SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number 0-17977
SUNRIVER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of Incorporation or Organization)
13-3469637
(I.R.S. Employer Identification No.)
9430 Research Blvd., Bldg. IV, Suite 200, Austin, TX
(Address of principal executive offices)
78759-6543
(Zip Code)
(512) 349-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ----
As of September 30, 1996, the Registrant had 47,858,145 shares of Common
Stock, $.01 par value per share, outstanding.
Note: This Form 10-Q/A corrects a typographical error in
the "Nine months ended September 30, 1995-Earnings (loss)
available for common shareholders-Statements of Operations" and
modifies the last paragraph under "Notes to Condensed
Consolidated Financial Statements," the paragraph immediately
preceding "Liquidity and Capital Resources" and the last
paragraph under "Liquidity and Capital Resources." No changes
are reported herein with respect to SunRiver Corporation's
Condensed Consolidated Financial Statements for the quarter or
nine months ended September 30, 1996.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine month periods ended September 30,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
<PAGE>
<TABLE>
<CAPTION>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
--------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 821,506 $ 448,237
Trade accounts receivable (including $2,472,218 and $6,206,007 from related
parties at September 30, 1996 and December 31, 1995, respectively), net 17,096,237 18,768,338
Inventories 27,067,506 25,758,040
Deferred income taxes 3,404,604 3,102,152
Prepaid expenses and other current assets 374,204 1,571,617
--------------- ---------------
Total current assets 48,764,057 49,648,384
Property and equipment, net 12,478,208 12,114,000
Goodwill, net 9,774,929 10,607,714
Other assets 4,659,860 3,910,235
--------------- ---------------
$ 75,677,054 $ 76,280,333
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 13,229,457 $ 8,000,000
Current portion of long-term debt (including $168,559 due to a related
party at December 31, 1995) 15,443,975 6,630,531
Accounts payable 11,207,296 14,506,202
Accrued expenses 3,434,981 4,255,508
Deferred revenue 335,120 826,844
--------------- ---------------
Total current liabilities 43,650,829 34,219,085
Long-term liabilities:
Long-term debt, less current maturities (including $8,000,000 of
debt to a related party at September 30, 1996 and December 31, 1995) 8,186,033 22,624,625
Deferred income taxes 2,652,850 2,213,198
Other 810,234 831,775
--------------- ---------------
Total long-term liabilities 11,649,117 25,669,598
--------------- ---------------
Total liabilities 55,299,946 59,888,683
Commitments and contingencies
Mandatorily redeemable preferred stock of subsidiary 3,554,692 3,554,692
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued - -
Common stock, $0.01 par value, 60,000,000 shares authorized, 47,858,145 and
45,550,214 shares issued at September 30, 1996 and December 31, 1995,
respectively 478,581 455,502
Additional paid-in capital 30,275,846 23,769,379
Deferred compensation (701,600) -
Amortization of deferred compensation 73,083 -
Accumulated deficit (13,303,494) (11,387,923)
---------------- ---------------
Total stockholders' equity 16,822,416 12,836,958
---------------- ---------------
$ 75,677,054 $ 76,280,333
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
1996 1995 1996 1995
---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales (including sales to a related party of
$15,250,000, $31,735,000, $4,110,000
and $12,382,000, respectively) $101,595,043 $ 68,261,152 $ 29,748,976 $ 23,408,289
Cost of sales 78,274,379 49,121,709 22,087,113 17,502,774
---------------- ----------------- ---------------- ---------------
Gross margin 23,320,664 19,139,443 7,661,863 5,905,515
Operating expenses:
Sales and marketing 9,725,111 5,792,885 3,968,162 1,954,574
General and administrative 7,176,144 4,870,741 2,868,131 2,152,810
Research and development 5,373,082 4,952,235 1,412,336 1,690,957
---------------- ----------------- ---------------- ---------------
Total operating expenses 22,274,337 15,615,861 8,248,629 5,798,341
---------------- ----------------- ---------------- ---------------
Operating income (loss) 1,046,327 3,523,582 (586,766) 107,174
Other (income) expense:
Interest 3,294,249 971,467 1,127,124 325,730
Other 203,730 (335,873) (58,931) (385,052)
---------------- ----------------- ---------------- ---------------
Total other (income) expense 3,497,979 635,594 1,068,193 (59,322)
---------------- ----------------- ---------------- ---------------
Income (loss) before income taxes and
discontinued operations (2,451,652) 2,887,988 (1,654,959) 166,496
Income tax (benefit) expense (908,600) 1,152,525 (615,218) 69,975
---------------- ----------------- ---------------- --------------
Income (loss) before discontinued operations (1,543,052) 1,735,463 (1,039,741) 96,521
Income from discontinued operations - 1,034,054 - -
---------------- ----------------- ---------------- --------------
Net income (loss) (1,543,052) 2,769,517 (1,039,741) 96,521
Dividend on preferred stock of subsidiary 372,519 - 124,173 -
Accretion to preferred stock of subsidiary - 609,116 - 210,143
---------------- ----------------- ---------------- --------------
Earnings (loss) available for common
shareholders (1,915,571) 2,160,401 (1,163,914) (113,622)
