February 18, 1998, there were 13,738,832 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days of the end of the fiscal
year ended December 31, 1997 and to distribute such Proxy Statement to its
stockholders in conjunction with the registrant's annual meeting to be held in
1998. PART III of this report incorporates by reference certain portions of the
Proxy Statement, as indicated herein.
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MASTERING, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I
Item 1. Business.................................................................... 4
Item 2. Properties.................................................................. 7
Item 3. Legal Proceedings........................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......................... 8
Item 4a. Executive Officers of the Registrant........................................ 8
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters......................................................... 9
Item 6. Selected Financial Data..................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 10
Item 8. Financial Statements and Supplementary Data................................. 18
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure......................................... 18
PART III
Item 10. Directors and Executive Officers............................................ 18
Item 11. Executive Compensation...................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................................. 18
Item 13. Certain Relationships and Related Transactions.............................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 19
Signatures ............................................................................ 21
</TABLE>
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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 the
Company, as hereinafter defined, and similar matters, may be deemed to be
"forward-looking" statements under the Private Securities Litigation Reform Act
of 1995. 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," and other areas of this report.
ITEM 1. BUSINESS
Mastering, Inc. (referred to in this report as "Mastering") was incorporated
under the laws of the state of Delaware in May of 1994 and was formerly known as
Eagle River Interactive, Inc. Mastering, together with its subsidiaries
(including its operating subsidiary, Mastering Computers, Inc.), is hereinafter
referred to as the "Company."
The Company develops and markets instructor-led training workshops and
computer-based training ("CBT") products for information technology ("IT")
professionals. These training products and services include instructor-led
Windows NT(TM), Windows 95(TM), TCP/IP (TM), Internet Information Server(TM) and
Exchange(TM) training workshops as well as Microsoft Certified Professional
preparation courses and on-site workshops held at customers' facilities, CBT
software covering a broad range of information technologies, other software,
videos and a newsletter. The Company's CBT products are delivered using CD-ROMs,
proprietary intranets, the Internet and the World Wide Web.
The Company markets and sells its instructor-led and CBT products and
services throughout the United States and in Canada, primarily through its
in-house telesales organization. Training products and services are also sold to
national accounts under long-term contracts, which are sold using outside
salespeople. At the end of 1997, the Company began marketing its training
products in Europe, with sales of instructor-led training workshops beginning in
the United Kingdom during the first quarter of 1998.
On February 18, 1998, Mastering entered into an Agreement and Plan of Merger
(the "Merger Agreement"), among PLATINUM technology, inc. ("Platinum"), PT
Acquisition Corporation I, a wholly owned subsidiary of Platinum ("Sub"), and
Mastering, providing for the merger (the "Merger") of Sub with and into
Mastering, with Mastering being the surviving corporation in the Merger.
Pursuant to the Merger Agreement, and subject to the terms and conditions
thereof, each share of Mastering's common stock will be converted into 0.448 of
a share of common stock of Platinum. The Merger is expected to be completed in
the second quarter of 1998 (although there can be no assurance that such
transaction will be completed) and accounted for as a pooling of interests.
Dispositions
During the year ended December 31, 1997, the Company sold its custom
interactive development and outdoor media business segments. As a result, the
operations from the custom interactive development and outdoor media business
segments have been accounted for as discontinued operations.
The Company approved a plan to dispose of its outdoor media business segment
on May 17, 1997, and has accounted for this segment as a discontinued operation.
On September 16, 1997, the Company completed the sale of the assets of its
outdoor media segment for approximately $4.0 million in cash and approximately
$0.6 million in notes receivable.
The Company announced its intent to sell its interactive business segment on
July 29, 1997, and has accounted for this segment as a discontinued operation.
On September 26, 1997, the Company completed the sale of the assets of its
interactive business segment for $13.5 million in cash and the right to future
payments contingent on the segment's future earnings.
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Services and Products
The Company's principal revenues come from instructor-led training workshops
and CBT products for IT professionals working in corporate environments. These
training products and services include instructor-led Windows NT(TM), Windows
95(TM), TCP/IP(TM), Internet Information Server(TM) and Exchange(TM) workshops,
Microsoft Certified Professional preparation courses, on-site workshops held at
customers' facilities, CBT software covering a broad range of information
technologies, other software, videos and a newsletter. The Company's CBT
products are delivered using CD-ROMs, proprietary intranets, the Internet and
the World Wide Web.
Instructor-Led Training
The Company develops and markets instructor-led training workshops for IT
professionals working in corporate environments. The workshops provide training
primarily on Microsoft(TM) operating systems. The Company offers one-day and
two-day training workshops as well as three-day and four-day Microsoft(TM)
Certified Professional preparation courses, which it hosts in cities across the
United States and in Canada, with an expansion into Europe during the first
quarter of 1998. Depending on the city and the course, a workshop may be
attended by as many as 500 IT professionals. The workshops are standardized,
with the same courses being offered nationally and in Canada.
Workshops are taught by instructors who are employees of the Company. When
not engaged in teaching a workshop, instructors spend their time developing and
updating course curriculum. The Company is a Microsoft Solutions Provider and a
member of Microsoft's Training Alliance, which gives the Company early access to
alpha and beta versions of selected new and updated Microsoft software. Course
content and the workshops themselves continue to evolve due to software upgrades
and enhancements and the introduction of new software, giving the Company
continuing revenue opportunities as IT professionals continue to take courses to
stay updated on the technology they support. As such, the Company's revenue is
significantly dependent on the introduction of new software and updates to
existing software. A decrease in the rate of such introductions or updates could
have a material adverse effect on the Company's results of operations.
Computer-Based Training
The Company, under a licensing agreement with a third party, licenses a CBT
development engine and more than 300 CBT titles, as well as most of its future
releases, which cover a broad range of information technologies. The Company's
CBT titles are sold to IT professionals and to end users of desk-top
applications such as common word-processing and spreadsheet programs. The
Company adds content to and/or enhances the user interface of many of the
licensed titles. The titles are private-labeled under the "Mastering Computers"
brand name. Sales of titles began in the first quarter of 1997. The initial term
of the licensing agreement is for an eighteen-month period ending June 30, 1998,
with two one-year renewal options exercisable by the Company. If the Company
exercises its two one-year renewal options, there can be no assurance that the
third party would agree to further renewal periods. Failure to renew the
contract or obtain CBT products from alternate suppliers could have a material
adverse effect on the Company's results of operations.
At the end of 1997, the Company introduced its Knowledge Track(TM) line of
CBT titles developed in house. This product line converts the content of the
Company's instructor-led training courses into interactive CBT titles in CD-ROM
format, which are sold as a complement to the instructor-led training courses
and as a stand-alone training product. Because these CBT products are based on
the Company's instructor-led training workshops, the content is continually
evolving as the related workshop content evolves.
Customers
In 1997, no customer accounted for 10 percent or more of the Company's
revenue from continuing operations. The five largest customers, in total,
accounted for 3 percent of the Company's 1997 revenue.
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The Company has provided training products and services to numerous Fortune
500 companies, other small and mid-size businesses, universities and various
Federal, state and local government agencies. During 1997, the Company trained
approximately 95,000 customers through instructor-led training workshops and
CBT. In 1997, the organizations with the most IT professionals attending the
Company's workshops were:
AT&T Corporation Intel Corporation
Allied Signal, Inc. Lockheed Martin Corporation
Blue Cross Blue Shield Association Lucent Technologies, Inc.
The Boeing Company MCI Communications Corporation
Eastman Kodak Company Pacific Bell
Electronic Data Systems Corporation Science Application International
General Electric Company Corporation
GTE Corporation Sprint Corporation
Hewlett-Packard Company Unisys Corporation
Honeywell, Inc. Xerox Corporation
Sales and Marketing
At the end of 1997, the Company employed 259 people engaged in sales and
marketing related activities, up from 152 at the beginning of the year. The
Company's telesales force sells all of the Company's training products and
services and is also used to identify sales leads for the Company's national
accounts program targeting Fortune 1000 prospects. The Company's telesales
organization makes one-on-one contact with prospective customers, allowing sales
representatives to develop a rapport with customers to enhance future repeat
sales.
The Company's sales effort is aided by a proprietary database of information
related to more than 4 million IT professionals. In 1997, the telesales
organization called most of these IT professionals.
At the end of 1997, the Company contracted with a third-party vendor to
implement a sales force automation system to significantly enhance its telesales
infrastructure to assist in the gathering and more-intuitive use of information
regarding IT professionals, businesses and government agencies. The Company
expects this system to be fully functional by the third quarter of 1998, and it
should enhance the Company's efforts to more effectively contact and develop
prospective customers and coordinate sales efforts.
The Company generally begins selling its instructor-led training workshops
several months before the commencement of the workshops. This advance selling
allows the Company to perform market research and allows the sales force to test
new products and to gauge customer demand prior to actual product introduction.
The Company also markets its products and services by distributing product
information through direct mail in advance of a seminar and by advertising in
technology-oriented publications.
The Company also generates sales and sales leads through its Internet web
site, where prospective customers can obtain detailed information about the
Company's products and services and interactively sample the Company's CBT. The
web site allows the Company to gather important demographic, professional and
personal information about prospective customers using accepted web-based
tracking techniques and on-line surveys. This information is used to test new
products and to gauge customer demands prior to actual product introduction and
to identify new sales leads.
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Competition
A shortage of IT professionals has led to the need for education on
continually evolving technologies. 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. The training market is highly fragmented and competitive. Because of
the lack of significant barriers to entry into the IT training market, the
Company expects this competition to continue in the future. In addition, many of
the Companies' competitors have significantly greater financial resources and
are competing with the Company through the acquisition of the Company's
competitors, price reductions and strategic partnerships, and the Company
expects this trend to continue in the future.
Many of the Companies' competitors have substantially greater technical,
sales, marketing and name recognition than the Company. In addition, the
training market is experiencing significant pricing pressure and the Company
expects the pricing pressure from competitors to increase in the future.
Accordingly, there can be no assurance that the Company will be able to continue
to provide services and products that compare favorably with those of its
competitors or that pricing pressure will not have a significant impact on the
Company's results of operations.
Employees
As of December 31, 1997, the Company had 390 employees, of which 259 were
engaged in sales and marketing related activities, 49 were engaged in operations
related activities, 11 were engaged in CBT-development related activities and 71
were engaged in support related activities.
The Company expects hiring in 1998 to continue in connection with the
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 strategic sales and marketing personnel and instructors. Competition for
such personnel is intense. The Company provides stock options to attract and
retain such personnel.
The Company expects to continue to hire additional sales and marketing
personnel and instructors. There can be no assurance that the Company will be
successful in attracting and retaining such personnel. Failure to attract and
retain key personnel could have a material adverse effect upon the Company's
business, results of operations and financial condition.
ITEM 2. PROPERTIES
The Company leases approximately 53,500 square feet of office and
administrative space in Scottsdale, Arizona in facilities housing its corporate
headquarters. The lease expires in December, 2008. In addition, the Company
leases approximately 3,900 square feet in Chicago, Illinois for its executive
and investor-relations activities and occupies approximately 1,200 square feet
in Portland, Oregon for its CBT research and development activities.
Upon completion of tenant improvements currently underway, the Company
expects to occupy an additional 5,000 square feet at the corporate headquarters.
