SCHEDULE 14C
(Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
X Preliminary Information Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
|_| Definitive Information Statement
SunRiver Corporation
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
|X No fee required.
|_| Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
P R E L I M I N A R Y C O P Y
SUNRIVER CORPORATION
Echelon IV, Suite 200
9430 Research Boulevard
Austin, Texas 78759-6543
INFORMATION STATEMENT
(Dated , 1997)
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. THE ACTIONS, DEFINED BELOW, HAVE ALREADY BEEN APPROVED BY WRITTEN CONSENT
OF SUNRIVER GROUP, INC. WHICH OWNS A MAJORITY OF THE COMPANY'S OUTSTANDING
SHARES OF COMMON STOCK. A VOTE OF THE REMAINING STOCKHOLDERS IS NOT NECESSARY.
GENERAL
This Information Statement is first being furnished on or about April __,
1997 to holders of record as of the close of business on April 9, 1997 of the
common stock, $.01 par value per share ("Common Stock"), of SunRiver
Corporation, a Delaware corporation (the "Company"), in connection with the
following (collectively, the "Actions"):
1. amending the Company's Certificate of Incorporation, as amended
("Certificate of Incorporation"), to increase the total number of shares of
Common Stock which the Company has authority to issue from 60,000,000 to
100,000,000; and
2. amending the Certificate of Incorporation to change the name of the
Company from SunRiver Corporation to Boundless Corporation.
The Board of Directors of the Company (the "Board") has approved, and
SunRiver Group, Inc. ("SunRiver Group"), which owned 26,439,380 shares
(approximately 52.9%) of the 50,016,629 shares of Common Stock outstanding, as
of April 2, 1997, has consented in writing to, the Actions.
Such approval and consent are sufficient under Section 228 of the Delaware
General Corporation Law and the Company's By-Laws to approve the Actions.
Accordingly, the Actions will not be submitted to the other Company stockholders
for a vote and this Information Statement is being furnished to stockholders
solely to provide them with certain information concerning the Actions in
accordance with the requirements of Delaware law and the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the regulations promulgated
thereunder, including particularly Regulation 14C.
The Actions will be effective on the date that a Certificate of Amendment
of the Certificate of Incorporation, in substantially the form of Exhibit A
hereto, is filed with the Secretary of State of the State of Delaware which will
occur on or after the 20th day following the date of this Information Statement.
For additional information about the Company, reference is made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 ("1996
10K"), attached hereto as Exhibit B.
The principal executive offices of the Company are located at Echelon IV,
Suite 200, 9430 Research Boulevard, Austin, Texas 78759-6543, and the Company's
telephone number is (512) 349-5800.
2
<PAGE>
AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 60,000,000 TO 100,000,000
It is proposed that the Certificate of Incorporation be amended to increase
the number of shares of authorized Common Stock from 60,000,000 to 100,000,000.
Such increase will be effected by amending the first sentence of Article Fourth
of the Certificate of Incorporation to read as follows:
"FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is One Hundred One Million
(101,000,000) which are divided into One Million (1,000,000) shares of
Preferred Stock, par value $.01 per share, and One Hundred Million
(100,000,000) shares of Common Stock, par value $.01 per share."
As described in the following items 1, 2, 3 and 4, additional authorized
shares above the 60,000,000 current limit are required to reserve shares
issuable upon exercise of the SunRiver Group Warrant, previously granted stock
options and additional stock options to be granted under the 1995 Plan and a
warrant to be issued to SunRiver Group and to reserve shares which may be
issuable upon conversion of convertible notes.
1. As of April 2, 1997, 50,016,629 shares of Common Stock and no shares of
Preferred Stock, $.01 par value ("Preferred Stock"), of the Company were
outstanding and 12,286,416 shares of Common Stock were issuable upon exercise of
outstanding options and warrants. In addition, the Company's registration
statement on Form S-1, declared effective on July 8, 1996 (the "Shelf
Registration Statement"), registered 14,444,210 shares of Common Stock under the
Securities Act of 1993, including 2,500,000 shares that may be issued and sold
by the Company from time to time. As of April 3, 1997, 1,360,849 of such
2,500,000 shares remained unissued. The sum of such 50,016,629 shares
outstanding, 12,286,416 shares issuable upon exercise of outstanding options and
warrants and 1,360,849 shares which may be issued and sold by the Company,
exceeds the 60,000,000 Common Stock authorization by 3,663,894 shares. Until the
Certificate of Incorporation is amended to increase the authorized Common Stock
sufficiently to allow for the reservation of all 4,174,704 shares underlying the
SunRiver Group Warrant, SunRiver Group has agreed to refrain from exercising its
right to purchase up to 2,654,565 out of the 4,174,704 shares upon exercise of
the SunRiver Group Warrant to the extent necessary to permit exercise by others
of their options and warrants and the offer and sale by the Company of newly
issued Common Stock under the Shelf Registration Statement. In addition,
SunRiver Group is expected to agree to refrain from exercising its right to
purchase all of such 4,174,704 shares subject to such terms.
2. Of the 6,000,000 shares of Common Stock issuable upon exercise of
options or stock grants made under the 1995 Plan previously approved by the
stockholders, as of April 2, 1997, options to purchase 4,512,045 shares had been
granted and were outstanding and 540,464 shares had been issued as stock grants
and none of the remaining 947,491 available shares have been reserved for future
grants. In order that these additional shares would be available for other
purposes, the Board of Directors has not reserved such shares for grants under
the 1995 Plan. Before such reservation can be made, an increase in the
authorized number of shares of Common Stock is necessary.
3. In connection with the Company's acquisition of certain assets from
Digital Equipment Corporation in October 1995, including the financing for such
acquisition through The Chase Manhattan Bank, N.A. ("Chase") and the related
restructuring of the Company's obligations to NCR Corporation ("NCR"), SunRiver
Group pledged 21,439,380 shares of Common Stock to Chase and 5,000,000 shares of
Common Stock to NCR. In consideration for such pledges and after authorized
shares become available, 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
-3-
<PAGE>
appropriate after obtaining independent advice regarding the fairness of such
warrants. In consideration for the Company's payment to Microelectronics and
Computer Technology Corporation ("MCC") of $500,000 as part of an agreement to
discharge all obligations of the Company, TradeWave Corporation ("TradeWave")
and SunRiver Group to MCC, including the release of SunRiver Group's guarantee
of TradeWave's obligations to MCC, the number of such warrants will be reduced
by the number of warrants equal in value to $500,000, determined under the
Black-Scholes valuation model or such other number of warrants determined by
independent advice regarding the fairness of such consideration.
4. In February and March 1997, the Company sold a total of $1,400,000
principal amount of notes ("Notes") convertible into shares of Common Stock
beginning on the 90th day after the date the Notes were sold. The terms of the
Notes are described in the 1996 10K under "Item 5 - Market for Registrant's
Common Equity and Related Stockholder Matters - Recent Sales of Unregistered
Securities." The Company has issued a total of 1,204,775 shares of Common Stock
which are being held in escrow and which will be released, in whole or in part,
to the holders of the Notes upon their conversion. Such number was the number of
shares which would be issuable upon conversion of the Notes assuming a
conversion based on the market price of the Common Stock around the time that
the Notes were sold. If the market price of the Common Stock at the time the
conversion of the Notes is exercised is below the market price at the time the
Notes were sold, the Company will be required to issue additional shares of
Common Stock to satisfy the conversion. Although the number of such required
additional shares cannot be determined at this time, in such event, the Company
will require authorized shares beyond the current limit of 60,000,000 in order
to meet its obligations to the holders of the Notes.
The Board believes that it is desirable to have up to approximately
36,000,000 additional shares of Common Stock available, as the occasion may
arise, for possible future financings and acquisitions, stock dividends, stock
issuances pursuant to employee benefit plans and other proper corporate
purposes. Having such additional shares available for issuance in the future
would give the Company greater flexibility by allowing shares to be issued
without incurring the delay and expense of a special stockholders' meeting.
Except as described in this Information Statement, the Company has no definitive
plans or commitments to issue additional Common Stock.
The additional shares of Common Stock, together with other authorized and
unissued shares, generally would be available for issuance without any
requirement for further stockholder approval, unless stockholder action is
required by applicable law, the Company's governing documents or by the rules of
the National Association of Securities Dealers, Inc. or any stock exchange on
which the Company's securities may then be listed.
Although the Board will authorize the issuance of additional shares of
Common Stock only when it considers doing so to be in the best interests of
stockholders, the issuance of additional shares of Common Stock may, among other
effects, have a dilutive effect on the earnings and equity per share of Common
Stock and on the voting rights of holders of shares of Common Stock. The
increase in the authorized number of shares of Common Stock also could be viewed
as having anti-takeover effects. Although the Board of Directors has no current
plans to do so, shares of Common Stock could be issued in various transactions
that would make a change in control of the Company more difficult or dilute the
stock ownership of a person seeking to obtain control. The Company is not aware
of any effort to accumulate shares of Common Stock or obtain control of the
Company by a tender offer, proxy contest, or otherwise, and the Company has no
present intention to use the increased shares of authorized Common Stock for
anti-takeover purposes.
-4-
<PAGE>
AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
TO BOUNDLESS CORPORATION
It is proposed that the Certificate of Incorporation be amended to change
the name of the Company from SunRiver Corporation to Boundless Corporation. The
amendment will be effected by amending Article First of the Certificate of
Incorporation to read as follows:
"FIRST: The name of the corporation (hereinafter called the
"corporation") is Boundless Corporation."
In 1996, the Company's wholly owned subsidiary, SunRiver Data Systems,
Inc., changed its name to Boundless Technologies, Inc. SunRiver Acquisition
Corp., a non-operating wholly owned subsidiary of the Company, intends to change
its name to Boundless Acquisition Corp. These changes arise out of the
settlement of the lawsuit brought in 1995 by Sun Microsystems, Inc. ("Sun
Microsystems") against the Company, its subsidiaries and SunRiver Group.
Sun Microsystems had alleged that the defendants infringed federally
registered and California registered SUN-based trademarks owned by Sun
Microsystems and violated California statutory and common laws of trademark and
tradename infringement, unfair competition, dilution and false advertising, all
based on allegations that the defendants' use of any SUNRIVER mark or name
creates a likelihood of confusion in violation of Sun Microsystems' rights. The
settlement requires the Company, its subsidiaries and SunRiver Group to stop
using any SunRiver-based mark or name except in limited circumstances.
The Board of Directors also believes that changing the Company's name to
Boundless Corporation will enhance the Company's business and prospects.
-5-
<PAGE>
SELECTED FINANCIAL DATA
For certain selected consolidated financial data of the Company for the
five years ended December 31, 1996, reference is made to the Selected
Consolidated Financial Data beginning on page 14 of the 1996 10K.
The selected consolidated financial data of the Company should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," incorporated by reference herein below.
FINANCIAL STATEMENTS
The Financial Statements and Financial Statement Schedules listed on the
index on page F-1 of the 1996 10K are incorporated by reference into this
Information Statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations beginning on page 16 of the 1996 10K is incorporated herein by
reference thereto.
By Order of the Board of Directors,
Wayne Schroeder
Chief Financial Officer
Dated: April ___, 1997
-6-
<PAGE>
EXHIBIT A TO INFORMATION STATEMENT
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
SUNRIVER CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
SUNRIVER CORPORATION.
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 Boundless Corporation."
3. 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 One Hundred One Million
(101,000,000) which are divided into One Million (1,000,000) shares of
Preferred Stock, par value $.01 per share, and One Hundred Million
(100,000,000) 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
<PAGE>
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."
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
, 1997
---------------------------
President
Attest:
- ----------------------
2
<PAGE>
EXHIBIT B TO INFORMATION STATEMENT
________________________________________________________________________________
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
Commission File Number 0-17977
SUNRIVER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3469637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Echelon IV, Suite 200,
9430 Research Blvd, Austin, TX 78759-6543
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 349-5800
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the last sale price
of the registrant's Common Stock on March 21, 1997, is $24,637,588.
As of March 21, 1997, the registrant had 49,631,398 shares of Common Stock,
$.01 par value per share, outstanding.
________________________________________________________________________________
<PAGE>
PART I
ITEM 1. BUSINESS
--------
General
SunRiver Corporation (the "Company") is engaged, through its
subsidiary, Boundless Technologies, Inc. ("Boundless"), in designing and
manufacturing computer terminals and network computers for business use. The
Company's general strategy is to provide access to corporate computing
environments, including mainframes, LANS, WANS, intranets and the Internet.
The 1996 fiscal year has been a year of transition for the Company that
culminated in senior management changes and internal restructuring programs
designed to refocus the Company on its core business while achieving significant
cost savings. These programs included a work force reduction at Boundless of
approximately 130 (35%) of Boundless employees worldwide and resulted in a
non-recurring charge of approximately $1.8 million. In addition, the Company
decided to discontinue the operations of its subsidiary, TradeWave Corporation
("TradeWave"), which resulted in a charge of approximately $6.6 million. Since
April 1995, TradeWave had been in the process of transitioning from a research
and development enterprise to a commercial provider of software for secure
business communications over TCP-IP-based networks. TradeWave had been consuming
substantial amounts of the Company's cash resources and was materially adversely
affecting the Company's profitability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations."
Also during 1996, the Company introduced a network computer product
line ("Network Computers") aimed at businesses desiring to replace terminals and
older networked personal computers ("PCs") with a lower-cost alternative to PCs
that will have the advantages of terminals and the functionality and performance
that businesses generally expect from PCs.
Boundless principally designs, assembles, sells and supports (i)
desktop computer display terminals, which generally do not have graphics
capabilities, although some have limited graphics capabilities ("General Display
Terminals"); (ii) Network Computers; and (iii) other terminal products that are
used in multi-user, personal computer and mini-computer-based environments
("MultiConsole Terminals"). The Company receives a royalty from a partnership
(the "GAI Partnership") formed by Boundless and General Automation, Inc. ("GAI")
and managed by GAI. The GAI Partnership designs, integrates, sells and supports
multi-user computer systems that can manage large volumes of data running
Boundless' and GAI's versions of a data-based system licensed from Pick Systems
("Pick").
The Company entered into the General Display Terminal and high
resolution, high performance desktop graphics display terminals ("Network
Graphics Displays") businesses in December 1994 when the Company purchased
Applied Digital Data Systems, Inc. ("ADDS") from NCR Corporation ("NCR"),
formerly AT&T Global Information Solutions Company (the "Boundless
Acquisition"). ADDS changed its name to SunRiver Data Systems, Inc. and, in
1996, to Boundless Technologies, Inc. For more than 25 years, ADDS had been a
supplier of general purpose desktop display terminals 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. (the "SunRiver Group Acquisition"). Prior thereto, SunRiver Group, Inc.
("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 MultiConsole
Terminals for open system, multi-user platforms.
In October 1995, Boundless 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 (the "Digital
Acquisition"). As a result, based on 1994 published industry data, the Company
believes that Boundless is the second largest manufacturer of General Display
Terminals in the world with an installed user base of more than 5,000,000 units.
As no manufacturing facilities were included in this acquisition, Boundless has
transferred all production of the VT and Dorio product lines from Digital's
facilities in the Far East to the Boundless' plant in Hauppauge, New York.
<PAGE>
Boundless 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 Computers are being marketed by
Boundless primarily to telecommunications, retail, financial, healthcare and
transportation businesses with light processing requirements and the need to
provide concurrent information to customers on a variety of topics, such as
billing and current and historical product and service 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.
Reference is made to Notes 1, 3, 4, 5, 6, 10 and 19 of Notes to
Consolidated Financial Statements for definitions of certain capitalized terms
and information regarding acquisitions and dispositions by the Company since
December 1994 and the GAI Partnership.
Risk Factors
The following factors relating to the Company, its business and
management should carefully be considered in evaluating the Company and its
prospects.
Debt Structure and Liquidity. The Company is highly leveraged. As of
December 31, 1996, the Company had a negative tangible net worth of $703,000 and
total liabilities of $57,168,000. The Company's cash requirements at December
31, 1996 included repayment of the remaining balance of $13,382,000, plus
interest, of the original $20,000,000 term loan, under its bank credit line with
The Chase Manhattan Bank, N.A. (the "Chase Credit Line"), in seven quarterly
installments; repayment of a revolving loan, under the Chase Credit Line of
$13,950,000, plus interest; payment of an $8,000,000 note (requiring quarterly
interest payments) payable to NCR on January 31, 1999; payment of $3,554,692 to
NCR if it exercises a put option at any time in 1999; and annual payments to NCR
of $497,657 in cash or the Company's Common Stock. 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 and/or a decrease in
availability under the Chase Credit Line, the Company's cash flow would be
adversely affected. 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Operating History. As a wholly-owned subsidiary of NCR, Boundless had
net losses of $2,940,336, $9,709,549 and $3,288,634 in the years ended December
31, 1992 and 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. The Company 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 and
the refinancing of debt in connection with the acquisition of assets from
Digital and non-recurring changes of approximately $8.4 million in the quarter
ended December 31, 1996 relating to the restructuring of the Company and the
discontinuance of TradeWave's operations. The Company believes that a comparison
of the Company's operating results since December 9, 1994 to prior results of
ADDS 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 ADDS 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
2
<PAGE>
Strategy. Approximately 80% of the Company's sales for the year ended
December 31, 1996 were of General Display Terminals. The Company's strategy has
been to increase its share of the General Display Terminals market. However,
other manufacturers have been abandoning the General Display Terminals business,
principally because of the erosion of gross margins and the market trend to
newer technologies. The Company has been increasing its market share in order to
increase its installed base of customers to which it can offer General Display
Terminals or, for those desiring them, alternative products with enhanced
features, such as Network Computers. The success of the Company's strategy
depends on its ability to compete in the intensely competitive marketplace for
its products. Initially, the success of this strategy is dependent on the
success of the Company's Network Computers. There can be no assurance that the
Company's strategy is valid. See "-Products and Services - Network Computers."
