Registration No. 33-80319
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNRIVER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3469637
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Echelon IV, Suite 200
9430 Research Boulevard
Austin, Texas 78759-6543
(512) 349-5800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Copies to:
Gerald Youngblood, Joseph L. Cannella, Esq.
Chairman Joseph D. Alperin, Esq.
SunRiver Corporation Fischbein Badillo Wagner Harding
9430 Research Boulevard 909 Third Avenue
Austin, Texas 78759-6543 New York, New York 10022
(512) 349-5800 (212) 826-2000
(name and address, including zip code
and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only Securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.|X|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Each Class Amount to be Offering Price Aggregate Registration
of Securities to be Registered Registered Per Share(1) Offering Price(1) Fee
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,000,000(2) $ 4.53 $ 4,531,250 $ 1,563
Common Stock, $.01 par value 500,000(2) $ 2.06 $ 1,031,250 $ 356
Common Stock, $.01 par value 853,000(3) $ 2.81 $ 2,399,063 $ 828
Common Stock, $.01 par value 12,091,210(4) $ 2.87 $ 34,762,229 $ 11,987
Total ...................... 14,444,210 -- $ 42,723,792 $ 14,734(5)
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Shares which may be offered by the Company.
(3) Consists of 275,000 shares which may be offered by the Company, 500,000
shares issuable upon exercise of certain five- year warrants expiring May
19, 1997 and registered for resale, 68,000 shares issuable upon exercise of
certain warrants expiring November 16, 1997 and registered for resale and
10,000 shares owned by one party.
(4) Includes 725,000 shares which may be offered by the Company and included in
the original filing as selling stockholder shares.
(5) Of which $13,171 was previously paid.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUNRIVER CORPORATION
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Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
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<TABLE>
<CAPTION>
Item of Form S-1 Prospectus Location
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<S> <C> <C>
1. Forepart of the Registration Statement and Outside Facing Page; Cross Reference Sheet; Outside
Front Cover Page of Prospectus....... Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus........................... Prospectus
3. Summary Information, Risk Factors, Ratio of Prospectus Summary, Risk Factors; Inapplicable
Earnings to Fixed Charges............ as to Ratio of Earnings to Fixed Charges
4. Use of Proceeds............................. Use of Proceeds
5. Determination of Offering Price............. Inapplicable
6. Dilution.................................... Inapplicable
7. Selling Security Holders.................... Selling Stockholders
8. Plan of Distribution........................ Plan of Distribution
9. Description of Securities to be Registered.. Description of Capital Stock
10. Interests of Named Experts and Counsel...... Legal Matters, Experts
11. Information with Respect to the Registrant
(a) Description of Business.............. Business
(b) Description of Property.............. Business
(c) Legal Proceedings.................... Business
(d) Dividends and Related Stockholder Matters Dividend Policy
(e) Financial Statements................. Financial Statements and Financial Statement
Schedules
(f) Selected Financial Data.............. Selected Consolidated Financial Data
(g) Supplementary Financial Information.. Inapplicable
(h) Management's Discussion and Analysis of Management's Discussion and Analysis of
Financial Condition and Results of Financial Condition and Results of
Operations.................... Operations
(i) Changes in Accountants............... Change in Accountants
(j) Directors and Executive Officers..... Management
(k) Executive Compensation............... Management
(l) Security Ownership................... Security Ownership of Certain Beneficial Owners
and Management
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(m) Certain Transactions................. Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Inapplicable
</TABLE>
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<PAGE>
Subject to Completion, Dated May 30, 1996
PROSPECTUS
14,444,210 Shares
SUNRIVER CORPORATION
Common Stock
--------------------
Up to 2,500,000 shares of common stock, par value $.01 ("Common Stock"), of
SunRiver Corporation (the "Company") may be offered from time to time by the
Company (the "Company Shares") and up to 11,944,210 shares of Common Stock,
including up to 568,000 shares issuable upon exercise of certain warrants with
exercise prices ranging from $.85 to $6.60 per share, subject to adjustment, may
be offered from time to time by the selling stockholders ("Selling
Stockholders"). It is currently contemplated that officers and directors of the
Company will offer and sell the Company Shares on behalf of the Company without
using the services of any underwriter, selling agent or finder. Prior to any
sales by the Company, the Company will update, where and as appropriate, the
Registration Statement of which this Prospectus is a part. The Company will not
receive any proceeds from the sale of the Selling Stockholders' shares. The
expenses of the offering, estimated at $225,000, will be paid by the Company.
See "Selling Stockholders", "Business-Purposes of Registration of Shares by the
Company" and "Plan of Distribution".
There will be approximately 50,170,506 shares of Common Stock issued and
outstanding after this offering, assuming all 14,444,210 shares are sold. The
14,444,210 shares offered hereby represent 159% of the 9,112,729 shares of
Common Stock which are owned by non-affiliates of the Company and are freely
tradeable on The Nasdaq SmallCap Market as of May 22, 1996. Sales and the
prospect of sales of the shares offered hereby could have a material adverse
impact on the market price of the Common Stock. See "Risk Factors - Adverse
Impact on Market Price of Common Stock" and "Plan of Distribution."
On May 29, 1996, the last reported sale price of the Company's Common Stock
on The Nasdaq SmallCap Market (symbol: SRVC) was $5-7/8 per share. See "Price
Range of Common Stock."
See "Risk Factors," beginning on page 4, for factors which should be
considered by prospective investors.
The sale of the shares offered hereby may be effected in one or more
transactions on the over-the-counter market, including ordinary brokers'
transactions, in privately negotiated transactions or through sales to one or
more dealers for resale of such shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the sellers. The shares offered
hereby may be sold in New Jersey only through a registered broker-dealer or in
reliance upon an exemption from registration. See "Plan of Distribution."
The Selling Stockholders and intermediaries through whom their shares and
shares offered hereby by the Company are sold may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares offered, and any profits realized or
commissions received may be deemed underwriting compensation. The Company has
agreed to indemnify the Selling Stockholders against certain liabilities,
including liabilities under the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is , 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless the context otherwise requires, references to the
Company in this Prospectus include the Company and its direct and indirect
subsidiaries including SunRiver Data Systems, Inc., the Company's principal
operating subsidiary.
The Company
The Company is engaged, through operating subsidiaries, in designing and
manufacturing graphics and text computer terminals for business use and in
developing Internet software for use by businesses. The Company's general
strategy is to be a provider of devices which provide access to corporate
network computing environments and software for secure, private communications
and electronic commerce over the Internet. The Company has two operating
subsidiaries, SunRiver Data Systems, Inc. ("SunRiver Data") and TradeWave
Corporation ("TradeWave").
SunRiver Data designs, assembles, sells and supports general purpose
desktop computer display terminals, which generally do not have graphics
capabilities but some of which have limited graphics capabilities ("General
Display Terminals"); high resolution high performance desktop network graphics
display terminals ("Network Graphics Displays") (this product was formerly
referred to by the Company as "X-Terminals") based on the X-Terminal protocol;
and desktop high performance alternatives to personal computer and other
terminal products in multi-user, personal computer and minicomputer-based
environments ("MultiConsole Terminals"). In addition, a partnership (the "GAI
Partnership") formed by SunRiver Data and General Automation, Inc. ("GAI") and
managed by GAI designs, integrates, sells and supports multi-user computer
systems that can manage large volumes of data running SunRiver Data's and GAI's
versions of a data-based system licensed from Pick Systems. These products and
services are offered solely to businesses.
In October 1995, SunRiver Data acquired assets relating to the General
Display Terminal products of Digital Equipment Corporation ("Digital") sold
under the "VT(R)" and "Dorio(R)" brands (excluding the VT 400 Series) and, as a
result, based on published 1994 industry data, the Company believes that
SunRiver Data is the second largest manufacturer of General Display Terminals in
the world with an installed user base of more than 5,000,000 units.
TradeWave develops and sells Internet software products and value-added
network services which enable desktop computer users to conduct commercial
transactions by way of the Internet.
The Company entered into the General Display Terminal and Network Graphics
Displays businesses in December, 1994 when the Company purchased Applied Digital
Data Systems, Inc. ("ADDS"), which subsequently changed its name to SunRiver
Data Systems, Inc., from NCR Corporation (formerly AT&T Global Information
Solutions Company) ("NCR" or "AT&T-GIS"). For more than 25 years, ADDS has been
a supplier of General Display Terminals and Network Graphics Displays worldwide
under either the customer's or ADDS(R) trademark. Simultaneously with the
Company's acquisition of ADDS, the Company acquired all of the assets and
business of SunRiver Group, Inc. ("SunRiver Group"). Prior to this acquisition,
SunRiver Group had been engaged for more than nine years in the development and
manufacture of software and hardware for MultiConsole Terminals. SunRiver Group
was a pioneer in the development of high-speed multi-console terminals for open
system, multi-user platforms. As a result of the Company's acquisition of ADDS
and the assets of SunRiver Group, SunRiver Group owns approximately 60% of the
Company's outstanding Common Stock (inclusive of 4,174,704 shares underlying
warrants).
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SunRiver Data offers standard and custom models of its General Display
Terminals primarily to retail, financial, telecommunications and wholesale
distribution businesses requiring them for data entry and point of sale
activities. Standard and custom model Network Graphics Displays are sold by
SunRiver Data primarily to telecommunications and financial businesses requiring
the ability to provide concurrent information to customers on a variety of
topics, such as billing, credit history and other account information.
MultiConsole Terminals are typically used by small to medium sized businesses,
such as chain stores, requiring predominantly transaction-oriented applications.
Sales of systems by the GAI Partnership are primarily to large distribution
centers, retail establishments, manufacturers, local governments and data-bases
for credit and collection, which require management of large volumes of data.
The products and services developed or being developed by TradeWave
include: enterprise-wide multi-media directories and catalogs, information
server distribution and retrieval client software, information security software
and services, and a line of financial transactions settlement software and
services. TradeWave recently introduced a suite of products and services to help
businesses use the Internet as if it were their own private network - a Virtual
Private Internet (VPItm). TradeWave's products have not yet gained widespread
commercial acceptance. TradeWave commenced operations in April 1995, when it
acquired technology from the Microelectronics and Computer Technology
Corporation ("MCC") and became an associate member of MCC. MCC is a research and
development consortium whose members include AT&T, Motorola, Kodak and Digital.
The Company was incorporated in Delaware in 1988. Prior to November, 1995,
the Company was known as All-Quotes, Inc. The Company's executive offices are
located at Echelon IV, Suite 200, 9430 Research Boulevard, Austin, Texas
78759-6543, and its telephone number is (512) 349-5800.
Before making an investment in the Common Stock, prospective purchasers
should carefully consider certain factors set forth under "Risk Factors."
The Offering
Common Stock
Offered by the Company . . . . . . 2,500,000 shares
Offered by Selling Stockholders. . 11,944,210 shares
Common Stock Outstanding . . . . . . . . . 46,895,895 shares(1)
Common Stock to be Outstanding
After the Offering . . . . . . . . 50,170,506 shares(2)(3)
Use of Proceeds . . . . . . . . . . . . . The Company will not receive any
proceeds from the sale of Common
Stock offered by the Selling
Stockholders.
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<PAGE>
All or a portion of the shares
offered by the Company may either
be issued in satisfaction of
obligations of TradeWave to MCC and
SunRiver Data to NCR or be sold, and
the proceeds used, for such purposes.
Any remaining shares may be sold by
the Company, and the proceeds used,
for additional working capital or for
other corporate purposes. See
"Reorganization-TradeWave
Acquisition" and "Recent Developments
-Restructuring of Obligations to
NCR" and "Use of Proceeds."
The Nasdaq SmallCap Market Symbol . . . . SRVC
- - ----------------------------
(1) Excludes 13,052,059 shares issuable upon exercise of outstanding
warrants and options at prices ranging from $.85 to $8.25 per share (subject to
adjustment), and warrants the Company expects to issue to SunRiver Group, with
an exercise of $3.875 per share, in connection with SunRiver Data's acquisition
of assets from Digital. See "Reorganization-Financing for the Digital
Acquisition," "Management-Executive Compensation" and "Security Ownership of
Certain Beneficial Owners and Management."
(2) Excludes 12,484,059 shares issuable upon exercise of outstanding
warrants and options at prices ranging from $1.35 to $8.25 per share, and
includes 568,000 shares offered hereby and issuable upon exercise of warrants at
prices ranging from $.85 to $6.60 per share (subject to adjustment), and the
maximum of 206,611 shares issuable to Digital depending on the closing price of
the Common Stock on the date of this Prospectus. See "Recent Developments -
Purchase of Digital's Assets" and "Selling Stockholders."
(3) This total plus the 12,484,059 shares referred to in footnote (2),
above, exceeds the Company's 60,000,000 shares of authorized Common Stock by
2,654,565 shares. SunRiver Group has agreed to refrain from exercising warrants
to purchase up to 2,654,565 shares of Common Stock to the extent necessary to
permit the exercise by others of their options and warrants and the offer and
sale by the Company of newly issued Common Stock.
RISK FACTORS
Prospective purchasers of the shares of Common Stock being offered hereby
(the "Offering") should carefully consider the following factors, as well as
other information set forth in this Prospectus, before making an investment in
the Common Stock.
Debt Structure and Liquidity
The Company is highly leveraged. As of December 31, 1995, the Company had a
negative tangible net worth of $1,271,768 and total liabilities of $63,443,375.
The Company's cash requirements at December 31, 1995 included repayment of a
term loan, under its bank credit line with The Chase Manhattan Bank, N.A., of
$20,000,000, plus interest, in eleven quarterly installments commencing March
31, 1996; repayment of a revolving loan, under the same bank credit line (the
"Chase Credit Line"), of $8,000,000, plus interest; payments of $2,500,000 by
TradeWave to MCC; and the payment of expenses of approximately $200,000 during
1996 relating to implementing the settlement agreement between the Company and
Sun Microsystems, Inc. that requires the Company to stop using any
SunRiver-based mark or name after April 23, 1997, except under limited
circumstances. The Company is limited by the terms of the Chase Credit Line from
providing TradeWave with funds to pay its obligations to MCC. While the Company
believes that cash generated from operations and available under the Chase
Credit Line will be sufficient to pay its other obligations as they become due,
in the event there is a decline in the Company's sales and earnings, the
Company's cash flow would be adversely affected including as a result of a
decrease in availability under the Chase Credit Line, the revolver portion of
which provides cash availability to the Company based, in part, on the eligible
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<PAGE>
accounts receivable generated by the Company. Accordingly, the Company may not
have the necessary cash to fund all of its obligations. The Company's ability to
obtain equity financing to reduce its debt and increase its stockholders' equity
is adversely affected by such leverage and other risks described below. See
"-TradeWave's Limited Operating History, Losses and Liquidity," "Recent
Developments," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and
"Business-Manufacturing."
Operating History
As a wholly-owned subsidiary of NCR, SunRiver Data had net losses of
$2,940,336, $9,709,549 and $3,288,634 in the years ended December 31, 1992 and
December 31, 1993 and the period from January 1, 1994 to December 9, 1994. Prior
to the Company's acquisition of the assets and business of SunRiver Group,
SunRiver Group had net income of $302,057 for the year ended December 31, 1992,
a net loss of $70,168 for the year ended December 31, 1993 and net income of
$37,618 for the year ended December 31, 1994 inclusive of the results for ADDS
for the period December 10 through December 31, 1994. While the Company had
income from continuing operations before taxes of $2,237,684 for the year ended
December 31, 1995, there can be no assurance that these results are indicative
of future operating results. In this regard, the Company has recorded
nonrecurring charges of approximately $2,207,000 in the quarter ended December
31, 1995 relating to the acquisition of in-process technology by TradeWave from
MCC and the refinancing of debt in connection with the acquisition of assets
from Digital. The Company believes that a comparison of the Company's operating
results since December 9, 1994 to prior results of SunRiver Data and SunRiver
Group is not meaningful because of the substantial changes that have been
effected by management of the Company since December 9, 1994, the date the
Company acquired SunRiver Data and the assets and business of SunRiver Group.
However, it will be necessary for the Company to have a longer operating history
as a basis for comparison and a meaningful evaluation of the Company's
performance. See "-TradeWave's Limited Operating History, Losses and Liquidity,"
"Recent Developments" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
TradeWave's Limited Operating History, Losses and Liquidity; Need for Additional
Financing
Since commencing business in April 1995, TradeWave incurred net losses of
approximately $2,000,000 through December 31, 1995. TradeWave's predecessor
incurred net losses of approximately $645,000 in 1993 and $285,000 in 1994.
During the fourth quarter of 1995, the Company recorded a nonrecurring charge of
$1,225,000 relating to the acquisition by TradeWave of in-process technology
from MCC when Management recognized that sales practices of its Internet
competitors had impaired the revenue potential of this technology. TradeWave has
not as yet realized any significant revenues from its recent introduction of a
suite of products and services to help businesses use the Internet as if it were
their own private network. Management of TradeWave anticipates that losses from
TradeWave's business will continue at least through the third quarter of 1996
and that TradeWave will require substantial additional financing from sources
other than the Company and SunRiver Data to sustain its current level of
operations and pay the $2,250,000 it owes to MCC, of which $1,250,000 is due in
1996, and $1,000,000 is due in 1997. See "Reorganization-TradeWave Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Products and Services."
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Strategy
Approximately 49.2% of the Company's sales for the year ended December 31,
1995 were of General Display Terminals. The Company has been increasing its
market share as other manufacturers of General Display Terminals have been
abandoning this business to manufacture personal computer-based architecture
with significant graphical capability. As a result of the Company's recent
acquisition of Digital's General Display Terminal product lines, the Company
believes, based on published 1994 data, that it is now the second largest
supplier of General Display Terminals in the world. The Company's strategy in
increasing its share of a market where the products and market are mature and
where there are substantial defections to other products is based upon its
belief that there will be a continuing substantial demand for General Display
Terminals, in part because of enhanced performance, and additional features,
including MS Windows NT and Internet support, that allow General Display
Terminals to compete favorably, in terms of performance and price, with low-cost
personal computers. The success of this strategy depends upon numerous
assumptions by the Company, including prices of low-cost personal computers and
the Company's belief that, in a transaction-oriented environment, a personal
computer is not a cost effective replacement for a General Display Terminal.
There can be no assurance that the Company's strategy is valid. See "Recent
Developments" and "Business - Products and Services."
Declining Gross Profit Margins; Competition
The business of the Company is intensely competitive and characterized by
constant pricing pressure. The computer industry has experienced industry-wide
declines in the average sales price of computer hardware. As a result, the
Company and its competitors have experienced downward pressure on gross margin.
Many of the Company's competitors are much larger companies with substantially
greater technical, financial and other resources than the Company. The Company's
ability to compete favorably is, in significant part, dependent upon its ability
to control costs, react timely and appropriately to short and long term trends
and competitively price its products; and there is no assurance that the Company
will be able to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business-Competition."
Adverse Impact on Market Price of Common Stock
As of May 22, 1996, up to approximately 9,112,729 shares of the Company's
Common Stock were freely tradeable on The Nasdaq SmallCap Market. Pursuant to
this Prospectus, Selling Stockholders may currently sell up to 9,972,494 of
their shares of Common Stock without restriction (assuming exercise of Selling
Stockholder warrants to purchase 568,000 shares of Common Stock). An additional
1,500,805 shares and 265,100 shares will be saleable by Selling Stockholders
pursuant to this Prospectus after June 9, 1996 and December 31, 1996,
respectively. There is neither an underwriter nor a coordinating broker through
which Selling Stockholders must sell their shares. Accordingly, sales and the
prospect of sales of Common Stock by the Selling Stockholders, as well as the
prospect of sales of up to 2,500,000 shares of Common Stock by the Company,
could have a material adverse impact on the market price of the Company's Common
Stock. See "Price Range of Common Stock," "Description of Capital Stock - Shares
Eligible for Future Sale" and "Plan of Distribution."
Fluctuations in Quarterly Results
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a number of factors, including
timing of new product introductions by the Company and its competitors; changes
in the mix of products sold; availability and pricing of subassemblies and
components from third parties; timing of orders; difficulty in maintaining
margins; and changes in pricing policies by the Company, its competitors or
suppliers. See "-Dependence Upon Suppliers; Shortages of Subassemblies and
Components" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations."
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Possibility of Volatility of Common Stock Price
There has been significant volatility in the market price of the Company's
Common Stock, and of the securities of companies engaged in the businesses
similar to the Company's business. Various factors and events may have a
significant impact on the market price of the Common Stock including
fluctuations in the prices of computer industry stocks, generally; announcements
by the Company, its suppliers or its competitors concerning quarterly and year
end results of operations; technological innovations or the introduction of new
products; shortages or failure of components or subassemblies; and public
concern about the economy, generally. See "Price Range of Common Stock" and
"-Adverse Impact on Market Price of Common Stock."
Dependence Upon Major Customers
NCR was the Company's most significant customer in 1995, accounting for
41.2% of the Company's revenue. However, sales in 1996 to NCR are not expected
to reach a comparable level because a substantial portion of 1995 sales were of
the Company's "Chameleon" Network Graphics Displays used by NCR in specific
projects completed during the first quarter of 1996. Although NCR is
contractually committed to purchase 90% of its terminal requirements from the
Company through December 9, 1999, it may under certain conditions cancel its
agreement without compensation to the Company. Digital is expected to be the
Company's most significant customer in 1996. While Digital is contractually
committed to purchase 95% of its terminal requirements from the Company through
October 23, 1999, it may terminate its agreement for cause without compensation
to the Company. The loss of NCR or Digital as a customer would have a material
adverse effect on the Company's results of operations and liquidity. See "Recent
Developments-Related Agreements with Digital" and "Business-Products and
Services."
Dependence Upon Suppliers; Shortages of Subassemblies and Components
The Company purchases subassemblies and components for its products almost
entirely from more than 40 domestic and Far East suppliers. Wong Electronics
Corp., which manufactures plug-in logic boards for the Company's General Display
Terminals, accounted for approximately 20% of the dollar amount of the Company's
total purchases in 1995 of subassemblies and components. No other supplier
accounted for 10% or more of such amount. While there are at least two qualified
suppliers for the subassemblies and components that are made to the Company's
specifications, they are generally single-sourced so that the Company is able to
take advantage of volume discounts and more easily ensure quality control. The
Company estimates that the lead time required before an alternate supplier can
begin providing the necessary subassembly or component would generally be
between six to ten weeks. The disruption of the Company's business during such
period of lead time could have a material adverse effect on its sales and
results of operations for the quarter and, perhaps, also for the fiscal year.
The Company has experienced shortages of supplies for components from time
to time as a result of industry-wide shortages, which sometimes result in market
price increases and allocated production runs. However, to date, such shortages
have not had a material adverse effect on the Company's business.
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<PAGE>
In connection with the transfer of all production of the VT and Dorio
product lines from Digital's facilities in the Far East to SunRiver Data's plant
in Hauppauge, New York, the Company is experiencing a shortage of a component
required to manufacture a key model of the VT and Dorio General Display
Terminals. As a result of this shortage, the Company expects a deferment of
revenue of between $2.5 million and $3.5 million of these products from the
second to the third and fourth quarters of 1996. Accordingly, the Company's
sales and income could be negatively affected during the second quarter of 1996.
The Company believes it can ameliorate the impact of such shift in sales by
aggressively marketing alternatives to its customers.
New Products and Technological Change
The computer industry is characterized by a rapid rate of product
improvement, technological change and product obsolescence. As a result, the
Company's product lines are subject to short life cycles. While the Company is
engaged in research and development of new products, no assurance can be given
that the Company will be able to bring any new products to market to replace
existing products rendered obsolete by technological change. The failure of the
Company to market new products on a timely basis could materially and adversely
affect the Company's business. Furthermore, inventory management is critical to
decreasing the risk of being adversely affected by obsolescence and there is no
assurance that the Company's inventory management systems will adequately
protect against this risk. The Company believes its flexible manufacturing
processes mitigate the risk of product obsolescence. The Company recorded
nonrecurring charges of approximately $1,225,000 during the quarter ended
December 31, 1995 when management recognized that the pricing practices of
bundling browser software by TradeWave's Internet competitors had impaired the
revenue potential of the in-process technology acquired by TradeWave from MCC.
See "Reorganization--TradeWave Acquisition" and "Business--Manufacturing."
Research and Development
There has been substantial investment in research and development of the
Company's existing products by SunRiver Group, SunRiver Data and Digital. The
Company will need to continue to introduce new products that match the
price/performance levels of competitive products. The development of new
products is inherently risky and expensive and the Company's working capital may
not be sufficient to permit it to fund the research and development required.
Furthermore, there can be no assurance that the Company will successfully
develop new products or that any new products that are developed will be
introduced in a timely manner and receive market acceptance. See "Business -
Products and Services" and Financial Statements and Pro Forma Information.
Expansion
SunRiver Group and SunRiver Data have benefitted from significant expansion
in the microcomputer industry during the past several years. Although the
Company expects the industry to continue to expand, the Company's business may
be adversely affected by a decline in the sales growth of microcomputer-related
products. As a result of the recent Digital transactions, the Company is
expanding its manufacturing capacity by reorganizing its current manufacturing
operations, investing in additional capital equipment and hiring additional
personnel and is also expanding its sales and marketing capacity by increasing
staffing and by increasing its marketing, sales promotion and advertising
activities. If sales of VT and Dorio brand General Display Terminals are
materially less than the historical sales of these brands by Digital, the
Company might have to substantially curtail its expanded activities and its
results of operations and liquidity could be materially and adversely affected.
See "Recent Developments."
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Control by SunRiver Group
SunRiver Group owns approximately 56% (approximately 50% on a fully diluted
basis) of the outstanding shares 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. SunRiver Group's control of
the Company may have an adverse effect on the market price of the Common Stock
due to the perception by existing or potential stockholders that influencing or
changing the Company's Management or policies would be difficult. Such control
could also make the possible takeover of the Company or the removal of
Management more difficult, discourage hostile bids for control of the Company in
which stockholders may receive premiums for their shares of Common Stock and
otherwise adversely affect the market price of the Common Stock. See "Security
Ownership of Certain Beneficial Owners and Management."
Dependence Upon Key Personnel
The Company's success will depend upon its key management, sales and
technical personnel. The Company does not have employment contracts with any of
its employees. In addition, the Company believes that, to succeed in the future,
it will be required to continue to attract, retain and motivate additional
skilled executive and technical sales and engineering employees who are in short
supply because of great demand throughout the industry for their services. The
loss of any of its existing key personnel or the inability to attract and retain
key employees in the future could have a material adverse effect on the Company.
See "Management."
No Dividends Anticipated
The Company has not paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. See "Dividend Policy."
Possible Adverse and Anti-takeover Effects of Authorization of Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of a
maximum of 1,000,000 shares of preferred stock ("Preferred Stock") on terms
which may be fixed by the Company's Board of Directors without further
stockholder action. The terms of the Preferred Stock may include dividend,
voting and liquidation preferences which could adversely affect the rights of
holders of the Common Stock. No Preferred Stock has been issued to date and the
Company has no current plans to issue Preferred Stock. The issuance of Preferred
Stock could make the possible takeover of the Company or the removal of
management of the Company more difficult, discourage hostile bids for control of
the Company in which stockholders may receive premiums for their shares of
Common Stock, otherwise dilute or subordinate the rights of holders of Common
Stock and adversely affect the market price of the Common Stock. See
"Description of Capital Stock--Preferred Stock."
Forward-Looking Information May Prove Inaccurate
This Prospectus 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, including the risk factors described in
this Prospectus. 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.
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REORGANIZATION
General
During the period beginning in December 1994 and ending in October 1995,
the Company made acquisitions and dispositions which resulted in a total change
in the Company's business and management. In addition, the Company changed its
fiscal year end from June 30 to December 31. The Company was known as
All-Quotes, Inc. before it changed its name to SunRiver Corporation in November,
1995.
In January 1995, the Company disposed of its business of collecting and
electronically distributing financial information to subscribers (the "Quote
Business"), a business in which it had been engaged since 1988. In August 1995,
the Company disposed of its remaining interest in diamond mining properties in
Sierra Leone.
As a result of two acquisitions, since December, 1994, the Company has been
engaged in designing, assembling, selling and supporting General Display
Terminals, Network Graphics Displays and MultiConsole Terminals. In connection
with these acquisitions, the Company's prior management was entirely replaced
effective December 9, 1994. A partnership formed by the Company and General
Automation, Inc. in May, 1995 ("GAI") and managed by GAI designs, integrates,
sells and supports multi-user computer systems running the Company's and GAI's
versions of the database system licensed from Pick Systems. These products and
services are offered solely to businesses.
As the result of a third acquisition, since April, 1995, the Company has
also been engaged in the business of developing Internet software products and
providing value-added network services which enable desktop computer users to
conduct commercial transactions by way of the Internet.
The Company substantially expanded its General Display Terminal business in
October, 1995, when it acquired assets from Digital relating to Digital's Dorio
and VT General Display Terminal Product lines. See "Recent Developments."
SunRiver Group and SunRiver Data Acquisitions
On December 12, 1994, effective December 9, 1994, the following occurred:
1. The Company acquired the assets and business (the "SunRiver Group
Acquisition") of SunRiver Group (formerly named SunRiver Corporation) in
exchange for the issuance to SunRiver Group of 5,594,001 shares of the Company's
Common Stock and an agreement to issue to SunRiver Group 20,845,379 additional
shares of the Company's Common Stock, which additional shares were issued in
October 1995. Such 26,439,380 shares constituted the total consideration paid to
SunRiver Group for the SunRiver Group Acquisition. The Company also agreed to
issue 4,091,210 shares of the Company's Common Stock, which were issued in
November 1995, to RAS Securities Corp. ("RAS") or its designees as consideration
for, among other matters, introducing the Company to SunRiver Group and advising
the Company with respect to the SunRiver Group Acquisition and the SunRiver Data
Acquisition (defined below). Included in the shares offered by this Prospectus
are 3,366,210 of such 4,091,210 shares. The agreed value of the shares issued to
SunRiver Group and RAS was 63.332344% and 9.8%, respectively, of the outstanding
Common Stock after giving effect to the issuances of the shares in the Private
Placement (defined below), 288,000 shares to Venture First II, L.P. in
satisfaction of a SunRiver Group obligation assumed by the Company and 300,000
shares to Rosbro Capital Corporation in exchange for the release of certain
obligations of the Company. See "Certain Transactions."
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2. Included in the assets acquired from SunRiver Group was an agreement
(the "SunRiver Data Acquisition Agreement") to acquire the outstanding common
stock of ADDS from NCR.
The SunRiver Data Acquisition Agreement was immediately contributed, along
with the other SunRiver Group assets acquired by the Company, to a newly formed
wholly-owned subsidiary of the Company, SunRiver Acquisition Corp. SunRiver
Acquisition Corp. then purchased the common stock of ADDS from NCR (the
"SunRiver Data Acquisition") for $13,000,000, of which $5,000,000 was paid in
cash and the balance of $8,000,000 was paid by the delivery of SunRiver
Acquisition Corp.'s promissory note (the "NCR Note").
In addition, NCR was granted a put option (the "Put Option") to require
SunRiver Acquisition Corp. to purchase all of the preferred stock, no par value,
of SunRiver Data (the "SunRiver Data Preferred Stock") owned by NCR for
$8,750,000, which was subsequently adjusted to $7,228,000. NCR granted a call
option (the "Call Option") to SunRiver Data that permitted SunRiver Data to
purchase the SunRiver Data Preferred Stock at prices starting at $7,000,000,
which was subsequently adjusted to $5,782,000. ADDS had authorized and issued to
NCR the SunRiver Data Preferred Stock prior to and in anticipation of the
SunRiver Data Acquisition. The Put Option and the Call Option prices were
adjusted downward as required by the SunRiver Data Acquisition Agreement
because, among other factors, the actual net asset value of ADDS on the date of
closing of the SunRiver Data Acquisition was lower than ADDS' prior estimated
net asset value as of such date. In October 1995, the NCR Note, the Put Option
and the Call Option were restructured, as more fully described below under
"-Restructuring of Obligations to NCR."
As consideration for SunRiver Group's guarantee of the Company's
obligations under the Put Option, the Company agreed to issue a warrant (the
"SunRiver Group Warrant") to SunRiver Group, which was issued in October 1995,
to purchase 4,174,704 shares of the Company's Common Stock on or before December
12, 2004 at $1.84 per share, the closing price of the Common Stock on The Nasdaq
SmallCap Market on December 9, 1994.
A portion of the purchase price for the SunRiver Data Acquisition was
funded by the Company's issuance of 7,000,000 shares of Common Stock for a total
of $3,500,000 ($.50 per share) in a private placement (the "Private Placement")
in which RAS acted as the exclusive placement agent. The $.50 per share price of
the Private Placement shares was determined by arms-length negotiations between
the Company and RAS. In connection with the Private Placement, the Company paid
RAS a total of approximately $945,000 consisting of a 10% commission of
$350,000, a 3% non-accountable expense allowance of $105,000, an investment
banking fee of $250,000 and a consulting fee of $240,000.
3. The Company's wholly owned subsidiary, All-Quotes Capital, Inc.
("Capital"), assumed all of the liabilities of the Company arising prior to
December 9, 1994 (the "Capital Assumed Liabilities") in consideration of the
Company's assignment to Capital of its rights to the Global Proceeds (defined
below).
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4. NCR agreed to purchase 90% of its terminal requirements from SunRiver
Data through December 9, 1999. However, NCR can terminate its agreements
governing such purchases, under certain circumstances, without compensation to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
Disposition of Quote Business and Diamond Mining Properties
On January 11, 1995 the Company sold to Global Market Information, Inc.,
for $1,800,000 (the "Global Proceeds") substantially all of the assets of the
Company's business of collecting and electronically distributing financial
information to subscribers (the "Quote Business"). Since then, substantially all
of the Global Proceeds have been used to pay the Capital Assumed Liabilities.
In connection with the SunRiver Group Acquisition, effective December 9,
1994, the Company relinquished voting control of Capital by granting a proxy to
Bronson Conrad and J. Gerald Combs (who simultaneously resigned as Chairman of
the Board, and President and Director, respectively, of the Company) to vote all
of the shares of common stock of Capital. Capital owned approximately 67% of
AmCan Diamond Mining Company, Ltd. ("AmCan"), the owner and operator of diamond
mining properties in Sierra Leone.
On August 14, 1995, the Company exchanged all of its shares of Capital's
common stock for 736,501 shares of the Company's Common Stock and Bronson
Conrad's relinquishment to the Company of his then currently exercisable options
to purchase 200,000 shares of Common Stock at $1.63 per share. In addition, the
Company and SunRiver Group exchanged general releases with Messrs. Conrad and
Combs and the Company released to Capital 4,000,000 of the 5,000,000 shares of
common stock of Capital's subsidiary, All-Quotes Data, Ltd., that had been
escrowed to secure payment of the Capital Assumed Liabilities. The remaining
1,000,000 shares will remain in escrow until the Capital Assumed Liabilities are
paid. See "Business-Legal Proceedings," "Management" and "Certain Transactions."
Reasons for SunRiver Group and SunRiver Data
Acquisitions and Dispositions of Prior Businesses
SunRiver Group needed additional equity financing quickly in order to
complete the acquisition of SunRiver Data. It believed that acquiring control of
a public company that had no operating business could provide it with the
ability to raise the necessary funds in a private placement to accredited
investors. Thereafter, such a company could provide access to additional capital
by means of private and/or public offerings. RAS knew that the Company was in
the process of selling its Quote Business and that the then current management
was desirous of offering the Company as a vehicle for a privately held company
to become a public company.
All-Quotes, Inc. had not realized a profit from the Quote Business in any
fiscal quarter since its inception in 1988, had accumulated losses as of
September 30, 1994 in excess of $5.8 million since inception, was subject to
extensive competition from others with substantially greater resources,
financial and otherwise, and expected competition in the financial information
business to intensify dramatically through the remainder of this decade.
Therefore, prior management of the Company concluded that it was highly unlikely
that the Quote Business could reach profitability in the foreseeable future and
that it would be in the best interests of the Company's stockholders to sell the
Quote Business.
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In the negotiations that ensued as a result of RAS' introduction of
SunRiver Group to the Company, SunRiver Group determined, without receiving any
independent evaluation, that the highly speculative diamond mining business
conducted by AmCan was not a business in which SunRiver Group had any interest
or expertise and that the retention of an interest in AmCan could adversely
affect the prospects for financing the acquisition of SunRiver Data.
TradeWave Acquisition
On April 20, 1995, EiNet Acquisition Corporation, a newly-formed
wholly-owned Delaware subsidiary of the Company (which changed its name to
TradeWave Corporation ("TradeWave")), acquired (the "TradeWave Acquisition") the
Enterprise Integration Network technology (the "TradeWave Technology") from the
Microelectronics and Computer Technology Corporation ("MCC") for $1,000,000 plus
royalties, of which $100,000 has been paid pursuant to an agreement, dated March
22, 1995, and amended March 4, 1996 (as amended, the "TradeWave Acquisition
Agreement"). In addition, the Company incurred approximately $300,000 in costs
directly related to the TradeWave Acquisition.
Coincidentally with the purchase of the TradeWave Technology, TradeWave
became an associate member of MCC. Associate membership gives TradeWave the
right to participate in joint research projects. In this regard, TradeWave
entered into a technology agreement, dated April 21, 1995, and amended March 4,
1996 (as amended, the "TradeWave Technology Agreement"), with MCC to participate
in the InfoSleuth Project to develop technology to intelligently navigate
dynamic information networks such as the Internet. MCC is a research and
development consortium whose members include AT&T, Motorola, Kodak and Digital.