The Company currently has an obligation to lease an additional 20,000 square
feet at the corporate office by December 1, 1998.
The Company owns approximately 3.5 acres of undeveloped land located next to
the Company's corporate headquarters in Scottsdale, Arizona.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims and lawsuits arising in the normal
course of business. Management believes that the ultimate liability, if any, in
excess of amounts already provided for is not likely to have a material adverse
effect on the Company's annual results of operations or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and current positions are as
follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------- --- --------------------------------------------
<S> <C> <C>
Terence M. Graunke............... 38 Chairman of the Board, President and Chief
Executive Officer
Thomas R. Graunke................ 32 Executive Vice President
Marc Pinto....................... 37 Executive Vice President and Chief Financial
Officer
Marko A. Rukavina III ........... 31 Executive Vice President
</TABLE>
Terence M. Graunke founded Mastering, Inc. (f/k/a Eagle River Interactive,
Inc.) 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 to Omnicom Group, Inc. in 1992. 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. The combined entity was renamed US Communications. Mr.
Graunke is the brother of Thomas R. Graunke.
Thomas R. Graunke has been Executive Vice President of the Company since
August 1996. Prior to joining the Company he was President of Mastering
Computers, Inc., an instructor-led Microsoft Windows(TM) training company, since
its inception in 1988. In July 1996, Mastering Computers, Inc. merged with a
wholly owned subsidiary of Mastering, Inc. (then known as Eagle River
Interactive, Inc.) to broaden its opportunities in the training area. Mr.
Graunke is the brother of Terence M. Graunke.
Marc Pinto has been Executive Vice President and 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.
Marko A. Rukavina III has been an Executive Vice President of the Company in
the operations and product-development area since mid 1997, and before that a
Senior Vice president with the Company since August 1996. Prior to joining the
Company he was Senior Vice President of Mastering Computers, Inc., an
instructor-led Microsoft Windows(TM) training company, since 1992.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "MASC". The table below sets forth for the periods indicated the range of
high and low sales prices for the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
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
High Low
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Fiscal Year Ended December 31, 1997
First Quarter ....................................................... $ 13 3/4 $ 7 1/8
Second Quarter....................................................... $ 11 1/2 $ 6 3/4
Third Quarter........................................................ $ 11 1/4 $ 7 1/4
Fourth Quarter....................................................... $ 10 3/4 $ 8
</TABLE>
As of February 6, 1998, there were 221 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.
Mastering completed an initial public offering of its Common Stock in March
of 1996. The registration statement on Form S-1 (Commission File No. 333-702)
relating to Mastering's initial public offering became effective on March 21,
1996. Mastering has used the proceeds from such initial public offering for
working capital and general corporate purposes, which is consistent with its
original stated intent.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per-share data)
The following table sets forth selected historical financial data for the
Company for each of the five years in the period ended December 31, 1997, which
data has been derived from the Company's audited consolidated financial
statements. Such selected historical financial data should be read in
conjunction with the audited consolidated financial statements, including the
notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31, (b)
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- --------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Revenue.................................... $ 40,966 $ 21,018 $ 10,168 $ 6,787 $ 3,895
Operating expenses......................... 37,149 21,574 9,720 6,567 4,156
Income (loss) from continuing operations 3,606 520 518 203 (264)
Income from continuing operations per
share - Basic (a)........................ $ .27 $ .04(c)
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Weighted average shares outstanding at year
end (a).................................. 13,535 12,286(c)
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<CAPTION>
As of December 31,(b)
---------------------------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (unaudited)
Total assets.............................. $ 64,319 $ 54,348 $ 5,481 $ 1,669 $ 2,338
Total long-term liabilities............... $ 255 $ 181 $ -- $ 928 $ --
Mandatorily redeemable convertible
preferred stock.......................... $ -- $ -- $ 6,898 $ -- $ --
Total stockholders' equity (deficit)...... $ 55,231 $ 49,914 $ (3,542) $ (705) $ (4)
</TABLE>
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(a) Historical income 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. Share and per share amounts for 1996
assume the conversion of the preferred stock on January 1, 1996 rather than
the date of the initial public offering.
(b) All amounts have been restated to reflect the disposition of the
interactive and outdoor media business segments which occurred in 1997 and
to reflect their treatment as discontinued operations for accounting
purposes.
(c) Income from continuing operations per share and weighted average shares
outstanding at year end for 1996 are unaudited and pro forma.
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 contained in this report.
Overview
The Company develops and markets instructor-led training workshops and CBT
products primarily for IT professionals. These training products and services
include instructor-led Windows NT(TM), Windows 95(TM), TCP/IP(TM), Internet
Information Server(TM) and Exchange(TM) training workshops as well as Microsoft
Certified Professional preparation courses, on-site workshops held at customers'
facilities, CBT software covering a broad range of information technologies,
other software, videos and a newsletter. The Company's CBT products are
delivered using CD-ROMs, proprietary intranets, the Internet and the World Wide
Web.
The Company markets and sells its instructor-led and CBT products and
services throughout the United States and in Canada, primarily through its
in-house telesales organization. Training products and services are also sold to
national accounts under long-term contracts, which are sold using outside
salespeople. At the end of 1997, the Company began marketing its training
products in Europe, with sales of instructor-led training workshops beginning in
the United Kingdom during the first quarter of 1998.
Dispositions
The Company approved a plan to dispose of its outdoor media business segment
on May 17, 1997. On September 16, 1997, the Company sold the assets of its
outdoor media segment for approximately $4.0 million in cash and approximately
$0.6 million in notes receivables.
The Company announced a plan to sell its interactive business segment on
July 29, 1997. On September 26, 1997, the Company sold the assets of its
interactive business segment for $13.5 million in cash and the right to future
payments contingent on the segment's future earnings.
Mergers
On February 18, 1998, Mastering entered into an Agreement and Plan of Merger
(the "Merger Agreement"), among PLATINUM technology, inc. ("Platinum"), PT
Acquisition Corporation I, a wholly owned subsidiary of Platinum ("Sub"), and
Mastering, providing for the merger (the "Merger") of Sub with and into
Mastering, with Mastering being the surviving corporation in the Merger.
Pursuant to the Merger Agreement, and subject to the terms and conditions
thereof, each share of Mastering's common stock will be converted into 0.448 of
a share of common stock of Platinum. The Merger is expected to be completed in
the second quarter of 1998 (although there can be no assurance that such
transaction will be completed) and accounted for as a pooling of interests.
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General
The Company generates revenue from sales of training products and services,
which consist primarily of instructor-led seminars on Microsoft Windows(TM)
operating systems and other IT topics, instructor-led Microsoft Certified
Professional preparation courses, on-site workshops, CBT software covering a
broad range of information technologies, other software, videos and a
newsletter. Revenue from seminars is generally collected in advance and deferred
and is recognized upon commencement of a seminar or a series of seminars in a
given city. In connection with certain seminar offerings, the Company also
provides its customers with course materials in advance of a seminar, in which
case it recognizes revenue for the value of the materials upon shipping the
materials and the remainder of the revenue upon commencement of the related
seminar or series of seminars. Other product revenue is generally recognized
when the products are shipped to the customer. Failure to increase the Company's
existing training revenue in an efficient manner could have a material adverse
effect on the Company's business, results of operations and financial condition.
Costs related to conducting training seminars consist primarily of salary
and related benefits for speakers and seminar personnel, rental of seminar
facilities and materials provided to seminar participants, some of which is
deferred until seminar commencement. Costs related to CBT products include
royalties paid to a third-party licensor and costs to duplicate and ship the CBT
product. Failure to increase sales and related infrastructure in an efficient
manner could have a material adverse effect on the Company's business, results
of operations 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.
Annual 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.
All amounts have been restated to reflect the disposition of the interactive and
outdoor media business segments which occurred in 1997.
<TABLE>
<CAPTION>
Percentage Increase
Percentage of Revenues (Decrease)
Year Ended December 31, Year to Year
-------------------------------- -----------------------
1997 1996 1995 1996:1997 1995:1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 94.9% 106.7%
Cost of revenue............................. 29.3% 25.2% 32.5% 126.4% 60.3%
Marketing and selling expenses.............. 43.4% 44.3% 42.6% 91.1% 115.0%
General and administrative expenses......... 15.5% 32.0% 19.8% (5.6)% 233.2%
Depreciation and amortization............... 2.5% 1.2% 0.7% 307.9% 256.3%
------- ------- -------
Net operating income (loss)................. 9.3% (2.7%) 4.4%
Interest income and other, net.............. 4.6% 7.3% 0.7%
------- ------- -------
Income from continuing operations before
income taxes.............................. 13.9% 4.6% 5.1%
Tax provision............................... (5.1)% (2.2%) 0.0%
-------- ------- -------
Income from continuing operations........... 8.8% 2.4% 5.1%
========== ========== ==========
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Revenue
Revenue for 1996 was approximately $21.0 million compared to revenue for
1997 of approximately $41.0 million, or a 94.9% increase over the prior year.
The growth from 1996 to 1997 was a result of the increase in the number and
types of seminars hosted, the addition of higher-priced product offerings and an
increase in the average price charged for the seminars along with the
introduction in 1997 of CBT products.
During 1997 the Company launched new instructor-led topics as well as
certification preparation courses. The Company's average prices increased for
all topics during 1997; however, there can be no assurance that average selling
prices will continue to increase or that products will not experience increased
pricing pressure in the future. An increase in pricing pressure or the inability
to continue increasing workshop prices could adversely affect the Company's
results of operations.
11
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The number of customers trained through seminars and CBT media increased
approximately 40% from approximately 68,000 in 1996 to approximately 95,000 in
1997. Seminars hosted increased from approximately 300 in 1996 to over 800 in
1997. There can be no assurance that the number of customers trained or the
number of seminars held will continue to increase. A reduction in the rate of
growth of, or a decrease in, customers trained, seminars hosted or the average
price paid per customer could adversely affect the Company's results of
operations.
The Company's results of operations are affected by a wide variety of other
factors that could adversely impact its revenue and profitability, many of which
are beyond the Company's control. These factors include, but are not limited to,
the Company's ability to design and introduce new products on a timely basis,
market acceptance of products, customer order patterns, the timing of product
releases from Microsoft, changes in products and services mix, product
performance, obsolescence, returns, technological changes, competition and
competitive pressures on pricing.
Cost of Revenue
Cost of Revenue expenses are primarily comprised of salaries, royalties, CBT
duplication and shipping, room and related seminar-coordination costs and
travel. Cost of Revenue for 1996 was approximately $5.3 million compared to
approximately $12.0 million in 1997. The Company's cost of revenue, as a
percentage of revenue, for 1996 and 1997 was approximately 25.2% and 29.3%,
respectively. The increase reflects the significant investment the Company made
in developing its infrastructure. Employees engaged in operations related
activities increased from 29 at the end of 1996 to 49 at the end of 1997.
Marketing and Selling Expenses
Marketing and selling expenses are primarily comprised of salaries,
commissions and benefits, direct mail and travel costs. Marketing and selling
expenses, as a percentage of revenue, for 1996 and 1997 were approximately 44.3%
and 43.4%, respectively. Marketing and selling expenses for 1996 were
approximately $9.3 million compared to approximately $17.8 million in 1997. The
increase from 1996 to 1997 was primarily due to the continued growth of the
Company's telesales organization and the corresponding increase in marketing and
selling personnel and costs associated with direct-mail campaigns. Marketing and
selling headcount increased from 152 at the end of 1996 to 259 at the end of
1997. The Company expects to increase marketing and selling expenses in the
future to support expansion of its marketing and sales efforts.