================ ================= ================ ================
Weighted average common shares outstanding 46,703,292 41,989,433 47,598,134 43,424,391
================ ================= ================ ================
Earnings (loss) per common share before
extraordinary items:
Continuing operations $ (0.04) $ 0.03 $ (0.02) $ 0.00
Discontinued operations 0.00 0.02 0.00 0.00
---------------- ----------------- ---------------- ----------------
Earnings (loss) per common share $ (0.04) $ 0.05 $ (0.02) $ 0.00
================ ================= ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
1996 1995
------------------ -----------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,543,052) $ 2,769,517
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Income from discontinued operations - (1,034,054)
Depreciation and amortization 2,919,237 2,204,611
Amortization of deferred compensation 73,083 -
Deferred revenues (491,724) (2,255,113)
Provision for doubtful accounts (276,191) 467,978
Provision for excess and obsolete inventory 992,857 47,099
Estimated value of compensatory warrants 160,800 -
Deferred taxes (27,309) -
Loss on sale of assets - 112,170
Changes in assets and liabilities:
Trade accounts receivable 1,948,292 (6,696,520)
Inventories (2,302,323) (253,820)
Other assets 16,320 (846,634)
Accounts payable and accrued expenses (3,872,604) 303,781
------------------ -----------------
Net cash used in operating activities (2,402,614) (5,180,985)
------------------ -----------------
Cash flows from investing activities:
Purchase of TradeWave, net of cash acquired - (100,000)
Capital expenditures (1,492,322) (365,866)
------------------ -----------------
Net cash used in investing activities (1,492,322) (465,866)
------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,468,896 694,094
Decrease in short-term debt, net (30,000) -
Proceeds from debt issuance 1,626,043 1,645,000
Purchase of treasury stock (1,305,000) -
Net change in revolving loan payable 5,200,000 3,211,965
Payment on long-term debt (5,600,757) -
Payments on capital leases (90,977) -
------------------ -----------------
Net cash provided by financing activities 4,268,205 5,551,059
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 373,269 (95,792)
Cash and cash equivalents at beginning of period 448,237 111,081
------------------ -----------------
Cash and cash equivalents at end of period $ 821,506 15,289
================== =================
Non-cash transactions:
Accretion to preferred stock of subsidiary $ - $ 609,116
Dividend on preferred stock of subsidiary 372,519 -
Conversion of notes payable to common stock 1,500,000 694,094
Estimated value of compensatory warrants 114,825 -
Issuance of common stock for consulting services 898,365 -
Deferred compensation 701,600 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Certain
prior period amounts in these financial statements have been reclassified
to conform with current period presentation. Operating results for the
nine month period ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
For further information refer to the consolidated financial statements and
footnotes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
BACKGROUND
SunRiver Corporation (the "Company") has two operating subsidiaries,
Boundless Technologies, Inc., formerly SunRiver Data Systems, Inc.
("Boundless") and TradeWave Corporation ("TradeWave"). Boundless develops,
manufactures and markets hardware, firmware and software for corporate
computing environments including Windows, legacy, UNIX, DOS, Java
and Internet/Intranet applications. Boundless' strategy is to offer a
complete family of products which include network computers and graphics,
text and Internet terminals. TradeWave markets, licenses and supports a
suite of software products and provides related services that enable a
business to design, build and deploy comprehensive public-key security
solutions for the conduct of enterprise-wide and business-to-business
communications and transactions over TCP/IP-based networks, including the
Internet and VANs, LANs and WANs.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in first-out basis. The major components of inventories are as
follows:
September 30, December 31,
1996 1995
---------------- ----------------
Raw materials and purchased components $ 19,928,953 $ 13,280,390
Finished goods 6,404,587 11,901,819
Demonstration equipment 361,167 222,130
Service parts 372,799 353,701
---------------- ----------------
$ 27,067,506 $ 25,758,040
================ ================
FINANCINGS
The Company completed several offerings of securities under Regulation S of
the Securities Act of 1933 during the first quarter of 1996 and received
proceeds from the sale of stock and exercise of warrants and options during
the second and third quarter of 1996 as described below:
In January 1996, the Company received gross proceeds of $1,000,000 by
selling 594,243 shares of Common Stock for $1.68 per share. In connection
with this offering, the Company issued warrants to financial advisors to
purchase 50,000 shares of Common Stock at an exercise price of $2.69,
valued at $77,000 and exercisable through January 3, 1999. $500,000 of the
proceeds of this offering was used by TradeWave for working capital. The
balance of the proceeds of this offering was used by the Company to
repurchase 275,000 restricted shares of its Common Stock at $1.80 per
share.
