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, 1997
Commission File Number 0-17977
BOUNDLESS 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.)
100 Marcus Blvd. Hauppauge, NY 11788p Code)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 342-7400
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. [ ]
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 4,
1998, is $22,522,042.
As of March 4, 1998, the registrant had 5,139,228 shares of Common
Stock, $.01 par value per share, outstanding.
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PART I
ITEM 1. BUSINESS
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General
Boundless Corporation, formerly known as SunRiver Corporation (the
"Company"), is engaged, through its subsidiary, Boundless Technologies, Inc.
("Boundless"), in designing and manufacturing computer terminals for business
use. The Company's general strategy is to provide highly efficient, low cost
access to corporate computing environments, including client/server, mainframes,
LANS, WANS, intranets and the Internet.
The 1997 fiscal year has been one of turnaround for the Company.
Leveraging the changes and internal restructuring undertaken in 1996, the
Company recorded quarterly and full-year profits in 1997. During 1997 the
Company released the second generation of its Windows-based terminals,
participated in a number of important tradeshows showcasing this new computing
environment, and forged important technological and marketing partnerships to
strengthen its position in the emerging network computing market. Also during
1997, the Company finalized the discontinuation of the operations of TradeWave
Corporation, renamed OTW Corporation ("OTW"), with the sale of certain assets to
Florida-based CyberGuard Corporation for a combination of cash, a royalty on
future revenues and the assumption of certain liabilities.
Boundless principally designs, assembles, sells and supports (i) ANSI/ASCII
desktop computer display terminals, which generally do not have graphics
capabilities, although some have limited graphics capabilities ("General Display
Terminals"); (ii) desktop display terminals that are significantly smaller and
have less processing power and memory than a general purpose PC but that enable
simple, easy and cost-effective access to corporate computing environments
("Windows(R) - based Terminals"), and software supporting Windows(R) - based
Terminals; and (iii) other terminal products that are used in multi-user,
personal computer and mini-computer-based environments ("MultiConsole
Terminals"). The Company is a limited partner in a partnership (the "GAI
Partnership") formed by Boundless and General Automation, Inc. ("GA") and
managed by GA. The GAI Partnership designs, integrates, sells and supports
multi-user computer systems that can manage large volumes of data running
Boundless' and GA'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, subsequently renamed Morgan Kent Group, Inc. ("Morgan Kent
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 no manufacturing facilities were included in the Digital
Acquisition, Boundless has transferred all production of the VT and Dorio
product lines from Digital's facilities in the Far East to Boundless' plant in
Hauppauge, New York.
Based on independent research results, the Company's share of the 1996
General Display Terminal market worldwide, in the U.S., and in Europe increased
to 36%, 34% and 43%, respectively. As a result, the Company believes it has the
second largest market share worldwide and in the U.S., and the largest market
share in Europe, of General Display Terminals. 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.
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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 Windows(R)-based Terminals are being
marketed by Boundless primarily to telecommunications, retail, financial,
general services, 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.
On March 26, 1998, the Company effected a one-for-ten reverse split
(the "Reverse Split") of its Common Stock. All information contained within this
Annual Report on Form 10-K has been restated to reflect retroactive application
of the Reverse Split unless otherwise noted.
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 the GAI Partnership and acquisitions and dispositions
by the Company since December 1994.
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. As of December 31, 1997, the Company had
a tangible net worth of $6,979,687 and total liabilities of $35,586,183. The
Company's cash requirements at December 31, 1997 included repayment of the
remaining balance of $3,250,000, plus interest, of the original $20,000,000 term
loan, under its bank credit line (the "Chase Credit Line") with The Chase
Manhattan Bank, ("Chase") , in four quarterly installments; repayment of a
revolving loan under the Chase Credit Line of $7,650,000, 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, $.01 par value per share ("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. For the years ended December 31, 1997, 1996 and 1995
the Company recorded earnings/(loss) available to common shareholders of
approximately $4,386,000, ($11,736,000), and $168,000, respectively. 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 OTW
and the refinancing of debt in connection with the acquisition of assets from
Digital and non-recurring charges of approximately $8,400,000 in the quarter
ended December 31, 1996 relating to the restructuring of the Company and the
discontinuance of OTW's operations. Prior to the Boundless and SunRiver Group
Acquisitions, ADDS recorded substantial losses and the results of operations of
Morgan Kent Group were not material. Accordingly, the Company believes a longer
operating history is necessary for a meaningful evaluation of the Company's
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
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Strategy. Approximately 84% of the Company's sales for the year ended
December 31, 1997 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 Windows(R)-based Terminals. 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 Windows(R)-based Terminals. There can
be no assurance that the Company's strategy is valid. See "-Products and
Services - Windows(R)-based Terminals."
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. IBM, NCR and Digital were the
Company's most significant customers in 1997, accounting for approximately 16%,
6% and 4%, 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.
On January 20, 1998, Compaq Computer Corp. ("Compaq") announced a
Letter of Intent for the purchase of Digital. The Company has no knowledge of
Compaq's intentions with respect to Digital's sales, marketing or product
strategies. Accordingly, there can be no assurance that the existing business
relationship between the Company and Digital will not be disrupted. The loss of
IBM, 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 their 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. Approximately $6,600,000 was charged to operations during the
quarter ended December 31, 1996, when the Company decided to discontinue OTW's
business because the Company decided that the resources necessary to bring OTW's
products to market should instead be allocated to the Company's core business
conducted by Boundless. Furthermore, Boundless established inventory reserves of
approximately $2,200,000 in the fourth quarter of 1996 because of obsolescence
resulting from technological change.
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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 and Windows(R)-based Terminals, accounted for approximately
19% and 16%, respectively, of the dollar amount of the Company's total purchases
in 1997 of subassemblies and components. 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 effect on the Company's business.
Research and Development. There has been substantial investment in
research and development of the Company's existing products by Morgan Kent
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 "-Manufacturing - Research and Development".
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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations."
Control by Morgan Kent Group. Morgan Kent Group owns approximately 51.4%
(approximately 53.8% on a fully diluted basis) of the outstanding shares of the
Company's Common Stock (including 307,502 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. Morgan
Kent Group's control of the Company may have an adverse effect on the market
price of the Common Stock due to the perception by existing or potential
stockholders that influencing or changing the Company's management or policies,
without Morgan Kent Group's consent, would be difficult; or the perception that
public sales of significant amounts of Common Stock by Morgan Kent Group is
likely. Such control would likely discourage hostile bids for control of the
Company in which stockholders may receive premiums for their shares of Common
Stock. See "Security Ownership of Certain Beneficial Owners and Management" 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 businesses similar to the Company's
business. Various factors and events may have a significant impact on the market
price of the Common Stock including fluctuations in the prices of computer
industry stocks, generally; announcements by the Company, its suppliers or its
competitors concerning quarterly and year end results of operations;
technological innovations or the introduction of new products; shortages or
failure of components or subassemblies; and public concern about the economy,
generally. See "Market for Registrant's Common Equity and Related Stockholder
Matters."
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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," "will" 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 Windows(R)-based
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 1997, sales to NCR constituted approximately
6% 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. However, Digital can
terminate the agreement for cause without compensation to the Company. Sales of
General Display Terminals to Digital constituted approximately 3% of total
General Display Terminal sales for 1997.
Network Graphics Displays. The Company's Network Graphics Displays are
a high resolution, high performance, graphical workstation for use in networked
computer environments. Sales of the Company's Network Graphics Displays have
generally been limited to a few large telecommunications customers. Due to the
small customer base, the low margins associated with Network Graphics Displays,
and the emergence of Windows(R)-based Terminals, the Company announced a
discontinuation of this product family in early 1998.
Windows(R)-based Terminals. Recent technological advances have enabled the
Company, and others, to develop hardware and software 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. As these technological advances allow the
desktop display device, or client, to be configured with less memory and
processing power, as compared to traditional PC configurations, they are
referred to as network computers or thin client devices ("thin clients"). Thin
clients, whose applications are executed exclusively on the server using
software from Microsoft or Citrix Systems, are called Windows(R)-based
Terminals. The Company's Windows(R)-based Terminals have no applications
storage, utilize the network servers for processing and are significantly
smaller than a general purpose PC. They use Intel and Intel-compatible
processors. A second generation Windows(R)-based Terminal, the Viewpoint(R) TC,
was released in the second quarter of 1997 that provides terminal users with a
General Display Terminal replacement, that maintains 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' network
administration software, called the Viewpoint(R) Administrator, that is
downloaded from the network server. The Company believes that for the following
primary reasons, Windows(R)-based Terminals, 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 Windows(R)-based Terminals offer a lower total cost of ownership than
PCs because:
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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 Windows(R)-based Terminals have the functionality and
performance that businesses generally expect from PCs.
o Windows(R)-based Terminals 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 Windows(R)-based Terminals include
retail, services, financial, education, healthcare, telecommunications and
transportation customers 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 Morgan Kent 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 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. Boundless is a limited partner with GA, the managing
partner, in 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 GA'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 GA,
subject to consultation from time to time with Boundless.
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 Windows(R)-based Terminals. Depot
service during normal business hours is also provided within the United States
by the Company for its desktop terminals.
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Percentage of Total Revenues. The table below sets forth, for each of
the last three years ended December 31 the percentage of total revenue
contributed by those classes of similar products or services which accounted for
10% or more of consolidated revenue in any of such years. Information for the
years ended December 31, 1996 and 1995 is based upon the consolidated operations
of the Company excluding revenue generated by OTW and by the General Display
Terminal business of Digital, prior to the Digital Acquisition in October, 1995.
General Network
Display Graphics Professional
Period Terminals Displays Services
- ------ --------- -------- --------
1997 83.6% 5.9% 3.7%
1996 80.0% 8.6% 5.0%
1995 49.8% 28.5% 13.5%
Foreign Sales. Net foreign sales were approximately $30,911,000,
$47,500,000 and $15,912,000 for 1997, 1996 and 1995, respectively. The tables
below set forth for each of the last three years ended December 31 the
approximate percentage of total revenue attributable to foreign sales and the
percentage attributable to the European region.
% of Total Revenue
------------------
Period Total Europe
- ------ ----- ------
1997 31.6% 27.0%
1996 33.9% 29.6%
1995 16.6% 13.0%
The increases in 1997 and 1996 versus 1995 are attributable to sales
of VT and Dorio General Display Terminals, sales of which have historically been
strong 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
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, 1997 totaled approximately
$7,345,000 as compared to $9,048,000 at December 31, 1996. Approximately
$6,910,000 of the Company's backlog at December 31, 1997 was for General Display
Terminals.
The Company is using approximately 90,000 of its 155,000 square feet
of space in the Hauppauge, NY, facility for manufacturing and has the capacity
to manufacture approximately 1,000,000 units per year.
Suppliers. The Company purchases subassemblies and components for its
products 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 and Windows(R)-based Terminals, accounted for approximately
19% and 16%, respectively, of the total dollar amount of the Company's total
purchases in 1997 of subassemblies and components. 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
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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. During 1995, 1996 and 1997, the Company's
cost of warranty repairs was approximately 1.2%, 2.4% and 2.0%, 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.
Research and Development. During 1997, 1996 and 1995, the Company
expended approximately $2,912,000, $4,855,000 and $4,569,000, respectively, on
research and development activities. Not included in the foregoing are research
and development expenses incurred by OTW. As a part of the Company's 1996
restructuring programs, the Company consolidated its research and development
activities by closing its Orlando, Florida facility (the Company's primary
Network Graphics Displays development center), and reducing its research and
development personnel from 55 to 24. Boundless' research and development
activities have historically related primarily to General Display Terminals and
Network Graphics Displays. Because General Display Terminals are mature
products, development activities over the past year have only included
enhancements to the existing product family, freeing resources for development
of the Compoany's Windows(R)-based Terminals. The Company intends to devote more
efforts to developing and acquiring new products and technologies that can
shorten the time-to-market of the Company's products. 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, that 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 dispersed locations in the United States and a European
office in the Netherlands. During 1997, the Company expanded its marketing
efforts to include South America, Asia-Pacific, 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 entered into 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.
8
<PAGE>
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 Windows(R)-based
Terminals, the Company emphasizes total cost of ownership, ease of
administration, security and the ability to access numerous applications. The
Company's Windows(R)-based Terminals can access the more than 100,000
applications that run under Microsoft Windows, including Windows NT and Windows
95. The Company's Windows(R)-based Terminals also provide access to UNIX and
legacy applications. The Company believes its expertise in integrating
Windows(R)-based Terminals 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 General Display Terminals is the primary target
market for its Windows(R)-based Terminals. 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.
The Company's business is not seasonal. The third quarter of the
calendar year contributes slightly less revenue, as a percent of total year
revenues, due to extended vacation periods in Europe, where sales of the
Company's VT/Dorio products are strong. Other 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 Windows(R)-based Terminals are Wyse, Neoware Systems, Inc., and Network
Computing Devices, Inc. The Company anticipates additional competitors, such as
Sun Microsystems, will enter the network computer market in 1998 and thereafter.
The Company's Windows(R)-based Terminals also compete with low-cost PCs and
traditional higher-cost PCs. Customer purchase criteria for Windows(R)-based
Terminals are primarily based upon reduced 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
The Company owns over 30 patents issued in the United States and
various foreign countries, none of which is believed to be material to its
business. 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, Viewpoint, VT and Dorio are registered in the
United States Patent and Trademark Office and in a number of foreign countries.
Environmental Regulation
Amounts incurred by Boundless in complying with federal, state and
local legislation pertaining to protection of the environment during the past
three years did not have a material effect upon capital expenditures or the
financial condition of the Company.
Employees
At December 31, 1997, the Company had approximately 325 full-time
employees engaged as follows: 26 in product design and engineering, 216 in
manufacturing and repair services, 48 in sales, systems services and marketing
and 35 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.
9
<PAGE>
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. The Company also leases approximately 8,303 square feet
of office space in Austin, Texas. The four-year lease for this facility expires
in 1998. The Company's current annual rent for the Austin facility is
approximately $124,548. The Company leases four other small facilities
throughout the United States for depot repair and support services. The annual
lease commitments for these facilities are not material.
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 it 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted during the fourth quarter of 1997 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 Reverse Split became effective March 26, 1998. Unless otherwise
noted, all information in this Annual Report on Form 10-K has been restated,
applying retroactive treatment of the Reverse Split.
The Company's Common Stock is quoted on The Nasdaq SmallCap Market
under the symbol BDLS. As of February 27, 1998, there were approximately 984
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. Price per share information has been restated
to give effect to the Reverse Split.
Year Ended December 31, 1997: High Low
---- ---
First quarter.................................... $19.38 $10.31
Second quarter................................... $15.94 $ 6.56
Third quarter.................................... $15.94 $ 7.19
Fourth quarter................................... $16.25 $ 6.56
Year Ended December 31, 1996:
First quarter.................................... $30.00 $22.50
Second quarter................................... $93.75 $20.00
Third quarter.................................... $83.75 $31.25
Fourth quarter................................... $36.25 $13.12
10
<PAGE>
The last sale price of the Company's Common Stock on March 4, 1998 was $ 9.06.