General and Administrative Expenses
General and administrative expenses include costs for the accounting,
registration, 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 for 1996 were approximately $6.7 million
compared to $6.3 million in 1997, representing a 5.6% decrease. The $6.7 million
in 1996 includes approximately $0.7 million of costs related to the Company's
acquisition of Mastering Computers, Inc. and related organizational realignment.
General and administrative expenses, as a percentage of revenue, for 1996 and
1997 were approximately 32.0% and 15.5%, respectively. The Company believes that
the infrastructure in place at December 31, 1997 is substantially sufficient to
support the level of operations expected for 1998. General and administrative
headcount increased from 57 at the end of 1996 to 71 at the end of 1997.
Depreciation and Amortization
Depreciation and amortization expense for 1996 was approximately $0.3
million compared to $1.0 million for 1997. Depreciation and amortization
expense, as a percentage of revenue, for 1996 and 1997 was approximately 1.2%
and 2.5%, respectively. The increase is primarily related to the significant
investment the Company has made in its computer equipment, leasehold
improvements and office equipment during 1997.
12
<PAGE>
Interest Income and Other, net
Interest Income and Other of approximately $1.5 million and $1.9 million for
1996 and 1997, respectively, primarily represents interest income on the
investment of the Company's proceeds from its 1996 initial public offering and
proceeds from the 1997 sale of its outdoor media and interactive business
segments.
Income Taxes
During 1996, the Company recorded an income tax benefit for the deferred
income tax asset created by 1995 and 1996 operating losses. Such losses resulted
in a deferred tax asset at December 31, 1996 of approximately $2.3 million.
During 1997, the Company recorded an approximately $2.1 million tax
provision from continuing operations and an approximate $0.8 million tax benefit
from discontinued operations. In addition, during 1997, the Company recorded a
$1.2 million deferred tax asset resulting from the exercise of non-qualified
stock options by employees. At December 31, 1997, in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
management has determined that it is more likely than not that the net deferred
tax asset of approximately $2.4 million as of December 31, 1997 will be
realized.
The Company bases its determination on the significant growth that has
occurred in its IT training business during 1996 and 1997. The Company's revenue
increased from $21 million in 1996 to $41 million in 1997, a 95% increase.
Income from continuing operations for 1996 was $0.5 million which increased to
$3.6 million in 1997, a 620% increase. Based on its projections, the Company's
management believes that profitable operations will be sustained in future
periods. However, no assurance can be given that such profitable operations will
in fact be sustained.
The Company's deferred income taxes result primarily from a net operating
loss carryforward ("NOL"), the use of accelerated depreciation methods for
income tax purposes, amortization differences relating to certain intangible
assets, and certain accrued expenses which are not deductible for income tax
purposes until paid. As of December 31, 1997, the Company had a tax NOL of
approximately $6.0 million, which expires in 2011.
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 IT training business and
operating efficiencies which may be gained under the Company's current
strategies.
Discontinued Operations
The Company approved a plan to dispose of its outdoor media business segment
on May 17, 1997. On September 16, 1997, the Company sold the assets of its
outdoor media business segment for approximately $4.0 million in cash and
approximately $0.6 million in notes receivable. As a result, the operations of
the outdoor media business segment have been accounted for as a discontinued
operation using a measurement date of May 17, 1997. The outdoor media business
segment offered traditional outdoor media advertising at United States ski
resorts. Revenue for the outdoor media business segment for 1996 and 1997 was
approximately $3.9 million and $2.1 million, respectively. Net income (loss) for
the outdoor media segment for 1997 and 1996 was approximately ($0.2) million and
$0.6 million, respectively. The 1997 amount includes approximately $0.2 million
of costs related to the sale.
The Company announced its intent to sell its interactive business segment on
July 29, 1997. On September 26, 1997, the Company sold the assets of its
interactive business segment for $13.5 million in cash and the right to future
payments contingent on the segment's future earnings. As a result, the
operations of the interactive segment have been accounted for as a discontinued
operation using a measurement date of July 28, 1997. The interactive business
segment developed and created interactive solutions that assist companies with
corporate communications. Revenue for the interactive business segment for 1996
and 1997 was approximately $14.3 million and $13.0 million, respectively. Net
loss for the interactive business segment for 1996 and 1997 was approximately
$4.1 million and $5.1 million, respectively. The net loss for 1996 includes
approximately $0.5 million of costs related to the 1996 acquisition of Graphic
Media, Inc.
13
<PAGE>
The net loss for 1997 includes approximately $1.5 million of costs related to
organizational realignment and sale of the interactive business segment.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Revenue
Revenue for 1995 was approximately $10.2 million compared to revenue for
1996 of approximately $21.0 million, or a 106.7% increase over the prior year.
The growth from 1995 to 1996 was a result of the increase in the number of
seminars hosted, the average number of attendees per seminar and the average
price charged for the seminars. The number of customers trained increased
approximately 55% from approximately 44,000 in 1995 to approximately 68,000 in
1996. Seminars hosted increased from approximately 235 in 1995 to approximately
300 in 1996.
Cost of Revenue
Cost of revenue, as a percentage of revenue, for 1995 and 1996 was
approximately 32.5% and 25.2%, respectively. Cost of revenue was approximately
$3.3 million in 1995 compared to $5.3 million in 1996. The increase in costs for
1996 is due to the Company's continued development of its business and is
consistent with its revenue growth. During 1996, the Company made substantial
investments in its operating infrastructure, particularly in salary and related
benefits.
Marketing and Selling Expenses
Marketing and selling expenses, as a percentage of revenue, for 1995 and
1996 were approximately 42.6% and 44.3%, respectively. Marketing and selling
expenses are primarily comprised of salaries, commissions and benefits, travel
and marketing program costs. Marketing and selling expenses were approximately
$4.3 million in 1995 compared to $9.3 million in 1996. The increase in costs
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,
registration, 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, as a percentage of revenue, for 1995 and
1996 were approximately 19.8% and 32.0%, respectively. General and
administrative expenses for 1995 were approximately $2.0 million compared to
$6.7 million in 1996. For 1996 general and administrative expenses include
approximately $0.7 million of costs related to Mastering, Inc.'s acquisition of
Mastering Computers, Inc. and related organization realignment. In addition, the
increase from 1995 to 1996 is due to the growth of the Company's business and
development of its infrastructure and the corresponding increase in the number
of executive and administrative personnel.
Depreciation and Amortization
Depreciation and amortization expense for 1995 was $0.1 million compared to
$0.3 million in 1996. Depreciation and amortization expense, as a percentage of
revenue, for 1995 and 1996 was approximately 0.7% and 1.2%, respectively.
Interest Income and Other, net
Interest Income and Other of approximately $0.1 million and $1.5 million for
1995 and 1996, respectively, primarily represents interest income. The increase
from 1995 to 1996 represents additional interest income on the investment of the
Company's proceeds from its initial public offering in 1996.
14
<PAGE>
Income Taxes
During 1996 the Company recorded an income tax benefit of approximately $2.3
million. In accordance with the provisions of SFAS No. 109, management of the
Company determined it was more likely than not that the $2.3 million net
deferred tax asset as of December 31, 1996, would be realized through future
taxable income generated by the Company.
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.
Quarterly Results (dollars in thousands) and Seasonality
The following table sets forth certain unaudited 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. All amounts have been
restated to reflect the disposition of the interactive and outdoor media
business segments which occurred in 1997. The operating results for any quarter
are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1996-- Three Months Ended 1997-- 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>
Revenue.................... $2,755 $ 3,999 $ 5,747 $ 8,517 $8,862 $ 9,842 $ 10,876 $ 11,386
------ ------- ------- ------- ------ -------- -------- --------
Expenses:
Cost of revenue.......... 777 915 1,357 2,247 2,578 2,894 3,178 3,342
Marketing and selling 1,859 2,129 2,567 2,749 3,384 4,295 4,944 5,155
expenses...................
General and
administrative expenses 289 1,564 2,322 2,546 1,884 1,560 1,391 1,512
Depreciation and
amortization........... 25 47 89 92 150 221 275 386
------ ------- ------- ------- ------ -------- -------- --------
Total operating expenses... 2,950 4,655 6,335 7,634 7,996 8,970 9,788 10,395
------ ------- ------- ------- ------ -------- -------- --------
Net operating income (195) (656) (588) 883 866 872 1,088 991
(loss) ....................
Interest income and other,
net ....................... 59 579 525 374 420 435 429 586
------ ------- ------- ------- ------ -------- -------- --------
Income (loss) from continuing
operations before income
taxes.................... (136) (77) (63) 1,257 1,286 1,307 1,517 1,577
Tax benefit (provision).... - (79) 102 (484) (478) (457) (531) (615)
------ -------- ------- -------- ------- --------- --------- --------
Income (loss) from
continuing operations.... (136) (156) 39 773 808 850 986 962
Discontinued operations, net 35 (475) (2,875) (97) 199 (1477) 253 -
------ -------- -------- -------- ------ --------- -------- --------
Net income (loss).......... $ (101) $ (631) $(2,836) $ 676 $1,007 $ (627) $ 1,239 $ 962
======= ======== ======= ======= ====== ========= ======== ========
</TABLE>
The Company's quarterly operating results may fluctuate due to a variety of
factors, including but not limited to, the addition or loss of a major customer,
the relative mix of higher- and lower-margin products and services, 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 and other factors that are outside the Company's
control.
The Company is subject to seasonal revenue fluctuations due to the impact of
holidays on the Company's ability to sell its products and services and conduct
its workshops. The Company experiences two to three weeks of reduced sales
productivity in its fourth quarter surrounding Thanksgiving and the December
holiday season, when both Company employees and potential customers often take
vacation. Since at that time the Company is typically selling workshops to be
held in its first quarter, this reduced productivity affects first-quarter
revenue. Similarly, the Company hosts few, if any, workshops during these
holiday weeks, which affects fourth-quarter revenue. The reduced sales
productivity also affects fourth-quarter CBT sales, which are typically shipped
and recognized as revenue in the fourth quarter. These seasonal trends have in
the past caused, and in the future could cause, revenues in the first and fourth
quarters of a year to be less, perhaps substantially so, than revenues for the
second and third quarters or to grow less rapidly than in other quarters. There
can be no assurance that these or other seasonal trends will not have a material
adverse effect on the Company's results of operations.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources includes the
impact of discontinued operations in the cash flow amounts, which is consistent
with the presentation in the Company's consolidated statements of cash flows.
