SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 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 June 30, 1996, the Registrant had 47,454,858 shares of Common Stock, $.01
par value per share, outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995.........................................3
Condensed Consolidated Statements of Operations (unaudited)
for the three and six month periods ended June 30, 1996 and 1995...........4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 1996 and 1995......................5
Notes to Condensed Consolidated Financial Statements (unaudited)...............6
2
<PAGE>
<TABLE>
<CAPTION>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,122,633 $448,237
Trade accounts receivable (including $1,687,499 and $6,206,007 from related
parties at June 30, 1996 and December 31, 1995, respectively), net 19,391,986 18,768,338
Inventories 27,827,985 25,758,040
Deferred income taxes 3,404,604 3,102,152
Prepaid expenses and other current assets 245,036 1,571,617
--------------- ---------------
Total current assets 52,992,244 49,648,384
Property and equipment, net 12,556,631 12,114,000
Goodwill, net 10,044,371 10,607,714
Other assets 4,276,994 3,910,235
--------------- ---------------
$79,870,240 $76,280,333
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $8,000,000
$10,000,000
Current portion of long-term debt (including $168,559 due to a related
party at December 31, 1995) 7,572,932 6,630,531
Accounts payable 16,188,918 14,506,202
Accrued expenses 3,837,333 4,255,508
Deferred revenue 465,916 826,844
--------------- ---------------
Total current liabilities 38,065,099 34,219,085
Long-term liabilities:
Long-term debt, less current maturities (including $8,000,000 of
debt to a related party at June 30, 1996 and December 31, 1995) 18,311,160 22,624,625
Deferred income taxes 2,652,850 2,213,198
Other 827,015 831,775
--------------- ---------------
Total long-term liabilities 21,791,025 25,669,598
--------------- ---------------
Total liabilities 59,856,124 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, 47,454,858 and
45,550,214 shares issued at June 30, 1996 and December 31, 1995, respectively 474,549 455,502
Additional paid-in capital 28,796,822 23,769,379
Deferred compensation (701,600) -
Amortization of deferred compensation 29,233 -
Accumulated deficit (12,139,580) (11,387,923)
--------------- ---------------
Total stockholders' equity 16,459,424 12,836,958
--------------- ---------------
$79,870,240 $76,280,333
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales (including sales to a related party of
$11,140,000, $3,935,000, $19,352,000
and $10,870,000, respectively)
$71,846,067 $44,852,863 $33,438,900 $25,686,366
Cost of sales 56,187,266 31,618,935 26,520,880 18,003,657
--------------- --------------- --------------- ---------------
Gross margin 15,658,801 13,233,928 6,918,020 7,682,709
Operating expenses:
Sales and marketing 5,756,949 3,838,311 3,231,502 2,079,936
General and administrative 4,308,013 2,717,931 2,009,551 1,501,090
Research and development 3,960,746 3,261,278 2,097,758 1,934,918
--------------- --------------- --------------- ---------------
Total operating expenses 14,025,708 9,817,520 7,338,811 5,515,944
--------------- --------------- --------------- ---------------
Operating income (loss) 1,633,093 3,416,408 (420,791) 2,166,765
Other expense:
Interest 2,167,125 645,737 1,094,407 341,657
Other 262,661 49,179 52,393 16,363
--------------- --------------- --------------- ---------------
Total other expense 2,429,786 694,916 1,146,800 358,020
--------------- --------------- --------------- ---------------
Income before income taxes and discontinued operations (796,693) 2,721,492 (1,567,591) 1,808,745
Income tax expense (293,382) 1,082,550 (703,382) 735,000
--------------- --------------- --------------- ---------------
Income (loss) before discontinued operations (503,311) 1,638,942 (864,209) 1,073,745
Income (loss) from discontinued operations - 1,034,054 - (206,229)
--------------- --------------- --------------- ---------------
Net income (loss) (503,311) 2,672,996 (864,209) 867,516
Dividend on preferred stock of subsidiary 248,346 - 124,173 -
Accretion to preferred stock of subsidiary - 398,973 - 202,957
--------------- --------------- --------------- ---------------
Earnings (loss) available for common shareholders $(751,657) $2,274,023 $(988,382) $664,559
=============== =============== =============== ===============
Weighted average common shares outstanding 46,250,954 40,939,281 46,574,806 41,776,129