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 prices of computer hardware. As a result, there has been significant
downward pressure on gross margin. Many of the Company's current and anticipated
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, including by
developing and introducing new products that gain wide market acceptance, and
competitively price its products. There is no assurance that the Company will be
able to compete effectively. See "Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence Upon Major Customers. Digital and NCR were the Company's
most significant customers in 1996, accounting for approximately 16% and 14%,
respectively, of the Company's total revenue. 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. 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. The
loss of Digital or NCR as a customer would have a material adverse effect on the
Company's results of operations and liquidity. See "- Sales and Marketing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence Upon Key Personnel. The Company's success will depend upon
its key management, sales and technical personnel. The Company and Boundless do
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 "Directors and
Executive Officers of the Registrant."
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 and flexible manufacturing systems will adequately protect
against this risk. 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. In addition, approximately $6.6 million was charged to
operations during the quarter ended December 31, 1996, when the Company decided
to discontinue TradeWave's business because the Company decided that the
resources necessary to bring TradeWave's products to market should instead be
allocated to the Company's core business conducted by Boundless.
3
<PAGE>
Furthermore, Boundless established inventory reserves of approximately $2.2
million in the fourth quarter of 1996 because of obsolescence resulting from
technological change.
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. Purchases from
Advanced Scientific Corp. and Wong Electronics Corp., which manufacture plug-in
logic boards in Taiwan and China, respectively, for the Company's General
Display Terminals, accounted for approximately 22% and 13%, respectively, of the
dollar amount of the Company's total purchases in 1996 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.
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 affect on the Company's business.
Research and Development. There has been substantial investment in
research and development of the Company's existing products by SunRiver Group,
Boundless 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 wide market
acceptance. See "-Products and Services - Research and Development and Financial
Statements and Pro Forma Information".
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 "-Manufacturing -
Suppliers," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations."
Control by SunRiver Group. SunRiver Group owns approximately 56.9%
(approximately 49.4% on a fully diluted basis) of the outstanding shares of the
Company's Common Stock (including 4,174,704 shares underlying warrants) 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 affect 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 or the perception that public sales of significant amounts of Common
Stock by SunRiver Group is likely. 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" and "Certain Relationships and Related Transactions" for
information regarding a possible future change of control.
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
4
<PAGE>
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 "Market for Registrant's Common Equity and Related Stockholder
Matters."
Forward-Looking Information May Prove Inaccurate. This Form 10-K
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 specific risk factors described
above. 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.
Products and Services
General Display Terminals. The Company's General Display Terminals are
ANSI/ASCII desktop terminals, which generally do not have graphics capabilities,
although some have limited graphics capabilities. The Company offers standard
and custom models, primarily for data entry and point of sale activities.
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 connection with the Boundless 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
display terminals), 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 Boundless and NCR will continue. In 1996, sales to NCR
constituted approximately 14% of total revenues.
In connection with the Digital Acquisition, Boundless and Digital
entered into a Basic Order Agreement for Text Terminal Products and Parts (the
"Digital Supply Agreement") whereby Digital agreed to purchase from Boundless at
least 95% of Digital's worldwide requirements for General Display Terminals and
related parts for a four-year period ending October 1999 and at least 80,000
General Display Terminals during the first year of such agreement. However,
Digital can terminate the agreement for cause without compensation to the
Company. Sales of General Display Terminals to Digital constituted approximately
16% of total General Display Terminal sales for 1996.
The Company does not anticipate that sales to NCR or Digital will
reach comparable levels in 1997. See "- "Marketing and Sales" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Network Computers. The Company's Network Computers have no applications
storage, depend almost entirely on network servers for processing and are
significantly smaller than a general purpose PC. They use Intel and
Intel-compatible processors. They are designed to offer customers simple, easy
and cost-effective access to current and emerging computing environments that
include Windows NT, UNIX and Java applications, corporate intranets and the
Internet. Since August 1996, the Company has introduced three Network Computer
models, the XL, XLC and TC. The XL and XLC are based on and replace the
Company's line of Network Graphics Displays. The TC is a new design. A second
generation Network Computer is expected to be released in the second quarter of
1997 and will provide terminal users with a text terminal replacement, that has
the look and feel of their current application, yet provides the ability to
transition to Windows, intranet, Internet and Java applications with the
addition of Boundless' software that is downloaded from the network server. The
5
<PAGE>
Company believes that for the following primary reasons, network computers,
generally, will be able to compete with PCs and Net PCs used in business
networks; although there is no assurance the Company's belief is correct.
o Network computers offer a lower total cost of ownership than PCs
because:
o Initial cost is lower.
o Maintenance costs are lower because of their simpler design
and fewer components.
o Hardware upgrade costs are lower because upgrading is
typically limited to the network server.
o Software upgrade, administration and support costs and costs
of controlling the use of differing software versions are
lower because software is principally limited to
centrally-located network servers.
o There is virtually no user involvement in configuring
systems, installing software and correcting problems, thereby
eliminating productivity losses resulting from activities not
relating to work.
o Network computers are more easily administered because of their
dependence upon centrally-located servers.
o Network computers have the functionality and performance that
businesses generally expect from PCs.
o Network computers allow for better security, in significant part,
because their lack of floppy disk drives prevents them from introducing a virus
into the network and prevents users from removing sensitive data from the
network.
Target users for the Company's Network Computers include
telecommunications, retail, financial, healthcare and transportation businesses
with light processing requirements and the need to provide concurrent
information to customers on a variety of topics, such as billing and current and
historical product and service information.
MultiConsole Terminals. The Company's MultiConsole Terminals were
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-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 and feel as a 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.
GAI Partnership. Effective May 22, 1995, Boundless entered into an
Operating Agreement with GAI covering Boundless' and GAI's participation in, and
management of, a newly-formed 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
Boundless' version and GAI's version of the Pick system on various hardware
platforms. Boundless' 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
6
<PAGE>
time with Boundless. See "Directors and Executive Officers of the Registrant"
for information regarding the affiliation of the Company's Chief Executive
Officer with GAI.
In addition, Boundless has subcontracted to the GAI Partnership all
services required by Boundless under its existing maintenance contracts
(including with respect to its Mentor Systems). The GAI Partnership is providing
maintenance service by telephone to Boundless customers and dispatches on-site
maintenance services pursuant to a maintenance agreement that the GAI
Partnership has entered into with NCR.
Boundless decided to substantially reduce its active participation in
the Pick systems business in order to devote more resources to its core
business. Boundless 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. For its contribution, Boundless receives a royalty from the GAI
Partnership. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 and 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 and Network Computers. Depot service
during normal business hours is also provided within the United States by the
Company for its desktop terminals.
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 years ended December 31,
1995 and 1996 is based upon the consolidated operations of the Company and
excludes revenue generated by TradeWave.
<TABLE>
<CAPTION>
General Network
Display Mentor Graphics Professional MultiConsole
Period Terminals Systems Displays Services Terminals
- ------ --------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
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%
1996 80.1% 2.6% 9.2% 5.0% 3.2%
</TABLE>
The following information (which is pro forma for 1994) presents the
consolidated results of operations as though the Boundless Acquisition had
occurred on January 1, 1994. It does not purport to be indicative of what would
have occurred had the Boundless Acquisition occurred as of January 1, 1994, 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.
7
<PAGE>
<TABLE>
<CAPTION>
General Network
Display Mentor Graphics Professional MultiConsole
Period Terminals Systems Displays Services Terminals
- ------ --------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1994 41.5% 13.3% 19.9% 21.3% 4.0%
1995 49.8% 4.7% 28.5% 13.5% 3.5%
1996 80.1% 2.6% 9.2% 5.0% 3.2%
</TABLE>
See Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Results of Operations - Years Ended December 31, 1995
and 1994.
Foreign Sales. Net foreign sales were approximately $1,127,000,
$15,912,000 and $47,500,000 for 1994, 1995 and 1996, respectively. On a pro
forma basis, net foreign sales for 1994 were approximately $8,020,000. 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
- ------ ----- ------ ------
1994 13.5% 5.2% 6.1%
1995 16.6% 13.0% 1.2%
1996 33.9% 29.6% 0.8%
% of Total Revenue
(Pro forma)
----------------------------------------------------------------
Period Total Europe Far East Middle East
- ------ ----- ------ -------- -----------
1994 10.0% 5.3% 1.0% 1.1%
1995 16.6% 13.0% 0.7% 0.3%
1996 33.9% 29.6% 2.0% 1.0%
The increases in 1995 and 1996 are attributable to sales of VT and
Dorio General Display Terminals, which have historically been strong sellers in
Europe.
Manufacturing
Assembly Operations. 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 cell-based manufacturing process that allows the Company to assemble
various models at mass production costs. The Company generally cross-trains its
8
<PAGE>
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 three to five
days after receipt of an order. Accordingly, backlog has not traditionally been
material to the Company. Backlog at December 31, 1996 totaled approximately
$9,048,000 as compared to $7,699,00 at December 31, 1995. Approximately
$7,165,000 of the Company's backlog at December 31, 1996 was for General Display
Terminals.
The Company is using approximately 90,000 of its 155,000 square
feet of space for manufacturing and has the capacity to manufacture
approximately 1,000,000 units per year. In order to meet anticipated demand for
General Display Terminals resulting from the Digital Acquisition, Boundless
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, increased the number of its manufacturing employees by
approximately 100 and added a second shift in 1996. In January 1997, Boundless
reduced by 60 the number of its manufacturing employees after completing the
fulfillment of the Digital commitment to purchase 80,000 General Display
Terminals in 1996.
Suppliers. The Company purchases subassemblies and components for
its products almost entirely from more than 40 domestic and Far East sources.
Purchases from Advanced Scientific Corp. and Wong Electronics Corp., which
manufacture in Taiwan and China, respectively, plug-in logic boards for the
Company's General Display Terminals, accounted for approximately 22% and 13%,
respectively, of the total dollar amount of the Company's total purchases in
1996 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. 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.
Warranties and Returns. The Company provides a one- to three-year
warranty covering defective materials and workmanship. The Company's products
are serviced at depots that are geographically dispersed throughout the world.
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 1994, 1995
and 1996, the Company's cost of warranty repairs was approximately 1.1%, 1.2%
and 2.4%, respectively, of the Company's total revenues. Warranty expense
increased 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.
9
<PAGE>
Research and Development. During 1994, 1995 and 1996, the Company
expended approximately $990,000, $4,569,000 and $4,855,000, respectively, on
research and development activities. Not included in the foregoing are research
and development expenses incurred by TradeWave. Boundless' research and
development activities have historically related primarily to the enhancement of
existing products. As a part of the Company's 1996 restructuring programs, the
Company consolidated its research and development activities by closing its
Orlando, Florida facility and reducing its research and development personnel
from 55 to 24. The Company intends to devote more efforts to developing and
acquiring new products and technologies that can shorten the time-tomarket of
the Company's products. For additional information regarding research and
development expenditures see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."
Sales and Marketing
The Company markets its terminal products through original
equipment manufacturers ("OEMs") and reseller distribution channels. OEMs, who
do not want to maintain engineering or manufacturing resources, can obtain
products with their brand name from Boundless. Customers can buy Boundless'
products from an international network of value-added resellers (VARs) and
regional distributors. In order to reduce its dependence on existing OEM
customers, the Company has been increasing its distribution channel marketing
and sales efforts and seeking additional OEM customers. 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 six geographically dispensed locations in the United
States and a European office in The Netherlands. The Company has recently been
expanding its marketing efforts to include South America, Asia, Australia and
New Zealand.
As a result of the Digital Acquisition, the Company has expanded
its OEM relationships and worldwide channels of distribution, particularly in
Europe. The Company reached distribution agreements with approximately ten
Western European distributors in 1997. Sales of VT and Dorio General Display
Terminals have historically been particularly strong in Europe, while sales of
the ADDS General Display Terminals have been stronger in the United States.
Sales to Digital constituted approximately 16% of the Company's
total revenue in 1996. Although Digital's contracts with its customers,
distributors and resellers were not assigned to Boundless, Boundless 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 Boundless at least 95% of Digital's worldwide
requirements for VT General Display Terminals, and related parts, for a
four-year period ending October 1999 and at least 80,000 General Display
Terminals during the first year of such agreement. In 1996, Digital purchased
more General Display Terminals than it required in order to satisfy such minimum
commitment. Digital may terminate its agreement for cause without compensation
to the Company. Digital is expected to continue to be the Company's most
significant customer in 1997, although the Company does not expect sales to
Digital will reach a comparable level in 1997. The loss of Digital as a customer
would have a material adverse affect on the Company's results of operations and
liquidity.
In 1996, approximately 14% of the Company's total revenues were
sales to NCR. Product sales to NCR are not expected to reach a comparable level
in 1997. 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.
In selling its General Display Terminals, the Company emphasizes
customization, reliability and compatibility with a broad range of UNIX, Pick
and other operating systems. In selling the Company's Network Computers, the
Company emphasizes total cost of ownership, ease of administration, security and
the ability to access numerous applications. The Company's Network Computers can
10
<PAGE>
access over 100,000 applications that run under Microsoft Windows, including
Windows NT and Windows 95. The Company's Network Computers also provide access
to UNIX and legacy applications. The Company believes its expertise in
integrating Network Computers within the total system architecture is an
important selling benefit.
The Company uses direct mail, telemarketing and cooperative
advertising and promotion to promote its products. The Company's installed user
base of more than 5,000,000 units is the primary target market for its new
Network Computer. The Company believes the most effective way to reach this
market is via cooperative marketing with its channel partners and an aggressive
use of public relations. Accordingly, significant direct mail/telemarketing and
public relations programs are planned for 1997. Additionally, the Company will
participate in a limited number of highly targeted trade shows during 1997.
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 Boundless and Wyse Technology,
Inc. ("Wyse"). General Display Terminal customer purchase criteria are based on
quality, customization, compatibility with other terminals, and price.
Currently, Boundless' principal competitors that manufacture and
market network computers are Wyse, HDS Network Systems, Network Computing
Devices and IBM. The Company anticipates additional competitors, such as Sun
Microsystems, will enter the network computer market in 1997 and thereafter. The
Company's Network Computers also compete with low-cost PCs and traditional
higher-cost PCs. Customer purchase criteria for Network Computers are primarily
based upon the total cost of ownership, ease of administration, reliability,
security and the breadth of applications access.
Boundless' MultiConsole Terminals are also competing in an emerging
market principally based on features and compatibility. Boundless's MultiConsole
Terminals directly compete with Maxpeed and indirectly compete with other
companies that provide alternative technology. Mentor Systems marketed by the
GAI Partnership compete in an environment where features, compatibility with
host systems, service and ease of doing business are the key competitive
factors.
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 Boundless' 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
Boundless 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
11
<PAGE>
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 ADDS, VT and Dorio are registered in the United
States Patent and Trademark Office and in a number of foreign countries.
Environmental Regulation
Boundless complies with federal, state and local legislation
pertaining to protection of the environment. Amounts incurred in complying with
these regulations during the past three years did not have a material affect
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 affect on the Company.
Employees
At March 15, 1997, the Company had approximately 313 full-time
employees engaged as follows: 24 in product design and engineering, 205 in
manufacturing, 42 in sales and marketing and 42 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.
ITEM 2. 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 Boundless. 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 $124,548. Although the Company has closed its
Orlando, Florida facility, the Company is obligated under a lease for 17,837
square feet of space in Orlando. 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.
ITEM 3. 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 yet been produced and no other discovery has taken place. This
litigation has been inactive since December 1994.
12
<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. 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 $165,000
(as of March 21, 1997) of the proceeds of the sale of the Quote Business 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; last sale price on March 26, 1997 was $0.56 CDN per share).