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."
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 years ended December 31, 1997, 1996
and 1995 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, 1994 and 1993 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.
For accounting purposes the SunRiver Group Acquisition has been
treated as a recapitalization of the Company with Morgan Kent 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 Morgan Kent Group. Financial information presented for
periods ended on December 31, 1994 includes the consolidated operations of
Morgan Kent 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.
11
<PAGE>
Consolidated Statement of Operations Data
For the years ended December 31:
(000's omitted)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $98,271 $138,225 $94,957 $8,344 $2,814
Gross margin 24,766 28,557 25,573 3,455 1,177
Operating expenses:
Sales and marketing 7,417 10,433 7,940 1,092 321
General and administrative 6,213 8,120 6,337 992 409
Research and development 2,912 4,855 4,569 990 493
Other nonrecurring charges (255) 1,980 (572) 61 (11)
------ ----- -------- ------ ------
Total operating expenses 16,287 25,388 18,274 3,135 1,212
------ ------ ------ ------ ------
Operating income (loss) 8,479 3,169 7,299 320 (35)
Interest expense (3,730) (3,794) (1,907) (97) (35)
------- ------- ------- ---- ----
Income (loss) from continuing
operations 4,749 (625) 5,392 223 (70)
Income tax expense (134) 962 (1,323) (185)
Loss from discontinued operations (9,652) (870)
Gain (loss) on extinguishment of debt - - (589) - -
------- ------- ------- ---- ----
Net income (loss) $4,883 $(11,239) $2,610 $38 $(70)
====== ========= ====== === =====
Earnings (loss) per common share from
continuing operations:
Basic $.89 $(.44) $.37 $(.01) $(.03)
==== ====== ==== ====== ======
Diluted $.86 $(.44) $.35 $(.01) $(.03)
==== ====== ==== ====== ======
Earnings (loss) per common share: Basic
Diluted $.89 $(2.50) $.04 $(.01) $(.03)
==== ======= ==== ====== ======
$.86 $(2.50) $.04 $(.01) $(.03)
==== ======= ==== ====== ======
Consolidated Balance Sheet Data
At December 31:
(000's omitted) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital $8,780 $3,172 $15,416 $6,764 $(63)
Total assets 54,548 69,525 75,856 37,171 940
Revolving credit loan 7,650 13,950 8,000 4,655 -
Long-term obligations 10,288 14,300 25,492 16,287 119
Mandatorily redeemable preferred stock 3,555 3,555 3,555 5,536 -
Total long-term obligations 13,843 17,855 29,047 21,823 119
Stockholders' equity (deficit) $15,407 $ 8,802 $12,837 $2,386 $39
</TABLE>
12
<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 the GAI Partnership and acquisitions and dispositions
by the Company since December 1994.
Results of Operations
The numbers and percentages contained in this Item 7 are approximate. Dollar
amounts are stated in thousands.
Charges Made in the Quarter Ended December 31, 1996
The Company recorded nonrecurring charges of $8,915 in the quarter ended
December 31, 1996 as follows:
1. $1,473 relating to severance costs associated with a reduction-in-force
affecting 130 employees at Boundless in December 1996;
2. $331 relating to the closing of Boundless' Orlando, Florida, facility;
and
3. $7,111 relating to the discontinuation of operations, in December, 1996,
of OTW. See Note 18 of Notes to Consolidated Financial Statements.
For purposes of classification in the Consolidated Statements of Operations
for the years ended December 31, 1997, 1996, and 1995, items 1 and 2 have
been included in "Other nonrecurring charges". Item 3 is included in "Loss
from discontinued operations."
Years Ended December 31, 1997 and 1996
Revenues: Revenues for the year ended December 31, 1997 were $98,271,
as compared to $138,225 for the year ended December 31, 1996.
Sales of the Company's General Display Terminals declined to $82,200
for the year ended December 31, 1997 from $110,671 for the year ended December
31, 1996, despite a 35% increase in sales to IBM. The decline is primarily
attributable to a reduction in sales to Digital of $16,954, resulting from
Digital's purchasing, during the fourth quarter of 1996, a substantial amount of
product to satisfy its obligations under the Digital Supply Agreement for 1996.
These purchases satisfied Digital's requirements for the majority of 1997. In
addition, sales of the Company's VT/Dorio product fell $10,496 in 1997 following
substantial sales of this product during the first quarter of 1996 driven from
pent-up demand during the transition of the product line to the Company's
Hauppauge manufacturing facility. Sales in 1997 of General Display Terminals to
NCR declined $2,646 from 1996. The decline in sales to NCR was expected and
relates to the disruption caused by the split-up of AT&T Corporation and NCR's
change in focus from Unix to NT-based servers.
13
<PAGE>
Based on independent research, overall industry demand for the General
Display Terminals will continue to decline as competing technologies, including
Windows(R)-based Terminals, gain market share. Despite this industry decline,
sales of General Display Terminals for 1998 are expected to approximate 1997
results. The Company has increased its marketshare over the last two years in
part because of enhanced performance, and additional features, including
Microsoft Windows(R) NT and Internet support, that allow General Display
Terminals to compete favorably, in terms of price and performance, with low-cost
personal computers, as well as by aggressive marketing.
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. To this end, the
Company is leveraging its manufacturing expertise, installed customer base, and
distribution networks while shifting research and development to software and
hardware development that will deliver Windows applications to the desktop by
means of Windows(R)-based Terminals.
Sales of Network Graphics Displays declined $6,140 to $5,756 for the
year ended December 31, 1997, from $11,896 for the year ended December 31, 1996.
This decline was anticipated and relates to the completion, during 1996, of
specific projects undertaken by NCR in 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.
Sales of the Company's Windows(R)-based Terminals amounted to $3,218
versus $747 for the years 1997 and 1996, respectively. 1997 was a turbulent year
for this emerging technology, as the industry and end-users debated the merits
of the Windows(R)-based Terminal and competing technologies. Despite the
substantial increase in 1997 sales over 1996, the revenue levels are below the
Company's expectations due to slower than anticipated market acceptance of this
new technology. However, the Company believes that Microsoft's recent decision
to support thin-client computing, and the recent abandonment of the "Net PC" as
a competing technology by some large computer manufacturers, will greatly
increase market acceptance for Windows(R)-based Terminals.
On May 12, 1997, the Company launched its first line of Windows(R)-based
Terminals which, along with network administration software, are marketed under
the trade names Viewpoint(R) TC and Viewpoint(R) Administrator, respectively.
The Company is targeting the approximately 35 million users of General Display
Terminals and Network Graphics Displays, many of whom are currently
transitioning or intending to transition to graphical applications that include
Windows, the Intranet and Java. In addition, the Company is targeting the
task-oriented users of older, less capable PCs that are unable to run the latest
Windows applications, including those users in business and education.
The Company believes its unique ability to customize the Viewpoint(R)
TC to meet specific end-customer needs will give it a sustainable competitive
advantage. Historically, this ability has been of great value to the Company's
terminal customers and the Company believes that this strategy will be equally
advantageous in the corporate network computer marketplace.
During the third quarter, NCR selected Boundless as an OEM to support
its entrance into thin client computing. In addition, Boundless continued to
witness significant customer support for its Viewpoint(R) TC with the attainment
of new customers in a number of important markets including education and
retail. The Company is working with Microsoft to promote Windows(R)-based
Terminals. The Company believes that with the release of Microsoft's Windows
Terminal Server software, code named "Hydra", acceptance of Windows(R)-based
Terminals will be further enhanced.
Net sales from the Company's repairs and spare parts business
decreased 51%, or $3,517, from $6,867 for the year ended December 31, 1996 to
$3,350 for the year ended December 31, 1997. The decline was due to reduced
spares sales to NCR and Digital, resulting from a change in NCR's field support
strategy and inventory purchasing habits and the overall decline in unit sales
to Digital. Ongoing spares sales to Digital are not expected to reach the 1996
volume levels because Digital's start-up stocking requirements are complete. Due
to new designs and engineering changes resulting in fewer components and
increased reliability, the Company does not anticipate that repair and spare
parts revenue will meet prior period levels.
14
<PAGE>
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%. GAI Partnership royalties received for the year ending
December 31, 1997, were $1,459 versus $2,473 for 1996. An additional $1,047 was
past due. Discussions regarding payment of the past due amount are ongoing.
During the fourth quarter of 1997, the Company began to record GAI Partnership
revenue only to the extent of cash received.
IBM was the most significant customer for the Company's products,
accounting for 16% of revenues for the year ended December 31, 1997. Sales to
NCR and Digital accounted for 6% and 4%, respectively, of revenues in 1997. The
loss of IBM, 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, 1997 was $24,766
(25.2% of revenue), as compared to gross margin for the year ended December 31,
1996 of $28,557 (20.7% of revenue). Sales of the Company's Network Graphics
Displays accounted for a smaller percentage of the Company's total revenues in
1997 as compared to 1996. This change in product mix increased the gross margin
percent, year-to-year, due to the relatively low gross margin associated with
Network Graphics Displays. In addition, during the fourth quarter of 1996, the
Company recorded inventory reserves and write-offs of $2,241 representing an
estimate of excess material on hand as of the end of the year; and wrote-off
$284 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 1996 gross margin. As a result of pricing actions and
inventory reduction programs undertaken during 1997, the Company was able to
release reserves of $1,263, resulting in an increase in the 1997 gross margin
percentage. 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.
Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 1997 or 1996. 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 Viewpoint(R) TC, 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 new products will
sustain the 1997 gross margin levels.
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, 1997, operating
expenses were $16,287 (16.6% of revenue), compared to expenses for 1996 of
$25,388 (18.4% of revenue). The decline stems from a reorganization of the
Company, including a reduction of 130 employees at the Company's subsidiary,
Boundless, and the discontinuation of the operations of OTW.
Sales and Marketing Expenses. Sales and marketing expenses declined
28.9% from $10,433 (7.5% of revenue) for the year ended 1996 to $7,417 (7.5% of
revenue) for the year ended December 31, 1997. The decline stems from reductions
in corporate advertising, marketing consulting and bad debt expense.
The Company promotes its products by means of a mix of media advertising,
direct mail, telemarketing, trade shows, public relations and cooperative
channel marketing programs. The Company's installed base of over 5,000,000 units
is the primary target market for the Viewpoint(R) TC. The Company's plan to
15
<PAGE>
reach this market is based on direct mail, telemarketing and advertising,
participating in events with its key partners, including Microsoft, and an
aggressive public relations campaign, including several domestic and
international press tours. The Company will also participate in key trade shows
during 1998.
General and Administrative Expenses. General and administrative
expenses decreased 23.5% from $8,120 (5.9% of revenue), to $6,213 (6.3% of
revenue) for the periods ending December 31, 1996 and 1997, respectively. The
decline is a result of the reduction in force as well as declines in legal and
audit expenses which related to its acquisition and restructuring activities.
Research and Development Expenses. Research and development expenses
decreased from $4,855 in 1996 to $2,912 in 1997. Research and development
expenses for 1996 included a write-off of $649 for previously capitalized
expenses associated with research projects the Company has abandoned. The
remainder of the decline resulted from a consolidation of research activities
including the closing of the Company's Orlando, Florida, facility.
Research and development expenses 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 Viewpoint(R) TC is
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.
Other Nonrecurring Charges. During the fourth quarter of 1996
Boundless recorded reserves of $1,804 relating to the reduction-in-force
discussed above. Of this amount, $1,473 related to severance payments and $331
related to the closing of the Company's Orlando, Florida, facility.
Interest Expense. Interest expense (net of interest income) amounted
to $3,730 for the year ended December 31, 1997 compared to $3,794 for 1996.
Income Tax Credit/Expense. The Company recorded an income tax credit
of $134 for the year ended December 31, 1997 compared to income tax expense of
$962 for the year ended 1996. The tax credit results from the utilization of net
operating loss carryforward credits of $1,481 and a tax adjustment for valuation
of the Company's deferred tax asset. As of December 31, 1997, there are no
remaining net operating loss carryforwards. 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 $1,100. 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. The Company
continues to provide a valuation allowence against 100% of its net deferred tax
asset.
Loss From Discontinued Operations. The Company recorded a loss
relating to the discontinuation of OTW of $9,652 for the period ended December
31, 1996. Since commencing business in 1995, OTW incurred net losses; and OTW's
predecessor incurred net losses of $645 in 1993 and $285 in 1994. OTW recorded
revenues of $1,900 for 1996 but was not able to generate material revenues from
its products. The discontinuation of OTW 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.
Net Income/ (Loss). For the year ended December 31, 1997, net income
was $4,883 (5.0% of revenue), compared to a net loss of $(11,239) for the year
ended December 31, 1996.
Years Ended December 31, 1996 and 1995
Charges Made in the Quarter Ended December 31, 1995
16
<PAGE>
The Company recorded nonrecurring charges of $2,382 in the quarter ended
December 31, 1995, as follows:
1. $ 1,225 relating to OTWs acquisition of in-process technology from
Microelectronics and Computer Technology Corporation ("MCC") classified and
included in "Loss from discontinued operations" in the Consolidated
Statement of Operations;
2. $982, classified and included in "Extraordinary loss on early
extinguishment of debt", relating to the prepayment of the debt facility
from Congress Financial Corporation using the Chase Credit Line, such $982
consisting of a $700 early termination fee and $282 of unamortized debt
issuance costs; and
3. $175 for a portion of the costs relating to the registration, in July
1996, of 1,444,421 shares of Common Stock on Form S-1, classified and
included in "Other nonrecurring charges", of which 1,194,421 shares were
registered for resale by selling stockholders from time to time and 250,000
shares were registered for sale by the Company from time to time.
Revenues: Revenues for the year ended December 31, 1996 were $138,225,
as compared to $94,957 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 $47,274 for the year ended December 31, 1995 to $110,671 for the year ended
December 31, 1996. The increase was due to the Digital Acquisition, with
increases in sales to other OEM's offsetting a $6,500 decline in sales to NCR.
Sales of Network Graphic Displays declined $14,425 to $12,643 for the
year ended December 31, 1996, from $27,068 for the year ended December 31, 1995.
This decline related to specific projects undertaken by NCR during 1995.
Net sales from the Company's repairs and spare parts business
increased 71%, or $2,861 from $4,006 for the year ended December 31, 1995 to
$6,867 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.
GAI Partnership royalties for the year ending December 31, 1996, were
$2,917 versus $1,383 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.
Gross Margin. Gross margin for the year ended December 31, 1996 was
$28,557 (20.7% of revenue), as compared to gross margin for the year ended
December 31, 1995 of $25,573 (26.9% of revenue). The decline in gross margin as
a percent of revenue was due to 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
$2,241 representing an estimate of excess material on hand as of the end of the
year; and wrote-off approximately $284 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%. Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 1997 or 1995.
17
<PAGE>
Total Operating Expenses. For the year ended December 31, 1996,
operating expenses were $25,388 (18.4% of revenue), compared to expenses for
1995 of $18,274 (19.2% of revenue).