Under the TradeWave Technology Agreement, TradeWave agreed to make payments of
$2,000,000 to MCC through December 31, 1997, primarily to support research
conducted by MCC. Of the $2,000,000, $550,000 has already been paid and the
balance (including $400,000 that was due December 31, 1995) is due in periodic
installments ranging from $50,000 to $400,000 during 1996 and 1997.
Of the remaining $800,000 due under the TradeWave Acquisition Agreement,
the Company has the option of paying $250,000 and $50,000 due May 31 and June
28, 1996, respectively, by delivering to MCC such number of shares of freely
tradeable Common Stock of the Company equal in value to 120% of the amount of
each such installment. The Company is jointly obligated with TradeWave to make
such payments.
In the event TradeWave defaults in its payments to MCC and fails to cure
such default following written notice thereof, MCC could compel TradeWave's
withdrawal from MCC, sue TradeWave for damages and/or sue the Company for
damages with respect to any defaults by the Company.
In the quarter ended December 31, 1995, the Company recorded a nonrecurring
charge of approximately $1,225,000 attributable to the acquisition of in-process
TradeWave Technology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations-Operating expenses."
The purchase of the TradeWave Technology and the payment of continuing
obligations to MCC were funded in part through the issuance of $1,000,000
principal amount of 10% convertible notes (the "$1,000,000 TradeWave Notes") and
a subsequent issuance of $400,000 principal amount of 10% convertible notes (the
"$400,000 TradeWave Notes") that were offered and sold to investors outside the
United States. The $1,000,000 TradeWave Notes and $400,000 TradeWave Notes were
converted into 1,270,375 shares (between June and August 1995) and 189,796
shares (in October 1995) of Common Stock, respectively. The conversion price for
both the $1,000,000 TradeWave Notes and the $400,000 TradeWave Notes was equal
to 60% of the average closing price for the Common Stock on The Nasdaq SmallCap
Market for the five business days immediately preceding the date of each
conversion.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations- Liquidity and Capital Resources."
RECENT DEVELOPMENTS
Purchase of Digital's Assets
On October 23, 1995, effective as of October 21, 1995, SunRiver Data
purchased from Digital certain assets (the "Digital Assets") relating to
Digital's General Display Terminals product lines sold under the "VT" and
"Dorio" brands, excluding the VT 400 Series (the "Digital Acquisition"). As a
result of the Digital Acquisition, based on published 1994 industry data, the
Company believes that SunRiver Data is the second largest manufacturer of
General Display Terminals in the world with an installed user base of more than
5,000,000 units.
The Digital Assets consisted principally of inventory, trade names,
trademarks and patents. Software and other intellectual property used by Digital
in its General Display Terminal business were simultaneously licensed to
SunRiver Data. No manufacturing facilities were included in the Digital Assets.
SunRiver Data has completed the transfer of all production of the VT and Dorio
product lines from Digital's facilities in the Far East to SunRiver Data's plant
in Hauppauge, New York and the transition from pilot to full production has been
completed. During the transfer period, Digital manufactured VT and Dorio
terminals for SunRiver Data for which SunRiver Data paid prices that the Company
and Digital agreed were equal to Digital's cost of manufacturing such terminals
plus 8%. See "Business-Manufacturing."
SunRiver Data is supplying Digital with VT General Display Terminals
pursuant to a four-year supply agreement. Although Digital's contracts with its
customers, distributors and resellers were not assigned to SunRiver Data,
SunRiver Data has been able, to date, to maintain substantially all of Digital's
prior relationships and arrangements with them. See "-Related Agreements With
Digital" and " Business- Sales and Marketing."
The purchase price of $18,697,693 paid for the Digital Assets included
inventory valued at approximately $7,482,000, after giving effect to an
adjustment reducing the purchase price by approximately $978,000 as a result of
the difference between the inventory Digital estimated would be transferred and
the inventory actually transferred to SunRiver Data at closing. In addition,
SunRiver Data is obligated to pay $347,093 for certain tooling and equipment to
be delivered by Digital by June 30, 1996. The price paid for Digital's inventory
was based on Digital's cost of manufacturing such inventory. The price paid, and
to be paid, for Digital's tooling and equipment is Digital's cost, net of
depreciation. Digital has paid the approximately $978,000 downward adjustment of
the purchase price.
Of the amount paid to Digital on the closing date, $14,476,795 was paid in
cash (before the approximately $978,000 downward adjustment of the purchase
price) out of the proceeds of a bank financing described under "-Financing For
the Digital Acquisition." $3,000,000 of the purchase price was paid by the
issuance of 793,389 shares of the Company's Common Stock, which was valued using
the $3- 25/32 per share closing price of the Common Stock on The Nasdaq SmallCap
Market on October 18, 1995. In the event that the closing price of the Common
Stock on The Nasdaq SmallCap Market on the date of this Prospectus is less than
$3-25/32 per share, the Company is obligated to issue to Digital up to an
additional 206,611 shares of registered Common Stock, promptly thereafter, equal
to the difference between (a) 3,000,000 divided by the greater of (i) such
closing price, not to exceed $3-25/32, and (ii) $3.00, and (b) 793,389. Assuming
the date of this Prospectus was May 29, 1996, when the closing price of the
Common Stock on The Nasdaq SmallCap Market was $5-7/8 per share, Digital would
be entitled to none of such 206,611 shares. The Offering includes the 793,389
shares issued to Digital and all of such 206,611 shares. Included in the
$18,697,693 purchase price is the value of the warrants issued to The Chase
Manhattan Bank, N.A. described below under "-Financing for the Digital
Acquisition."
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The Digital Acquisition has been accounted for as a purchase. The Company
recorded goodwill of approximately $10,778,000, which is the excess of the
purchase price and related costs over the fair value of net assets acquired.
This goodwill will be amortized by the Company over 10 years.
In addition to paying for the Digital Assets, SunRiver Data was required to
pay NCR $3,500,000 in cash as a part of the restructuring of obligations to NCR.
See "- Restructuring of Obligations to NCR" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Related Agreements with Digital
SunRiver Data and Digital entered into a Basic Order Agreement for Text
Terminals Products and Parts (the "Digital Supply Agreement"), whereby Digital
agreed to purchase from SunRiver Data at least 95% of Digital's worldwide
requirements for General Display Terminals and related parts for a four-year
period commencing October 23, 1995 and at least 80,000 General Display Terminals
during the first year of such agreement. The Company guaranteed all of SunRiver
Data's obligations under the Digital Supply Agreement. See
"Business-Manufacturing."
SunRiver Data and Digital also entered into (i) a Manufacturing Services
Agreement, pursuant to which Digital agreed to manufacture VT and Dorio General
Display Terminals until January 30, 1996 and modules (components of terminals)
until June 30, 1996, and (ii) a Maintenance Service Agreement pursuant to which
Digital agreed to provide, for four years, certain worldwide warranty and
post-warranty servicing on VT and Dorio terminals sold and designated for such
servicing by SunRiver Data. The pricing under these agreements was determined by
arms-length negotiations between the parties. See "Business- Manufacturing."
Financing for the Digital Acquisition
SunRiver Data obtained bank loans to pay the cash portion of the purchase
price of the Digital Assets from The Chase Manhattan Bank, N.A., acting for
itself and as agent for other participating banks ("Chase"), under a term loan
in the principal amount of $20,000,000 and a revolving line-of-credit providing
for revolving loans of up to $20,000,000, based upon lending formulas and
subject to sublimits and other terms, as are set forth in the loan documents.
SunRiver Data also used proceeds of the Chase Credit Line to pay all outstanding
indebtedness, including a $700,000 early termination fee, totaling approximately
$11,400,000, owed to Congress Financial Corporation ("Congress") under a
revolving line-of-credit incurred in connection with the SunRiver Data
Acquisition. In the quarter ended December 31, 1995, the Company recorded
nonrecurring charges of $282,000 for unamortized debt issuance costs relating to
the prepayment of the Congress debt facility and such $700,000 early termination
fee. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources."
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The Company guaranteed the obligations of SunRiver Data to Chase and
collateralized its guarantee with a pledge of all of the outstanding common
stock of SunRiver Acquisition Corp. SunRiver Acquisition Corp. also guaranteed
the obligations of SunRiver Data to Chase and collateralized its guarantee with
a pledge of all of the outstanding common stock of SunRiver Data (the "SunRiver
Data Common Stock"). SunRiver Group further secured SunRiver Data's obligations
to Chase by pledging 21,439,380 shares of the Company's Common Stock.
In addition, the Company issued to The Chase Manhattan Bank, N.A. a warrant
to purchase 1,000,000 shares of the Company's Common Stock, exercisable at
$3.6875 per share, subject to adjustment, at any time after October 20, 1996 and
prior to the close of business on October 19, 2000. Furthermore, in
consideration for (i) SunRiver Group's pledge of 21,439,380 shares of the
Company's Common Stock to Chase and (ii) SunRiver Group's pledge to NCR of
5,000,000 shares of the Company's Common Stock pursuant to the terms of the
Restructuring, described below, the Company expects to issue to SunRiver Group
warrants to purchase such number of shares of Common Stock at $3.875 per share,
subject to adjustment, as the Board of Directors of the Company determines is
appropriate after obtaining independent advice regarding the fairness of such
warrants.
Restructuring of Obligations to NCR
As a condition to the Chase Credit Line, SunRiver Data, SunRiver
Acquisition Corp. and SunRiver Group were required to restructure obligations to
NCR (the "Restructuring") which were incurred in December 1994 in connection
with the SunRiver Data Acquisition. See "Reorganization."
In the Restructuring, which became effective simultaneously with the
Digital Acquisition and the Chase Credit Line: (i) the Company paid NCR
$3,500,000 in cash to redeem a portion of the SunRiver Data Preferred Stock;
(ii) the Call Option was amended (the "Amended Call Option") to reduce its
exercise price to $3,554,692 and to change its expiration date to the earlier of
January 30, 1999 or the completion by SunRiver Data or any of its parent
companies of a public offering; (iii) the Put Option was amended (the "Amended
Put Option") to reduce its exercise price to $3,554,692 and to make it
exercisable on or after the expiration date of the Amended Call Option until
December 31, 1999; (iv) the Company issued to NCR a warrant to purchase 500,000
shares of the Company's Common Stock, exercisable at $3.875 per share, subject
to adjustment, at any time after October 20, 1996 and prior to the close of
business on October 20, 1998; (v) SunRiver Data and its parent companies agreed
to pay NCR $497,657 (the "Annual Payment Amount"), which is being accounted for
as a dividend on the SunRiver Data Preferred Stock and represents a 14% per
annum yield, on October 20, 1996 and each anniversary thereafter ("Annual
Payment Date"), until either the Amended Put Option or the Amended Call Option
has been exercised or canceled, each such payment to be made in cash, to the
extent permitted by the terms of the Chase Credit Line and, to the extent not so
permitted, the balance of the Annual Payment Amount must be paid by delivering
to NCR such number of registered shares of the Company's Common Stock which, if
sold on the applicable Annual Payment Date, would net such balance due; (vi) the
maturity date of the NCR Note was extended to January 31, 1999 and, if SunRiver
Acquisition Corp. makes a public offering of its securities, it must prepay the
NCR Note in an amount equal to the difference between the net proceeds of the
offering and the amount paid to NCR or any of its affiliates on redemption or
purchase by SunRiver Acquisition Corp. of the SunRiver Data Preferred Stock plus
the amount paid to Chase under the terms of the Chase Credit Line; (vii)
SunRiver Acquisition Corp.'s pledge to NCR of the SunRiver Data Common Stock was
canceled and the SunRiver Data Common Stock was pledged to Chase; (viii)
SunRiver Group's pledge to NCR of the Company's Common Stock was reduced to
5,000,000 shares of Common Stock and SunRiver Group pledged the remainder of its
shares of the Company's Common Stock to Chase. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
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Financing for the Restructuring
The cash payment of $3,500,000 made to NCR was paid by the Company from
proceeds of four financings.
In an offering completed October 12, 1995 pursuant to Regulation S ("Reg.
S") under the Securities Act of 1933, the Company received gross proceeds of
$750,000 by selling convertible non-interest bearing notes (the "$750,000
Note"). The $750,000 Note was converted in November 1995 into 359,691 shares of
Common Stock determined by dividing $750,000 by 70% of the average closing bid
price of the Common Stock for the five business days immediately preceding the
date of each conversion.
In Reg. S offerings completed October 20, 1995, the Company received gross
proceeds of $2,500,000 by selling convertible non-interest bearing notes (the
"$2,500,000 Notes"). The $2,500,000 Notes were converted on November 30, 1995
into 1,236,855 shares of Common Stock determined by dividing 2,500,000 by 70% of
the average closing bid price of the Common Stock for the five business days
immediately preceding each conversion.
In a Reg. S offering completed on October 30, 1995, the Company received
gross proceeds of $1,000,000 by selling 315,457 shares of Common Stock for $3.17
per share, a price equal to 87.5% of the closing price of the Common Stock on
October 27, 1995. On December 12, 1995, the Company issued to the purchaser an
additional 78,632 shares of Common Stock, equal to the difference between (a)
1,000,000 divided by 87.5% of the average closing bid price of the Common Stock
for the five business days immediately preceding the 41st day from issuance, and
(b) 315,457. The Company allocated the $1,000,000 proceeds to common stock, in
the amount of the total par value of the shares, and additional paid in capital
for the excess. Upon issuance of the additional shares, common stock was
increased by the total par value of the shares with a corresponding decrease in
paid-in-capital.
The Company issued 78,500 shares of Common Stock, which were valued at
$3.625 per share, and warrants to purchase 500,000 shares of Common Stock to
financial advisors in connection with the October 20, 1995 and October 30, 1995
Reg. S. offerings, described above. These warrants are exercisable for three
years at the market price of the Common Stock on the date of the warrants'
issuance (ranging from $3.625 to $3.78125 per share), and the holders have
registration rights with respect to the shares issuable upon exercise of these
warrants.
The Company borrowed $1,000,000 on October 20, 1995, that was repayable in
ten days, and issued to a financial advisor warrants to purchase 25,000 shares
of Common Stock at $3.875 per share and, otherwise having the same terms as the
warrants referred to in the preceding paragraph. This loan was repaid out of the
proceeds of the Reg. S offering completed October 30, 1995 and described above.
-17-
<PAGE>
Additional Financing
In an offering under Reg. S completed on January 5, 1996, the Company
received gross proceeds of $1,000,000 by selling 496,124 shares of Common Stock
for $2.02 per share, a price equal to 75% of the closing bid price of the Common
Stock on January 2, 1996. As permitted by their agreement with the Company, the
purchasers elected to adjust the $2.02 price per share to $1.68 per share, which
is 75% of the average closing bid price of the Common Stock during the five
business days immediately preceding such election. As a result of such
adjustment, an additional 98,119 shares of Common Stock were issued, bringing
the total to 594,243 shares. The Company allocated the $1,000,000 proceeds to
common stock, in the amount of the total par value of the shares, and additional
paid in capital for the excess. Upon issuance of the additional shares, common
stock was increased by the total par value of the shares with a corresponding
decrease in paid-in-capital. In connection with this offering, the Company
issued warrants, exercisable within three years, to financial advisors to
purchase 50,000 shares of Common Stock at an exercise price of $2.6875 per
share. Approximately $505,000 of the proceeds of this offering was used by
TradeWave for current expenses. The balance of the proceeds was used by the
Company to purchase, in a privately-negotiated transaction and at a price of
$1.80 per share (approximately 33% below market price), 275,000 shares of
restricted Common Stock owned by one of the Company's minority stockholders. The
purchase of these shares is being accounted for as treasury shares using the
cost method and the shares have been retired.
In Reg. S offerings commenced in January and completed in February 1996,
the Company received gross proceeds of $1,500,000 by selling convertible
non-interest bearing notes (the "$1,500,000 Notes") which allowed the holders to
convert the $1,500,000 Notes during the period beginning on the 41st day
following their issuance until March 10, 1997 into that number of shares of
Common Stock determined by dividing $1,500,000 by (i) 87-1/2% of the average
closing bid price for the Common Stock for the five business days immediately
preceding the conversion date ("Average Bid Price") if such price is less than
$3.15 per share; or (ii) seventy-five percent of the Average Bid Price if such
price is not less than $3.15 per share; however, the conversion price would be
no less than $1.60 per share nor more than $3.00 per share. The maximum number
of shares into which the $1,500,000 Notes were convertible was 937,500. As of
May 8, 1996, holders of all of the $1,500,000 Notes had converted their notes
into 783,313 shares of Common Stock at the average price of $1.91 per share. In
connection with this Reg. S offering, the Company issued warrants, exercisable
within three years, to financial advisors to purchase 150,000 shares of Common
Stock at an exercise price ranging from $2.41 to $2.6875 per share. $810,000 of
the net proceeds of this offering was used by the Company to purchase, in
privately-negotiated transactions and at a price of $1.80 per share
(approximately 33% below market price), 450,000 shares of restricted Common
Stock owned by one of the Company's minority stockholders. The purchase of these
shares is being accounted for as treasury shares using the cost method and the
shares have been retired. The remainder of the net proceeds of these offerings
was used by TradeWave for working capital.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders pursuant to this Prospectus.
The Company will satisfy the obligations of TradeWave to MCC of $400,000
through June 28, 1996 either by using Company Shares or, if circumstances
permit, selling Company Shares and using the proceeds to pay such obligations.
Assuming the $300,000 due to MCC is paid in Company Shares, based on its $5-7/8
closing price on The Nasdaq SmallCap Market on May 29, 1996, the Company would
be obligated to deliver 61,277 Company Shares to MCC of which 10,213 shares
would constitute the 20% premium payable to MCC in connection with such
delivery. The Company Shares may also be sold, and the proceeds used, to pay the
remainder of TradeWave's obligations to MCC; be issued to NCR or sold and the
proceeds used to pay the $497,657 Annual Payment Amount to NCR; be issued as
full or partial consideration for future acquisitions of, or investments in,
other businesses; or be sold to obtain additional working capital or funds for
other corporate purposes. See "Reorganization-TradeWave Acquisition" and "Recent
Developments-Restructuring of Obligations to NCR."
-18-
<PAGE>
DIVIDEND POLICY
The Company presently anticipates that all of its future earnings will be
retained for development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, restrictions on the payment of
dividends imposed by its lenders, future earnings, capital requirements, the
general financial condition of the Company, and general business conditions. The
Chase Credit Line prevents the Company from declaring any dividends on the
Company's Common Stock and any other class of capital stock of the Company
except that the Company has received a waiver from Chase regarding the Annual
Payment Amount of $497,657 to NCR as a dividend on the SunRiver Data Preferred
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on The Nasdaq SmallCap Market under
the symbol SRVC (formerly ALQT). As of May 29, 1996, there were approximately
289 holders of record of the Company's Common Stock. The following table sets
forth the high and low last sale prices for the Company's Common Stock, as
reported by NASDAQ, for the periods indicated.
Year Ended December 31, 1994: High Low
---- ---
First quarter...................... $4 1/4 $1 5/8
Second quarter..................... $4 3/8 $1 7/8
Third quarter...................... $3 1/4 $2 1/16
Fourth quarter..................... $4 $1 7/16
Year Ended December 31, 1995:
First quarter...................... $2 3/4 $1 1/8
Second quarter..................... $2 1/6 $1 3/16
Third quarter...................... $3 15/16 $1 1/16
Fourth quarter..................... $3 11/16 $2 1/2
Year Ending December 31, 1996:
First quarter...................... $3 $2 1/4
The last sale price of the Company's Common Stock on May 29, 1996 was $5-7/8.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the periods and the dates indicated. The statement of operations
data for the years ended December 31, 1995, 1994 and 1993 and the balance sheet
data as of December 31, 1995 and 1994 set forth below have been derived from the
financial statements of the Company, which have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants, as indicated in their
report included elsewhere herein. The selected financial data should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
-19-
<PAGE>
Financial Statements of the Company and related Notes and other financial
information included elsewhere herein.
Consolidated Statement of Operations Data:
(000's omitted)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
---------------------------------------------------- -----------
(unaudited)
1991 1992 1993 1994(1) 1995(1) 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $2,240 $2,584 $2,814 $8,344 $96,122 $19,166 $38,407
Gross margin 638 1,093 1,177 3,454 26,738 5,551 8,741
Operating expenses:
Sales and marketing 589 278 321 1,092 8,347 1,758 2,525
General and administrative 604 248 409 992 7,314 1,217 2,298
Research and development 502 291 493 990 7,444 1,326 1,863
--- --- --- --- ----- ----- -----
Total operating expenses 1,695 817 1,223 3,074 23,105 4,302 6,687
----- --- ----- ----- ------ ----- -----
Operating income (loss) (1,057) 276 (46) 380 3,634 1,250 2,054
Interest expense (75) (41) (35) (97) (1,968) 304 1,073
Other 70 7 11 (60) 572 33 210
------ ----- ----- ------ ------ ----- -----
Income (loss) from continuing
operations (1,062) 242 (70) 223 2,238 913 771
Income tax expense - - - (185) (187) 348 410
Income from discontinued operations - - - - 1,149 1,240 -
Gain (loss) on extinguishment of debt - 60 - - (589) - -
------ ----- ----- ------ ------ ------ -----
Net income (loss) $(1,062) $302 $(70) $38 $2,610 $1,805 $361
------ ----- ----- ------ ------ ------ -----
------ ----- ----- ------ ------ ------ -----
Earnings (loss) available for common
shareholders $(1,062) $302 $(70) $(26) $168 $1,609 $237
------ ----- ----- ------ ------ ------ -----
------ ----- ----- ------ ------ ------ -----
Earnings (loss) per common share $ (0.04) $0.01 $(0.00) $0.00 $0.00 $ 0.04 $ 0.00
------ ----- ----- ------ ------ ------ -----
------ ----- ----- ------ ------ ------ -----
Consolidated Balance Sheet Data:
(000's omitted)
Working capital $269 $338 $(63) $6,764 $15,429 $10,074 $14,720
Total assets 799 902 940 37,171 76,280 41,889 79,911
Revolving credit loan - - - 4,655 8,000 3,335 9,500
Long-term obligations, excluding
mandatorily redeemable preferred stock 123 134 119 16,287 25,670 16,664 23,885
Mandatorily redeemable preferred stock - - - 5,536 3,555 5,732 3,555
------ ----- ----- ------ ------ ------ -----
Total long-term obligations 123 134 119 21,823 29,225 22,396 27,440
Stockholders' equity (deficit) (174) 113 39 2,386 12,837 5,267 14,032
</TABLE>
- - -----------------------------
(1) During the period beginning in December 1994 and ending in October
1995, the Company made acquisitions and dispositions which resulted in a total
change in the Company's business. See "Reorganization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
-20-
<PAGE>
SUNRIVER CORPORATION AND SELECTED DIGITAL TEXT TERMINAL PRODUCTS
PRO FORMA FINANCIAL STATEMENTS
The following pro forma combined condensed financial statements reflect the
Digital Acquisition, in which the Company acquired selected text terminal
products, sold under the VT and Dorio brand (excluding the VT 400 Series), of
the video business segment of the Components and Peripherals Business Unit of
Digital (the "Selected Digital Text Terminal Products"). The Digital Acquisition
has been accounted for using the purchase method of accounting.
The unaudited pro forma combined condensed financial statements combine the
Company's statement of operations and the statement of revenue and direct
operating expenses of the Selected Digital Text Terminal Products as if the
acquisition had occurred on January 1, 1995. The pro forma statements do not
purport to be indicative of results of operations had the respective
acquisitions occurred at the beginning of the period or of the results which may
occur in the future. Reference is made to the audited consolidated balance sheet
of SunRiver Corporation as of December 31, 1995 at F-3 of this Prospectus as the
Digital Acquisition is already reflected in such balance sheet.
The statement of operations of the Company and the statement of revenue and
direct operating expenses of the Selected Digital Text Terminal Products have
been derived from their respective historical financial statements. The
statement of revenue and direct operating expenses for Selected Digital Text
Terminal Products for the period ended October 21, 1995 is unaudited. The pro
forma financial statements should be read in conjunction with the accompanying
notes thereto and with the historical financial statements and related notes
thereto of the Company and Selected Digital Text Terminal Products.
As a result of the Digital Acquisition, the Company has expanded its
manufacturing capacity by reorganizing its current manufacturing operations,
investing in additional capital equipment and hiring additional personnel. It
also expanded its sales and marketing capacity by increasing staffing, and by
increasing its marketing, sales promotion and advertising activities. Only
incremental indirect costs are necessary to facilitate this expansion and the
increased volume. A European sales presence is being organized through an
affiliate in The Netherlands. Allocated costs within the historical Selected
Digital Text Terminal Products statement of revenue and direct operating
expenses have been eliminated in the pro forma adjustments and estimated
incremental indirect costs have been added. Because Digital purchases
subassemblies and components in greater quantities than the Company, the Company
believes that Digital is able to negotiate more favorable purchase terms than
the Company will be able to; but by manufacturing and shipping from its New York
facility, the Company will enjoy reduced warehousing costs. These differences
have not been reflected in the pro forma adjustments but are not expected to
have a material impact on costs of goods sold.
-21-
<PAGE>
SunRiver Corporation and Selected Digital Text Terminal Products
Unaudited Pro Forma Combined Condensed Income Statement
For the Year Ended December 31, 1995
(000's)
<TABLE>
<CAPTION>
SunRiver Selected Pro Forma & Pro Forma
Corporation Digital Terminal Purchase Other Total
Products Adjustments Adjustments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $96,122 $ 54,230 $ 150,352
Cost of revenue 69,384 42,861 F 112,245
------ ------ ------- ------ ---------
Gross margin 26,738 11,369 38,107
------ ------ ---------
Operating expenses:
Research and development 7,445 1,481 F $2,007 A 10,933
Selling, general and administrative 15,660 $3,123 C 2,491 B 21,274
------ ------ -------- ------ ---------
Total operating expenses 23,105 1,481 F 3,123 4,498 32,207
------ ------ -------- ------ ---------
Income (loss) from operations 3,633 9,888 F (3,123) (4,498) 5,900
Other expense (1,396) (2,897) D (4,293)
Income tax expense (187) (156) E (643)
------ ------ -------- ------ ---------
Income (loss) from continuing 2,050 9,888 F (3,123) (7,851) 964
operations
Dividend on preferred stock (93) (405) G (498)
Accretion to preferred stock (681) 681 G
------ ------ -------- ------ ---------
Income available from continuing operations $ 1,276 $ 9,888 F $(3,123) $(7,575) $ 466
------ ------ -------- ------ ---------
------ ------ -------- ------ ---------
for common shareholders
Income per share $ 0.03 $ 0.01
Shares used in computing per share 43,656 46,659
amounts
</TABLE>
-22-
<PAGE>
SunRiver Corporation and Selected Digital Text Terminal Products
Unaudited Pro Forma Combined Condensed Income Statement
For the Year Ended December 31, 1995
(000's)
The unaudited pro forma combined condensed income statement reflects the impact
of the following adjustments:
A. Record research and development expense incremental to the Digital
product line and composed primarily of staffing increases.
B. Record incremental general and administrative expenses to the Digital
product line for legal, accounting and insurance. Sales expense
consists of increased staffing of a European office as well as
increases in marketing development funds and advertising. Selling,
general and administrative expenses are expected to increase as the
percentage of non-Digital revenue increases.
C. Record depreciation and amortization on Digital's acquired assets.
D. Record interest expense, at a rate of approximately 8.7%, on bank debt
arising from the acquisition ($2,847,000), reduced by interest
eliminated on debt retired in connection with the acquisition
($411,000). Also includes amortization of debt issuance costs related
to the acquisition ($461,000).
E. Record tax expense on combined earnings (assumed 40% rate).
F. Excludes allocated research and development and Selling, general and
administrative expenses that are not directly attributable to the
product line sold. Includes allocated freight, duty and order
fulfillment costs.
G. Record new terms of restructured terms of mandatorily redeemable
preferred stock of subsidiary.
Note: The July 1, 1995 year-end fiscal results of Selected Text Terminal
Products have been converted to calendar year-end results based on
quarterly data provided by Digital.
The historical SunRiver Corporation condensed income statement excludes a
non-recurring charge to retained earnings of approximately $1,668,000 in
connection with the restructuring of the mandatorily redeemable preferred
stock.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
For accounting purposes the SunRiver Group Acquisition has been treated as
a recapitalization of the Company with SunRiver Group as the acquirer and with
carryover basis of its assets and liabilities. Accordingly, the historical
financial information presented herein, prior to the SunRiver Data Acquisition,
are those of SunRiver Group. Financial information presented for periods ended
on December 31, 1994 include the consolidated operations of SunRiver Group for
all of 1994 and of SunRiver Data for the period from December 9, 1994, the
effective date of the SunRiver Data Acquisition, through December 31, 1994. See
"Reorganization."
Prior to the SunRiver Group and SunRiver Data Acquisitions, All-Quotes,
Inc. had not realized a profit since its inception in 1988, and had accumulated
losses exceeding $5,800,000. At September 30, 1994, on a pro forma basis giving
effect to the sale of the Quote Business, the Company had current assets
(including Global Proceeds of $1,700,000, after deducting $100,000 of estimated
taxes and expenses of the sale of the Quote Business) of $2,218,654 and total
assets of $4,192,251, current liabilities of $652,646, long term debt of
$284,030, and stockholders' equity of $3,240,174. In addition to current assets,
total assets consisted of the Company's investment in the AmCan Diamond Mining
properties and equipment relating thereto. To the extent such assets had not
been expended for operating expenses and such liabilities had not been paid by
December 9, 1994, they were included in the assets assigned by the Company to
Capital and Capital Assumed Liabilities. The Company has been advised by Capital
that the remaining current assets of the Company, approximately $519,000 at
September 30, 1994, were expended for operating expenses and other obligations
of Capital. As of March 31, 1996, all but approximately $165,000 of the Global
Proceeds had been paid to satisfy claims of creditors of Capital and to pay the
Capital Assumed Liabilities.
The following comparison of summary data presents the consolidated pro
forma results of operations for the year ended December 31, 1994 as if the
SunRiver Data Acquisition had occurred on January 1, 1994 and reflects the
impact of certain adjustments such as: amortization of goodwill, increased
interest expense, increased depreciation expense and decreased allocated
corporate overhead charges. It does not purport to be indicative of what would
have occurred had the acquisition occurred as of January 1, 1994, or of the
results which may occur in the future. The pro forma results exclude the results
of operations for TradeWave for the period prior to its acquisition in April
1995. The results of operations for the three months ended March 31, 1995
exclude the results of operations of TradeWave and the Digital Acquisition:
-24-
<PAGE>
Quarter Ended March 31, Year Ended December 31,
------------------------- -------------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited) (unaudited) (pro forma)
Total revenues $38,407,167 $19,166,497 $96,122,379 $80,091,206
Net income/(loss) $360,898 $1,805,481 $2,609,927 $(4,281,600)
Earnings/(loss) available for
common shareholders $236,725 $1,609,465 $167,739 $(5,220,406)
Earnings/(loss) per share $.00 $.04 $.00 $(.18)
Results of Operations
As used in this "Results of Operations" section, the term "pro forma"
refers to the results of operations that include the effects of the SunRiver
Data Acquisition but exclude the effects of the TradeWave and Digital
Acquisitions. The Company is able to discuss the pro forma results of operations
taking into account the SunRiver Data Acquisition, because key management
personnel of ADDS remained with the Company following the SunRiver Data
Acquisition. The Company is not able to discuss pro forma results of operations
which take into account the Digital Acquisition because the requisite management
personnel did not become employees of SunRiver Data. See SunRiver Corporation
and Selected Digital Text Terminal Products Financial Statements.
Quarters Ended March 31, 1996 and 1995
The following comparison of the Company's results of operations for the
quarters ended March 31, 1996 and March 31, 1995 should be read in conjunction
with "-Years Ended December 31, 1995 and 1994."
Total revenues: Revenue for the three months ended March 31, 1996 was
---------------
approximately $38,400,000, as compared to approximately $19,200,000 for the
three months ended March 31, 1995.
Revenue from the Company's General Display Terminals increased nearly
four-fold from approximately $7,700,000 in the first quarter of 1995 to
approximately $29,800,000 in the first quarter of 1996. Offsetting this increase
is a decrease in sales to NCR caused by the break-up of AT&T and the resulting
re-organization of NCR.
Sales of the Company's Network Graphics Displays for the three months ended
March 31, 1996 decreased 16.4% to approximately $4,100,000 as compared to sales
of approximately $4,900,000 for the three months ended March 31, 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 three months ended March 31, 1996 was
approximately $735,000, of which approximately $354,000 was derived from
TradeWave's subcontracting work under a contract with the U.S. Department of
Defense which is scheduled to expire in September 1996. The balance of
approximately $381,000 of revenue was derived from licensing and commercial
contract work.
-25-
<PAGE>
The Company formed the GAI Partnership in May 1995. The Company believes
that, in the declining Pick market, it is beneficial to create a more
significant market presence by partnering with GAI. As a result, the GAI
Partnership is one of the largest providers in the Pick marketplace. The GAI
Partnership has allowed the Company to reduce its active participation in the
Pick systems business in order to devote more time to its core businesses. The
Company recorded revenues from the GAI Partnership and post sale support of
approximately $1,200,000 for the first quarter 1996 versus approximately
$4,900,000 for the comparable period in 1995. The contribution of Pick related
revenues to gross margin has increased approximately 7% from 1995 to 1996.
NCR was the most significant customer for the Company's products,
accounting for 17%, or approximately $6,500,000, of revenue for the three months
ended March 31, 1996. Digital accounted for 10% of the Company's revenue for the
first quarter 1996.
Gross margin: Gross margin for the three months ended March 31, 1996 was
------------- approximately $8,700,000 (22.8% of revenue), as compared to
gross margin for the three months ended March 31, 1995 of approximately
$5,600,000 (29% of revenue). The decline in gross margin as a percentage of
revenue in 1996, as compared to 1995, stems primarily from a shift in revenue
mix among the Company's higher margin Pick systems and post-sale support
business and the Company's lower margin Network Graphics Displays and General
Display Terminal products.
Gross profit margins in future periods may be affected by several factors
such as sales volume, shifts in product mix, pricing strategies and absorption
of manufacturing costs.
Sales and marketing expenses: Sales and marketing expenses increased
-------------------------------- approximately 44% ($800,000) due to the
TradeWave Acquisition, as well as increases in advertising and public relations
activities to develop channel partners and expand market presence. In addition,
the Company opened a sales and marketing office in Europe. This increase was
offset partially by the release of bad debt expense of approximately $430,000 in
connection with the collection of doubtful accounts which had been previously
fully reserved.
General and administrative expenses: General and administrative expenses
------------------------------------ increased approximately $1,000,000, to
$2,300,000 (6% of revenue) for the quarter ended March 31, 1996 from
approximately $1,200,000 (6.3% of revenue) for the quarter ended March 31, 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 expenses: Research and development expenses for
---------------------------------- the first quarter of 1996 increased
approximately $500,000 over 1995. R & D expenses were approximately $1,900,000
and $1,300,000 for the three months ended March 31, 1996 and 1995, respectively.
Research and development efforts are being expended on a line of network and
Internet access computers and to provide Internet products and services based on
a secure technology platform that can be customized and packaged together with
specific modules to meet customer requirements.
Other expense: Interest expense (net of interest income) amounted to
-------------- approximately $1,000,000 for the three months ended March
31, 1996 compared to approximately $300,000 for 1995. The increase is wholly
attributable to the Digital Acquisition, financed by the Company through Chase,
which financing was composed of both a term and revolving credit line. See
"-Liquidity and Capital Resources."
-26-
<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 March 31, 1996, the effective tax rate was 53.2% due to the
tax treatment of the amortization of goodwill associated with the Digital
Acquisition. The effective tax rate for the first quarter, 1995, was 38%. Net
income: For the three months ended March 31, 1996, net income was approximately
$400,000 (1% of revenue), compared to net income of approximately $1,800,000 for
the comparable period, 1995. Operating income increased 64.4% from approximately
$1,300,000 for the quarter ended March 31, 1995, to approximately $2,000,000 for
the quarter ended March 31, 1996.
Earnings available for common shareholders: Earnings available for common
------------------------------------------- shareholders declined from
approximately $1,600,000 ($0.04 per share) for the three months ended March 31,
1995, to approximately $200,000 ($0.0048 per share) for the three months ended
March 31, 1996. For the quarter ended March 31, 1995, earnings available for
common shareholders included accretion, in the amount of $200,000 on mandatorily
redeemable preferred stock of the Company held by NCR. In connection with the
Digital Acquisition, NCR agreed to refinance the preferred stock whereby the
Company agreed to pay NCR approximately $500,000 per annum, which is being
accounted for as a dividend on the preferred stock. For the quarter ended March
31, 1996, earnings available for common shareholders included a dividend on the
preferred stock of approximately $100,000.
Charges Made in Quarter Ended December 31, 1995
The Company recorded nonrecurring charges of approximately $2,382,000 in
the quarter ended December 31, 1995, as follows:
(i) $ 1,225,000 relating to TradeWave's acquisition of in-process
technology from MCC;
(ii) $982,000 relating to the prepayment of the Congress debt
facility using the Chase Credit Line consisting of a $700,000
early termination fee and $282,000 of unamortized debt issuance
costs; and
(iii) $175,000 for a portion of the costs relating to the
Offering.