Net cash used in operations for 1996 was approximately $8.0 million and largely
reflects the investment made by the Company to grow its operating
infrastructure. Net cash provided by operations for 1997 was
15
<PAGE>
approximately $4.1 million and includes an increase in accounts payable largely
related to the sales force automation system. Net cash used in investing
activities was approximately $31.2 million for 1996 related primarily to
investments made from the proceeds of the Company's initial public offering and
the purchase of property and equipment. Net cash provided by investing
activities was approximately $4.2 million for 1997 related to the proceeds
received from the sale of the interactive and outdoor media business segments
offset by the purchase of property and equipment and investments made in
long-term U.S. government backed securities. Purchases of property and equipment
in 1996 and 1997 were due to the Company's rapid staffing growth and related
office space expansion. Cash flows provided by financing activities were
approximately $45.6 million and $1.1 million in 1996 and 1997, respectively. The
net cash inflow from financing activities in 1996 reflects the completion of the
initial public offering of the Company's Common Stock. The net cash inflow from
financing activities for 1997 reflects the proceeds realized by the Company upon
the exercise of stock options by employees and the purchase of stock through the
employee stock purchase plan.
As of December 31, 1997, the Company had approximately $27.9 million of
cash, cash equivalents and short-term investments, 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.
Year 2000
The Company has assessed and continues to assess the impact the Year 2000
issue will have on its reporting systems and operations. The Company has
determined that its operating and financial software systems (including its new
sales force automation system) will be Year 2000 compliant through the release
of updated software versions. The Company will test the new systems for Year
2000 compliance as they are released. In addition, the Company does not believe
that it is substantially reliant on any one customer or supplier and therefore
does not believe that the Year 2000 compliance of such companies will have a
significant impact on the Company. The Company does not anticipate that the Year
2000 issue will have a significant impact on its financial position or results
of operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), Disclosure About Segments of an Enterprise and Related
Information, which supersedes Statement of Financial Accounting Standards No.
14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated.
16
<PAGE>
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 Company's limited operating history and substantial
operating losses, 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,
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).
Additional Risk Factors That Could Affect Results of Operations
The Company's instructor-led and CBT products and services are subject to
certain additional risks and uncertainties, including 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 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.
The Company's results of operations are affected by a wide variety of other
factors that could adversely impact its revenue and profitability, many of which
are beyond the Company's control. These factors include, but are not limited to,
the Company's ability to design and introduce new products on a timely basis,
market acceptance of products, customer order patterns, the timing of product
releases from Microsoft, changes in products and services mix, product
performance, obsolescence, returns, technological changes, competition and
competitive pressures on pricing.
In addition to the other factors identified in this Annual Report on Form
10-K, the following risk factors could materially and adversely affect the
Company's future results of operations and could cause actual events to differ
materially from those predicted in the Company's forward-looking statements
relating to its business.
Fluctuations in Results of Operations
The Company has in the past experienced fluctuations in its quarterly
results of operations and anticipates that such fluctuations will continue in
the future. Although the Company's continuing opeations have been profitable in
certain prior quarters, there can be no assurance that such profitability will
continue in the future or that the levels of profitability will not vary
significantly among quarterly periods. The Company's results of operations may
fluctuate as a result of many factors, including the addition or loss of a major
customer, the relative mix of higher- and lower-margin products and services,
changes in pricing strategies, costs related to the expansion of operations, the
cost of acquisitions, capital expenditures, the hiring or loss of personnel,
general economic conditions and the timing of product introduction, by
Microsoft(TM).
The Company's expense levels are based in significant part on its
expectations regarding future revenues and are fixed to a large extent in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any
significant revenue shortfall would therefore have a material adverse effect on
the Company's results of operations.
Developing Market
The market for IT education and training is rapidly evolving. New methods of
delivering training products and services are being developed and offered in the
marketplace. Many of these new training products and services will involve new
and different business models. Accordingly, the Company's future success will
depend upon, among other factors, the extent to which the Company is able to
develop and implement products and services which address the Company's market
requirements. There can be no assurance that the Company will be successful in
meeting changing market needs.
17
<PAGE>
Seasonality
The Company is subject to seasonal revenue fluctuations due to the impact of
holidays on the Company's ability to sell its products and services and conduct
its workshops. The Company experiences two to three weeks of reduced sales
productivity in its fourth quarter surrounding Thanksgiving and the December
holiday season, when both Company employees and potential customers often take
vacation. Since at that time the Company is typically selling workshops to be
held in its first quarter, this reduced productivity affects first-quarter
revenue. Similarly, the Company hosts few, if any, workshops during these
holiday weeks, which affects fourth-quarter revenue. The reduced sales
productivity also affects fourth-quarter CBT sales, which are typically shipped
and recognized as revenue in the fourth quarter. These seasonal trends have in
the past caused, and in the future could case, revenues in the first and fourth
quarters of a year to be less, perhaps substantially so, than revenues for the
second and third quarters or to grow less rapidly than in other quarters. There
can be no assurance that these or other seasonal trends will not have a material
adverse effect on the Company's results of operations.
Dependence on Key Personnel
The Company's future success depends, in large part, on the continued
service of its key management, telesales, financial, product and service
development and operational personnel and on its ability to attract, motivate
and retain highly qualified employees, including management personnel. In
particular, the loss of certain senior management personnel or other key
employees could have a material adverse effect on the Company's business and
results of operations. The Company expects to continue to hire additional
product and service development, sales and marketing and support staff and
instructors. However, there can be no assurance that the Company will be
successful in attracting, retaining or motivating key personnel. The inability
to hire and retain qualified personnel or the loss of the services of key
personnel could have a material adverse effect upon the Company's current
business, new product and service development efforts and future business
prospects.
ITEM 8. FINANCIAL STATEMENTS 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
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information under the captions "Election of Directors to the Mastering
Board" and "Mastering Section 16(a) Beneficial Ownership Reporting Compliance"
in the Proxy Statement and the information set forth under Item 4a of this
report are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Except for information referred to in Item 402(a)(8) of Regulation S-K, the
information under the captions "Election of Directors" and "Mastering Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of and Principal
Shareholders of Mastering" in the Proxy Statement is incorporated herein by
reference.
18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions of Mastering" in the Proxy Statement is incorporated herein by
reference."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements are filed as part of this report:
Mastering, Inc. and Subsidiaries Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets As of December 31, 1997 and 1996
Consolidated Statements of Operations For the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity (Deficit) For the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
(a) (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.
(a) (3) Exhibits
(a) The following exhibits are filed with this report or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number ----------------------------------------------------------------
------
<S> <C> <C>
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)
4.3 -- Amendment to Rights Agreement between the Registrants and Harris
Trust and Savings Bank, as Rights Agent (7)
10.1 -- Registrant's Amended and Restated 1995 Executive Stock Option
Plan(2)(5)
10.2 -- Registrant's Amended and Restated 1995 Employee Stock Option Plan(5)
10.3 -- Amended and Restated Employment Agreement with Terence
M. Graunke(1)(2)
10.4 -- Employment Agreement with Marc Pinto(1)(2)
10.5 -- Form of Directorship Agreement between the Registrant
and each director(1)
10.6 -- Registrant's 401(k) Plan(1)(2)
10.7 -- Trust Agreement between the Registrant and
the Charles Schwab Trust Company relating to
the Registrant's 401(k)
Plan(1)(2)
10.8 -- Registrant's Employee Stock Purchase Plan(1)(2)
10.9 -- Registrant's Performance Bonus Plan(1)(2)
10.10 -- Registration Rights Agreement between the Registrant
and the holders of the Registrant's Series A Preferred
Stock, as amended(1)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
10.11 -- Asset Purchase Agreement by and among SkiView, Inc.,
SkiView Acquisition Corp. and Allegheny Media(1)
10.12 -- Secured Promissory Note of SkiView, Inc. in favor of
Oldview, Inc.(1)
10.13 -- Security Agreement between SkiView, Inc. and Oldview,
Inc. and U.S. Communications Corporation(1)
10.14 -- Agreement and Plan of Merger dated June 21, 1996 among
Eagle River Interactive, Inc., Sushi Acquisition Corp.,
Graphic Media, Inc. and Stockholders thereof(3)
10.15 -- 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)
10.16 -- Registration Agreement dated June 21, 1996 between
Eagle River Interactive, Inc., Philip Meurer, Joseph
Parker, Lee J. Jacobson and E. Michael Loftus(3)
10.17 -- Employment and Noncompetition Agreement dated June 21,
1996 between Graphic Media, Inc. and Philip Meurer(3)(2)
10.18 -- 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)
10.19 -- 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)
10.20 -- Stock Pledge Agreement dated as of July 31,
1996 between Eagle River Interactive, Inc. and Thomas R.
Graunke(4)
10.21 -- Registration Rights Agreement dated as of
July 31, 1996 between Eagle River Interactive,
Inc. and Thomas R. Graunke(4)
10.22 -- Employment and Noncompetition Agreement dated as of
July 31, 1996 between Eagle River Interactive, Inc. and
Thomas R. Graunke(4)(2)
10.23 -- Employment and Noncompetition Agreement dated as of December 9, 1996
between Eagle River Interactive, Inc. and Kevin J. Rowe (2)
10.24 -- Agreement and Plan of Merger dated as of February 18, 1998 among
Platinum Technology, Inc., PT Acquisition Corporation I and the
Registrant (6)
21 -- 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.
(5) Incorporated by reference to the Company's Registration Statement on Forms
S-8 (File No. 333-42949)
(6) Incorporated by reference to the exhibits to the company's Current Report on
Form 8-K dated February 20, 1998
(7) Incorporated by reference to the Company's Registration Statement on Form
8-A/A (File No. 0-28004)
(b) Reports on Form 8-K
None.
20
<PAGE>
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.
MASTERING, INC.
(Registrant)
Date: March 19, 1998 By: /s/ Marc Pinto
-----------------------------------
Marc Pinto
Executive Vice President and
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, as 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 this 19th day of March, 1998.
<TABLE>
<CAPTION>
Signature Title
- ------------------------------------ ------------------------------------
<S> <C>
/s/ Terence M. Graunke
- ------------------------------------ Chairman of the Board, President
Terence M. Graunke and Chief Executive Officer
(principal executive officer)
/s/ Marc Pinto
- ------------------------------------ Executive Vice President and Chief
Marc Pinto Financial Officer (principal
financial officer)
/s/ Stephen S. Krell
- ------------------------------------ Vice President of Finance (principal
Steven S. Krell accounting officer)
/s/ Paul D. Carberry
- ------------------------------------ Director
Paul D. Carbery
/s/ Casey G. Cowell
- ------------------------------------ Director
Casey G. Cowell
/s/ Andrew J. Filipowski
- ------------------------------------ Director
Andrew J. Filipowski
/s/ Jamie Cowie
- ------------------------------------ Director
Jamie Cowie
- ------------------------------------ Director
Peter I. Mason
/s/ Paul G. Yovovich
- ------------------------------------ Director
Paul G. Yovovich
</TABLE>
21
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mastering, Inc.:
We have audited the accompanying consolidated balance sheets of Mastering, Inc.
(formerly Eagle River Interactive, Inc.), a Delaware corporation, and
subsidiaries (collectively, the Company) as of December 31, 1997 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, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
----------------------------------------
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 19, 1998.