Sales and Marketing Expenses. Sales and marketing expenses increased
31.4% from $7,940 for the year ended 1995 to $10,433 for the year ended 1996.
The increase related to marketing and advertising efforts focused on the new
name for Boundless as well as public relations activities to develop channel
partners, launch the Company's thin client 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 $6,337 (6.7% of revenue), to $8,120 (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 $860 offsetting declines in legal and audit expenses.
Research and Development Expenses. Research and development expenses
increased from $4,569 in 1995 to $4,855 in 1996. Research and development
expenses for 1996 include a write-off of $649 for previously capitalized
expenses associated with research projects the Company had abandoned.
Other Nonrecurring Charges. During the fourth quarter of 1996
Boundless recorded reserves of $1,804 relating to the reduction-in-force
discussed above. Of this amount, $1,473 related to severance payments and $331
related to the closing of the Company's Orlando, Florida, facility.
Interest Expense. Interest expense (net of interest income) amounted
to $3,794 for the year ended December 31, 1996 compared to $1,907 for 1995. The
increase was attributable to the Digital Acquisition, which was financed, in
part, with the Chase Credit Line.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was $962 compared to $1,538 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 $1,100. This reversal was
due to management's reassessment of the realizability of the deferred tax asset.
The income tax expense in 1996 related 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 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 from the sale, in January 1995, of a business in
which it was previously engaged and which was unrelated to the Company's
business.
The Company also recorded a loss relating to OTW of $9,652 and $2,019
for the periods ended December 31, 1996 and 1995, respectively. Since commencing
business in 1995 OTW incurred net losses; and OTW's predecessor incurred net
losses of $645 in 1993 and $285 in 1994. OTW recorded revenues of $1,900 for
1996 but was not able to generate material revenues from its products.
Extraordinary Loss on Early Extinguishment of Debt. During October
1995, the Company incurred expenses of $589 (net of a tax benefit of $393) 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 Income/ (Loss). For the year ended December 31, 1996, the net loss
was $(11,239) , compared to net income of $2,610 for the year ended December 31,
1995.
18
<PAGE>
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. Management does not believe that the developing
economic recession in Asia will have an adverse impact on the Company's
operation.
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 $8,780 as of December 31, 1997,
compared to $3,172 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
Chase. At December 31, 1997, the Chase Credit Line consisted of a $15,000
revolving line of credit ("Revolving Loan") and a $20,000 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 is available under
the Revolving Loan for letters of credit. At December 31, 1997, the Company owed
Chase $10,900, of which $7,650 was owed under the Revolving Loan and $3,250 was
owed under the Term Loan. The balance of the Term Loan is repayable in four
quarterly installments of $1,000 terminating December 31, 1998, the same day the
Revolving Loan terminates. At December 31, 1997, the Company had availability of
$1,094 under the Revolving Loan. As a result of the borrowing base formula, the
credit available to the Company could be adversely restricted in the event of
further declines in the Company's sales and increases in orders may not be able
to be financed under the Chase Credit Line.
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 by the Company. As a result of continued profitability
throughout 1997, and the significant reduction in outstanding debt, the Company,
during December, 1997, renegotiated its loan agreements to provide more
favorable terms to 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 related to continuing
operations during the year ended December 31, 1997 was $16,688, principally
related to collections of accounts receivable and reductions in inventories of
$6,872 and $5,438, respectively. These collections and reductions were partially
offset by reductions in accounts payable and other accrued expenses of $3,146.
Net cash used to settle the remaining payables of the discontinued operations of
OTW was $3,492. Net cash used in investing activities was comprised of capital
expenditures of $247. Net cash used in financing activities was principally
comprised of repayments of outstanding obligations under the Chase Credit Line
of $16,423 and a loan renegotiation fee of $450, offset by net proceeds of
$1,513 from the issuance of convertible notes, and the exercise of options and
warrants which provided net cash of $136.
In addition to obligations previously discussed, long-term capital
requirements at December 31, 1997 included: (i) a secured note payable to NCR of
$8,000 (the "NCR Note") bearing interest at 8% per annum payable quarterly with
principal due on or before January 31, 1999; (ii) $3,555 payable upon exercise
by NCR in 1999 of the Amended Put Option (defined in Note 3 of Notes to
Consolidated Financial Statements);and (iii) a lease commitment of $130 per year
through December 1998 for the Company's Austin, Texas facility.
19
<PAGE>
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 $498 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 1997 obligation was satisfied by the delivery
of shares of Common Stock to NCR. Also, as part of the restructuring, 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 December 31, 1997, the Company's total long-term debt was
approximately $10,288 and the current portion of the long-term debt was
approximately $3,250. 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.
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 effect on the Company's business.
Inventory turnover was 3.2 times in 1995 versus 4.2 times in 1996, and
4.2 times in 1997. 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 for 1995 to $18,525 for 1996. Inventory reserves at
December 31, 1996 were $5,853 and were $3,996 for the year ended December 31,
1997.
Accounts Receivable. The Company sells its products on prepayment and
net 30 day terms. Receivable turnover was 7.6 in 1995, 7.4 in 1996 and 6.0 in
1997.
20
<PAGE>
Compliance with Year 2000
Management has initiated a Company wide program to prepare the
Company's computer systems and applications for Year 2000 compliance. The
Company expects to incur internal staff costs as well as other expenses
necessary to prepare its systems for the year 2000. The Company expects to both
replace some systems and upgrade others. Maintenance or modification costs will
be expensed as incurred. The total cost of this effort is still being evaluated,
but is not expected to be material to the Company.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129") is effective for financial
statements ending after December 15, 1997. The new standard reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company does not expect adoption of SFAS No. 129 to have a material effect, if
any, on its consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") is effective for financial statements
with fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company has yet to determine the preferred format for
presenting this information.
Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131") is effective
for financial statements beginning after December 15, 1997. The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to stockholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate
and their major customers. The Company is presently evaluating the impact of
SFAS No. 131 on its financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
None.
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
21
<PAGE>
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. In addition to auditing the financial statements for
the years ended December 31, 1997 and 1996, BDO Seidman, LLP re-audited the
financial statements for the year ended December 31, 1995.
22
<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
- ---- --- ---------------------
J. Gerald Combs 48 Chairman of the Board of Directors,
Chief Executive Officer
Jeffrey K. Moore 28 Vice President- Corporate Development, Director
Joseph Gardner 38 Vice-President - Finance, Chief Financial Officer
Gary Wood 54 Director
Daniel Matheson 48 Director
J. Gerald Combs was elected Chairman and Chief Executive Officer of
the Company and its subsidiaries on May 9, 1997. Mr. Combs has been the Chairman
and CEO of Morgan Kent Group, the majority shareholder of the Company, since
April 1997 and Chairman and CEO of Merrico Corporation, a privately held
financial consulting firm since 1992. Mr. Combs also served as President of
All-Quotes, Inc., the predecessor of the Company, from October 1993 to December
1994.
Jeffrey K. 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. From September 1996 to April 1997, he had served as President and
Chairman of the Board of Morgan Kent 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.
Joseph Gardner was appointed Vice President- Finance and Chief
Financial Officer of the Company effective October 31, 1997. Mr. Gardner has
been employed by Boundless since April of 1990. Prior to October 31, 1997, Mr.
Gardner served as the Controller and Vice President- Quality Assurance of
Boundless.
Gary Wood has been a member of the Company's Board of Directors since
November 1996 and has been serving since September 1, 1997 as Chief Operating
Officer of Collins Financial Services, Inc. He serves on the board of directors
of The Capital Network, Inc., and the Mental Health Association in Texas. 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.
23
<PAGE>
The following individuals, although not executive officers or
directors, are key employees and are 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.
Michael D. Stebel was appointed Vice President of Global Marketing of
Boundless in December, 1996. Mr. Stebel joined Boundless in 1992 as Marketing
Manager for Boundless' Systems business.
Non-employee members of the Company's Board of Directors receive
$12,000 annually as compensation for services rendered to the Company in their
capacity as directors of the Company. Gary Wood and Daniel Matheson were each
granted options on July 1, 1997, 15,000 and 25,000, respectively, to purchase
shares of Common Stock at $6.60 per share that expire in July 2002 and vest
immediately on the date of grant. In addition, Mr. Matheson was paid $50,000
during 1997 in recognition for services rendered to the Company during the
period from August, 1996, to July, 1997, for which services Mr. Matheson had not
otherwise been compensated.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Forms 3 and 4 relating to the Company's securities
indicates that the Form 3 relating to Mr. Jeffrey Moore's appointment to the
Board in January 1997, and the Form 4 relating to Morgan Kent Group's assignment
in June 1997 of less than 1% of its warrants to purchase shares of Common Stock,
were not timely filed with the Commission. The Company has been advised that
such tardiness was inadvertent.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The table below discloses all cash compensation awarded to, earned by
or paid to the Company's present and former Chief Executive Officer, the
executive officer of the Company who earned more than $100,000 for services
rendered in all capacities to the Company during the fiscal year ended December
31, 1997, and the two highest paid individuals who earned more than $100,000 for
services rendered to the Company but who were not executive officers at December
31, 1997 (collectively, the "named executive officers"). In addition, it
provides information with respect to the compensation paid by the Company to the
named executive officers during 1996 and 1995.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation Options(#) Compensation
- ----------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Gerald Combs(1) 12/31/97 $123,436 - $8,497 65,000 -
CEO and Chairman 12/31/96 - - - - 11,546
12/31/95 - - - -
Leonard MacKenzie 12/31/97 - - - -
Former CEO and 12/31/96 - - - 50,000 -
Chairman 12/31/95 - - - - -
Thomas Upton(2) 12/31/97 $96,058 - $67,244 12,500 -
President, Boundless 12/31/96 $95,733 $1,031 $35,227 5,500 -
Global Distribution 12/31/95 $75,610 - $117,451 1,000 -
Joseph Gardner 12/31/97 $100,000 $25,000 - 10,000 -
Vice President-Finance $99,673 $23,440 - 1,500 -
Chief Financial Officer $93,559 $5,480 - 6,500 -
Brian Hann 12/31/97 $119,788 - - 12,500 -
Vice President $111,577 $34,511 - 3,000 -
Operations $99,996 $5,925 - 6,500 -
</TABLE>
(1) Other annual compensation for 1997 includes taxable fringe benefits. "All
Other Compensation" for 1996 consists of 11,546 shares of registered Common
Stock granted during the period Mr. Combs acted as a consultant to the
Company. In 1997, Mr. Combs' pre-existing options to purchase 90,000 shares
of Common Stock at an exercise price of $15.00 per share (expiring on
January 24, 1999 as to 20,000 options and on October 3, 1999 as to 70,000
options) were amended so that the exercise price is $6.60 per share and
they expire on July 1, 2002.
(2) Other annual compensation consisted of commissions of $67,244 in 1997,
$35,227 in 1996, $31,702 in 1995 and reimbursement for relocation expenses
of $85,749 in 1995. Resigned January 24, 1998.
25
<PAGE>
Employment Agreements
None of the Company's officers has an employment contract with the
Company.
Compensation Committee Interlocks and Insider Participation
Mr. Combs, Mr. Jeffrey Moore, Leonard MacKenzie and Wayne Schroeder,
who were executive officers of the Company during 1997, were also members of the
Company's Board of Directors during such times and participated in deliberations
concerning executive officer compensation. Their joint deliberations gave rise
to conflicts of interest which could have affected their compensation and the
number of stock options granted to them individually and as a group. During
parts of 1997, Mr. Combs and Mr. Moore were also members of the Board and
officers of Morgan Kent Group which had certain relationships, and entered into
certain transactions, with the Company during 1997 as described below under
"Item 13- Certain Relationships and Related Transactions."
26
<PAGE>
1995/ 1997 Incentive Plans
The Company's 1995 Incentive Plan covered the issuance of up to 600,000 shares
of Common Stock. As additional shares were no longer available to be issued
under the 1995 Incentive Plan, the Board adopted the 1997 Incentive Plan in July
1997 which covers the issuance of up to 1,000,000 shares of Common Stock.
Option Grants in Last Fiscal Year
---------------------------------
The following table sets forth information, as of December 31, 1997,
regarding the outstanding options to purchase the Company's Common Stock granted
in 1997 under either the Company's 1995 Incentive Plan or 1997 Incentive Plan
("1995/1997 Plan" ) to the named executive officers:
<TABLE>
<CAPTION>
Number of Potential Realizable
Securities Percent of Total Value at Assumed
Underlying Options/SARs Exercise or Annual Rates of Stock
Options/SARs Granted under Base Price Expiration Price Appreciation for
Name Granted (#)(3) 1995 /1997 Plan ($/Sh) Date Option Term
---- -------------- --------------- ------ ---- -----------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
J.Gerald Combs (1)(3) 65,000 14.7% $ 6.60 7/02/02 118,525 261,909
Thomas Upton (2)(3) 12,500 2.8% $10.00 6/07/02 34,535 76,314
Joseph Gardner (2)(3) 10,000 2.3% $10.00 6/07/02 27,628 61,051
Brian Hann (2)(3) 12,500 2.8% $10.00 6/07/02 34,535 76,314
</TABLE>
- --------------------------
(1) Options vest as follows: With respect to 40,000 shares, the
options vested at the date of grant specified in footnote 3; with respect to
12,500 shares, the options vest one year after the applicable grant date, and
the remaining options to purchase 12,500 shares vest two years after the
applicable grant date.
(2) Options vest 50% one year following the applicable grant date
specified in footnote 3, below and the remainder vest pro rata on a monthly
basis over the subsequent three years.
(3) Grant dates are as follows: Combs: 7/01/97; Upton: 6/06/97;
Gardner: 6/06/97; Hann: 6/06/97.
27
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options to purchase shares of Common Stock at
December 31, 1997.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 1997 (#) December 31, 1997 ($)(1)
------------------------------- -------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Excisable Unexercisable
---- ----------- -------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Gerald Combs $0 $0 130,000 25,000 $0 $0
Leonard Mackenzie 0 0 50,000 - 0 0
Thomas Upton 0 0 3,021 15,979 0 0
Joseph Gardner 0 0 2,885 13,115 0 0
Brian Hann 0 0 5,635 16,365 0 0
</TABLE>
(1) The last sale price of the Company's Common Stock on December 31, 1997, as
reported by The Nasdaq SmallCap Market, was $ 6.56.
28
<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 5,
1998, 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 Morgan Kent Group is 711 Fifth Avenue, 5th Floor, New York, NY 10022.
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
- ------------------------ ------------------ ------------------
Morgan Kent Group, Inc. 2,951,440(1) 54.2%
Stephen Maysonave, Voting Trustee 2,951,440(1)(2) 54.2%
J. Gerald Combs 131,100(3) 2.5%
Leonard Mackenzie 50,000(3) 1.0%
Gary Wood 15,000(3) *
Daniel Matheson 25,000(3) *
Jeffrey Moore 25,000(2) (3) *
Joseph Gardner 3,885(3) *
Thomas Upton 8,760(3) *
Brian Hann 10,823(3) *
All current directors and executive
officers as a group
(seven individuals) 219,569(3) 4.1%
- --------------------------------
* Less than 1%.