=============== =============== =============== ===============
Earnings (loss) per common share before extraordinary items:
Continuing operations $(0.02) $0.03 $(0.02) $0.02
Discontinued operations 0.00 0.03 0.00 0.00
--------------- --------------- --------------- ---------------
Earnings (loss) per common share $(0.02) $0.06 $(0.02) $0.02
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
1996 1995
--------------- ----------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(503,311) $2,672,996
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Income from discontinued operations - (1,034,054)
Depreciation and amortization 2,323,059 1,312,586
Amortization of deferred compensation 29,233 -
Deferred revenues (360,928) -
Provision for doubtful accounts (276,191) 301,681
Provision for excess and obsolete inventory 992,857 (52,930)
Estimated value of compensatory warrants 160,800 -
Deferred taxes (27,309) 112,170
Changes in assets and liabilities:
Trade accounts receivable (347,457) (8,876,935)
Inventories (3,062,802) 173,365
Other assets 528,354 (471,581)
Accounts payable and accrued expenses 1,652,324 415,427
--------------- ----------------
Net cash provided by (used in) operating activities 1,108,629 (5,447,275)
--------------- ----------------
Cash flows from investing activities:
Purchase of TradeWave, net of cash acquired - (100,000)
Capital expenditures (1,244,009) (262,354)
--------------- ----------------
Net cash used in investing activities (1,244,009) (362,354)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,985,840 694,094
Decrease in short-term debt, net (30,000) -
Proceeds from debt issuance 1,654,000 1,000,000
Purchase of treasury stock (1,305,000) -
Net change in revolving loan payable 2,000,000 4,021,738
Payment on long-term debt (3,438,070) -
Payments on capital leases (56,994) -
--------------- ----------------
Net cash provided by financing activities 1,809,776 5,715,832
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,674,396 (93,797)
Cash and cash equivalents at beginning of period 448,237 111,081
--------------- ----------------
Cash and cash equivalents at end of period $2,122,633 $17,284
=============== ================
Non-cash transactions:
Accretion to preferred stock of subsidiary $398,973
Dividend on preferred stock of subsidiary $248,346 -
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.
5
<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 six month period ended June 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, which are incorporated by reference herein.
Capitalized terms not defined in this Form 10-Q have the meanings assigned to
them in the Company's Prospectus dated July 8, 1996.
Background
SunRiver Corporation (the "Company") has two operating subsidiaries, SunRiver
Data Systems, Inc. ("SunRiver Data") and TradeWave Corporation ("TradeWave").
SunRiver Data develops, manufactures and markets hardware, firmware and software
for corporate computing environments including legacy, UNIX, Windows and
Internet applications. SunRiver Data's 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:
Inventories
June 30, December 31,
1996 1995
--------------- ---------------
Raw materials and purchased components $19,896,476 $13,280,390
Finished goods 7,394,071 11,901,819
Demonstration equipment 192,065 222,130
Service parts 345,373 353,701
--------------- ---------------
$27,827,985 $25,758,040
=============== ===============
6
<PAGE>
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 exercise of warrants and options during the second quarter of 1996 as
described below:
In January 1996, the Company received gross proceeds of $1M 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 $77K
and exercisable through January 3, 1999. Approximately $0.5M 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 $0.5M 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 $85K, 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.
In January 1996, the Company received gross proceeds of $1M 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 $0.2M, exercisable through
February 7, 1999. A portion of the proceeds of this offering, $0.3M, 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, 404,307 of the Company's warrants were
exercised (with exercise prices from $1.50 to $3.87) yielding proceeds of
$1,248,310 and 470,653 of the Company's options were exercised (with
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 ($200,000 of which was paid
at June 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.