F-2
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
-------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,379 $ 9,032
Short-term investments 9,479 24,963
Accounts receivable, net of allowance for doubtful accounts of $288
and $184, respectively 1,987 1,130
Deferred seminar expenses 2,372 1,016
Net current assets of discontinued operations (Note 2) - 4,268
Deferred tax asset (Note 9) 2,025 1,592
Other current assets 442 96
-------------- -------------
Total current assets 34,684 42,097
-------------- -------------
PROPERTY AND EQUIPMENT:
Land 1,450 -
Furniture, fixtures and computer equipment 7,794 1,652
Leasehold improvements 533 -
-------------- -------------
9,777 1,652
Less - accumulated depreciation (1,334) (255)
-------------- -------------
Net property and equipment 8,443 1,397
-------------- -------------
NON-CURRENT ASSETS:
Long-term investments (Note 4) 20,363 -
Net long-term assets of discontinued operations (Note 2) - 9,789
Deferred tax asset (Note 9) 352 704
Other non-current assets 477 361
-------------- -------------
Total non-current assets 21,192 10,854
-------------- -------------
$ 64,319 $ 54,348
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,616 $ 898
Accrued liabilities 2,101 2,212
Deferred revenue 1,881 1,094
Current portion capital lease obligations 135 36
Other current liabilities 100 13
-------------- -------------
Total current liabilities 8,833 4,253
NON-CURRENT LIABILITIES:
Capital lease obligations, net of current portion 255 181
-------------- -------------
Total liabilities 9,088 4,434
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 3, 4, 5, 7, 8 and 11):
Common stock $.001 par value; 30,000,000 shares authorized;
13,703,828 and 13,356,990 shares issued and outstanding, respectively 14 13
Unrealized gain on "Available for Sale" securities 186 -
Additional paid-in capital 57,487 54,938
Accumulated deficit (2,456) (5,037)
-------------- -------------
Total stockholders' equity 55,231 49,914
-------------- -------------
Total liabilities and stockholders' equity $ 64,319 $ 54,348
============== =============
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
F-3
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE $ 40,966 $ 21,018 $ 10,168
------------- ------------- -------------
OPERATING EXPENSES:
Cost of revenue 11,992 5,296 3,304
Marketing and selling expenses 17,778 9,304 4,328
General and administrative expenses 6,347 6,721 2,017
Depreciation and amortization 1,032 253 71
------------- ------------- -------------
Total operating expenses 37,149 21,574 9,720
------------- ------------- -------------
NET OPERATING INCOME (LOSS) 3,817 (556) 448
Interest income and other, net 1,870 1,537 70
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 5,687 981 518
Tax provision (Note 9) (2,081) (461) -
------------- ------------- ------------
INCOME FROM CONTINUING OPERATIONS 3,606 520 518
------------- ------------- -------------
DISCONTINUED OPERATIONS (Note 2)
Loss from discontinued operations, net of income tax benefit
of $1,196 and $2,721 in 1997 and 1996, respectively (1,858) (3,610) (3,441)
Gain (loss) on disposal, net of income taxes of $394
and $40 in 1997 and 1996, respectively 833 198 (350)
------------- ------------- -------------
(1,025) (3,412) (3,791)
------------- ------------- -------------
NET INCOME (LOSS) $ 2,581 $ (2,892) $ (3,273)
============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE (Pro forma for 1996, Note 1):
Income from continuing operations $ 0.27 $ 0.04
Loss from discontinued operations, net (0.08) (0.28)
------------- -------------
Net income (loss) $ 0.19 $ (0.24)
============= =============
Weighted average shares 13,535,105 12,285,782
============= =============
DILUTED EARNINGS (LOSS) PER SHARE (Pro forma for 1996, Note 1):
Income from continuing operations $ 0.25 $ 0.04
Loss from discontinued operations, net (0.07) (0.25)
------------- -------------
Net income (loss) $ 0.18 $ (0.21)
============= =============
Weighted average shares 14,534,596 13,714,600
============= =============
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-4
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Series A
Mandatorily
Redeemable
Convertible
Preferred Stock Common Stock
-------------------------- ---------------------------
Shares Amount Shares Amount
------------- --------- -------------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 - $ - 1,599,744 $ 1
Issuance of shares upon conversion of debt - - 30 -
Exchange ERC for ERI shares - - 3,122,118 3
Issuance of Series A Preferred Stock, net of issuance costs 1,342,000 6,710 - -
Issuance of Common Stock - - 15,000 -
Exercise of stock options - - - -
Amortization of deferred compensation - - - -
Issuance of stock for technology - - 125,556 1
Shareholder S corporation distribution - - - -
Net loss - - - -
Dividends accrued on Series A Preferred Stock - 188 - -
------------- --------- -------------- ---------
BALANCE, December 31, 1995 1,342,000 6,898 4,862,448 5
Undistributed losses reclassified to additional paid-in
capital due to termination of S corporation status - - - -
Shareholder S corporation distributions - - - -
Dividends accrued on Series A Preferred Stock - 178 - -
Conversion of Series A Preferred Stock (1,342,000) (7,076) 4,026,000 4
Proceeds from initial public offering, net of underwriter
commissions and $1,632 of offering costs - - 4,309,000 4
Amortization of deferred compensation - - - -
Acquisition and retirement of shares from GM shareholder - - - -
Issuance of Common Stock pursuant to employee stock
purchase plan - - 10,673 -
Exercise of stock options - - 148,869 -
Issuance of stock options - - - -
Net loss - - - -
------------- --------- -------------- ---------
BALANCE, December 31, 1996 - - 13,356,990 13
Exercise of stock options - - 300,503 1
Issuance of Common Stock pursuant to employee stock
purchase plan - - 46,335 -
Unrealized gain on "Available for Sale" securities - - - -
Tax benefit related to exercise of non-qualified stock options - - - -
Net income - - - -
------------- --------- -------------- ---------
BALANCE, December 31, 1997 - $ - 13,703,828 $ 14
============= ========= ============== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain on Additional
Deferred "Available for Paid-in
Compensation Sale" Securities Capital
---------------------- ---------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1994 $ - $ - $ 17
Issuance of shares upon conversion of debt - - 566
Exchange ERC for ERI shares - - (3)
Issuance of Series A Preferred Stock, net of issuance costs - - (114)
Issuance of Common Stock - - 19
Exercise of stock options (49) - 297
Amortization of deferred compensation 31 - -
Issuance of stock for technology - - 142
Shareholder S corporation distribution - - -
Net loss - - -
Dividends accrued on Series A Preferred Stock - - (188)
------------ ---------- ---------
BALANCE, December 31, 1995 (18) - 736
Undistributed losses reclassified to additional paid-in
capital due to termination of S corporation status - - (3,126)
Shareholder S corporation distributions - - (138)
Dividends accrued on Series A Preferred Stock - - (178)
Conversion of Series A Preferred Stock - - 7,072
Proceeds from initial public offering, net of underwriter
commissions and $1,632 of offering costs - - 50,459
Amortization of deferred compensation 18 - -
Acquisition and retirement of shares from GM shareholder - - (352)
Issuance of Common Stock pursuant to employee stock
purchase plan - - 54
Exercise of stock options - - 261
Issuance of stock options - - 150
Net loss - - -
------------ ---------- ---------
BALANCE, December 31, 1996 - - 54,938
Exercise of stock options - - 1,080
Issuance of Common Stock pursuant to employee stock
purchase plan - - 276
Unrealized gain on "Available for Sale" securities - 186 -
Tax benefit related to exercise of non-qualified stock options - - 1,193
Net income - - -
------------ ---------- ---------
BALANCE, December 31, 1997 $ - $ 186 $ 57,487
============ ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
---------------- -------------
<S> <C> <C>
BALANCE, December 31, 1994 $ (723) $ (705)
Issuance of shares upon conversion of debt - 566
Exchange ERC for ERI shares - -
Issuance of Series A Preferred Stock, net of issuance costs - (114)
Issuance of Common Stock - 19
Exercise of stock options - 248
Amortization of deferred compensation - 31
Issuance of stock for technology - 143
Shareholder S corporation distribution (269) (269)
Net loss (3,273) (3,273)
Dividends accrued on Series A Preferred Stock - (188)
--------- ---------
BALANCE, December 31, 1995 (4,265) (3,542)
Undistributed losses reclassified to additional paid-in
capital due to termination of S corporation status 3,126 -
Shareholder S corporation distributions (1,006) (1,144)
Dividends accrued on Series A Preferred Stock - (178)
Conversion of Series A Preferred Stock - 7,076
Proceeds from initial public offering, net of underwriter
commissions and $1,632 of offering costs - 50,463
Amortization of deferred compensation - 18
Acquisition and retirement of shares from GM shareholder - (352)
Issuance of Common Stock pursuant to employee stock
purchase plan - 54
Exercise of stock options - 261
Issuance of stock options - 150
Net loss (2,892) (2,892)
--------- ---------
BALANCE, December 31, 1996 (5,037) 49,914
Exercise of stock options - 1,081
Issuance of Common Stock pursuant to employee stock
purchase plan - 276
Unrealized gain on "Available for Sale" securities - 186
Tax benefit related to exercise of non-qualified stock options - 1,193
Net income 2,581 2,581
--------- ---------
BALANCE, December 31, 1997 $ (2,456) $ 55,231
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
AS OF DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,581 $ (2,892) $ (3,273)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 2,797 2,149 1,057
Write-off product technology - - 241
Deferred tax provision (benefit) 1,270 (2,296) -
Loss on disposal of property and equipment - 66 23
Gain on sale of discontinued operations (6,709) - -
Compensation from issuance of stock options - 150 200
Amortization of deferred compensation - 18 31
Reserve for bad debts 150 165 150
Reserve for uncollectable advances to affiliates - (262) 262
Changes in assets and liabilities-
Accounts receivable 188 (2,801) (1,530)
Costs and estimated earnings in excess of billings 219 (2,095) (28)
Other current assets (2,695) (320) (107)
Other assets 1,478 (623) (44)
Accounts payable and accrued liabilities 4,537 1,031 1,880
Billings in excess of costs and estimated earnings 168 (63) 218
Revenue billed in advance 128 (212) (61)
------------- ------------- --------------
Net cash provided by (used in) operating activities 4,112 (7,985) (981)
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,711) (5,982) (1,740)
Proceeds from disposition of property and equipment 75 18 -
Proceeds from sale of discontinued operations 17,500 - -
Purchase of product rights - - (50)
Cash paid for acquisitions - (242) (1,230)
Advances to affiliates - - (262)
Purchase of investments (4,879) (24,963) -
Unrealized gain on available for sale securities 186 - -
Other - - (4)
------------- ------------- --------------
Net cash provided by (used in) investing activities 4,171 (31,169) (3,286)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - 1,905 2,850
Repayment of line of credit - (1,905) (2,988)
Proceeds from long-term debt - 350 250
Repayment of long-term debt - (3,737) (360)
Repayment of capital leases (293) (208) (47)
Payment of noncompete obligation - (96) (96)
Distributions to S corporation shareholders - (1,144) (269)
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 exercise of common stock options and
stock purchase plan 1,357 315 19
------------- ------------- --------------
Net cash provided by financing activities 1,064 45,591 5,955
------------- ------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,347 6,437 1,688
CASH AND CASH EQUIVALENTS, beginning of period 9,032 2,595 907
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 18,379 $ 9,032 $ 2,595
============= ============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 36 $ 269 $ 697
============= ============= ==============
Cash paid for income taxes $ 190 $ - $ -
============= ============= =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
MASTERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
Mastering, Inc. (formerly Eagle River Interactive, Inc.), 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, Mastering, Inc. completed
mergers with Graphic Media, Inc. ("GM") and Mastering Computers, Inc.