Years Ended December 31, 1995 and 1994-
Total revenues: Revenue for the year ended December 31, 1995 were
--------------- $96,122,379, as compared to $8,343,666 for the year ended
December 31, 1994. The increase is wholly attributable to the acquisition of
SunRiver Data ($86,613,431) and TradeWave ($1,165,282). On a pro forma basis,
revenue increased approximately 20% for the year ended December 31, 1995,
compared to 1994. Pro forma revenue for the year ended December 31, 1994 were
approximately $80,091,000.
Revenue from the Company's Network Graphics Displays for the year ended
December 31, 1995 increased $11,400,000 over pro forma revenue for the year
ended December 31, 1994. Substantially, all of these revenues were from sales to
NCR and represent the roll-out of the Company's new "Chameleon" product. The
Company believes that sales of Unix-based Network Graphics Displays will decline
substantially in the future because of the probability of a market trend toward
NT-based solutions. Additionally, revenue from the Company's General Display
Terminals increased $14,500,000, or 44.3%, for the year ended December 31, 1995
over the pro forma revenue for the year ended December 31, 1994 because the
Company began shipping General Display Terminals to IBM, a new customer, and
also began shipping VT and Dorio General Display Terminals. The Company expects
to substantially increase revenue from General Display Terminals as it ramps up
VT and Dorio production during the first half of 1996; the Company believes that
this increase and increases in revenue from sales of NT-based Network Graphics
Displays will offset the declines in revenue from sales of Unix-based Network
Graphics Displays.
-27-
<PAGE>
TradeWave revenue for the year ended December 31, 1995 were $1,165,282, of
which $725,945 was derived from TradeWave's subcontracting work under a contract
with the U.S. Department of Defense which is scheduled to expire in September
1996. The balance of $439,336 of revenue was derived from licensing and
commercial contract work. TradeWave's goal is to leverage its Internet expertise
to provide fully integrated, Internet-based, electronic solutions that enable
businesses to communicate and conduct electronic commerce over the Internet with
their trading partners and customers. See "Business--Products and Services."
Revenue from the Company's Pick-based computer systems declined
approximately $6,000,000 from approximately $10,500,000 to approximately
$4,500,000 for the years ended December 31, 1994 and 1995. The decline was
caused by significant industry-wide decreases in the average selling price of
computer hardware, particularly PC-based systems, as well as a movement in the
Pick market away from proprietary operating systems towards more "open"
computing environments. Post support revenues were adversely affected due to the
competitive requirements of offering increased warranty periods, up from one to
three years, and due to the decline in Pick-based hardware unit sales.
In response to the developments in the Pick market, the Company formed the
GAI Partnership. The Company believes that, in the declining Pick market, it is
beneficial to create a more significant market presence by partnering with GAI.
As a result, the GAI Partnership is one of the largest providers in the Pick
marketplace. The GAI Partnership has allowed the Company to reduce its active
participation in the Pick systems business in order to devote more time to its
core businesses. The Company recorded revenues from the GAI Partnership of
approximately $1,400,000 in 1995.
In response to a trend, that began several years ago, of industry-wide
declines in unit sales of General Display Terminals and average selling prices
per unit (which stabilized in 1995), the Company has been increasing its General
Display Terminals market share and either maintaining or increasing its General
Display Terminals margins by purchasing the Digital Assets and by promoting the
quality of its terminals and the flexibility of its just-in-time manufacturing
capabilities. The Company also positioned its MultiConsole Terminals as low-cost
alternatives to serial character terminals in multi-user, microcomputer and
personal computer environments emphasizing transaction-oriented processing. The
Company is developing a line of network access computers which offer easy and
cost-effective access to current Unix-based and emerging NT- based computing
environments. This product line will initially be based on SunRiver Data's
Network Graphics Displays technology. In addition, TradeWave recently introduced
a suite of products which enables companies to conduct secure, private
communications, internally and with business partners. See "Business- Products
and Services-Business of TradeWave."
The Company's strategy in increasing its share of market where the product
and market are mature is based upon its belief that there will be a continuing
substantial demand for General Display Terminals, in part because of enhanced
performance, and additional features, including MS Windows NT and Internet
support, that allow General Display Terminals to compete favorably, in terms of
price and performance, with low-cost personal computers. To this end, the
Company will leverage its manufacturing expertise and distribution networks
while research and development activities within SunRiver Data are shifted to
software and hardware development that will deliver Windows-based applications
to the desktop.
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<PAGE>
NCR was the most significant customer for the Company's products,
accounting for 41.2% of revenue for the year ended December 31, 1995. Sales to
NCR grew approximately $4,100,000, from $35,500,000 to $39,600,000, for the year
ended December 31, 1994 and 1995 respectively. A substantial portion of 1995
product sales to NCR are not expected to reach a comparable level in 1996
because they were of the Company's "Chameleon" Network Graphics Displays used by
NCR in specific projects completed during the first quarter of 1996. Although
NCR is contractually committed to purchase 90% of its terminal requirements from
the Company through December 9, 1999, it may under certain conditions cancel its
agreement without compensation to the Company. Digital is expected to be the
Company's most significant customer in 1996. While Digital is contractually
committed to purchase 95% of its terminal requirements from the Company through
October 23, 1999, it may terminate the agreement for cause without compensation
to the Company. The loss of NCR or Digital as a customer would have a material
adverse effect on the Company's results of operations and liquidity. Sales to
IBM represented 9.7% and 19.8%, respectively, of the Company's total revenue and
General Display Terminal revenue for 1995. The addition of IBM as a customer and
the acquisition of the VT and Dorio product lines are diversifying a customer
base previously dominated by NCR.
Based on published 1994 industry data, the Company believes it is the
second largest manufacturer of General Display Terminals in the world and, as a
result, the Company believes it has a competitive advantage over smaller
manufacturers with respect to large customers such as NCR, Digital and IBM. In
addition, the Company believes that SunRiver Data's focus on quality gives it a
competitive advantage over competitors that focus more on volume.
Services revenue, which is principally from maintenance of the Company's
Pick-based systems and depot repair of the Company's desktop products, declined
21%, or approximately $3,600,000 on a pro forma basis, from approximately
$16,800,000 to approximately $13,200,000. Despite the increases in certain
warranty periods during which services are free, post sale support revenue of
desktop products did not decrease because the Company increased service charges
and serviced terminals manufactured by others. Maintenance revenues for
Pick-based systems declined due to the increase in the warranty period but also
due to the movement of the installed base to the GAI Partnership.
Gross margin. Gross margin for the year ended December 31, 1995 was
-------------
$26,738,138 (27.8% of revenue), as compared to gross margin for the year ended
December 31, 1994 of $3,454,080 (41.4% of revenue). On a pro forma basis, gross
margin for the year ended December 31, 1994 was approximately $22,851,650 (28.5%
of revenue), exclusive of inventory reserve provisions of approximately
$4,046,000 (4.0% of revenue). A substantial portion of the 1994 inventory
provisions resulted from a revision in the formula to estimate inventory
utilization. The 1994 gross margin of 41.4% of revenue excluded the results of
operations of ADDS prior to December 9, 1994 and included the full year of
revenue of the Company's high margin MultiConsole Terminals. The inventory
reserve provision in 1995 was $99,000, which is more representative of the
annual provision requirement. The decline in gross margin in 1995, as compared
to pro forma gross margin for 1994, stems primarily from a shift in revenue mix
among the Company's higher margin Pick systems and post-sale support business
and the Company's lower margin Network Graphics Displays and General Display
Terminal products. In a continuing effort to maintain and improve margins,
management has focused on quality, flexibility, and product cost reductions,
thereby increasing product margins over prior years in an industry otherwise
characterized by commodity pricing. The acquisition from Digital of the VT and
Dorio General Display Terminal products will further enhance margins as (i)
sales of General Display Terminals are expected to increase substantially and,
accordingly, the Company will more fully utilize its production capacity, (ii)
it increases the Company's ability to advantage volume purchase discounts, and
(iii) it significantly expands the Company's distribution network and global
reach.
-29-
<PAGE>
From time-to-time margins are adversely affected by industry shortages of
key components. The Company emphasizes product and cost reductions in its
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices that are
available. See "-Asset Management."
In connection with the transitioning of manufacturing of the VT and Dorio
products to SunRiver Data, the Company is experiencing a shortage of a custom
component required to manufacture a key model of the VT and Dorio products. The
Company believes this shortage will shift sales of between $2.5 million to $3.5
million of these products from the second to the third and fourth quarters of
1996. To ameliorate the impact of this shift, the Company believes it will
satisfy a portion of the demand with an alternative product.
Operating expenses. For the year ended December 31, 1995, operating
-------------------
expenses were $23,104,629 (24.0% of revenue), including expenses of $4,257,834
for TradeWave, compared to pro forma expenses of approximately $21,746,382
(27.2% of revenue) for 1994. See "--Years ended December 31, 1994 and 1993 -
Operating Expenses" for an explanation of the decrease.
Pro forma sales and marketing and research and development expenses
declined both nominally ($411,000 and $2,206,000 respectively) and as a percent
of sales for 1995 compared to 1994.
In April 1995, the Company allocated substantially all of the $1,300,000
purchase price of the TradeWave Technology (inclusive of capitalized costs of
approximately $300,000 directly related to the TradeWave Acquisition) to
purchased intellectual property. This allocation was based upon the belief that
the web browser and directory technology included in the TradeWave Technology
were ready to be commercialized profitably. Subsequently in 1995, management
recognized that sales practices of its Internet competitors of providing
Internet browser software free of charge and advertising space in Internet
directories free or for a nominal charge had impaired the revenue potential of
this technology. Nevertheless, this technology is considered a valuable
component of TradeWave's Virtual Private Internet products. In October 1995,
TradeWave developed a new strategic plan, which de-emphasized the web browser
and directory services technology included in the TradeWave Technology and
instead emphasized the Company's Virtual Private Internet solution which
integrates applications, information servers, directory services, browser
software and security. Based on this revised strategic plan, the Company
recognized that no significant revenues would result until development of the
integrated Virtual Private Internet solution was completed and released for
commercialization. Accordingly, in the quarter ended December 31, 1995, the
Company recognized a $1,225,309 million charge associated with in-process
research and development.
General and administrative expenses increased, on a pro forma basis,
approximately $4,000,000, to $7,300,000 (7.6% of revenue) for the period ended
December 31, 1995 from $3,338,502 for the period ended December 31, 1994. The
increase stems from expenses associated with TradeWave ($976,724) as well as
$386,061 of amortization of goodwill associated with the Company's acquisition
of TradeWave, SunRiver Data and the VT and Dorio product lines. Additionally,
the 1994 expense excludes approximately $2,200,000 of allocated general and
administrative expenses from NCR relating to pension and post- retirement
benefits.
Management expects marketing and corporate communication expenses to
increase in succeeding periods as the Company undertakes aggressive advertising
and public relations activities to develop channel partners and expand its
market presence. Marketing and sales expenses are also expected to increase (but
decline as a percent of revenue) as the Company absorbs the General Display
Terminal product lines purchased from Digital. The Company is expanding its
European sales presence and its marketing development programs to support such
absorption. See "Business - Sales and Marketing".
-30-
<PAGE>
Research and development expenses within SunRiver Data are shifting to
software and hardware development that will deliver user-friendly Windows-based
applications to the desktop while maintaining current cost and administrative
benefits of the shared resource multi-user computing model. Research and
development efforts are also being expended on a line of network and Internet
access computers. Within TradeWave, development efforts are focusing on
providing Internet products and services based on a common technology platform
that can be customized and packaged together with specific modules to meet
customer requirements.
Other expense. Interest expense (net of interest income) amounted to
--------------
$1,967,432 for the year ended December 31, 1995 compared to $96,996 for 1994.
The acquisition of SunRiver Data was, in part, financed by the Company's
issuance of the NCR Note, which bears interest at 8% per annum. In addition, the
Company financed its working capital requirements from December 9, 1994 through
October 23, 1995 under a credit line which required payment of interest of 2%
over the prime rate. See "-Liquidity and Capital Resources."
Income tax expense. During the fourth quarter of 1995, the Company recorded
------------------
a reversal of a deferred tax valuation allowance resulting in a reduction in tax
expense of approximately $1,100,000. This reversal was based on management's
assessment that it was more likely than not that the deferred tax assets would
be realized through future taxable earnings or alternative tax strategies.
Income from discontinued operations. For the year ended December 31, 1995
------------------------------------
the Company recorded a loss of $223,442 relating to its investment in AmCan and
realized a gain of $1,372,239 from the sale, completed January 9, 1995, of the
Quote Business.
Extraordinary loss on early extinguishment of debt. During October 1995 the
--------------------------------------------------
Company incurred expenses of approximately $589,000 (net of a tax benefit of
approximately $393,000), in connection with the financing for the Digital
Acquisition, of an early termination fee under the Company's previous revolving
line-of-credit and related costs that had been capitalized when such
line-of-credit was originally obtained.
Net income. For the year ended December 31, 1995, net income was $2,609,927
----------
(2.7% of revenue), compared to net income of $37,618 for the year ended December
31, 1994. Operating income, excluding the non-recurring charge for in-process
technology, for the year ended December 31, 1995 was $4,858,818 (5.1% of
revenue) as compared to a pro forma loss for the year ended December 31, 1994 of
$2,940,732. Income from continuing operations for the year ended December 31,
1995 was $2,050,307. On a pro forma basis, the net income increased
approximately $6,892,000 for fiscal year 1995 versus a pro forma net loss of
approximately $4,282,000 for the year ended December 31, 1994.
Earnings available for common shareholders. Earnings available for common
-------------------------------------------
shareholders increased from a loss of $26,222 for the year ended December 31,
1994 to income of $167,739 for the year ended December 31, 1995. For the year
ended December 31, 1994, earnings available for common shareholders included
accretion in the amount of $63,840 on mandatorily redeemable preferred stock
held by NCR. In connection with the Digital Acquisition, NCR agreed to refinance
the preferred stock whereby the Company agreed to pay NCR $497,657 per annum,
and which is being accounted for as a dividend on the preferred stock. For the
year ended December 31, 1995 earnings available for common shareholders included
a dividend on the preferred stock of $93,130 and accretion to preferred stock of
$680,803.
-31-
<PAGE>
Years ended December 31, 1994 and 1993
Total revenue: Revenue for the year ended December 31, 1994 were $8,343,666
-------------
representing a net increase of $5,529,189 from $2,814,477 for the year ended
December 31, 1993. Most of this increase was due to the acquisition of SunRiver
Data. To a lesser extent, revenue was augmented by increased sales of
MultiConsole Terminals. The increase in MultiConsole Terminal sales was a result
of increased marketing and promotional activities.
On an unaudited pro forma basis, revenue declined 10.5% from $89,516,293 in
1993 to $80,091,206 in 1994. The reduction was due substantially to a revenue
decline of approximately $7,500,000 in sales of Mentor Systems business
(described under "Business-Products and Services") as well as a reduction of
approximately $1,200,000 in associated post-support activity. The decline
stemmed from significant industry- wide decreases in the average selling price
of computer hardware, particularly PC-based systems, as well as a movement in
the Pick market away from proprietary operating systems towards more "open"
computing environments. In 1994, the Company's key European VAR introduced its
own product, further eroding market share. Maintenance revenues declined both
due to the decrease in Mentor System hardware sales and the increase in the
standard warranty period from one to three years.
Gross margin: Gross margin increased by $2,277,193 to $3,454,080 (41.4% of
------------
revenue) for the year ended December 31, 1994 from $1,176,887 (41.8% of revenue)
for the year ended December 31, 1993. Most of this increase was due to the
acquisition of SunRiver Data.
On a pro forma basis, gross margin declined 3.4% from $19,472,406 in 1993
to $18,805,650 in 1994. As a percent of revenue, gross margin improved to 23.5%
in 1994 from 21.8% in 1993, due substantially to price increase-related margin
improvement in the Company's professional services business, as well as the
introduction of the lower cost "Chameleon" Network Graphics Displays. Offsetting
decreases in gross margins resulted from increases in inventory reserves in 1993
of $3,062,968 and $3,977,578 in 1994, the majority of which related to Network
Graphics Displays and a decline in revenues from the Company's higher margin
Mentor Systems. See "- Asset Management."
Operating expenses: Operating expenses declined (on a pro forma basis)
-------------------
26.1% or $7,666,622 from $29,413,004 (32.9% of revenue) to $21,746,382 (27.2% of
revenue) for the years ended 1993 and 1994, respectively. During February 1994,
ADDS completed implementation of a voluntary early retirement program and
implemented an involuntary reduction-in-force. During December, 1994, the
Company, in conjunction with the SunRiver Data Acquisition, implemented
additional reduction-in-force actions affecting 39 of the approximately 385 ADDS
employees. Pursuant to the SunRiver Data Acquisition Agreement, the expenses
associated with this action were borne by NCR. Further following the SunRiver
Data Acquisition, management implemented a series of expense controls to better
ensure near-term profitability.
General and administrative expenses: General and administrative expenses
------------------------------------
increased by $582,883 to $992,122 (11.9% of revenue) for the year ended December
31, 1994 from $409,239 (14.5% of revenue) for the year ended December 31, 1993.
Most of the increase was due to the acquisition of SunRiver Data. Salary and
related expenses also increased due to increases in staff prior to the SunRiver
Data Acquisition. Salaries and bonuses for the year ended December 31, 1994
increased to approximately $417,000 from approximately $128,000 for the year
ended December 31, 1993 and increased as a percentage of revenue to 5.0% from
4.5% during this period.
-32-
<PAGE>
On a pro forma basis, general and administrative expenses declined 37.2%
from $5,318,286 (5.9% of revenue) for the year ended 1993 to $3,338,502 (4.2% of
revenue) for the year ended 1994. See "-Operating expenses."
Sales and marketing expenses: Sales and marketing expenses increased by
-----------------------------
$770,839 to $1,091,532 (13.1% of revenue) for the year ended December 31, 1994
from $320,693 (11.4% of revenue) for the year ended December 31, 1993. Most of
the increase was due to the acquisition of SunRiver Data and a general increase
in market development activities. Salaries, commissions and bonuses for the year
ended December 31, 1994 increased to approximately $535,000 from approximately
$193,000 for the year ended December 31, 1993 and decreased as a percentage of
revenue to 6.4% from 6.9% during this period.
On a pro forma basis, sales and marketing expenses fell to $8,757,866
(10.9% of revenue) for the year ended 1994 from $12,439,976 (13.9% of revenue)
for the year ended 1993. In addition to the expense reduction related to
reductions-in-force, the Company increased its reserve for bad debts in 1993 to
better reflect the realizability of collection of certain of the Company
accounts receivable. Bad debt for 1993 was $1,251,214 as compared to $465,673
for 1994. See "-Operating expenses."
Research and development: Research and development expenses increased by
------------------------
$497,609 to $990,281 (11.9% of revenue) for the year ended December 31, 1994
from $492,672 (17.5% of revenue) for the year ended December 31, 1993. Most of
the increase was due to the acquisition of SunRiver Data. Salaries and bonuses
for the year ended December 31, 1994 increased to approximately $599,000 from
approximately $255,000 for the year ended December 31, 1993 and decreased as a
percentage of revenue to 7.2% from 9.1% during this period. See "-Operating
expenses."
On a pro forma basis, the research and development expenses decreased 17.2%
from $11,654,742 (13.0% of revenue) to $9,650,014 (12.0% of revenue) for the
periods ended December 31, 1993 and 1994, respectively.
Interest expense and Other income or expenses: Interest expense increased
---------------------------------------------
to $96,996 in 1994 from $35,774 in 1993 as a result of increased borrowing for
the SunRiver Data Acquisition and to provide working capital. The annual
interest rate paid by the Company under these loans was two points above the
lender's prime lending rate. Other expenses of $60,531 were incurred for the
year ended December 31, 1994 as compared to income earned of $11,323 for the
year ended December 31, 1993. Most of this change represents a charge for
non-capitalized expenses in connection with the SunRiver Data Acquisition.
On a pro forma basis, interest expense and other income or expenses
declined to $1,340,868 for the year ended December 31, 1994 from $3,413,025 for
the year ended December 31, 1993. Included in 1993 expenses was $1,512,500 in
litigation expense awarded under an arbitration ruling and relating to an
alleged breach of oral contract under which the Company was to distribute a
software product for Electronic Data Processing plc. (EDP), a distributor of the
Company's products.
Income tax expense: All of the income tax expense of $185,000 for 1994 is
-------------------
attributable to the SunRiver Data Acquisition. SunRiver Group incurred no income
tax liability during 1994 and 1993.
-33-
<PAGE>
Net income: Net income increased to $37,618 for the year ended December 31,
----------
1994 from a loss of $70,168 for the year ended December 31, 1993. This increase
is mostly attributable to the SunRiver Data Acquisition.
On a pro forma basis, the net loss of the Company declined to $4,281,600
for the year ended December 31, 1994 from a net loss of $13,353,623.
Impact of Inflation
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. The Company
has flexibility in its pricing and could, if necessary, pass along price changes
to most of its customers.
Liquidity and Capital Resources
The discussion below regarding liquidity and capital resources should be
read together with the information included under "Business-Financing for the
Digital Acquisition, -Restructuring of Obligations to NCR, -Additional
Financing."
Working capital was approximately $14,700,000 as of March 31, 1996,
$15,429,299 as of December 31, 1995 and $6,764,112 as of December 31, 1994. On
October 23, 1995, the Company's $14,000,000 revolving credit loan arrangement
with Congress Financial Corporation (the "Congress Credit Line") was replaced by
a $40,000,000 facility provided by Chase in connection with the Digital
Acquisition. Borrowing under the Congress Credit Line bore interest at 2% per
annum above the prime rate and was based on a formula of up to 85% of eligible
receivables and up to 50% of eligible inventory. At December 31, 1994, the
Company owed $4,654,922 under the Congress Credit Line.
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 March 31, 1996, the Company owed
Chase $28,000,000, of which $9,500,000 was owed under the Revolving Loan and
$18,500,000 was owed under the Term Loan. The Term Loan is repayable in eleven
quarterly installments, of which the first four installments are $1,500,000 and
the remaining seven installments are $2,000,000. The first installment of the
Term Loan was due March 31, 1996, and the final installment is due September 30,
1998, the same day the Revolving Loan terminates. At the Company's option, the
Revolving Loan and Term Loan bear interest at either the base rate plus 1.25%
(subject to reduction), or the London Interbank Offer Rate ("LIBOR") plus 2.5%
(subject to reduction). The base rate is the higher of (i) the Federal Funds
Rate of the Federal Reserve, plus 1/2 of 1%, or (ii) the Prime Rate of Chase. At
February 29, 1996 the Company's indebtedness under the Chase Line of Credit
consisted of the $20,000,000 Term Loan bearing interest at 8.19% per annum and
$11,000,000 under the Revolving Loan bearing interest at 8.55%. At March 31,
1996, the Company had approximately $6,500,000 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.
-34-
<PAGE>
Net cash provided by operating activities during the three months ended
March 31, 1996 amounted to approximately $1,000,000. This provision was
primarily attributable to an increase of approximately $2,200,000 and $800,000
in trade receivables and inventory respectively, offset by decreases in accounts
payable and accrued expenses of approximately $1,600,000. Net cash used in
investing activities for the three months ended March 31, 1996 was approximately
$500,000 and related to the acquisition of capital assets. Net cash provided
from financing activities was approximately $1,200,000 for the quarter ended
March 31, 1996 and was composed of $1,500,000 from the Revolving Loan to finance
the working capital needs of SunRiver Data, offset by a decrease of $1,500,000
in the Term Loan due to scheduled repayment; approximately $1,100,000 from the
issuance of stock, of which approximately $500,000 was used to provide working
capital for TradeWave and the balance used by the Company to repurchase 275,000
restricted shares of its Common Stock at $1.80 per share; and the issuance of
convertible debt of $1,500,000 was used to purchase 450,000 restricted shares of
the Company's Common Stock at $1.80 per share.
Net cash used in operating activities during the year ended December 31,
1995 amounted to $9,322,058. This usage was primarily attributable to an
increase of approximately $12,361,000 in trade receivables and inventory
increases of $7,595,096 of VT and Dorio General Display Terminals manufactured
by Digital for SunRiver Data which were offset by increases in accounts payable
and accrued expenses of $9,156,144. Net cash used in investing activities for
the year ended December 31, 1995 was $15,606,141 and related to the acquisition
of TradeWave, the VT and Dorio product lines and capital assets. Net cash
provided from financing activities was $25,265,355 for the year ended December
31, 1995 and was primarily composed of $20,000,000 from the Term Loan to finance
the Digital Acquisition; $2,164,243 from the issuance of stock to finance the
Digital Acquisition and provide working capital for TradeWave; the issuance of
convertible debt of $4,575,000 to finance the TradeWave and Digital
Acquisitions, and $3,365,550 from the Chase revolving line of credit to support
the working capital needs of SunRiver Data.
In addition to obligations previously discussed, long-term capital
requirements at December 31, 1995 included: (i) a secured note payable to NCR of
$8,000,000 (the "NCR Note") bearing interest at 8% per annum, payable quarterly,
with principal due on December 31, 1997; (ii) $3,554,692 payable upon exercise
of the Put Option; (iii) a lease commitment of $248,113 per year through
November 1997 for the Company's Orlando, Florida facility, a portion of which
the Company is subleasing for an annual rent of approximately $53,000; (iv)
obligations of TradeWave discussed below; and (v) a lease commitment of $106,557
per year through December 1998 for the Austin, Texas headquarters facility. See
"Business-Manufacturing."
The terms of the NCR Note and the Put Option were restructured in October
1995, in connection with the Digital Acquisition. The Amended Put Option is
exercisable at $3,554,692 during the period January 30 through December 31,
1999. The Company agreed to pay NCR $497,657 in cash or the Company's registered
Common Stock on each October 20 until the Amended Call Option or Amended Put
Option is exercised. In addition, the maturity date of the NCR Note was extended
to January 31, 1999 from the earlier of December 9, 1997 or the closing of a
public offering by SunRiver Data or the Company. See "Business - Restructuring
of Obligations to NCR."
In addition, $2,500,000 is required in 1996 and 1997 ($250,000 of which has
been paid in 1996) to fund TradeWave's obligations to MCC under the TradeWave
Acquisition Agreement ($900,000) and under the TradeWave Technology Agreement
($1,600,000); of the $2,500,000, $1,500,000 is due in 1996 and $1,000,000 is due
in 1997. SunRiver Group has guaranteed TradeWave's obligations to make payments
to MCC under the TradeWave Technology Agreement and the Company is jointly
obligated with TradeWave for the payment of $250,000 and $50,000 due under the
TradeWave Acquisition Agreement on May 31 and June 28, 1996, respectively, which
may be paid, at the Company's option, by delivering to MCC such number of shares
of the Company's freely tradeable Common Stock equal in market value to 120% of
the value of each such installment. Upon payment by SunRiver Group or the
Company to MCC of any of TradeWave's obligations, the payor will become a
creditor of TradeWave to the extent of such payment.
-35-
<PAGE>
The Chase Credit Line limits the amount of (i) TradeWave indebtedness that
can be guaranteed by the Company to $1,250,000, (ii) dividends from SunRiver
Data to the Company to $200,000 per year and (iii) net proceeds from sales of
the Company's equity securities that can be retained by the Company so that
amounts owed under the Chase Credit Line can be prepaid using a portion of such
proceeds. The Company is a guarantor of TradeWave equipment financing and a
guarantor or co-obligor of payments due to MCC totaling $300,000, described
above. Payments due to MCC which exceed such $300,000 and working capital
requirements of TradeWave, which are likely to exceed cash flow generated from
its operations, may require substantial additional financing from sources other
than the Company. In an attempt to secure the capital required for TradeWave,
the Company is discussing various avenues of financing, including commercial
lending and equity investment. There are no definitive agreements or
understandings regarding the terms or conditions upon which any such financing
will be provided and there can be no assurance that such efforts will be
successful or on terms beneficial to TradeWave or the Company. In the absence of
such financing, TradeWave may seek to sell off certain of its product lines,
which the Company believes may provide sufficient cash to fund these obligations
but which will negatively affect TradeWave's future prospects. In such case,
there can be no assurance that such sales can be accomplished on terms
acceptable to TradeWave.
At March 31, 1996, the Company's total long-term debt was approximately
$27,600,000 and the current portion of the long-term debt was approximately
$7,100,000. At December 31, 1995, the Company's total long-term debt was
approximately $29,255,000, and the current portion of the long-term debt was
approximately $6,631,000. The acquisitions made by the Company in 1994 and 1995,
along with the implementation of management's strategy, have positioned the
Company as the world's second largest provider of General Display Terminals
(based on 1994 published industry data) and as a participant in the emerging
market known as the "Internet". The Company believes that cash generated by
SunRiver Data's operations will be sufficient to pay the Company's current and
long-term debts, when due, except that the Company will be required to refinance
the mortgage of $8,000,000 on its Hauppauge facility when due on January 31,
1999 and the payment of obligations of TradeWave to MCC may require additional
financing as described above.
Furthermore, the Company anticipates expenses of approximately $435,000, of
which approximately $200,000 will be paid during 1996 and the balance was paid
in 1995, to implement the settlement reached between the Company and Sun
Microsystems, Inc. that requires the Company to stop using any SunRiver- based
trademark or trade name after April 23, 1997, except under limited
circumstances. The Company believes that cash flow generated from operations and
credit available under the Chase Credit Line will be sufficient to cover these
expenditures.
The Company's principal obligations under the Amended Put Option come due
after the expiration of the Chase Credit Line and the Company will attempt to
finance the payment of this obligation as part of a replacement credit facility
which will be required to refinance the Company's existing revolving line of
credit. Company Shares may be issued to NCR or sold, and the proceeds used, to
pay the $497,657 Annual Payment Amount to NCR.
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<PAGE>
Asset Management
Inventory. Management has instituted policies and procedures to maximize
---------
product availability and delivery while minimizing inventory levels so as to
lessen the risk of product obsolescence and price fluctuations. Most components
and sub-assemblies are stocked to provide for an order-to-ship cycle of seven
days. The Company follows an inventory cycle count program which dictates either
monthly, quarterly, or semi-annual physical inventory counts depending upon
product cost and usage. Additionally, an annual wall- to-wall physical count is
conducted with results compared to the Company's perpetual inventory records.
The Company utilizes various subcontractors that manufacture subassemblies
and component parts of its products based on specifications supplied by the
Company. As a guideline, the Company attempts to have two qualified
subcontractors for each of its high dollar value, long lead time, customized
components which it chooses to outsource. In certain cases, the Company may
decide to purchase components from only one of the qualified subcontractors in
an attempt to control manufacturing overhead costs tied to supplier management
and development. In all cases, backup qualified subcontractors are identified by
the Company in the event that termination of the primary source could occur. If
such termination occurs, the Company may experience short-term production delays
of six to ten weeks, increases in material and freight costs and loss or
deferment of sales revenue as the alternate subcontractor initiates production
runs and expedites delivery to the Company. Furthermore, worldwide shortages of
raw material creates supply problems for the computer industry from time to
time. Such supply shortages may cause market price increases and allocated
production runs which could have an adverse affect on the Company's business.
On a pro forma basis, inventory turnover was 3.2 times in 1993 versus 4.5
times in 1994, and 3.2 times in 1995. The inventory turnover rate increased from
1993 to 1994 primarily due to a significant decline in the net average inventory
position of the Company from $14,210,727 for 1993 to $11,232,443 for 1994. The
inventory turnover decline from 1994 to 1995 is attributable to the inventory
increases necessary to support the Digital Acquisition during the transition of
production of the VT and Dorio product lines to the Company's Hauppauge
manufacturing facility. Management created inventory reserve provisions, on a
pro forma basis, of $3,020,652 for 1993 and $4,350,763 for 1994 based on a
revision, in July, 1994. Inventory reserve provisions for 1995 were $99,000.
Accounts receivable. The Company sells its products on prepayment and net
--------------------
30 day terms. Prior to the SunRiver Data Acquisition, the Company experienced
minimal write-offs of accounts receivable. On a pro forma basis, receivable
turnover was 8.9 in 1993, 7.8 in 1994 and 8.3 in 1995.
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.
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BUSINESS
General
The Company is engaged, through operating subsidiaries, in designing and
manufacturing graphics and text computer terminals for business use and in
developing Internet software for businesses. The Company's general strategy is
to be a provider of devices which provide access to corporate network computing
environments, and software for secure, private communications and electronic
commerce over the Internet. The Company has two operating subsidiaries, SunRiver
Data and TradeWave.
SunRiver Data designs, assembles, sells and supports General Display
Terminals, Network Graphics Displays and Advanced Workgroup Technologies,
including MultiConsole Terminals. A partnership formed in May 1995 by SunRiver
Data and General Automation, Inc. ("GAI"), and managed by GAI, designs,
integrates, sells and supports multi-user computer systems running SunRiver
Data's and GAI's version of the database system licensed from Pick Systems.
SunRiver Data also offers post-sale customer support services for its desktop
terminals. SunRiver Data's products and services are offered solely to
businesses.
In October 1995, SunRiver Data acquired assets relating to the General
Display Terminal products of Digital, including the "VT(R)" and "Dorio(R)"
brands. As a result, based on 1994 published industry data, the Company believes
SunRiver Data is the second largest manufacturer of General Display Terminals in
the world with an installed user base of more than 5,000,000 units. No
manufacturing facilities were included in the Digital Assets. SunRiver Data has
transferred all production of the VT and Dorio product lines from Digital's
facilities in the Far East to SunRiver Data's plant in Hauppauge, New York. See
"Recent Developments-Purchase of Digital's Assets" and "-Manufacturing."
TradeWave develops and sells Internet software products and value-added
network services which enable desktop computer users to conduct commercial
transactions by way of the Internet.
Products and Services
General Display Terminals. The Company's General Display Terminals are
--------------------------
ANSI/ASCII desktop terminals, which generally do not have graphics capabilities
but some of which have limited graphics capabilities. The Company offers
standard and custom models, primarily for data entry and point of sale
activities. Most of the Company's General Display Terminal customers are retail,
financial, telecommunications and wholesale distribution businesses. General
Display Terminals are sold by the Company under the Company's ADDS(R), Dorio(R)
and VT(R) trademarks. The ADDS, Dorio and VT brands are complementary products,
providing slightly different features to various user segments.
In 1994 and 1995, approximately 44% and 41%, respectively, of the combined
pro forma sales of the Company were to NCR. In connection with the SunRiver Data
Acquisition, the Company entered into various agreements with NCR pursuant to
which the Company will continue to supply at least 90% of NCR's terminal
requirements (including Network Graphics Displays), until December 1999.
However, NCR can terminate such contracts, without compensation to the Company,
under certain circumstances. Accordingly, there can be no assurance that the
long-standing business relationship between SunRiver Data and NCR will continue
or that it will continue at the same level as in the past.
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<PAGE>
In connection with the Digital Acquisition, SunRiver Data and Digital
entered into the Digital Supply Agreement whereby Digital agreed to purchase
from SunRiver Data at least 95% of Digital's worldwide requirements for General
Display Terminals and related parts for a four-year period commencing October
23, 1995 and at least 80,000 General Display Terminals during the first year of
such agreement. Sales of General Display Terminals to Digital during November
and December 1995 constituted approximately 14% of total General Display
Terminal sales for such two month period. The Company expects that Digital will
be its most significant customer in 1996, in part because 1996 sales to NCR are
not expected to reach a level comparable to 1995 sales.
Network Graphics Displays. The Company's Network Graphics Displays are a
--------------------------
high resolution, high performance, graphical, desktop workstation for use in
networked computer environments. Network Graphics Displays are capable of
displaying on screen, and at the same time, information accessed from multiple
host computers and multiple applications running on a single host. Network
Graphics Displays are compatible with UNIX operating systems (and many others)
and facilitate the use of servers from many computer suppliers intermixed in a
networked environment. Most of the Company's sales of Network Graphics Displays
are to telecommunications and financial businesses which require the ability to
provide concurrent information to customers on a variety of topics, such as
billing and current and historical product and service information. The Company
has released in the first quarter of 1996 a newly designed Network Graphics
Displays which will offer a small footprint for point of service requirement
uses where desktop or counter space is limited.
SunRiver is developing a line of network access computers which will offer
customers simple, easy and cost-effective access to current and emerging
computing environments. This includes the World Wide Web, Internet and Corporate
Intranets, Java applications, distributed access to DOS, and 16-bit and 32-bit
Windows applications and legacy applications on mainframe and minicomputer
systems. Initial network access computers will be based on SunRiver's Network
Graphics Displays technology. SunRiver Data is using TradeWave's technologies to
enhance the security features of these products. A built-in Java interpreter
will allow certain of these products to run Java applications and browse the
Internet and corporate intranets. Java is a language used for developing
multi-platform applications for the Internet. SunRiver Data and TradeWave have
licensed the Java programming language and HotJava Web browser from Sun
Microsystems, Inc. Certain of these products will provide access to DOS, Windows
3.x, Windows 95 and Windows NT applications which run on a centralized server.
Advanced Workgroup Technologies. The Company's Advanced Workgroup
-----------------------------------
Technologies (including MultiConsole Terminals) have been developed by SunRiver
Group and are based on patented technology. MultiConsole Terminals offer a
cost-effective upgrade or replacement for serial character terminals in multi-
user, micro-computer and personal computer ("PC") based environments. The
Company's MultiConsole Terminals principally consist of two components, a host
adapter which plugs into a PC, and a logic box. Each host adapter permits up to
eight MultiConsole Terminals to access the same host computer and up to 32
terminals can access the same host computer using four host adapters. The
MultiConsole Terminal has the same look, feel and capabilities as the PC.