(1) Includes 307,502 shares underlying the warrant held by Morgan Kent Group
(the "Morgan Kent Group Warrant") to purchase shares of Common Stock at an
exercise price of $7.50 per share. These warrants were repriced in
September, 1997, from $18.40 per share and the number of shares underlying
the warrants were reduced from 414,970 to 327,847.
(2) Includes the shares beneficially owned by Morgan Kent Group, as a result of
Mr. Maysonave's beneficial ownership, as voting trustee, of 3,330,000
shares of Series B Preferred Stock of Morgan Kent 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 Morgan Kent Group's entire board of
directors which has the sole voting power and, with the stockholders of
Morgan Kent Group, shares the investment power with respect to the Common
Stock owned by Morgan Kent 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 Morgan Kent Group's Series B
Preferred. There can no assurance that a change of control of the Company
will not occur as a result of sales of Series B Preferred owned by the
Moore Brothers in order to satisfy court orders (currently being appealed)
for restitution of $12 million to federal agencies by William Moore, their
father.
(3) Includes or consists of shares of Common Stock issuable upon exercise of
options as follows: Mr. Combs: 130,000; Mr. Mackenzie: 50,000; Mr. Wood:
15,000; Mr. Matheson: 25,000; Mr. Moore: 25,000; Mr. Gardner: 3,885; Mr.
Upton: 3,760; and Mr. Hann: 6,823. Mr. Mackenzie is a former Chairman and
Chief Executive Officer of the Company.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During a portion of 1997, Morgan Kent Group was a guarantor of
$750,000 owed by OTW to MCC through the end of 1997 under the Technology
Agreement between OTW and MCC. Additionally, in connection with the Company's
acquisition of OTW, OTW owed MCC $1,250,000 payable through the end of 1997 and
MCC was disputing the adequacy of the delivery of 6,000 shares of Common Stock
to satisfy a $250,000 payment due in 1996. In March 1997, MCC, OTW, the Company
and Morgan Kent Group entered into agreements whereby all prior obligations of
the parties, including Morgan Kent Group's guaranty, were discharged and OTW's
membership in MCC was terminated. The Company paid MCC $500,000 and OTW granted
MCC a non-exclusive license to use TradeVPI and assigned to a designee of MCC
OTW's rights in the Infosleuth Project.
As of April, 1997, the Company agreed to pay Morgan Kent Group $20,000
per month for financial consulting services, which services the Company deemed
critical to its success. In October, the Company prepaid this fee in the amount
of $380,000, and for 1997 recorded an expense of $162,500.
In connection with the Digital Acquisition in October 1995, Morgan
Kent Group pledged (the "Pledge") 2,143,938 shares of Common Stock to Chase and
500,000 shares of Common Stock to NCR. In consideration of the Pledge, the
Company had agreed to issue to Morgan Kent Group warrants to purchase such
number of shares of Common Stock at $38.75 per share, subject to adjustment, as
the Board of Directors of the Company determined was appropriate after obtaining
independent advice regarding the fairness of such warrants (a "fairness
opinion"). In December, 1997, Morgan Kent Group accepted the Company's offer of
$300,000 in lieu of such warrants, an amount approved by the Board of Directors
after receiving quotations for the cost of a fairness opinion regarding the
value of such warrants. The Company paid this obligation during the first
quarter of 1998. The Pledge to Chase was terminated December 1997.
The Company and Morgan Kent Group had anticipated that the operating
results of the Company, as a result of the Digital Acquisition, would enable the
Company to meet its covenants under the Chase Credit Line and terminate the
Chase portion of the Pledge by November, 1996. The Company did not achieve the
operating results necessary to release Morgan Kent Group from the Pledge to
Chase and, as a result, the Company agreed to pay Morgan Kent Group, effective
January 1, 1997, an asset utilization fee of $17,500 per month for each month,
or part thereof, that the Pledge, either to Chase or NCR, remains in effect. For
1997 such fees amounted to $192,500. The Pledge to Chase was canceled December
1997. The Pledge to NCR remains in effect.
In July, 1997, the Company loaned Morgan Kent Group $50,000 and, in
return, Morgan Kent Group signed a promissory note due July, 1999 and bearing
interest at a rate equal to the Company's borrowing rate under its revolving
credit line. Interest is payable one year following the date of the note, and
quarterly thereafter.
In September, 1997, the Company and Morgan Kent Group negotiated a
repricing of the warrant (the "Morgan Kent Group Warrant") which had been issued
to Morgan Kent Group in consideration for Morgan Kent Group's guarantee of the
Amended Put Option to NCR. Using the Black-Scholes option pricing model the
Morgan Kent Group Warrant to purchase 414,970 shares of Common Stock at $18.40
per share was repriced to $7.50 per share, and the number of Common Stock shares
purchasable upon exercise of the Morgan Kent Group Warrant was reduced to
327,847 shares.
30
<PAGE>
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
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, 1997 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 did not file any reports on Form 8-K during the fourth
quarter of 1997.
31
<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 30, 1998
BOUNDLESS CORPORATION
By: /s/
---------------------------------
J. Gerald Combs
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 30, 1998
- ---------------------
J. Gerald Combs Chief Executive Officer
/s/ Vice-President - Finance, Chief Financial March 30, 1998
- ---------------------
Joseph Gardner Officer (Principal Accounting Officer)
Vice President, Director March 30, 1998
- ---------------------
Jeffrey K. Moore
/s/ Director March 30, 1998
- ---------------------
Daniel Matheson
/s/ Director March 30, 1998
- ---------------------
Gary Wood
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No.* Description of Exhibit
- ------------ ----------------------
3.1** Certificate of Incorporation and Certificates of Amendment
thereto.
3.2[5] By-Laws
10(a)[2] 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)[4] Lease, dated August 22, 1994, between International Software
Systems, Inc. and SunRiver Corporation (now Morgan Kent Group,
Inc.) of the premises located at Suite 201, Building IV, 9430
Research Blvd. Austin, Texas. (Originally filed as exhibit
10(e).)
10(c)[3] Operating Agreement for General Automation LLC, dated as of May
22, 1995, between SunRiver Data Systems, Inc. and General
Automation, Inc. (Originally filed as exhibit 10(g).)
10(d) Registrant's 1995 Incentive Plan (Incorporated by reference to
and filed as Exhibit E to Registrant's Information Statement,
dated September 28, 1995).
10(e) Registrant's 1997 Incentive Plan (Incorporated by reference to
and filed as Exhibit A to Registrant's Information Statement,
dated March 6, 1998).
10(f)[1] Asset Purchase Agreement, dated as of October 20, 1995, between
Digital Equipment Corporation, as Seller, and SunRiver Data
Systems, Inc., as Purchaser. (Originally filed as exhibit 2(a).)
10(g)[1] 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 Registrant as guarantor of the obligations of
SunRiver Data Systems, Inc. thereunder. (Originally filed as
exhibit 2(b).)
10(h)[1] Maintenance Service Agreement, dated as of October 20, 1995,
between SunRiver Data Systems, Inc. and Digital Equipment
Corporation. (Originally filed as exhibit 2(e).)
10(i)[1] Credit Agreement and Guaranty, dated as of October 20, 1995,
among SunRiver Data Systems, Inc., as Borrower, SunRiver
Acquisition Corp. and Registrant, as Guarantors, SunRiver Group,
Inc., as Hypothecator, and The Chase Manhattan Bank, N.A., as
Agent and Bank. (Originally filed as exhibit 2(k).)
10(j)** Amendments 1 through 7, amending the Credit Agreement and
Guaranty, dated as of October 20, 1995, among Chase et al.
10(k) Intentionally Omitted.
10(l)[1] Security Agreement, dated as of October 20, 1995, between The
Chase Manhattan Bank, N.A., as agent and bank, and SunRiver Data
Systems, Inc. (Originally filed as exhibit 2(n).)
10(m)[1] 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. (Originally filed as exhibit 2(o).)
E-1
<PAGE>
10(n)[1] Trademark Security Interest Agreement, dated October 20, 1995,
between The Chase Manhattan Bank, N.A. and SunRiver Data Systems,
Inc. (Originally filed as exhibit 2(p).)
10(o)[1] 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. (Originally filed as exhibit
2(q).)
10(p)[1] Pledge Agreement, dated October 20, 1995, between The Chase
Manhattan Bank, N.A. and Registrant (Originally filed as exhibit
2(r).)
10(q)[1] Pledge Agreement, dated October 20, 1995, between The Chase
Manhattan Bank, N.A. and SunRiver Acquisition Corp. (Originally
filed as exhibit 2(s).)
10(r)[1] Hypothecation Agreement, dated October 20, 1995, between The
Chase Manhattan Bank, N.A. and SunRiver Group, Inc. (Originally
filed as exhibit 2(t).)
10(s)[1] Release and Reassignment Agreement, dated October 20, 1995,
between SunRiver Data Systems, Inc. and Congress Financial
Corporation. (Originally filed as exhibit 2(u).)
10(t)[1] Supplementary Agreement, dated October 20, 1995, among SunRiver
Group, Inc., SunRiver Acquisition Corp., SunRiver Data Systems,
Inc. and AT&T Global Information Solutions Company. (Originally
filed as exhibit 2(v).)
10(u)[1] Cancellation of Pledge Agreements, dated October 20, 1995,
executed by AT&T Global Information Solutions Company.
(Originally filed as exhibit 2(w).)
10(v)[1] Pledge Agreement, dated October 20, 1995, between AT&T Global
Information Solutions Company, as pledgee, and SunRiver Group,
Inc., as pledgor. (Originally filed as exhibit 2(x).)
10(w)[1] 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. (Originally filed
as exhibit 2(y).)
10(x)[1] 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.
(Originally filed as exhibit 2(z).)
10(y)[1] 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.
(Originally filed as exhibit 2(aa).)
10(z)[2] Promissory Note Secured by Real Estate Mortgage from SunRiver
Acquisition Corp. payable to AT&T Global Information Solutions
Company, dated December 9, 1994. (Originally filed as exhibit
2(f).)
11 Statement re Computation of Per Share Earnings. See Consolidated
Financial Statements.
16[6] Letter of Coopers & Lybrand L.L.P. regarding change of the
Company's certifying accountant. (Originally filed as exhibit
16(b).)
21** List of Subsidiaries
23** Consent of BDO Seidman, LLP.
E-2
<PAGE>
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 original documents
from which they are being incorporated.
** Filed herewith.
[1] Incorporated by reference to Registrant's Current Report on Form 8-K dated
October 23, 1995.
[2] Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 12, 1994.
[3] Incorporated by reference to Registrant's amended Annual Report on Form
10-K/A for the transition period July 1 through December 31, 1994.
[4] Incorporated by reference to Registrant's Annual Report on Form 10-K for
the transition period July 1 through December 31, 1994.
[5] Incorporated by reference to Registrant's Registration Statement on Form
S-18 (File No. 33-32396-NY).
[6] Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 17, 1996.