("Mastering Computers"), which were accounted for as poolings of interests. In
addition, during 1996 Mastering, Inc. formed SRC Localisation ("SRC"), a 99%
owned subsidiary, which is located in Paris, France. Collectively Mastering,
Inc., and ERC, SkiView, ERP, GM and Mastering Computers, all of which are
Mastering, Inc.'s wholly owned subsidiaries, and SRC, are herein referred to as
the "Company".
The Company's operating subsidiary, Mastering Computers, develops and markets
instructor-led training workshops and computer-based training ("CBT") products
for information technology ("IT") professionals. These training products and
services include instructor-led Windows NT(TM), Windows 95(TM), TCP/IP(TM),
Internet Information Server(TM) and Exchange(TM) training workshops, Microsoft
Certified Professional preparation courses, on-site workshops held at customers'
facilities, CBT software covering a broad range of information technologies,
other software, videos and a newsletter. The Company's CBT products are
delivered using CD-ROMs, proprietary intranets, the Internet and the World Wide
Web.
The Company's operating subsidiary, Mastering Computers, markets and sells its
instructor-led and CBT products and services throughout the United States and in
Canada, primarily through its in-house telesales organization. Training products
and services are also sold to national accounts under long-term contracts, which
are sold using outside salespeople. At the end of 1997, the Company began
marketing its training products in Europe, with sales of instructor-led training
workshops beginning in the United Kingdom during the first quarter of 1998.
The Company has completed two acquisitions accounted for as poolings of
interests since its inception. Accordingly, the accompanying consolidated
financial statements reflect the combined financial position, operating results
and cash flows of 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. In 1995, the Company accounted for
ERC and SkiView as a reorganization of entities under common control and their
assets and liabilities are included in the consolidated financial statements at
their historical cost.
During 1997, the Company sold two of its business segments, the interactive and
outdoor media segments. The Company has accounted for these two business
segments as discontinued operations (see Note 2). As a result of this
determination, the operations of the interactive and outdoor media business
segments have been reflected as discontinued operations in the accompanying
consolidated financial statements for all periods presented. The interactive
business segment developed and created custom interactive solutions that assist
United States and international companies with corporate communications,
marketing and training. The outdoor media business segment offered traditional
outdoor media advertising at United States ski resorts.
F-7
<PAGE>
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.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and SRC. All material intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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 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
financial statements on January 1, 1995 to reflect the purchase of SkiView and
Production Masters, Inc. ("PMI"), a company that operated an audio and video
post-production studio. The Company acquired and assumed certain liabilities in
connection with the SkiView and PMI acquisitions. These assets and liabilities
have been accounted for as discontinued operations in the accompanying
consolidated financial statements. PMI and SkiView were sold in 1995 and 1997,
respectively (see Note 2).
Effective November 1996, the Company acquired certain assets and assumed certain
liabilities of SRC. The Company incurred approximately $107,000 of acquisition
costs and paid approximately $242,000 in cash at the closing of the SRC
acquisition. SRC was a component of the interactive business segment.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
which supersedes Accounting Principles Board Opinion No. 15, the former existing
authoritative guidance. SFAS No. 128 modifies the calculation of primary and
fully diluted earnings per share (EPS) and replaces them with basic and diluted
EPS. SFAS No. 128 is effective for financial statements for both interim and
annual periods presented after December 15, 1997, and as a result, all
prior-period EPS data presented has been restated.
EPS is not considered relevant for the year ended December 31, 1995, given the
changes in the capital structure of Company which occurred on March 21, 1996
(the date of the Company's initial public offering). In addition, EPS for 1996
is unaudited and pro forma assuming the
F-8
<PAGE>
conversion of the Company's mandatorily redeemable convertible Series A
Preferred Stock ("Preferred Stock") (which was converted to common stock on the
date of the Company's initial public offering) had occurred on January 1, 1996.
A reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the years ended December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Unaudited
1997 Pro Forma 1996
------------------------------------- -------------------------------------
Effect of Effect of
Basic Stock Diluted Basic Stock Diluted
EPS Options EPS EPS Options EPS
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income from operations
(numerator) $ 3,606,000 - $ 3,606,000 $ 520,000 - $ 520,000
=========== =========== =========== ===========
Discontinued operations,
net (numerator) $(1,025,000) - $(1,025,000) $(3,412,000) - $(3,412,000)
=========== =========== =========== ===========
Net income (loss)
(numerator) $ 2,581,000 - $ 2,581,000 $(2,892,000) - $(2,892,000)
=========== =========== =========== ===========
Shares (denominator) 13,535,105 999,491 14,534,596 12,285,782 1,428,818 13,714,600
=========== =========== =========== ===========
Per share amount - income
from operations $ .27 $ .25 $ .04 $ .04
Per share amount -
discontinued operations,
net (.08) (.07) (.28) (.25)
----------- ----------- ----------- -----------
Per share amount - net
income (loss) $ .19 $ .18 $ (.24) $ (.21)
=========== =========== =========== ===========
</TABLE>
For purposes of applying the treasury stock method, the Company has assumed that
it could fully use the assumed tax deduction arising from the exercise of
non-qualified stock options.
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.
F-9
<PAGE>
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 SkiView, which conducted the Company's outdoor
media business. The Company incurred approximately $35,000 of acquisition costs.
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
=============
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.
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
=============
In September 1995, the chief executive officer ("CEO") of the Company converted
$512,000 of debt and $54,000 of accrued interest payable to him into common
stock of the Company.
During 1997, 1996, and 1995, the Company acquired approximately $244,000,
$769,000, and $171,000, respectively, of equipment under capital leases.
On March 21, 1996, the effective date of the Company's initial public offering,
holders of 1,342,000 shares of the Company's Preferred Stock converted their
shares into 4,026,000 shares of the Company's common stock (see Notes 5 and 7).
F-10
<PAGE>
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, 1997 and 1996, the Company had invested approximately
$29,407,000 and $24,963,000, respectively, in United States government
securities ("Government Securities"). In addition, as of December 31, 1997, the
Company had an equity investment in Allin Communications Corporation ("ACC")
recorded for $435,000 (see Note 4). Of the $29,407,000 of Government Securities
investments at December 31, 1997, approximately $19,928,000 are classified as
long-term investments in the accompanying consolidated balance sheets. The
Company has the positive intent and ability to hold all of its Government
Securities to maturity and not to engage in trading or selling activities with
respect to these securities. These Government Securities are classified as held
to maturity in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and are recorded at amortized cost. At December
31, 1997, total Government Securities had a fair value of approximately
$29,455,000, and reflect unrealized gains of approximately $48,000. These
Government Securities contain provisions whereby they may be called at the
option of the issuer for amounts at least equal to their carrying amount.
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 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.
In management's opinion, the Company's accounts receivables do not represent a
significant credit risk to the Company.
Fair Value of Financial Instruments
As of December 31, 1997 and 1996, the Company's financial instruments other than
investments primarily consisted of cash, short-term trade receivables and
payables, and capital leases. The carrying values of these instruments
approximate fair value because of their primarily short-term nature.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with 1997
presentation.
Property and Equipment
Property and equipment are recorded at cost. The Company depreciates these
assets using the straight-line method over the following estimated useful lives:
Furniture, fixtures and computer equipment 3 to 7 years
Leasehold improvements Term of the lease
F-11
<PAGE>
Assets purchased under capital leases are depreciated over the lesser of their
estimated useful lives or the term of the lease.
The land recorded in the accompanying consolidated balance sheet at December 31,
1997 represents raw land that is owned by the Company and located next to the
Company's headquarters in Scottsdale, Arizona.
Accrued Liabilities
The components of accrued liabilities are as follows:
December 31,
1997 1996
------------- -------------
Accrued salaries, wages, benefits and bonuses $ 655,000 $ 820,000
Accrued sales taxes 285,000 566,000
Accrued liabilities for discontinued operations 426,000 -
Other accrued expenses 735,000 826,000
------------- -------------
Totals $ 2,101,000 $ 2,212,000
============= =============
Product License Costs
A contract requires the Company to pay royalties on certain CBT product sales.
Royalties are generally a fixed amount per unit sold or a percentage of the
Company's net sales of certain products and are generally accrued as products
are sold.
Revenue Recognition
The Company generates revenue from sales of training products and services,
which consist primarily of instructor-led seminars on Microsoft Windows(TM)
operating systems and other IT topics, instructor-led Microsoft Certified
Professional preparation courses, on-site workshops, computer based training
software covering a broad range of information technologies, other software,
videos and a newsletter. Revenue from seminars is generally collected in advance
and deferred and is recognized upon commencment of a seminar or a series of
seminars in a given city. In connection with certain seminar offerings, the
Company also provides its customers with course materials in advance of a
seminar, in which case it recognizes revenue for the value of the materials upon
shipping the materials and the remainder of the revenue upon commencement of the
related seminar or series of seminars. Other product revenue is generally
recognized when the products are shipped to the customer.
Costs related to training seminars consist primarily of labor and related
benefits for speakers and seminar personnel, rental of seminar facilities and
materials provided to seminar participants, some of which is deferred until
seminar commencement. Costs related to CBT products include royalties paid to a
third-party licensor and costs to duplicate and ship the CBT product.
Income Taxes
The Company provides for income taxes using the asset and liability method
prescribed by 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.
F-12
<PAGE>
SFAS No. 109 requires recognition of deferred tax assets for the expected future
tax effects of all deductible temporary differences, sloss 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.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated.
(2) DISCONTINUED OPERATIONS:
On July 29, 1997, the Company announced its intention to dispose of its outdoor
media business segment. On September 16, 1997, the Company sold the assets of
its outdoor media business segment for approximately $4.0 million in cash and
approximately $600,000 in notes receivable resulting in a pre-tax gain of
approximately $1.1 million. The Company approved the disposition of the outdoor
media business segment, including a plan for the Company to identify potential
buyers, on May 17, 1997. As a result, the Company has accounted for the segment
as a discontinued operation in the accompanying consolidated financial
statements for all periods presented, with a measurement date of May 17, 1997.
The following table presents approximate revenue and net income (loss) for the
outdoor media business segment for the period from January 1, 1997 to September
16, 1997, and the years ended December 31, 1996 and 1995:
For the Years Ended
December 31,
January 1, 1997 -------------------------------
to September 16, 1997 1996 1995
-------------------------- ------------- --------------
Revenue $ 2,100,000 $ 3,900,000 $ 4,000,000
Net income (loss) (200,000) 500,000 (600,000)
F-13
<PAGE>
Included in the net loss for the period from January 1, 1997 to September 16,
1997 is approximately $0.2 million of costs related to the sale. The net loss
for the period from May 18, 1997 to September 16, 1997 was approximately
$800,000.
Also on July 29, 1997, the Company announced its intention to dispose of its
interactive business segment. On September 26, 1997, the Company sold the assets
of its interactive business segment for $13.5 million in cash and the right to
future payments contingent on the segment's future earnings resulting in a
pre-tax gain of approximately $5.6 million. As a result of this transaction, the
Company has accounted for the interactive business segment as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented with a measurement date of July 28, 1997.