Nevertheless, MultiConsole Terminals do not have CPUs since they share the CPU
of the host computer. MultiConsole Terminals are best suited for small to
medium-sized businesses requiring predominantly transaction-oriented
applications. Typical users include financial branch offices, hospitals, hotels,
retailers, pharmacies and professional offices, such as accounting firms,
doctors' and dentists' offices and law firms.
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<PAGE>
GAI Partnership. Effective May 22, 1995, SunRiver Data entered into an
----------------
Operating Agreement with GAI covering SunRiver Data's and GAI's participation
in, and management of, a newly-formed Delaware limited liability company (the
"GAI Partnership"). The GAI Partnership combines into a single business the
development, distribution, maintenance and support of Pick-based computer
systems and software running SunRiver Data's version and GAI's version of the
Pick system on various hardware platforms. SunRiver Data's systems consist of
Unix Software with NCR System 3000 hardware and operating system software under
the Mentor(R) Operating Environment brand name, as well as a lower cost system
under the Mentor PRO brand name for use with standard PC's (collectively,
"Mentor Systems"). Mentor Systems are used to manage large volumes of data.
Users of Mentor Systems include large distribution centers, retail
establishments, manufacturers, local governments and data bases for credit and
collections. The business and affairs of the GAI Partnership are managed
exclusively by GAI, subject to consultation from time to time with SunRiver
Data.
In addition, SunRiver Data has subcontracted to the GAI Partnership all
services required by SunRiver Data under its existing maintenance contracts
(including with respect to its Mentor Systems). For such services, SunRiver Data
pays GAI a monthly management fee. The GAI Partnership is providing maintenance
service by telephone to the SunRiver Data customers and dispatches on-site
maintenance services pursuant to a maintenance agreement which the GAI
Partnership has entered into with NCR. As SunRiver Data's existing maintenance
contracts expire, the GAI Partnership is responsible for renewal and billing of
all new service contracts.
SunRiver Data decided to substantially reduce its active participation in
the Pick systems business in order to devote more resources to its core
business. SunRiver Data believes that, in the declining Pick market, it is
beneficial to create a more significant market presence by partnering with GAI.
As a result, the GAI Partnership is one of the largest providers in the Pick
marketplace. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Professional Services. Prior to the formation of the GAI Partnership, a
----------------------
material portion of the Company's revenues was derived from its activities as a
provider of consulting, installation, software and hardware maintenance,
software upgrade, tuning, disaster backup and other professional services. These
services were provided almost exclusively to Mentor Systems users and value
added resellers ("VARs") of systems purchased from the Company as well as to
users of the Company's other products desiring more service and support than the
basic warranty provides. The Company is continuing to provide these services
with respect to its desk top terminals. Depot service during normal business
hours is also provided within the United States by the Company for its desktop
terminals.
Business of TradeWave. TradeWave is engaged in the business of developing
----------------------
and selling Internet software components and value-added services. In March
1996, TradeWave introduced a suite of products which enables companies to
conduct secure, private communication internally and with business partners, by
creating a Virtual Private Internet (VPI(TM)). With a VPI, a company can use the
public Internet as a network infrastructure, but can do so in a private, secure
fashion. A VPI incorporates Entrust, a security product licensed from Northern
Telecom, and TradeWave's certification authority and access-control product. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations-Operating expenses."
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<PAGE>
TradeWave's certification authority product allows individuals to be
identified by an electronic certificate on their personal computer, a key
requirement for private communications over a network and for privately
conducting transactions. TradeWave's access-control product recognizes
individuals by their electronic certificate, and determines the access
privileges and restrictions which are granted to an individual for a given
computing resource.
TradeWave also develops directory products which allow customers to find
information, goods and services on the Internet. TradeWave's current directory
is Galaxy, a search tool available on the Internet. TradeWave is developing
custom marketplace directory products based upon the Galaxy architecture.
TradeWave plans to target these products to the information and resource needs
of specific industries.
TradeWave is a subcontractor for MCC under a government contract with the
U.S. Department of Defense that is expected to generate revenues of
approximately $1,700,000 from April 1995 through September 1996 when the
contract expires. Under such government contract, TradeWave is developing
commercial uses for the Internet, including the streamlining of manufacturing
processes through use of the Internet. Of TradeWave's sales of $1,165,282 for
the period ended December 31, 1995, $725,945 was derived from such government
contract.
Percentage of Total Revenues. The table below sets forth, for each of the
----------------------------
last three years ended December 31 and for the period December 9 through
December 31, 1994, the percentage of total revenue contributed by those classes
of similar products or services which accounted for ten percent or more of
consolidated revenue in either of the last three calendar years. The information
presented in the following table, for periods prior to December 9, 1994, is
based upon the operations of SunRiver Group. Such information for the period
December 9, 1994 through December 31, 1994 and for the year ended December 31,
1995 is based upon the consolidated operations of SunRiver Data and SunRiver
Group and excludes revenue generated by TradeWave.
Period General Network
Display Mentor Graphics Professional MultiConsole
Terminals Systems Displays Services Terminals
--------- ------- -------- ------------ ------------
1993 - - - - 100%
1994 26.3% 10.3% 9.4% 14.0% 40.0%
1994 (December 12-31) 42.6% 16.6% 15.1% 22.7% 3%
1995 49.8% 4.7% 28.5% 13.5% 3.5%
The following pro forma information presents the consolidated results of
operations as though the SunRiver Data Acquisition had occurred on January 1,
1993. It does not purport to be indicative of what would have occurred had the
SunRiver Data Acquisition occurred as of January 1, 1993, or of the results
which may occur in the future. Such pro forma information excludes TradeWave
revenue and the effects relating to the Digital Acquisition. See SunRiver
Corporation and Selected Digital Text Terminal Products Financial Statement.
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<PAGE>
General Network
Display Mentor Graphics Professional MultiConsole
Period Terminals Systems Displays Services Terminals
- - ------ --------- ------- -------- ------------ ------------
1993 37.2% 19.8% 19.8% 20.1% 3.1%
1994 41.5% 13.3% 19.9% 21.3% 4.0%
1995 49.8% 4.7% 28.5% 13.5% 3.5%
The decline in the relative share of the Mentor Systems product line
reflects the industry-wide declines in the average sales price of computer
hardware as well as the movement in the Pick market from proprietary Pick-based
software solutions to more open systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Foreign Sales. Net foreign sales were approximately $537,000, $1,127,000
-------------
and $15,912,000 for 1993, 1994 and 1995, respectively. On a pro forma basis, net
foreign sales were approximately $12,993,000, $8,020,000 and $15,912,000 for
1993, 1994 and 1995, respectively. The tables below set forth for each of the
last three years ended December 31 the approximate percentage of total revenue
attributable to foreign sales in the regions set forth in the table.
% of Total Revenue
------------------
Period Total Europe Canada
------ ----- ------ ------
1993 19.1% 5.6% 12.6%
1994 13.5% 5.2% 6.1%
1995 16.6% 13.0% 1.2%
% of Total Revenue
(Pro forma)
------------------
Period Total Europe Far East Middle East
- - ------ ----- ------ -------- -----------
1993 14.5% 9.0% 1.3% 0.9%
1994 10.0% 5.3% 1.0% 1.1%
1995 16.6% 13.0% 0.7% 0.3%
The decline in foreign sales as a percent of total sales in 1994 is wholly
attributable to the decline in sales of the Company's Mentor Systems product
line, traditionally providing a large contribution to the Company's
international sales. In addition to the market trend away from Pick-based
software solutions, and industry-wide decreases in the average sales price of
computer hardware, the decline in international sales of Mentor Systems was
attributed to the introduction of a Pick compatible product offering by the
Company's key European value added reseller ("VAR"). The increase from 1994 to
1995 is attributable to the sale of the recently acquired VT and Dorio General
Display Terminals, sales of which have historically been strong in Europe.
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Manufacturing
The Company's manufacturing operations are located at its main facility in
Hauppauge, New York and include procurement of components and the assembly and
testing of its products. The Company does not manufacture any of the
subassemblies or components used in the assembly of its products. Investment in
production equipment is not material to the Company's manufacturing operations.
Semi-skilled and skilled workers assemble products using a conveyor belt, work
station system that is commonly used for similar operations. The Company
generally cross-trains its workers so that they are able to work at all work
stations. Once assembled, all systems undergo a test cycle, using sophisticated
diagnostic procedures. The Company has earned ISO 9002 certification for its
manufacturing standards.
The Company has a flexible manufacturing control system that is run by
software developed by the Company. This system provides a flexible,
customer-focused manufacturing approach that enables the company to quickly
customize products for orders of one to one thousand. Just-in-time systems allow
the Company to achieve efficient asset utilization and fast response time to
customers. The Company is generally able to fill orders within 3 to 5 days after
receipt of an order. Accordingly, backlog has not traditionally been material to
the Company. Backlog at December 31, 1995 totaled approximately $ 7,699,000 as
compared to $6,300,000 (pro forma) at December 31, 1994. Approximately
$7,351,000 of the Company's backlog at December 31, 1995 was for General Display
Terminals.
The Company is using approximately 90,000 of its 155,000 square feet of
space for manufacturing, with a capacity to manufacture approximately 650,000
units per year. A second shift was recently added but is not being fully
utilized. In order to meet anticipated demand for General Display Terminals
resulting from the Digital Acquisition, SunRiver Data has increased the
manufacturing square footage from 80,000 to 90,000 and added tooling and
equipment at a cost of approximately $800,000 at its Hauppauge, New York
facility, has increased the number of its employees by approximately 117 and
anticipates it will have to fully utilize the second shift. The Company had been
engaged in pilot production of VT and Dorio General Display Terminals at its
Hauppauge plant but the transition to full production has been achieved. While
the Company believes existing inventory will be generally sufficient to satisfy
customer demand, there may be temporary supply and demand imbalances in the mix
of models. Once the Company reaches full production early in the third quarter,
this imbalance should no longer apply.
The Company purchases subassemblies and components for its products almost
entirely from more than 40 domestic and Far East sources. Wong Electronics
Corp., which manufactures plug-in logic boards in Taiwan for the Company's
General Display Terminals, accounted for approximately 20% of the total dollar
amount of the Company's total purchases in 1995 of subassemblies and components.
No other supplier accounted for 10% or more of such amount. While there are at
least two qualified suppliers for the subassemblies and components that are made
to the Company's specifications, they are generally single- sourced so that the
Company is able to take advantage of volume discounts and more easily ensure
quality control. The Company estimates that the lead time required before an
alternate supplier can begin providing the necessary subassembly or component
would generally be between six to ten weeks. The disruption of the Company's
business during such period of lead time could have a material adverse effect on
its sales and results of operations for the quarter and, perhaps, also for the
fiscal year. The Company has experienced shortages of supplies for components
from time to time as a result of industry-wide shortages, which sometimes result
in market price increases and allocated production runs. To date, such shortages
have not had a material adverse effect on its business.
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<PAGE>
In connection with the transfer of all production of the VT and Dorio
product lines from Digital facilities in the Far East to the Company's
facilities in Hauppauge, New York, the Company is experiencing a shortage of a
component required to manufacture a key model of the VT and Dorio General
Display Terminals. As a result of this shortage, the Company expects to
experience product delays which will result in the deferment of revenue which
the Company would have otherwise expected during the second quarter to be
realized in the third and fourth quarters of 1996. The Company's sales could be
negatively affected as a result of these production delays, but the Company
believes that it can ameliorate such losses by aggressively marketing
alternatives to its customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations - Asset
Management."
The Company provides a three-year warranty covering defective materials and
workmanship with respect to the VT and Dorio General Display Terminals. With
respect to the Company's other General Display Terminals and Network Graphics
Displays, the Company provides a one-year United States warranty covering
defective materials and workmanship provided the user returns the defective
product to a repair depot located in Hauppauge, New York; Stone Mountain,
Georgia; Schaumberg, Illinois; or Irvine, California. In lieu of providing a
warranty, the Company provides its foreign distributors and VARs with spare
parts and spare units. Users can purchase extended warranties of up to three
years or can pay for repairs on a time and materials basis. On a pro forma
basis, during 1993, 1994 and 1995, the Company's cost of warranty repairs was
approximately 1.3%, 1.1%, and 1.2%, respectively, of the Company's sales. The
Company anticipates warranty expense to increase in 1996 as a result of the
Company's Maintenance Service Agreement with Digital. Software is not warranted
by the Company but users are permitted to return software for a refund within 30
days after purchase. Accordingly, customers are afforded the opportunity to use
software on a trial basis.
The Company also grants 90-day stock rotation rights to selected
distributors and, pursuant to an agreement with the Company, NCR can return
products within 90 days of shipment. If the Company cannot resell such products,
NCR is required to pay the Company 15% of the sales price of the returned
products. Because of the Company's ability to provide products using
just-in-time manufacturing techniques, the Company believes that NCR has been
limiting orders to products for which it has firm commitments from its
customers.
During 1993, 1994 and 1995, the Company expended approximately $493,000,
$990,000 and $7,444,000, respectively, on research and development activities.
In 1993, such expenditures were related to MultiConsole product development. In
1994, development activities encompassed MultiConsole Terminals, Network
Graphics Displays, General Display Terminals, and Mentor software development.
During 1995 research and development activities relating to General Display
Terminals, Network Graphics Displays and MultiConsole Terminals totaled
approximately $4,570,000 and the remainder of approximately $2,874,000 was used
for TradeWave software development activities. Research and development expense
for TradeWave in 1995 included a charge of approximately $1,225,000 relating to
the write-off of acquired in-process research and development. The Company has
combined its Network Graphics Displays and MultiConsole engineering staffs to
achieve economies of scale and to work on integrating the Company's Network
Graphics Displays and MultiConsole technologies. For additional information
regarding research and development expenditures see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Operating expenses - Research and development."
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<PAGE>
Sales and Marketing
The Company markets its terminal products through original equipment
manufacturer (OEM) partners and reseller distribution channels. OEM
manufacturers, who do not want to maintain engineering or manufacturing
resources, can obtain products with their brand name from SunRiver Data.
Customers can buy SunRiver Data's products from an international network of
value-added resellers (VARs) and regional distributors. Through its sales force,
the Company sells directly to large VARs and regional distributors and also
sells to major national and international distributors. The Company's sales
force operates out of ten locations in the United States and a European office
in The Netherlands. An independent sales representative operates in Austria.
As a result of the Digital Acquisition, the Company has expanded its OEM
relationships and worldwide channels of distribution. Sales of VT and Dorio
brand General Display Terminals, acquired from Digital, have historically been
particularly strong in Europe, while sales of the ADDS General Display Terminals
have been stronger in the United States.
The Company's Mentor Operating Environment Systems are sold by VARs that
typically own vertical applications that are compatible with such operating
systems. The Company's Mentor Pro Pick System is being sold by the GAI
Partnership through its traditional VAR channel and also by OEMs in the United
States.
In 1995, the Company realized a material portion of its revenue through its
agreement with NCR as approximately 50% of the combined sales of the General
Display Terminals and Network Graphics Displays were to NCR. Product sales to
NCR are not expected to reach a comparable level in 1996 because a substantial
portion of 1995 sales to NCR were of the Company's Chameleon Network Graphics
Displays used by NCR in specific projects completed during the first quarter of
1996. Digital is expected to be the Company's most significant customer in 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although NCR is contractually committed to purchase 90% of its
terminal requirements from the Company through December 1999, it may, under
certain conditions, cancel its agreement without compensation to the Company.
The loss of NCR as a customer would have a material adverse effect on the
Company's results of operations and liquidity.
Although Digital's contracts with its customers, distributors and resellers
were not assigned to SunRiver Data, SunRiver Data has been able to maintain
substantially all of Digital's prior relationships and arrangements with them.
In addition, under the Digital Supply Agreement, Digital agreed to purchase from
SunRiver Data at least 95% of Digital's worldwide requirements for VT brand
General Display Terminals, and related parts, for a four-year period commencing
October 23, 1995 and at least 80,000 General Display Terminals during the first
year of such agreement. Digital may terminate its agreement for cause without
compensation to the Company. Digital is expected to be the Company's most
significant customer in 1996. Sales of General Display Terminals to Digital
during November and December 1995 constituted approximately 15% of total General
Display Terminal sales during such two month period. The loss of Digital as a
customer would have a material adverse effect on the Company's results of
operations and liquidity.
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<PAGE>
In selling its General Display Terminals and Network Graphics Displays, the
Company emphasizes customization, reliability and compatibility with Pick and
UNIX operating systems. The Company is currently investing in providing Windows
NT capability. For Network Graphics Displays, the Company's technical expertise
required to integrate Network Graphics Displays within a total system
architecture is a key selling benefit. The Company emphasizes its proprietary
technology, transaction speed and cost of ownership in the marketing of its
MultiConsole Terminal products.
The Company has not historically used direct media advertising, relying
instead on cooperative advertising. Cooperative advertising expenses have not
been material to the Company's business, accounting for less than .5% of the
Company's sales during the last two years. The Company began limited direct
advertising and direct marketing in 1995. In addition, the Company has retained
the services of an investor relations firm and a marketing firm to promote the
Company and its products. In 1996 and succeeding periods, management plans to
undertake aggressive advertising and public relations activities to develop
channel partners and expand its market presence. In this connection, the Company
has expanded its European sales presence and is cooperating with its
distributors to provide advertising and promotional programs that are funded in
part by the Company.
The Company's business is not seasonal. Fluctuations in quarterly sales
result from large orders that are unrelated to the time of year.
Competition
The General Display Terminal market has undergone consolidation and the two
largest competitors that have emerged are SunRiver Data and Wyse Technology,
Inc. Customer purchase criteria are based upon quality, customization, breadth
of emulation features, and price. Growth in the Network Graphics Displays market
is flat and consolidation is expected. SunRiver Data's principle Network
Graphics Displays competitors are Hewlett-Packard Corp., Network Computing
Devices and Tektronix, Inc. Customer purchase criteria are based upon features
(such as speed and audio and video performance) and price. A new set of
competitors is emerging in the network access computer market. These include Sun
Microsystems, Inc., IBM, Oracle, Microsoft and Netscape.
Mentor Systems compete in an environment where features, compatibility with
host systems, service and ease of doing business are the key competitive
factors. Principal Mentor System competitors are Pick Systems, Unidata and VMark
Software. SunRiver Data's MultiConsole Terminals are also competing in an
emerging market principally based on features and compatibility. SunRiver Data's
MultiConsole Terminals directly compete with Maxpeed and indirectly compete with
numerous other companies that provide such alternative technology.
Dominant competitors in the commercial Internet market have not emerged. A
wide variety of companies are competing in this market. TradeWave's direct
competitors are small to medium-sized companies, such as Open Market, Inc. Many
of TradeWave's Competitors are better capitalized with more employees. Large
companies such as Hewlett-Packard and Microsoft are acquiring, licensing, or
developing competitive products and technologies.
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<PAGE>
Patents, Trademarks and Licensing
While the Company owns over 30 patents issued in the United States and
various foreign countries, only three patents are believed to be material to its
business. The first patent is for technology called Multiconsole Bus Extension
Serial Interface (the "BESI Patent") and was issued in Canada on May 7, 1991 and
in the United States on October 29, 1991. The BESI Patent expires October 28,
2008 in the United States and on May 6, 2005 in Canada. The BESI Patent is
currently being examined by the European Patent Office with respect to Austria,
Belgium, France, Germany, Greece, Italy, Netherlands, Spain, Sweden, Switzerland
and the United Kingdom. While the BESI Patent prevents competitors from having
certain features in their MultiConsole Terminals, which the Company believes
provide the Company with a competitive advantage, the Company's competitors can
nevertheless produce MultiConsole Terminals, using other technological
approaches, that compete with the Company's products.
The other two patents were acquired from Digital. One relates to Image
Rotation (the "Image Rotation Patent") and the other to a protocol for allowing
multiple user sessions on a single line (the "Multisession Patent"). The
Multisession Patent is important to users whose terminals are attached to
Digital computers. While it allows for differentiation of SunRiver Data's
products, Wyse Technology, Inc. offers a similar feature. The Image Rotation
Patent protects a feature of the VT and Dorio terminals (and can be used for
other SunRiver Data terminals) that is useful for product differentiation, but
not essential to users. The Company is currently pursuing licensing one or both
of these two patents to several other companies. Digital has retained a fully
paid-up, non-exclusive, assignable, irrevocable, world-wide license of the
patents which the Company acquired from Digital. The United States expiration
dates for the Image Rotation and Multisession Patents are February 6, 2007 and
December 13, 2005, respectively. The Image Rotation and Multisession Patents
have also issued internationally.
The Company believes that the knowledge and experience of its management
and personnel and their ability to develop, manufacture and market the Company's
products in response to specific customer needs is more significant than its
patent rights.
The trademarks "Mentor," "Mentor Pro", "ADDS", "VT" and "Dorio" are
registered in the United States Patent and Trademark Office and in a number of
foreign countries.
Mentor Systems are produced and distributed pursuant to non-exclusive
licenses to the Company from Pick Systems that provide for royalty payments on
systems shipped.
Legal Proceedings
An action was commenced by John Marsala ("Marsala") on October 20, 1994,
based on breach of contract, in the Supreme Court of the State of New York,
County of New York. This action is entitled "John Marsala v. All Quotes, Inc. et
al.," Index No. 129936-94. Marsala was a former dealer employed by the Company
to enroll subscribers in its dial-up market services. Marsala claims in excess
of $1,500,000 in damages pursuant to the terms of an alleged dealership
agreement between the parties. The Company has denied that it owes any sums to
Marsala and has counterclaimed for fraud against Marsala. The Company intends to
vigorously defend this suit since it believes that is has meritorious defenses
to the action. Document requests have been served on Marsala, however, to date,
no documents have been produced and no other discovery has taken place. This
litigation has been inactive since December 1994.
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<PAGE>
In January, 1995, an action was commenced against the Company, certain
officers of Capital, and certain other defendants in the Supreme Court of the
State of New York, County of New York, entitled "George Zakar USA Securities,
Inc., et al. v. All-Quotes, Inc., et al.," Index No. 100577/95 ("Zakar"). The
complaint in the above-referenced action asserts seven causes of action against
the Company and certain other defendants for breach of contract, fraud and
interference with plaintiffs' business relationships arising out of a series of
alleged communications between plaintiffs and representatives of the Company
regarding certain new business ventures allegedly to be undertaken jointly by
plaintiffs and the Company. The complaint in the above-referenced action seeks
damages in the amount of $2,000,000 with respect to each cause of action alleged
against the Company and certain of Capital's officers and specific performance
of the alleged oral contract between plaintiffs and the Company. On or about
March 17, 1995, the Company and the named officers of Capital served a verified
answer denying the material allegations of the complaint and asserting six
affirmative defenses. This litigation is in the discovery stage with depositions
having begun in April 1996. The Company intends to vigorously defend this
litigation.
Capital has agreed to indemnify the Company for any losses the Company may
incur in connection with the claims of Marsala and Zakar and, to secure
Capital's indemnification, there is being held in escrow approximately $185,000
(as of January 16, 1996) of the Global Proceeds and 1,000,000 shares of the
common stock of All-Quotes Data, Ltd. (now named AmCan Minerals Ltd.) which
common stock is traded on the Vancouver Stock Exchange (symbol: AMF.V). While
the Company believes the Capital indemnification will be sufficient to protect
the Company from loss, there can be no assurance that the Company will be fully
indemnified for losses it may incur in connection with these pending
litigations.
Environmental Regulation
SunRiver Data complies with federal, state and local legislation pertaining
to protection of the environment. Amounts incurred in complying with these
regulations during 1993, 1994 and 1995 did not have a material effect upon
capital expenditures or the financial condition of the Company. However, any
change in federal, state or local environmental regulations could have a
material adverse effect on the Company.
Employees
At April 10, 1996, the Company had approximately 469 full-time employees
engaged as follows: 89 in product design and engineering, 267 in manufacturing,
45 in sales and marketing and 68 in administration. None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
relations with its employees to be satisfactory.
Properties
The Company owns a 155,000 square foot facility at 100 Marcus Boulevard,
Hauppauge, New York, the principal manufacturing, sales and distribution
facility of SunRiver Data. Subsequent to the SunRiver Group Acquisition, on
December 12, 1994, the Company established its corporate headquarters at Echelon
IV, Suite 200, 9430 Research Boulevard, Austin, Texas, where the Company leases
approximately 8,303 square feet of space for a four-year period expiring in
1998. The Company's current annual rent for the Austin facility is approximately
$106,557. The Company also leases 17,837 square feet of space in Orlando,
Florida where the Company conducts research and development operations. This
lease is at a current annual rent of approximately $248,113 and expires in
November 1997. Approximately 3,800 square feet of the Orlando space has been
subleased for an annual rent of approximately $53,000.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Positions and Offices
Gerald Youngblood 44 Chairman of the Board of Directors and President
(Principal Executive Officer)
William Long 45 Executive Vice-President and Director
Toni McElroy 48 Executive Vice-President - Finance, Treasurer,
Secretary and Director (Principal Financial Officer, to
be replaced in that capacity by Roger Hughes in June
1996)
Sam K. Smith 63 Director
Tony Giovaniello 40 Executive Vice-President, Chief Operating Officer
(of SunRiver Data)
Gerald Youngblood has been Chairman of the Board of Directors, Chief
Executive Officer and President of the Company and SunRiver Data since December
1994. Since September 1991, Mr. Youngblood has also served as President, Chief
Executive Officer and a Director of SunRiver Group. Prior thereto, from March
1989 to September 1991, Mr. Youngblood served as Vice-President of Business
Development for SunRiver Group.
William C. Long has been Executive Vice-President and Director of the
Company and SunRiver Data since December 1994. Since September 1991, Mr. Long
has also served as Executive Vice-President, Chief Operating Officer and a
Director of SunRiver Group. Prior thereto, from September 1988 to September
1991, he served as Vice-President of Product Development and Director of
SunRiver Group.
Toni S. McElroy has been a Director, Chief Financial Officer,
Vice-President of Finance, Secretary and Treasurer of the Company and SunRiver
Data since December 1994. Since June 1993, she has also served as Controller of
SunRiver Group (serving only part-time from April 1993 to May 1993). From
September 1990 to February 1993, she served as Assistant Controller of Griffith
Consumers Company, Inc. Prior thereto, from July 1989 to July 1990, Ms. McElroy
served as Accounting Manager of SunRiver Group. Beginning in June 1996, Roger
Hughes will become the Company's Chief Financial Officer and Ms. McElroy will
become Vice President of Finance of TradeWave.
Roger Hughes, prior to agreeing to become the Company's Chief Financial
Officer beginning in June 1996, was the Chief Financial Officer since March 1994
of Optical Data Systems, Inc., a manufacturer and marketer of computer
networking and internetworking products for application in LANs. Prior to
joining Optical Data Systems, Mr. Hughes was the President and Chief Executive
Officer of Merit Technology, Inc., a military software company which, on
February 18, 1994, filed for protection under Chapter 11 of the Bankruptcy Code.
On August 22, 1995, an order confirming Merit Technology's First Amended Plan of
Reorganization, and ordering the dissolution of Merit Technology after all
distributions are made to creditors and equity holders, was entered by the
bankruptcy court.
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<PAGE>
Sam K. Smith was appointed to the Board of Directors of the Company
effective April 1996 and has been serving as an advisor to the Company since
January 1995. Since 1988, he has been serving as a director, and as chairman
since 1993, of Landmark Graphics Corporation, a supplier of workstation software
for the petroleum industry. For six years, he had served as a director of Convex
Computer Corp., a super- computer manufacturer, before it was recently sold to
Hewlett-Packard. Mr. Smith is the Chairman of Merit Technology, Inc., a military
software company which he co-founded in July 1984. On February 18, 1994, Merit
Technology filed for protection under Chapter 11 of the Bankruptcy Code and on
August 22, 1995, an order confirming Merit Technology's First Amended Plan of
Reorganization, and ordering the dissolution of Merit Technology after all
distributions are made to creditors and equity holders, was entered by the
bankruptcy court. From 1984 to 1993, Mr. Smith was a special limited partner of
Sevin Rosen Venture Funds, a venture capital firm. He serves as a director of
Mizar, Inc., a supplier of digital signal processor boards, and serves on the
board of visitors of the schools of electrical engineering of the University of
Oklahoma and the University of Texas, Dallas.
Tony Giovaniello was elected Executive Vice President - Chief Operating
Officer of SunRiver Data in January 1996 and has been acting in such capacity
since May 1995. From December 1994 to May 1995, Mr. Giovaniello served as
Managing Director of Text Terminals of SunRiver Data. Mr. Giovaniello has been
employed by SunRiver Data since February 1986 where he has served in various
capacities including Assistant Vice-President of Marketing, Director of Sales
and Director of Intercompany and International Sales of SunRiver Data's
Display's Business Unit.
The following individuals although not executive officers or directors are
key employees and expected to make significant contributions to the business of
the Company:
Brian L. Hann has served as Vice-President of Manufacturing of SunRiver
Data since December 1994. Mr. Hann has been employed by SunRiver Data since
March of 1986 and has previously served as Assistant Vice-President of
Manufacturing and Customer Services.
Roy Smith has been Chief Executive Officer of TradeWave since it was
acquired by the Company from MCC. Prior thereto, Mr. Smith was Vice President
and Program Director of MCC's enterprise integration network division. From 1984
to 1989, Mr. Smith was Director of Engineering of the Advanced Products Division
at Mentor Graphics.
Members of the Company's Board of Directors ("Board" or "Board of
Directors") do not receive any compensation for services rendered to the Company
in their capacity as directors of the Company. However, the Company has granted
Sam Smith non-qualified options to purchase 75,000 shares of Common Stock at an
exercise price of $1.35 per share. Such options expire on May 1, 2000 and vest
25% on May 1, 1996 and the remainder pro rata on a monthly basis through May 1,
1999.
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<PAGE>
Article Twelfth of the Company's Certificate of Incorporation provides
that, to the fullest extent permitted by Section 102 of the General Corporation
Law of the State of Delaware, no director of the Company shall be liable to the
Company for damages for breach of his or her fiduciary duty as a director.
Article Eleventh of the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Section 145 of the General Corporation Law of
the State of Delaware, the Company shall indemnify any and all persons whom it
shall have the power to indemnify (which include directors, officers, employees
or agents of the Company) against liability for certain of their acts.
Executive Compensation
The table below discloses all cash compensation awarded to, earned by or
paid to the present executive officers of the Company, and the two highest paid
non-executive officers of the Company, who earned $100,000 or more for services
rendered in all capacities to the Company during the fiscal year ended December
31, 1995. In addition, it provides information with respect to the compensation
of such persons for 1994 and 1993.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ------------
Name and Principal Other Annual Other Annual
Position Year Salary Bonus Compensation Options(#) Compensation
- - ------------------ ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Chairman of the 12/31/95 $157,057 $128,600(2) - 300,000 -
Board of Directors 12/31/94 $ 80,985 $ 75,000 - - -
and President(1) 12/31/93 $ 81,509 - - - -
Toni McElroy, 12/31/95 $107,969 $ 46,662(2) - 125,000 -
Executive Vice 12/31/94 $ 40,940 $ 25,000 - - -
President - Finance (1) 12/31/93 $ 23,407 - (1) - -
Tony Giovaniello, 12/31/95 $118,917 $ 47,930(2) - 125,000 -
Executive Vice 12/31/94 $ 98,162 $ 54,708 - - -
President of SunRiver 12/31/93 $ 76,801 $ 25,098 - - -
Data (1)
William Long, 12/31/95 $105,902 $ 17,283 - 100,000 -
Executive Vice 12/31/94 $ 79,447 - - - -
President(1) 12/31/93 $ 80,910 - - - -
Steve Kuntz, Vice 12/31/95 $110,001 $ 30,187(2) $36,837 (3)- 65,000 -
President - Sales 12/31/94 $ 76,170 $ 44,643 - - -
of SunRiver Data (1) 12/31/93 $ 80,000 $ 21,857 - - -
</TABLE>
(1) Unless otherwise noted, compensation for 1995 and the period December 9
through December 31, 1994 is from SunRiver Data and compensation for the
balance of 1994 and for 1993 is from SunRiver Group (for Mr. Youngblood,
Mr. Long and Ms. McElroy) and from ADDS (for Messrs. Giovaniello and
Kuntz). Ms. McElroy rejoined SunRiver Group on a part time basis starting
in April 1993 and began working full time in June 1993; her 1993
compensation reflects only the amounts received from SunRiver Group. In
1993, Ms. McElroy received options for 90,000 shares of SunRiver Group
common stock of which 15,000 shares were fully vested. Mr. Kuntz is no
longer employed by the Company.
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<PAGE>
(2) Consists, in part, of bonuses for service rendered in connection with the
Digital Acquisition (Mr. Youngblood: $100,000; Mr. Giovaniello: $25,000;
Ms. McElroy: $25,000; and Mr. Kuntz: $10,000).
(3) Relocation reimbursements.
Employment Agreements
None of the Company's officers has an employment contract with the Company.
Compensation Committee Interlocks and Insider Participation
Messrs. Youngblood and Long and Ms. McElroy, who are executive officers of
the Company, are also members of the Company's Board of Directors and, during
1995, participated in deliberations concerning executive officer compensation
but none of them voted on his or her own individual compensation. However, their
joint deliberations gave rise to conflicts of interest which could have affected
their respective compensation and the number of stock options granted to them
individually and as a group. In April 1996, the Board of Directors established a
Compensation Committee of the Board, consisting of Mr. Youngblood and Sam Smith,
which will determine executive officer compensation.
-52-
<PAGE>
1995 Incentive Plan
The following table sets forth information, as of December 31, 1995,
regarding the outstanding options granted under the Company's 1995 Incentive
Plan ("1995 Plan") and the holders thereof:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Annual Rates of Stock
Underlying Options/SARs Exercise or Price Appreciation for
Options/SARs Granted under Base Price Expiration Option Term
Name Granted (#)(1) 1995 Plan ($/Sh) Date 5%($) 10%($)
---- -------------- ------------- ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gerald Youngblood 300,000 11.8% $1.35 May 1, 2000 49,680 168,750
Toni McElroy 125,000 4.9% $1.35 May 1, 2000 20,700 70,313
Tony Giovaniello 125,000 4.9% $1.35 May 1, 2000 20,700 70,313
William Long 100,000 3.9% $1.35 May 1, 2000 16,560 56,250
Steve Kuntz 65,000 2.6% $1.35 May 1, 2000 10,764 36,563
</TABLE>
- - --------------------------
(1) Options vest fully on May 1, 1999 over the following vesting schedule:
25 percent on May 1, 1996 and the remainder pro rata on a monthly basis through
May 1, 1999. Options may be exercised by the payment of cash or the delivery of
Common Stock valued at fair market value (as defined in the 1995 Plan) on the
date of exercise. On December 29, 1995, the last sale price of the Common Stock
on The Nasdaq SmallCap Market was $2- 15/16.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table provides information on the value of the Company's
named executive officers' unexercised options to purchase shares of Common Stock
as at December 31, 1995.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 1995 (#) December 31, 1995 ($)(1)
----------------------------- ------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Youngblood 0 $0 0 300,000 $0 $476,250
Toni McElroy 0 0 0 125,000 0 198,438
Tony Giovaniello 0 0 0 125,000 0 198,438
William Long 0 0 0 100,000 0 158,750
Steve Kuntz 0 0 0 65,000 0 103,188
</TABLE>
(1) Fiscal year ended December 31, 1995. The last sale price of the Company's
Common Stock on December 29, 1995, as reported by The Nasdaq SmallCap
Market, was $2-15/16.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of May 22, 1996, by (i)
each of the Company's directors and named officers, (ii) directors and named
officers of the Company as a group and (iii) each person believed by the Company
to own beneficially more than 5% of its outstanding shares of Common Stock. Each
such person has sole voting and investment powers with respect to his and her
shares.(1) The address of SunRiver Group and Gerald Youngblood is the address of
the Company set forth under "Prospectus Summary".
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<PAGE>
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- - ------------------------ ------------------ ------------------
SunRiver Group 30,614,084(2) 59.9%
Gerald Youngblood, Voting Trustee 30,614,084(3) 59.9%
William C. Long 1,520,090(4) 3.0%
Toni McElroy 319,404(5) .63%
Tony Giovaniello 14,500 .03%
Steve Kuntz 45,000 .09%
All directors and executive
officers as a group
(five individuals) 30,743,584(2) 60.2%
---------- -----
- - --------------------------
(1) The beneficial ownership presentation set forth in the table assumes the
issuance of all shares of common stock and warrants issued, and to be
issued pursuant to the terms of the SunRiver Group Acquisition.
(2) Includes 4,174,704 shares underlying the SunRiver Group Warrant. SunRiver
Group has the sole power to vote and to dispose of these shares.
(3) Includes the shares beneficially owned by SunRiver Group, as a result of
Mr. Youngblood's beneficial ownership, as voting trustee, of 4,900,000
shares of Series B Preferred Stock of SunRiver Group (the "Series B
Preferred"). The Series B Preferred has the power to elect three of the
five directors, constituting SunRiver Group's entire board of directors.
The voting trust shares constitute 75.4% of the 6,500,000 outstanding
shares of the Series B Preferred. Messrs. Jeffrey K. Moore and Matthew R.