In January 1996, the Company received gross proceeds of $500,000 by
selling convertible non-interest bearing notes which require the holders to
convert the notes by March 10, 1997 into a maximum of 312,500 shares of
Common Stock. In connection with this offering, the Company issued
warrants to financial advisors to purchase 50,000 shares of Common Stock at
an exercise price of $2.74 per share, valued at $85,000, exercisable
through January 26, 1999. The proceeds of this offering were used by the
Company to repurchase 273,333 restricted shares of its Common Stock at
$1.80 per share. These notes have been converted into 254,826 shares of
Common Stock.
<PAGE>
In January 1996, the Company received gross proceeds of $1,000,000 by
selling convertible non-interest bearing notes which require the holders to
convert the notes by March 10, 1997 into a maximum of 625,000 shares of
Common Stock. In connection with this offering, the Company issued
warrants to financial advisors to purchase 100,000 shares of Common Stock
at an exercise price of $2.69 per share, valued at $200,000, exercisable
through February 7, 1999. A portion of the proceeds of this offering,
$300,000, was used by the Company to repurchase 176,667 restricted shares
of its Common Stock at $1.80 per share. These notes have been converted
into 528,487 shares of Common Stock.
In the quarter ended June 30, 1996, warrants to purchase 404,307
shares of the Company's common stock were exercised at exercise prices from
$1.50 to $3.87, yielding proceeds of $1,248,310, and options to purchase
470,653 shares of the Company's common stock were exercised at exercise
prices from $1.35 to $2.56, yielding proceeds of $727,532. In accordance
with the amended credit agreement with Chase (see "Liquidity and Capital
Resources"), the Company used $600,642 to pay down the Chase term loan, and
the remainder of the proceeds can be used by the Company to fund the
working capital needs of TradeWave.
In the quarter ended September 30, 1996, options to purchase 93,287
shares of the Company's common stock were exercised at an exercise price
of $1.35, yielding proceeds of $125,938. In accordance with the amended
credit agreement with Chase (see "Liquidity and Capital Resources"), the
Company used $100,750 ($22,078 of which was paid at September 30, 1996) to
pay down the Chase term loan, and the remainder of the proceeds can be used
by the Company to fund the working capital needs of TradeWave. Also in
accordance with the Amended Credit Agreement with Chase (see "Liquidity and
Capital Resources") the Company sold 250,000 shares of common stock in the
public market yielding net proceeds of $907,053 (at prices ranging from
$3.375 to $3.875) to fund the working capital needs of TradeWave. In
accordance with Amendment No. 1 to the Asset Purchase Agreement between MCC
and TradeWave, the note payment of $250,000 due May 31, 1996 was paid by
delivering 60,000 shares valued at $5.00 per share in July 1996, which
represented 120% of the amount due. Subsequently MCC notified the Company
that the delivery of such shares did not satisfy the May 31, 1996 payment
obligation to MCC. The Company is disputing the claim.
A Registration Statement on Form S-1 filed with the Securities and
Exchange Commission was effective on July 8, 1996. The Company registered
for sale up to 2,500,000 shares of newly issued common stock and selling
stockholders registered for sale up to 11,944,210 shares of existing common
stock. Of the 2,500,000 newly registered shares, the Company has sold
392,000 shares and has delivered an additional 60,000 shares and 168,651
shares to MCC and NCR Corporation, respectively, in payment of obligations.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Through acquisition of technology and product lines and new product
development, the Company is seeking to become a leader in providing
computing access solutions in network-centric environments. In this
regard, the acquisition of TradeWave in April of 1995, the formation of the
GAI partnership in May of 1995, the acquisition of the VT and Dorio product
line from Digital Equipment Corporation ("Digital") in October of 1995 and
development efforts focusing on the network computing market are the major
factors that have caused the fluctuations in revenue and expenses when
comparing 1996 to 1995.
The Company's hardware products, manufactured and marketed by Boundless,
consist of graphics and text terminals in two categories. Data Systems
Group products are text terminals used primarily for data entry and point
of sale applications. The ADDS, VT and Dorio products are in this
category. Network Computer Group products are high resolution, high
performance, graphical, desktop workstations and network computers for use
in network-centric environments, and are capable of accessing and
displaying information from multiple host computers and multiple
applications. The Company's latest product introduced in the third
quarter, a part of this category, is a family of network computers which
offer customers easy and cost-effective access to current and emerging
computing environments, including the Windows, legacy, UNIX, DOS, Java and
Internet/Intranet applications.
The numbers and percentages contained in this Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations
are approximate.
THIRD QUARTER OF 1996 COMPARED WITH THIRD QUARTER OF 1995
Revenue - Revenue for the three months ended September 30, 1996 were
- -------
$29,700,000, as compared to $23,400,000 for the three months ended
September 30, 1995. The major components of the change are discussed
below.