7
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Through acquisitions of techology 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 Digital's VT and Dorio product line in October of 1995 and
development efforts focusing on the network computing market make year to year
comparisons as required by Form 10-Q less meaningful than 1996 quarter to
quarter comparisons. Overall, margins have declined as the higher margin mature
product sales have continued to decline and sales of lower margin acquired
products have increased. (See "Six months ended June 30, 1996 compared with six
months ended June 30, 1995 - Gross Margin.") Operating expenses continue to
increase as new products are being developed and marketing expenses related to
establishing broader market presence are being incurred.
Second quarter of 1996 compared with first quarter of 1996
- ----------------------------------------------------------
The table below compares the first and second quarter of 1996:
<TABLE>
<CAPTION>
First Quarter Second Quarter Increase
1996 1996 (Decrease)
--------------- --------------- ---------------
(in thousands of dollars)
<S> <C> <C> <C>
Sales $38,407 $33,439 $(4,968)
Cost of sales 29,666 26,521 (3,145)
--------------- --------------- ---------------
Gross margin 8,741 6,918 (1,823)
22.8% 20.7%
Expenses:
Sales and marketing 2,525 3,232 707
6.6% 9.7%
General and administrative 2,298 2,009 (289)
6.0% 6.0%
Research and development 1,863 2,098 235
4.9% 6.3%
--------------- --------------- ---------------
Total expenses 6,686 7,339 653
17.4% 21.9%
--------------- --------------- ---------------
Total operating income 2,055 (421) (2,476)
5.4% -1.3%
Other income and expense 1,284 1,147 (137)
3.3% 3.4%
--------------- --------------- ---------------
Net income before income tax 771 (1,568) (2,339)
2.0% -4.7%
Income tax 410 (704) (1,114)
--------------- --------------- ---------------
Net income $361 $(864) $(1,225)
===============
0.9% -2.6%
=============== ===============
</TABLE>
8
<PAGE>
Sales - Sales for Network Graphic Display products were down $2.7M from the
- -----
first quarter 1996 due to the expected decline as the completion of certain NCR
projects was realized. General Display Terminal sales were down $2.1M from the
first quarter 1996, primarily due to reduction of inventory levels in the IBM
and Digital distribution channels, which was offset, in part, by increased sales
through general distribution channels. Sales of Digital products were down
approximately $1M from first quarter levels.
Gross margin - Gross margin was down 2% from the first quarter to approximately
- ------------
21%. Network Graphic Display margin was down $0.6M due to sales volume
reductions and to an inventory reserve increase of $0.3M on memory devices,
which account for the 2% decline. While the Company expects gross margins to
stabilize, there can be no asurance this will occur.
Sales and marketing - Sales and marketing expenses increased approximately $0.7M
- -------------------
due to an allowance for doubtful accounts caused by the shift in composition of
accounts receivable balances.
General and administrative - General and administrative expenses decreased
- ---------------------------
approximately $0.3M from first quarter to second quarter 1996. Decreases of
these expenses at both TradeWave and SunRiver Data were offset by additional
expenses of the Company resulting in the net $0.3M decrease.
Research and development - Research and development expenses increased $0.2M
- -------------------------
from the first to second quarter 1996. An increase in TradeWave's VPI product
development efforts of $0.5M was offset by a decrease at SunRiver Data of $0.3M
due to the capitalization of development expenses.
Other expense - Interest expense (net of interest income) remained the same for
- -------------
both quarters at $1.1M.
Net income - Net income for the first quarter 1996 was $0.4M compared to a loss
- ----------
of $0.9M for the second quarter 1996, caused primarily by the sales decline,
explained previously, resulting in lower gross margins.
Second quarter of 1996 compared with second quarter of 1995
- -----------------------------------------------------------
Sales - Sales for the three months ended June 30, 1996 were $33.4M, as compared
- -----
to $25.7M for the three months ended June 30, 1995.