There can be no assurance that the Company will be fully indemnified for losses
it may incur in connection with these pending litigations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted during the fourth quarter of 1996 to a vote of
stockholders of the Company through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock is quoted on The Nasdaq SmallCap Market
under the symbol SRVC. As of March 21, 1997, there were approximately 943
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, 1995: High Low
----- ----
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 Ended December 31, 1996:
First quarter............................ $3 $2-1/4
Second quarter........................... $9-3/8 $2
Third quarter............................ $8-3/8 $3-1/8
Fourth quarter..... .................... $3-5/8 $1-5/16
The last sale price of the Company's Common Stock on March 21, 1997 was $1-1/16
13
<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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
In a sale completed on March 14, 1997 ("Original Date") pursuant to
Section 903(c)(2) of Regulation S ("Reg. S") under the Securities Act of 1933,
the Company received total gross proceeds of $400,000 by issuing to two
non-"U.S. Persons" (the "Holders"), as defined in Reg. S, convertible notes (the
"Notes") bearing interest at 8% per annum (or 16% per annum upon the occurrence
of certain events of default) payable, with principal, on December 31, 1998 (the
"Maturity Date"). The Holder has the right to convert all or part of its Note
during the period beginning on the 90th day following the Original Date until
the later of the Maturity Date or the date the Note is paid in full into that
number of shares of Common Stock determined by dividing the outstanding
principal of and accrued and unpaid interest on the Note by (i) 82-1/2% of the
average closing bid price ("Average Bid Price") for the Common Stock on The
Nasdaq SmallCap Market for the five trading days immediately preceding the
conversion date; or (ii), if the Holder delivers written notice to the Company
between the 60th and 90th days after the Original Date that the Holder has
elected the alternate conversion price, 82-1/2% of the Average Bid Price for the
five trading days immediately preceding the date of such notice, in which case
the Holder is obligated to convert the entire balance of the Note on or prior to
the Maturity Date. The Company may compel conversion of the Notes if they have
not been converted into shares of Common Stock before the Maturity Date and the
Company may redeem the Notes if the Average Bid Price for any five trading day
period is less than $1.25. In connection with this offering, the Company paid a
commission of 10% of the gross proceeds and agreed to issue to another non-U.S.
Person warrants to purchase 33,000 shares of Common Stock at an exercise price
of $1.375 per share.
On February 28, 1997, the Company sold $1,000,000 principal amount
of convertible notes on terms substantially similar to the terms of the Notes,
as described in the Company's Current Report on Form 8-K filed with the
Commission on March 17, 1997.
In February 1996, the Company issued to a company which leased
equipment to TradeWave a warrant to purchase 75,000 shares of Common Stock,
exercisable at $2.69 per share until February 1999.
ITEM 6. 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 and
balance sheet data for the year ended December 31, 1996 set forth below have
been derived from the financial statements of the Company which have been
audited by BDO Seidman, LLP, independent certified public accountants as
indicated in their report included in this Form 10-K. The statement of
operations data for the years ended December 31, 1993, 1994 and 1995 and the
balance sheet data for the year ended December 31, 1995 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.
The selected financial data should be read in conjunction with, and are
qualified in their entirety by, the Consolidated Financial Statements of the
Company and related Notes and other financial information included elsewhere
herein.
14
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data:
(000's omitted)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $2,584 $2,814 $8,344 $94,957 $138,225
Gross margin 1,093 1,177 3,455 25,573 28,557
Operating expenses:
Sales and marketing 278 321 1,092 7,940 10,433
General and administrative 248 409 992 6,337 8,120
Research and development 291 493 990 4,569 4,855
------- ------- ------- -------- ---------
Total operating expenses 817 1,223 3,074 18,846 23,408
------- ------- ------- -------- ---------
Operating income (loss) 276 (46) 381 6,727 5,149
Interest expense (41) (35) (97) (1,907) (3,794)
Other 7 11 (61) 572 (1,980)
------- ------- ------- -------- ---------
Income (loss) from continuing
operations 242 (70) 223 5,392 (625)
Income tax expense - - (185) (1,323) 962
Income from discontinued operations - - - (870) (9,652)
Gain (loss) on extinguishment of debt 60 - - (589) -
------- ------- ------- -------- ---------
Net income (loss) $302 $ (70) $38 $2,610 ($11,239)
======= ======= ======= ======== =========
Earnings (loss) per common share $.01 $0 $0 $0 $(0.25)
======= ======= ======= ======== =========
Consolidated Balance Sheet Data:
(000's omitted)
Working capital $338 $(63) $ 6,764 $15,416 $3,172
Total assets 902 940 37,171 75,856 69,525
Revolving credit loan - - 4,655 8,000 13,950
Long-term obligations 134 119 16,287 25,492 14,300
Mandatorily redeemable preferred stock - - 5,536 3,555 3,555
Total long-term obligations 134 119 21,823 29,047 17,855
Stockholders' equity (deficit) $ 113 $ 39 $ 2,386 $12,837 $8,802
15
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
General
Reference is made to Notes 1,3,4,5,6,10 and 18 of Notes to Consolidated
Financial Statements for definitions of certain capitalized terms and
information regarding acquisitions and dispositions by the Company since
December 1994 and the GAI Partnership.
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 Boundless 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 Boundless for the period from December 9, 1994, the effective
date of the Boundless Acquisition, through December 31, 1994.
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 Boundless
Acquisition but exclude the effects of the TradeWave and Digital Acquisitions
prior to the date of their respective acquisitions. The Company is able to
discuss the pro forma results of operations taking into account the Boundless
Acquisition, because key management personnel of ADDS remained with the Company
following the Boundless 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
Boundless.
Charges Made in Quarters Ended December 31, 1995 and 1996
The Company recorded nonrecurring charges of approximately $2,382,000
in the quarter ended December 31, 1995, as follows:
1. $1,225,000 relating to TradeWave's acquisition of in-process technology from
MCC;
2. $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
3. $175,000 for a portion of the costs relating to the registration, in July
1996, of 14,444,210 shares of Common Stock on Form S-1, of which approximately
11,944,210 shares were registered for resale by selling stockholders from time
to time and 2,500,000 shares were registered for sale by the Company from time
to time.
The Company recorded nonrecurring charges of approximately $8,915,000
in the quarter ended December 31, 1996 as follows:
1. $1,473,000 relating to severance costs associated with a reduction-in-force
affecting approximately 130 employees at Boundless in December 1996;
2. $331,000 relating to the closing of Boundless' Orlando, Florida, facility;
and
3. $7,111,000 relating to the discontinuation of operations, in December, 1996,
of TradeWave. See Note 18 of Notes to Consolidated Financial Statements.
16
<PAGE>
Years Ended December 31, 1996 and 1995
Revenues: Revenues for the year ended December 31, 1996 were
$138,225,000, as compared to $94,957,000 for the year ended December 31, 1995.
The increase is wholly attributable to increases in sales of General Display
Terminals.
Sales of the Company's General Display Terminals more than doubled from
approximately $47,274,000 for the year ended December 31, 1995 to approximately
$110,671,000 for the year ended December 31, 1996. This increase is due to the
Digital Acquisition, with increases in sales to other OEM's offsetting a
$6,500,000 decline in sales to NCR. The decline in sales to NCR was expected and
relates to the disruption caused by the break-up of AT&T.
Sales of General Display Terminals for 1997 are not expected to reach
the 1996 levels for a number of reasons. The Digital Acquisition agreement
required Digital to purchase 80,000 units in the first year. As a result, the
Company believes that the significant purchases by Digital during the fourth
quarter to meet this volume commitment leaves Digital with inventory levels
sufficient to meet its terminal needs for the first half of 1997. The VT and
Dorio terminals are based on a proprietary architecture and, as a result, its
users requiring flexibility are prone to more quickly move to alternative
platforms. Finally, demand for the General Display Terminals continues to
decline as competing technologies, including Network Computers, are gaining
market share.
In response to this trend, that began several years ago, of
industry-wide declines in unit sales of General Display Terminals and, until
1995, average selling prices per unit, the Company has been increasing its
General Display Terminals market share and either maintaining or increasing its
General Display Terminal 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 has also positioned its MultiConsole
product as a low-cost alternative to serial character terminals in multi-user,
microcomputer and personal computer environments emphasizing transaction-
oriented processing. The Company is developing a line of Network Computers which
offer easy and cost-effective access to current Unix-based and emerging NT-based
computing environments.
The Company's strategy in increasing its share of a 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 is leveraging its manufacturing expertise installed custom base and
distribution networks while shifting research and development to software and
hardware development that will deliver Windows-based applications to the desktop
by means of terminals and Network Computers.
Sales of Network Graphic Displays declined approximately $14,425,000 to
$12,643,000 for the year ended December 31, 1996, from approximately $27,068,000
for the year ended December 31, 1995. This decline was anticipated and relates
to specific projects undertaken by NCR during 1995. The Company believes that
sales of Network Graphics Displays will continue to decline for the same reasons
demand for General Display Terminals is declining.
Net sales from the Company's repairs and spare parts business increased
approximately 71%, or $2,861,000, from $4,006,000 for the year ended December
31, 1995 to approximately $6,867,000 for the year ended December 31, 1996. The
increase was due to increased spares sales to NCR and start-up spares sales to
Digital under a maintenance service agreement entered into in connection with
the Digital Acquisition. Ongoing spares sales to Digital are not expected to
reach the 1996 volume levels as Digital's start-up stocking requirements are
substantially complete.
17
<PAGE>
GAI Partnership royalties for the year ending December 31, 1996, were
approximately $2,917,000 versus $1,383,000 for 1995 (May-December). The GAI
Partnership agreement provides for the payment of royalties to the Company as a
percentage of partnership revenues,commencing May 1995, as follows: months 1-12,
12%; months 13-24, 10%; months 25-36, 9%; months 37-48, 8%; and months 49-60,
7%.
Digital was the most significant customer for the Company's products,
accounting for 15.7% of revenues for the year ended December 31, 1996. Sales to
NCR accounted for 13.7% of revenues in 1996. Although both Digital and NCR are
expected to remain significant customers for the Company's products, neither is
expected to account for revenues of the Company comparable to 1996. The loss of
NCR or Digital as a customer, and as a distribution channel for the Company's
General Display Terminals, would have a material adverse effect on the Company's
results of operations and liquidity.
Gross Margin. Gross margin for the year ended December 31, 1996 was
$28,557,000 (20.7% of revenue), as compared to gross margin for the year ended
December 31, 1995 of $25,573,000 (26.9% of revenue). This decline in gross
margin as a percent of revenue stems primarily from a shift in revenue mix from
sales of the Company's higher margin Pick systems (until May, 1995, when the GAI
partnership was formed) and post-sale support business to the Company's lower
margin Network Graphics Displays and General Display Terminals. In addition,
during the fourth quarter of 1996, the Company recorded inventory reserves and
write-offs of approximately $2,241,000 representing an estimate of excess
material on hand as of the end of the year; and wrote-off approximately $284,000
of previously capitalized research and development cost as a result of the
cancellation of certain programs. The combined effect of these reserves and
write-offs was to reduce gross margin by 1.8%. Gross margin in future periods
may be affected by several factors such as sales volume, shifts in product mix,
pricing strategies and absorption of manufacturing costs.
In a continuing effort to maintain and improve margins in an industry
otherwise characterized by commodity pricing, management has focused on quality,
flexibility, and product cost reductions. In addition, sales of the Company's
Network Computers, which carry margins greater than its General Display
Terminals, are expected to positively impact the Company's gross margin.
However, there can be no assurance, given the recent introduction of this new
technology, that the Company's Network Computers will improve gross margin.
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 available.
See "Asset Management."
Total Operating Expenses. For the year ended December 31, 1996,
operating expenses were approximately $23,408,000 (16.9% of revenue), compared
to expenses for 1995 of approximately $18,846,000 (19.8% of revenue). As a
result of a reorganization of the Company, including a reduction-in-force
effecting 130 employees at Boundless, management expects that operating
expenses, in amount and as a percent of revenue, will decline in 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased
31.4% from approximately $7,940,000 for the year ended 1995 to approximately
$10,433,000 for the year ended 1996. The increase relates to marketing and
advertising efforts focused on the new name for the Company's Boundless
subsidiary as well as public relations activities to develop channel partners,
launch the Company's Network Computer product line and integrate the VT and
Dorio product line into Boundless' product family.
General and Administrative Expenses. General and administrative
expenses increased 28.1% from approximately $6,337,000 (6.7% of revenue), to
$8,120,000 (5.9% of revenue) for the periods ending December 31, 1995 and 1996,
respectively. Amortization of goodwill associated with the Boundless Acquisition
and Digital Acquisition increased approximately $860,000, offsetting declines in
legal and audit expenses.
18
<PAGE>
Research and Development Expenses. Research and development expenses
increased from approximately $4,569,000 in 1995 to $4,855,000 in 1996. Research
and development expenses for 1996 include a write-off of approximately $649,000
for previously capitalized expenses associated with research projects the
Company has abandoned.
Research and development expenses are expected to decline due to a
consolidation of research activities including the closing of the Company's
Orlando, Florida, facility. Research and development expenses within Boundless
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. The Company's Network Computers are designed to offer customers
simple, easy and cost-effective access to current and emerging computing
environments that include Windows NT, UNIX and Java applications, corporate
intranets and the Internet. Since August, 1996, the Company has released three
Network Computer models, and is expecting to release a second generation Network
Computer in the second quarter of 1997.
Other Charges. Other expenses for 1996 were approximately $5,774,000
compared to $1,335,000 for 1995. Interest expense (net of interest income)
amounted to $3,794,000 for the year ended December 31, 1996 compared to
$1,907,000 for 1995. The increase is attributable to the Digital Acquisition,
which was financed, in part, with the Chase Credit Line. During the fourth
quarter of 1996 Boundless recorded reserves of approximately $1,804,000 relating
to the reduction-in-force discussed above. Of this amount, $1,473,000 related to
severance payments and $331,000 related to the closing of the Orlando, Florida,
facility.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was approximately $962,000 compared to $1,538,000 for the year ended 1995.
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 due to management's reassessment of the
realizability of the deferred tax asset. The income tax expense in 1996 relates
to state income taxes of Boundless and to the Company's determination that the
valuation allowance should be re-established.
Loss From Discontinued Operations. For the year ended December 31, 1995
the Company recorded a loss of $223,442 relating to its disposition of an
investment in a diamond mining property located in Sierra Leone. Additionally,
for the year ended December 31, 1995, the Company realized a gain (net of
applicable taxes) of $1,372,239 from the sale, in January 1995, of a business in
which it was previously engaged and which was unrelated to the Company's current
business.
The Company also recorded a loss relating to the discontinuation of
TradeWave of approximately $9,652,000 and $2,019,000 for the periods ended
December 31, 1996 and 1995, respectively. Since commencing business in 1995
TradeWave incurred net losses; and TradeWave's predecessor incurred net losses
of approximately $645,000 in 1993 and $285,000 in 1994. TradeWave recorded
revenues of $1,900,000 for 1996 but was not able to generate material revenues
from TradeVPI. The discontinuation of TradeWave was a material component of the
Company's restructuring program and is intended to allow the Company to focus on
its core businesses conducted by Boundless.
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 Digital Acquisition.
The total charge was composed of an early termination fee under the Company's
previous revolving line-of-credit and related costs that had been capitalized
when the previous line-of-credit was originally obtained.
Net Loss. For the year ended December 31, 1996, the net loss was
$(11,736,000) (8.5% of revenue), compared to net income of $168,000 for the year
ended December 31, 1995. Despite an anticipated decline in revenues in 1997, the
19
<PAGE>
Company believes that it will be profitable in 1997 as a result of its
restructuring programs and introduction of its Network Computers.
Years ended December 31, 1995 and 1994
The following comparison of unaudited summary data presents the consolidated pro
forma results of operations for the year ended December 31, 1994 as if the
Boundless 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.
Year Ended December 31,
1995 1994
(Pro Forma)
------------ ------------
Net sales $94,957,000 $80,091,000
Net income/(loss) $2,610,000 $(4,282,000)
Earnings/(loss) available for common
shareholders 168,000 $(5,220,000)
Earnings/(loss) per share $.00 $(.18)
Net Sales: Net sales for the year ended December 31, 1995 were
$94,957,000 as compared to $8,344,000 for the year ended December 31, 1994. The
increase is wholly attributable to the acquisition of Boundless ($86,613,000).
On a pro forma basis, net sales increased approximately 19% for the year ended
December 31, 1995, compared to 1994. Pro forma net sales for the year ended
December 31, 1994 were approximately $80,091,000.
Sales of the Company's Network Graphics Displays for the year ended
December 31, 1995 increased $11,400,000 over pro forma sales for the year ended
December 31, 1994. Substantially, all of these sales were to NCR and represented
the roll-out of the Company's "Chameleon" product. Additionally, sales of the
Company's General Display Terminals increased $14,500,000, or 44.3%, for the
year ended December 31, 1995 over the pro forma sales for the year ended
December 31, 1994 because the Company began shipping VT and Dorio products as
well as General Display Terminals to IBM.
Net sales of the Company's Pick-based computer systems and post-sale
support businesses declined approximately $10,000,000 from approximately
$27,300,000 to approximately $17,300,000 for the year ended December 31, 1995
compared to 1994, principally because the Company contributed its Pick business
to the GAI Partnership in May 1995. The decline was also 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.
20
<PAGE>
In response to the developments in the Pick market, the Company formed,
in May 1995, the GAI Partnership. The GAI Partnership allowed the Company to
reduce its active participation in the Pick systems business in order to devote
more time to its core businesses. Royalties from the GAI Partnership were
$1,383,000 for the year ended December 31, 1995.
NCR was the most significant customer for the Company's products ,
accounting for 41.2% of revenues 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
years ended December 31, 1994 and 1995 respectively. Sales to IBM represented
9.7% and 19.8%, respectively, of the Company's total revenue and General Display
Terminal revenue for 1995.