The following table presents approximate revenue and net loss for the
interactive business segment for the period from January 1, 1997 to September
26, 1997 and the years ended December 31, 1996 and 1995:
For the Years Ended
December 31,
January 1, 1997 -------------------------------
to September 26, 1997 1996 1995
-------------------------- -------------- --------------
Revenue $ 13,000,000 $ 14,300,000 $ 6,700,000
Net loss 5,100,000 4,100,000 2,600,000
Included in the net loss for the period from January 1, 1997 to September 26,
1997 is approximately $1.5 million of costs related to the organizational
realignment and sale of the interactive business segment. The net loss for the
period from July 29, 1997 to September 26, 1997 was approximately $2.6 million.
The Company sold the following assets and was relieved of the following
liabilities related to the outdoor media and interactive business segments at
their respective sale dates:
Assets:
Current assets
Accounts receivable, net $ 3,938
Other current assets 2,345
-------------
Total current assets 6,283
Property, plant and equipment, net 5,711
Goodwill and other assets, net 3,389
-------------
Total assets 15,383
-------------
F-14
<PAGE>
Liabilities:
Current liabilities
Accounts payable 778
Accrued liabilities 1,764
Other current liabilities 1,148
-------------
Total current liabilities 3,690
Noncurrent liabilities 277
-------------
Total liabilities 3,967
-------------
Net Assets Sold $ 11,416
=============
Effective June 30, 1995, the Company discontinued the operations of PMI. The
assets were sold to a third party for approximately $700,000 and all proceeds
from the liquidation of the assets were paid to the previous owner of the PMI
business in satisfaction of all acquisition-related liabilities. As a result,
the operations of PMI through its disposition have been reflected as
discontinued operations in the accompanying consolidated financial statements
for all periods presented. The Company recorded a loss on the disposal of this
segment of approximately $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, net of income tax, from discontinued operations
representing the settlement of certain contingencies related to the PMI business
segment.
(3) 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 the 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 of a share of the Company's common stock with all
the outstanding shares of GM common stock being exchanged for 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 addition, 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.
On August 1, 1996, pursuant to an agreement and plan of merger, the Company
completed the merger of a wholly owned subsidiary with Mastering Computers, 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
F-15
<PAGE>
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.
(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. These advances
accrued interest at 15% per annum, compounded quarterly, and matured 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 ACC (which was
formed by the combination of SeaVision and other companies). During 1997, ACC
repaid the advance with $161,000 of cash and 14,418 shares of ACC common stock.
In connection with the September 1995 Preferred Stock offering, the CEO of the
Company issued a contingent note (the "Contingent Note") to the Company. This
note transferred to the Company future gains arising from the sale of the CEO's
10.5% equity interest in SeaVision. The terms of the Contingent Note require the
CEO 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
enterprise with significant liquidity issues.
In November 1996, ACC completed an initial public offering of its common stock.
The SeaVision stock owned by the CEO was converted into 241,200 shares of ACC
Common Stock, all of which are subject to the terms of the Contingent Note.
During 1997, the Contingent Note was amended. The amendment defines procedures
by which the Company can require the sale of the ACC shares and defines
procedures by which the CEO may segregate and retain a portion of the ACC shares
having a market value of approximately $500,000. As of December 31, 1997, the
CEO had not sold any of his shares of ACC. The Company has recorded
approximately $435,000 of available-for-sale securities related to the ACC
shares owned and the ACC shares subject to the Contingent Note, which is
included in long-term investments in the accompanying consolidated balance
sheet.
(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 approximately $46,727,000. Upon the closing of the
offering, all 1,342,000 shares of Preferred Stock outstanding were converted
into 4,026,000 shares of common stock (See Note 7).
In addition, the terms of the Preferred Stock provided that accrued dividends
were not payable upon conversion of the 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 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.
F-16
<PAGE>
In April 1996, the underwriters of the Company's initial public offering
exercised their over-allotment option and purchased from the Company an
additional 309,000 shares of common stock at $13.00 per share, with net proceeds
to the Company aggregating $3,736,000.
(6) OTHER RELATED PARTY TRANSACTIONS:
In addition to the related party transactions discussed above, the Company had
the following related party transactions:
o The Company uses an aircraft owned by an entity in which the CEO is the
primary owner. Costs incurred to rent the aircraft totaled
approximately $313,000, $280,000 and $149,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. In 1996, the Company's
policy was to pay rental rates which approximated first class
commercial rates for similar flights, taking into account the number of
passengers on each flight. During 1997, the Company's policy was to pay
$750 per flight hour, regardless of the number of passengers on each
flight. As of December 31, 1996, the Company had prepaid approximately
$186,000 to this entity, which is recorded in the accompanying
consolidated balance sheet. As of December 31, 1997, the Company had a
payable due to this entity of approximately $50,000, which is recorded
in the accompanying consolidated balance sheet.
o The Company leased office space from an entity owned by several members
of the board of directors. Related rental expense totaled approximately
$31,000 and $81,000 in 1997 and 1996, respectively. The lease was
terminated in May 1997.
o The Company incurred approximately $43,000, $800,000 (including
$505,000 of initial public offering costs) and $280,000 to a law firm
for legal services performed for the period from January 1, 1997
through April 30, 1997 and for the years ended December 31, 1996 and
1995, respectively. A director and stockholder in the Company was a
partner of the law firm when the services were provided. At December
31, 1996, approximately $90,000 of these costs were included in accrued
expenses in the accompanying consolidated balance sheets.
o Mastering Computers' ongoing direct-mail campaigns and newsletter
printing and mailing involved approximately 9,350,000, 4,345,000 and
2,988,000 direct-mail pieces in 1997, 1996 and 1995, respectively. With
respect to these direct-mail campaigns, Mastering Computers incurred to
related-party companies approximately $466,000, $1,327,000 and $641,000
in 1997, 1996 and 1995, respectively for printing, film work, data
processing, marketing and mailing. These amounts were paid to two
companies owned by family members of the Company's CEO and one of its
Executive Vice Presidents. During 1995, services provided by
related-party companies were on an informal basis, and amounts billed
included a fee to manage all aspects of the direct-mail campaign and
newsletter printing and mailing and an amount to pay third-party
vendors to provide the related services. During 1996 and the period
from January 1, 1997 through April 4, 1997, Mastering Computers
arranged with one of the related-party companies to pay the related
party a fee equal to 15% of all submitted third-party vendor invoices
and to reimburse the related party for all such vendor invoices paid by
the related-party. After April 4, 1997, the Company began paying the
vendors directly and paid only the 15% fee to the related party. At
December 31,
F-17
<PAGE>
1997 and 1996, approximately $22,253 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 to the related party
companies are comparable to those that would have been paid to
unaffiliated companies.
o 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 CEO and one of its Executive Vice
Presidents. The Company had approximately $41,000 payable to this
related party included in accrued expenses at December 31, 1995
relating to the agreement. This agreement was terminated in 1996.
o During 1996, the Company paid approximately $185,000 for consulting
services to a family member of the Company's CEO and one of its
Executive Vice Presidents, primarily under an agreement entered into by
Mastering Computers prior to Mastering Computers' merger with the
Company. This agreement was terminated in 1996.
(7) STOCKHOLDERS' EQUITY :
Rights Agreement
The Board of Directors of the Company declared a dividend distribution of one
purchase right (a "Right") for each outstanding share of common stock. Upon the
occurrence of 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 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.
Preferred Stock
During 1995 the Company sold 1,342,000 shares of 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 certain outstanding debt 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.
S-Corporation Distribution
Prior to their merger with the Company, GM and Mastering Computers were
S Corporations for income tax purposes. Accordingly, distributions from such
entities to their shareholders were made relating to the shareholders' tax
liabilities.
F-18
<PAGE>
(8) 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
Committee may grant options to purchase up to an aggregate of 4,500,000 shares
under the Executive Option Plan, of which 3,512,400 are considered Standard
Options and 987,600 are considered Special Options. The Standard Options are
generally 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.
1995 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 options
to purchase up to an aggregate of 1,500,000 shares under the Employee Option
Plan. The options are generally exercisable in four equal annual installments
beginning 12 months after the date of grant.
Mastering Computers Stock Options
Mastering Computers had granted certain key employees options to purchase shares
of common stock of Mastering Computers. A portion of those options vested
immediately at the grant date, and the remaining options vested upon the change
of control resulting from Mastering Computers' merger with the Company. All
outstanding Mastering Computers options were exchanged for options of the
Company. For certain options, the excess of the fair value of the underlying
stock on the date of grant over the exercise price has been recorded as
compensation expense and additional paid-in capital in the accompanying
consolidated balance sheets.
Employee Stock Purchase Plan
In January 1996, the Board of Directors adopted, and the Company's stockholders
approved, the Employee Stock Purchase Plan, which is intended to qualify 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
F-19
<PAGE>
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 approximately 41,000 and 10,700 shares
during 1997 and 1996, respectively.
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 the impact of issuing employee stock options or similar
equity instruments 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 value of all options granted
during 1997, 1996 and 1995 using the Black-Scholes pricing model and the
following weighted average assumptions:
1997 1996 1995
------------- ------------- ---------
Risk-free interest rate 5.88% 6.02% 5.91%
Expected dividend yield 0% 0% 0%
Expected lives outstanding 4 years 4 years 4 years
Expect volatility 86.40% 104.14% 104.14%
To estimate lives of options for this valuation, it was assumed options will be
exercised upon becoming fully vested. All options are initially assumed to vest.
Cumulative compensation cost recognized in pro forma income from continuing
operations 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. As discussed in Note 11, the Company has entered into an agreement
which, if consummated, would result in the accelerated vesting of stock options
and would require the recognition, in pro forma footnote disclosure, of the
unrecognized pro forma compensation expense under SFAS No. 123.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's pro forma net income (loss) and pro
forma net income (loss) per diluted common share would have been reported as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 2,581,000 $ (2,892,000) $ (3,273,000)
============== ============== ===============
Pro forma $ (763,000) $ (6,093,000) $ (4,292,000)
============== ============== ==============
Unaudited net income (loss) per diluted common share:
As reported $ 0.18 $ (0.21)
============== ==============
Pro forma $ (0.05) $ (0.45)
============== ==============
</TABLE>
F-20
<PAGE>
Weighted average shares used to calculate pro forma loss per diluted share were
determined as described in Note 1. Historical income 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 (see Note 1).
A summary of stock options as of December 31, 1997, 1996 and 1995 and changes
during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,087,669 $ 6.73 2,096,713 $ 2.74 - $ -
Granted 1,538,641 8.33 2,536,925 9.87 2,096,713 2.74
Canceled (785,644) 10.71 (397,100) 7.62 - -
Exercised (300,503) 3.65 (148,869) 1.70 - -
--------- --------- ---------
Outstanding at end
of year 4,540,163 $ 6.78 4,087,669 $ 6.73 2,096,713 $2.74
========= ========= =========
Options exercisable at
end of year (see Note 11) 2,124,648 $ 5.62 1,344,949 $ 3.13 207,296 $1.23
Weighted average fair
value of options granted $ 5.44 $ 7.17 $ 2.11
========= ========= =========
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1997 Life Price 1997 Price
-------------------- ------------ --------------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$.01 -
$1.46 473,265 7.37 years $ 1.26 275,911 $ 1.25
$3.75 -
$9.00 3,476,135 8.79 years $ 6.27 1,726,796 $ 5.64
$9.38 -
$22.13 590,763 8.73 years $14.19 121,941 $15.10
--------- ---------
$.01 -
$22.13 4,540,163 8.63 years $ 6.78 2,124,648 $ 5.62
========= =========
</TABLE>
(9) INCOME TAXES:
Mastering, Inc. was an S corporation for federal and state income tax purposes
until September 29, 1995. Accordingly, Mastering, Inc. was not subject to income
tax, as all of its taxable income or loss was reported in the tax return of its
shareholders for the period from inception through September 29, 1995. Upon
Mastering, Inc.'s conversion to a C corporation, a net deferred tax asset of
approximately $502,000 was recorded by the
F-21
<PAGE>
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 Mastering, Inc. 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 Computers, 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
its net operating loss. Such net operating loss was primarily the result of the
Company's investment in infrastructure to significantly expand its interactive
business and, to a much lesser degree, losses from its outdoor media business
segment. 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 it is more likely than not that the related deferred tax
asset would be realized as a result of taxable income generated by the Company's
future years' operations.