E-3
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
Schedule I - Condensed Financial Information of Registrant (Parent Company)
Condensed Balance Sheets as of December 31, 1997 and 1996 S-1
Condensed Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 S-2
Condensed Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 S-3
Schedule II - Valuation and Qualifying Accounts S-4
F-1
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Boundless Corporation
We have audited the accompanying consolidated balance sheets of Boundless
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. We have also audited the
schedules 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 and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. 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 Boundless
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Dallas, Texas
February 23, 1998, except for Notes 1, 11 and 19 as
to which the date is March 26, 1998
F-2
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
December 31,
--------------------
1997 1996
--------- ---------
Current assets: $ 2,929 $ 5,213
Cash and cash equivalents
Trade accounts receivable (including $224
and $2,393 from related parties), net 14,395 20,928
Income tax refunds 800 1,118
Inventories (Notes 7 and 10) 13,682 18,525
Deferred income taxes (Note 9) 1,561 -
Prepaid expenses and other current assets 711 256
--------- ---------
Total current assets 34,078 46,040
Property and equipment, net (Note 8) 10,614 11,474
Goodwill, net (Note 5) 8,428 9,505
Other assets 1,428 2,506
--------- ---------
$ 54,548 $ 69,525
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note 10) $ 7,650 $ 13,950
Current portion of long-term debt (Note 10) 3,250 8,009
Accounts payable 8,840 10,891
Accrued expenses 5,378 6,346
Deferred revenue 180 180
Net liabilities of discontinued operation (Note 18) - 3,492
--------- --------
Total current liabilities 25,298 42,868
Long-term liabilities:
Long-term debt, less current maturities (including
$8,000 and $8,000 to a related party) (Note 10) 8,000 13,382
Deferred income taxes (Note 9) 1,561 -
Other 727 918
--------- --------
Total long-term liabilities 10,288 14,300
--------- --------
Total liabilities 35,586 57,168
Commitments and contingencies (Notes 1, 14, 15, 17 and 18) - -
Mandatorily redeemable preferred stock of subsidiary
(Notes 3 and 5) 3,555 3,555
Stockholders' equity (Notes 11 and 19):
Preferred stock - -
Common stock 51 49
Additional paid-in capital 34,094 31,877
Accumulated deficit (18,738) (23,124)
--------- --------
Total stockholders' equity 15,407 8,802
--------- --------
$ 54,548 $ 69,525
========= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
(in thousands, except per share data)
December 31,
----------------------------------
1997 1996 1995
Revenue:
Product sales (including sales
to related parties of $6,476,
$21,855 and $39,600) $ 94,607 $ 130,733 $ 81,761
Services 3,664 7,492 13,196
--------- --------- ---------
Total revenue 98,271 138,225 94,957
Cost of revenue:
Product sales 71,477 107,029 62,555
Services 2,028 2,639 6,829
--------- --------- ---------
Total cost of revenue 73,505 109,668 69,384
--------- --------- ---------
Gross margin 24,766 28,557 25,573
Operating expenses:
Sales and marketing 7,417 10,433 7,940
General and administrative 6,213 8,120 6,337
Research and development 2,912 4,855 4,569
Other nonrecurring charges (credits) (255) 1,980 (572)
--------- --------- ---------
Total operating expenses 16,287 25,388 18,274
--------- --------- ---------
Operating income 8,479 3,169 7,299
Interest expense 3,730 3,794 1,907
--------- --------- ---------
Income (loss) before income taxes,
extraordinary item and discontinued
operations 4,749 (625) 5,392
Income tax expense (134) 962 1,323
--------- --------- ---------
Income (loss) from continuing operations 4,883 (1,587) 4,069
Loss from discontinued operations - (9,652) (870)
--------- --------- ---------
Income (loss) before extraordinary item 4,883 (11,239) 3,199
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $393 - - (589)
--------- --------- ---------
Net income (loss) 4,883 (11,239) 2,610
Dividend on preferred stock of subsidiary 497 497 93
Accretion to preferred stock of subsidiary - - 681
Restructuring of preferred stock of subsidiary - - 1,668
--------- --------- ---------
Earnings (loss) available for common
shareholders $ 4,386 $ (11,736) $ 168
========= ========= =========
Weighted average common shares outstanding 4,925 4,702 4,366
========= ========= =========
Earnings (loss) per common share from:
Continuing operations $ 0.89 $ (0.44) $ 0.37
Discontinued operations 0.00 (2.06) (0.20)
Extraordinary loss 0.00 0.00 (0.13)
--------- --------- ---------
Basic earnings (loss) per common share $ 0.89 $ (2.50) $ 0.04
========= ========= =========
Earnings (loss) available for common
shareholders adjusted for income
impact of assumed conversions $ 4,426 $ (11,736) $ 193
========= ========= =========
Weighted average dilutive shares outstanding 5,103 4,702 4,674
========= ========= =========
Diluted earnings (loss) per common share $ 0.86 $ (2.50) $ 0.04
--------- --------- ---------
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Additional
Common Stock Paid-in Accumulated
-------------
Shares Amount Capital Deficit Total
------ ------ ------- ---------- --------
Balance, January l, 1995 3,882 $39 $13,902 ($11,556) $2,385
Common stock sold 441 5 5,540 5,545
Conversion of notes payable 306 3 4,572 4,575
Distribution of net assets (74) (1) (2,356) (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
------ ------ ------- -------- -------
Balance, December 31, 1995 4,555 46 24,179 (11,388) 12,837
Conversion of notes payable 78 1 1,499 1,500
Common stock sold 127 1 2,869 2,870
Common stock issued for payment
of long-term debt 6 300 300
Options and warrants issued for
services to non-employees 526 526
Stock options exercised 59 1 884 885
Deferred compensation
from below market grants of stock
options of subsidiary 107 107
Dividend on preferred stock
of subsidiary 17 497 (497) -
Warrants exercised 51 1 1,422 1,423
Common stock repurchased and
retired (73) (1) (1,304) (1,305)
Common stock issued for
consulting services 37 898 898
Net loss (11,239) (11,239)
------ ------ ------- -------- -------
Balance, December 31, 1996 4,857 49 31,877 (23,124) 8,802
Conversion of notes payable, net
of expenses 218 2 1,520 1,522
Options and warrants issued for
services to non-employees 63 63
Stock options exercised 16 116 116
Dividend on preferred stock of
subsidiary 35 497 (497) -
Warrants exercised 13 21 21
Net income 4,883 4,883
------ ------ ------- -------- -------
Balance, December 31, 1997 5,139 $51 $34,094 ($18,738) $15,407
------ ------ ------- -------- -------
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
(in thousands, except per share data)
December 31,
----------------------------------
1997 1996 1995
----------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 4,883 $ (11,239) $ 2,610
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Loss loss from discontinued operations - 9,652 870
Depreciation and amortization 3,725 3,957 2,857
Loss from disposal of assets - 133 -
Deferred revenues - (647) (3,193)
Provision (credit) for doubtful accounts (20) 180 1,072
Provision (credit) for excess and
obsolete inventory (595) 3,845 348
Deferred taxes - 358 (2,256)
Write off of intangible assets - - 1,554
Shares issued in settlement of
management agreement - - 155
Extraordinary loss on early extinguishment
of debt - - 282
Changes in assets and liabilities:
Trade accounts receivable 6,872 (3,548) (12,270)
Inventories 5,438 3,388 (7,595)
Other assets (470) 1,592 (1,595)
Accounts payable and accrued expenses (3,145) (76) 8,938
------- ------- -------
Net cash:
Provided by (used in) continuing operations 16,688 7,595 (8,223)
Used in discontinued operations (3,492) (6,160) (1,629)
------- ------- -------
Net cash provided by (used in) operating
activities 13,196 1,435 (9,852)
Cash flows from investing activities:
Capital expenditures (247) (1,384) (229)
Purchase of Digital Assets - - (14,970)
------- ------- -------
Net cash used in investing activities (247) (1,384) (15,199)
------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 136 5,177 2,164
Proceeds from debt issuance 1,700 1,500 24,575
Purchase and retirement of common stock - (1,305) -
Advances on loans payable - 5,950 3,365
Payments on loans payable (16,423) (6,526) -
Costs associated with issuance of debt (637) - (1,284)
Restructuring of mandatorily redeemable
preferred stock of subsidiary - - (3,500)
Payments on capital leases (9) (3) (11)
------- ------- -------
Net cash provided by (used in) financing
activities (15,233) 4,793 25,309
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (2,284) 4,844 258
Cash and cash equivalents at beginning
of period 5,213 369 111
------- ------- -------
Cash and cash equivalents at end of period $ 2,929 $ 5,213 $ 369
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the Years Ended
(in thousands, except per share data)
------------------------------
1997 1996 1995
------------------------------
Non-cash transactions:
Accretion to preferred stock of subsidiary $ - $ - $ 681
Dividend on Preferred Stock of Subsidiary 497 497 93
Distribution of net assets - - 2,357
Conversion of notes payable to common stock 1,700 1,500 4,575
Issuance of common stock for Note Payment - 300 -
Estimated value of compensatory options and
warrants 63 526 3,216
Issuance of common stock for consulting services - 898 380
Issuance of common stock in Digital Acquisition - - 3,000
Equipment acquisitions funded through capital leases - 107 232
Cash paid for:
Interest 2,742 4,293 1,615
Taxes 634 (794) 1,553
The accompanying notes are an integral part
of these consolidated financial statements
F-7
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except share data)
1. Background
As further described in Note 19, the Company declared a one-for-ten reverse
stock split effective March 26, 1998. All per share amounts in the consolidated
financial statements and notes to the consolidated financial statements have
been restated to reflect the one-for-ten reverse stock split unless otherwise
noted.
Boundless 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 highly efficient, low cost access to corporate computing
environments, including client/server, mainframes, LANS, WANS, intranets and the
Internet.
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, through its wholly owned
subsidiary, SunRiver Acquisition Corp. ("Acquisition"), 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, subsequently
renamed Morgan Kent Group, Inc. ("Morgan Kent 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" 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' products and services are offered solely to businesses.
F-8
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
In April 1995, the Company, through OTW Corporation ("OTW") (see Note 4),
formerly TradeWave Corporation, had been engaged in the business of developing
and selling Internet software and value-added services which enabled businesses
to conduct private, secure communication and electronic commerce transactions
over the Internet. During December 1996, the Company discontinued the operations
of OTW and, during the first quarter of 1997 finalized the discontinuation with
the sale of certain assets of OTW to a company for a combination of cash, a
royalty on future revenue and the assumption of certain liabilities. (See Note
18).
2. Summary of Significant Accounting Policies
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Acquisition and Boundless, 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 original 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.
Long Lived Assets
- -----------------
In accordance with Statement of Financial Accounting Standards (SFAS) No. 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 circumstances indicate the carrying
amount of an asset may not be fully recoverable. As part of the 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, 1997 indicated there was
no impairment to these assets' carrying values.
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. Once
technological feasibility has been established, costs are capitalized until the
product is ready to be marketed, pursuant SFAS No. 86. At December 31, 1997,1996
and 1995, capitalized software development costs, net of amortization were $0,
$74 and $319.
F-9
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 $284 and $1,227 as of December 31, 1997 and
1996, 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 one customer representing 16% of total revenues in 1997, and had
revenues from two customers representing 16% and 14% of total revenues in 1996.
One customer represented 42% of the 1995 revenue.
Concentration of Credit Risk
- ----------------------------
The Company is required by SFAS No. 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.
Advertising
- -----------
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $1,158, $1,631 and $561 for the years ended December 31, 1997, 1996
and 1995.
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 $1,078, $1,117 and $386 for the years ended December 31,
1997, 1996 and 1995.
Earnings (Loss) Per Common Share
- --------------------------------
Earnings (loss) available for common shareholders includes the effects of the
accretion to the preferred stock of a subsidiary and preferred stock dividends.
SFAS No. 128, "Earnings Per Share" ("EPS"), is effective for financial
statements issued for the periods ending after December 15, 1997, including
interim periods. SFAS No. 128 requires restatement of all prior period EPS data
presented. The adoption of SFAS No. 128 did not have a material effect on the
Company's EPS calculation. The new standard also requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS which is as follows:
F-10
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
For the Year Ended December 31, 1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Net income $4,883
Preferred stock dividends (497)
----------
Basic earnings per share:
Income available to common shareholders 4,386 4,925 $0.89
==========
Effect of dilutive securities:
options and warrants - 101
convertible notes 40 77
---------- ------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions 4,426 5,103 $0.86
========== ============ ==========
For the Year Ended December 31, 1996
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Loss from continuing operations ($1,587)
Discontinued operations (9,652)
Preferred stock dividends (497)
----------
Basic earnings per share:
Loss available to common shareholders (11,736) 4,702 ($2.50)
=========
Effect of dilutive securities:
options and warrants - -
convertible notes - -
---------- ----------
Diluted earnings per share:
Loss available to common shareholders
plus assumed conversions ($11,736) 4,702 ($2.50)
========== ============ ==========
For the Year Ended December 31, 1995
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Net income $4,069
Extraordinary loss on early
extinguishment of debt (589)
Loss from discontinued operations (870)
Preferred stock restructuring (2,349)
Preferred stock dividends (93)
----------
Basic earnings per share:
Income available to common shareholders 168 4,366 $0.04
==========
Effect of dilutive securities:
options and warrants - 248
convertible notes 25 60
---------- ----------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $193 4,674 $0.04
========== ============ ==========
F-11
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
Options to purchase 289,908 shares of common stock at a weighted average price
of $17.66 per share were not included in the computation of diluted earnings per
share in 1997 because the options' exercise price was greater than the average
market price of the common shares. The options were still outstanding at
December 31, 1997.
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 SFAS No. 109.
Accordingly, deferred income taxes are recorded to reflect the future tax
consequences of differences between the tax basis of assets and liabilities and
their financial amounts at year-end.
Stock Based Compensation
- ------------------------
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 SFAS No. 123 "Accounting for Stock Based Compensation" for financial
statement disclosure purposes and issuances of options and warrants to
non-employees for services rendered.
New Accounting Standards
- ------------------------
SFAS No. 130, "Reporting Comprehensive Income" is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has yet to determine the
preferred format for presenting this information.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" is effective for financial statements with fiscal years beginning
after December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to stockholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company is
presently evaluating the impact of SFAS No. 131 on its financial reporting.
3. Acquisition of SunRiver Group and Boundless
Issuance of Common Stock to Morgan Kent Group (formerly SunRiver Group)
- -----------------------------------------------------------------------
Pursuant to the terms of the SunRiver Group Acquisition agreement referred to in
Note 1, on December 9, 1994 the Company issued 559,400 shares of its common
stock, $.01 par value ("Common Stock"), to Morgan Kent Group and also agreed to
issue to Morgan Kent Group, that number of newly issued shares that would have
increased Morgan Kent 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.
F-11
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 amend its
Certificate of Incorporation to increase the number of authorized shares and
issue the required shares to establish Morgan Kent Group's ownership at not less
than 63% of the Company's then outstanding common stock. At December 9, 1994,
the Company delivered to Morgan Kent Group proxy and voting agreements which
entitled Morgan Kent Group to represent and vote 310,300 shares at any meeting
of stockholders on any matter requiring stockholder approval. These proxy and
voting agreements, along with the shares issued to Morgan Kent Group at closing,
represented at least 51% of the voting rights of the outstanding common
stockholders. As Morgan Kent 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 2,000,000 to 6,000,000, and issued the
additional shares (2,084,538), 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 Put Option
referred to in Note 5, the Company issued to Morgan Kent Group a warrant to
acquire an additional 417,470 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, All-Quotes Capital, Inc.
("Capital"), and effectively cease all existing business operations. The
proceeds from a private placement then in process (more fully described below)
and the Morgan Kent 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 Morgan Kent 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
- ---------------------
The Company, through 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 expense 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.
F-12
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 700,000 shares of Common Stock at $5.00 per share to accredited
investors in a private placement in which an underwriter (RAS Securities Corp.)
acted as the exclusive placement agent. As of December 31, 1994, 407,745 shares
of Common Stock had been issued in connection with such private offering. The
remaining 292,255 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 a 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.
4. Acquisition of Enterprise Integration Network Technology
During April 1995, the Company, through its wholly-owned subsidiary EINet
Acquisition Corporation (name changed to TradeWave Corporation and subsequently
to OTW Corporation), 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, OTW 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
127,038 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 OTW's Virtual Private Internet
product. In October 1995, OTW developed a new strategic plan, which
de-emphasized the web browser and directory services technology and instead
emphasized the OTW'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 3l, 1995, the Company recognized a $1,225 charge
associated with in-process research and development.
F-13
<PAGE>
BOUNDLESS 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 OTW, the Company and Morgan Kent Group from any and all
obligations in return for $500 and a non-exclusive license to the software
developed by OTW. Morgan Kent Group was a guarantor of the amounts owed under
the Technology Agreement.
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 ("General
Display 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
General Display 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 General
Display Terminals and related parts for a four-year period, with a minimum of
80,000 units of General Display 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 General Display Terminals through January 30, 1996
and modules until June 30, 1996; (ii) provided to Boundless certain technical,
sales, marketing and administrative services relating to General Display
Terminal products through February 19, 1996 and (iii) is providing certain
worldwide warranty and post-warranty servicing on General Display 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 was obligated to pay $347 for certain
tooling and equipment delivered by Digital prior to 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 100,000 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 formulas and subject to sub-limits and other terms as are set forth in
the loan documents. Boundless also used proceeds of the Bank Financing to pay
all outstanding amounts owed to Congress Financial Corporation ("Congress")
under a revolving line-of-credit, plus a $700 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 are being amortized on a
straight-line basis over the three-year term of such Bank Financing.
F-14
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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. 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. Morgan Kent Group also guaranteed the
obligations of Boundless, which was collateral ized by a pledge of 2,143,938
shares of Common Stock of the Company owned by Morgan Kent Group.
In addition, the Company issued to Chase a warrant to purchase 100,000 shares of
common stock exercisable at $36.90 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. In November, 1997, the Company agreed to exchange
the warrant for 100,000 shares at $36.90 per share for a warrant to purchase
31,375 shares at $10.00 per share. These warrants were determined to have
approximately the same value as determined by a Black-Scholes valuation model.
The NCR Restructuring
- ---------------------
As a condition to the Bank Financing, Boundless, Acquisition and Morgan Kent
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.
F-15
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 50,000 shares of Common Stock of the Company, exercisable at $38.75 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% on the Boundless preferred
stock, (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) Boundless Acquisition Corp.'s pledge to NCR of the
Boundless common stock was canceled and the Boundless common stock was pledged
to Chase; (viii) Morgan Kent Group's pledge to NCR of Common Stock of the
Company was reduced to 500,000 shares and Morgan Kent Group pledged the
remainder of its Common Stock of the Company to Chase.