Moore (the "Moore Brothers") each owns 1,657,000 shares of the Series B
Preferred, and, voting together, have the power to replace Gerald
Youngblood as voting trustee under the voting trust agreement, which
permits a majority in interest of the voting trust shares to remove the
voting trustee at any time for any reason. Each of the Moore brothers
disclaims beneficial ownership of the other's shares of SunRiver Groups'
Series B Preferred. See "Certain Transactions."
(4) Includes 1,295,530 shares of Common Stock and 204,560 shares underlying the
SunRiver Group Warrant as a result of ownership of shares of Series A
Preferred Stock of SunRiver Group and options to purchase common stock of
SunRiver Group.
(5) Includes 232,667 shares of Common Stock and 36,737 shares underlying the
SunRiver Group Warrants as a result of ownership of options to purchase
common stock of SunRiver Group.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth, as of May 22, 1996 the number of shares of
Common Stock, being offered for sale by each Selling Stockholder, which in each
case equals the number of shares of Common Stock beneficially owned by such
Selling Stockholders, except as footnoted below. Each Selling Stockholder has
advised the Company that he, she or it has sole voting and investment power with
respect to his, her or its shares. Unless noted otherwise or unless additional
securities of the Company are acquired by Selling Stockholders, the Selling
Stockholders will own no securities of the Company following the sale of such
shares.
Shares Being Offered and
Beneficially Owned Prior to
Offering
---------------------------
Theodore C.L. Aalbersberg 50,000
Miram Akhmedchanov(1)(5) 35,000
David Aronson 50,000
Milton H. Barker 50,000
Norman B. Barker and Leona J. Barker, as
joint tenants 100,000
Sidney Borenstein(1)(5) 30,000
Lewis S. Broad 150,000
Ted L. Brown (IRA) 50,000
Ted L. Brown 50,000
BTI Computers, Inc. 100,000
John W. Caldwell 50,000
Michael Cantor 150,000
Ron Cantor, Esq., Attorney for Marc
Roberts, Eugene Silverman and James Katz 50,000
as Tenants in Common
Edward H. Caplan 40,000
Michael Carrieri(2)(4) 10,000
William E. Cassidy 100,000
Dominic Choong (W) (50,000)
Connie S. Y. Coleman 50,000
Jose Colon 50,000
Eugene L. Crance 50,000
Yuthika Dalal 100,000
Davis Brothers Cotton Inc. 70,000
Digital Equipment Corporation(3) 1,000,000
East/West International 472,000
Edgewater Trust(5) 950,000
Eldad Investment Club 50,000
Alan Fisher 50,000
Jeffrey Foster(2)(4) 5,500
Michael Franklin(1)(5) 20,000
Alan H. Franklin, Estate of (1)(5) 20,000
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<PAGE>
William Harrell Freeman 50,000
Louis Gaudio
and Rosann Gaudio, JTIC 100,000
Gilman Investment Company(W) (100,000)
Anthony Giovaniello(2)(4) 14,500
Goodman Fence, Inc. (John H. Goodman,
president) 50,000
Sheldon H. Gopstein 10,000
Grand Stands, Inc. (W) (50,000)
Stephen Green(2)(4) 9,100
Brian Hann(2)(4) 40,000
Phillip Hay 200,000
Barry J. Heller, Sr. 100,000
Toshiko Hirata 100,000
Jerry Ivy Separate Property Revocable Trust
dtd 4-20-90 (Jerry Ivy, trustee) 400,000
JCF One Trust
(Diane Finkle, trustee) 50,000
Douglas Francis Johnston 100,000
Neil H. Jones 100,000
Brian Jost 50,000
Kevin Karcher(2)(4) 54,500
Kempisty & Company, CPA's P.C. 10,000
Malka Klein 50,000
Abraham Klein 50,000
Stephen Kuntz(2)(4) 45,000
Richard M. Larry 100,000
Glen R. Larson 50,000
Tuan-Li Diana Liao 300,000
Betsy Lodwick and L.N. Lodwick, JTWROS 200,000
William Long(2)(4) 20,000
Michael Lubin Profit Sharing Keogh Trust 250,000
Asadour Manavazian 150,000
Mario Marsillo, Jr. 50,000
Toni McElroy(2)(4) 50,000
Milton Trust(5) 633,900
Niles Moser 100,000
James S. Mulholland 200,000
Robert E. Newman 100,000
Elliott Ostro 100,000
Pan Pacific Securities Management Ltd. (W) (100,000)
Constantine Papadopoulas (W) (50,000)
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<PAGE>
Parkland, Inc. 50,000
Paul Aleks Jewelry (W) (50,000)
Craig Parks(2)(4) 10,000
Faye Peltz(1)(5) 150,000
Robert Porter(2)(4) 36,000
John Quakenbush 100,000
RAS Securities Corp.(1)(5) 505,310
Kenneth Romano (W) (50,000)
Guillermo Rosales 100,000
Mark Rubin (W) (50,000)
The Schmidt Family Trust (Chauncey E.
Schmidt, Trustee) 100,000
Robert A. Schneider(1)(5) 300,000
Arnold James Schwimmer 200,000
Irwin Segal 100,000
Aleksandr Shvarts (W*) (68,000)
Clarence Sikes 50,000
George Sinel 40,000
Socrates Skiadas 100,000
Michael Stebel(2)(4) 10,000
Sullivan Trust(5) 525,400
Joseph R. Takats 200,000
Yair Talmi 50,000
Yai Tai Tang 50,000
Grigori Tsoukanov 50,000
Thomas Upton(2)(4) 60,000
Wabash Leasing (Harvey Delott, president) 50,000
James A. White
and Ann H. White 100,000
Raymond J. Wiacek 200,000
Esther Williams 300,000
Judith Wohlberg 50,000
Gerald D. Wollert Revocable Living Trust
dated 4/4/90 50,000
(W) Holders of warrants, expiring May 19, 1997, to purchase the number of
shares of Common Stock indicated in parentheses, at a price per share to be
adjusted to between $.85 and $1.75, subject to further adjustment. Dominic
Choong is also record holder 39,333 shares of Common Stock.
(W*) Holder of warrants, expiring November 16, 1997, to purchase, at $6.60 per
share, the number of shares of Common Stock indicated in parentheses.
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<PAGE>
(1) Together with the 364,600 shares transferred by RAS to employees of
SunRiver Data, constitutes the 3,366,210 shares being offered hereby by RAS
and its designees. See "Reorganization - SunRiver Group and SunRiver Data
Acquisitions."
(2) Current or former employees of SunRiver Data who as a group acquired
364,600 shares from RAS. Such shares, except those owned by Mr. Kuntz and
Mr. Karcher, may not be sold on or prior to December 31, 1996.
(3) Digital currently owns 793,389 shares of Common Stock but may receive up to
an additional 206,611 shares of Common Stock upon effectiveness of this
Registration Statement if the closing price of the Common Stock is less
than $3-25/32 on The Nasdaq Small Cap Market. See "Recent Developments -
Purchase of Digital's Assets - Related Agreements With Digital."
(4) Current or former employees of the Company. The shares listed, except those
owned by Mr. Kuntz and Mr. Karcher, may not be sold on or prior to
December 31, 1996. See "Security Ownership of Certain Beneficial Owners and
Management" for additional shares of Common Stock beneficially owned by the
Company's executive officers and directors.
(5) One-half of listed shares may not be sold prior to June 9, 1996.
PLAN OF DISTRIBUTION
Each Selling Stockholder is free to offer and sell his or her shares of
Common Stock at such times, in such manners and at such prices as he or she
shall determine. Shares of Common Stock may be offered by the Selling
Stockholders in one or more types of transactions, which may or may not involve
brokers, dealers or cash transactions. The Selling Stockholders may also use
Rule 144 to sell such shares, if they meet the criteria and conform to the
requirements of such Rule. See "Security Ownership of Certain Beneficial Owners
and Management - Shares Eligible For Future Sale."
There is no underwriter or coordinating broker acting in connection with
the proposed sales of shares of Common Stock by the Selling Stockholders. The
Selling Stockholders and any broker-dealers that act in connection with the sale
of the Selling Stockholders' Common Stock may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act of 1933.
It is currently anticipated that officers and directors of the Company will
offer and sell the Company Shares on behalf of the Company without using the
services of any underwriter, selling agent or finder. However, the Company may
sell the Company Shares through underwriters or dealers or through agents. If an
underwriter is used, a post-effective amendment ("Post-Effective Amendment") to
the Registration Statement of which this Prospectus is a part will set forth the
terms of the offering, including the names of any underwriters, the net proceeds
to the Company from the offering, any fixed underwriting discounts and other
items constituting underwriters' compensation, any initial public offering price
and any fixed discounts or concessions allowed or reallowed or paid to dealers.
If underwriters should be used in the sale of the Company Shares, such shares
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the times of sale.
-59-
<PAGE>
Any agent of the Company involved in the offer or sale of the Company
Shares will be named with respect thereto in a Post-Effective Amendment and any
commissions payable by the Company to such agent will be set forth in that
Post-Effective Amendment. Unless otherwise indicated in that Post-Effective
Amendment, any such agent will be acting on a best efforts basis for the period
of its appointment.
The Company may indemnify underwriters and dealers, if any, that
participate in the sales of the Company Shares against, and make contributions
to them with respect to, certain civil liabilities, including liabilities under
the Securities Act of 1933.
CERTAIN TRANSACTIONS
In December 1994, the Company agreed to pay each of Rosbro, a corporation
beneficially owned by Mr. Conrad, and Mr. Combs $100,000 in consideration for
services rendered in connection with the SunRiver Data Acquisition. This
liability was included in the Capital Assumed Liabilities and, in August 1995,
Mr. Conrad and Mr. Combs each provided to the Company general releases,
releasing all of their prior claims against the Company, including this
liability. As additional consideration for Mr. Combs' services, on October 3,
1994, the Company granted options to Mr. Combs to purchase 700,000 shares of
Common Stock at $2.38 per share (subsequently adjusted to $1.50 per share in
consideration for his agreement not to exercise such options for a certain
period of time) at any time prior to October 3, 1999. Prior to December 12,
1994, the Company was obligated to pay cash compensation to Rosbro in the amount
of $120,000 per annum. The Rosbro Agreement was terminated on December 12, 1994
in consideration for the issuance of 300,000 shares of the Company's Common
Stock. The Company believes that the terms of the transactions between the
Company and Rosbro and the Company and Mr. Combs were as favorable to the
Company as obtainable from unaffiliated third parties. See "Management-
Executive Compensation."
Mr. William Moore, the father of Jeffrey K. Moore and Matthew R. Moore, has
acted as a consultant for the SunRiver Group from time to time, and North
American Funding Corporation, L.L.C. ("NAFC"), a corporation of which he is the
sole stockholder, received a consulting fee of $75,000 in consideration for
services rendered in connection with the acquisition of SunRiver Data. In
addition, included among the SunRiver Group liabilities, which were assumed by
the Company, is a consulting agreement with NAFC pursuant to which the Company
was obligated to pay NAFC $120,000 per year for general financial consulting
services. Such agreement was cancelled and a new agreement was entered into
between the Company and NAFCO Consulting, Inc. ("NAFCO"), a corporation wholly
owned by William Moore, that provided for, in addition to payment of $120,000
for general financial consulting services, compensation for special assignments
in amounts to be agreed upon by the parties. The Company paid NAFCO $137,742 in
1995, including $10,000 for special assignments and $7,742 for expenses. This
agreement terminated December 31, 1995 and in connection therewith, the Company
believes that the agreement between the Company and NAFCO was on terms as
favorable to the Company as obtainable from unaffiliated third parties. On
August 16, 1995 and January 31, 1996, the Company issued 200,000 shares and
225,000 shares, respectively, of Common Stock to William Moore (as stock grants
under the Company's 1995 Incentive Plan, which the Company has valued at
$905,000) in consideration for special consulting services rendered in 1995. On
September 13, 1995, NAFCO made a loan of $95,000 to TradeWave that was repaid in
installments, without interest, by January 10, 1996. Reference is made to Note 3
to the table under the caption "Security Ownership of Certain Beneficial Owners
and Management", above, regarding the shares of preferred stock of SunRiver
Group owned by Messrs. Jeffrey K. Moore and Matthew R. Moore, which, if voted
together, have the power to elect three of the five directors of SunRiver Group.
-60-
<PAGE>
On December 12, 1994, effective December 9, 1994, the Company acquired, and
contributed to SunRiver Data, the SunRiver Group assets and assumed all of the
SunRiver Group liabilities. In connection with the foregoing, the Company (i)
issued a total of 12,594,001 shares of its Common Stock, of which 5,594,001
shares were issued to SunRiver Group and 7,000,000 shares were issued to
investors in the Private Placement at $.50 per share; (ii) in connection with
the Private Placement, paid RAS $455,000 for acting as exclusive placement
agent, $250,000 as an investment banking fee and $240,000 as a consulting fee;
(iii) agreed to issue an additional 24,936,589 shares of its Common Stock
(20,845,379 to SunRiver Group and 4,091,210 to RAS or its designees); and (iv)
agreed to issue to SunRiver Group the SunRiver Group Warrant to purchase an
additional 4,174,704 shares of the Company's Common Stock at $1.84 per share
(the closing market price of the Common Stock on December 9, 1994). In
connection with the Digital Acquisition, SunRiver Group pledged 21,439,380
shares of Common Stock to Chase and 5,000,000 shares of Common Stock to NCR. In
consideration of such pledge, the Company expects to issue to SunRiver Group
warrants to purchase such number of shares of Common Stock at $3.875 per share,
subject to adjustment, as the Board of Directors of the Company determines is
appropriate after obtaining independent advice regarding the fairness of such
warrants.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). As of May 22, 1996, the
Company had outstanding 46,895,895 shares of Common Stock and no shares of
Preferred Stock.
Common Stock
The shares of Common Stock currently outstanding are fully paid and
non-assessable. Each holder of Common Stock is entitled to one vote for each
share owned of record on all matters voted upon by stockholders, and other than
the election of directors, which requires a plurality vote, a majority vote of
the outstanding stock entitled to vote is required for all actions to be taken
by stockholders. In the event of a liquidation, dissolution or winding-up of the
Company, holders of the Common Stock are entitled to share equally and ratably
in the assets of the Company, if any, remaining after the payment of all debts
and liabilities of the Company and the liquidation preference of any outstanding
Preferred Stock. The Common Stock has no preemptive rights, no cumulative voting
rights, and no redemption, sinking fund or conversion provisions. Since the
holders of Common Stock do not have cumulative voting rights, holders of more
than 50% of the outstanding shares can elect all of the directors of the Company
and holders of the remaining shares by themselves cannot elect any directors.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board out of funds legally available for such purpose, subject
to the dividend and liquidation rights of any Preferred Stock that may be
issued.
-61-
<PAGE>
Preferred Stock
The Certificate of Incorporation of the Company gives the Board the
authority to issue up to 1,000,000 shares of Preferred Stock from time to time,
in one or more series and in any manner permitted by law, as determined from
time to time by the Board. The Preferred Stock may have such voting powers, full
or limited, or no voting powers, and such designations, preferences and
relative, participating, optional, or other special rights and qualifications,
limitations or restrictions, as the Board determines.
Shares of the Preferred Stock could be issued that would have rights with
respect to voting, dividends and liquidation that would be adverse to those of
the Common Stock. The Board could approve the issuance of Preferred Stock to
discourage attempts by others to obtain control of the Company by merger, tender
offer, proxy contest or otherwise by making such attempts more costly to
achieve.
The Board believes that it is desirable to have a sufficient number of
shares of Preferred Stock available, as the occasion may arise, for possible
future financings and acquisition transactions and other proper corporate
purposes. Having a sufficient number of shares of Preferred Stock available for
issuance in the future would give the Company greater flexibility by allowing
shares of Preferred Stock to be issued without incurring the delay and expense
of a special stockholders' meeting. The Company is not conducting any
negotiations and has no present plans, agreements, or understandings, written or
oral, regarding acquisitions involving the issuance of Preferred Stock.
Shares Eligible for Future Sale
The 30,614,084 shares of the Company's Common Stock beneficially owned by
SunRiver Group are "restricted" securities within the meaning of Rule 144 under
the Securities Act ("Rule 144") and may not be sold unless registered under the
Securities Act or exempt from such registration, including as a result of the
exemption provided by Rule 144. SunRiver has agreed not to sell any of such
shares until June 9, 1996 without the prior written consent of RAS. Commencing
December 12, 1996, 26,439,380 of the shares owned by SunRiver Group will be
eligible for resale under Rule 144. Shares purchasable upon exercise of warrants
owned by SunRiver Group would not be eligible for resale under Rule 144 until
two years after they are purchased.
Under Rule 144, an "affiliate" of an issuer is a person who directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with such issuer. Rule 144 permits an "affiliate" of
the Company to sell, within any three-month period, a number of shares that does
not exceed the greater of (a) 1% of the shares of Common Stock then outstanding
or (b) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale.
No predictions can be made as to the effect, if any, that sales of shares
under Rule 144 or the availability of shares for sale will have on the market
prices of the Company's Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Company's Common Stock.
-62-
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered hereby is being passed on by
Fischbein Badillo Wagner Harding, 909 Third Avenue, New York, New York 10022.
EXPERTS
The consolidated balance sheets of SunRiver Corporation and Subsidiaries as
of December 31, 1995 and December 31, 1994 and their consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
ended December 31, 1995, December 31, 1994 and December 31, 1993, included in
this Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of said firm
as experts in auditing and accounting. The Statement of Assets Sold as of July
1, 1995 and the Statements of Revenue and Direct Operating Expenses for the
years ended July 1, 1995, July 2, 1994 and July 3, 1993 of the Selected Text
Terminal Products of the Video Business Segment of the Components & Peripherals
Business Unit of Digital Equipment Corporation, (the "Business") included in
this Prospectus, have been included herein in reliance on the report, which
includes explanatory paragraphs, of Coopers & Lybrand L.L.P., independent
accountants, given on authority of said firm as experts in auditing and
accounting. The explanatory paragraphs state that the statements were prepared
to present the assets sold by the Business to SunRiver Corporation and the
revenue and direct operating expenses of the Business and are not intended to be
a complete presentation of the Business' financial position, results of
operations or cash flows. Also, expenses include only those costs directly
attributable to the products sold. They do not contain any other costs which are
not directly attributable to the products sold. As a result, the statements
presented may not be indicative of the results of operations that would have
been achieved had the Business operated as a nonaffiliated entity.
CHANGE IN ACCOUNTANTS
On December 9, 1994, the Company's former accountant, Philip C. Kempisty of
Kempisty & Company, C.P.A., P.C. ("Former Accountant"), was dismissed as the
Company's accountant and on December 12, 1994, the Company appointed, as its
accountant, Coopers & Lybrand L.L.P.
During the two fiscal years, and any interim period, preceding December 9,
1994 (the "Reporting Period"), none of the Former Accountant's reports on the
Company's financial statements contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principals. During the Reporting Period, there were, to the best
knowledge of the Company, no matters of disagreement between it and the Former
Accountant which would have caused the Former Accountant to make a reference
thereto in connection with its report. During the Reporting Period, the Company
was not advised by the Former Accountant (1) that internal controls necessary
for the Company to develop reliable financial statements do not exist; (2) that
the Former Accountant would no longer be able to rely on management's
representations or that it is unwilling to be associated with the financial
statements prepared by management; (3) that the Company needs to expand
significantly the scope of its audit; (4) that the Former Accountant has
received information which does or which may, if further investigated, impact
the fairness or reliability of a previous report or financial statement or which
does or may cause the Former Accountant to be unwilling to rely on management's
representations or be associated with the Company's financial statements; or (5)
that the Former Accountant did not conduct such further investigation or
expanded audit, or was not able to resolve its concerns about the Company,
because of its dismissal.
-63-
<PAGE>
The decision to change accountants was approved by the Board of Directors
of the Company.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a
Registration Statement (of which this Prospectus is a part and which term shall
encompass any amendments thereto) on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained herein
concerning the provisions of any documents are not necessarily complete;
reference is made to the Registration Statement and such exhibits for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. For further information
pertaining to the shares offered hereby and to the Company, reference is made to
the Registration Statement, including the financial statements, schedules and
exhibits filed as part thereof, which may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549. In addition, upon request such information will be made available
for inspection and copying at the Commission's public reference facilities at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at Seven World Trade Center, 13th Floor, New York, New York
10048.
-64-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
SunRiver Corporation:
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheets as of March 31, 1996 (unaudited)
and December 31, 1995 F-29
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1996 and 1995 F-30
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1996 and 1995 F-31
Notes to Consolidated Financial Statements (unaudited) F-32
Selected Text Terminal Products of the Video Business Segment of the Components
& Peripherals Business Unit of Digital Equipment Corporation:
Report of Independent Accountants F-34
Financial Statements:
Statement of Assets Sold, as of July 1, 1995 F-35
Statements of Revenue and Direct Operating Expenses for
the years ended July 3, 1993, July 2, 1994 and July 1, 1995 F-36
Notes to the Statements F-37
Statement of Assets Sold (unaudited), as of September 30, 1995 F-40
Statements of Revenue and Direct Operating Expenses (unaudited)
for the three months ended September 30, 1995 and September 30,
1994 F-41
Notes to the Statements (unaudited) F-42
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
(Parent Company)
Condensed Balance Sheets as of December 31, 1995 and 1994 S-1
Condensed Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 S-2
Condensed Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 S-3
Schedule II - Valuation and Qualifying Accounts S-4
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
SunRiver Corporation
We have audited the accompanying consolidated financial statements and financial
statement schedules of SunRiver Corporation and Subsidiaries listed in the index
on page F-1 of this Prospectus. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SunRiver
Corporation and Subsidiaries as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 1, 1996
F-2
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
--------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $448,237 $111,081
Trade accounts receivable (including $6,206,007 and $1,662,000 from related
parties at December 31, 1995 and 1994, respectively), net 18,768,338 7,479,682
Inventories 25,758,040 10,876,834
Deferred income taxes 3,102,152 990,000
Prepaid expenses and other current assets 1,571,617 269,229
--------------- ---------------
Total current assets 49,648,384 19,726,826
Property and equipment, net 12,114,000 13,377,130
Goodwill, net 10,607,714 1,458,265
Other assets 3,910,235 2,608,882
--------------- ---------------
--------------- ---------------
$76,280,333 $37,171,103
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $8,000,000
Current portion of long-term debt (including $168,559 due to a related party) 6,630,531
Accounts payable 14,506,202 $5,948,758
Accrued expenses 4,255,508 2,993,671
Deferred revenue 826,844 4,020,285
--------------- ---------------
Total current liabilities 34,219,085 12,962,714
Long-term liabilities:
Long-term debt, less current maturities (including $8,000,000 and $8,168,559 of
debt to related parties at December 31, 1995 and 1994, respectively) 22,624,625 12,823,481
Deferred income taxes 2,213,198 2,888,000
Other 831,775 575,221
--------------- ---------------
Total long-term liabilities 25,669,598 16,286,702
--------------- ---------------
Total liabilities 59,888,683 29,249,416
Commitments and contingencies
Mandatorily redeemable preferred stock of subsidiary 3,554,692 5,535,631
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued - -
Common stock purchased but unissued, $.01 par value per share, 24,936,589
shares to be issued at December 31, 1995 - 249,366
Common stock, $0.01 par value, 60,000,000 shares authorized, 45,550,214 and
13,887,923 shares issued at December 31, 1995 and 1994, respectively 455,502 138,880
Additional paid-in capital 23,769,379 13,553,472
Accumulated deficit (13,056,178) (11,555,662)
--------------- ---------------
Total stockholders' equity 11,168,703 2,386,056
--------------- ---------------
--------------- ---------------
$74,612,078 $37,171,103
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1995 1994 1993
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
Product sales (including sales to a related party of $39,600,000
and $1,841,000 in 1995 and 1994) $2,814,477
$82,919,043 $7,172,747
Services 13,203,336 1,170,919 -
--------------- -------------- ---------------
Total revenue 96,122,379 8,343,666 2,814,477
Cost of revenue:
Product sales 62,555,141 4,378,332 1,637,590
Services 6,829,100 511,254 -
--------------- -------------- ---------------
Total cost of revenue 69,384,241 4,889,586 1,637,590
--------------- -------------- ---------------
Gross margin 26,738,138 3,454,080 1,176,887
Operating expenses:
Sales and marketing 8,346,374 1,091,532 320,693
General and administrative 7,313,909 992,122 409,239
Research and development 6,219,037 990,281 492,672
Charge associated with acquired in-process research and development 1,225,309
--------------- -------------- ---------------
Total operating expenses 23,104,629 3,073,935 1,222,604
--------------- -------------- ---------------
Operating income (loss) 3,633,509 380,145 (45,717)
Other (income) expense:
Interest expense 1,967,432 96,996 35,774
Other (571,607) 60,531 (11,323)
--------------- -------------- ---------------
Total other expense 1,395,825 157,527 24,451
--------------- -------------- ---------------
Income (loss) before income taxes and extraordinary item 2,237,684 222,618 (70,168)
Income tax expense 187,377 185,000
--------------- -------------- ---------------
Income (loss) before extraordinary item 2,050,307 37,618 (70,168)
Income from discontinued operations 1,148,797
Extraordinary loss on early extinguishment of debt,
net of tax benefit of $392,785 (589,177)
--------------- -------------- ---------------
Net income (loss) 2,609,927 37,618 (70,168)
Dividend on preferred stock of subsidiary 93,130
Accretion to preferred stock of subsidiary 680,803 63,840 -
Charge for restructuring of preferred stock of subsidiary 1,668,255
--------------- -------------- ---------------
--------------- -------------- ---------------
Earnings (loss) available for common shareholders $167,739 $ (26,222) $(70,168)
--------------- -------------- ---------------
--------------- -------------- ---------------
Weighted average common shares outstanding 43,656,273 27,185,879 26,435,288
--------------- -------------- ---------------
--------------- -------------- ---------------
Earnings per common share before extraordinary items:
Continuing operations $ (0.00) $ 0.00 $ 0.00
Discontinued operations $0.02
Extraordinary loss $ (0.01)
--------------- -------------- ---------------
--------------- -------------- ---------------
Earnings per common share $0.00 $ 0.00 $ 0.00
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid-In Accumulated
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Capital Deficit Total
---------- --------- ---------- --------- ----------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................ 13,269,882 $132,699 24,105,919 $241,059 26,431,986 $264,320 $10,933,696 $(11,459,272) $ 112,502
Retirement of pre-
ferred stock...... (79,885) (779) (4,813) (5,612)
Issuance of common
stock............. 7,393 74 1,926 2,000
Net loss............ (70,168) (70,168)
---------- -------- ---------- -------- ---------- -------- ----------- ------------ ----------
Balance at December 31,
1993................ 13,269,882 132,699 24,026,034 240,260 26,439,379 264,394 10,930,809 (11,529,440) 38,722
Recapitalization.... (13,269,882) (132,699)(24,026,034) (240,260) 7,719,681 77,197 1,489,495 1,193,773
Issuance of common
stock, net of
expenses.......... 4,077,452 40,775 845,048 885,823
Issuance of common
stock for retire-
ment of long-term
debt to related
party............. 288,000 2,880 141,120 144,000
Issuance of common
stock to related
party in settlement
of management
agreement......... 300,000 3,000 147,000 150,000
Accretion of pre-
ferred stock of
subsidiary........ (63,840) (63,840)
Net income.......... 37,618 37,618
---------- -------- ---------- -------- ---------- -------- ----------- ------------ ----------
Balance at December 31,
1994 (1)............ -- -- -- -- 38,824,512 388,246 13,553,472 (11,555,662) 2,386,056
Issuance of common
stock............. 4,405,486 44,054 5,500,439 5,544,493
Conversion of notes
payable........... 3,056,717 30,567 4,544,433 4,575,000
Distribution of net
assets............ (736,501) (7,365) (2,350,165) (2,357,530)
Warrants issued in
connection with
placement of debt. 1,691,200 1,691,200
Restructuring of
mandatorily re-
deemable preferred
stock of subsidi-
ary............... 830,000 (1,668,255) (838,255)
Dividend on pre-
ferred stock of
subsidiary........ (93,130) (93,130)
Accretion to pre-
ferred stock of
subsidiary........ (680,803) (680,803)
Net income.......... 2,609,927 2,609,927
---------- -------- ---------- -------- ---------- -------- ----------- ------------ ----------
Balance at December 31,
1995................ -- $ -- -- $ -- 45,550,214 $455,502 $23,769,379 $(11,387,923) $12,836,958
---------- -------- ---------- -------- ---------- -------- ----------- ------------ ----------
---------- -------- ---------- -------- ---------- -------- ----------- ------------ ----------
</TABLE>
(1) Includes 26,936,589 shares of common stock purchased but unissued at
December 31, 1994
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $2,609,927 $ 37,618 $ (70,168)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Income from discontinued operations.......................... (1,148,797)
Depreciation and amortization................................ 2,731,627 306,721 58,372
Amortization of debt issuance costs.......................... 183,735
Deferred revenues............................................ (3,193,441) (397,073)
Provision for doubtful accounts.............................. 1,072,000 47,863
Provision for excess and obsolete inventory.................. 347,890 42,150 24,928
Deferred taxes............................................... (2,786,954) 48,000
Write-off of intangible assets............................... 1,554,216
Shares issued in settlement of management agreement.......... 155,250 150,000
Charge associated with acquired in-process research and
development................................................ 1,225,309
Extraordinary loss on early extinguishment of debt........... 281,962 8,173
Changes in assets and liabilities:
Trade accounts receivable.................................... (12,360,657) (1,878,993) (80,800)
Inventories.................................................. (7,595,096) (313,348) (39,134)
Other assets................................................. (1,555,173) (496,316) (24,059)
Accounts payable and accrued expenses........................ 9,156,144 1,607,519 34,957
------------ ------------ ----------
Net cash used in operating activities.................. (9,322,058) (837,686) (95,904)
------------ ------------ ----------
Cash flows from investing activities:
Capital expenditures........................................... (267,327) (100,190) (17,419)
Purchase of SunRiver Data, net of cash acquired................ (5,441,392)
Payments for other assets...................................... (3,133)
Purchase of Digital assets..................................... (14,970,449)
Purchase of EINet assets....................................... (368,365)
------------ ------------ ----------
Net cash used in investing activities.................. (15,606,141) (5,541,392) (20,552)
------------ ------------ ----------
Cash flow from financing activities:
Proceeds from issuance of common stock......................... 2,164,243 1,840,857 2,000
Decrease in short-term debt, net............................... (40,360)
Proceeds from debt issuance.................................... 4,575,000 1,680,585 42,916
Advance payment on GAI Partnership............................. 75,000
Costs associated with issuance of debt instruments............. (1,295,000)
Restructuring of mandatorily redeemable preferred stock of
subsidiary................................................... (3,500,000) (5,612)
Net change in revolving loan payable........................... 3,365,550
Proceeds from debt issuance to finance acquisition............. 20,000,000 2,961,274
Purchase of treasury stock..................................... (15,000) (1,861)
Payments on capital leases..................................... (44,438) (44,551) (58,136)
------------ ------------ ----------
Net cash provided by financing activities.............. 25,265,355 6,423,165 13,947
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents............. 337,156 43,897 (102,509)
Cash and cash equivalents at beginning of period................. 111,081 67,184 169,693
------------ ------------ ----------
Cash and cash equivalents at end of period....................... $ 448,237 $ 111,081 $ 67,184
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
Continued
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the Years Ended
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Non-cash transactions:
Equipment acquisitions funded through capital leases........... $ 232,022
Issuance of common stock to retire debt........................ -- $ 144,000
Issuance of common stock for management services............... -- 150,000
Expenses paid for private placement to be deducted from
proceeds..................................................... -- 955,000
Accretion to preferred stock of subsidiary..................... 680,803 63,840
Dividend on preferred stock of subsidiary...................... 93,130
Conversion of notes payable to common stock.................... 4,575,000
Distribution of net assets..................................... 2,357,530
Issuance of common stock in Digital acquisition................ 3,000,000
Issuance of common stock for consulting services............... 380,250
Obligations incurred in connection with the acquisition
of equipment and intellectual property 741,944 8,000,000
Estimated value of compensatory warrants....................... 3,216,267
Cash paid for:
Interest....................................................... 1,615,011 31,600 $ 35,800
Taxes.......................................................... 1,552,914
</TABLE>
F-7
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
SunRiver Corporation (the "Company") is engaged, through operating subsidiaries,
in designing and manufacturing graphics and text computer terminals for business
use and in developing Internet software for businesses. The Company's general
strategy is to operate in one business segment as a provider of devices which
provide access to corporate network computing environments, and software for
secure, private communications and electronic commerce over the Internet. The
Company has two operating subsidiaries, SunRiver Data Systems Inc., ("SunRiver
Data") and TradeWave Corporation ("TradeWave").
During the period beginning in December 1994 and ending in October 1995, the
Company made acquisitions and dispositions which resulted in a total change in
the Company's business and management. On December 9, 1994, All-Quotes, Inc.
("All-Quotes") and its wholly-owned subsidiary All-Quotes Capital ("Capital")
entered into an acquisition agreement with SunRiver Group , formerly named
SunRiver Corporation, (the "SunRiver Group Acquisition"). Pursuant to the terms
of the SunRiver Group Acquisition agreement, All-Quotes agreed to issue to
SunRiver Group that number of newly issued shares which represented at least 63%
of the outstanding shares of common stock of All-Quotes in exchange for all of
SunRiver Group's assets and liabilities. This transaction is more fully
described in Note 3. For accounting purposes the transaction was treated as a
recapitalization of All-Quotes, with SunRiver Group as the acquirer, and its
assets and liabilities are recorded at carryover basis. The former businesses of
All-Quotes that were distributed to certain All-Quotes' shareholders (see Note
18) during 1995 were recorded at historical net book value. Accordingly, the
historical financial statements prior to December 9, 1994 are those of SunRiver
Group, and all historical and any pro forma information related to All-Quotes
has been excluded from these financial statements. The Company, which was
incorporated in Delaware in 1988 as All-Quotes, Inc., changed its name to
SunRiver Corporation, and changed its fiscal year end from June 30 to December
31.
As a result of two acquisitions since December 1994, the Company, through
SunRiver Data, has been designing, assembling, selling and supporting general
display terminals with limited graphics capability, high performance network
graphics display terminals based on the X-Terminal protocol, and high
performance alternatives to personal computers and other terminal products in
multi-user, personal computer and minicomputer-based environments.
The Company, through its indirect, wholly-owned subsidiary, SunRiver Data,
manufactures and sells display desktop devices through both direct and indirect
marketing channels. The Company acquired all of the outstanding common stock of
SunRiver Data on December 9, 1994, through a newly-formed wholly-owned
subsidiary, SunRiver Acquisition Corporation ("Acquisition"). This transaction
is more fully described in Note 3.
In October 1995, SunRiver Data acquired assets relating to the General Display
Terminal products of Digital Equipment Corporation ("Digital") sold under the
"VT" and "Dorio" brands (excluding the VT 400 Series) (see Note 5).
F-8
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
A partnership formed in May 1995 by SunRiver Data and General Automation, Inc.
("GAI"), and managed by GAI, designs, integrates, sells and supports multi-user
computer systems that can manage large volumes of data running SunRiver Data's
and GAI's version of the database system licensed from Pick Systems. SunRiver
Data also offers post-sale customer support services for its desktop terminals.
SunRiver Data's products and services are offered solely to businesses.
As a result of a third acquisition (see Note 4) in April 1995, the Company,
through TradeWave, has also been engaged in the business of developing and
selling Internet software and value-added services which enable businesses to
conduct private, secure communication and electronic commerce transactions over
the Internet.
2. Summary of Significant Accounting Policies
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, after elimination of intercompany accounts and transactions.
Certain reclassifications have been made to prior years' financial statements to
conform to the current year presentation.
Cash and Cash Equivalents
- - -------------------------
All highly liquid investments with remaining maturities at purchase of three
months or less are considered cash equivalents.
Property and Equipment
- - ----------------------
Property and equipment are stated at cost. Depreciation is computed on the
straight line method over the estimated useful lives of the assets. Buildings
and improvements are depreciated over a 25 year period, and machinery and
equipment are depreciated over periods ranging from 2 to 15 years. Expenditures
that increase the value or extend the life of an asset are capitalized, while
costs of maintenance and repairs are expensed as incurred. Gains or losses upon
disposal of assets are recognized in income.
F-9
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Fair Value of Financial Instruments
- - -----------------------------------
The carrying amounts of cash and cash equivalents, redeemable preferred stock
and long-term debt reported on the balance sheets approximate their fair value.
The Company estimated the fair value of redeemable preferred stock and long-term
debt by comparing the carrying amount to the future cash flows of the
instrument, discounted using the Company's incremental rate of borrowing for a
similar instrument.
Research and Development
- - ------------------------
Research and development expenses are charged to operations as incurred. The
development costs of software to be marketed are expensed as incurred until
technological feasibility is established. After that time, the remaining
software production costs are capitalized as other assets in the balance sheet.
Capitalized software costs are amortized using the sum of the years' digits
method over three years, the estimated economic life of the software products.
At December 31, 1995 and 1994, capitalized software development costs, net of
amortization, were $319,248 and $562,000. Amounts capitalized and expensed for
the years ended December 31, 1995 and 1994 were as follows:
1995 1994
------------ ------------
Capitalized software costs................... $ 409,048 $ 40,000
Amortization expense......................... 408,703 30,000
Revenue Recognition
- - -------------------
The Company recognizes revenue from product sales upon shipment to the customer.