Sales from Digital products introduced in 1995 through the Digital Acquisition
increased $19.3M. Sales from the Company's General Display Terminals decreased
from approximately $11.3M in the three months ending June 30, 1995 to
approximately $8.2M in the comparable period of 1996. This change is
represented by a $2M drop in sales to NCR due to the disruption caused by the
break-up of AT&T and a $1.2M drop due to decreased channel activity in IBM
product sales.
9
<PAGE>
Sales of the Company's Network Graphics Displays for the three months ended June
30, 1996 decreased $5.8M to $1.3M. This decline was anticipated and relates to
the completion, during the first quarter of 1996, of specific projects
undertaken by NCR.
Sales in the Company's Pick systems and services business area decreased $3.1M
when compared quarter to quarter and was $1.1M for the second quarter 1996. The
reduction is due to the Company's strategy to concentrate on its core
businesses.
Gross margin - Gross margin dollars fell $0.8M from $7.7M in the second quarter
- ------------
of 1995 to $6.9M in the second quarter of 1996. Gross margin as a percent of
sales dropped 9.2% when comparing the two periods primarily due to the sales
decline in General Display Terminal and Network Graphic Display products. In the
General Display Terminal area, margin dollars declined $2.5M as the new Digital
products (with lower margins) comprised 70% of the total text revenue in the
second quarter 1996 as compared to 0%, in the second quarter of 1995.
Conversely, ADDS General Display Terminal products (with higher margins)
represented only 30% of the revenue for the second quarter of 1996 as compared
to 100% in the comparable period of 1995. The Network Graphics Display business
impacted gross margin negatively by $4.6M as sales declined to $1.1M for the
second quarter 1996. (See "Six months ended June 30, 1996 compared with six
months ended June 30, 1995 - Gross margin")
Sales and marketing - Sales and marketing expenses increased approximately 1.6%
- -------------------
as a percent of sales, from $2.1M in the second quarter 1995 to $3.2M in the
second quarter 1996 primarily due to increased spending at TradeWave, as well as
increases in advertising and public relations activities at SunRiver Data to
develop channel partners and expand market presence. In addition, the Company
opened a sales and marketing office in Europe.
General and administrative - General and administrative expenses increased
- ---------------------------
approximately $0.5M, to $2M (6% of revenue) for the quarter ended June 30, 1996
from $1.5M for the quarter ended June 30, 1995. The increase stems from expenses
associated with TradeWave as well as amortization of goodwill associated with
the Company's acquisition of the VT and Dorio product lines.
Research and development - Research and development expenses for the second
- --------------------------
quarter of 1996 increased $0.2M over the second quarter of 1995. R&D expenses
were $2.1M and $1.9M for the three months ended June 30, 1996 and 1995,
respectively. Research and development efforts are being expended on a line of
network and Internet access computers to be introduced by SunRiver Data and
Internet software products and services based on a secure technology platform
that can be packaged together with specific modules providing other security and
non-security applications.
Other expense - Interest expense (net of interest income) amounted to $1.1M for
- -------------
the three months ended June 30, 1996 compared to $0.3M for the three months
ended June 30,1995. The increase is attributable to the Digital Acquisition,
financed by the Company through The Chase Manhattan Bank N.A. ("Chase") (the
"Chase Credit Line"), which financing was composed of both a term and revolving
credit (See "-Liquidity and Capital Resources"). Other expenses were $.05M and
$.02M for the three months ended June 30, 1996 and 1995 respectively.
10
<PAGE>
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 June 30, 1996, the
effective tax rate was 45% . The effective tax rate for the second quarter 1995
was 41%.
Net income - For the three months ended June 30, 1996, net loss was $0.9M (-2.5%
- ----------
of revenue), compared to net income of $0.9M for the comparable period in 1995.
Operating income decreased from an approximately $2.2M profit for the quarter
ended June 30, 1995, to an approximately $0.4M loss for the quarter ended June
30, 1996. The 1996 operating loss for the second quarter 1996 is made up of a
profit at SunRiver Data of $1.4M, or 4%, offset by a loss at TradeWave and
overhead of the Company.