Sales of the Company's Data Systems Group for the three months ended
September 30, 1996 increased $13,600,000, to $23,100,000. Sales of VT and
Dorio products increased $14,600,000. Sales of the Company's legacy text
terminals decreased $1,000,000 in the three months ending September 30,
1996 to $8,500,000. This change consists of a $1,500,000 drop in sales to
NCR due to the disruption caused by the break-up of AT&T and a $1,300,000
drop due to decreased channel activity in IBM product sales, offset by a
$1,800,000 increase in sales to smaller distributors and value added
resellers previously customers of NCR.
Sales of the Company's Network Computer Group for the three months ended
September 30, 1996 decreased $7,500,000, to $1,800,000. This decline was
anticipated and relates to the completion, during the first quarter of
1996, of specific projects undertaken by NCR. The Company has, however,
recently booked orders valued at $5,400,000 to expand the original
projects. Delivery of the product is expected to occur during the fourth
quarter of 1996 and the first quarter of 1997.
TradeWave revenue for the three months ended September 30, 1996 increased
$500,000, to $700,000. TradeWave's revenue is shifting from its
subcontracting work under a contract with the U.S. Department of Defense,
which expires in the last quarter of 1996, to sales of its VPI suite of
products. TradeWave is transitioning from a research and development
company to a commercial enterprise, and accordingly is deploying its
resources to support those products as they emerge.
Gross margin - Gross margin for the three months ended September 30, 1996
- ------------
was $7,700,000, 25.8% of revenue, as compared to $5,900,000, 25.2% of
revenue, for the three months ended September 30, 1995. The increase is
primarily due to product mix. In the Data Systems Group, gross margin
increased 1.1% to 23.5% for the three months ending September 30, 1996 due
to product mix. The Network Computer Group had a gross margin of 12% in
the third quarter of 1996 as compared to 21.2% in the third quarter 1995.
The low gross margin for the Network Computer Group was expected, as the
Company incurred production start-up costs for its new network computer
line. As production of this new product proceeds, the Company expects cost
reduction measures will be successful.
Sales and marketing - Sales and marketing expenses in the three months
- -------------------
ended September 30, 1996 increased $2,000,000, to $4,000,000, 13.3% of
revenue. The change was due to increased spending at TradeWave, and
increases in marketing and public relations activities at Boundless to
develop channel partners, launch the network computer product, expand
market presence and create recognition of its new name.
General and administrative - General and administrative expenses in the
- --------------------------
three months ended September 30, 1996 increased $700,000, to $2,900,000,
9.6% of revenue. The increase stems from TradeWave's transition from a
development company to a commercial enterprise and parent company overhead.
Resources formerly devoted to product development have been focused on
supporting the recently introduced VPI suite of products.
Research and development - Research and development expenses in the three
- ------------------------
months ended September 30, 1996 decreased $300,000, to $1,400,000, 4.7% of
revenue. The decrease is primarily a result of TradeWave's transition from
a development company to a commercial enterprise. Resources formerly
devoted to product development have been focused on supporting the recently
introduced VPI suite of products.
<PAGE>
Other expense - Interest expense (net of interest income) for the three
- -------------
months ended September 30, 1996 increased $800,000 to $1,100,000, 3.8% of
revenue. The increase is attributable to the Digital Acquisition, financed
in part by the Company through borrowing from The Chase Manhattan Bank
N.A., agent for the banking group ("Chase") (the "Chase Credit Line"),
(See "-Liquidity and Capital Resources").
Income tax expense - Income taxes are provided in accordance with the
- ------------------
liability method of accounting for income taxes pursuant to the Financial
Accounting Standards Board Statement No. 109. For the three months ended
September 30, 1996, the effective tax rate was 37%, compared to 42% for the
same period in 1995.
Net income - For the three months ended September 30, 1996, the net loss
- ----------
was $1,000,000, compared to net income of $100,000 for the same period in
1995. Operating income decreased from $100,000 for the three months ended
September 30, 1995 to an operating loss of $600,000 for the same period in
1996. The operating loss for the three months ended September 30, 1996 is
made up of income at Boundless of $1,400,000 (compared to $1,000,000 in the
same period in 1995) offset by a loss at TradeWave of $1,600,000 and
unallocated corporate expenses of $400,000 at the parent Company.
Earnings available for common shareholders - Earnings available for common
- ------------------------------------------
shareholders declined from a loss of $100,000 for the three months ended
September 30, 1995, to a loss of $1,200,000 or $(0.02) per share for the
three months ended September 30, 1996. Earnings available for common
shareholders is net income less accretion to or dividends on mandatorily
redeemable preferred stock.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue - Revenue for the nine months ended September 30, 1996 was
- -------
$101,600,000, as compared to $68,300,000 for the nine months ended
September 30, 1995. The major components of the change are discussed
below.