A provision for estimated future returns and potential warranty liability is
recorded at the time revenue is recognized. Service revenue is recognized when
services are performed and billable. Revenue from maintenance and extended
warranty agreements are deferred and recognized ratably over the term of the
agreement.
Advertising Expenses
- - --------------------
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $561,849 and $104,603 for the years ended December 31, 1995 and
1994, respectively.
Goodwill
- - --------
Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill is amortized on a straight-line basis over 10 years. Amortization of
goodwill amounted to $386,061 for the year ended December 31, 1995 and $10,994
during the period from acquisition to December 31, 1994.
F-10
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Earnings (Loss) Per Common Share
- - --------------------------------
The computation of earnings (loss) per common share is based upon the weighted
average number of common shares and common equivalent shares outstanding during
the period, deemed to include shares purchased but unissued, plus (in periods in
which they have a dilutive effect) the effect of common shares contingently
issuable from exercise of stock options and warrants, and conversion of
convertible notes payable. These contingently issuable common shares were not
included in the calculation of earnings (loss) per share for any period except
the year ended December 31, 1994, as the effect would have been either not
material or anti-dilutive for all other periods presented. Earnings (loss)
available for common shareholders includes the effects of the accretion to the
preferred stock of a subsidiary and preferred stock dividends. As a result of
the recapitalization described in Note 1, the number of shares outstanding have
been retroactively restated for all periods presented.
Pervasiveness of Estimates
- - --------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
- - ------------
As more fully discussed in Note 9, income taxes are provided in accordance with
the liability method of accounting for income taxes pursuant to the Financial
Accounting Standards Board ("FASB") Statement No. 109. Accordingly, deferred
income taxes are recorded to reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial amounts at
year end.
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, companies to adopt fair value accounting to recognize
compensation expense for grants under stock-based compensation plans. However,
companies must comply with the fair value disclosure requirements set forth in
Statement 123, which is effective for fiscal years beginning after December 15,
1995. The Company expects to adopt only the reporting standards of Statement
123, which should not impact the Company's financial statements.
F-11
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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.
3. Acquisition of SunRiver Group and SunRiver Data
Issuance of Common Stock to SunRiver Group
- - ------------------------------------------
Pursuant to the terms of the SunRiver Group Acquisition agreement referred to in
Note 1, on December 9, 1994, the Company issued 5,594,001 shares of its common
stock to SunRiver Group in exchange for all of SunRiver Group's assets and
liabilities. The Company also agreed to issue to SunRiver Group, for no
additional consideration, that number of newly issued shares that would have
increased SunRiver Group's total ownership of the Company's outstanding common
stock to not less than 63% after giving effect to certain other issuances of
common stock as described below.
On December 9, 1994, the Company did not have a sufficient number of shares of
authorized but unissued common stock available to complete the transactions
required by the SunRiver Group Acquisition agreement. Accordingly, the Board of
Directors of the Company agreed to take all steps required to restate its
Certificate of Incorporation to increase the number of authorized shares and
issue the required shares to establish SunRiver Group's ownership at not less
than 63% of the Company's then outstanding common stock. At December 9, 1994,
the Company delivered to SunRiver Group proxy and voting agreements which
entitled SunRiver Group to represent and vote 3,103,000 shares at any meeting of
stockholders on any matter requiring stockholder approval. These proxy and
voting agreements, along with the shares issued to SunRiver Group at closing,
represent at least 51% of the voting rights of the outstanding common
stockholders. As SunRiver Group unconditionally controlled the Company and had
the intent and ability to maintain ongoing ownership as noted above, the
transaction was accounted for effective December 9, 1994. During 1995, the
Company amended its Certificate of Incorporation to increase the total number of
shares of common stock authorized from 20,000,000 to 60,000,000, and issued the
additional shares required under the SunRiver Group Acquisition agreement.
During October 1995, pursuant to the terms of the SunRiver Group Acquisition
agreement and in consideration for SunRiver Group's guarantee of the Amended Put
Option referred to in Note 5, the Company issued to SunRiver Group a warrant to
acquire an additional 4,174,704 shares of the Company's common stock at an
exercise price equal to the market value per share of the Company's common stock
on December 9, 1994. The value of such warrants was determined to be immaterial.
Exchange Offer
- - --------------
On December 9, 1994, the Company agreed to assign all of its assets and
liabilities to its wholly-owned subsidiary, Capital, and effectively cease all
existing business operations. The proceeds from a private placement in process
(more fully described below) and the SunRiver Group assets and liabilities were
excluded from the assets and liabilities assigned to Capital. Capital entered
into an escrow agreement whereby cash and shares of its common stock were
deposited in escrow as collateral for all of the Company liabilities transferred
to it. The Company agreed to prepare and complete an exchange offer whereby the
Company would exchange all of its common stock of Capital for shares of common
stock of the Company held by certain of its shareholders of record as of the
closing date, none of whom were part of SunRiver Group. Accordingly, Capital's
net assets were classified as discontinued operations in the accompanying
December 31, 1994 consolidated balance sheet.
F-12
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As more fully described in Note 18, in 1995 the Company sold substantially all
of the operating assets of its dial-up market data services and later disposed
of its remaining interest in Capital.
Other Issuances of Common Stock
- - --------------------------------
On December 9, 1994, the Company issued 288,000 shares of common stock, valued
at $.50 per share, to a creditor of the Company in satisfaction of the
outstanding principal and related accrued interest owed by the Company as of
that date.
On December 9, 1994, the Company issued 300,000 shares of common stock, valued
at $.50 per share, to Rosbro Capital Corp. ("Rosbro"), which was charged to
expense, as consideration for releasing the Company from its obligations under a
management consulting agreement. Rosbro is a corporation that is beneficially
owned by the former Chairman of the Company.
SunRiver Data Acquisition
- - -------------------------
Acquisition acquired all of the outstanding common stock of SunRiver Data from
the former owner, NCR Corporation ("NCR") (the "SunRiver Data Acquisition"), for
$5 million in cash, an $8 million mortgage note payable to NCR and $5.5 million
of mandatorily redeemable preferred stock of SunRiver Data. Additionally,
approximately $441,000 in expenses associated with the purchase were incurred.
Under the terms of the agreement, NCR assumed all intercompany balances, tax
liabilities, accrued pension liabilities, and accruals for employee-related
plans, such as medical and workers compensation of SunRiver Data as of December
9, 1994. Also, NCR retained the liability for any post employment benefits
related to terminations within six months of the closing date of the
transaction. Benefits payable under the pension plan, which were frozen as of
the closing date, will be maintained in NCR's defined benefits plan.
Additionally, NCR assumed the defense of certain legal proceedings at its own
expense. NCR also agreed to pay, at its own expense, any amounts paid in
settlement related to these proceedings.
SunRiver Data has 1,000 authorized shares of redeemable preferred stock (the
"SunRiver Data Preferred Stock"), all of which are issued to NCR and
outstanding. In connection with the SunRiver Data Acquisition, NCR was granted a
put option (the "Put Option") to require Acquisition to purchase all of the
preferred stock of SunRiver Data owned by NCR. In addition, NCR granted a call
option (the "Call Option") to SunRiver Data that permitted SunRiver Data to
purchase the preferred stock. As more fully described in Note 5, the terms of
the Put Option and the Call Option were restructured in October 1995.
A portion of the purchase price for the SunRiver Data Acquisition was funded by
the sale of 7,000,000 shares of common stock at $.50 per share to accredited
investors in a private placement in which an underwriter (RAS) acted as the
exclusive placement agent. As of December 31, 1994, 4,077,452 shares of common
stock had been issued in connection with the offering. The remaining 2,922,548
shares were issued in 1995. Total gross proceeds from the offering were
$3,500,000. Expenses relating to this offering were approximately $1,343,000, of
which RAS received $945,000, consisting of a commission of 10%, a
non-accountable expense allowance of 3% of the gross proceeds, $250,000 as an
investment banking fee and a $240,000 consulting fee. The per share price of the
offering was determined by arms-length negotiations between the Company and RAS.
The balance of the cash portion of the purchase price was paid from borrowings
on the revolving line of credit.
F-13
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The SunRiver Data Acquisition has been accounted for under the purchase method
and, accordingly, the operating results of the Company include the results of
operations of SunRiver Data since the date of acquisition. The acquisition
resulted in goodwill of $1,469,259, which is being amortized over 10 years. The
following is a summary of the assets and liabilities of SunRiver Data, as
acquired, as of the date of the acquisition:
Current assets............................................ $ 16,775,440
Property, plant and equipment, net........................ 13,432,242
Goodwill.................................................. 1,469,259
Other assets.............................................. 978,816
------------
Total assets............................................ $ 32,655,757
------------
------------
Current liabilities....................................... $ 10,268,144
Long-term debt............................................ 8,000,000
Other liabilities......................................... 3,470,822
------------
Total liabilities....................................... $ 21,738,966
------------
------------
Mandatorily redeemable preferred stock.................... $ 5,471,791
------------
------------
See Note 5 for an unaudited pro forma summary of consolidated results of
operations in connection with the SunRiver Data Acquisition and the acquisition
of the Digital assets.
4. Acquisition of Enterprise Integration Network Technology
During April 1995, the Company, through its newly formed, wholly-owned
subsidiary EINet Acquisition Corporation (name changed to TradeWave Corporation
("TradeWave")), acquired the Enterprise Integration Network technology (the
"TradeWave Technology") form the Microelectronics and Computer Technology
Corporation ("MCC") (the "TradeWave Acquisition") for approximately $1.3 million
plus royalties.
The purchase of the TradeWave Technology from MCC was funded in part through the
issuance of $1 million principal amount of 10% convertible notes ("TradeWave
Notes") to investors outside the United States. These notes have been converted
into 1,270,375 shares of the Company's common stock. In April 1995, the Company
allocated substantially all of the $1.3 million purchase price of the TradeWave
Technology (inclusive of approximately $300,000 of capitalized costs directly
related to the TradeWave acquisition) to purchased intellectual property. This
allocation was based upon the belief that the web browser and directory
technology included in the TradeWave Technology were ready to be commercialized
profitably. Subsequently in 1995, management recognized that sales practices of
its Internet competitors of providing Internet browser software free of charge
and listings and advertising space in Internet directories free or for a nominal
charge had impaired the revenue potential of this technology. Nevertheless, this
technology is considered a valuable component of the Virtual Private Internet
product. In October 1995, TradeWave developed a new strategic plan, which
de-emphasized the web browser and directory services technology and instead
emphasized the Company's Virtual Private Internet solution integrating
applications, information servers, directory services and security. Based on
this revised business plan, the Company recognized that no significant revenues
would result until development of the integrated Virtual Private Internet
solution was completed and released for commercialization. Accordingly, in the
quarter ended December 31, 1995, the Company recognized a $1.2 million charge
associated with in-process research and development.
F-14
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
TradeWave simultaneously entered into a technology agreement (the "Technology
Agreement") with MCC to participate in current and future research and
development projects selected by the Company. The current project is working on
the development of technology to intelligently navigate dynamic information
networks such as the Internet.
The Company has continuing monetary obligations to MCC under the TradeWave
Acquisition Agreement. Pursuant to a restructuring in March 1996 of past-due and
future payments owing to MCC, (i) TradeWave has the option of paying $100,000
(that was due December 31, 1995), $250,000 and $50,000 due under the purchase
agreement, as amended for the TradeWave Technology ("TradeWave Acquisition
Agreement") on April 30, May 31 and June 28, 1996, respectively, by delivering
to MCC such number of shares of freely tradable common stock of the Company
equal in value to 120% of the amount of each such installment and the Company is
jointly obligated with TradeWave to make such payments; (ii) payments totaling
$500,000 that were due to MCC on December 31, 1995 under the TradeWave
Acquisition Agreement and the Technology Agreement were rescheduled for payment
throughout 1996; and (iii) SunRiver Group reaffirmed to MCC its guaranty of
TradeWave's payment obligations under the Technology Agreement. The Company
currently anticipates that it will deliver to MCC shares of freely tradable
common stock and/or use proceeds from the sale of common stock by the Company in
payment of TradeWave's obligations to MCC.
5. Acquisition of Text Terminal Business From Digital Equipment Corporation
The Transaction
- - ---------------
During October 1995, SunRiver Data purchased from Digital Equipment Corporation
("Digital") certain assets (the "Digital Assets") relating to Digital's general
purpose character-cell, host-dependent computer display terminals ("text
terminals") product lines, including products sold under the "VT" and "Dorio"
brands (the "Digital Acquisition"). The Digital Acquisition has been accounted
for as a purchase.
The Digital Assets consisted principally of inventory, trade names, trademarks
and patents. Software and other intellectual property used by Digital in its
text terminal business were simultaneously licensed to SunRiver Data. As no
manufacturing facilities were included in the Digital Assets, SunRiver Data
transferred production of the acquired product lines from Digital's facilities
in the Far East to the SunRiver Data plant in Hauppauge, New York.
Pursuant to a related supply agreement, Digital agreed to purchase from SunRiver
Data at least 95 percent of Digital's worldwide requirements for text terminals
and related parts for a four-year period, which would include at least 80,000
units of text terminals during the first year. The Company has guaranteed all of
the obligations of SunRiver Data under the supply agreement.
SunRiver Data and Digital also entered into agreements pursuant to which Digital
(i) manufactured for SunRiver Data text terminals through January 30, 1996 and
will manufacture modules until June 30, 1996; (ii) provided to SunRiver Data
certain technical, sales, marketing and administrative services relating to text
terminal products through February 19, 1996 and (iii) will provide certain
worldwide warranty and post-warranty servicing on text terminals sold and
designated for such servicing by SunRiver Data for a period of four years.
The purchase price of the Digital Assets, $18,697,693, included $7,481,502 for
inventory, $188,478 for other assets and $250,000 for intellectual property. The
Company recorded $10,777,713 in goodwill, which is the excess of the purchase
price and related direct costs of the acquisition of $2,199,072 over the fair
value of net assets acquired. In addition, SunRiver Data is obligated to pay
$347,093 for certain tooling and equipment to be delivered by Digital by June
30, 1996.
F-15
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Financing
- - -------------
Of the amount paid to Digital, $13,498,621 was paid in cash with $3,000,000 paid
by the issuance of 793,389 shares of the Company's common stock , which the
Company is required, at its cost, to register for resale under applicable
securities laws. In the event the closing price per share of the Company's
common stock on the NASDAQ SmallCap Market on the date such registration
statement becomes effective is less than $3.78125, the Company is obligated to
issue to Digital up to 206,611 additional shares of common stock, equal to the
difference between (a) 3,000,000 divided by the greater of (i) such closing
price, not to exceed $3.78125, and (ii) $3.00, and (b) 793,389. Had the
registration statement become effective on March 1, 1996, the Company would have
had to issue the additional 206,611 shares of common stock to Digital.
SunRiver Data obtained bank financing (the "Bank Financing") to pay the cash
portion of the purchase price of the Digital Assets from Chase Manhattan Bank,
N.A., acting for itself and as agent for other participating banks ("Chase"),
under a term loan in the principal amount of $20,000,000 and a revolving
line-of-credit providing for revolving loans of up to $20,000,000, based upon
lending formulas and subject to sub-limits and other terms, as are set forth in
the loan documents. SunRiver Data also used proceeds of the Bank Financing to
pay all outstanding amounts owed to Congress Financial Corporation ("Congress")
under a revolving line-of-credit, plus a $700,000 early termination fee, which
the Company recorded as an expense in October 1995. The Company recorded an
expense of approximately $282,000 related to costs that had been capitalized
when the Congress line-of-credit was originally obtained. The Company incurred
costs related to the Bank Financing of $1,295,000, which is being amortized on a
straight-line basis over the three year term of such Bank Financing.
The Company guaranteed the obligations of SunRiver Data under the Bank
Financing, which was collateralized by a pledge of all of the outstanding common
stock of Acquisition ("SunRiver Data Common Stock"). Acquisition also guaranteed
the obligations of SunRiver Data under the Bank Financing and collateralized its
guarantee with a pledge of all of the outstanding common stock of SunRiver Data.
SunRiver Group also guaranteed the obligations of SunRiver Data, which was
collateralized by a pledge of 21,439,380 shares of common stock of the Company
owned by SunRiver Group.
In addition, the Company issued to Chase a warrant to purchase 1,000,000 shares
of common stock exercisable at $3.875 per share , subject to anti-dilution
adjustments, at any time after October 20, 1996 and prior to the close of
business on October 19, 2000. These warrants were valued at $1,660,000 and are
being amortized as debt issue costs. Furthermore, in consideration for SunRiver
Group's pledge to NCR of 5,000,000 shares of common stock of the Company for an
extended period pursuant to the terms of the Restructuring, as defined and
described below, the Company expects to issue to SunRiver Group warrants to
purchase such number of shares of common stock at $3.875 per share, subject to
adjustment, as the Board of Directors of the Company determines is appropriate.
The NCR Restructuring
- - ---------------------
As a condition to the Bank Financing, SunRiver Data, Acquisition and SunRiver
Group were required to restructure (the "Restructuring") obligations to NCR
which were incurred in December 1994 in connection with the Company's
acquisition of SunRiver Data from NCR.
F-16
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SunRiver Data has 1,000 shares of redeemable preferred stock, all of which are
issued to NCR and currently outstanding. In the Restructuring (i) the Company
paid NCR $3,500,000 in cash; (ii) the Call Option to permit the Company to
purchase the preferred stock of SunRiver Data owned by NCR was amended (the
"Amended Call Option") to reduce its aggregate exercise price to $3,554,692 and
to change its expiration date to the earlier of January 30, 1999 or the
completion by SunRiver Data or any of its parent companies of a public offering;
(iii) the Put Option requiring the Company to purchase the preferred stock was
amended (the "Amended Put Option") to reduce its exercise price to $3,554,692,
and to become exercisable on or after the expiration date of the Amended Call
Option until December 31, 1999; (iv) the Company issued to NCR a warrant, valued
at $830,000, to purchase 500,000 shares of common stock of the Company,
exercisable at $3.875 per share, subject to adjustment, at any time after
October 20, 1996 and prior to the close of business on October 20,1998; (v)
SunRiver Data and its parent companies agreed to pay NCR $497,657, a rate of
14%, (the "Annual Payment Amount") on October 20, 1996 and each anniversary
thereafter (the "Annual Payment Date"), until either the Amended Put Option or
the Amended Call Option has been exercised or canceled, each such payment to be
made in cash, to the extent permitted by the terms of the Bank Financing, and,
to the extent not so permitted, the balance of the Annual Payment Amount must be
paid by delivering to NCR such number of shares of common stock of the Company
which, if sold on the applicable Annual Payment Date, would net such balance
due; (vi) the maturity date of the $8,000,000 Promissory Note payable by the
Company to NCR was extended to January 31, 1999 and if Acquisition makes a
public offering of its securities, it must prepay the Promissory note in an
amount equal to the difference between the net proceeds of the offering and the
amount paid to NCR or any of its affiliates on redemption or purchase by
Acquisition of the SunRiver Data Preferred Stock plus the amount paid to Chase
under the terms of the Bank Financing; (vii) SunRiver Acquisition Corp.'s pledge
to NCR of the SunRiver Data common stock was canceled and the SunRiver Data
common stock was pledged to Chase; (viii) SunRiver Group's pledge to NCR of
common stock of the Company was reduced to 5,000,000 shares and SunRiver Group
pledged the remainder of its common stock of the Company to Chase.
In the event of liquidation of SunRiver Data, NCR shall be entitled to
$3,554,692 before any amount shall be paid to holders of the common stock. While
the preferred stock is outstanding, SunRiver Data is restricted from creating
any shares of stock which shall be in any respect on parity with or have any
preferences to take priority over the preferred stock, or to alter in any manner
the rights or preferences of the preferred stock.
The Company recorded a charge of $1,668,255 to retained earnings at the date of
the Restructuring for the difference between the change in the carrying value of
the mandatorily redeemable preferred stock and the sum of the cash payment and
the fair value of the warrant for 500,000 shares of common stock of the Company
issued to NCR.
The cash payment of $3,500,000 made to NCR was paid by the Company from funds
received in transactions in which the Company received gross proceeds of
$4,250,000 from Regulation S offerings to investors outside of the United
States. In two offerings, the Company issued non-interest bearing convertible
promissory notes for $2,500,000 (the "$2,500,000 Notes") and $750,000 (the
"$750,000 Notes"), respectively. The $2,500,000 Notes were converted on November
30, 1995 into 1,236,855 shares of common stock of the Company determined by
dividing $2,500,000 by 70% of the average closing bid price of the common stock
of the Company on the five business days immediately preceding the conversion.
The $750,000 Notes were converted in November 1995 into 359,691 shares of common
stock of the Company determined by dividing $2,500,000 by 70% of the average
closing bid price of the common stock of the Company on the five business days
immediately preceding the conversion. Upon conversion of such non-interest
bearing notes, depending on the significance of the amount, a portion of the
difference between the carrying value of the notes and the fair market value of
the shares issued is accounted for as financing expense and the remainder as
cost of equity. The amount to be allocated to financing expense, assuming an
estimated interest rate of approximately 20%, was determined to be immaterial.
In a third Regulation S offering, the Company received gross proceeds of
$1,000,000 by selling 472,589 shares of common stock. In addition, the Company
obtained bridge financing of $1,000,000 at 6% interest approximately ten days
before the close of the offerings. This loan was repaid from the proceeds of the
offerings described above.
F-17
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In addition, warrants, valued at $661,200, to purchase 525,000 shares of common
stock of the Company exercisable at $3.625 to $3.875, the market price on the
date of grant, were granted to financial advisors in October 1995 in connection
with these offerings. These warrants are exercisable for three years from the
date of grant and the holders have registration rights with respect to the
shares issuable upon exercise of these warrants. A portion of the value of the
warrants was recorded as a cost of equity and a portion as debt issuance costs
in accordance with the terms of the associated equity or debt instruments.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of Digital Assets had occurred at the beginning
of 1995 and 1994, respectively, and as if the SunRiver Data Acquisition
described in Note 3 had occurred at the beginning of 1994. The pro forma
presentation reflects the impact of certain adjustments; (a) amortization of
goodwill, (b) increased interest expense, (c) increased depreciation expense,
and (d) decrease of corporate overhead charges. It does not purport to be
indicative of the financial results which actually would have occurred had the
acquisition been made at the beginning of 1995 and 1994, respectively, or of the
results which may occur in the future.
1995 1994
------------- -------------
Net sales....................................... $ 150,352,000 $ 144,263,000
Income (loss) from continuing operations........ $ 466,000 $ (5,431,000)
Income (loss) per share from continuing
operations.................................... $ 0.01 $ (0.18)
The following is a summary of the Digital Assets as of the date of the
acquisition:
Inventory....................................... $ 7,481,502
Goodwill........................................ 11,027,713
Other assets.................................... 188,478
-------------
Total assets.................................. $ 18,697,693
-------------
-------------
6. GAI Partnership
During May 1995, SunRiver Data entered into an agreement with GAI covering
SunRiver Data's and GAI's participation in, and management of, a newly-formed
Delaware limited liability company (the "GAI Partnership"), of which SunRiver
Data's interest at inception was 49%. The GAI Partnership, which was formed with
a nominal investment from GAI and SunRiver Data, combines into a single business
the development, distribution, maintenance and support of computer systems and
software running the SunRiver Data and the GAI version of a database licensed
from Pick Systems on various hardware platforms. The business and affairs of the
GAI Partnership are managed exclusively by GAI, subject to consultation from
time to time with SunRiver Data. As such, SunRiver Data's investment in GAI is
accounted for using the equity method. SunRiver Data receives monthly cash
distributions equal to a percentage of the net revenues of the GAI Partnership.
Such distributions amounted to $1,475,000 for the year ended December 31, 1995
and are included in product sales in the accompanying consolidated statements of
operations.
F-18
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
7. 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:
December 31,
-----------------------------
1995 1994
-------------- --------------
Raw materials and purchased components........ $ 13,280,390 $ 7,716,108
Finished goods................................ 11,901,819 2,408,078
Demonstration equipment....................... 222,130 416,204
Service parts................................. 353,701 336,444
-------------- --------------
$ 25,758,040 $ 10,876,834
-------------- --------------
-------------- --------------
8. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------
1995 1994
-------------- --------------
Land......................................... $ 3,780,000 $ 3,780,000
Buildings and improvements................... 6,035,631 5,781,000
Machinery and equipment...................... 4,754,393 4,403,075
-------------- --------------
14,570,024 13,964,075
Less accumulated depreciation and
amortization............................. (2,456,024) (586,945)
-------------- --------------
$ 12,114,000 $ 13,377,130
-------------- --------------
-------------- --------------
F-19
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. Income Taxes
The Company files a consolidated federal tax return.
The components of income tax expense (benefit) for the years ended December
31,1995, 1994 and 1993 are as follows:
1995 1994 1993
------------- -------------- -------------
Current:
Federal........................... $ 596,602 $ 126,000 $ --
State............................. 430,727 11,000
------------- -------------- -------------
1,027,329 137,000 --
Deferred:
Federal........................... (82,669) 44,000 (23,093)
State............................. (29,284) 4,000
Valuation allowance............... (1,120,784) 23,093
------------- -------------- -------------
(1,232,737) 48,000 --
------------- -------------- -------------
$ (205,408) $ 185,000 $ --
------------- -------------- -------------
------------- -------------- -------------
The significant components of the deferred tax expense (benefit) were as follows
for the years ended December 31:
1995 1994 1993
------------- -------------- -------------
Utilization of net operating loss
carryforwards.................... $ (23,093)
Valuation reserves................. $(1,120,784) 23,093
Accounts receivable reserves....... (135,859) $ 20,700
Inventory reserves................. 963,099 (7,500)
Fixed assets....................... (326,346)
Acquired research and development.. (430,401)
Warranties......................... (181,877) 38,200
569 (3,400)
------------- -------------- -------------
$(1,232,737) $ 48,000 $ --
------------- -------------- -------------
------------- -------------- -------------
Loss carryforwards as of December 31, 1994 were either used to offset gain on
disposition of the former dial-up market data services business or expired due
to cessation of such business pursuant to restrictions defined in the Internal
Revenue Code related to a change in ownership or control.
F-20
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
For financial statement purposes, the actual effective consolidated tax rates
have been applied to the income from operations before taxes when calculating
the tax provision. The actual income tax provision differs from the provision
based on the statutory income tax rate, 34%, as follows:
1995 1994 1993
------------- -------------- -------------
Tax expense (benefit) computed at
statutory rate................... $ 462,512 $ 76,000 $ (23,857)
Increase (reduction) due to:
Goodwill amortization............ 135,963 3,700
Losses for which no tax benefit
was provided................... 88,800
Other, net....................... 74,153 1,500 764
State income tax benefit, net
of federal income taxes........ 242,748 15,000
Change in valuation allowance.... (1,120,784) -- 23,093
------------- -------------- -------------
Income tax expense (benefit)....... $ (205,408) $ 185,000 $ --
------------- -------------- -------------
------------- -------------- -------------
The components of the net deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Current deferred tax assets:
Net operating loss carryforwards $53,388 $1,700,000
Accounts receivable 562,738 370,000
Inventory 1,543,158 1,566,000
Warranties 562,258 360,000
Other 638,086 244,000
Valuation allowance -- (3,250,000)
--------------- ---------------
Total current deferred tax assets 3,359,628 990,000
--------------- ---------------
Current deferred tax liabilities:
Software capitalized and other (257,476) (210,000)
--------------- ---------------
Net current deferred tax assets 3,102,152 780,000
--------------- ---------------
Noncurrent deferred tax assets:
Property and equipment 9,250 --
Acquired research and development 430,401 --
--------------- ---------------
Total noncurrent deferred tax assets 439,651 --
Noncurrent deferred tax liabilities:
Property and equipment (2,652,850) (2,678,000)
--------------- ---------------
Net noncurrent deferred tax liabilities (2,213,199) (2,678,000)
Net deferred tax assets (liabilities) $888,953 $(1,898,000)
--------------- ---------------
--------------- ---------------
</TABLE>
F-21
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
At December 31, 1994, the valuation allowance for deferred tax assets related
primarily to tax benefits applicable to inventory and reserves and net operating
loss carryforwards. The tax benefits subsequently recognized in 1995 were
allocated first to reduce goodwill ($1,311,137), then to reduce other
non-current intangibles related to the SunRiver Data Acquisition ($243,079) and
the remaining balance to reduce income tax expense ($1,120,784).
10. Debt
Notes Payable
- - -------------
Notes payable at December 31, 1995 consisted of a $20,000,000 revolving credit
agreement entered into with Chase in October 1995 for loans and letters of
credit, based upon the availability of collateral, generally a percentage of
inventory and accounts receivable as specified in the agreement. The interest
rate is prime (8.5% at December 31, 1995) plus 1.25% or the applicable
eurocurrency rate (5.75% at December 31, 1995) plus 2.5%, generally at the
option of the Company. The revolving loan outstanding at December 31, 1995 was
$8,000,000. Each drawing under a trade letter of credit is subject to a drawing
fee equal to a minimum of 0.25% of the amount drawn. In addition, a letter of
credit fee of 2% per annum of the average face amount of all standby letters of
credit outstanding is payable quarterly. There were letters of credit totaling
$4,274,360 outstanding at December 31, 1995. The maximum amount of additional
credit available under the revolving loan at December 31, 1995 was $6,787,621,
subject to limitations base on the amount of eligible collateral.
The commitment fee is 0.5% per year on the average daily unused principal
balance of the revolving loan and the outstanding letters of credit. The
weighted average interest rate on short-term borrowings was 10.5% and 9.4% for
the years ended December 31, 1995 and 1994, respectively.
Long-term Debt
- - --------------
Long-term debt at December 31, 1995 consisted of the following:
1995 1994
------------ --------------
Note payable to AT&T-GIS, bearing interest at 8%
quarterly, principal due on or before January
31, 1999, collateralized by land and building... $ 8,000,000 $ 8,000,000
Term loan payable to banks, collateralized by
accounts receivable, inventories and substan-
tially all other assets of the Company,
bearing interest at a variable rate payable
quarterly (9.75% at December 31, 1995)........... 20,000,000 4,654,922
Note payable to shareholder of SunRiver Group,
bearing interest at 9% payable quarterly,
principal due June 1996......................... 168,559 168,559
Note payable to a corporation, non-interest
bearing due in installments through 1997 at
an effective rate of 9%......................... 773,535
Other............................................. 313,062
------------- --------------
29,255,156 12,823,481
Less current maturities on long-term debt......... (6,630,531) --
------------- --------------
$ 22,624,625 $ 12,823,481
------------- --------------
------------- --------------
F-22
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Acquisition is the legal obligor of the note payable to NCR. The note is payable
on or before January 31, 1999. However, the note and accrued interest is
immediately due should Acquisition make an offering of its stock or debt
pursuant to the Securities and Exchange Act of 1933.
The term and revolving loan agreement outstanding at December 31, 1995 required
SunRiver Data to maintain at all times certain financial ratios, including
specified levels of tangible net worth, fixed charge coverage, interest coverage
and cash flow leverage.
SunRiver Data is prohibited from declaring or paying dividends on its stock, or
redeeming or otherwise acquiring any class of capital stock during the term of
the agreement. The maximum aggregate amount that SunRiver Data may loan or
advance to the Company in a fiscal year is $200,000 less the total cash dividend
SunRiver Data paid to the Company in that year. As of December 31, 1995,
SunRiver Data and TradeWave had restricted net assets of $16,779,000 and none,
respectively. The term and revolving loan agreement requires the Company to make
contingent payments on the term loan should the Company obtain financing above a
certain level by issuing stock.
The Company guaranteed the obligations of SunRiver Data under the Bank
Financing, which was collateralized by all of the outstanding common stock of
Acquisition . Acquisition also guaranteed the obligations of SunRiver Data under
the Bank Financing and collateralized its guarantee with all of the outstanding
common stock of SunRiver Data. SunRiver Group collateralized its guarantee of
SunRiver Data's obligations to Chase with 21,439,380 shares of common stock of
the Company.
The revolving loan payable to a financial institution outstanding at December
31, 1994 was at an interest rate of prime (8.5% at December 31, 1994) plus two
percent, due monthly. The revolving loan was paid in full during October 1995
pursuant to the Bank Financing described in Note 5.
Aggregate debt scheduled maturities at December 31, 1995 were as follows:
1996...................................... $ 6,630,531
1997...................................... 8,554,804
1998...................................... 6,069,821
1999...................................... 8,000,000
-------------
$ 29,255,156
11. Options and Warrants
Options and warrants to purchase 11,557,293 shares of common stock were
outstanding at December 31, 1995. The options and warrants are exercisable
through 2002 at exercise prices ranging from $1.35 to $8.25. Options and
warrants to purchase 7,472,093 shares were exercisable at December 31, 1995.
None were exercised in 1995, 1994 or 1993.
In March 1995, the Company adopted an Incentive Stock Plan (the "1995 Plan")
which permits the Board of Directors to grant performance shares, stock awards,
stock options, stock appreciation rights, stock units and incentive awards to
employees, non-employee directors and others. The maximum number of shares to be
issued under the 1995 Plan is not to exceed 6,000,000.
F-23
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In March 1995, the Company amended the Amended and Restated 1991 Employee and
Director Stock Option Plan to provide that the options no longer automatically
expire upon termination of the grantee's employment.
TradeWave has reserved 1,500,000 shares of common stock to be issued upon
exercise of incentive stock options (ISO) or non-qualified stock option (NQSO)
to purchase common stock to be granted under the TradeWave Corporation 1995
Stock Option Plan (the "Plan"). Options to purchase common stock may be granted
to key employees, officers, directors and independent agents or consultants.
Under the Plan, options to purchase common stock may be granted at prices not
less than fair market value (ISO) (110% of fair market value in certain
instances), or 75% of fair market value (NQSO). The term of an option is fixed
by the Board of Directors, but in no event less than one year or more than ten
years. The Plan is administered by the Board of Directors of the Company. No
options have been granted. However, the Company has committed by letter to grant
approximately 800,000 shares to thirty-five employees. Vesting is generally
ratably over a four year period, except for "founding employees", whose initial
options will vest twenty to forty percent immediately, and the balance ratably
over three years. Options vested would be exercisable on or after April 1, 1996
as described in the commitment letter.
12. Related Party Transactions
The Company sells display desktop devices to and purchases components from NCR
and its subsidiaries. The Company's sales to NCR and its subsidiaries were
$39,600,000 and $1,841,000 for 1995 and the period from acquisition to December
31, 1994, respectively. Purchases from NCR and its subsidiaries were $13,088,399
and $125,000 for those same periods, respectively. The Company had accounts
receivable outstanding of approximately $5,166,000 and $1,662,000 and accounts
payable of $452,070 and $125,000 at December 31, 1995 and 1994, respectively.
The Company has entered into agreements with NCR, which have an initial term of
approximately five years, under which NCR will purchase display desktop devices
from the Company, which NCR will market and sell under its own logo. NCR will
supply computer system platform products to the Company for resale with its
system software. To support this ongoing relationship, NCR will also provide
field support services to the Company's customers. Under the agreements, NCR
must purchase from the Company a minimum percentage of the Seller's total volume
of purchases of this type of desktop device for domestic delivery. Pricing of
the product sold under the agreements is a specified percentage of list price,
such percentage to be negotiated annually.
The former President of All-Quotes Capital provided certain consulting services
to the Company during 1995 related to the Digital Assets acquisition, obtaining
financing, and miscellaneous corporate matters. Compensation to the individual
for the services amounted to approximately $440,000, including approximately
$104,000 paid in cash and $335,000 paid in common stock of the Company.
Effective January 1, 1995, the Company entered into an agreement with an
individual whose sons are significant shareholders of SunRiver Group. Under the
agreement, the individual provided consulting services to the Company for a
monthly fee of $10,000 plus additional fees for services outside the scope of
that required by the base fee. During 1995 the Company granted the individual
425,000 shares of common stock valued at $901,563 at the date of grant for
performing the special services.
F-24
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
13. Leases
The Company leases certain sales offices and miscellaneous office equipment
under operating lease agreements which expire at various times through May 2001.
Total rent expense was $622,887, $122,825 and $71,100 in 1995, 1994 and 1993,
respectively.
Future minimum rental commitments as of December 31, 1995 were as follows:
1996................................. $ 633,639
1997................................. $ 546,700
1998................................. $ 388,581
1999................................. $ 251,044
2000................................. $ 155,148
Beyond............................... $ 24,035
-------------
$ 1,999,147
14. Contingencies
The Company is subject to lawsuits and claims that arose in the normal course of
business. Management is of the opinion that all such matters are without merit,
or are of such kind, or involve such amounts, as would not have a significant
effect on the financial position, results of operations or cash flows of the
Company if disposed unfavorably.
In accordance with the terms of the SunRiver Group Acquisition agreements, the
sellers have agreed to assume the defense of these legal proceedings initiated
prior to the date of the acquisitions at their own expense, including all
potential liability that may result from an adverse judgment in any of these
matters. While the Company believes that the indemnification will be sufficient
to protect the Company from loss, there can be no assurance that the Company
will be fully indemnified for losses, if any, it may incur in connection with
pending litigation.
15. Preferred Stock
In March 1995, the Company amended its Certificate of Incorporation to authorize
the Board of Directors to issue up to 1,000,000 shares of preferred stock in one
or more series, with preference and other rights as determined from time to time
by the Board of Directors. No such shares had been issued at December 31, 1995.