Earnings available for common shareholders - Earnings available for common
- ---------------------------------------------
shareholders declined from $0.7M $(.02 per share) for the three months ended
June 30, 1995, to a loss of $1M or $(0.02) per share for the three months ended
June 30, 1996. For the quarter ended June 30, 1995, earnings available for
common shareholders was calculated by deducting accretion of $0.2M to
mandatorily redeemable preferred stock from net income. The Company agreed to
pay NCR $0.5M per annum, which is being accounted for as a dividend on the
preferred stock. Earnings available for common shareholders for the second
quarter 1996 was calculated by deducting the dividend on the preferred stock of
$0.1M from net income.
Six months ended June 30, 1996 compared with six months ended June 30, 1995
- ---------------------------------------------------------------------------
Sales - Sales for the six months ended June 30, 1996 was $71.8M, as compared to
- -----
$44.9M for the six months ended June 30, 1995.
Sales from the Company's General Display Terminals increased from approximately
$19M in the six months ended June 30, 1995 to approximately $57.5 from the
comparable period of 1996. The main contributor to the increase was sales of the
Digital products, introduced in 1995 through acquisition, which accounted for
$38M.
Sales of the Company's Network Graphics Displays for the six months ended June
30, 1996 decreased to $5.5M as compared to sales of approximately $12.1M for the
six months ended June 30, 1995. This decline was anticipated and relates to the
completion, during the first quarter of 1996, of specific projects undertaken by
NCR.
TradeWave revenue for the six months ended June 30, 1996 was $1.3M, of which
$0.8M was derived from TradeWave's subcontracting work under a contract with the
U.S. Department of Defense which is scheduled to expire in the last quarter of
1996. TradeWave is transitioning from a research and development to a commercial
enterprise, and in March 1996 publicly announced TradeVPI 2.0 and the related
certification authority service, TradeAuthority, which are expected to be
generally available in September 1996.
The Company formed the GAI Partnership in May, 1995. The Company recorded
revenues from the GAI Partnership and post sale support of approximately $2.3M
for the six months ended June 30, 1996 versus $9.2M for the comparable period in
1995. The contribution of Pick related revenues to SunRiver Data's gross margin
for the six months ended June 30, 1996 has increased approximately 17.5% from
the comparable period in 1995. Gross margin percentage for the six months ended
June 30, 1996 was 58.4% compared to 40.9% for 1995.
The Company's most significant customers for the six months ended June 30, 1996
were NCR, Digital and IBM , accounting for 13%, 12% and 10% respectively of the
Company's sales for the period.
11
<PAGE>
Gross margin - Gross margin for the six months ended June 30, 1996 was $15.7M
- -------------
(22% of revenue), as compared to gross margin for the six months ended June 30,
1995 of $13.2M (30% of revenue). As previously disclosed, the shift in revenue
mix from the Company's higher margin Pick systems and post sale support business
to the Company's lower margin General Display Terminal products (which include
the Digital product line) has resulted in a decline of gross margin. The General
Display Terminal products comprised 80% of revenue at 19.8% gross margin for the
six months ending June 30, 1996, compared to 42% of revenue at a 23.5% gross
margin for the six months ending June 30, 1995. The lower gross margin for the
General Display Terminal product line for the first six months of 1996 is
attributable to costs associated with the Digital product line including higher
shipping costs than originally calculated in standard cost and other increases
in supplemental excess and obsolete reserves, warehousing costs for Europe and
warranty costs. Other cost factors include premiums paid for Digital products
acquired from Digital while the Company was preparing to manufacture VT and
Dorio products and premiums paid in shipping costs to meet customer demand.
Offsetting these costs, as a result of the Digital Acquisition, the Company has
more fully utilized its production capacity, increased its ability to take
advantage of volume purchase discounts and expanded its distribution network and
global reach. While the Company expects gross margins to stabilize, there can be
no assurance this will occur.