Sales of the Company's Data Systems Group for the nine months ended
September 30, 1996 increased $52,100,000 to $80,600,000. The main
contributor to the increase was sales of the VT and Dorio products acquired
in 1995.
Sales of the Company's Network Computer Group for the nine months ended
September 30, 1996 decreased $14,100,000, to $7,300,000. This decline was
anticipated and relates to the completion, during the first quarter of
1996, of specific projects undertaken by NCR. The Company has, however,
recently booked orders valued at $5,400,000 to expand the original
projects. Delivery of the product is expected to occur during the fourth
quarter of 1996 and the first quarter of 1997.
TradeWave revenue for the nine months ended September 30, 1996 increased
$900,000, to $1,900,000, when compared to the period from April 1, 1995
(inception) to September 30, 1995. TradeWave's revenue is shifting from
its subcontracting work under a contract with the U.S. Department of
Defense which expires in the last quarter of 1996, to sales of its VPI
suite of products. TradeWave is transitioning from a research and
development company to a commercial enterprise, and accordingly is
deploying its resources to support those products as they emerge.
The Company's most significant customers for the nine months ended
September 30, 1996 were NCR and Digital, accounting for 13% and 12.9%,
respectively, of the Company's sales for the period.
Gross margin - Gross margin for the nine months ended September 30, 1996
- ------------
was $23,300,000, 23% of revenue, as compared to gross margin for the nine
months ended September 30, 1995 of $19,100,000, 28% of revenue. As
previously disclosed, the shift in revenue mix to the Company's lower
margin Data Systems Group products has resulted in a decline of gross
margin. The Data Systems Group products comprised 79% of revenue at 20.8%
gross margin for the nine months ending September 30, 1996, compared to 42%
of revenue at a 23.1% gross margin for the nine months ending September 30,
1995. The lower gross margin for the Data Systems Group product line for
the first nine months of 1996 is attributable to costs associated with the
absorption of the VT and Dorio products, including higher shipping costs
than planned, increases in excess and obsolete inventory reserves,
warehousing costs for Europe, warranty costs and premiums paid to Digital
for manufacture of these products while the Company was preparing to
manufacture them. The Company has offset a portion of these costs by more
fully utilizing its production capacity, increasing its ability to take
advantage of volume purchase discounts and expanding its distribution
network and global reach. The Company expects gross margin to fluctuate
as several varying factors impact overall gross margin including sales
volume, shifts in product mix, pricing strategies, absorption of
manufacturing costs and new product introductions.
Sales and marketing - Sales and marketing expenses for the nine months
- -------------------
ended September 30, 1996 increased $3,900,000, to $9,700,000, 9.6% of
revenue. As previously discussed this increase is due to increased
spending at TradeWave, and increases in marketing and public relations
activities at Boundless to develop channel partners, launch the network
computer product, expand market presence and create recognition for its new
name.
General and administrative - General and administrative expenses for the
- --------------------------
nine months ended September 30, 1996 increased $2,300,000, to $7,200,000,
7.1% of revenue. The increase stems primarily from expenses associated
with TradeWave as well as amortization of goodwill associated with the
Company's acquisition of the VT and Dorio products and parent company
overhead.
<PAGE>
Research and development - Research and development for the nine months
- ------------------------
ended September 30, 1996 increased $400,000, to $5,400,000, 5.3% of
revenue. Expenses at Boundless decreased $500,000, while TradeWave's
expense increased $900,000. Research and development efforts are being
expended on a line of network and Internet access computers introduced by
Boundless and software products and services that enable businesses to
design, build and deploy comprehensive public-key security solutions for
the conduct of enterprise-wide and business-to-business communications and
transactions over TCP/IP-based networks, including the Internet, VANs, LANs
and WANs.
Other expense - Interest expense (net of interest income) for the nine
- -------------
months ended September 30, 1996 increased $2,300,000, to $3,300,000, 3.2%
of revenue. The increase is attributable to the Digital Acquisition,
financed in part by the Company through borrowing from Chase (See "-
Liquidity and Capital Resources").
Income tax expense - Income taxes are provided in accordance with the
- ------------------
liability method of accounting for income taxes pursuant to the Financial
Accounting Standards Board Statement No. 109. For the nine months ended
September 30, 1996, the effective tax rate was 37%, compared to 40% for the
same period in 1995.
Net income - For the nine months ended September 30, 1996, net loss was
- ----------
$1,500,000, compared to net income of $2,800,000 for the same period in
1995. Operating income decreased from $3,500,000 for the nine months ended
September 30, 1995 to $1,000,000 for 1996. The operating income for the
nine months ended September 30,1996 is made up of income at Boundless of
$5,700,000 (compared to $4,500,000 in the same period in 1995) offset by a
loss at TradeWave of $3,800,000 and overhead of $900,000 at the parent
Company.