In the event of liquidation of Boundless, NCR is entitled to $3,555 before any
amount is paid to holders of the Boundless common stock. While the Boundless
preferred stock is outstanding, Boundless is restricted from creating any shares
of stock which shall be in any respect on parity with or have any preferences to
take priority over the 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 50,000 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 123,686 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 35,969
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,
F-16
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 47,259 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 52,500 shares of common stock
of the Company exercisable at $36.25 to $38.75, 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. 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, or of the
results that may occur in the future.
1995
-------------
Net sales $ 150,352
Income from continuing operations 466
Income per share from continuing operations $0.10
6. GAI Partnership
Effective May 1995, Boundless and GA formed a limited liability company ("the
GAI Partnership") with GA owning 51% and Boundless owning 49%. The GAI
Partnership 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 Notes 1 and 3)
Under the terms of the operating agreement which governs the operation of the
GAI Partnership, (the "Operating Agreement"), the GAI Partnership operates and
manages GA's and Boundless' Pick business. Under the Operating Agreement,
Boundless is entitled to receive cash distributions from the GAI Partnership in
an amount equal to a percentage of the GAI Partnership's net revenues, which is
payable whether or not the GAI Partnership 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 the GAI Partnership, if any, after the payment to Boundless of the
net revenue percentage described above.
F-17
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
Under the Operating Agreement, the business and affairs of the GAI Partnership
are managed exclusively by GA. However, in the event that the GAI Partnership
fails to achieve agreed upon revenue or profit projections, Boundless has the
right to the GAI Partnership 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 the GAI Partnership. During the first year of the
Operating Agreement, Boundless paid a management fee of $1,031 in connection
with GA's duties as manager of the GAI Partnership. However, subsequent to the
first year of the Operating Agreement, GA will not be entitled to any
compensation for acting as manager of the GAI Partnership.
Boundless received cash distributions of $1,459, $2,473 and $1,475 for the years
ended December 31, 1997, 1996 and 1995, which are included in product sales in
the accompanying consolidated statements of operations. The Company accounts for
the 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.
As of December 31, 1997, the Company was owed $1,047 under the terms of the
agreement and had not received required payments during the second half of 1997.
Due to the uncertainty regarding the collectibility of such payments, the
Company has recognized revenue only to the extent of cash collected. Although
the Company, under the terms of the Partnership Agreement, may assume the
management responsibilities of the Partnership, the Company has been negotiating
a settlement of the receivable with General Automation. There can be no
assurance the Company will be successful in this effort.
F-18
<PAGE>
BOUNDLESS 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,
-------------------------
1997 1996
----------- -----------
Raw materials and purchased components $ 10,723 $ 12,845
Finished goods 2,477 4,942
Demonstration equipment 135 396
Service parts 347 342
----------- -----------
$ 13,682 $ 18,525
=========== ===========
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,
-------------------------
1997 1996
----------- -----------
Land $ 3,780 $ 3,780
Buildings and improvements 6,193 6,175
Machinery and equipment 5,058 4,846
----------- -----------
15,031 14,801
Less accumulated depreciation and amortization 4,417 3,327
----------- ----------
$ 10,614 $ 11,474
=========== ==========
9. Income Taxes
The provision for income taxes consisted of the following for the years ended
December 31:
1997 1996 1995
----------- ---------- ------------
Current:
Federal $ (347) $ (340) $ 597
State 213 413 431
--------- -------- ---------
(134) 73 1,028
--------- -------- ---------
Deferred:
Federal 2,573 (3,176) (83)
State 208 - (29)
Valuation allowance (2,781) 4,065 (1,121)
--------- -------- ---------
- 889 (1,233)
--------- -------- ---------
$ (134) $ 962 $ (205)
========= ======== =========
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:
F-19
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
1997 1996 1995
----------- ---------- ------------
Federal income tax at statutory rate $ 1,615 $ (3,760) $ 463
Utilization of prior year net
operating loss carryforwards (1,481) - -
State income taxes, net of federal
income tax benefit 278 273 243
Other, net 23 609 210
Changes in net deferred tax assets and
valuation allowances (569) 3,840 (1,121)
--------- -------- ----------
Income tax expense (benefit) $ (134) $ 962 $ (205)
========= ======== ==========
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 OTW
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,
-----------------------
1997 1996
---------- ----------
Current deferred tax assets:
Inventory $ 1,759 $ 2,524
Accounts receivable 108 466
Warranties 753 723
Other - 764
--------- ---------
Total current deferred tax assets 2,620 4,477
Current deferred tax liabilities:
Software capitalized and other - (28)
--------- ---------
Net current deferred tax assets 2,620 4,449
--------- ---------
Noncurrent deferred tax assets:
Net operating loss carryforwards - 1,466
Other 307 -
--------- ---------
Total noncurrent deferred tax assets 307 1,466
Noncurrent deferred tax liabilities:
Property and equipment (1,868) (2,075)
--------- ---------
Net noncurrent deferred tax liabilities (1,561) (609)
--------- ---------
Net deferred tax assets 1,059 3,840
Less valuation allowance (1,059) (3,840)
--------- ---------
$ - $ -
--------- ---------
F-20
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
At December 31, 1997 and 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 income tax return. As of December 31,
1997 there are no remaining net operating loss carryforwards.
10. Debt
Notes Payable
- -------------
Notes payable at December 31, 1997 consisted of a $15,000 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. This was reduced from a
revolving credit limit of $20,000 in 1996. The interest rate is prime plus 1.25%
or LIBOR plus 2.5% (9.75% at December 31, 1997). The revolving loan outstanding
at December 31, 1997 and 1996 was $7,650 and $13,950.
During the year ended December 31, 1996, the Company was in violation of
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.
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 $1,000
and $4,050 outstanding at December 31, 1997 and 1996. The maximum amount of
additional credit available under the revolving loan at December 31, 1997 and
1996 was $1,094 and $4,607, subject to limitations based on the amount of
eligible collateral.
The commitment fee is 0.5% per year on the average daily unused principal
balance of the revolving loan and the outstanding letters of credit. The
weighted average interest rate on short-term borrowings was 10.25%, 9.5% and
10.5% for the years ended December 31, 1997, 1996 and 1995, respectively.
Long-term Debt
- --------------
Long-term debt at December 31, 1997 and 1996 consisted of the following:
Note payable to NCR, bearing 1997 1996
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, due December 1998
and collateralized by accounts
receivable, inventories and
substantially all other assets of
the Company, bearing interest
at a variable rate payable quarterly
(9.75 % at December 31, 1997) 3,250 13,382
Other - 9
----- ------
11,250 21,391
Less current maturities
on long-term debt 3,250 8,009
----- -----
$ 8,000 $ 13,382
========= ========
OTW had a non-interest bearing note payable (effective rate of 9%) to a
corporation in installments through 1997. The note had a balance of $500 as of
December 31, 1996, 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.
F-21
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 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 Chase agreement. The maximum aggregate amount that Boundless may loan or
advance to the Company in a fiscal year is $500 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. Morgan Kent Group collateralized its guarantee of
Boundless's obligations to Chase with 2,143,938 shares of common stock of the
Company.
As a result of the Company's financial performance throughout 1997, and the
substantial reduction in debt, the Company and Chase renegotiated the terms of
its revolving loan agreement, including the release of the Morgan Kent Group's
shares of Common Stock which were pledged to Chase.
Aggregate debt scheduled maturities at December 31, 1997 were as follows:
1998 $ 3,250
1999 8,000
--------
$ 11,250
========
11. Equity
At December 31, 1997 and 1996, stockholders' equity consisted of the following:
Preferred stock, $0.01 par value, 1997 1996
1,000,000 shares authorized, ---- ----
none issued $ - $ -
Common stock, $0.01 par value,
25,000,000 shares authorized,
5,139,228 and 4,857,231 shares
issued at December 31, 1997
and 1996, respectively 51 49
Additional paid-in capital 34,094 31,877
Accumulated deficit (18,738) (23,124)
--------- --------
Total stockholders' equity $ 15,407 $ 8,802
========= ========
The Company amended its Certificate of Incorporation during April 1997 to
authorize the Company to issue up to 1,000,000 shares of preferred stock and
10,000,000 shares of Common Stock, subsequently increased to 25,000,000 through
an amendment filed on March 26, 1998. 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 of preferred stock had been issued at
December 31, 1997.
The Company issued 20,000 and 22,500 shares of its Common Stock during August
1995 and January 1996, valued at $16.30 and $25.60 per share, to an individual
whose sons are significant shareholders of Morgan Kent Group, the majority
shareholder of the Company, which was charged to expense in connection with
special consulting services rendered in 1995.
F-22
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
The Company issued 1,700 and 11,546 shares of its Common Stock during 1995 and
1996, valued at $32.50 and $24.20 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 2,000 shares of its Common Stock during January 1996, valued
at $11.20 per share, to an investment advisor in connection with services
rendered in 1995.
The Company issued 1,000 shares of its Common Stock during January 1996, valued
at $11.94 per share, to the former audit firm of the Company.
The Company issued 6,000 shares of its Common Stock during July 1996, valued at
$50.00 per share, to MCC as payment of installment due on outstanding
obligations of OTW.
The Company issued 34,620 shares of its Common Stock on October 1997, valued at
$14.40 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 and 1997 as follows:
1. The Company received gross proceeds of $400 by issuing, in a sale completed
March 14, 1997, convertible notes bearing interest at 8% per annum. As of
December 31, 1997, the entire note had been converted into 58,849 shares of
Common Stock.
2. The Company received gross proceeds of $1,000 on February 28, 1997, through
the issuance of interest-bearing convertible notes. As of December 31,
1997, the entire note had been converted into 127,360 shares of Common
Stock. In connection with this offering the Company issued warrants to a
financial advisor to purchase 5,045 shares of Common Stock at an exercise
price of $13.75 per share. This warrant was valued at $19.
3. 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 25,483 shares of Common Stock. The proceeds of
this offering were used to repurchase 27,333 shares of Common Stock at
$18.00 per share.
4. The Company received gross proceeds of $1,000 by selling 59,424 shares of
Common Stock for $16.80 per share. Approximately $505 of the proceeds of
this offering was used to fund working capital of OTW. The balance of the
proceeds was used to repurchase 27,500 shares of restricted shares of its
Common Stock at $18.00 per share.
F-23
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
5. 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 52,849 shares of Common Stock. A portion, $810,
of the proceeds of this offering was used to repurchase 17,667 shares of
Common Stock at $18.00 per share. The balance of the proceeds was used
primarily to fund working capital of OTW.
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 600,000. 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 109,850 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, 1997 and 1996, all options issued to
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 income (loss) applicable to common stockholders and
income (loss) per share as if compensation cost for the Company's employee stock
options granted had been determined in accordance with the fair value based
method prescribed in SFAS No. 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 weighted average assumptions used for grants in 1997 and 1996
as follows:
1. Dividend yield of 0% for all years
2. Expected volatility ranging from .71 to .78
3. Risk-free interest rates ranging from 5.22% to 5.83%
4. Expected terms ranging from 2 to 5 years.
Under the accounting provisions of SFAS No. 123, the Company's net earnings
(loss) applicable to common stockholders and earnings (loss) per share would
have been increased to the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net earnings (loss) applicable to
common shareholders
As reported $ 4,386 $ (11,736) $ 168
Under SFAS No. 123 2,269 (13,263) (211)
Earnings (loss) per share
As reported - basic $ 0.89 $ (2.50) $ 0.04
As reported - diluted 0.86 (2.50) 0.O4
Under SFAS No. 123 - basic 0.46 (2.82) (0.05)
Under SFAS No. 123- diluted 0.44 (2.82) (0.05)
A summary of the status of the Company's stock options and warrants as of
December 31, 1997 and 1996, and changes during the years ending on those dates
is presented below:
F-24
<PAGE>
BOUNDLESS 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, 1997:
Options 1997 1996
------- ---------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------ -------------- --------- --------------
Outstanding at
beginning of year 526,515 $ 16.80 393,750 $ 14.32
Granted 536,875 8.90 403,912 18.34
Exercised (16,529) (6.90) (92,742) (9.54)
Forfeited (348,063) (14.70) (178,405) (18.76)
----------- ------------- --------- -------
Outstanding at
end of year 698,798 $ 11.98 526,515 $ 16.75
=========== ============= ========= =========
Options exercisable
at end of year 519,344 $ 12.26 310,077 $ 16.80
=========== ============= ========= =========
Weighted average fair
value of options
granted during the year $ 4.86 $ 22.00
=========== ==========
Warrants 1997 1996
- -------- ---------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------ -------------- --------- --------------
Outstanding at
beginning of year 667,062 $ 24.40 753,659 $ 29.55
Granted 397,017 8.60 32,500 26.95
Exercised (23,094) (7.50) (51,097) (27.86)
Forfeited (565,376) (22.40) (68,000) (82.50)
----------- ------------- --------- -------
Outstanding at
end of year 475,609 $ 14.56 667,062 $ 24.15
=========== ============= ========= =========
Options exercisable
at end of year 475,609 $ 14.56 667,062 $ 24.15
=========== ============= ========= ==========
Weighted average fair
value of warrants
granted during the year $ 6.14 $ 26.30
============= ==========
F-25
<PAGE>
The following tables summarize information about fixed stock options and
warrants outstanding at December 31, 1997:
Weighted
Number Average Number
Outstanding at Remaining Exercisable at
December 31, Exercise Contractual Life December 31,
Options 1997 Price (Years) 1997
----------------------------------------------------------------
258,250 $ 6.60 4.50 205,250
300 7.20 4.55 --
62,440 10.00 4.43 --
75,000 10.30 4.25 75,000
12,900 11.30 4.83 --
138,203 13.50 2.10 102,246
25,000 15.70 4.97 25,000
13,100 16.30 1.19 13,100
1,250 17.50 1.20 1,250
5,500 20.60 1.59 5,500
64,000 21.30 1.93 61,958
24,250 25.60 2.09 20,313
17,465 28.20 2.94 9,110
1,140 32.80 2.78 617
--------- -------- --------- -----------
698,798 $11.98 3.56 519,344
========= ======== ========= ===========
Weighted
Number Average Number
Outstanding at Remaining Exercisable at
December 31, Exercise Contractual Life December 31,
Warrants 1997 Price (Years) 1997
-------------- -------- ---------------- ---------------
307,502 $ 7.50 6.95 307,502
31,375 10.00 2.80 31,375
1,440 13.80 2.44 1,440
2,500 18.40 6.95 2,500
30,000 18.40 4.39 30,000
7,292 26.90 1.08 7,292
7,500 26.90 1.14 7,500
5,000 27.40 1.07 5,000
5,000 30.00 1.00 5,000
2,625 36.30 0.83 2,625
1,875 36.60 2.83 1,875
21,000 37.80 0.80 21,000
52,500 38.80 0.80 52,500
--------- -------- ---------- --------
475,609 $14.56 5.2 475,609
========= ======== ========== ========
F-26
<PAGE>
In accordance with SFAS No. 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.
In connection with the February 1997 offerings of securities under Regulation S
of the Securities Act of 1933, the Company issued warrants to financial advisors
to purchase 5,045 shares of Common Stock at exercise price $13.75 per share,
exercisable through February 1999. These warrants were valued at approximately
$19.