During the six months ending June 30, 1996, the Company took write-offs for
inventory and warranty costs that may prove recoverable in future periods. The
Company anticipates some improvement in gross margins for VT and Dorio products
because they are no longer being manufactured by Digital for SunRiver Data and
the Company is no longer incurring warehousing costs in Europe by shipping
directly from its Hauppauge manufacturing facility. The Digital distribution
channel with its European and Pacific Rim access is very important to the
strategy of the Company going forward. The Company is experiencing changing
buying habits from customers in this channel as they take advantage of the
Company's just-in-time delivery capability. This has had an adverse effect on
the Company's inventory volumes, but as the Company adjusts to different buying
patterns of its customers, the Company should be able to reduce these inventory
levels.
Gross profit margins in future periods may be adversely affected by several
factors such as sales volume, shifts in product mix, pricing strategies and
absorption of manufacturing costs.
Sales and marketing - Sales and marketing expenses decreased as a percentage of
- -------------------
revenue but increased in dollar amount. For the six months ended June 30, 1996,
sales and marketing expenses were $5.8M (8% of revenue) compared with $3.8M
(8.6% of revenue) for the comparable period in 1995.
General and administrative - General and administrative expenses stayed level as
- --------------------------
a percentage of revenue at approximately 6% for both the six months of 1996 and
1995. The actual dollars for the six months ended June 30, 1996 was $4.3M
compared with $2.7M for 1995. The dollar increase stems from expenses associated
with TradeWave as well as amortization of goodwill associated with the Company's
acquisition of the VT and Dorio product lines.
Research and development - Research and development for the six months ended
- -------------------------
June 30, 1996 decreased as a percentage of revenue from 7.3% in 1995 to 5.5% in
1996 but increased $0.7M in absolute dollars. SunRiver Data's R&D expense
decreased from $2.7M for the six months ended June 30, 1995 to $2.3M for the
comparable period in 1996. For the six months ended June 30, 1996, TradeWave's
expense was $1.6M compared to $0.5M in 1995, which included only three months of
expenses. Research and development efforts are being expended on a line of
network and Internet access computers to be introduced by SunRiver Data and
Internet software products and services based on a secure technology platform
that can be packaged together with specific modules providing other security and
non-security applications.
12
<PAGE>
Other expense - Interest expense (net of interest income) amounted to $2.2M for
- -------------
the six months ended June 30, 1996 compared to $0.6M for 1995. The increase is
attributable to the Digital Acquisition, financed by the Company through the
Chase Credit Line, which financing was composed of both a term and revolving
credit line (See "-Liquidity and Capital Resources.") Other expenses were $0.3M
and $0.05M for the six months ended June 30, 1996 and 1995 respectively.
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 six months ended June 30, 1996, the
effective tax rate was 37% . The effective tax rate for the comparable period in
1995 was 40%.
Net income - For the six months ended June 30, 1996, net loss was $0.5M (-0.7%
- ----------
of revenue), compared to net income of $2.7M for the comparable period in 1995.
Operating income decreased from approximately $3.4M for the six months ended
June 30, 1995 to approximately $1.6M for 1996. The operating income for the six
months ended June 30,1996 is made up of a gain from SunRiver Data of $4.3M
(compared to $3.4M in the comparable period in 1995) offset by a loss at
TradeWave and overhead of the Company.
Earnings available for common shareholders - Earnings available for common
- ---------------------------------------------
shareholders declined from $2.3M ($0.06 per share) for the six months ended June
30, 1995, to a loss of $0.8M ($0.02 per share) for the six months ended June 30,
1996. For the six months ended June 30, 1995, earnings available for common
shareholders was calculated by deducting dividends of $0.4M 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 products sold by the Company to decline.
Liquidity and Capital Resources
Working capital was $15M as of June 30, 1996 and $15.4M as of December 31, 1995.