Gross Margin. Gross margin for the year ended December 31, 1995 is
$25,573,000 (26.9% of revenue), as compared to gross margin of $3,455,000 (41.4%
of revenue) for the year ended December 31, 1994. On a pro forma basis, gross
margin for the year ended December 31, 1994 was approximately $22,784,000 (28.4%
of revenue), exclusive of inventory reserves of approximately $3,978,000 (5.0%
of revenue). The 1994 inventory reserve resulted from a revision in the formula
to estimate inventory utilization. The 1994 gross profit of 41.4% of sales
excluded the results of operations of ADDS prior to December 9, 1994, while
including the full year of sales of the Company's high margin, MultiConsole
products. The inventory reserve in 1995 was $213,000, which is more
representative of the annual reserve 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.
Total Operating Expenses. For the year ended December 31, 1995,
operating expenses were $18,846,000 (19.8% of revenue), compared to pro forma
expenses of approximately $21,746,382 (27.2% of revenue) for 1994. During
December, 1994, the Company, in conjunction with the Boundless Acquisition,
implemented reduction-in- force actions affecting 39 of the then existing 385
employees.
Sales and Marketing Expenses. Pro forma sales and marketing expenses
declined 9.3% from approximately $8,758,000 ( 10.9% of revenue) to approximately
$7,940,000 (8.4% of revenue). The decrease is attributable to the
reduction-in-force described above.
General and Administrative Expenses. General and administrative
expenses increased, on a pro forma basis, approximately $2,998,000 to $6,337,000
(6.7% of revenue) for the period ended December 31, 1995 from $3,338,502 for the
period ending December 31, 1994. The increase stems from expenses associated
with the Company's Boundless Acquisition and Digital Acquisition.
Research and Development Expenses. Pro forma research and development
expenses declined from $9,650,000 for the year ended December 31, 1994, to
$4,569,000 for the year ended December 31, 1995. In addition to the
reduction-in-force previously discussed, 1994 was a year of significant
expenditures to develop a new Network Graphics Display architecture.
Other Charges. Interest expense (net of interest income) amounted to
$1,907,000 for the year ended December 31, 1995 compared to $97,000 for 1994.
The acquisition of Boundless was, in part, financed by the Company's issuance of
the NCR note. 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.
21
<PAGE>
Income Tax. 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 due to management's
reassessment of the realizability of the deferred tax asset.
Income From Discontinued Operations. For the year ended December 31,
1995 the Company recorded a loss of $223,442 relating to its disposition of an
investment in a diamond mining property located in Sierra Leone. Additionally,
for the year ended December 31, 1995, the Company realized a gain (net of
applicable taxes) of $1,372,239 from the sale, in January 1995, of a business in
which it was previously engaged and which was unrelated to the Company's current
business.
For the period ended December 31, 1995, the Company also recorded a
loss relating to the discontinuation of TradeWave's operations of approximately
$2,019,000. This loss related to the net operations of TradeWave for the year
ended December 31, 1995.
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 purchase of
certain assets relating to Digital's general purpose display terminals. The
total charge was composed of an early termination fee under the Company's
previous revolving line-of-credit and related costs that had been capitalized
when the previous line-of-credit was originally obtained.
Net Income. For the year ended December 31, 1995, net income was
$2,610,000 (2.7% of revenue), compared to net income of $38,000 for the year
ended December 31, 1994. Income from continuing operations for the year ended
December 31, 1995 was $4,069,000. On a pro forma basis, the net income increased
approximately $8,351,000 for fiscal year 1995 versus a pro forma net loss of
approximately $4,282,000 for the year ended December 31, 1994.
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 Notes 5 and 18 of Notes to
Consolidated Financial Statements.
Working capital was approximately $3,172,000 as of December 31, 1996.
Historically, the Company has relied on cashflow from operations, bank
borrowings and sales of its common stock to finance its working capital, capital
expenditures and acquisitions.
The Company currently has a bank credit facility that is provided by
the Chase Manhattan Bank (the "Chase Credit Line"). At December 31, 1996, the
Chase Credit Line consisted 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, 1996, the Company owed
Chase $27,332,000, of which $13,950,000 was owed under the Revolving Loan and
$13,382,000 was owed under the Term Loan. The balance of the Term Loan is
repayable in six quarterly installments of $2,000,000 with the remaining balance
due September 30, 1998, the same day the Revolving Loan terminates. At December
31, 1996, the Company had availability of $4,607,000 under the Revolving Loan.
22
<PAGE>
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.
During 1996, the Company violated certain covenants of the Chase Credit
Line. Prior to the fourth quarter covenant violations, Chase, as agent for the
bank syndicate, had been granting waivers of these covenant violations without
requiring any material change in the governing documents. As a result of the
fourth quarter violations, the Company entered into negotiations with the bank
syndicate to revise the covenants and to obtain a waiver of the fourth quarter
violations. During March 1997, the Company completed negotiations with the bank
syndicate and obtained both the requested revisions to the covenants and the
waiver of the fourth quarter violations, principally in exchange for a payment
of $500,000 by the Company. While the Company believes it will maintain
compliance with the revised covenants, there can be no assurance that it will be
able to comply.
Net cash provided by operating activities during the year ended
December 31, 1996 was $1,435,000. Cash provided by continuing operations was
$7,595,000 which was principally attributable to reductions in inventories of
$3,388,000 and other assets of $1,592,000. These reductions were partially
offset by an increase in receivables of $3,548,000. Net cash used in
discontinued operations was a result of the discontinued operation of TradeWave
which had a loss from discontinued operations of $9,652,000. The effect of this
loss on operating cash flows was offset by its outstanding payables at December
31, 1996 of $3,492,000. Net cash used in investing activities was comprised of
capital expenditures of $1,384,000. Net cash provided by financing activities
was principally comprised of net offering proceeds of $2,870,000 and the
exercise of options and warrants which provided net cash of $2,277,000. In
addition, the Company issued $1,500,000 in convertible notes which were
subsequently converted to Common Stock and received net proceeds from its
revolving line of credit in the amount of $5,950,000. Cash used in investing
activities was comprised of $1,305,000 to purchase and retire Common Stock and
$6,496,000 to meet the current obligations related to the Company's term note
payable to Chase.
In addition to obligations previously discussed, long-term capital
requirements at December 31, 1996 included: (1) 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 or before January 31, 1999; (ii) $3,554,692 payable upon
exercise of the Amended Put Option (defined in Note 3 of Notes to Consolidated
Financial Statements); (iii) a lease commitment of approximately $180,000
through November 1997 for the Company's Orlando, Florida facility, net of
$50,000 receivable from a sublessee; (iv) obligations of TradeWave discussed
below; and (v) a lease commitment of $130,000 per year through December 1998 for
the Austin, Texas headquarters facility.
The terms of the NCR Note and the Put Option were restructured in
October 1995, in connection with the Digital Acquisition. As a part of the
restructuring, the Company agreed to pay NCR $497,657 in cash or the Company's
Common Stock on each October 20 until the Amended Call Option or Amended Put
Option is exercised. The October 1996 obligation was satisfied by the delivery
of common stock to NCR. 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 Boundless or the Company.
The Company's principal obligations under the Amended Put Option come
due after the expiration of the Chase Credit Line. 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.
At February 28, 1997, the Company's total long-term debt was
approximately $24,132,000 and the current portion of the long-term debt was
approximately $8,000,000. The Company believes that cash generated by Boundless'
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 NCR Note,
which is secured by a mortgage on the Company's Hauppauge facility, by its
January 31, 1999 due date.
As of December 31, 1996, the Company and Boundless had advanced $6,605,000
to TradeWave as intercompany transfers. Funding TradeWave's cash requirements
has adversely affected liquidity since its acquisition in April, 1995. The
23
<PAGE>
Company will not be reimbursed for the intercompany transfers. The Company
believes its liquidity will improve as a result of the discontinuation of
TradeWave's operations. See Note 18 of Notes to Consolidated Financial
Statements.
In March 1997, MCC and TradeWave, the Company and SunRiver Group
entered into agreements whereby all obligations of the parties in connection
with the Technology Agreement and the transfer of the TradeWave Technology were
discharged and TradeWave's membership in MCC was terminated. The Company paid
MCC $500,000, granted MCC a non-exclusive license to use the TradeVPI's
operations and assigned to a designee off MCC TradeWave's rights in the
Infosleuth Project. At the time of this settlement, MCC was owed $1,250,000
through December 31, 1997 and had disputed the adequacy of the delivery of
60,000 shares of common stock to satisfy a $250,000 payment due in 1996.
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 and results are compared to the Company's perpetual
inventory records.
The Company utilizes various subcontractors that manufacture 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 most cases,
backup qualified subcontractors are identified by the Company in the event that
termination of the primary source could occur. If such a termination occurs, the
Company may experience short-term production delays and increases in material
and freight costs 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 4.5 times in 1994 versus
3.2 times in 1995, and 4.2 times in 1996. The inventory turnover rate increased
from 1995 to 1996 primarily due to a significant decline in the net average
inventory position of the Company from $25,758,000 for 1995 to $18,525,000 for
1996. 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 to the Company's Hauppauge manufacturing facility.
Management created inventory reserves of $3,977,578 for 1994 based on a
revision, in July 1994, in the formula to estimate inventory utilization. Prior
to July, 1994, the formula was based on forecasts of product sales and, as
revised, the formula is based on historical inventory usage. Inventory reserves
at December 31, 1995 were $303,200 and were $5,853,000 for the year ended
December 31, 1996.
Accounts Receivable. The Company sells its products on prepayment and
net 30 day terms. Prior to the Boundless Acquisition, the Company experienced
minimal write-offs of accounts receivable. On a pro forma basis, receivable
turnover was 7.8 in 1994, 7.6 in 1995 and 7.4 in 1996.
24
<PAGE>
New Accounting Standards
In October 1995, the FASB issued Statement 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), which establishes fair value-based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity securities, including all
arrangements under which employees receive stock based compensation. Statement
123 encourages, but does not require, employers to adopt fair value accounting
to recognize compensation expense for grants under stock-based compensation
plans. However, companies must comply with the disclosure requirements set forth
in statement 123 which is effective for fiscal years beginning after December
31, 1995. The Company adopted only the disclosure requirements of Statement 123
in 1996.
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 application of
Statement 121 had no significant impact upon the Company's financial statements.
In March 1997, the FASB issued Statement 128, "Earnings Per Share"
("Statement 128"), which requires a calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share include no dilution. The Company
does not expect Statement 128 to have a significant impact on its calculation of
earnings per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
See Item 14(a)(1) and (2) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On December 17, 1996, Coopers & Lybrand L.L.P. ("Coopers & Lybrand")
resigned as the independent accountants of the Company. During the two fiscal
years, and any interim period, preceding December 17, 1996 (the "Reporting
Period"), none of Coopers & Lybrand'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 principles.
During the Reporting Period, there were, to the best knowledge of the Company,
no matters of disagreement between it and Coopers & Lybrand which would have
caused Coopers & Lybrand to make a reference thereto in connection with its
report.
During the Reporting Period, the Company was not advised by Coopers &
Lybrand (1) that internal controls necessary for the Company to develop reliable
financial statements did not exist; (2) that Coopers & Lybrand would no longer
be able to rely on management's representations or that it was unwilling to be
associated with the financial statements prepared by management; (3) that
Coopers & Lybrand needed to expand significantly the scope of its audit; (4)
that Coopers & Lybrand had received information which did, or which might, if
further investigated, impact the fairness or reliability of a report or
financial statement previously issued or to be issued or which did or might
cause Coopers & Lybrand to be unwilling to rely on management's representation
or be associated with the Company's financial statements; or (5) that Cooper &
Lybrand did not conduct such further investigation or expanded audit, or was not
able to resolve its concerns about the Company, because of its pending
resignation as the Company's accountant or any other reason.
On January 7, 1997, BDO Seidman, LLP was appointed by the Company as
its independent accountant.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Positions and Offices
Leonard Mackenzie 59 Chairman of the Board of Directors,
President and Chief Executive Officer
Wayne Schroeder 54 Vice-President - Finance, Chief Financial
Officer and Secretary and Director
Bob James 56 President and Chief Executive Officer of
Boundless
Thomas Upton 40 President of the Boundless Global
Distribution Division
Gary Wood 53 Director
Daniel Matheson 47 Director
Jeffrey K. Moore 27 Director
Leonard Mackenzie has been the Company's Chairman of the Board and
acting President and Chief Executive Officer since November 1996. He has been a
Board member since 1980 and was, from 1980 to 1992, Chairman, President and
Chief Executive Officer of GAI, a provider of computer system services, products
and components and the managing member of the GAI Partnership. He co-founded in
1987 and has been a director since 1987 of U.S. Gas Transportation, Inc., a
privately-held natural gas asset management company. Mr. Mackenzie also
co-founded in 1993 and has been a director of Vineyard Engine Systems, Inc., a
privately-held developer of conversion technology for alternative fuels.
Wayne Schroeder has served as Vice President-Finance, Chief Financial
Officer and Secretary of the Company and Boundless since December 1996 and as a
Director of the Company since January, 1997. He joined the Company as its
Controller in November 1996 and was a financial consultant from May 1994 to
November 1996, with the Company as one of his primary clients. From July 1987 to
May 1994, he was Chief Operating Officer, Chief Financial Officer and a Director
of Arrhythmia Research Technology, Inc., a company whose shares are traded on
the American Stock Exchange.
Bob James has served as President and Chief Executive Officer of
Boundless since March 1997 and has been an employee of the Company since January
1997. Since 1982, he has been President and Chief Executive Officer of ABM Data
Systems, Inc. ("ABM"), a privately-held company that is a leading provider
worldwide of security software and a customer of Boundless. He is devoting a
limited portion of his business time to ABM. Prior thereto, he was President and
Chief Executive Officer for approximately two years of Racal-Chubb Security
Systems USA ("Racal-Chubb"), a leading worldwide provider of complete security
systems. Mr. James became President and Chief Executive Officer of Racal-Chubb
when it purchased Texas Tele Systems, a security systems provider that Mr. James
founded in 1972.
26
<PAGE>
Tom Upton has served as President of the Global Distribution Division
at Boundless since January 1997 and has been employed by Boundless or ADDS for
fifteen years. In 1991, Mr. Upton became manager of major accounts for the
Systems Division at ADDS. He became Director of World Wide Systems Sales in late
1994 and, in May 1995, Vice President of World Wide Sales for a six-month
transitional period in connection with the commencement of business of the GAI
Partnership. After such transitional period, he became Senior Director of World
Wide Sales at Boundless.
Gray Wood has been a member of the Company's Board of Directors since
November 1996 and has been serving since January 1, 1996 as President of Texas
Taxpayers and Research Association Research Foundation, a 500 member business
sponsored organization that researches state fiscal policy. From April 1988 to
December 1995, he served as President of Texas Research League.
Daniel Matheson has been a member of the Company's Board since August
1996. Mr. Matheson has been counsel to the law firm of Locke Purnell Rain Harrel
P.C. in Austin, Texas since June 1995 and has practiced law in the general
banking, corporate, securities and state government (legislative and regulatory)
areas for more than twenty years. Between May 1993 and May 1996, he was
Executive Vice-President and General Counsel of The Capital Network Systems,
Inc., a privately-held telecommunications company. Between January 1994 and
December 1996, he was also Chairman of the Board of The Capital Network, Inc., a
not-for-profit economic development agency.
Jeffrey Moore has served as a member of the Company's Board and a Vice
President of Boundless since January 1997. He joined the Company in May 1996 as
a financial analyst reporting to the Company's Chief Financial Officer and
President. Since September 1996, he has been President and Chairman of the Board
of SunRiver Group. From February 1994 to August 1995, he participated in an
executive training program with Sewell Lexus, Inc. Prior to February 1994, Mr.
Moore attended Baylor University where he received a BBA in Finance.
The following individual, although not an executive officer or
director, is a key employee and is expected to make significant contributions to
the business of the Company:
Brian L. Hann was appointed Vice President of Operations of Boundless
in March 1997 after serving as Vice President of Manufacturing of Boundless
since December 1994. Mr. Hann has been employed by Boundless since March of 1986
and has served as Assistant Vice President of Manufacturing and Customer
Services.
In addition, Stephen Maysonave was appointed as an advisor to the
Company's Board in November 1996. On September 17, 1996, Mr. Maysonave became
the voting trustee of a majority of the outstanding shares of Series B Preferred
Stock of SunRiver Group, the beneficial holder of a majority of the outstanding
shares of the Company's Common Stock.
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, Gary Wood and Daniel
Matheson were each granted options in 1996 to purchase 100,000 shares of Common
Stock at $1.57 per share that expire in December 2002 and vest according to the
following schedule: 33.3% on January 1, 1998 and, as to the remaining 66.7%, pro
rata on a monthly basis on the final day of each month during the period
commencing February 1, 1998 and ending December 1, 1999.
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
27
<PAGE>
shall have the power to indemnify (which include directors, officers, employees
or agents of the Company) against liability for certain of their acts.
Change in Management
Effective November 1, 1996, the following persons (the "Resigners")
resigned, at the request of SunRiver Group, from all management and Board
positions which they had with the Company and/or its subsidiaries: Gerald
Youngblood, Chairman and President; Roger Hughes, Chief Financial Officer; John
Osborne, a member of the Board and Vice President of Sales, Marketing and
Service of the Company and Chief Executive Officer of Boundless; Roy Smith,
Vice-Chairman of TradeWave; Ron Brittian, a member of the Board of the Company
and Chairman of the Board of TradeWave; and Sam Smith, a member of the Board.