Earnings available for common shareholders - Earnings available for common
- ------------------------------------------
shareholders declined from a profit of $2,200,000, $0.05 per share, for the
nine months ended September 30, 1995, to a loss of $1,900,000, $(0.04) per
share, for the nine months ended September 30, 1996. Earnings available
for common shareholders was calculated by deducting accretion to or
dividends on mandatorily redeemable preferred stock from net income.
The Company has not been adversely affected by inflation because
technological advances and competition within the microcomputer industry
have generally caused prices of components in products sold by the Company
to decline.
The reader is advised to consider the following brief summary of certain
risk factors affecting the Company and TradeWave. The computer industry is
characterized by a rapid rate of product improvement, technological change
and product obsolescence. As a result of recent acquisitions, the Company
is currently dependent upon the ability of display terminals to compete,
in terms of price and performance, with personal computers in the
client/server environment. The terminal market continues to decline and
margins are eroding. The Company's introduction of one of the first
network computers, low cost computers with no data storage capacity and
limited computing power, is a part of its strategy to provide a lower cost
alternative to personal computers. However, there can be no assurance that
the terminal/network computer strategy will be successful, or that
competitors with greater resources and/or superior products will not
adversely affect the success of the Company's strategy. TradeWave is
emerging from the development phase and recently launched its initial
product, Internet security software. TradeWave is dependent upon, among
other factors, the success of its first product, its ability to develop and
introduce new products and its ability to compete in the highly competitive
software market. In addition, the reader is advised to consider risk
factors relating to the Company's breaches of covenants under the Chase
Credit Line (see "Liquidity and Capital Resources"), certain allegations
by MCC (see "Notes to Condensed Consolidated Financial Statements -
Financings") and the changes in the Company's management (see "Item 5.
Other Information"). Furthermore, a private placement of TradeWave
common stock on the terms described in the Company's Prospective, dated
July 8, 1996 will not be completed and a registration statement with
respect to an initial public offering of TradeWave common stock will
not be filed in 1996.
LIQUIDITY AND CAPITAL RESOURCES
From time to time the Company has requested and received waivers from Chase
with respect to breaches of covenants under the Chase Credit Line.
Discussions are ongoing with Chase with respect to waivers of breaches of
several covenants. As a result of the breaches by the Company of the
covenants, the Company is in technical default of the Chase Credit Line.
There can be no assurance that the Company will be successful in obtaining
these waivers. Until such time as the necessary waivers are received, the
total amount due to Chase is, and will be, classified as current debt on
the Balance Sheet. The Company has been informed that additional money may,
or may not, at the discretion of the banks, be advanced until these issues are
resolved. The banks have reserved their right to exercise any of their
rights and remedies at any time with respect to such defaults. Efforts are
underway to obtain other financing on more favorable terms to pay the
amounts due to Chase. There can be no assurance that these efforts will be
successful.
The Chase Credit Line consists of a $20,000,000 revolving line of credit
("Revolving Loan") and a $20,000,000 term loan ("Term Loan"). Borrowing
under the Revolving Loan is based on a borrowing base formula of up to 80%
of eligible receivables, plus 50% of delineated eligible inventory, plus
30% of non-delineated eligible inventory. Up to $7,500,000 is available
under the Revolving Loan for letters of credit. At December 31, 1995, the
Company owed Chase $28,000,000, of which $8,000,000 was owed under the
Revolving Loan and $20,000,000 was owed under the Term Loan. At September
30, 1996, the Company owed Chase $28,100,000, of which $13,200,000 was owed
under the Revolving Loan and $14,900,000 was owed under the Term Loan. As
of such date, the Company had $1,900,000 of availability remaining under
the Revolving Loan. As a result of the borrowing-base formula, the credit
available to the Company could be adversely restricted in the event the
Company's sales decline.
<PAGE>
Net cash deficit from operating activities during the nine months ended
September 30, 1996 amounted to $2,400,000. This was primarily attributable
to an increase of $2,300,000 in inventory and a decrease of $3,900,000 in
accounts payable and accrued expenses offset by a decrease in accounts
receivable of $1,900,000 and depreciation and amortization of $2,300,000.
Net cash used in investing activities for the nine months ended September
30, 1996 was $1,500,000 and related to the acquisition of capital assets.
Net cash provided from financing activities was $4,300,000 for the nine
months ended September 30, 1996 and was composed primarily of $5,200,000
drawn on the Revolving Loan to finance the working capital needs of
Boundless, $1,900,000 from the sale of stock, $1,200,000 from the exercise
of warrants, $1,500,000 from the sale and conversion of convertible notes
and $900,000 from the exercise of stock options, offset by payments on long-
term debt of $5,600,000 and $1,300,000 for purchase of treasury stock which
was immediately retired. Of the $2,000,000 proceeds received from the
exercise of warrants and options, $700,000 is due to Chase per the Third
Amendment to the Chase Credit Agreement dated July 9, 1996 and the
remainder can be used for funding TradeWave's working capital needs.