On October 23, 1995, the Company's $14M revolving credit loan arrangement with
Congress Financial Corporation (the "Congress Credit Line") was replaced by a
$40M facility provided by Chase in connection with the Digital Acquisition.
The Chase Credit Line consists of a $20M revolving line of credit ("Revolving
Loan") and a $20M 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 $7.5M is available under the Revolving Loan for letters of credit. At
December 31, 1995, the Company owed Chase $28M, of which $8M was owed under the
Revolving Loan and $20M was owed under the Term Loan. At June 30, 1996, the
Company owed Chase $26.8M, of which $10M was owed under the Revolving Loan and
$16.8M was owed under the Term Loan. As of such date, the Company had
approximately $5M 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.
At June 30, 1996, the Company's total long-term debt was approximately $18.3M,
and the current portion of the long-term debt was approximately $17.6M. From
time to time the Company has requested waivers from Chase with respect to
breeches of financial covenants under the Chase Credit Line. The Company is
currently seeking waivers with respect to two covenants and discussions are
ongoing with Chase with respect to these covenants. The Company believes that
the waivers will be forthcoming, although there can be no assurance that the
Company will be successful.
13
<PAGE>
Net cash provided by operating activities during the six months ended June 30,
1996 amounted to $1.1M. This was primarily attributable to an increase of
approximately $3.1M in inventory offset by an increase of $1.6M in accounts
payable and accrued expenses and depreciation and amortization of $2.3M. Net
cash used in investing activities for the three months ended June 30, 1996 was
$1.2M and related to the acquisition of capital assets. Net cash provided from
financing activities was $1.8M for the six months ended June 30, 1996 and was
composed primarily of $2M drawn on the Revolving Loan to finance the working
capital needs of SunRiver Data, $1M from the sale of stock, $1.3M from the
exercise of warrants, $1.5M from the sale of convertible notes, and $.7M from
the exercise of stock options, offset by payments on long-term debt of $3.3M and
$1.3M for purchase of treasury stock which was immediately retired. Of the $2M
proceeds received from the exercise of warrants and options, $.6M 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, Trade Wave has been financed primarily through loans made to TradeWave
by the Company. As of June 30, 1996, the Company has advanced $2.5M to TradeWave
as intercompany transfers. Additional intercompany transfers from July 1, 1996
through August 10, 1996 of approximately $0.8M have been made by the Company to
TradeWave. 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 SunRiver Data and provides
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. The Company has not sold any of
such shares to date. 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 opposed by the Chase Credit Line.
In this connection, TradeWave has been attempting to secure financing from the
sale of its common stock. As announced in a press release on July 9, 1996,
TradeWave is preparing for a firm commitment underwritten initial public
offering of its common stock. TradeWave's ability to complete a public offering
will depend on a number of factors, including stock market conditions. There can
be no assurance that TradeWave will be successful in completing this proposed
initial public offering.
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.
14
<PAGE>
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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
Sam K. Smith, age 63, and Ron Brittian, age 53, became directors of the Company,
effective in April and July 1996, respectively. Mr. Smith has been serving as a
director since 1988 and as Chairman, since 1993, of Landmark Graphics Corp., a
supplier of work stations software for the petroleum industry; he served as a
director of ComVest Computer Corp., a super-computer manufacturer, for more than
six years; and he is a director of Mizar, Inc., a supplier of digital signal
processor boards. From 1992-1995, Mr. Brittian was Executive Vice President of
Texas Instruments and, from 1987-1992, he was a partner at Sevin Rosen Venture
Capital Funds, where he identified high technology venture capital investments
and served as Chairman and Chief Executive Officer of three venture-back
companies. Additional information regarding Messrs. Smith and Brittian is set
forth in the Company's Prospectus dated July 8, 1996.
In July 1996, William Long and Toni McElroy resigned as directors of the
Company, after serving on the Board since December 1994. Mr. Long and Ms.
McElroy continue to be employees of the Company. The Company is considering
candidates to fill the vacancies created by their resignations.