The Company, Boundless and TradeWave entered into separation agreements
with each of the Resigners pursuant to which severance payments were agreed to
be made in the following amounts: Gerald Youngblood, $200,000; Roger Hughes,
$180,000; John Osborne, $190,000; and Roy Smith, $150,000. In addition, each
Resigner's previously granted options to purchase Common Stock of the Company
and TradeWave became fully and immediately vested and exercisable for three
years, subject to each Resigner's agreement not to sell 50% of his option shares
until May 1, 1997.
Unrelated to the changes in management of November 1, 1996, Toni
McElroy, a former Vice-President of Finance of the Company, resigned from the
Company in December 1996 at the request of the Company, Tony Giovaniello, former
Chief Operating Officer of Boundless, resigned from Boundless in March 1997 and
Bill Long, a former Executive Vice President of the Company, resigned from the
Company in January 1997.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The table below discloses all cash compensation awarded to, earned by
or paid to the present or former Chief Executive Officer and the 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, 1996,
including the two highest paid individuals who were executive officers in 1996
but not at year end (the "named executive officers"). In addition, it provides
information with respect to the compensation of the named executive officers for
1995 and 1994.
28
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
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>
Leonard MacKenzie 12/31/96 $ - $ - - 500,000 -
Chief Executive 12/31/95 - - - - -
Officer since 11/96 12/31/94 - - - - -
Gerald Youngblood(1) 12/31/96 $171,539 $122,680 - 150,000 -
Former CEO 12/31/95 $157,057 $128,600 - 300,000 -
12/31/94 $ 80,985 $ 75,000 - - -
Tom Upton(2)(3) 12/31/96 $ 95,733 $ 1,031 $ 35,227 55,000 -
President, Boundless 12/31/95 $ 75,610 - $117,451 10,000 -
Global Distribution 12/31/94 $ 73,113 - $ 50,535 - -
Tony Giovaniello(3) 12/31/96 $138,654 $ 43,027 - 35,000 -
Former COO of 12/31/95 $118,917 47,930 - 125,000 -
Boundless 12/31/94 $ 98,162 54,708 - - -
John Osborne(4) 12/31/96 $120,577 $ 40,000 - 200,000 -
Former CEO of 12/31/95 - - - - -
Boundless 12/31/94 - - - - -
Toni McElroy(5) 12/31/96 $107,885 $ 39,674 - 35,000 -
Former Vice 12/31/95 107,969 46,662 - 125,000 -
President-Finance 12/31/94 40,940 25,000 - - -
</TABLE>
(1) Resigned from the Company in November 1996 and received severance pay of
$33,333 in 1996 and payment for unused vacation and sick leave of $20,000,
which are not reflected in the above table.
(2) Other annual compensation consisted of commissions of $35,227 in 1996,
$31,702 in 1995 and $34,552 in 1994 and reimbursement for relocation
expenses of $85,749 in 1995 and $15,983 in 1994.
(3) Compensation prior to December 9, 1994 was from ADDS.
(4) Resigned from the Company in November 1996 and received severance pay of
$15,833 in 1996 and payment for unused vacation and sick leave of $25,577,
which are not reflected in the above table.
(5) Received severance pay of $4,231 in 1996. Upon termination of her
employment, 80,000 of her options to purchase 160,000 shares of Common
Stock granted in 1995 and 1996 vested immediately and the remaining 80,000
was forfeited.
Employment Agreements
None of the Company's officers has an employment contract with the
Company.
29
<PAGE>
Compensation Committee Interlocks and Insider Participation
Mr. Youngblood, Mr. Long and Ms. McElroy, who were executive officers
of the Company during parts of 1996, were also members of the Company's Board of
Directors during such times and participated in deliberations concerning
executive officer compensation. Their joint deliberations gave rise to conflicts
of interest which could have affected their compensation and the number of stock
options granted to them individually and as a group.
30
<PAGE>
1995 Incentive Plan
Option Grants in Last Fiscal Year
---------------------------------
The following table sets forth information, as of December 31, 1996,
regarding the outstanding options granted in 1996 under the Company's 1995
Incentive Plan ("1995 Plan") to the named executive officers:
<TABLE>
<CAPTION>
Potential Realizable
Number of Value at Assumed
Securities Percent of Total Annual rates of Stock
Underlying Options/SARs Exercise or Price Appreciation for
Options/SARs Granted under Base Price Expiration Option Term
Name Granted (#)(4) 1995 Plan ($/Sh) Date 5%($) 10%($)
---- -------------- --------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Leonard MacKenzie(1) 500,000 15.6% $1.57 12/02 1,007,437 1,291,568
Gerald Youngblood(2) 300,000 9.3% $1.35 11/99 470,396 546,014
150,000 4.7% $2.56 11/99 446,005 517,702
Tom Upton(3) 20,000 0.6% $2.82 2/01 72,381 92,795
30,000 1.1% $2.13 4/01 95,674 122,658
Tony Giovaniello(3) 35,000 1.1% $2.56 1/01 114,989 147,420
John Osborne(2) 200,000 6.2% $2.13 11/99 494,787 574,325
Toni McElroy(2) 17,500 0.5% $1.35 5/98 25,461 27,431
62,500 1.9% $2.56 5/98 172,435 185,778
</TABLE>
- --------------------------
(1) Options vest pro rata on a monthly basis over the 6 months after the
applicable grant date listed in footnote 4, below.
(2) Options became fully vested as of the applicable grant date listed in
footnote 4, below, as part of a severance arrangement.
(3) Options vest 25% one year following the applicable grant date listed in
footnote 4, below and the remainder vests pro rata on a monthly basis over the
subsequent three year period.
(4) Grant dates for options are as follows: Mackenzie: 12/19/96;
Youngblood: 11/1/96; Upton: 2/1/96 for 20,000 and 4/23/96 for 30,000;
Giovaniello: 1/5/96; Osborne: 11/1/96; McElroy: 12/3/96.
31
<PAGE>
<TABLE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options to purchase shares of Common Stock as at
December 31, 1996.
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 1996 (#) December 31, 1996 ($)(1)
-------------------------------- ---------------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leonard MacKenzie 0 $0 0 500,000 $0 $30,000
Gerald Youngblood 0 0 450,000 0 84,000 0
Tom Upton 0 0 3,958 61,042 1,108 1,692
Tony Giovaniello 10,000 20,875 39,479 110,521 11,054 21,146
John Osborne 0 0 200,000 0 0 0
Toni McElroy 0 0 80,000 0 17,500 0
</TABLE>
(1) The last sale price of the Company's Common Stock on December 31, 1996, as
reported by The Nasdaq SmallCap Market, was $1.63
32
<PAGE>
ITEM 12. 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 March 21,
1997, by (i) each of the Company's directors and "named executive officers,"
(ii) directors and executive 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. Except as indicated, each such person has
sole voting and investment powers with respect to his and her shares. The
address of SunRiver Group is 515 Congress Avenue, Suite 2500, Austin, Texas
78701. The address of Stephen Maysonave is 919 Corriente Pointe, Redwood City,
CA 94065.
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
SunRiver Group 30,614,084(1) 56.9%
Stephen Maysonave,
Voting Trustee 30,614,084(1)(2) 56.9%
Leonard Mackenzie 416,667(3) *
Tom Upton 125,000(4) *
Gerald Youngblood 450,000(3) *
Tony Giovaniello 65,937(3) *
John Osborne 200,000(3) *
Toni McElroy 150,000(5) *
Gary Wood - *
Daniel Matheson - *
Jeffrey Moore -(2) *
All current directors and executive
officers as a group
(seven individuals) 708,334 1.4%
* Less than 1%.
(1) Includes 4,174,704 shares underlying the warrant held by SunRiver Group
(the "SunRiver Group Warrant") to purchase shares of Common Stock at an
exercise price of $1.84 per share. For additional warrants which may be
issued to SunRiver Group, see "Item 13-Certain Relationships and Related
Transactions."
(2) Includes the shares beneficially owned by SunRiver Group, as a result of
Mr. Maysonave's beneficial ownership, as voting trustee, of 3,330,000
shares of Series B Preferred Stock of SunRiver Group (the "Series B
Preferred") pursuant to a voting trust expiring March 1999. Under a
stockholders agreement, the Series B Preferred has the power to elect three
of the five directors constituting SunRiver Group's entire board of
directors which has the sole voting power and, with the stockholders of
SunRiver Group, shares the investment power with respect to the Common
Stock owned by SunRiver Group. The 3,330,000 shares constitute 51.2% of the
6,500,000 outstanding shares of the Series B Preferred. Messrs. Jeffrey K.
Moore and Matthew R. Moore (the "Moore Brothers") together own a majority
of the outstanding shares of the Series B Preferred and a majority of the
shares in the voting trust, and, voting together, have the power under the
voting trust agreement to replace Stephen Maysonave as voting trustee at
any time for any reason. Each of the Moore Brothers disclaims beneficial
ownership of the other's shares of SunRiver Group's Series B Preferred. See
"Item 13--Certain Relationships and Related Transactions" for legal
proceedings and pledges of Common Stock by SunRiver Group which may, at a
subsequent date, result in a change in control of the Company.
(3) Consists of shares of Common Stock which may be issued upon exercise of
options.
33
<PAGE>
(4) Includes 65,000 shares issuable upon exercise of options.
(5) Includes 80,000 shares issuable upon exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
As of March 1997, SunRiver Group was a guarantor of $750,000 owing from
TradeWave to MCC through the end of 1997 under the Technology Agreement between
TradeWave and MCC. Additionally, in connection with the TradeWave Acquisition,
TradeWave owed MCC $1,250,000 payable through the end of 1997 and MCC had
disputed the adequacy of the delivery of 60,000 shares of Common Stock to
satisfy a $250,000 payment due in 1996. In March 1997, MCC, TradeWave, the
Company and SunRiver Group entered into agreements whereby all obligations of
the parties in connection with the Technology Agreement and the TradeWave
Acquisition Agreement, including SunRiver Group's guaranty, were discharged and
TradeWave's membership in MCC was terminated. The Company paid MCC $500,000 and
TradeWave granted MCC a non-exclusive license to use TradeVPI and assigned to a
designee of MCC TradeWave's rights in the Infosleuth Project.
Prior to his appointment as the Company's Controller in November 1996
and Chief Financial Officer in December 1996, Wayne Schroeder was a financial
consultant to the Company and received consulting fees in 1996 of $87,500 from
Boundless and $30,000 from TradeWave.
William Moore, the father of Jeffrey K. Moore and Matthew R. Moore, has
acted as a consultant for SunRiver Group from time to time and, during 1995, was
a key consultant to the Company in financing transactions and acquisitions that
resulted in the substantial growth of the Company, including the acquisition of
TradeWave in April 1995 and the Digital Acquisition in October 1995. Under an
agreement between the Company and NAFCO Consulting, Inc. ("NAFCO"), a
corporation wholly owned by William Moore, the Company paid NAFCO $137,742 in
1995, including $10,000 for special assignments and $7,742 for expenses. The
Company believes that the agreement between the Company and NAFCO, which
terminated on December 31, 1995, was on terms as favorable to the Company as
obtainable from unaffiliated third parties. On August 6, 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 1995 Plan, which the
Company has valued at $905,000) in consideration for special consulting services
rendered in 1995. Reference is made to Note 2 to the table under the caption
"Security Ownership of Certain Beneficial Owners and Management," above,
regarding the shares of Series B Preferred of SunRiver Group owned by Messrs.
Jeffrey K. Moore and Matthew R. Moore, which, if voted together, have the power
to control SunRiver Group.
In April 1996, William Moore was convicted of felonies related to the
acquisition and operation of a Texas savings and loan from 1982 to 1984 and was
ordered to pay approximately $12 million in restitution to several federal
agencies. Although William Moore disclaims beneficial ownership of, or an
economic interest in, the controlling shares of SunRiver Group owned by his
sons, there can be no assurance that the federal government will not attempt to
attribute an economic interest in such shares to William Moore, or that his sons
will not sell such shares, in order to satisfy this restitution order. Either of
these outcomes could result in a change in control of SunRiver Group and,
therefore, the Company and its subsidiaries. Mr. Moore is appealing these
convictions and restitution order. It is not possible to predict whether or when
such a change of control will occur or the effect of any such change in the
Company.
34
<PAGE>
In connection with the Digital Acquisition in October 1995, 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. In consideration for the release of
SunRiver Group's guarantee to MCC, the number of such warrants will be reduced
by the number of warrants equal in value to $500,000, determined under the
Black-Scholes valuation model or some other number of warrants determined by
independent advice regarding the fairness of such consideration.
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page No.
- ----------------------------------------------------------------------- --------
(a) (1)(2) Financial Statements and Schedules
-----------------------------------
Index to Financial Statements F-1
All other financial statements and schedules not listed have been
omitted since the required information is either included in the
Financial Statements and the Notes thereto as included in the Company's
Annual Report on Form 10-K for the Year ended December 31, 1996 or is
not applicable or required.
(3) The exhibits listed in the exhibit index attached to this
Report are filed as part of this Report.
(b) Reports on Form 8-K
-------------------
The Company filed a report on Form 8-K to report an event occurring on
December 17, 1996 and included the following item:
Item 4. Changes in Registrant's Certifying Accountant.
The Company did not file any other reports on Form 8-K during the
fourth quarter of 1996.
35
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
Reports of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
Schedule I - Condensed Financial Information of Registrant
(Parent Company)
Condensed Balance Sheets as of December 31, 1996 and 1995 S-1
Condensed Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 S-2
Condensed Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 S-3
Schedule II - Valuation and Qualifying Accounts S-4
F-1
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
SunRiver Corporation
We have audited the accompanying consolidated balance sheet of SunRiver
Corporation and Subsidiaries as of December 31, 1996 and the related statements
of operations, stockholders' equity and cash flows for the year then ended. We
have also audited the schedules for the year ended December 31, 1996 listed in
the index on page F-1 of this Form 10-k. 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 audit.
We conducted our audit 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 audit provides 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, 1996 and the consolidated
results of their operations and their cash flows for the year then ended 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.
BDO Seidman, LLP
Austin, Texas
March 21, 1997
F-2
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
SunRiver Corporation
We have audited the accompanying consolidated balance sheet of SunRiver
Corporation and Subsidiaries as of December 31, 1995 and the related statements
of operations, stockholder's equity and cash flows for each of the two years in
the period ended December 31, 1995. We have also audited the schedules for the
years ended December 31, 1995 and 1994 listed in the index on page F-1 of this
Form 10-K. 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 the consolidated
results of their operations and their cash flows for each of the two 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, except for Notes 9 and 18, as to which the date is March 28, 1997
F-3
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,213 $ 369
Trade accounts receivable, (including $2,393 and $6,206
from related parties), net 22,046 18,678
Inventories (Notes 7 and 10) 18,525 25,758
Deferred income taxes (Note 9) - 3,011
Prepaid expenses and other current assets 256 1,572
---------------- ----------------
Total current assets 46,040 49,388
Property and equipment, net (Note 8) 11,474 11,795
Goodwill, net (Note 5) 9,505 10,608
Other assets 2,506 3,744
Net assets of discontinued operations (Note 18) - 321
---------------- ----------------
$ 69,525 $ 75,856
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note 10) $ 13,950 $ 8,000
Current portion of long-term debt (including $169
to a related party at December 31, 1995) (Note 10) 8,009 6,211
Accounts payable 10,892 14,340
Accrued expenses 6,345 4,594
Deferred revenue 180 827
Net liabilities of discontinued operation (Note 18) 3,492 -
---------------- ----------------
Total current liabilities 42,868 33,972
Long-term liabilities:
Long-term debt, less current maturities (including $8,000
and $8,000 to a related party) (Note 10) 13,382 22,008
Deferred income taxes (Note 9) - 2,652
Other 918 832
---------------- ----------------
Total long-term liabilities 14,300 25,492
---------------- ----------------
Total liabilities 57,168 59,464
Commitments and contingencies (Notes 1, 14, 15, 17 and 18) - -
Mandatorily redeemable preferred stock of subsidiary 3,555 3,555
Stockholders' equity (Notes 11 and 19):
Preferred stock - -
Common stock 486 456
Additional paid-in capital 31,440 23,769
Accumulated deficit (23,124) (11,388)
---------------- ----------------
Total stockholders' equity 8,802 12,837
---------------- ----------------
$ 69,525 $ 75,856
================ ================
</TABLE>
The accompany notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994
------------------ ----------------- --------------
<S> <C> <C> <C>
Revenue:
Product sales (including sales to related
parties of $21855, $39,600 and $1,841) $ 130,733 $ 81,761 $ 7,173
Services 7,492 13,196 1,171
------------------ ----------------- --------------
Total revenue 138,225 94,957 8,344
Cost of revenue:
Product sales 107,029 62,555 4,378
Services 2,639 6,829 511
------------------ ----------------- --------------
Total cost of revenue 109,668 69,384 4,889
------------------ ----------------- --------------
Gross margin 28,557 25,573 3,455
Operating expenses:
Sales and marketing 10,433 7,940 1,092
General and administrative 8,120 6,337 992
Research and development 4,855 4,569 990
------------------ ----------------- --------------
Total operating expenses 23,408 18,846 3,074
------------------ ----------------- --------------
Operating income 5,149 6,727 381
Other (income) expense:
Interest expense 3,794 1,907 97
Other 1,980 (572) 61
------------------ ----------------- --------------
Total other expense 5,774 1,335 158
------------------ ----------------- --------------
Income (loss) before income taxes,
extraordinary item and discontinued operations (625) 5,392 223
Income tax expense 962 1,323 185
------------------ ----------------- --------------
Income (loss) from operations (1,587) 4,069 38
Loss from discontinued operations (9,652) (870) -
------------------ ----------------- --------------
Income (loss) before extraordinary item (11,239) 3,199 38
Extraordinary loss on early extinguishment of debt,
net of tax benefit of $393 - (589) -
------------------ ----------------- --------------
Net income (loss) (11,239) 2,610 38
Dividend on preferred stock of subsidiary 497 93 -
Accretion to preferred stock of subsidiary - 681 64
Restructuring of preferred stock of subsidiary - 1,668 -
------------------ ----------------- --------------
Earnings (loss) available for common shareholders $ (11,736) $ 168 $ (26)
================== ================= ==============
Weighted average common shares outstanding 47,023 43,656 27,186
================== ================= ==============
Earnings (loss) per common share from:
Continuing operations $ (0.04) $ 0.04 $ 0.00
Discontinued operations (0.21) (0.02) 0.00
Extraordinary loss 0.00 (0.02) 0.00
------------------ ----------------- --------------
Earnings (loss) per common share $ (0.25) $ 0.00 $ 0.00
================== ================= ==============
</TABLE>
The accompany notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(in thousands)
<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, January 1, 1994 13,270 $133 24,026 $240 26,439 $264 $10,931 $(11,530) $ 38
Recapitalization (13,270) (133) (24,026) (240) 7,720 77 1,489 1,193
Common stock sold,
net of expenses 4,077 41 845 886
Common stock issued for retirement
of long-term debt to related party 288 3 141 144
Common stock issued to related party
in settlement of management agreement 300 3 147 150
Accretion to preferred stock
of subsidiary (64) (64)
Net income 38 38
-------- -------- --------- ----------- --------- -------- --------- ------------ ---------
Balance, December 31, 1994 (1) - - - - 38,824 388 13,553 (11,556) 2,385
Common stock sold 4,406 44 5,501 5,545
Conversion of notes payable 3,057 31 4,544 4,575
Distribution of net assets (737) (7) (2,350) (2,357)
Warrants issued in connection
with placement of debt 1,691 1,691
Restructuring of mandatorily redeemable
preferred stock of subsidiary 830 (1,668) (838)
Dividend on preferred stock
of subsidiary (93) (93)
Accretion to preferred stock
of subsidiary (681) (681)
Net income 2,610 2,610
-------- -------- --------- ----------- --------- -------- --------- ------------ ---------
</TABLE>
(1) Includes 26,937 shares of common stock purchased but unissued at December
31, 1994.