A warrant to purchase 30,000 shares of Common Stock of the Company at an
exercise price of $18.70 per share, exercisable through January 31, 2002 was
granted July 1997 in consideration for ongoing services provided in the area of
financial consulting. The warrant is valued at approximately $63.
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.
OTW adopted a 1995 Stock Option Plan during 1995. The discontinuance of
operations at OTW during December, 1996, caused the options outstanding to be
without value.
F-27
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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
$5,858, $15,454, and $39,600 for 1997, 1996 and 1995 respectively. Purchases
from NCR and its subsidiaries were $87, $2,440, and $13,088 for those same
periods, respectively. The Company had accounts receivable outstanding from NCR
and its subsidiaries of approximately $224 and $2,422 at December 31, 1997 and
1996, respectively. In addition, the Company received cash distributions from
GAI of $1,459, $2,473 and $1,475 for the years ended December 31, 1997, 1996 and
1995.
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.
During April, 1997, the Company agreed to pay Morgan Kent Group an asset
utilization fee of $17 per month, or part thereof, for each month that Common
Stock owned by Morgan Kent Group remained pledged as collateral against the
Company's indebtedness to Chase or NCR. For 1997 such fees amounted to $192. At
December 31, 1997, 500,000 shares of Common Stock owned by Morgan Kent Group
remained pledged to NCR.
In April, 1997, the Company signed a consulting agreement with Morgan Kent Group
under which the Company agreed to pay Morgan Kent Group $20 per month to provide
financial advisory services. In October, 1997, the Company prepaid this fee in
the amount of $380 for services to be rendered in October 1997 and thereafter.
Expenses for 1997 under this agreement were $162.
On July 18, 1997, Morgan Kent Group issued to the Company a promissory note in
the amount of $50, bearing interest at the rate applicable to the Company under
its revolving credit line, in consideration for a loan made by the Company. The
first interest payment is due one year following the execution of the note and
quarterly thereafter. The note matures July 18, 1999.
During September, 1997, the Company and Morgan Kent Group negotiated a repricing
of the warrant which had been delivered to Morgan Kent Group in consideration
for Morgan Kent Group's guarantee of the Amended Put Option to NCR. The original
warrant to purchase 414,970 shares of Common Stock at $18.40 per share was
exchanged for a warrant to purchase 327,847 shares of Common Stock for $7.50 per
share. These warrants were determined to have approximately the same value as
determined by a Black-Scholes valuation model.
In connection with the Digital Acquisition (see Note 4) Morgan Kent Group
pledged 2,143,938 shares of Common Stock to Chase and 500,000 shares of Common
Stock to NCR. In consideration of such pledge, the Company had expected to issue
to Morgan Kent Group warrants to purchase such number of shares of Common Stock
at $38.75 per share as the Board of Directors of the Company determined was
appropriate after obtaining independent advice regarding the fairness of such
warrants. During December, 1997, Morgan Kent Group accepted the Company's offer
of $300 in lieu of the warrant; such amount having been determined by
independent advice.
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 $572, $636, and $622 in 1997, 1996 and 1995,
respectively.
F-28
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
Future minimum rental commitments as of December 31, 1997 were as follows:
1998 $ 466
1999 205
2000 101
2001 34
2002 1
--------
$ 807
--------
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. Foreign Sales
Foreign sales were approximately $30,911, $47,500 and $15,912 for 1997, 1996 and
1995, 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:
1997 1996 1995
---- ---- ----
Europe 27% 30% 13%
Other 5% 4% 4%
---- ---- ----
Total 32% 34% 17%
==== ==== ====
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 years ended December 31, 1997 and 1996, the Company made contributions of
$33 and $17 to the plan. No contributions were made during the year ended
December 31, 1995.
18. Discontinued Operations
The Company adopted a formal plan in December 1996 to discontinue operations by
March 31, 1997 of its OTW 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 OTW
employees were terminated by March 5, 1997 and a small group of consultants were
retained to affect an orderly cessation of its customer obligations. During
April, 1997, the Company finalized the discontinuation of OTW with the sale of
certain assets to a company for a combination of cash, a royalty on future
revenues and the assumption of certain liabilities.
The assets of OTW, 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 for 1996 of approximately
$1,470. The debts and commitments that were guaranteed by the Company and Morgan
Kent Group, including the OTW note payable to MCC, severance pay and lease
commitments, totaling approximately $3,492 are included in the accompanying
consolidated balance sheet.
F-29
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
(In thousands, except share data)
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 OTW 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 OTW 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 1996
have been restated for the period from inception of OTW, April 1995, through
December 31, 1995.
Net sales of OTW for 1996 and 1995 were $2,086 and $ l,165
In 1995, the Company sold substantially all of the operating assets of its
dial-up market data services business.
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 73,650 shares of the Company's common
stock, which were retired.
The results of these discontinued operations for the years ended December 31,
1996 and 1995 are summarized below:
1996 1995
--------- -----------
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)
========= ===========
No tax benefit is given for the loss on discontinued operations of OTW 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 OTW 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 carryforwards which are not available for
offset against the Company's income from continuing operations.
19. Subsequent Events
On March 6, 1998, the Company filed an Information Statement on Schedule 14C
with the Securities and Exchange Commission in connection with the following:
F-30
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, continued
In thousands, except share data)
1. amending the Company's Certificate of Incorporation (a) to effect a
one-for-ten reverse split of the issued and outstanding shares of
Common Stock, and (b) to decrease the total number of shares of Common
Stock which the Company has authority to issue from 100,000,000,
pre-reverse split, to 25,000,000, post-reverse split; and
2. approving the Company's 1997 Incentive Plan permitting the grant of
stock options, stock appreciation rights, performance shares, stock
awards, stock units and incentive awards to employees, directors and
others.
This Information Statement was furnished on March 6, 1998 to holders of record
as of the close of business on December 31, 1997 of the Common Stock of the
Company. The actions described in item 1, above, including the one-for-ten
reverse split were effected on March 26, 1998.
F-31
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(In thousands, except per share data)
ASSETS December 31,
------------------------
1997 1996
---- ----
Current assets:
Cash and cash equivalents $ - $ 6
Accounts receivable 50 340
Other current assets 403 -
------------------------
Total current assets 453 346
Investments in and advances to subsidiaries
(eliminated in consolidation):
Investments, at equity 616 (4,154)
Advances to subsidiaries, net 15,134 12,752
Other assets 45 84
------------------------
$ 16,248 $ 9,028
========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $841 $226
------------------------
Total current liabilities 841 226
------------------------
Total liabilities 841 226
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,
25,000,000 shares authorized,
5,139,228 and 4,857,231 shares
issued at December 31, 1997 and 1996,
respectively 51 49
Additional paid-in capital 34,094 31,877
Accumulated deficit (18,738) (23,124)
-------------------------
Total stockholder's equity 15,407 8,802
-------------------------
$ 16,248 $ 9,028
=========================
S-1
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
(In thousands, except per share data)
December 31,
---------------------------------
1997 1996 1995
---------------------------------
Sales $ - $ - $ -
Cost of Sales - - -
---------------------------------
Gross margin - - -
Expenses:
Operating 234 2,367 651
Interest 98 52 2
Other (income) and expenses 250 (323) -
---------------------------------
582 2,096 653
---------------------------------
Loss before benefit for income
taxes and other items below (582) (2,096) (653)
Benefit (provision) for income taxes 198 (191) 215
---------------------------------
Loss before equity from consolidated
subsidiaries (384) (2,287) (438)
Equity in income (loss) of consolidated
subsidiaries 4,770 203 (543)
---------------------------------
Loss from continuing operations 4,386 (2,084) (981)
Equity from gain (loss)on disposal
of discontinued operations - (9,652) 1,149
---------------------------------
Earnings (loss) available for
common shareholders $ 4,386 $(11,736) $ 168
=================================
S-2
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
(In thousands, except per share data)
-------------------------------------
1997 1996 1995
-------------------------------------
Net cash flows provided by
(used in) operating activities 5,497 (10,747) (1,619)
Cash flows from
investing activities:
Decrease (increase) in net
advances to subsidiaries (2,382) (4,113) (5,629)
Increase(decrease) in investment
in consolidated subsidiaries, net (4,770) 9,324 508
Payments for other assets - (44) -
-------------------------------------
Net cash provided by (used in)
investing activities (7,152) 5,167 (5,121)
Cash flows from financing activities:
Proceeds from sale of convertible
notes 1,700 1,500 4,575
Costs associated with issuance
of debt (187) - -
Net Proceeds from issuance of
common stock 136 3,980 2,164
-------------------------------------
Net cash provided by financing
activities 1,649 5,480 6,739
-------------------------------------
Net increase (decrease) in cash
and cash equivalents (6) (100) (1)
Cash and cash equivalents
at beginning of year 6 106 107
Cash and cash equivalents -------------------------------------
at end of year 0 6 106
=====================================
Non-cash transactions:
Conversion of convertible notes
into common stock 1,700 1,500 4,575
Compensatory value of options
and warrants 63 526 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 497 497
Issuance of common stock for
TradeWave obligation - 300
S-3
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
(In thousands, except per share data)
Balance at
Beginning of Balance at End
Description Period Additions Deductions of Period
- --------------------- ------------ ----------- ----------- --------------
Allowances:
Doubtful accounts:
1997 1,227 (20) 923 (A) 284
1996 1,407 150 330 (A) 1,227
1995 1,067 1,072 732 (A) 1,407
Inventory reserves:
1997 5,853 (595) 1,262 (B) 3,996
1996 3,032 3,845 1,024b(B) 5,853
1995 3,998 99 1,065 (B) 3,032
A) Includes accounts written off during the period.
B) Includes inventory written off during the period.
S-4
<PAGE>
BOUNDLESS CORPORATION
INDEX OF EXHIBITS ATTACHED
Exhibit No. Description of Exhibits
----------- -----------------------
3.1 Certificate of Incorporation and Certificates of
Amendment thereto
10(j) Amendments 1 through 7, amending the Credit Agreement
and Guaranty, dated as of October 20, 1995, among Chase
et al.
21 List of Subsidiaries
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
Exhibit 3.1
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
ALL-QUOTES, INC.
----------------
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the
"corporation") is All-Quotes, Inc.
SECOND: The address, including street, number, city, and county, of
the registered office of the corporation in the State of Delaware is 229 South
State Street, City of Dover, County of Kent, 19901; and the name of the
registered agent of the corporation in the State of Delaware at such address is
The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is thirty million (30,000,000) shares, and the par
value of each share is $.001 per share. All such shares are of one class and are
shares of Common Stock.
FIFTH: The name and the mailing address of the incorporator is as
follows:
NAME MAILING ADDRESS
---- ---------------
Lucetta M. Billhime 711 Fifth Avenue
New York, N.Y. 10022
SIXTH: The corporation is to have perpetual existence.
<PAGE>
SEVENTH: The Board of Directors is expressly authorized to adopt,
amend or repeal the by-laws of the corporation.
EIGHTH: Elections of directors need not be by written ballot unless
the by-laws of the corporation shall otherwise provide.
NINTH: Whenever a compromise or arrangement is proposed between
this corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders of this corporation, as the case may be,
and also on this corporation.
TENTH: The corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter preserved by statute, and all rights conferred upon
stockholders herein are granted subject to this preservation.
ELEVENTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify and advance the expenses of any and
all persons whom it shall have power to indemnify or advance the expenses of
under said section from and against any and all of the expenses, judgments,
fines, amounts paid for settlements, liabilities, or other matters referred to
in or covered by said section, and the indemnification and advancement of
expenses provided for herein shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
-2-
<PAGE>
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
TWELFTH: No director of the corporation shall be liable to the
corporation or its stockholders or monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
Signed: June 8, 1988 Lucetta M. Billhime
------------------------------
Incorporator
-3-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
UNDER SECTION 241 OF THE
DELAWARE CORPORATION LAW
Pursuant to the provisions of Section 241 of the Delaware Corporation Law, the
undersigned corporation adopts the following Certificate of Amendment of its
Certificate of Incorporation:
FIRST: The name of the corporation is ALL-QUOTES, INC.
SECOND: The Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on June 9, 1988.
THIRD: The Certificate of Incorporation is amended to change the
number of authorized shares which the corporation shall have authority to issue
from thirty million (30,000,000) shares with a par value of $.001 per share, to
five-hundred million (500,000,000) shares and the par value for each share shall
be $.00001 per share.
FOURTH: To effect the foregoing, Article FOURTH relating to the
authorized shares of the corporation is amended to read as follows:
"FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is five
hundred million (500,000,000) shares, and the par
value of each share is $.00001 per share. All such
shares are of one class and are shares of Common
Stock."
FIFTH: The corporation has not received any payment for any of its
stock, directors of the corporation were not named in the original Certificate
of Incorporation and have not yet been elected, and this amendment has been duly
adopted by the sole incorporator of the corporation in accordance with Section
241 of the Delaware Corporation Law.
<PAGE>
IN WITNESS WHEREOF, ALL-QUOTES, INC., the corporation
hereinbefore mentioned, has caused this Certificate of Amendment to be signed in
its name by its sole incorporator this 23rd day of June, 1988, and the
statements contained therein are affirmed and true under penalties of perjury.
ALL-QUOTES, INC.
Lucetta M. Billhime
------------------------------
Lucetta M. Billhime
Incorporator
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article FOURTH thereof and by substituting in lieu of
said Article FOURTH the following new Article:
"FOURTH": The total number of shares of stock which the Corporation
shall have the authority to issue is Twenty Million (20,000,000) shares of
Common Stock, par value $0.01 per share."
On the effective date of this certificate of amendment, the
outstanding common stock of the Corporation shall be reverse split 1-for-100, so
that each share of Common Stock, par value $0.00001 per share, of the
Corporation outstanding prior to such effective date shall on such effective
date be converted into 1/100th of a share of Common Stock, par value $0.01 per
share.
The Amendment of the Certificate of Incorporation herein certified has
been duly adopted in accordance with the provisions of Sections 228 and 242 of
the General Corporation Law of the State of Delaware.
Signed and attested to on
May 19, 1992
Bronson Conrad
------------------------------
Bronson Conrad, President
Attest:
William Lappen
- ---------------------------
William Lappen, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is
hereby amended by striking out Article FOURTH thereof and by substituting
in lieu of said Article FOURTH the following new Article:
"FOURTH: The total number of shares of all classes of stock
which the corporation shall have authority to issue is Sixty-One Million
(61,000,000) which are divided into One Million (1,000,000) shares of Preferred
Stock, par value $.01 per share, and Sixty Million (60,000,000) shares of Common
Stock, par value $.01 per share.
The shares of Preferred Stock may be issued from time to time in one
or more series, in any manner permitted by law, as determined from time to time
by the Board of Directors, and stated in the resolution or resolutions providing
for the issuance of such shares adopted by the Board of Directors pursuant to
authority hereby vested in it. Without limiting the generality of the foregoing,
shares in such series shall have such voting powers, full or limited, or no
voting powers, and shall have such designations, preferences, and relative,
participating, optional, or other special rights, and qualifications,
limitations, or restrictions thereof, permitted by law, as shall be stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. The number
of shares of any such series so set forth in such resolution or resolutions may
be increased (but not above the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it."