In April 1996, Mr. Bill Moore, a former key financial consultant to the Company,
was convicted in United States District Court of felonies arising out of the
acquisition and operation in 1982 - 1984 of a failed savings and loan located in
McAllen, Texas. He is appealing these convictions which include an order for Mr.
Moore to pay restitution to the United States of $12 million. Mr. Moore's sons,
Jeffrey and Matthew, voting together have the power to elect three of the five
directors of SunRiver Group, Inc. ("SunRiver Group"). In turn, SunRiver Group
owns approximately 56% of the Company's common stock (excluding 4,174,704 shares
underlying warrants held by SunRiver Group) and, accordingly, has the ability to
elect all directors, authorize certain transactions that require stockholder
approval, and otherwise control Company policies, without concurrence of the
Company's minority stockholders.
Mr. Bill Moore has at all times disclaimed any beneficial ownership or economic
interest in the shares of SunRiver Group owned by his sons, Jeffrey and Matthew.
Furthermore, Mr. Moore has no continuing involvement with the Company and has
advised that he will not attempt to exert any direct or indirect influence over
the Company's management. The Company does not anticipate any adverse
consequences stemming from Mr. Moore's conviction. Nevertheless, the U.S.
Government, in pursuit of restitution of approximately $12 million, may claim
Mr. Moore has an interest in the shares of SunRiver Group owned by his sons. The
Company cannot predict the impact of restitution proceedings, if any, on the
ownership or control of the shares of the Company's common stock by the Moore
brothers.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
June 30, 1996.
SIGNATURES
Pursuant to the requirements 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.
Dated: August 14, 1996
SunRiver Corporation
By: /s/ Roger Hughes
----------------------------
Roger Hughes
Vice President, Finance and
Chief Financial Officer
17
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
SunRiver Corporation and Consolidated Subsidiary Companies
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Primary earnings per common share:
Income from continuing operations $(503,311) $1,638,942 $(864,209) $1,073,745
Preferred stock dividend $248,346 $- $124,173 $-
Preferred stock accretion $- $398,973 $- $202,957
--------------- --------------- --------------- ----------------
Income before discontinued operations (751,657) 1,638,942 (988,382) 1,073,745
Discontinued operations $- $1,034,054 $- $(206,229)
--------------- --------------- --------------- ================
Earnings available for common shareholders $(751,657) $2,672,996 $(988,382) $867,516
=============== =============== =============== ================
Weighted average shares outstanding during the period 46,250,954 40,939,281 46,574,806 41,776,129
Common stock equivalents
--------------- --------------- --------------- ----------------
Weighted average common shares outstanding 46,250,954 40,939,281 46,574,806 41,776,129
=============== =============== =============== ================
Income before discontinued operations $(0.02) $0.03 $(0.02) $0.02
Discontinued operations $ - $0.03 $ - $-
Primary earnings per common share $(0.02) $0.06 $(0.02) $0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> $2,122,633
<SECURITIES> 0
<RECEIVABLES> 20,434,069
<ALLOWANCES> 1,042,083
<INVENTORY> 27,827,985
<CURRENT-ASSETS> 52,992,244
<PP&E> 15,814,033
<DEPRECIATION> 3,257,402
<TOTAL-ASSETS> 79,870,240
<CURRENT-LIABILITIES> 38,065,099
<BONDS> 18,311,160
3,554,692
0
<COMMON> 474,549
<OTHER-SE> 16,657,242
<TOTAL-LIABILITY-AND-EQUITY> 79,870,240
<SALES> 64,724,421
<TOTAL-REVENUES> 71,846,067
<CGS> 54,326,366
<TOTAL-COSTS> 56,187,266
<OTHER-EXPENSES> 16,455,494
<LOSS-PROVISION> (276,191)
<INTEREST-EXPENSE> 2,167,125
<INCOME-PRETAX> (796,693)
<INCOME-TAX> (293,382)
<INCOME-CONTINUING> (503,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503,311)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