During 1996, the Company recorded an income tax benefit for the deferred income
tax asset created by 1995 and 1996 operating losses, which resulted in a
deferred tax asset at December 31, 1996 of approximately $2.3 million.
During 1997, the Company recorded an approximately $2.1 million tax provision
from continuing operations and an approximate $0.8 million tax benefit from
discontinued operations. In addition, during 1997 the Company recorded an
approximately $1.2 million deferred tax asset resulting from the exercise of
non-qualified stock options by employees. At December 31, 1997, in accordance
with the provisions of SFAS No. 109, management has determined that it is more
likely than not that the tax asset of approximately $2.4 million as of December
31, 1997 will be realized.
The Company bases its determination on the significant growth that has occurred
in its IT training business during 1996 and 1997. The Company's revenue
increased from $21 million for 1996 to $41 million for 1997, a 95% increase.
Income from continuing operations for 1996 was $0.5 million which increased to
$3.6 million in 1997, a 620% increase. Based on its projections, the Company's
management believes that profitable operations will be sustained in future
periods.
The Company's deferred income taxes result primarily from a net operating loss
carryforward ("NOL"), the use of accelerated depreciation methods for income tax
purposes, amortization
F-22
<PAGE>
differences relating to certain intangible assets, and certain accrued expenses
which are not deductible for income tax purposes until paid. As of December 31,
1997, the Company had a tax NOL of approximately $6.0 million, which expires in
2011.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs before they expire. Management anticipates
that taxable income during the carryforward period will arise primarily as a
result of the Company's continued growth in its IT training business and
operating efficiencies which may be gained under the Company's current
strategies.
The components of the net deferred income tax assets at December 31, 1997 and
1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 2,328,000 $ 1,724,000
Depreciation and amortization - 602,000
Allowance for bad debts 109,000 127,000
Non-deductible accruals 358,000 390,000
Compensation related to options granted
below fair market value 130,000 130,000
Tax credit carryforwards and other 350,000 -
Less - valuation allowance (254,000) (424,000)
----------- -----------
Total deferred tax assets 3,021,000 2,549,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization 120,000 -
Deferred revenue 524,000 235,000
Other - 18,000
----------- -----------
Total deferred tax liabilities 644,000 253,000
----------- -----------
Net deferred tax assets $ 2,377,000 $ 2,296,000
=========== ===========
A reconciliation of income tax provision from continuing operations at the
statutory rate to the Company's effective rate is as follows:
1997 1996
---- ----
Computed at the expected statutory rate 34% 34%
Non-deductible expenses 2% 2%
State income tax benefit 4% 4%
Change in valuation allowance (3%) (6%)
Loss from S corporation - 14%
Other - (1%)
---- ----
Income tax provision - effective rate 37% 47%
==== ====
(10) COMMITMENTS AND CONTINGENCIES:
Licensing Agreement
F-23
<PAGE>
On December 30, 1996, the Company signed a licensing agreement with a third
party to license a 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 the third party future minimum royalties and license fees of $600,000
in 1997 and $400,000 in 1998 as well as royalties for each CBT title sold beyond
the amount required to fulfill the minimum royalty obligation.
Employment Agreements
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.
Retirement and Profit Sharing Plans
The Company has adopted a 401(k) retirement savings plan (the "Plan"). All of
the Company's employees are eligible to participate beginning on the first day
of the month following ninety days of employment 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 3% of the employee's annual compensation. The Company's matching
contributions vest over a four-year period beginning on the date the employee
was hired. During 1997 and 1996, the Company contributed approximately $235,000
and $51,000, respectively, to the Plan, for employees included in continuing
operations.
Legal Matters
The Company is party to various claims and lawsuits arising out of the normal
course of business. Management believes that the ultimate liability, if any, in
excess of amounts already provided for, is not likely to have a material adverse
effect on the Company's annual results of operations or financial condition.
F-24
<PAGE>
Operating Leases
The Company has entered into operating leases for office space and equipment. As
of December 31, 1997, future minimum lease payments required under such
operating leases are as follows:
1998 $ 1,275,282
1999 1,546,030
2000 1,546,030
2001 1,540,257
2002 1,540,257
Thereafter 8,748,055
-------------
Total $ 16,195,911
=============
Rent expense included in continuing operations in the accompanying consolidated
statements of operations for the years ended December 31, 1997, 1996 and 1995
was approximately $285,000, $200,000 and $140,000, respectively.
(11) SUBSEQUENT EVENT:
In February 1998, the Company announced that it had reached an agreement whereby
it would be merged with a wholly-owned subsidiary of PLATINUM technology, inc.
("PT" and the "Merger"). In management's opinion, the Merger is expected to be
completed in the second quarter of 1998 and accounted for as a pooling of
interests. Consummation of the Merger must be approved by the Company's
shareholders. If the Merger is approved, PT will exchange 0.448 of a share of PT
common stock for each share of the Company's common stock. In addition, in
accordance with the terms of the outstanding stock option plans, all outstanding
unvested stock options will vest upon the consummation of the Merger and all
outstanding options will be assumed by PT.
F-25
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Number ----------------------------------------------------------------
------
<S> <C> <C>
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)
4.3 -- Amendment to Rights Agreement between the Registrants and Harris
Trust and Savings Bank, as Rights Agent (7)
10.1 -- Registrant's Amended and Restated 1995 Executive Stock Option
Plan(2)(5)
10.2 -- Registrant's Amended and Restated 1995 Employee Stock Option Plan(5)
10.3 -- Amended and Restated Employment Agreement with Terence
M. Graunke(1)(2)
10.4 -- Employment Agreement with Marc Pinto(1)(2)
10.5 -- Form of Directorship Agreement between the Registrant
and each director(1)
10.6 -- Registrant's 401(k) Plan(1)(2)
10.7 -- Trust Agreement between the Registrant and
the Charles Schwab Trust Company relating to
the Registrant's 401(k)
Plan(1)(2)
10.8 -- Registrant's Employee Stock Purchase Plan(1)(2)
10.9 -- Registrant's Performance Bonus Plan(1)(2)
10.10 -- Registration Rights Agreement between the Registrant
and the holders of the Registrant's Series A Preferred
Stock, as amended(1)
10.11 -- Asset Purchase Agreement by and among SkiView, Inc.,
SkiView Acquisition Corp. and Allegheny Media(1)
10.12 -- Secured Promissory Note of SkiView, Inc. in favor of
Oldview, Inc.(1)
10.13 -- Security Agreement between SkiView, Inc. and Oldview,
Inc. and U.S. Communications Corporation(1)
10.14 -- Agreement and Plan of Merger dated June 21, 1996 among
Eagle River Interactive, Inc., Sushi Acquisition Corp.,
Graphic Media, Inc. and Stockholders thereof(3)
10.15 -- 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)
10.16 -- Registration Agreement dated June 21, 1996 between
Eagle River Interactive, Inc., Philip Meurer, Joseph
Parker, Lee J. Jacobson and E. Michael Loftus(3)
10.17 -- Employment and Noncompetition Agreement dated June 21,
1996 between Graphic Media, Inc. and Philip Meurer(3)(2)
10.18 -- 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)
10.19 -- 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)
10.20 -- Stock Pledge Agreement dated as of July 31,
1996 between Eagle River Interactive, Inc. and Thomas R.
Graunke(4)
10.21 -- Registration Rights Agreement dated as of
July 31, 1996 between Eagle River Interactive,
Inc. and Thomas R. Graunke(4)
10.22 -- Employment and Noncompetition Agreement dated as of
July 31, 1996 between Eagle River Interactive, Inc. and
Thomas R. Graunke(4)(2)
10.23 -- Employment and Noncompetition Agreement dated as of December 9, 1996
between Eagle River Interactive, Inc. and Kevin J. Rowe (2)
10.24 -- Agreement and Plan of Merger dated as of February 18, 1998 among
Platinum Technology, Inc., PT Acquisition Corporation I and the
Registrant (6)
21 -- Subsidiaries of Registrant
23 -- Consent of Arthur Andersen LLP
24 -- Power of Attorney (contained on signature pages hereto)
27 -- Financial Data Schedule
</TABLE>
<PAGE>
(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.
(5) Incorporated by reference to the Company's Registration Statement on Forms
S-8 (File No. 333-42949)
(6) Incorporated by reference to the exhibits to the company's Current Report
on Form 8-K dated February 20, 1998.
(7) Incorporated by reference to the Company's Registration Statement on Form
8-A/A (File No. 0-28004)
SUBSIDIARIES OF REGISTRANT
Mastering Computers, Inc.
Graphic Media, Inc.
SkiView, Inc.
Eagle River Productions, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Annual Report on Form 10-K, into
Mastering, Inc.'s previously filed registration statements on Forms S-8 (File
Nos. 333-42949 and 333-07133).
/s/ ARTHUR ANDERSEN, LLP
----------------------------------------
ARTHUR ANDERSEN LLP
Denver, Colorado.
January 19, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997, AS RESTATED PURSUANT TO STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128").
THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION II
OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF
1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE
DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE,
UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 18,379,000 9,032,000
<SECURITIES> 29,842,000 24,963,000
<RECEIVABLES> 2,275,000 1,314,000
<ALLOWANCES> 288,000 184,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 34,684,000 42,097,000
<PP&E> 9,777,000 1,652,000
<DEPRECIATION> 1,334,000 255,000
<TOTAL-ASSETS> 64,319,000 54,348,000
<CURRENT-LIABILITIES> 8,833,000 4,253,000
<BONDS> 0 0
0 0
0 0
<COMMON> 14,000 13,000
<OTHER-SE> 55,217,000 49,901,000
<TOTAL-LIABILITY-AND-EQUITY> 64,319,000 54,348,000
<SALES> 0 0
<TOTAL-REVENUES> 40,966,000 21,018,000
<CGS> 0 0
<TOTAL-COSTS> 37,149,000 21,574,000
<OTHER-EXPENSES> 36,000 30,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36,000 30,000
<INCOME-PRETAX> 5,687,000 981,000
<INCOME-TAX> (2,081,000) (461,000)
<INCOME-CONTINUING> 3,606,000 520,000
<DISCONTINUED> (1,025,000) (3,412,000)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,581,000 (2,892,000)
<EPS-PRIMARY> 0.19 (0.24)
<EPS-DILUTED> 0.18 (0.21)
</TABLE>