To date, TradeWave has been financed primarily through loans made to
TradeWave by the Company. As of September 30, 1996, the Company has
advanced $4,400,000 to TradeWave as intercompany transfers. The September
30, 1996 payment in the amount of $250,000 due to MCC under the Research
and Development Agreement was made in November 1996. The Company's
ability to fund TradeWave's capital in the future is substantially
restricted by the terms of the Chase Credit Line, which, among
other things, limits dividends and advances from Boundless and
provides that specified percentages (currently 80%) of the net proceeds
received by the Company on the sale of its capital stock must be
used by the Company to prepay the Chase Term Loan. The Company received
Chase's consent to the sale, by not later than December 31, 1996, of up to
833,333 shares of the Company's common stock to fund TradeWave's capital
requirements. As of the date of this Form 10-Q, the Company has sold
392,000 out of such 833,333 shares at prices ranging from $3.25 to $3.875
per share. There can be no assurance that the company will be able to
obtain Chase's consent to provide additional funding to TradeWave beyond
the limits imposed by the Chase Credit Line or that it will be possible
to sell the balance of the allowed shares by December 31, 1996.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This report contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this document,
the words "anticipate," believe," "estimate," and "expect," and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to future
events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, believed, estimated or expected. The Company does
not intend to update these forward-looking statements and information.
NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation" ("Statement 123"), which establishes fair value-based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity securities, including all
arrangements under which employees receive stock based compensation.
Statement 123 encourages, but does not require, employers to adopt fair
value accounting to recognize compensation expense for grants under stock-
based compensation plans. However, companies must comply with the
disclosure requirements set forth in Statement 123 which is effective for
fiscal years beginning after December 31, 1995. The Company expects to
adopt only the reporting standards of Statement 123.
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("Statement 121"), which addresses the accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used. It also addresses the accounting for
long-lived assets and certain identifiable intangibles to be disposed of.
Statement 121 has an effective date of January 1, 1996. The Company does
not expect application of Statement 121 to have a significant impact upon
the Company's financial statements.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
CHANGES IN MANAGEMENT AND THE BOARD OF DIRECTORS
Effective November 7, 1996, Leonard N. Mackenzie was elected Chairman of
the Board of Directors and Acting President and Chief Executive Officer of
the Company and Gary E. Wood was elected a director of the Company.
Biographical information regarding each of the three current
members of the Company's Board is set forth below.
<PAGE>
Mr. Mackenzie, age 59, has been since 1980 a Board member and was,
from 1980 to 1992, Chairman, President and Chief Executive Officer
of General Automation, Inc., a provider of computer system services,
products and components. He co-founded in 1987, and has been a
director since 1987 of, U.S. Gas Transportation, Inc., a privately-held
natural gas asset management company. Mr. Mackenzie also co-
founded in 1993, and has been a director of, Vinyard Engine
Systems, Inc., a privately-held developer of conversion technology for
alternative fuels.
Mr. Wood, age 52, has been serving since January 1, 1996 as President
of Texas Taxpayers and Research Association Research Foundation, a 500
member business sponsored organization that researches state fiscal policy.
From April 1988 to December 1995, he served as President of Texas Research
League.
Daniel Matheson, age 47, was appointed to the Company's Board in
August 1996. Since May 1993, he has been Executive Vice President and
General Counsel of Network System, Inc., a privately-held
telecommunications company and Chairman of the Board of The Capital
Network, Inc., a not-for-profit economic development agency. In addition,
Mr. Matheson is counsel to Locke Purnell Rain Harrell P.C. in Austin, Texas
and has worked in the general banking, corporate, securities and state
government (legislative and regulatory) areas for more than 20 years.
In addition, Stephen Maysonave was appointed as an advisor to the Company's
Board. On September 17, 1996, Mr. Maysonave became the voting trustee of a
majority of the outstanding shares of Series B Preferred Stock of SunRiver
Group, Inc. ("SunRiver Group"), the beneficial holder of a majority of the
outstanding shares of the Company's common stock. For additional
information, reference is made to Mr. Maysonave's Schedule 13D, dated
September 26, 1996. Amendment No. 3 to the Schedule 13D of SunRiver Group
filed October 30, 1996 disclosed that changes in management at the Company
had been requested by SunRiver Group and the existence of a one-year
financial advisory agreement between SunRiver Group and Mr. William Moore,
expiring October 31, 1997.
Effective November 1, 1996, the persons listed below (collectively,
the "Resigners") resigned from all management and Board positions which
they had with the Company and/or its subsidiaries. The resignations had
been requested by SunRiver Group.