16. Concentration of Credit Risk
The Company is required by FASB Statement 105, "Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk," to disclose
concentrations of credit risk regardless of the degree of such risk. The
Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company's cash policy limits credit exposure, however, for
limited periods of time during the year bank balances may exceed the FDIC
insurance coverage. The Company routinely assesses the financial strength of its
customers and as a consequence, believes that its accounts receivable credit
risk exposure is limited. No collateral is required. The Company extends credit
in the normal course of business to a number of distributors and value-added
resellers in the computer industry.
F-25
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Net export sales were approximately $15,912,000, $1,127,000 and $1,537,000 for
1995, 1994 and 1993, respectively. The following table shows the approximate
percentage of total revenue attributable to export sales to the regions
described for each of the years ended December 31:
1995 1994 1993
---------- ---------- ----------
Europe.......................... 13.0% 5.2% 5.6%
Canada.......................... 1.2% 6.1% 12.6%
Other........................... 2.4% 2.2% 0.9%
---------- ---------- ----------
Total..................... 16.6% 13.5% 19.1%
---------- ---------- ----------
---------- ---------- ----------
17. Defined Contribution Plan
The Company provides a 401(k) retirement savings plan (the "401(k) Plan") for
its full-time employees. Under the provisions of the 401(k) Plan, each
participant may elect to contribute up to 15% of his or her annual salary. At
its discretion, the Company may make contributions to the 401(k) Plan, however
no such contributions were made in the year ended December 31, 1995.
18. Discontinued Operations
In 1995, the Company sold substantially all of the operating assets of its
dial-up market data services business to Global Market Information for
$1,800,000.
Pursuant to the SunRiver Group Acquisition agreement, the Company disposed of
substantially all of its interest in diamond mining properties in Sierra Leone
(through All-Quotes Data, Ltd. which changed its name to AmCan Minerals, Ltd.
("AmCan")) by granting to Bronson Conrad and J. Gerald Combs (who simultaneously
resigned as Chairman of the Board and President and director, respectively, of
the Company) a proxy to vote all shares of common stock of Capital owned by the
Company (which then constituted 100% of Capital's outstanding common stock) on
all matters upon which the common stock had the right to vote such shares. As a
result, the common stock relinquished its indirect beneficial ownership of
approximately 67% of AmCan. Capital subsequently issued 15,000,000 shares of its
common stock to Deston Holdings, Ltd., a company beneficially owned by Bronson
Conrad. The Company's ownership of Capital's common stock was thereby reduced
from 100% to less than 1% and stockholders' equity of the Company was reduced by
approximately $2,357,530, which was its basis in Capital. The Company's
remaining interest in Capital was subsequently repurchased by Capital in
exchange for 736,501 shares of the Company's common stock, which were retired.
The results of these discontinued operations at December 31, 1995 are summarized
below:
Loss on discontinued operations.................... $ (223,442)
Gain on disposal of part of discontinued
operations....................................... 1,372,239
--------------
Income from discontinued operations................ $ 1,148,797
--------------
--------------
F-26
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The gain on the sale of a portion of the discontinued operations had no tax
effect due to the availability of net operating loss carry-forwards which are
not available for offset against the Company's income from continuing
operations.
In addition, no tax benefit is given for the loss on discontinued operations as
these operations are not included in consolidation for tax purposes.
19. Subsequent Events
Regulation S Offerings
The Company completed several offerings of securities under Regulation S of the
Securities Act of 1933 (a "Regulation S Offering") subsequent to December 31,
1995 described below:
1. In January 1996, the Company received gross proceeds of $1,000,000 by
selling 496,124 shares of common stock for $2.012 per share, a price equal
to 75% of the closing bid price of the common stock on January 2, 1996. 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. The warrants were valued at approximately $77,000. Approximately
$505,000 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.
2. 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, exercisable through January 26, 1999. These
options were valued at approximately $85,000. 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.
3. In February 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, exercisable through February 7, 1999.
These warrants were valued at approximately $164,000. A portion of the
proceeds of this offering, $318,000, were used by the Company to repurchase
176,667 restricted shares of its common stock at $1.80 per share.
Other (unaudited)
- - -----------------
In connection with the $1,000,000 offering in January 1996, as permitted by
their agreement with the Company, the purchasers elected to adjust the price per
share to $1.68 per share, which is 75% of the average closing bid price of the
common stock during the five business days immediately preceding such election.
As a result of such adjustment, an additional 98,119 shares of common stock were
issued, bringing the total to 594,243.
F-27
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In connection with the $500,000 and $1,000,000 offerings in January and February
1996, respectively, holders of approximately $158,000 of the notes had converted
their notes into 79,606 shares of common stock through April 10, 1996.
Employee Stock Options Granted and Warrants Granted
- - ---------------------------------------------------
Options to purchase a total of 628,810 of common stock of the Company were
granted subsequent to December 31, 1995 under the 1995 Plan to employees. The
options are exercisable from 1997 to 2001 at exercise prices from $2.57 to
$2.82.
A warrant to purchase 50,000 shares of common stock of the Company was granted
in consideration for ongoing services provided in the area of financial public
relations. A warrant to purchase 75,000 shares of common stock of the Company
was granted in consideration for obtaining an equipment leasing line of
$1,000,000 for expansion requirements of TradeWave.
F-28
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $2,100,902 $448,237
Trade accounts receivable (including $2,438,000 and $6,206,007 from related
parties at March 31, 1996 and December 31, 1995, respectively), net.......... 21,421,302 18,768,338
Inventories..................................................................... 25,875,190 25,758,040
Deferred income taxes........................................................... 3,359,628 3,102,152
Prepaid expenses and other current assets....................................... 401,773 1,571,617
--------------- ---------------
Total current assets.................................................... 53,158,795 49,648,384
Property and equipment, net........................................................ 12,263,304 12,114,000
Goodwill, net...................................................................... 10,299,229 10,607,714
Other assets....................................................................... 4,189,431 3,910,235
--------------- ---------------
$79,910,759 $76,280,333
--------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable................................................................... $11,000,000 $8,000,000
Current portion of long-term debt (including $168,559 due to a related party)... 7,101,725 6,630,531
Accounts payable................................................................ 15,177,859 14,506,202
Accrued expenses................................................................ 4,765,428 4,255,508
Deferred revenue................................................................ 393,684 826,844
--------------- ---------------
Total current liabilities............................................... 38,438,696 34,219,085
Long-term liabilities:
Long-term debt, less current maturities (including $8,000,000 of
debt to a related party at March 31, 1996 and December 31, 1995)............. 20,483,864 22,624,625
Deferred income taxes........................................................... 2,652,850 2,213,198
Other........................................................................... 748,420 831,775
--------------- ---------------
Total long-term liabilities............................................. 23,885,134 25,669,598
--------------- ---------------
Total liabilities.................................................. 62,323,830 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, 45,888,969 and
45,550,214 shares issued at March 31, 1996 and December 31, 1995,
respectively................................................................. 458,890 455,502
Additional paid-in capital...................................................... 24,724,545 23,769,379
Accumulated deficit............................................................. (11,151,198) (11,387,923)
--------------- ---------------
Total stockholders' equity.............................................. 14,032,237 12,836,958
--------------- ---------------
$79,910,759 $76,280,333
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
<TABLE>
<CAPTION>
1996 1995
------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Sales (including sales to a related party of $7,205,000
and $8,482,000 in 1996 and 1995, respectively)
$38,407,167 $19,166,497
Cost of sales ................................................ 29,666,386 13,615,278
----------- -----------
Gross margin ...................................... 8,740,781 5,551,219
Operating expenses:
Sales and marketing ....................................... 2,525,447 1,758,375
General and administrative ................................ 2,298,462 1,216,841
Research and development .................................. 1,862,988 1,326,360
----------- -----------
Total operating expenses ............................... 6,686,897 4,301,576
----------- -----------
Operating income .................................. 2,053,884 1,249,643
Other expense:
Interest expense .......................................... 1,072,718 304,080
Other ..................................................... 210,268 32,815
----------- -----------
Total other expense .................................... 1,282,986 336,895
----------- -----------
Income before income taxes and discontinued operations ....... 770,898 912,748
Income tax expense ........................................... 410,000 347,550
----------- -----------
Income before discontinued operations ........................ 360,898 565,198
Income from discontinued operations .......................... -- 1,240,283
----------- -----------
Net income ................................................... 360,898 1,805,481
Dividend on preferred stock of subsidiary .................... 124,173 --
Accretion to preferred stock of subsidiary ................... -- 196,016
----------- -----------
----------- -----------
Earnings available for common shareholders ................... $ 236,725 $ 1,609,465
----------- -----------
----------- -----------
Weighted average common shares outstanding ................... 49,253,619 40,158,218
----------- -----------
----------- -----------
Earnings per common share before extraordinary items:
Continuing operations ..................................... $ 0.00 $ 0.01
Discontinued operations ................................... 0.00 0.03
----------- -----------
----------- -----------
Earnings per common share .................................... $ 0.00 $ 0.04
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
1996 1995
----------- ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income....................................... $ 360,898 $ 1,805,481
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Income from discontinued operations............ -- (1,240,283)
Depreciation and amortization.................. 986,218 704,830
Deferred revenues.............................. (433,160) --
Provisions for doubtful accounts............... (499,283) 66,631
Provisions for excess and obsolete inventory... 654,264 61,314
Estimated value of compensatory warrants....... 74,700 --
Changes in assets and liabilities:
Trade accounts receivable....................... (2,153,681) (5,501,851)
Inventories.................................... (771,414) 1,158,295
Other assets................................... 1,163,698 88,880
Accounts payable and accrued expenses.......... 1,614,936 1,265,380
------------ -----------
Net cash provided by (used in)
operating activities................... 997,176 (1,591,323)
------------ -----------
Cash flows from investing activities:
Capital expenditures............................. (545,610) (163,343)
Net cash used in investing activities.... (545,610) (163,343)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 1,066,666 694,094
Decrease in short-term debt, net................. (30,000) --
Proceeds from debt issuance...................... 1,500,000 --
Purchase of treasury stock....................... (1,305,000) --
Net change in revolving loan payable............. 1,500,000 952,966
Payment on term loan............................. (1,500,000) --
Payments on capital leases....................... (30,567) --
------------ -----------
Net cash provided by financing
activities............................. 1,201,099 1,647,060
------------ -----------
Net increase (decrease) in cash and cash
equivalents...................................... 1,652,665 (107,606)
Cash and cash equivalents at beginning of period... 448,237 111,081
------------ -----------
Cash and cash equivalents at end of period......... $ 2,100,902 $ 3,475
------------ -----------
------------ -----------
Non-cash transactions:
Accretion to preferred stock of subsidiary....... $ 196,016
Dividend on preferred stock of subsidiary........ $ 124,173 --
Conversion of notes payable to common stock...... 109,000 --
Estimated value of compensatory warrants......... 490,625 --
Issuance of common stock for consulting services. 893,364 --
Cash paid for:
Interest......................................... 781,540 304,080
Taxes............................................ 205,352 347,550
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 re-classified to conform with current period presentation. Operating
results for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending 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.
2. 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, graphics, text and Internet terminals.
TradeWave develops and markets a suite of secure Web access software products,
TradeVPI. In addition, TradeWave owns and operates the Galaxy, an Internet
search directory and it offers Virtual Private Internet ("VPI") and electronic
commerce consulting services.
In an attempt to secure the capital required for TradeWare, the Company is
discussing various avenues of financing, including commercial lending and equity
investment. There are no definitive agreements or understandings regarding the
terms or conditions upon which any such financing will be provided and there can
be no assurance that such efforts will be successful or on terms beneficial to
TradeWare or the Company.
3. 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:
March 31, December 31,
1996 1995
-------------- --------------
Raw materials and purchased components......... $ 15,395,066 $ 13,280,390
Finished goods................................. 9,905,869 11,901,819
Demonstration equipment........................ 244,616 222,130
Service parts.................................. 329,639 353,701
-------------- --------------
$ 25,875,190 $ 25,758,040
-------------- --------------
-------------- --------------
4. Financings
Regulation S Offerings
The Company completed several offerings of securities under Regulation S of the
Securities Act of 1933 during the first quarter of 1996 as described below:
o In January 1996, the Company received gross proceeds of $1 million 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. Approximately
$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.
F-32
<PAGE>
o 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.
o In January 1996, the Company received gross proceeds of $1 million 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, approximately
$300,000, was used by the Company to repurchase 176,667 restricted shares
of its Common Stock at $1.80 per share.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors of
Digital Equipment Corporation:
We have audited the accompanying Statement of Assets Sold of the Selected Text
Terminal Products of the Video Business Segment of the Components and
Peripherals Business Unit of Digital Equipment Corporation (the "Business") as
of July 1, 1995, and the related Statements of Revenue and Direct Operating
Expenses, for each of the three fiscal years in the period ended July 1, 1995,
with the exception of Note 4, which is unaudited. The statement of assets sold
and statements of revenue and direct operating expenses are the responsibility
of Digital Equipment Corporation's management. Our responsibility is to express
an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of Assets sold and statements
of Revenue and direct operating expenses are free of material misstatement. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the statement of assets Sold and
Statements of Revenue and Direct Operating Expenses. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements were prepared to present the assets sold to SunRiver
Data Systems, Inc. of the Business and the Revenues and Direct Operating
Expenses of the Business pursuant to the acquisition agreement described in note
1, and are not intended to be a complete presentation of the Business' financial
position, results of operations or cash flows.
As discussed in Note 2, expenses include only those costs directly attributable
to the products sold. They do not contain any other costs which are not directly
attributable to the products sold. Such allocations are provided in Note 4
(unaudited) of the statements, which reflects a summary of the applicable
expenses that were excluded. As a result, the statements presented may not be
indicative of the results of operations that would have been achieved had the
Business operated as a nonaffiliated entity.
In our opinion, with the exception of note 4, which is unaudited, the statements
referred to above present fairly, in all material respects, the assets sold of
the Business as of July 1, 1995, and its Revenues and Direct Operating Expenses
for each of the three fiscal years in the period ended July 1, 1995, pursuant to
the acquisition agreement described in note 1, in conformity with generally
accepted accounting principles.
December 20, 1995
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
F-34
<PAGE>
SELECTED TEXT TERMINAL PRODUCTS OF THE VIDEO BUSINESS
SEGMENT OF THE COMPONENTS & PERIPHERALS BUSINESS UNIT
OF DIGITAL EQUIPMENT CORPORATION
STATEMENT OF ASSETS SOLD
July 1, 1995
(in thousands)
ASSETS
Inventory (Note3):
Work in process $ 506
Finished goods 12,467
-------
Total inventories 12,973
-------
Equipment (Note 3):
Production and other equipment 1,006
Less accumulated depreciation 765
-------
Net equipment 241
-------
Total assets sold $13,214
-------
-------
The accompanying notes are an integral part of the statements.
F-35
<PAGE>
SELECTED TEXT TERMINAL PRODUCTS OF THE VIDEO BUSINESS
SEGMENT OF THE COMPONENTS & PERIPHERALS BUSINESS UNIT
OF DIGITAL EQUIPMENT CORPORATION
STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES
(in thousands)
Year Ended
------------------------------------------
July 1, 1995 July 2, 1994 July 3, 1993
------------ ------------ ------------
Revenue:
External $ 45,136 $ 21,931
Affiliates 26,138 16,709
------------ ------------
Total revenue 71,274 38,680
------------ ------------
Direct operating expenses:
Cost of external sales 25,459 12,458
Cost of affiliated sales 14,128 8,510
Research and engineering 2,048 3,442 $ 3,489
----------- ------------ ----------
Total direct operating expenses $ 41,635 $ 24,410 $ 3,489
----------- ------------ ----------
Excess revenue over direct
operating expenses $ 29,639 $ 14,230 $ (3,489)
=========== ============ ==========
The accompanying notes are an integral part of the statements.
F-36
<PAGE>
SELECTED TEXT TERMINAL PRODUCTS OF THE VIDEO BUSINESS
SEGMENT OF THE COMPONENTS & PERIPHERALS BUSINESS UNIT
OF DIGITAL EQUIPMENT CORPORATION
NOTES TO THE STATEMENTS
1. Background:
Pursuant to an Asset Purchase Agreement (the "Agreement") dated October 20,
1995, between Digital Equipment Corporation ("Digital") and SunRiver Data
Systems, Inc. ("SunRiver"), effective October 21, 1995, Digital sold to
SunRiver certain tangible assets consisting principally of inventory and
equipment, and certain contract rights and intellectual property (carried
at zero value) of Selected Text Terminal products (the "Products") of the
Video Business Segment of the Components & Peripherals ("C&P") Business
Unit of Digital. Digital and SunRiver are also entering into certain
related service and supply agreements.
The Video Business Segment is involved in the design, manufacture, and
marketing of Text Terminal products as general purpose, asynchronous
serial, character cell, interactive display stations using ANSI or ASCII
command and control protocols.
2. Basis of Presentation:
The Statement of Assets Sold and the Statements of Revenue and Direct
Operating Expenses (the "Statements") are derived from the historical books
and records of the Video Business Segment of the C&P Business Unit of
Digital and present assets sold and revenue and direct operating expenses
of the Products sold. The assets and the revenue and direct expenses in the
Statements represent the assets and the revenues and direct expenses of the
Products of the Video Business Segment sold in the Agreement.
The Statements of Revenue and Direct Operating Expenses include the
manufacturing and overhead costs relating to the Products sold, which have
been incurred at the primary manufacturing location in Taiwan. The facility
in Taiwan also supports other product lines within the C&P business unit of
Digital as well as other business units of Digital. The Statements of
Revenue and Direct Operating Expenses include allocations of costs incurred
within the Taiwan plant applicable to the Products sold. They do not
contain any other allocations of expense by Digital because they are not
directly attributable to the products sold. Such allocations are provided
in Note 4 (unaudited) of the Statements, which reflects a summary of the
applicable expenses that were excluded from the Statements.
Average standard cost was used in calculating the cost of external sales
and the cost of affiliated sales. The cost of external sales and the cost
of affiliated sales only reflect direct product costs. This includes direct
material, labor, and overhead, and includes all direct Taiwan plant
incurred costs (i.e., plant variances, plant period costs, inventory
valuation changes). It does not include costs incurred outside of Taiwan
(i.e., freight, duty and order fulfillment costs, C&P Business Unit sales
and marketing costs, order administration costs, and product delivery
costs, and Digital corporate overhead costs) because they are not directly
attributable to the products sold. Such allocations are provided in Note 4
(unaudited) of the Statements, which reflects a summary of the applicable
expenses that were excluded from the Statements.
F-37
<PAGE>
Administrative functions, and services performed for the C&P Business Unit
by centralized service functions within Digital and allocated to the C&P
business were not allocated to the reported products sold because these
costs are not directly attributable to the products sold. Such allocations
are provided in Note 4 (unaudited) of the Statements, which reflects a
summary of the applicable expenses that were excluded from the Statements.
Research and engineering expenses only include direct costs of engineering
development, product management, and support. Allocated research and
engineering costs were not included. Such allocations are provided in Note
4 (unaudited) of the Statements, which reflects a summary of the applicable
expenses that were excluded from the Statements.
The Products sold were supported by a general sales force within the C&P
Business Unit of Digital that were not dedicated specifically to the
discrete Products sold. Such costs have not been allocated to the products
within the business unit for the purposes of the Statements because these
costs are not directly attributable to the products sold. Such allocations
are provided in Note 4 (unaudited) of the Statements, which reflects a
summary of the applicable expenses that were excluded from the Statements.
The Statements do not reflect the results of operations for either
Digital's recently launched "Multia" brand or for other products that were
not included in the acquisition. Digital has retained all rights related to
inventory, licenses, patents, and trademarks for sales of such products to
its customers through its own distribution channels.
3. Summary of Significant Accounting Policies:
As a result of the above, the Statements presented may not be indicative of
the results of operations that would have been achieved had the products
been operated as a nonaffiliated entity. The following policies were
followed in each year presented on the Statements:
Fiscal Year
The fiscal year of Digital is the fifty-two/fifty-three week period ending
the Saturday nearest the last day of June. The fiscal years ended July 1,
1995 and July 2, 1994 included 52 weeks. The fiscal year ended July 3, 1993
included 53 weeks.
Translation of Foreign Currencies
For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities are translated into U.S. dollars at current
exchange rates. Nonmonetary assets such as inventories and property, plant
and equipment are translated at historical rates. Income and expense items
are translated at average exchange rates prevailing during the year, except
that inventories and depreciation charged to operations are translated at
historical rates.
Revenue Recognition
Revenues from external and affiliate product sales are recognized at the
time the product is shipped to the external customer. All terminal sales
include a keyboard. Keyboard revenues were determined using average sales
values.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
F-38
<PAGE>
Research and Engineering Costs
Research and engineering costs are charged to expense when incurred.
Equipment
Equipment is recorded at cost. Expenditures for maintenance and repairs are
charged to expense while the costs of significant improvements are
capitalized. Depreciation expense on production and other equipment is
computed principally using straight-line methods with asset lives of two to
eight years.
4. Excluded Historical Expenses (unaudited):
The following expenses were excluded from the Statements of Revenue and
Direct Operating Expenses because they were not directly attributable to
the products sold. The allocations below represent the expense allocations
of the Products sold in the Agreement. The expenses have been allocated
based on a variety of methods depending on the nature of the expense
including by unit produced, by proportion of the total product revenue or
expense to the total business segment or business unit revenue or expense
and by management estimate. Management believes that these assumptions are
reasonable under the circumstances. Such allocations include freight, duty,
and order fulfillment costs, research and engineering costs, C&P Business
Unit sales and marketing costs, order administration costs, and product
delivery costs, and Digital corporate overhead costs and are provided
below:
(in thousands)
Year Ended
------------------------------------------
July 1, 1995 July 2, 1994 July 3, 1993
------------ ------------ ------------
Cost of sales
Freight, duty and order fulfillment $ 17,300 $ 10,300
Research and engineering 898 553 $ 63
Selling, general and administrative
expenses allocations:
Sales and marketing 15,891 4,970 163
Order administration 443 198
Corporate overhead 3,322 1,563 $
----------- ------------ ----------
Total allocations omitted $ 37,844 $ 17,584 $ 226
=========== ============ ==========
F-39
<PAGE>
Selected Text Terminal Products of the Video Business
Segment of the Components & Peripherals Business Unit
of Digital Equipment Corporation
Statement of Assets Sold
September 30, 1995
(in thousands)
(unaudited)
ASSETS
------
Inventory:
Work in process $ 1,769
Finished goods 13,206
Total inventories 14,975
Equipment:
Production and other equipment 1,006
Less accumulated depreciation (794)
-----
Net equipment 212
-----
Total assets sold $15,187
F-40
<PAGE>
Selected Text Terminal Products of the Video Business
Segment of the Components & Peripherals Business Unit
of Digital Equipment Corporation
Statements of Revenue and Direct Operating Expenses
(in thousands)
(unaudited)
Three months ended
------------------
September 30, September 30,
1995 1994
------------- -------------
Revenue:
External $11,419 $ 6,924
Affiliates 4,739 6,772
------- --------
Total revenue 16,158 13,696
------- --------
Direct operating expenses:
Cost of external sales 6,360 3,905
Cost of affiliated sales 2,640 3,661
Research and engineering 494 440
------- --------
Total direct operating expenses 9,494 8,006
------- --------
Excess revenue over direct operating
expenses $ 6,664 $ 5,690
------- --------
------- --------
The accompanying notes are an integral part of the statements.
F-41
<PAGE>
Selected Text Terminal Products of the Video Business
Segment of the Components & Peripherals Business Unit
of Digital Equipment Corporation
Notes to the Statements
1. Background:
----------
Pursuant to an Asset Purchase Agreement (the "Agreement") dated October 20,
1995, between Digital Equipment Corporation ("Digital") and SunRiver Data
Systems, Inc. ("SunRiver"), effective October 21, 1995, Digital sold to
SunRiver certain tangible assets consisting principal of inventory and
equipment, and certain contract rights and intellectual property (carried
at zero value) of Selected Text Terminal products (the "Products") of the
Video Business Segment of the Components & Peripherals ("C&P") Business
Unit of Digital. Digital and SunRiver are also entering into certain
related service and supply agreements.
The Video Business Segment is involved in the design, manufacture, and
marketing of Text Terminal products as general purpose, asynchronous
serial, character cell, interactive display stations using ANSI or ASCII
command and control protocols.
2. Basis of Presentation:
---------------------
The accompanying unaudited statement of assets sold and statements of
revenue and direct operating expenses 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
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the period ended September 30,
1995, are not necessarily indicative of the results that may be expected
for the year ended June 29, 1996. The accompanying unaudited statement of
assets sold and statements of revenue and direct operating expenses should
be read in conjunction with the statement of assets sold and statements of
revenue and direct operating expenses and footnotes included in this Form
S-1.
The statement of assets sold and the statements of revenue and direct
operating expenses (the "Statements") are derived from the historical books
and records of the Video Business Segment of the C&P Business Unit of
Digital and present assets sold and revenue and direct operating expenses
of the Products sold. The assets and the revenue and direct expenses in the
Statements represent the assets and the revenues and direct expenses of the
Products of the Video Business Segment sold in the Agreement.
The statements of revenue and direct operating expenses include the
manufacturing and overhead costs relating to the Products sold, which have
been incurred at the primary manufacturing location in Taiwan. The facility
in Taiwan also supports other product lines within the C&P business unit of
F-42
<PAGE>
Selected Text Terminal Products of the Video Business
Segment of the Components & Peripherals Business Unit
of Digital Equipment Corporation
Notes to the Statements, continued
Digital as well as other business units of Digital. The statements of
revenue and direct operating expenses include allocations of costs incurred
within the Taiwan plant applicable to the Products sold. They do not
contain any other allocations of expense by Digital because they are not
directly attributable to the products sold. Such allocations are provided
in Note 3 of the Statements, which reflects a summary of the applicable
expenses that were excluded from the Statements.
Average standard cost was used in calculating the cost of external sales
and the cost of affiliated sales. The cost of external sales and the cost
of affiliated sales only reflect direct product costs. This includes direct
material, labor, and overhead, and includes all direct Taiwan plant
incurred costs (i.e., plant variances, plant period costs, inventory
valuation changes). It does not include costs incurred outside of Taiwan
(i.e., freight, duty and order fulfillment costs, C&P Business Unit sales
and marketing costs, order administration costs, and product delivery
costs, and Digital corporate overhead costs) because they are not directly
attributable to the Products sold. Such allocations are provided in Note 3
of the Statements, which reflects a summary of the applicable expenses that
were excluded from the Statements.
Administrative functions and services performed for the C&P Business Unit
by centralized service functions within Digital and allocated to the C&P
business were not allocated to the reported Products sold because these
costs are not directly attributable to the Products sold. Such allocations
are provided in Note 3 of the Statements, which reflects a summary of the
applicable expenses that were excluded from the Statements.
Research and engineering expenses only include direct costs of engineering
development, product management, and support. Allocated research and
engineering costs were not included. Such allocations are provided in Note
3 of the Statements, which reflects a summary of the applicable expenses
that were excluded from the Statements.
The Products sold were supported by a general sales force within the C&P
Business Unit of Digital that were not dedicated specifically to the
discrete Products sold. Such costs have not been allocated to the products
within the business unit for the purposes of the Statements because these
costs are not directly attributable to the Products sold. Such allocations
are provided in Note 3 of the Statements, which reflects a summary of the
applicable expenses that were excluded from the Statements.
The Statements do not reflect the results of operations for either
Digital's recently launched "Multia" brand or for other products that were
not included in the acquisition. Digital has retained all rights related to
inventory, licenses, patents, and trademarks for sale of such products to
its customers through its own distribution channels.
F-43
<PAGE>
Selected Text Terminal Products of the Video Business
Segment of the Components & Peripherals Business Unit
of Digital Equipment Corporation
Notes to the Statements, continued
3. Excluded Historical Expenses:
----------------------------
The following expenses were excluded from the statements of revenue and
direct operating expenses because they were not directly attributable to
the products sold. The allocations below represent the expense allocations
of the Products sold in the Agreement. The expenses have been allocated
based on a variety of methods depending on the nature of the expense
including by units produced, by proportion of the total product revenue or
expense to the total business segment or business unit revenue or expense,
and by management estimate. Management believes that these assumptions are
reasonable under the circumstances. Such allocations include freight, duty,
and order fulfillment costs, research and engineering costs, C&P Business
Unit sales and marketing costs, order administration costs and product
delivery costs, and Digital corporate overhead costs and are provided
below:
(in thousands)
Three months ended
------------------
September 30, September 30,
1995 1994
------------- -------------
Cost of sales
Freight, duty, and order fulfillment $ 4,325 $ 3,720
Research and engineering 217 193
Selling, general and administrative expense
allocations:
Sales and marketing 2,513 3,417
Order administration 87 93
Corporate overhead 996 714
-------- --------
Total allocations omitted $ 8,138 $ 8,137
-------- --------
-------- --------
F-44
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
ASSETS 1995 1994
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 105,824 $ 107,455
Other current assets .................................................................. -- --
------------ ------------
Total current assets .......................................................... 105,824 107,455
Investments in and advances from subsidiaries (eliminated in
consolidation):
Investments, at equity ................................................................ 5,169,767 5,677,959
Advances to (from) subsidiaries, net .................................................. 8,339,306 (3,853,056)
Assets held for sale ..................................................................... -- 1,208,733
Other assets ............................................................................. 39,763
------------ ------------
$ 13,654,660 $ 3,141,091
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................................. $ 817,702 $ 755,034
------------ ------------
Total current liabilities ..................................................... 817,702 755,034
------------ ------------
Total liabilities ............................................................. 817,702 755,034
Commitments and contingencies
Stockholder's equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none ................... -- --
issued
Common Stock purchased but unissued, $.01 par value per share,
24,936,589 shares to be issued at December 31, 1995 ................................ -- 249,366
Common stock, $0.01 par value, 60,000,000 shares authorized,
45,550,214 and 13,887,923 shares issued at December 31, 1995
and 1994, respectively ............................................................. 455,502 138,879
Additional paid-in capital ............................................................ 23,769,379 13,553,473
Accumulated deficit ................................................................... (11,387,923) (11,555,661)
------------ ------------
Total stockholder's equity .................................................... 12,836,958 2,386,057
------------ ------------
$ 13,654,660 $ 3,141,091
============ ============
</TABLE>
The financial statements should be read in conjunction with the Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, which information is included elsewhere
herein.
S-1
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Sales ........................................................................ $ -- $ 3,180,351 $ 2,814,477
Cost of sales ................................................................ 1,692,323 1,637,590
------------ ------------ ------------
Gross margin ...................................................... 1,488,028 1,176,887
Expenses:
Operating ................................................................. 651,234 1,636,341 1,222,604
Interest .................................................................. 1,667 32,996 35,774
Other (income) and expenses ............................................... 77,872 (11,323)
------------ ------------ ------------
652,901 1,747,209 1,247,055
------------ ------------ ------------
Loss before benefit for income taxes and other items shown below ............. (652,901) (259,181) (70,168)
Benefit for income taxes ..................................................... 215,036 --
------------ ------------ ------------
Loss before equity in loss from consolidated subsidiaries .................... (437,865) (259,181) (70,168)
Equity in income (loss) of consolidated subsidiaries ......................... (543,193) 232,959
------------ ------------ ------------
Loss from continuing operations .............................................. (981,058) (26,222) (70,168)
Equity from gain on disposal of discontinued operations ...................... 1,148,797
------------ ------------ -------------
Net income (loss) ................................................. $ 167,739 $ (26,222) $ (70,168)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding .......................................... 43,656,273 27,185,879 26,435,288
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per share:
From continuing operations ............................................. $ (0.02) $ 0.00 $ 0.00
From disposal of discontinued operations ............................... $ 0.02
------------ ------------ ------------
Net income (loss) ............................................................ $ 0.00 $ 0.00 $ 0.00
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The financial statements should be read in conjunction with the Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, which information is included elsewhere
herein.
S-2
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Net cash flows used in operating activities ............................... $(1,619,703) $ 214,412 $ (95,904)
Cash flows from investing activities:
Decrease (increase) in net advances to subsidiaries ................. (5,629,363) 3,700,343
Increase in investment in consolidated subsidiaries, net ............ 508,192 (5,677,960)
Payments for other assets ........................................... -- (22,381) (20,552)
----------- ----------- -----------
Net cash provided by (used in) investing activities ....................... (5,121,171) (1,999,998) (20,552)
Cash flows from financing activities:
Proceeds from sale of convertible notes ............................. 4,575,000
Proceeds from issuance of common stock .............................. 2,164,243 1,825,857 2,000
Decrease in short-term debt ......................................... -- (40,360)
Proceeds from debt issuance ......................................... -- 41,055
Payments on capital lease obligations ............................... -- (58,136)
Advance payment on strategic alliance ............................... -- 75,000
Retirement of preferred stock ....................................... -- (5,612)
----------- ----------- -----------
Net cash provided by financing activities ................................. 6,739,243 1,825,857 13,947
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ...................... (1,631) 40,271 (102,509)
Cash and cash equivalents at beginning of year ............................ 107,455 67,184 169,693
----------- ----------- -----------
Cash and cash equivalents at end of year ................................. $ 105,824 $ 107,455 $ 67,184
----------- ----------- -----------
----------- ----------- -----------
Non-cash transactions: .................................................... --
Conversion of convertible notes into common stock ................... $ 4,575,000
Compensatory value of warrants ...................................... 3,216,267
Common stock issued for consulting services ......................... 380,250
Accrual of services to be paid in common stock ...................... 856,562
Distribution of assets of discontinued operations ................... 2,357,530
Issuance of common stock in Digital purchase ........................ 3,000,000
</TABLE>
The financial statements should be read in conjunction with the Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, which information is included elsewhere
herein.
S-3
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Description Period Additions Deductions End of Period
- - -------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Allowances:
Doubtful accounts:
1993................ $ -- $ -- $ -- $ --
1994................ $ -- $1,176,000 (A) $ 109,000 (B) $1,067,000
1995................ $1,067,000 $1,072,000 $ 732,000 (C) $1,407,000
Inventory reserves:
1993................ $ -- $ -- $ -- $ --
1994................ $ -- $4,046,000 (D) $ 48,000 $3,998,000
1995................ $3,998,000 $ 99,000 $1,065,000 (E) $3,032,000
</TABLE>
A) Includes $1,128,000 of allowance for accounts acquired in the SunRiver Data
Acquisition.
B) Includes accounts written off during the period.
C) Includes accounts written off during the period.
D) Includes $4,004,000 of reserves for inventory acquired in the SunRiver Data
Acquisition.
E) Includes inventory written off during the period.
S-4
<PAGE>
<TABLE>
<CAPTION>
================================================= ====================================================
<S> <C>
No dealer, salesman or other person has
been authorized to give any information or to
make any representations, other than those
contained in this Prospectus, and, if given or
made, such information or representations must
not be relied upon as having been authorized by SUNRIVER CORPORATION
the Company or by the Underwriter. This
Prospectus does not constitute an offer to sell, 14,444,210 Shares
or a solicitation of an offer to buy, any of Common Stock
securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is
not qualified and to do so or to anyone to whom
it is unlawful to make such offer of solicitation.
Neither the delivery of this Prospectus nor
any sale made hereunder shall under any
circumstances create any implication that there
has been no change in the affairs of the
Company since the date hereof or that the
information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
Page PROSPECTUS
Prospectus Summary............................2
Risk Factors..................................4
Reorganization...............................10
Recent Developments..........................14
Use of Proceeds..............................18
Dividend Policy..............................19
Price Range of Common Stock..................19
Selected Consolidated Financial Data.........19
SunRiver Corporation and Selected Digital
Text Terminal Products Pro Forma
Financial Statements........................21
Management's Discussion and Analysis of , 1996
Financial Condition and Results of
Operations.................................24
Business.....................................38
Management...................................49
Security Ownership of Certain Beneficial
Owners and Management......................54
Selling Stockholders.........................56
Plan of Distribution.........................59
Certain Transactions.........................60
Description of Capital Stock.................61
Legal Matters................................63
Experts......................................63
Change In Accountants........................63
Additional Information.......................64
Index to Financial Statements...............F-1
================================================= ====================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the shares of Common Stock offered hereby, all
of which will be borne by Registrant.
SEC registration fee ........................................ $ 14,734
Nasdaq listing fee........................................... 7,500
Legal fees and expenses...................................... 75,000
Accountants' fees and expenses............................... 100,000
Printing expenses............................................ 15,000
Transfer agent fees and expenses............................. 1,000
Miscellaneous expenses....................................... $ 11,766
-------------
Total........................................................ $ 225,000
-------------
-------------
Item 14. Indemnification of Directors and Officers
Paragraph (7) of subsection (b) of Section 102 of the General Corporation
Law of the State of Delaware provides that a certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director except for (i) a breach of the director's duty of
loyalty; (ii) acts or omissions not in good faith or which involve intentional
misconduct, or a knowing violation of the law; (iii) an unlawful payment of
dividend, stock purchase or redemption under Section 174 of such law; or (iv)
for any transaction wherein the director derived an improper personal benefit.
Section 145 of such law provides, generally, that a person sued as a director,
officer, employee or agent of a corporation may be indemnified by the
corporation in nonderivative suits for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. In the case of criminal actions and proceedings,
such person must have had no reasonable cause to believe his conduct was
unlawful. Indemnification of expenses is authorized in stockholder derivative
suits where such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and so
long as he had not been found liable for negligence or misconduct in the
performance of his duty to the corporation. Even in this latter instance, the
court may determine that, in view of all the circumstances, such person is
entitled to indemnification for such expenses as the court deems proper. A
person sued as a director, officer, employee or agent of a corporation who has
been successful in defense of the action must be indemnified by the corporation
against expenses.