(continued)
The accompanying notes are an integral part
of the financial statements.
F-6
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY, CONTINUED
(in thousands)
<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, December 31, 1995 - - - - 45,550 456 23,769 (11,388) 12,837
Conversion of notes payable 783 8 1,492 1,500
Common stock sold 1,267 12 2,858 2,870
Common stock issued for payment
of long-term debt 60 1 299 300
Options and warrants issued for
services to non-employees 526 526
Stock options exercised 587 6 879 885
Deferred compensation from
below market grants of stock
options of subsidiary 107 107
Dividend on preferred stock
of subsidiary 169 1 496 (497) -
Warrants exercised 511 5 1,418 1,423
Common stock repurchased and retired (725) (7) (1,298) (1,305)
Common stock issued for consulting services 370 4 894 898
Net loss (11,239) (11,239)
-------- -------- --------- ----------- --------- -------- --------- ------------ ---------
Balance, December 31, 1996 - $ - - $- 48,572 $486 $31,440 $(23,124) $ 8,802
======== ======== ========= =========== ========= ======== ========= ============ =========
</TABLE>
The acompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
(in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(11,239) $ 2,610 $ 38
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Income (loss) from discontinued operations 9,652 870 --
Depreciation and amortization 3,957 2,857 307
Loss from disposal of assets 133
Deferred revenues (647) (3,193) (397)
Provision for doubtful accounts 180 1,072 48
Provision for excess and obsolete inventory 3,845 348 42
Deferred Taxes 358 (2,256) 48
Write off of intangible assets -- 1,554 --
Shares issued in settlement of
management agreement -- 155 150
Extraordinary loss on early
extinguishment of debt -- 282 8
Changes in assets and liabilities:
Trade accounts receivable (3,548) (12,270) (1,879)
Inventories 3,388 (7,595) (314)
Other assets 1,592 (1,595) (496)
Accounts payable and accrued expenses (76) 8,938 1,607
-------- -------- --------
Net cash:
Provided by (used in) continuing operations 7,595 (8,223) (838)
Used in discontinued operations (6,160) (1,629)
-------- -------- --------
Net cash provided by (used in) operating activities 1,435 (9,852) (838)
Cash flows from investing activities:
Capital expenditures (1,384) (229) (100)
Purchase of Digital Assets -- (14,970) --
Purchase of Boundless, net of cash acquired -- -- (5,441)
-------- -------- --------
Net cash used in investing activities (1,384) (15,199) (5,541)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,177 2,164 1,841
Decrease in short-term debt (30) -- --
Proceeds from debt issuance 1,500 24,575 4,642
Purchase and retirement of common stock (1,305) -- (15)
Advances on revolving loan payable 5,950 3,365 --
Payment on long-term debt (6,496)
Costs associated with issuance of debt -- (1,284) --
Restructuring of mandatorily redeemable
preferred stock of subsidiary -- (3,500) --
Payments on capital leases (3) (11) (45)
-------- -------- --------
Net cash provided by financing activities 4,793 25,309 6,423
-------- -------- --------
Net increase in cash and cash equivalents 4,844 258 44
Cash and cash equivalents at beginning of period 369 111 67
-------- -------- --------
Cash and cash equivalents at end of period $ 5,213 $ 369 $ 111
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the Years Ended
(in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Non-cash transactions:
Issuance of common stock to retire debt $ -- $ -- $ 144
Issuance of common stock for
management services -- -- 150
Expenses for private placement
deducted from proceeds -- -- 955
Accretion to preferred stock of subsidiary -- 681 64
Dividend on Preferred Stock of Subsidiary 497 93 --
Distribution of net assets -- 2,357 --
Conversion of notes payable to common stock 1,500 4,575 --
Issuance of common stock for Note Payment 300 -- --
Estimated value of compensatory
options and warrants 526 3,216 --
Issuance of common stock for consulting services 898 380 150
Issuance of common stock in Digital Acquisition -- 3,000 --
Obligations incurred in connection
with the acquisition of equipment
and intellectual property -- 742 8,000
Equipment acquisitions funded through capital leases 107 232 --
Deferred compensation
Cash paid for:
Interest 4,293 1,615 32
Taxes (794) 1,553 --
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
1. Background
SunRiver Corporation (the "Company") is engaged in designing and manufacturing
graphics and text computer terminals for business use. 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. The Company has two
subsidiaries, Boundless Technologies, Inc., formerly SunRiver Data Systems Inc.,
("Boundless") and TradeWave Corporation ("TradeWave"). The Company has
discontinued the operations of TradeWave. (See Note 18)
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, the Company, which
was then known as 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"). For accounting purposes the transaction was treated as a
recapitalization of All-Quotes, with SunRiver Group as the acquirer, and its
assets and liabilities were recorded at carryover basis. The former businesses
of All-Quotes that were distributed to certain All-Quotes' shareholders 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
Boundless, 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 acquired all of the outstanding common stock of Boundless on
December 9, 1994, through a newly formed wholly owned subsidiary, SunRiver
Acquisition Corporation ("Acquisition"). This transaction is more fully
described in Note 3. Boundless also offers post-sale customer support services
for its desktop terminals. Boundless' products and services are offered solely
to businesses.
In October 1995, Boundless 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).
A partnership formed in May 1995 by Boundless and General Automation, Inc.
("GA"), and managed by GA, designs, integrates, sells and supports multi-user
computer systems that can manage large volumes of data running Boundless's and
GA's version of the database system licensed from Pick Systems. Boundless also
offers post-sale customer support services for its desktop terminals.
Boundless'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, had 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. During December 1996, the Company decided to discontinue the
operations of TradeWave (See Note 18).
During the third and fourth quarters of 1996, the Company violated certain
financial covenants of the Chase Credit Line and, during other periods of 1996,
violated certain other covenants. Prior to the fourth quarter violations, Chase
Manhattan Bank, as agent for the bank syndicate, granted waivers to the covenant
violations. As a result of the fourth quarter violations, the Company entered
F-10
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
into negotiations with the bank syndicate to revise the covenants for future
quarters and to obtain a waiver of the fourth quarter violations. During March
1997, the Company completed negotiations with the bank syndicate and obtained
both the requested revisions to the covenants and the waiver of the fourth
quarter violations. The Company believes it will maintain compliance with the
revised covenants.
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.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of cash and cash equivalents, mandatorily 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, 1996 and 1995, capitalized software development costs, net of
amortization, were $74 and $319. During the year ended December 31, 1996, the
Company wrote off $327 of the capitalized software. Amounts capitalized and
expensed for the years-ended December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
----------- ----------- -----------
Capitalized software costs $ 33 $ 195 $ 40
Amortization expense 308 409 30
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. The Company has recorded an
allowance for doubtful accounts of $1,227 and $1,407 as of December 31, 1996 and
Continued
F-11
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
1995, respectively. 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. The Company had
revenue from two customers representing 16% and 14% of total revenues in 1996,
and had revenues from one customer of 42% of total revenues in 1995.
Advertising
- -----------
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $1,631, $561 and $104 for the years ended December 31, 1996, 1995
and 1994.
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 $1,117 and $386 for the years ended December 31, 1996 and
1995 and $11 during the period from acquisition to December 31, 1994.
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 has
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
- ------------------------
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock issued to Employees." The Company
follows FASB Statement 123, "Accounting for Stock-Based Compensation" for
financial statement disclosure purposes and issuance of options and warrants to
non-employees for services rendered.
In accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", management reviews long-lived
assets and intangible assets for impairment whenever events or changes in
Continued
F-12
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
circumstances indicate the carrying amount of an asset may not be fully
recoverable. As part of this assessment, management prepares an analysis of the
undiscounted cash flows for each product that has significant long-lived or
intangible asset values associated with it. This analysis for the asset values
as of December 31, 1996 indicated there was no impairment to these assets'
carrying values.
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with APB No. 15, "Earnings Per Share". SFAS
No. 128 provides for calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an entity similar to
fully diluted earnings per share. The Company will adopt SFAS No. 128 in 1997
and its implementation is not expected to have a material effect on the
consolidated financial statements.
3. Acquisition of SunRiver Group and Boundless
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,
represented 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 these warrants was determined to be immaterial
under APB 25 during 1994.
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
Continued
F-13
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
existing business operations. The proceeds from a private placement then 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.
As more fully described in Note 18, in January 1995 the Company sold
substantially all of the operating assets of its dial-up market data services
business and later disposed of its remaining interest in Capital.
Boundless Acquisition
- ---------------------
Acquisition acquired all of the outstanding common stock of Boundless from the
former owner, NCR Corporation ("NCR") (the "Boundless Acquisition"), for $5,000
in cash, an $8,000 mortgage note payable to NCR (the "NCR Note") and $5,472 of
mandatorily redeemable preferred stock of Boundless. Additionally, approximately
$441 in expenses associated with the purchase was 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 Boundless 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, are 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.
Boundless has 1,000 authorized shares of mandatorily redeemable preferred stock
(the "Boundless Preferred Stock"), all of which are issued to NCR and
outstanding. In connection with the Boundless Acquisition, NCR was granted a put
option (the "Put Option") to require Acquisition to purchase all of the
preferred stock of Boundless owned by NCR. In addition, NCR granted a call
option (the "Call Option") to Boundless that permitted Boundless 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 Boundless 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.
Expenses relating to this offering were approximately $1,343, of which RAS
received $945, consisting of a commission of 10%, a non-accountable expense
allowance of 3% of the gross proceeds, $250 as an investment banking fee and a
$240 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.
The Boundless Acquisition has been accounted for under the purchase method and,
accordingly, the operating results of the Company include the results of
operations of Boundless since the date of acquisition.
Continued
F-14
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
The following is a summary of the assets and liabilities of Boundless, as
acquired, as of the date of the acquisition:
Current assets $ 16,775
Property, plant and equipment, net 13,432
Other assets 2,448
------------------
Total assets $ 32,655
==================
Current liabilities $ 10,268
Long-term debt 8,000
Other liabilities 3,471
------------------
Total liabilities $ 21,739
==================
Mandatorily redeemable preferred stock $ 5,472
See Note 5 for an unaudited pro forma summary of consolidated results of
operations in connection with the Boundless 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), acquired
the Enterprise Integration Network technology (the "TradeWave Technology") from
the Microelectronics and Computer Technology Corporation ("MCC") (the "TradeWave
Acquisition") for approximately $1,300 plus royalties.
At the same time, TradeWave 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 focused on the
development of technology to intelligently navigate dynamic information networks
such as the Internet.
The purchase of the TradeWave Technology from MCC was funded in part through the
issuance of $1,000 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 the entire $1,300 purchase price of the TradeWave
Technology (inclusive of approximately $300 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 was considered a valuable component of TradeWave's 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 TradeWave's Virtual Private Internet solution integrating
applications, information servers, directory services and security ("Trade
VPI"). 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
$1,225 charge associated with in-process research and development.
Continued
F-15
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
The Company had continuing monetary obligations to MCC under the TradeWave
Acquisition Agreement and the Technology Agreement. The Release, Settlement and
Satisfaction of Indebtedness Agreement ("Release Agreement") dated March 5, 1997
with MCC released TradeWave, SunRiver and SunRiver Group from any and all
obligations in return for $500 and a non-exclusive license to the certain
software developed by TradeWave. SunRiver Group was a guarantor of the amounts
owed under the Technology Agreement.
In connection with the Digital Acquisition in October 1995, 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. In consideration for the release of
SunRiver Group's guarantee to MCC, the number of such warrants will be reduced
by the number of warrants equal in value to $500,000, determined under the
Black-Scholes valuation model or some other number of warrants determined by
independent advice regarding the fairness of such consideration.
5. Acquisition of Text Terminal Business From Digital Equipment Corporation
The Transaction
- ---------------
During October 1995, Boundless 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 Boundless. As no
manufacturing facilities were included in the Digital Assets, Boundless
transferred production of the acquired product lines from Digital's facilities
in the Far East to the Boundless plant in Hauppauge, New York.
Pursuant to a related supply agreement, Digital agreed to purchase from
Boundless at least 95 percent of Digital's worldwide requirements for text
terminals and related parts for a four-year period, with a minimum of 80,000
units of text terminals during the first year. The Company has guaranteed all of
the obligations of Boundless under the supply agreement.
Boundless and Digital also entered into agreements pursuant to which Digital (i)
manufactured for Boundless text terminals through January 30, 1996 and modules
until June 30, 1996; (ii) provided to Boundless certain technical, sales,
marketing and administrative services relating to text terminal products through
February 19, 1996 and (iii) is providing certain worldwide warranty and
post-warranty servicing on text terminals sold and designated for such servicing
by Boundless for a period of four years.
The purchase price of the Digital Assets, $18,697, included $7,481 for
inventory, $188 for other assets and $250 for intellectual property. The Company
recorded $10,777 in goodwill, which is the excess of the purchase price and
related direct costs of the acquisition of $2,199 over the fair value of net
assets acquired. In addition, Boundless is obligated to pay $347 for certain
tooling and equipment to be delivered by Digital by June 30, 1996.
The Financing
- -------------
Of the amount paid to Digital, $13,498 was paid in cash with $3,000 paid by the
issuance of 1,000,000 shares of the Company's common stock, which the Company
registered in July 1996, at its cost, for resale under applicable securities
laws. Boundless 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 and a revolving line-of-
credit providing for revolving loans of up to $20,000, based upon lending
Continued
F-16
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
formulas and subject to sub-limits and other terms as are set forth in the loan
outstanding amounts owed to Congress Financial Corporation ("Congress") under a
revolving line-of-credit, plus a $700 early termination fee, which the Company
recorded as an expense in October 1995. The Company recorded an expense of
approximately $282 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, which is being amortized on a straight-line basis
over the three-year term of such Bank Financing.
The Company guaranteed the obligations of Boundless under the Bank Financing,
which was collateralized by a pledge of all of the outstanding common stock of
Acquisition ("Boundless Common Stock"). Acquisition also guaranteed the
obligations of Boundless under the Bank Financing and collateralized its
guarantee with a pledge of all of the outstanding common stock of Boundless.
SunRiver Group also guaranteed the obligations of Boundless, 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 $3.69 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 and are being
amortized as debt issue costs.
The NCR Restructuring
- ---------------------
As a condition to the Bank Financing, Boundless, 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
Boundless from NCR.