Gerald Youngblood: Chairman of the Board and President of the Company
and a member of the Boards of Boundless and TradeWave;
Roger Hughes: Vice President-Finance and Chief Financial Officer of
the Company, Boundless and TradeWave;
John Osborne: a member of the Board and Vice President of Sales,
Marketing and Service of the Company, President and Chief Executive Officer
of Boundless and a member of the Board of TradeWave;
Roy Smith: Vice Chairman of the Board of TradeWave;
Ron Brittian: a member of the Board of the Company and Chairman of
the Board of TradeWave; and
Sam Smith: a member of the Boards of the Company and TradeWave.
In connection with the Resigners' resignations, the Company, Boundless and
TradeWave (collectively, the "Employer") jointly entered into with each of
Messrs. Youngblood, Hughes, Osborne and Roy Smith (each, an "Employee
Resigner") a Separation Agreement and General Release and with each of
Messrs. Brittian and Sam Smith a General Release Agreement (these six
agreements are collectively referred to as the "Separation and Release
Agreements"). The terms of the Separation and Release Agreements are
briefly summarized below.
The Employer agreed to continue to pay each Employee Resigner's salary
while he performs consulting services for the Employer until April 30,
1997, unless such services are terminated earlier by either the Employer or
Resigner, and to pay, as a severance payment, one-years' salary in twelve
monthly installments beginning after the consulting period ends. The
severance payments are in the following aggregate amounts: Gerald
Youngblood, $200,000; Roger Hughes, $180,000; John Osborne, $190,000; and
Roy Smith, $150,000.
Each Resigner's previously granted options to purchase common stock of the
Company and TradeWave became fully and immediately vested and exercisable
for three years, subject to each Resigner's agreement not to sell 50% of
his option shares until May 1, 1997. The amount and exercise prices of
these options are:
Gerald Youngblood: to purchase 450,000 shares of the Company's common
stock at exercise prices of $1.35 per share as to 300,000 shares and $2.56
per share as to 150,000 shares; to purchase 25,000 shares of TradeWave
common stock at an exercise price of $1.00 per share.
Roger Hughes: to purchase 250,000 shares of the Company's common
stock at an exercise price of $2.13 per share; to purchase 50,000 shares of
TradeWave common stock at an exercise price of $1.00 per share.
John Osborne: to purchase 200,000 shares of the Company's common
stock at an exercise price of $2.13 per share; to purchase 50,000 shares of
TradeWave common stock at an exercise price of $1.00 per share.
<PAGE>
Roy Smith: to purchase 14,510 shares of the Company's common stock at
an exercise price of $2.82 per share; to purchase 120,000 shares of
TradeWave common stock at exercise prices of $0.20 per share as to 60,000
shares and $1.00 per share as to 60,000 shares.
Ron Brittian: to purchase 75,000 shares of the Company's common stock
at an exercise price of $2.13 per share.
Sam Smith: to purchase 75,000 shares of the Company's common stock at
an exercise price of $1.35 per share.
The Employer also agreed to maintain for six years director and officer
liability insurance covering each Employee Resigner, provided full releases
to each Resigner and agreed to indemnify each Resigner pursuant to pre-
existing indemnification agreements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
All of the following exhibits were filed with the Form 10-Q for the quarter
ended 9/30/96 amended by this Form 10-Q/A:
Exhibit 10(a): Form of Separation Agreement and General Release, dated as
of November 1, 1996, entered into by SunRiver Corporation,
Boundless Technologies, Inc. and TradeWave Corporation with
Gerald Youngblood, Roger Hughes, John Osborne and Roy Smith.
Exhibit 10(b): Form of General Release Agreement, dated as of November 1,
1996, entered into by SunRiver Corporation, Boundless
Technologies, Inc. and TradeWave Corporation with Ron Brittian
and Sam Smith.
Exhibit 10(c): Form of Employment Agreement, dated as of October 11, 1996,
entered into by SunRiver Corporation with Gerald Youngblood,
Roger Hughes and John Osborne.
Exhibit 10(d): Form of Indemnification Agreement, dated September 3, 1996,
except for Roy Smith's agreement which is dated September 18, 1996,
entered into by SunRiver Corporation with Gerald Youngblood,
Roger Hughes, John Osborne, Ron Brittian and Sam Smith and by
TradeWave Corporation with Gerald Youngblood, Roger Hughes, John
Osborne, Roy Smith, Ron Brittian and Sam Smith.
Exhibit 11: Computation of Per Share Earnings
Exhibit 27: Financial Data Schedule for the quarter ended September 30, 1996
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 21, 1996
SunRiver Corporation
By: /s/ Leonard Mackenzie
_________________________________________
Leonard Mackenzie
President and Chief Executive Officer
By: /s/ Wayne Schroeder
_________________________________________
Wayne Schroeder
Chief Accounting Officer