II - 1
<PAGE>
Registrant's Certificate of Incorporation, as amended, contains the
indemnification provisions set forth below:
"ELEVENTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify and advance the expenses of any and
all persons whom it shall have power to indemnify or advance the expenses of
under said section from and against any and all of the expenses, judgments,
fines, amounts paid in settlements, liabilities, or other matters referred to in
or covered by said section, and the indemnification and advancement of expenses
provided for herein shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
"TWELFTH: No director of the corporation shall be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit."
The Registrant maintains policies insuring the Company's directors and
officers against certain liabilities for actions taken in such capacities,
including liabilities under the Securities Act 1933, as amended ("Securities
Act").
Item 15. Recent Sales of Unregistered Securities
During the last three years, the Registrant has sold and issued the
following unregistered securities:
In connection with the Registrant's December 1994 acquisition of SunRiver
Group, Inc. (formerly named SunRiver Corporation ("SunRiver Group")), the
Registrant issued (1) in December 1994 5,594,001 shares of its common stock, par
value $.01 ("Common Stock"), to SunRiver Group in consideration for the assets
and business of SunRiver Group; (2) in October 1995 20,845,379 additional shares
of Common Stock to SunRiver Group for such consideration; (3) in October 1995 a
warrant to SunRiver Group to purchase 4,174,704 shares of Common Stock at $1.84
per share as consideration for SunRiver Group's guarantee of the Registrant's
obligations under a put option granted to NCR Corporation (formerly known as
AT&T Global Information Solutions Company) ("NCR" or "AT&T-GIS"); and (4) in
November 1995 4,091,210 shares of its Common Stock to RAS Securities Corp.
("RAS") and its designees in consideration for, among other matters, RAS's
introducing the Registrant to SunRiver Group and advising the Registrant with
respect to its acquisition of SunRiver Group and Applied Digital Data Systems,
Inc. In addition, in December 1994, the Registrant issued 288,000 shares of
Common Stock to Venture First II, L.P. in satisfaction of a SunRiver Group
obligation assumed by the Registrant and 300,000 shares of Common Stock to
Rosbro Capital Corporation in exchange for the release of certain obligations of
the Registrant.
II - 2
<PAGE>
In April 1995, the Registrant issued to Vortex Capital Corp., One World
Asset Management and Tremont Bermuda Ltd. warrants to purchase a total of 88,889
shares of Common Stock at $1.50 per share in consideration for consulting and
financial services provided and to be provided to the Registrant. In January
1996, the Registrant issued to The Research Works, Inc. a warrant to purchase
50,000 shares of Common Stock at $3.50 per share, adjusted to $3.00 per share,
in consideration for services relating to the production and distribution of
certain reports on behalf of the Registrant.
In connection with the acquisition by Registrant's wholly-owned subsidiary,
SunRiver Data Systems, Inc., in October 1995 of certain assets of Digital
Equipment Corporation ("Digital"), the Registrant issued in October 1995 (1) a
warrant to The Chase Manhattan Bank, N.A. to purchase 1,000,000 shares of Common
Stock at $3.6875 per share in consideration for providing financing for the
Registrant; (2) a warrant to NCR to purchase 500,000 shares of Common Stock at
$3.875 per share in partial consideration for NCR's agreeing to a restructuring
of the Registrant's obligations to NCR; (3), for $3,000,000 of the purchase
price of Digital's assets, 793,389 shares of Common Stock to Digital, and
granted to Digital the right to receive up to an additional 206,611 shares of
Common Stock in the event the closing price of the Common Stock on The NASDAQ
SmallCap Market on the date the registration relating to such shares becomes
effective is less than $3-25/32. Digital is one of the selling stockholders
whose shares of Common Stock (including the additional 206,611 shares which may
be issued to Digital) are being registered by this Registration Statement.
In January 1996, the Registrant issued to Kempisty & Company, CPA's P.C.,
its former accountant, 10,000 shares of Common Stock in consideration for
services rendered. Kempisty & Company is one of the selling stockholders whose
10,000 shares are being registered by this Registration Statement.
In January 1996, the Registrant issued to Lehman Brothers Inc. 20,000
shares of Common Stock in consideration for financial services rendered.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. The sales of securities were made pursuant to
Regulation D under such act without the use of an underwriter, and the
certificates or documents evidencing the securities bear a restrictive legend
permitting the transfer thereof only upon registration of the shares or an
exemption under the Securities Act.
In December 1994 and March 1995 the Registrant issued, at $.50 per share, a
total of 7,000,000 shares of its Common Stock in a private placement to
accredited investors under Regulation D of the Securities Act in which RAS
Securities Corp. acted as the exclusive placement agent and received a
commission of 10% and a non-accountable expense allowance of 3% of the gross
proceeds of the private placement and an investment banking fee of $250,000 and
a consulting fee of $240,000. The purchasers of the Common Stock in this private
placement are among the selling stockholders whose shares of Common Stock are
being registered by this Registration Statement.
The Registrant has sold convertible notes and Common Stock in offerings
under Regulation S ("Reg. S") under the Securities Act. The Company relied upon
Rule 903(c)(2) of Reg. S with respect to its Reg. S offerings and the basis of
the exemption in each such offering was as follows: (i) the offer and sale of
the securities were made in an "off shore transaction" as defined in Rule
902(i), subsections (1)(i) and (1)(ii)(A); (ii) no directed selling efforts, as
defined in Rule 902(b), were made in the United States by the Registrant, a
distributor, any of their respective affiliates, or any person acting on behalf
of any of foregoing; (iii) the Registrant is a reporting issuer; (iv) offering
restrictions were implemented--the subscription agreements and convertible notes
contained statements to the effect that the securities have not
II - 3
<PAGE>
been registered under the Securities Act and may not be offered or sold in the
United States or to U.S. persons unless the securities are registered under the
Securities Act or an exemption from the registration requirements of the
Securities Act is available; and the offer and sale of the securities were not
made pursuant to an offering circular or prospectus, as none was prepared or
provided; (v) the purchasers agreed that securities could not be transferred or
resold to any U.S. person, until at least the 41st day following the date of
their issuance and then only in accordance with the Securities Act and
applicable state laws and each purchaser also agreed that it was solely
responsible for compliance with the Securities Act and applicable state laws
with respect to any such transfer or resale.
In two Reg. S offerings, the Registrant in April 1995 sold $1,000,000
principal amount of 10% convertible notes ("$1,000,000 TradeWave Notes") and in
August 1995 sold $400,000 principal amount of 10% convertible notes ("$400,000
TradeWave Notes"). The $1,000,000 TradeWave Notes and $400,000 TradeWave Notes
were converted into 1,270,375 shares (between June and August 1995) and 189,796
shares (in October 1995) of Common Stock, respectively. The conversion price for
both the $1,000,000 TradeWave Notes and the $400,000 TradeWave Notes was equal
to 60% of the average closing price for the Common Stock on The Nasdaq SmallCap
Market for the five business days immediately preceding the date of each
conversion. For financial services rendered in connection with the $1,000,000
TradeWave Notes and the $400,000 TradeWave Notes and to be rendered to the
Registrant pursuant to a consulting arrangement, the Registrant issued to
financial advisors warrants to purchase prior to April 21, 2000 88,889 shares of
Common Stock at the exercise price of $1.50.
In a Reg. S offering completed October 12, 1995, the Registrant received
gross proceeds of $750,000 by selling convertible non-interest bearing notes
(the "$750,000 Note"). The $750,000 Note was converted into 359,691 shares of
Common Stock.
In Reg. S offerings completed October 20, 1995, the Registrant received
gross proceeds of $2,500,000 by selling convertible non-interest bearing notes
(the "$2,500,000 Notes"). The $2,500,000 Notes were converted into 1,236,855
shares of Common Stock.
In a Reg. S offering completed on October 30, 1995, the Registrant received
gross proceeds of $1,000,000 by selling 315,457 shares of Common Stock for $3.17
per share, a price equal to 87.5% of the closing price of the Common Stock on
October 27, 1995. Pursuant to agreement, the Company issued to the purchasers an
additional 78,632 shares of Common Stock under this Reg. S offering.
The Registrant issued 78,500 shares of Common Stock, which were valued at
$3.625 per share, and warrants to purchase 500,000 shares of Common Stock to
financial advisors in connection with the October 20, 1995 and October 30, 1995
Reg S. offerings. These warrants are exercisable for three years at the market
price of the Common Stock on the date of the warrants' issuance (ranging from
$3.625 to $3.78125 per share) and the holders have registration rights with
respect to the shares issuable upon exercise of the warrants.
The Registrant borrowed $1,000,000 on October 20, 1995, that was repayable
in ten days, and issued to a financial advisor warrants to purchase 25,000
shares of Common Stock at $3.875 per share and otherwise having the terms of the
warrants which are referred to in the preceding paragraph. This loan was repaid
out of the proceeds of a Reg. S offering completed October 30, 1995, described
above.
In an offering under Reg. S completed on January 5, 1996, the Registrant
received gross proceeds of $1,000,000 by selling 496,124 shares of Common Stock
for $2.02 per share, a price equal to 75% of the closing bid price of the Common
Stock on January 2, 1996. As permitted by their agreement with the Registrant,
the purchasers elected to adjust the $2.02 price per share to $1.68 per share,
which is 75% of
II - 4
<PAGE>
the average closing bid price of the Common Stock during the five business days
immediately preceding such election. As a result of such adjustment, an
additional 98,119 shares of Common Stock were issued, bringing the total to
594,243 shares. In connection with this offering, the Registrant issued
warrants, exercisable within three years, to financial advisors to purchase
50,000 shares of Common Stock at an exercise price of $2.6875.
In Reg. S offerings commenced in January and completed in February 1996,
the Registrant received gross proceeds of $1,500,000 by selling convertible
non-interest bearing notes (the "$1,500,000 Notes") which allowed the holders to
convert the $1,500,000 Notes during the period beginning on the 41st day
following their issuance until March 10, 1997 into that number of shares of
Common Stock determined by dividing $1,500,000 by (i) 87-1/2% of the average
closing bid price for the Common Stock for the five business days immediately
preceding the conversion date ("Average Bid Price") if such price is less than
$3.15 per share; or (ii) seventy-five percent of the Average Bid Price if such
price is not less than $3.15 per share; however, the conversion price would be
no less than $1.60 per share nor more than $3.00 per share. The maximum number
of shares into which the $1,500,000 Notes were convertible was 937,500. As of
May 8, 1996, holders of all of the $1,500,000 Notes had converted their notes
into 783,313 shares of Common Stock at the average price of $1.91 per share. In
connection with this Reg. S offering, the Registrant issued warrants,
exercisable within three years, to financial advisors to purchase 150,000 shares
of Common Stock at an exercise price ranging from $2.41 to $2.6875 per share.
Item 16(a). List of Exhibits
Exhibit No.* Description of Exhibit
2(a)[2] Asset Purchase Agreement, dated as of October 20, 1995, between
Digital Equipment Corporation, as Seller, and SunRiver Data
Systems, Inc., as Purchaser.
2(b)[2] Basic Order Agreement for Text Terminals Products and Parts,
dated as of October 20, 1995, between Digital Equipment
Corporation, as Buyer, and SunRiver Data Systems, Inc., as
Seller, with All-Quotes, Inc. as guarantor of the obligations of
SunRiver Data Systems, Inc. thereunder.
2(c)[2] Manufacturing Services Agreement, dated as of October 20, 1995,
between Digital Equipment Corporation and SunRiver Data Systems,
Inc.
2(d)[2] Interim Services Agreement, dated as of October 20, 1995, between
Digital Equipment Corporation and SunRiver Data Systems, Inc.
2(e)[2] Maintenance Service Agreement, dated as of October 20, 1995,
between SunRiver Data Systems, Inc. and Digital Equipment
Corporation.
2(f)[2] Trademark Assignment, dated as of October 20, 1995, from Digital
Equipment Corporation to SunRiver Data Systems, Inc.
2(g)[2] Software License Agreement, dated as of October 20, 1995, between
Digital Equipment Corporation and SunRiver Data Systems, Inc.
II - 5
<PAGE>
2(h)[2] Patent Assignment and License Agreement, dated as of October 20,
1995, between Digital Equipment Corporation and SunRiver Data
Systems, Inc.
2(i)[2] Registration Agreement relating to the common stock of
All-Quotes, Inc., dated as of October 20, 1995, between
All-Quotes, Inc. and Digital Equipment Corporation.
2(j)[2] Stipulation for Permanent Injunction and Final Order Thereon,
entered October 30, 1995, relating to action by Sun Microsystems,
Inc. against SunRiver Corporation, et al.
2(k)[2] Credit Agreement and Guaranty, dated as of October 20, 1995,
among SunRiver Data Systems, Inc., as Borrower, SunRiver
Acquisition Corp. and All-Quotes, Inc., as Guarantors, SunRiver
Group, Inc., as Hypothecator, and The Chase Manhattan Bank, N.A.,
as Agent and Bank.
2(l)[2] Revolving Credit Note, dated October 20, 1995, of SunRiver Data
Systems, Inc. payable to The Chase Manhattan Bank, N.A.
2(m)[2] Term Loan Note, dated October 20, 1995, of SunRiver Data Systems,
Inc. payable to The Chase Manhattan Bank, N.A.
2(n)[2] Security Agreement, dated as of October 20, 1995, between The
Chase Manhattan Bank, N.A., as agent and bank, and SunRiver Data
Systems, Inc.
2(o)[2] Patent Security Interest Agreement, dated as of October 20, 1995,
between The Chase Manhattan Bank, N.A., as agent and bank, and
SunRiver Data Systems, Inc.
2(p)[2] Trademark Security Interest Agreement, dated October 20, 1995,
between The Chase Manhattan Bank, N.A. and SunRiver Data Systems,
Inc.
2(q)[2] Copyright Security Interest Agreement, dated as of October 20,
1995, between The Chase Manhattan Bank, N.A., as agent and bank,
and SunRiver Data Systems, Inc.
2(r)[2] Pledge Agreement, dated October 20. 1995, between The Chase
Manhattan Bank, N.A. and All-Quotes, Inc.
2(s)[2] Pledge Agreement, dated October 20, 1995, between The Chase
Manhattan Bank, N.A. and SunRiver Acquisition Corp.
2(t)[2] Hypothecation Agreement, dated October 20, 1995, between The
Chase Manhattan Bank, N.A. and SunRiver Group, Inc.
2(u)[2] Release and Reassignment Agreement, dated October 20, 1995,
between SunRiver Data Systems, Inc. and Congress Financial
Corporation.
2(v)[2] Supplementary Agreement, dated October 20, 1995, among SunRiver
Group, Inc., SunRiver Acquisition Corp., SunRiver Data Systems,
Inc. and AT&T Global Information Solutions Company.
2(w)[2] Cancellation of Pledge Agreements, dated October 20, 1995,
executed by AT&T Global Information Solutions Company.
II - 6
<PAGE>
2(x)[2] Pledge Agreement, dated October 20, 1995, between AT&T Global
Information Solutions Company, as pledgee, and SunRiver Group,
Inc., as pledgor.
2(y)[2] Amended and Restated Call Option, dated October 20, 1995, granted
to SunRiver Data Systems, Inc. relating to 1,000 shares of
preferred stock of SunRiver Data Systems, Inc.
2(z)[2] Amended and Restated Put Option, dated October 20, 1995, granted
to AT&T Global Information Solutions Company relating to 1,000
shares of preferred stock of SunRiver Data Systems, Inc.
2(aa)[2] Agreement to Extend Promissory Note and Mortgage, dated October
20, 1995, among SunRiver Acquisition Corp., SunRiver Data
Systems, Inc. and AT&T Global Information Systems, Inc.
2(bb)[3] Acquisition Agreement by and among SunRiver Corporation (now
SunRiver Group, Inc.), All-Quotes, Inc., and All-Quotes Capital
Corp., dated December 9, 1994 (filed as exhibit 2(a) to
Registrant's December 12, 1994 Form 8-K).
2(cc)[3] Amendment No. 1 to the Acquisition Agreement, dated December 9,
1994 (filed as exhibit 2(b) to Registrant's December 12, 1994
Form 8-K).
2(dd)[3] Stock Purchase Agreement by and among AT&T Global Information
Solutions Company, Applied Digital Data Systems, Inc., and
SunRiver Corporation (now SunRiver Group, Inc.), dated November
23, 1994 (filed as exhibit 2(c) to Registrant's December 12, 1994
Form 8-K).
2(ee)[3] Promissory Note Secured by Real Estate Mortgage from SunRiver
Acquisition Corp. payable to AT&T Global Information Solutions
Company, dated December 9, 1994 (filed as exhibit 2(f) to
Registrant's December 12, 1994 Form 8-K).
2(ff)[3] Guarantee by SunRiver Corporation (now SunRiver Group, Inc.) to
AT&T Global Information Solutions Company, dated December 9, 1994
(filed as exhibit 2(i) to Registrant's December 12, 1994 Form
8-K).
2(gg)[3] Agency Agreement between All-Quotes, Inc. and RAS Securities
Corp., dated October 27, 1994 (filed as exhibit 2(n) to
Registrant's December 12, 1994 Form 8-K).
2(hh)[3] RAS Assignment and Transfer Agreement between All-Quotes, Inc.
and RAS Securities Corp., dated December 9, 1994 (filed as
exhibit 2(o) to Registrant's December 12, 1994 Form 8-K).
2(ii)[3] Letter Agreement from All-Quotes, Inc. to RAS Securities Corp.
regarding Gross Fees payable by All-Quotes, Inc. to RAS
Securities Corp., dated December 9, 1994 (filed as exhibit 2(p)
to Registrant's December 12, 1994 Form 8-K).
2(jj)[3] Consulting Fee Agreement between All-Quotes, Inc. and RAS
Securities Corp., dated December 8, 1994 (filed as exhibit 2(q)
to Registrant's December 12, 1994 Form 8-K).
II - 7
<PAGE>
2(kk)[7] Agreement of Purchase and sale by and between All-Quotes, Inc.
and Global Market Information, Inc. dated October 13, 1994 (filed
as Exhibit A to Registrant's December 5, 1994 Information
Statement).
2(ll)[4] Asset Purchase Agreement, dated as of March 22, 1995, between
Microelectronics and Computer Technology Corporation and EiNet
Acquisition Corp. (now TradeWave Corporation) (filed as exhibit
2(s) to Registrant's 1994 10-K/A). (This Agreement has been
revised. See Exhibits 2(mm) and 2(nn), below.)
2(mm)[10] Amendment No. 1, dated March 4, 1996, to the Asset Purchase
Agreement between MCC and TradeWave Corporation.
2(nn)[10] Amendment No. 1, dated March 4, 1996, to the Addendum to the
Research and Development Agreement between MCC and TradeWave
Corporation.
3.1** Certificate of Incorporation and Certificates of Amendment
thereto.
3.2[8] By-Laws
4(a)[2] Warrant granted to The Chase Manhattan Bank, N.A. to purchase
1,000,000 shares of the common stock of All-Quotes, Inc.
4(b)[2] Warrant granted to AT&T Global Information Solutions Company to
purchase 500,000 shares of the common stock of All-Quotes, Inc.
4(c)[9] Warrant granted to SunRiver Group, Inc. to purchase 4,174,704
shares of All-Quotes, Inc. Common Stock.
4(d)[3] Two Proxy and Voting Agreements, each appointing William Long and
Gerald Youngblood as attorneys and proxies to vote shares of
All-Quotes, Inc., dated December 9, 1994 (filed as exhibit 4(b)
to Registrant's December 12, 1994 Form 8-K).
4(e)[3] Amended and Restated Voting Trust Agreement
4(f)** Agreement of SunRiver Group, Inc. not to exercise warrants to
purchase 2,654,565 shares of SunRiver Corporation Common Stock.
5** Opinion of Fischbein Badillo Wagner Harding
10(a)[3] Joint Marketing and Volume Purchase Agreement by and between
Applied Digital Data Systems, Inc. and AT&T Global Information
Solutions Company, dated December 12, 1994.
10(b)[3] Master OEM Maintenance Agreement by and between Applied Digital
Data Systems, Inc. and AT&T Global Information Solutions Company,
dated December 9, 1994.
10(c)[3] ADDS Computer Systems Purchase Agreement by and between Applied
Digital Data Systems, Inc. and AT&T Global Information Solutions
Company, dated December 9, 1994.
II - 8
<PAGE>
10(d)[3] Registration Rights Agreement between All-Quotes, Inc. and RAS
Securities Corp., dated December 9, 1994.
10(e)[5] Lease, dated August 22, 1994, between International Software
Systems, Inc. and SunRiver Corporation (now SunRiver Group, Inc.)
of the premises located at Suite 201, Building IV, 9430 Research
Blvd. Austin, Texas.
10(f)[5] Lease, dated March 16, 1992, between Aetna Life Insurance Company
and NCR Corporation of the premises located at Heathrow, I Office
Building, 250 International Parkway, Heathrow, Florida.
10(g)[4] Operating Agreement for General Automation LLC, dated as of May
22, 1995, between SunRiver Data Systems, Inc. and General
Automation, Inc.
10(h)[4] Consulting Agreement, dated as of January 1, 1995, between
SunRiver Data Systems, Inc. and NAFCO Consulting, Inc.
10(i)[9] Addendum to Consulting Agreement, dated as of January 2, 1995,
among SunRiver Data Systems, Inc., NAFCO Consulting, Inc. and
William M. Moore.
10(j)[4] Stock Option Agreement, dated October 3, 1994, between the
Company and J. Gerald Combs, granting to Mr. Combs the option to
purchase 700,000 shares of Common Stock (filed as exhibit 10(i)
to Registrant's 1994 Form 10-K/A).
10(k)[4] Letter Agreement, dated January 24, 1995, from SunRiver Group,
Inc. to All-Quotes, Inc. and RAS Securities Corp. agreeing not to
register shares of Common Stock prior to June 9, 1996 (filed as
exhibit 10(j) to Registrant's 1994 Form 10-K/A).
10(l)[6] All-Quotes, Inc. 1995 Incentive Plan (filed as Exhibit E to
Registrant's Information Statement, dated September 28, 1995).
10(m)[10] Exchange of Shares Agreement, dated August 14, 1995, between
All-Quotes, Inc. and All- Quotes Capital Corp. involving the
exchange of common stock of the respective companies, general
releases and release from escrow of common stock of All-Quotes
Data, Ltd.
11[10] Statement re Computation of Per Share Earnings.
16[4] Letter of Philip Kempisty, former accountant to All-Quotes, Inc.,
regarding change of the Company's certifying accountant.
21[9] List of Subsidiaries
23(a)** Consent of Fischbein Badillo Wagner Harding (included in Exhibit
5)
23(b)1** Consent of Coopers & Lybrand L.L.P.-Austin, Texas
23(b)2** Consent of Coopers & Lybrand L.L.P.-Boston, Massachusetts
- - ----------------------
II - 9
<PAGE>
* Numbers inside brackets indicate documents from which exhibits
have been incorporated by reference.
Unless otherwise indicated, documents incorporated by reference
refer to the identical exhibit number in the documents from which
they are being incorporated.
** Filed herewith.
[2] Incorporated by reference to Registrant's Current Report on Form
8-K dated October 23, 1995.
[3] Incorporated by reference to Registrant's Current Report on Form
8-K dated December 12, 1994.
[4] Incorporated by reference to Registrant's amended Annual Report
on Form 10-K/A for the transition period July 1 through December
31, 1994.
[5] Incorporated by reference to Registrant's Annual Report on Form
10-K for the transition period July 1 through December 31, 1994.
[6] Incorporated by reference to Registrant's Information Statement
dated September 28, 1995.
[7] Incorporated by reference to Registrant's Information Statement
dated December 5, 1994.
[8] Incorporated by reference to Registrant's Registration Statement
on Form S-18 (File No. 33-32396-NY).
[9] Incorporated by reference to the original Registration Statement
on Form S-1 (File No. 33- 80319).
[10] Incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
[11] Incorporated by reference to Amendment No. 2 to the Registration
Statement in Form S-1 (File No. 33-80319).
Item 17. Undertakings.
The Company hereby undertakes:
(a) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually
II - 10
<PAGE>
or in the aggregate, represents a fundamental change in the information set
forth in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the Registration Statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") that are incorporated by reference in this Registration
Statement;
(b) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(d) That, insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions of the General Corporation Law of the State
of Delaware, the Company's Certificate of Incorporation, employment agreements
with certain officers of the Company or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II - 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Austin, Texas on the
30th day of May, 1996.
SUNRIVER CORPORATION
By: /s/ Gerald Youngblood
-------------------------
Gerald Youngblood
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Gerald Youngblood Chairman of the Board of Directors, May 30, 1996
- - ---------------------
Gerald Youngblood President, and Director
(Principal Executive Officer)
/s/ William C. Long Executive Vice President, May 30, 1996
- - ---------------------
William C. Long and Director
/s/ Toni McElroy Executive Vice-President, Finance, May 30, 1996
- - ---------------------
Toni McElroy Treasurer, Secretary, and
Director (Principal Financial
Officer and Principal Accounting Officer)
/s/ Sam Smith Director May 30, 1996
- - ---------------------
Sam Smith
II - 12
<PAGE>
E X H I B I T S
Exhibit No. Description of Exhibit Page
3.1 Certificate of Incorporation and Certificates of Amendment therto
4(f) Agreement of SunRiver, Inc. not to exercise warrants to purchase
2,654,565 shares of SunRiver Corporation Common Stock
5 Opinion of Fischbein Badillo Wagner Harding
23(a) Consent of Fischbein Badillo Wagner Harding
(included in Exhibit 5)
23(b)1 Consent of Coopers & Lybrand L.L.P.-Austin, Texas
23(b)2 Consent of Coopers & Lybrand L.L.P.-Boston, Massachusetts
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
ALL-QUOTES, INC.
----------------
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the "corporation")
-----
is All-Quotes, Inc.
SECOND: The address, including street, number, city, and county, of the
------
registered office of the corporation in the State of Delaware is 229 South State
Street, City of Dover, County of Kent, 19901; and the name of the registered
agent of the corporation in the State of Delaware at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act or
-----
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
------
have authority to issue is thirty million (30,000,000) shares, and the par value
of each share is $.001 per share. All such shares are of one class and are
shares of Common Stock.
FIFTH: The name and the mailing address of the incorporator is as follows:
-----
NAME MAILING ADDRESS
---- ---------------
Lucetta M. Billhime 711 Fifth Avenue
New York, N.Y. 10022
SIXTH: The corporation is to have perpetual existence.
-----
<PAGE>
SEVENTH: The Board of Directors is expressly authorized to adopt, amend or
-------
repeal the by-laws of the corporation.
EIGHTH: Elections of directors need not be by written ballot unless the
------
by-laws of the corporation shall otherwise provide.
NINTH: Whenever a compromise or arrangement is proposed between this
-----
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders of this corporation, as the case may be,
and also on this corporation.
TENTH: The corporation reserves the right to amend, alter, change or repeal
-----
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter preserved by statute, and all rights conferred upon stockholders
herein are granted subject to this preservation.
ELEVENTH: The corporation shall, to the fullest extent permitted by Section
--------
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify and advance the expenses of any and all
persons whom it shall have power to indemnify or advance the expenses of under
said section from and against any and all of the expenses, judgments, fines,
amounts paid for settlements, liabilities, or other matters referred to in or
covered by said section, and the indemnification and advancement of expenses
provided for herein shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
-2-
<PAGE>
TWELFTH: No director of the corporation shall be liable to the corporation
-------
or its stockholders or monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
Signed: June 8, 1988 Lucetta M. Billhime
----------------------------------
Incorporator
-3-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
UNDER SECTION 241 OF THE
DELAWARE CORPORATION LAW
Pursuant to the provisions of Section 241 of the Delaware Corporation Law, the
undersigned corporation adopts the following Certificate of Amendment of its
Certificate of Incorporation:
FIRST: The name of the corporation is ALL-QUOTES, INC.
SECOND: The Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on June 9, 1988.
THIRD: The Certificate of Incorporation is amended to change the number of
authorized shares which the corporation shall have authority to issue from
thirty million (30,000,000) shares with a par value of $.001 per share, to
five-hundred million (500,000,000) shares and the par value for each share shall
be $.00001 per share.
FOURTH: To effect the foregoing, Article FOURTH relating to the authorized
shares of the corporation is amended to read as follows:
"FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is five hundred million
(500,000,000) shares, and the par value of each share is
$.00001 per share. All such shares are of one class and are
shares of Common Stock."
FIFTH: The corporation has not received any payment for any of its stock,
directors of the corporation were not named in the original Certificate of
Incorporation and have not yet been elected, and this amendment has been duly
adopted by the sole incorporator of the corporation in accordance with Section
241 of the Delaware Corporation Law.
<PAGE>
IN WITNESS WHEREOF, ALL-QUOTES, INC., the corporation hereinbefore mentioned,
has caused this Certificate of Amendment to be signed in its name by its sole
incorporator this 23rd day of June, 1988, and the statements contained therein
are affirmed and true under penalties of perjury.
ALL-QUOTES, INC.
Lucetta M. Billhime
-------------------
Lucetta M. Billhime
Incorporator
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article FOURTH thereof and by substituting in lieu of said Article
FOURTH the following new Article:
"FOURTH": The total number of shares of stock which the Corporation shall
have the authority to issue is Twenty Million (20,000,000) shares of Common
Stock, par value $0.01 per share."
On the effective date of this certificate of amendment, the outstanding
common stock of the Corporation shall be reverse split 1-for-100, so that each
share of Common Stock, par value $0.00001 per share, of the Corporation
outstanding prior to such effective date shall on such effective date be
converted into 1/100th of a share of Common Stock, par value $0.01 per share.
The Amendment of the Certificate of Incorporation herein certified has been
duly adopted in accordance with the provisions of Sections 228 and 242 of the
General Corporation Law of the State of Delaware.
Signed and attested to on
May 19, 1992
Bronson Conrad
-----------------------------
Bronson Conrad, President
Attest:
William Lappen
- - --------------------------
William Lappen, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article FOURTH thereof and by substituting in lieu of said Article
FOURTH the following new Article:
"FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is Sixty-One Million (61,000,000)
which are divided into One Million (1,000,000) shares of Preferred Stock, par
value $.01 per share, and Sixty Million (60,000,000) shares of Common Stock, par
value $.01 per share.
The shares of Preferred Stock may be issued from time to time in one or
more series, in any manner permitted by law, as determined from time to time by
the Board of Directors, and stated in the resolution or resolutions providing
for the issuance of such shares adopted by the Board of Directors pursuant to
authority hereby vested in it. Without limiting the generality of the foregoing,
shares in such series shall have such voting powers, full or limited, or no
voting powers, and shall have such designations, preferences, and relative,
participating, optional, or other special rights, and qualifications,
limitations, or restrictions thereof, permitted by law, as shall be stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. The number
of shares of any such series so set forth in such resolution or resolutions may
be increased (but not above the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it."
<PAGE>
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
Signed and attested to on
October 15, 1995
Gerald Youngblood
----------------------------
Gerald Youngblood, President
Attest:
Toni McElroy
- - -----------------------
Toni McElroy, Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article FIRST thereof and by substituting in lieu of said Article
FIRST the following new Article:
" FIRST: The name of the corporation (hereinafter called the "corporation")
-----
is SunRiver Corporation."
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
Signed and attested to on
November 29, 1995
Gerald Youngblood
----------------------------
Gerald Youngblood, President
Attest:
Toni McElroy
- - -----------------------
Toni McElroy, Secretary
EXHIBIT 4(f)
SUNRIVER CORPORATION
Echelon IV, Suite 200
9430 Research Boulevard
Austin, TX 78759-6543
May 28, 1996
Mr. Gerald Youngblood, President
SunRiver Group, Inc.
Echelon IV, Suite 200
9430 Research Boulevard
Austin, TX 78759-6543
Re: SunRiver Group, Inc. Warrant
Gentlemen:
This letter confirms SunRiver Group, Inc.'s agreement that it will not
exercise its option to purchase 2,654,565 out of the 4,174,704 shares of common
stock of SunRiver Corporation which it would otherwise be entitled to purchase
pursuant to the terms of the warrant issued to SunRiver Group, Inc. by SunRiver
Corporation which is dated October 19, 1995 (the "SunRiver Group Warrant"). This
restriction on exercise will expire on a share by share basis as SunRiver
Corporation reserves shares of its common stock to allow for the exercise of the
SunRiver Group Warrant in full, which SunRiver Corporation hereby agrees to do
as soon as shares become available from any source including on the expiration
of unexercised warrants and stock options. At SunRiver Group, Inc.'s request,
SunRiver Corporation hereby agrees to amend its certificate of incorporation to
increase the number of shares of common stock it is authorized to issue
thereunder to such number of shares as is sufficient to allow for the
reservation of all shares of common stock underlying the SunRiver Group Warrant.
This agreement supersedes the prior agreement between the parties dated February
7, 1996.
Very truly yours,
/s/
--------------------------
William C. Long,
Executive Vice-President
AGREED AND ACCEPTED
BY SUNRIVER GROUP, INC.
/s/
- - ------------------------------
Gerald Youngblood, President
<PAGE>
EXHIBIT 5
May 30, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: SunRiver Corporation
Amendment No. 3
to Registration Statement
on Form S-1; File No. 33-80319
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Dear Sirs:
As counsel to SunRiver Corporation, a Delaware corporation (the
"Company"), we have been requested to render this opinion for filing as Exhibit
5 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (the
Amendments No. 1, No. 2 and No. 3 and the Registration Statement, collectively,
the "Registration Statement"). Each term used herein that is defined in the
Registration Statement and has not been otherwise defined herein, shall have the
meaning specified in the Registration Statement.
The Registration Statement covers 14,444,210 shares of Common Stock,
par value $.01 per share ("Shares").
We have examined the originals or photocopies or certified copies of
such records of the Company, certificates of officers of the Company and other
documents as we have deemed necessary or appropriate for the purpose of this
opinion. In such examination, we have assumed the genuineness of all signatures
on documents where we have not witnessed the execution thereof, the authenticity
of all documents submitted to us as originals, the conformity to the originals
of all documents submitted to us as certified copies or photocopies and the
authenticity of the originals of such latter documents.
Based on such examination and such other investigations as we have
deemed necessary, we are of the opinion that:
1. The Shares have been duly authorized.
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2. Except for the Shares issuable upon exercise of warrants, the
Shares being offered by the Selling Stockholders are legally and validly issued,
fully paid and nonassessable.
3. The Shares issuable upon exercise of warrants have been duly
reserved for issuance upon such exercise and will be legally and validly issued,
fully paid and nonassessable when issued and paid for in accordance with the
terms of such warrants.
4. The Shares which the Company may issue to Microelectronics and
Computer Technology Corporation ("MCC") to satisfy obligations of TradeWave
Corporation to MCC of $300,000 through June 28, 1996 and the Shares which the
Company may issue to NCR Corporation ("NCR") as a $497,657 annual dividend on
the outstanding preferred stock of SunRiver Data Systems, Inc. will be legally
and validly issued, fully paid and nonassessable when:
(i) the Board of Directors of the Company shall have taken
appropriate action with respect to the issuance and delivery of
such Shares; and
(ii) such Shares shall have been issued and delivered to MCC and
NCR, as the case may be, for the consideration contemplated in
the Registration Statement.
Our opinion regarding the legality of the issuance of all other Shares
to be offered by the Company, from time-to-time in the future, will be filed as
an exhibit to the Registration Statement at such time as the Prospectus included
in the Registration Statement is supplemented or amended to cover such offering
by the Company.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
Fischbein Badillo Wagner Harding
EXHIBIT 23(b)1
CONSENT OF INDEPENDENT ACCOUNTANTS
SunRiver Corporation:
We hereby consent to the inclusion in this registration Statement on Form
S-1 (File No. 33-80319) of our report, dated March 1, 1996, on our audits of the
financial statements and financial statement schedules of SunRiver Corporation
and Subsidiaries. We also consent to the reference to our firm under the
captions "Experts" and "Selected Consolidated Financial Data".
COOPERS & LYBRAND L.L.P.
Austin, Texas
May 29, 1996
EXHIBIT 23(b)2
CONSENT OF INDEPENDENT ACCOUNTANTS
SunRiver Corporation:
We consent to the inclusion in this registration statement on Form S-1
(File No. 33-80319) of our report, which includes explanatory paragraphs, dated
December 20, 1995, on our audit of the Statement of Assets Sold and Statements
of Revenue and Direct Operating Expenses of the Selected Text Terminal Products
of the Video Business Segment of the Components and Peripherals Business Unit of
Digital Equipment Corporation (the "Business"), appearing in SunRiver
Corporation's amended Current Report on Form 8-K/A, dated October 23, 1995. The
explanatory paragraphs state that the statements were prepared to present the
assets sold by the Business to SunRiver Corporation and the revenue and direct
operating expenses of the Business and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. Also, expenses include only those costs directly attributable to the
products sold. They do not contain any other costs which are not directly
attributable to the products sold. As a result, the statements presented may not
be indicative of the results of operations that would have been achieved had the
Business operated as a nonaffiliated entity. We also consent to the reference to
our firm under the heading "Experts" in the prospectus which is a part of this
registration.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 30, 1996