Boundless has 1,000 shares of mandatorily redeemable preferred stock, all of
which are issued to NCR and currently outstanding. In the Restructuring (i) the
Company paid NCR $3,500 in cash; (ii) the Call Option permitting the Company to
purchase the preferred stock of Boundless owned by NCR was amended (the "Amended
Call Option") to reduce its aggregate exercise price to $3,555 and to change its
expiration date to the earlier of January 30, 1999 or the completion by
Boundless 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 $3,555, 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, 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) Boundless and its parent
companies agreed to pay NCR $497, 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 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
Boundless 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
Boundless common stock was canceled and the Boundless 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 Boundless, NCR shall be entitled to $3,555 before
any amount shall be paid to holders of the Boundless common stock. While the
Boundless preferred stock is outstanding, Boundless is restricted from creating
Continued
F-17
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
any shares of stock which shall be in any respect on parity with or have any
preferences to take priority over the Boundless preferred stock, or to alter in
any manner the rights or preferences of the Boundless preferred stock.
The Company recorded a charge of $1,668 to retained earnings at the date of the
Restructuring for the difference between the change in the carrying value of the
Boundless 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 made to NCR was paid by the Company from gross
proceeds of $4,250 received by the Company 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 (the "$2,500
Notes") and $750 (the "$750 Notes"), respectively. The $2,500 Notes were
converted on November 30, 1995 into 1,236,855 shares of common stock of the
Company determined by dividing $2,500 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 Notes were converted in November 1995 into 359,691
shares of common stock of the Company determined by dividing $750 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 by selling 472,589 shares of common stock. In addition, the
Company obtained bridge financing of $1,000 at 6% interest approximately ten
days before the close of the offerings. This loan was repaid from the proceeds
of the offerings described above.
In addition, warrants, valued at $661, 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 Boundless 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 that may
occur in the future.
<TABLE>
<CAPTION>
1995 1994
------------------ -----------------
<S> <C> <C>
Net sales $ 150,352 $ 144,263
Income (loss) from continuing operations 466 (5,431)
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 $ 7,482
Goodwill 11,028
Other assets 188
------------------
Total assets $ 18,698
</TABLE>
==================
Continued
F-18
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
6. GAI Partnership
Effective May 1995, Boundless and GA formed a limited liability company ("GAI")
with GA owning 51% and Boundless owning 49%. GAI was formed to allow GA to
acquire the former ADDS Pick based business owned by Boundless. This business
was acquired by Boundless from NCR in December 1994 along with a terminal
business. (See Note 1 and 3)
Under the terms of the operating agreement which governs the operation of GAI,
(the "Operating Agreement"), GAI operates and manages GA's and Boundless' Pick
business. Under the Operating Agreement, Boundless is entitled to receive cash
distributions from GAI in an amount equal to a percentage of GAI's net revenues,
which is payable whether or not GAI is profitable or generating positive cash
flow. The percentage of net revenues to which Boundless is entitled was 12% for
the first year of the Operating Agreement (subject to a minimum of $2,900 in the
first year only) and will decline annually thereafter in steps until it reaches
7% in the fifth year. However, the percentage of net revenues payable to
Boundless is subject to adjustment (upward or downward) under certain
circumstances. Subsequent to the fifth year of the Operating Agreement, the
percentage of net revenues to be paid to Boundless is to be determined by
negotiations between GA and Boundless. GA is entitled to retain all cash
generated by GAI, if any, after the payment to Boundless of the net revenue
percentage described above.
Under the Operating Agreement, the business and affairs of GAI are managed
exclusively by GA. However, in the event that GAI fails to achieve agreed upon
revenue or profit projections, Boundless has the right to thereafter jointly
manage GAI with GA. Further, upon the occurrence of certain other events,
including the failure of GAI to pay to Boundless the percentage of net revenues
to which Boundless is entitled, Boundless has the right to thereafter replace GA
as the sole manager of GAI. During the first year of the Operating Agreement,
Boundless paid a management fee of $1,031,000 in connection with GA's duties as
manager of GAI. However, subsequent to the first year of the Operating
Agreement, GA will not be entitled to any compensation for acting as manager of
GAI.
Boundless received cash distributions of $2,473 and $1,475 for the years ended
December 31, 1996 and 1995 and is included in product sales in the accompanying
consolidated statements of operations. The Company accounts for GAI partnership
revenue as a royalty rather than an equity investment due to the uncertainty
regarding the initial value of its contribution to the GAI partnership.
Continued
F-19
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
7. Inventories
The major components of inventories are as follows:
December 31,
--------------------------------------
1996 1995
------------------ -----------------
Raw materials and purchased components $ 12,845 $ 13,280
Finished goods 4,942 11,902
Demonstration equipment 396 222
Service parts 342 354
------------------ -----------------
$ 18,525 $ 25,758
================== =================
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in first-out basis.
8. Property and Equipment
Property and equipment consists of the following:
December 31,
---------------------------------------
1996 1995
------------------ -----------------
Land $ 3,780 $ 3,780
Buildings and improvements 6,175 5,893
Machinery and equipment 4,846 4,520
------------------ -----------------
14,801 14,193
Less accumulated depreciation and (3,327) (2,398)
amortization ------------------ -----------------
$ 11,474 $ 11,795
================== =================
9. Income Taxes
The provision for income taxes consisted of the following for the years ended
December 31:
1996 1995 1994
-------- -------- --------
Current:
Federal $ (340) $ 597 $ 126
State 413 431 11
------- ------- -------
73 1,028 137
------- ------- -------
Deferred:
Federal (3,176) (83) 44
State -- (29) 4
Valuation allowance 4,065 (1,121) --
------- ------- -------
889 (1,233) 48
------- ------- -------
$ 962 $ (205) $ 185
======= ======= =======
Continued
F-20
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
The provision for income taxes differs from the amount of income tax determined
by applying the statutory federal income tax rate to operations before income
taxes as a result of the following:
1996 1995 1994
---------- --------- ----------
Federal income tax at statutory rate $ (3,760) $ 463 $ 76
Goodwill amortization 186 136 4
Losses for which no tax benefit was provided - - 89
State income tax benefit, net
of federal income taxes 273 243 15
Other, net 423 74 1
Change in valuation allowance 3,840 (1,121) -
--------- ---------- ----------
Income tax expense (benefit) $ 962 $ (205) $ 185
========= ========== ==========
The income tax benefit of $205 for the year ended December 31, 1995 includes a
$393 tax benefit of an extraordinary loss and a $1,135 tax benefit from the
TradeWave discontinued operations which are reflected net of tax in the
accompanying consolidated statements of operations.
The components of the net deferred tax assets and liabilities were as follows:
December 31,
-------------------
1996 1995
-------- --------
Current deferred tax assets:
Inventory $ 2,524 $ 1,543
Accounts receivable 466 563
Warranties 723 562
Net operating loss carryforwards -- 53
Other 764 638
------- -------
Total current deferred tax assets 4,477 3,359
Current deferred tax liabilities:
Software capitalized and other (28) (257)
------- -------
Net current deferred tax assets 4,449 3,102
------- -------
Noncurrent deferred tax assets:
Net operating loss carryforwards 1,466 --
Property and equipment -- 9
Acquired research and development -- 430
------- -------
Total noncurrent deferred tax assets 1,466 439
Noncurrent deferred tax liabilities:
Property and equipment (2,075) (2,653)
------- -------
Net noncurrent deferred tax liabilities (609) (2,214)
------- -------
Net deferred tax assets 3,840 888
Less valuation allowance (3,840) --
------- -------
$ -- $ 888
======= =======
Continued
F-21
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
At December 31, 1996, the Company has recorded a 100% valuation allowance on the
net deferred tax asset since it could not be determined if the asset was more
likely than not to be realized.
The Company files a consolidated federal tax return. As of December 31, 1996,
the Company has net operating loss carryforwards of approximately $4,300 that
will expire during 2011. For the year ended December 31, 1996, the Company was
able to carryback $980 of its net operating losses, which resulted in a
receivable of approximately $340.
10. Debt
Notes Payable
- -------------
During the year ended December 31, 1996, the Company was in violation in
substantially all loan covenants, including maintaining specified levels of
tangible net worth, fixed charge coverage, interest coverage and cash flow
coverage. In March 1997 the revolving loan agreement was amended to revise the
loan covenants. The banks also waived all prior loan covenant violations through
that date. As a result, the Company has presented its current maturities of
long-term debt in accordance with the original terms of the agreement, which
were not affected by the amendment.
Notes payable at December 31, 1996 and 1995 consisted of a $20,000 revolving
credit agreement included in the Chase Credit Line 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 plus 1.25% or LIBOR plus 2.5% (8.00% at December 31, 1996). The
revolving loan outstanding at December 31, 1996 and 1995 was $13,950 and $8,000.
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 $4,050
and $4,274 outstanding at December 31, 1996 and 1995. The maximum amount of
additional credit available under the revolving loan at December 31, 1996 and
1995 was $4,607 and $6,500, 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 9.5%, 10.5% and 9.4%
for the years ended December 31, 1996, 1995 and 1994, respectively.
Long-term Debt
- --------------
Long-term debt at December 31, 1996 and 1995 consisted of the following:
Continued
F-22
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
1996 1995
------------ -----------
Note payable to AT&T-GIS, bearing interest at
8% payable quarterly, principal due on or before
January 31, 1999, collateralized by land and building $ 8,000 $ 8,000
Term loan payable to banks, collateralized by accounts
receivable, inventories and substantially all other
assets of the Company, bearing interest at a variable
rate payable quarterly (8.00 % at December 31, 1996) 13,382 20,000
Note payable to shareholder of SunRiver Group, bearing
interest at 9% payable quarterly, paid in June 1996 - 169
Other 9 50
------------ -----------
21,391 28,219
Less current maturities on long-term debt (8,009) (6,211)
------------ -----------
$ 13,382 $ 22,008
============ ===========
TradeWave had a non-interest bearing note payable (effective rate of 9%) to a
corporation in installments through 1997. The note had balances of $500 and $773
as of December 31, 1996 and 1995, respectively, and is included in the net
liabilities of discontinued operations in the accompanying Consolidated Balance
Sheets. This note was paid in full in March 1997.
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.
Boundless 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 Boundless may loan or advance
to the Company in a fiscal year is $200 less the total cash dividend Boundless
paid to the Company in that year. 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 Boundless under the Bank Financing,
which was collateralized by all of the outstanding common stock of Acquisition.
Acquisition also guaranteed the obligations of Boundless under the Bank
Financing and collateralized its guarantee with all of the outstanding common
stock of Boundless. SunRiver Group collateralized its guarantee of Boundless's
obligations to Chase with 21,439,380 shares of common stock of the Company.
Aggregate debt scheduled maturities at December 31, 1996 were as follows:
1997 $ 8,009
1998 5,382
1999 8,000
---------
$ 21,391
=========
Continued
F-23
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
11. Equity
At December 31, 1996 and 1995, stockholders' equity consisted of the following:
1996 1995
------------ ------------
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued $ - $ -
Common stock, $0.01 par value, 60,000,000 shares
authorized, 48,572,000 and 45,550,000 shares issued
at December 31, 1996 and 1995, respectively 486 456
Additional paid-in capital 31,440 23,769
Accumulated deficit (23,124) (11,388)
------------ ------------
Total stockholders' equity $ 8,802 $ 12,837
============ ============
The Company amended its Certificate of Incorporation during March 1995 to
authorize the Board of Directors to issue up to 1,000,000 shares of preferred
stock and 60,000,000 shares of common stock. The preferred stock may be issued
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, 1996.
The Company issued 288,000 shares of its common stock during December 1994,
valued at $0.50 per share, to a creditor in satisfaction of the outstanding
principal and interest owed by the Company as of that date.
The Company issued 300,000 shares of its common stock during December 1994,
valued at $0.50 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. At the time, Rosbro was a corporation
beneficially owned by the former Chairman of the Company.
The Company issued 200,000 and 225,000 shares of its common stock during August
1995 and January 1996, valued at $1.63 and $2.56 per share, to an individual
whose sons are significant shareholders of SunRiver Group, the majority
shareholder of the Company, which was charged to expense in connection with
special consulting services rendered in 1995.
The Company issued 17,000 and 115,464 shares of its common stock during 1995 and
1996, valued at $3.25 and $2.42 per share, to the former President of the
Company, which was charged to expense in connection with certain consulting
services rendered in 1995.
The Company issued 20,000 shares of its common stock during January 1996, valued
at $1.12 per share, to an investment advisor in connection with services
rendered in 1995.
The Company issued 10,000 shares of its common stock during January 1996, valued
at $1.94 per share, to the former audit firm of the Company.
The Company issued 60,000 shares of its common stock during July 1996, valued at
$5.00 per share, to MCC as payment of installment due on outstanding obligations
of TradeWave.
The Company issued 168,651 shares of its common stock on October 1996, valued at
$2.95 per share, to NCR as payment of dividends due on Boundless preferred stock
(See Note 3).
The Company completed several offerings of securities under Regulation S of the
Securities Act of 1933 during 1996 as follows:
Continued
F-24
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
1. The Company received gross proceeds of $1,000 by selling 594,243 shares of
common stock for $1.68 per share. Approximately $505 of the proceeds of
this offering was used to fund working capital of TradeWave. The balance of
the proceeds was used to repurchase 275,000 shares of restricted shares of
its common stock at $1.80 per share.
2. The Company received gross proceeds of $500 by selling convertible
non-interest bearing notes. During the year ended December 31, 1996, these
notes were converted into 254,826 shares of common stock. The proceeds of
this offering were used to repurchase 273,333 shares of common stock at
$1.80 per share.
3. The Company received gross proceeds of $1,000 by selling convertible non-
interest bearing notes. During the year ended December 31, 1996, these
notes were converted into 528,487 shares of common stock. A portion,
$810,000, of the proceeds of this offering was used to repurchase 176,667
shares of common stock at $1.80 per share. The balance of the proceeds was
used primarily to fund working capital of TradeWave.
12. Options and Warrants
In March 1995, the Company adopted an Incentive Stock Option Plan (the "1995
Plan") which permits the Board of Directors to grant performance shares, stock
awards, stock options, Stock appreciation rights 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. The exercise price of
each option granted is to be equal to or less than the market price of the
Company's stock on the date of grant. The terms of the options are generally
over five years with vesting occurring in 25% increments beginning one year
after the grant date.
Prior to the 1995 Plan, the Company had adopted the 1991 Employee and Director
Stock Option Plan (the "1991 Plan"). After the adoption of the 1995 Plan, the
Company amended the 1991 Plan, eliminating any further grants of options under
the 1991 Plan. As of December 31, 1996 there were 1,098,500 fully vested options
outstanding, expiring in 2002.
The Company has elected to continue to account for stock options issued to
employees in accordance with APB 25, "Accounting for Stock Issued to Employees".
During the years ended December 31, 1996 and 1995, all options issued to
directors, officers and employees were granted at an exercise price, which
equaled or exceeded the market price per share at the date of grant and
accordingly, no compensation was recorded.
Effective for the year ended December 31, 1996, the Company was required to
adopt the disclosure portion of FASB Statement 123, "Accounting for Stock-Based
Compensation". This statement requires the Company to provide pro forma
information regarding net loss applicable to common stockholders and loss per
share as if compensation cost for the Company's stock options granted had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weight average assumptions used for grants in 1996 and 1995 as follows:
1. Dividend yield of 0% for all years
2. Expected volatility of .71
3. Risk-free interest rates ranging from 5.22% to 5.83%
4. Expected terms ranging from 2 to 5 years.
Continiued
F-25
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
Under the accounting provisions of FASB Statement 123, the Company's net loss
applicable to common stockholders and loss per share would have been increased
to the pro forma amounts indicated below:
1996 1995
-------------- -------------
Net loss applicable to common stockholders
As reported $ (11,736) $ 168
Pro forma (13,263) (211)
Loss per share
As reported $ (0.25) $ 0.00
Pro forma (0.28) 0.00
A summary of the status of the Company's stock options and warrants as of
December 31, 1996 and 1995, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
Options 1996 1995
- ------- ------------------------------ ----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,937,500 $ 1.43 1,358,500 $ 1.56
Granted 4,039,117 1.83 2,639,600 1.36
Exercised (927,421) (0.95) - -
Forfeited (1,787,110) (1.87) (60,600) (1.35)
--------------- -------------- ------------- -------------
Outstanding at end of year 5,262,086 $ 1.68 3,937,500 $ 1.43
=============== ============== ============= =============
Options exercisable at end of year 3,100,401 $ 1.68 1,358,500 $ 1.56
=============== ============== ============= =============
Weighted average fair value
of options granted during the year $ 2.20 $ 1.24
============== =============
</TABLE>
<TABLE>
<CAPTION>
Warrants 1996 1995
- -------- ------------------------------ -----------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 7,536,593 $ 2.95 5,499,704 $ 2.76
Granted 325,000 2.69 2,113,889 3.66
Exercised (510,973) (2.79) - 0.00
Forfeited (680,000) (8.25) (77,000) $ (8.25)
--------------- -------------- ------------- -------------
Outstanding at end of year 6,670,620 $ 2.42 7,536,593 $ 2.95
=============== ============== ============= =============
Options exercisable at end of year 6,670,620 $ 2.42 6,036,593 $ 2.95
=============== ============== ============= =============
Weighted average fair value
of warrants granted during the $ 2.63 $ 3.68
year ============== =============
</TABLE>
Continued
F-26
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1996:
Options
- -------
Weighted
Number Average Number
Outstanding Remaining Exercisable
at December Exercise Contractual at December
31, 1996 Price Life (Years) 31, 1996
----------- -------- ------------ ------------
1,872,981 $ 1.35 3.16 933,064
900,000 1.50 2.60 900,000
1,050,000 1.57 5.97 250,000
131,000 1.63 2.19 131,000
12,500 1.75 2.20 12,500
55,000 2.06 2.59 55,000
715,000 2.13 3.07 605,000
277,500 2.56 3.21 167,500
230,305 2.82 3.81 41,520
17,800 3.28 3.84 4,817
----------- ------------
5,262,086 3,100,401
=========== ============
Warrants
- --------
Weighted
Number Average Number
Outstanding Remaining Exercisable
at December Exercise Contractual at December
31, 1996 Price Life (Years) 31, 1996
----------- -------- ------------ ------------
50,000 $ 1.00 0.38 50,000
350,000 1.65 0.38 350,000
4,174,704 1.84 7.94 4,174,704
50,000 2.41 2.07 50,000
147,916 2.69 2.11 147,916
50,000 3.00 2.00 50,000
45,000 3.63 1.83 45,000
1,000,000 3.69 3.80 1,000,000
210,000 3.78 1.80 210,000
525,000 3.88 1.80 525,000
68,000 6.60 0.88 68,000
----------- ------------
6,670,620 6,670,620
=========== ============
For the year ended December 31, 1996, in accordance with FASB Statement 123, the
Company is required to account for options issued to non-employees for services
rendered using the fair value method over their vesting period.
The Company granted an option to purchase 250,000 shares of common stock to a
consultant in December 1996, vesting immediately, with an exercise price of
$1.57. The option expires in December 2002. The option was granted for services
rendered during the year ended December 31, 1996. The Company recorded
compensation expense based on the fair value of the options on the grant date of
$250 using the Black-Scholes option-pricing model.
Continued
F-27
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
A warrant to purchase 75,000 shares of common stock of the Company at an
exercise price of $2.69 per share, exercisable through March 20, 1999, was
granted in February, 1996 in consideration for obtaining an equipment leasing
line of $1,000 for expansion requirements of TradeWave. The warrant was valued
at approximately $115.
In connection with the January 1996 offerings of securities under Regulation S
of the Securities Act of 1933, the Company issued warrants to financial advisors
to purchase 200,000 shares of common stock at exercise prices ranging from $2.41
to $2.69 per share, exercisable through February 1999. These warrants were
valued at approximately $326.
The Company issued warrants to purchase 50,000 shares of common stock in
consideration for services provided for financial public relations. The warrants
have an exercise price of $3.00 and are exercisable through December 1998. This
warrant was valued at approximately $50.
The warrants issued to non-employees were recorded based on the fair values of
the warrants on the grant date, using the Black-Scholes option-pricing model.
TradeWave adopted a 1995 Stock Option Plan during 1995. The discontinuance of
operations at TradeWave during December caused the options outstanding to be
without value.
13. 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
$15,454, $39,600 and $1,841 for 1996 and 1995 and the period from acquisition to
December 31, 1994, respectively. Purchases from NCR and its subsidiaries were
$2,440, $13,088 and $125 for those same periods, respectively. The Company had
accounts receivable outstanding from NCR and its subsidiaries of approximately
$2,422 and $5,166 at December 31, 1996 and 1995, respectively, and accounts
payable of $452 at December 31, 1995. In addition, the Company received cash
distributions from GAI of $2,473 and $1,475 for the years ended December 31,
1996 and 1995. The Company had a receivable from GAI of $963 as of December 31,
1996.
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 prices,
such percentage to be negotiated annually.
The former President of 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, including approximately $104
paid in cash and $335 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 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 at the date of grant for performing the
special services. The agreement terminated December 31, 1995.
Continued
F-28
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
14. 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 $636, $622, and $122 in 1996, 1995 and 1994,
respectively.
Future minimum rental commitments as of December 31, 1996 were as follows:
1997 $ 742
1998 718
1999 422
2000 198
2001 34
-----------
$ 2,114
===========
15. 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,
Capital agreed to assume the defense of those legal proceedings initiated prior
to the date of the acquisitions at its expense, including all potential
liability that may result from an adverse judgment in any of those 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.
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.
Net export sales were approximately $46,800, $15,912 and $1,127 for 1996, 1995
and 1994, 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:
Continued
F-29
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
1996 1995 1994
------------- ---------- ---------
Middle East 1% 0% 0%
Europe 30% 13% 5%
Africa 1% 0% 0%
Canada 0% 1% 6%
Other 2% 3% 3%
============= ========== =========
Total 34% 17% 14%
============= ========== =========
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. During
the year ended December 31, 1996, the Company made a contribution of $17 to the
plan. No contributions were made during the year ended December 31, 1995. The
Company does not intend to make a contribution for the year ended December 31,
1997.
18. Discontinued Operations
The Company adopted a formal plan in December 1996 to discontinue operations by
March 31, 1997 of its TradeWave subsidiary. The plan contemplated the sale of
the business or its assets if possible, or a dissolution through a Voluntary
Petition for Bankruptcy under Chapter 7 of the Bankruptcy Code. All TradeWave
employees were terminated on March 5, 1997 and a small group of consultants were
retained to effect an orderly cessation of its customer obligations.
The Company does not anticipate selling TradeWave for an amount that would be
more beneficial than declaring bankruptcy. Therefore the loss generated by
TradeWave for the year ended December 31, 1996, assumes that TradeWave will file
under Chapter 7 of the Bankruptcy Code.
The assets of TradeWave, consisting primarily of equipment and accounts
receivable, were written down to their liquidation value, resulting in a loss of
approximately $360. All unsecured liabilities that could be discharged through
bankruptcy have been written off, resulting in income of approximately $1,470.
The debts and commitments that were guaranteed by the Company and SunRiver
Group, including the TradeWave note payable to MCC, severance pay and lease
commitments, totaling approximately $3,492 are included in the accompanying
consolidated balance sheet. The Company's management believes that the disposal
or liquidation of TradeWave will be accomplished with no significant additional
losses accruing to the Company.
The estimated loss on the disposal of the discontinued operations of
approximately $3,860 represents the estimated loss on the disposal of the assets
of TradeWave and a provision of approximately $4,200 for the expected operating
loss during the phase out period from December 1996 through March, 1997, when
operations ceased. Approximately $2,300 of the operating loss was incurred
during 1996.
Operating results of TradeWave for the eleven months ended November 30, 1996 are
reflected separately in the accompanying Statements of Operations. The
Consolidated Balance Sheets and Consolidated Statements of Operations for 1995
have been restated for the period from inception of TradeWave, April 1995,
through December 31, 1995.
Net sales of TradeWave for 1996 and 1995 were $2,086 and $1,165.
Continued
F-30
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
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.
Pursuant to the SunRiver Group Acquisition Agreement, the Company disposed of
substantially all of its interest in diamond mining properties in Sierra Leone
(owned through Capital and its subsidiary 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 Company 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, 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, 1996 and 1995 are
summarized below:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Loss on discontinued operations $ (4,243) $ (2,242)
Gain (loss) on disposal of part of discontinued operations (5,409) 1,372
================== =================
Loss from discontinued operations $ (9,652) $ (870)
================== =================
</TABLE>
No tax benefit is given for the loss on discontinued operations of TradeWave for
the year ended December 31, 1996, as it could not be determined if it was more
likely than not that the net operating loss would be realized. The loss on the
discontinued operations of TradeWave for the year ended December 31, 1995 is
reflected net of tax benefit of $1,135.
The gain on the sale of a portion of the discontinued operations of the diamond
mining property for the year ended December 31, 1995 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.
No tax benefit is given for the loss on discontinued operations for the year
ended December 31, 1995, as these operations are not included in consolidation
for tax purposes.
19. Subsequent Events
Regulation S Offerings
- ----------------------
The Company completed two offerings of securities under Regulation S of the
Securities Act of 1933 (a "Regulation S Offering") subsequent to December 31,
1996 described below:
1. In February 1997, the Company received gross proceeds of $1,000 by selling
convertible notes, bearing interest at 8%, which require the holders to
convert the notes by December 31, 1998 into common stock.
Continued
F-31
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(In thousands, except share data)
2. In March 1997, the Company received gross proceeds of $400 by selling
convertible notes, bearing interest at 8%, which require the holders to
convert the notes by December 31, 1998 into common stock. In connection
with this offering, the Company issued warrants to a financial advisor to
purchase 33,000 shares of common stock at an exercise price of $1.375 per
share, exercisable through February 28, 2000. These options were valued at
approximately $13. The proceeds of these offerings will be used by the
Company to finance the discontinuance of operations at TradeWave.
Employee Stock Options Granted and Warrants Granted
- ---------------------------------------------------
Options to purchase a total of 300,000 shares of common stock of the Company
were granted subsequent to December 31, 1996 under the 1995 Plan to employees.
The options vest through the year 2001, and are exercisable through the year
2003 at an exercise price of $1.50.
A warrant to purchase 300,000 shares of common stock of the Company at an
exercise price of $1.87 per share, exercisable through January 31, 2002, was
granted in consideration for ongoing services provided in the area of financial
consulting. The warrant was valued at approximately $487.
Continued
F-32
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(In thousands)
December 31,
---------------------------
ASSETS 1996 1995
------------- -------------
Current assets:
Cash and cash equivalents $ 6 $ 106
Income tax refund 340 --
-------- --------
Total current assets 346 106
Investments in and advances to subsidiaries
(elimitated in consolidation):
Investments, at equity (4,154) 5,170
Advances to subsidiaries, net 12,752 8,339
Other assets 84 40
-------- --------
$ 9,028 $ 13,655
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses 226 818
-------- --------
Total current liabilities 226 818
-------- --------
Total liabilities 226 818
Commitments and contingencies
Stockholder's 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, 48,572,315 and 45,550,214 shares issued
at December 31, 1996 and 1995, respectively 486 456
Additional paid-in capital 31,440 23,769
Accumulated deficit (23,124) (11,388)
-------- --------
Total stockholder's equity 8,802 12,837
-------- --------
$ 9,028 $ 13,655
======== ========
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, 1996, 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
(In thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales $ -- $ -- $ 3,180
Cost of sales -- -- 1,692
-------- -------- --------
Gross margin -- -- 1,488
Expenses:
Operating 2,367 651 1,636
Interest 52 2 33
Other (income) and expenses (323) -- 78
-------- -------- --------
2,096 653 1,747
-------- -------- --------
Loss before benefit for income taxes and other items below (2,096) (653) (259)
Benefit (provision) for income taxes (191) 215 --
-------- -------- --------
Loss before equity in loss from consolidated subsidiaries (2,287) (438) (259)
Equity in income (loss) of consolidated subsidiaries 203 (543) 233
-------- -------- --------
Loss from continuing operations (2,084) (981) (26)
Equity from gain (loss) on disposal of discontinued operation (9,652) 1,149 --
-------- -------- --------
Net income (loss) $(11,736) $ 168 $ (26)
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding 47,023 43,656 27,186
======== ======== ========
Earnings (loss) per share:
From continuing operations $ (0.04) $ (0.02) $ 0.00
From disposal of discontinued operations (0.21) 0.02
-------- -------- --------
Net income (loss) $ (0.25) $ 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, 1996, which information is included elsewhere herein.
S-2
<PAGE>
SUNRIVER CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
---------- --------- ----------
<CAPTION>
<S> <C> <C> <C>
Net cash flows used in operating activities (10,747) (1,620) 214
Cash flows from investing activities:
Decrease (increase) in net advances to subsidiaries (4,113) (5,629) 3,700
Increase in investment in consolidated subsidiaries, net 9,324 508 (5,678)
Payments for other assets (44) -- (22)
------- ------- -------
Net cash used in investing activities 5,167 (5,121) (2,000)
Cash flows from financing activities:
Proceeds from sale of convertible notes 1,500 4,575
Proceeds from issuance of common stock 3,980 2,164 1,826
------- ------- -------
Net cash provided by financing activities 5,480 6,739 1,826
------- ------- -------
Net increase (decrease) in cash and cash equivalents (100) (2) 40
Cash and cash equivalents at beginning of year 105 107 67
------- ------- -------
Cash and cash equivalents at end of year 5 105 107
======= ======= =======
Non-cash transactions:
Conversion of convertible notes into common stock 1,500 4,575
Compensatory value of options and warrants 526 3,216
Common stock issued for consulting services 898 380
Accrual of services to be paid in common stock -- 857
Distribution of assets of discontinued operations -- 2,358
Issuance of common stock in Digital purchase -- 3,000
Issuance of common stock for preferred dividend of subsibiary 497
Issuance of common stock for TradeWave obligation 300
</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, 1996, 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,
(In thousands)
Balance at
Beginning of Balance at
Description Period Addition Deductions End of Period
- -------------------- ------------- -------- ---------- -------------
Allowances:
Doubtful accounts:
1994 - 1,176 (A) 109 (B) 1,067
1995 1,067 1,072 732 (C) 1,407
1996 1,407 150 330 (C) 1,227
Inventory reserves:
1994 - 4,046 (D) 48 3,998
1995 3,998 99 1,065 (E) 3,032
1996 3,032 3,845 1,024 (E) 5,853
A) Includes $1,128 of allowance for accounts acquired in the Boundless
Acquisition.
B) Includes accounts written off during the period.
C) Includes accounts written off during the period.
D) Includes $4,004 of reserves for inventory acquired in the Boundless
Acquisition.
E) Includes inventory written off during the period.
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 1997
SUNRIVER CORPORATION
By: /s/
-------------------------------------
Leonard Mackenzie
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/
- --------------------- Chairman of the Board of Directors, March 28, 1997
Leonard Mackenzie President and Chief Executive Officer
/s/
- ---------------------- Vice-President - Finance, Chief March 28, 1997
Wayne Schroeder Financial Officer, Secretary and
Director (Principal Financial and
Accounting Officer)
/s/
- ---------------------- Director March 28, 1997
Gary Wood
/s/
- --------------------- Director March 28, 1997
Daniel Matheson
/s/
- --------------------- Director March 28, 1997
Jeffrey K. Moore
<PAGE>
EXHIBIT INDEX
-------------
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.
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.
E-1
<PAGE>
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.
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).
E-2
<PAGE>
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).
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[12] 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).
E-3
<PAGE>
4(e)[3] Amended and Restated Voting Trust Agreement
4(f)[12] Agreement of SunRiver Group, Inc. not to exercise warrants to
purchase 2,654,565 shares of SunRiver Corporation Common Stock.
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.
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.
E-4
<PAGE>
10(n)[14] Form of Separation Agreement and General Release, dated as of
November 1, 1996, entered into by SunRiver Corporation, Boundless
Technologies, Inc. and TradeWave Corporation with Gerald
Youngblood, Roger Hughes, John Osborne and Roy Smith (filed as
Exhibit 10(a) to the Registrant's Form 10-Q for the quarter ended
September 30, 1996).
11** Statement re Computation of Per Share Loss. See Consolidated
Financial Statements.
16[4] Letter of Philip Kempisty, former accountant to All-Quotes, Inc.,
regarding change of the Company's certifying accountant.
16(b)[13] Letter of Coopers & Lybrand L.L.P. regarding change of the
Company's certifying accountant.
21[9] List of Subsidiaries
23** Consent of BDO Seidman, LLP.
27** Financial Data Schedule.
- ----------------------
* 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 on Form S-1 (File No. 33-80319).
E-5
<PAGE>
[12] Incorporated by reference to Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 33-80319).
[13] Incorporated by reference to the Registrant's Current Report on
Form 8-K dated December 17, 1996.
[14] Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
E-6
<PAGE>
Exhibit 23 to 1996 10-K
CONSENT OF INDEPENDENT ACCOUNTANTS
SunRiver Corporation
We hereby consent to the incorporation by reference in the
registration statement of SunRiver Corporation on Form S-8 (File No. 33-95846)
of our report dated March 21, 1997 on our audits of the consolidated financial
statements and schedules of SunRiver Corporation and Subsidiaries as of December
31, 1996 and for the year ended December 31, 1996, which report is included in
this Annual Report on Form 10-K.
BDO SEIDMAN, LLP
Austin, Texas
March 21, 1997
<PAGE>
EXHIBIT 27 TO 1996 10-K
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
MULTIPLIER 1,000
TABLE
S C
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END DEC-31-1996
PERIOD-END DEC-31-1996
CASH 5,213
SECURITIES 0
RECEIVABLES 23,273
ALLOWANCES 1,227
INVENTORY 18,525
CURRENT-ASSETS 46,040
PP&E 14,801
DEPRECIATION 3,327
TOTAL-ASSETS 69,525
CURRENT-LIABILITIES 42,868
BONDS 13,382
PREFERRED-MANDATORY 3,555
PREFERRED 0
COMMON 486
OTHER-SE 8,316
TOTAL-LIABILITY-AND-EQUITY 69,525
SALES 130,733
TOTAL-REVENUES 138,255
CGS 107,029
TOTAL-COSTS 109,668
OTHER-EXPENSES 25,388
LOSS-PROVISION 0
INTEREST-EXPENSE 3,794
INCOME-PRETAX (625)
INCOME-TAX 962
INCOME-CONTINUING (1,587)
DISCONTINUED (9,652)
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (11,239)
EPS-PRIMARY (0.25)
EPS-DILUTED (0.25)