<PAGE>
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
Signed and attested to on
October 15, 1995
Gerald Youngblood
---------------------------
Gerald Youngblood, President
Attest:
Toni McElroy
- -----------------------
Toni McElroy, Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALL-QUOTES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is ALL-QUOTES, INC.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article FIRST thereof and by substituting in lieu of
said Article FIRST the following new Article:
"FIRST: The name of the corporation (hereinafter called the
"corporation") is SunRiver Corporation."
IN WITNESS WHEREOF, the Amendment of the Certificate of
Incorporation herein certified has been duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware. Prompt written notice of the adoption of the amendment herein
certified has been given to those stockholders who have not consented in writing
thereto, as provided in Section 228 of the General Corporation Law of the State
of Delaware.
Signed and attested to on
November 29, 1995
Gerald Youngblood
----------------------------
Gerald Youngblood, President
Attest:
Toni McElroy
- -----------------------
Toni McElroy, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
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
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
<PAGE>
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
May 27, 1997
J. Gerald Combs
-------------------------
Chief Executive Officer
Attest:
Wayne Schroeder
- ---------------
Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT of
CERTIFICATE OF INCORPORATION of
BOUNDLESS CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is BOUNDLESS CORPORATION.
2. The Certificate of Incorporation of the Corporation is
hereby amended by striking out Article FOURTH thereof and by substituting in
lieu of said Article FOURTH the following new Article:
"FOURTH: The total number of shares of all classes of stock
which the corporation shall have authority to issue is Twenty-Six Million
(26,000,000) which are divided into One Million (1,000,000) shares of Preferred
Stock, par value $.01 per share, and Twenty-Five Million (25,000,000) shares of
Common Stock, par value $.01 per share.
On the effective date (the "Effective Date") of this
Certificate of Amendment, all outstanding shares of Common Stock of the
Corporation shall be automatically combined at the rate of one-for-ten (the
"Reverse Split") without the necessity of any further action on the part of the
holders thereof or the corporation, provided, however, that the corporation
shall, through its transfer agent, exchange certificates representing Common
Stock outstanding immediately prior to the Reverse Split (the "Existing Common")
into new certificates representing the appropriate number of shares of Common
Stock resulting from the combination ("New Common"). No fractional shares, but
only whole shares of New Common shall be issued to any holder of less than ten
(10) shares or any number of shares which, when divided by ten (10), does not
result in a whole number. In lieu of fractional shares, the corporation has
arranged for its transfer agent (the "Exchange Agent") to remit payment therefor
on the following terms and conditions and as set forth in the corporation's
Information Statement dated March 6, 1998 with respect to the Reverse Split:
<PAGE>
The price payable by the corporation for fractional shares of
Existing Common, certificates for which are surrendered to the Exchange Agent in
connection with the Reverse Split, shall be equal to the product of (a) the
number of such shares which cannot be exchanged for a whole number of shares of
New Common and (b) the average of the closing price of one share of Existing
Common as reported on The Nasdaq SmallCap Market for the ten business days
immediately preceding the Effective Date for which transactions in the Existing
Common are reported. The par value of the Common Stock shall remain as otherwise
provided in Article FOURTH of this Certificate of Incorporation and shall not be
modified as a result of the Reverse Split. From and after the Effective Date,
certificates representing shares of Existing Common shall represent only the
right of the holders thereof to receive New Common and payment as provided
herein for any fractional shares of Existing Common.
From and after the Effective Date, the term "New Common" as
used in this Article FOURTH shall mean Common Stock as provided in this
Certificate of Incorporation.
The shares of Preferred Stock may be issued from time to time
in one or more series, in any manner permitted by law, as determined from time
to time by the Board of Directors, and stated in the resolution or resolutions
providing for the issuance of such shares adopted by the Board of Directors
pursuant to authority hereby vested in it. Without limiting the generality of
the foregoing, shares in such series shall have such voting powers, full or
limited, or no voting powers, and shall have such designations, preferences, and
relative, participating, optional, or other special rights, and qualifications,
limitations, or restrictions thereof, permitted by law, as shall be stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. The number
of shares of any such series so set forth in such resolution or resolutions may
be increased (but not above the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it."
-2-
<PAGE>
IN WITNESS WHEREOF, the Amendment of the Certificate of
Incorporation herein certified has been duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware. Prompt written notice of the adoption of the amendment herein
certified has been given to those stockholders who have not consented in writing
thereto, as provided in Section 228 of the General Corporation Law of the State
of Delaware. The undersigned does affirm the foregoing as true under the
penalties of perjury this 25th day of March, 1998.
/s/ J. Gerald Combs
-----------------------
J. GERALD COMBS,
Chairman and
Chief Executive Officer
-3-
EXHIBIT 10(j)
FIRST AMENDMENT TO CREDIT AGREEMENT AND GUARANTY,
HYPOTHECATION AGREEMENT AND LOAN DOCUMENTS
FIRST AMENDMENT TO CREDIT AGREEMENT AND GUARANTY,
HYPOTHECATION AGREEMENT AND LOAN DOCUMENTS, dated as of February 2, 1996
("Amendment Agreement") among SunRiver Data Systems, Inc. ("Borrower"), SunRiver
Acquisition Corporation ("SRAC"), SunRiver Corporation (formerly known as All
Quotes. Inc.) ("SRC"), SunRiver Group, Inc. ("SRG"), The Chase Manhattan Bank,
N.A. ("Chase"), each other lender which may hereafter execute and deliver an
instrument of assignment with respect to the Credit Facilities as defined in and
under the Credit Agreement referred to below (each a "Bank" and collectively,
the "Banks"), and The Chase Manhattan Bank, N.A., as agent for the Banks (in
such capacity, together with its successors in such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to each of (1) the
Credit Agreement and Guaranty dated as of October 20, 1995 among the Borrower,
SRAC, SRC, SRG, Chase and the Agent (as amended, supplemented or modified from
time to time, the "Credit Agreement"); and (2) the Hypothecation Agreement dated
as of October 20, 1995 made by SRG to each of the Banks and the Agent (as
amended, supplemented or modified from time to time, the "Hypothecation
Agreement"). Any term used in this Amendment Agreement and not otherwise defined
in this Amendment Agreement shall have the meaning assigned to such term in the
Credit Agreement.
The parties hereto have agreed to amend each of the Credit
Agreement and the Hypothecation Agreement and certain of the Loan Documents as
hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 4 hereof, hereby amended as
follows:
(a) The Cover Page and Preamble are amended by changing the
date of the Credit Agreement to October 23, 1995.
(b) Section 2.11, Mandatory Prepayments, is amended by adding
at the end of the fourth paragraph therein the following:
"In addition, notwithstanding the foregoing, the proceeds of
SRC's issuance of not more than Nine Hundred Eighty Four
Thousand Three Hundred Seventy Five (984,375) shares of its
capital stock in January and February, 1996 may be
<PAGE>
used by SRC to repurchase not more than Eight Hundred Seventy
Five Thousand (875,000) shares of its capital stock during
January and February, 1996 and are not required to make a
Prepayment Obligation as required above. In addition, each of
the exceptions set forth in this paragraph will not count
against the Borrower or either Guarantors right to retain the
first One Million Five Hundred Thousand Dollars ($1,500,000)
in accordance with item (1) of the first sentence of this
paragraph."
(c) Section 11.01, Minimum Tangible Net Worth, is amended by
(i) deleting each "Period" and its corresponding "Minimum Amount" and inserting
in their place the following:
"Period Minimum Amount
------- --------------
From December 31, 1995 to and ($ 500,000)
including March 30, 1996
From March 31, 1996 to and $ 1,500,000
including June 29, 1996
From June 30, 1996 to and $ 3,500,000
including September 29, 1996
From September 30, 1996 to and $ 6,500,000
including December 30, 1996
From December 31, 1996 to and $11,000,000"
including March 30, 1997
and by (ii) deleting "Fifteen Million Dollars ($15,000,000)" in the second
paragraph thereof and inserting in its place the following:
"Eleven Million Dollars ($11,000,000)"
(d) Section 11.02, Fixed Charge Coverage Ratio, is amended in
its entirety to read as follows:
"Borrower will have for each period specified below a ratio of
(1) the sum of (a) Earnings Before Interest, Taxes, Depreciation and
Amortization for such period minus (b) Capital Expenditures for such
period, to (2) the sum of (a) Cash Interest Expense for such period,
plus (b) the Current Portion of Long Term Debt as of the last day of
such period, plus (c) Dividends Paid during such period, of not less
than the ratio specified below for such period:
2
<PAGE>
Period Ratio
------ -----
For the four quarters (taken 1.00 to 1
together as a whole) ending on
December 31, 1995
For the four quarters (taken 1.05 to 1
together as a whole) ending on March
31, 1996
For the four quarters (taken 1.10 to 1
together as a whole) ending on June
30, 1996
For the four quarters (taken 1.25 to 1"
together as a whole) ending on each
Quarterly Date during the period
from and including September 30,
1996 to and including September 30,
1998
(e) Section 11.03, Interest Coverage Ratio, is amended by
deleting each "Period" and its corresponding "Ratio" and inserting in their
place the following:
"Period Ratio
For the four quarters (taken together as a whole) ending on each
Quarterly Date during the period from and including December 31, 3.75 to 1
1995 to and including June 30, 1996
For the four quarters (taken together as a whole) ending on each
Quarterly Date during the period from and including September 30, 4.00 to 1"
1996 to and including September 30,
1998
(f) Section 11.04, Cash Flow Leverage Ratio, is amended by
deleting each "Date" and its corresponding "Ratio" and inserting in their place
the following:
3
<PAGE>
"Date Ratio
- ----- -----
December 31, 1995 4.15 to 1
March 31, 1996 3.75 to 1
June 30, 1996 3.00 to 1
Each Quarterly Date between
and including September 30,
1996 and September 30, 1998 2.50 to 1"
SECTION 2. Amendment to Hypothecation Agreement. The
Hypothecation Agreement is, effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 4 hereof, hereby
amended as follows:
(a) The Preamble is amended by changing the date of the
Hypothecation Agreement to October 23, 1995.
(a) Section 15, Termination and Release of Hypothecation
Agreement, is amended in its entirety to read as follows:
"If at any time after December 31, 1996, (i) there
are no outstanding Defaults or Events of Default, (ii) the
Interest Rate Adjustment Ratio is lees than 2 to 1 on two
consecutive Quarterly Dates, and (iii) the Tangible Net Worth
of Borrower is equal to or greater than Fifteen Million
Dollars ($15,000,000), then the Hypothecator is released from
its pledge and hypothecation under this Hypothecation
Agreement and this Hypothecation Agreement is terminated."
SECTION 3. Amendment to All Loan Documents. Each and every
Loan Document, which has not already been so amended or is not already dated
October 23, 1995, is, effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 4 hereof, hereby
amended as follows:
(a) The Preamble of each end every Loan Document is amended by
changing the date of such Loan Document to October 23, 1995.
SECTION 4. Conditions of Effectiveness. This Amendment
Agreement shall become effective as of the date of this Amendment Agreement when
and if the Agent shall have received on or before such date each of the
following documents, in form and substance satisfactory to the Lender and its
counsel, and each of the following conditions has been fulfilled:
4
<PAGE>
(1) Amendment Agreement. This Amendment Agreement duly executed
by each party hereto:
(2) Officer's Certificate. The following statements shall be
true and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Amendment Agreement and the transactions contemplated hereby:
(a) The representations and warranties contained in the
Credit Agreement and in each of the Loan Documents
are correct in all material respects on and as of the
date hereof as though made on and as of such date;
and
(b) No Default or Event of Default has occurred and is
continuing; and
(3) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
SECTION 5. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereto, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment Agreement shall not operate as a waiver of any right, power or remedy
of the Banks or the Agent under any of the Loan Documents, nor constitute a
waiver of any provision of any of the Loan Documents, and, except as
specifically provided herein, the Credit Agreement and each other Loan Document
shall remain in full force and effect and are hereby ratified and confirmed.
SECTION 6. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent on demand for all out-of-pocket costs, expenses and charges
(including without limitation, all reasonable fees and charges of legal counsel
for the Agent, Chase and each Bank) incurred by the Agent, Chase or the Banks in
connection with the preparation, reproduction, execution and delivery of this
Amendment Agreement and any other instruments and documents to be delivered
hereunder. In addition, the Borrower
5
<PAGE>
shall pay any and all stamp and other taxes and fees payable or determined to be
payable in connection with the execution and delivery, filing or recording of
this Amendment Agreement and the other instruments and documents to be delivered
hereunder, and agrees to save the Banks and the Agent harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes or fees.
SECTION 7. Governing Law. This Amendment Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 8. Headings. Section headings in this Amendment Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Amendment Agreement for any other purpose.
SECTION 9. Counterpart. This Amendment Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any party hereto may execute this
Amendment Agreement by signing any such counterpart.
[INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment Agreement to be duly executed as of the day and year first above
written.
SUNRIVER DATA SYSTEMS, INC.
By /s/
--------------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER ACQUISITION CORPORATION
By /s/
-------------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER CORPORATION
By /s/
-------------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER GROUP, INC.
By /s/
------------------------------
Name: Gerald Youngblood
Title: President
THE CHASE MANHATTAN BANK, N.A.,
as Agent
By /s/
-------------- -------------
Name: Gary R. Olson
Title: Vice President
7
<PAGE>
THE CHASE MANHATTAN BANK, N.A.,
as Bank
By /s/
--------------------------
Name: Gary R. Olson
Title: Vice President
8
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
May 22, 1996 ("Second Amendment") among SunRiver Data Systems, Inc.
("Borrower"), SunRiver Acquisition Corporation ("SRAC"), SunRiver Corporation
(formerly known as All Quotes, Inc.) ("SRC") , SunRiver Group, Inc. ("SRG"), The
Chase Manhattan Bank, N.A. ("Chase"), each other lender which may hereafter
execute and deliver an instrument of assignment with respect to the Credit
Facilities as defined in and under the Credit Agreement referred to below (each
a "Bank" and collectively, the "Banks"), and The Chase Manhattan Bank, N.A., as
agent for the Banks (in such capacity, together with its successors in such
capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit
Agreement and Guaranty dated as of October 23, 1995 among the Borrower, SRAC,
SRC, SRG, Chase and the Agent, as amended by the First Amendment to Credit
Agreement and Guaranty, Hypothecation Agreement and Loan Documents (the "Credit
Agreement"). Any term used in this Second Amendment and not otherwise defined in
this Second Amendment shall have the meaning assigned to such term in the Credit
Agreement.
The parties hereto have agreed to amend the Credit Agreement
as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. Section 14.01 of the
Credit Agreement, Amendments and Waivers, is, effective as of the date hereof
and subject to the satisfaction of the conditions precedent set forth in Section
2 hereof, hereby amended by (i) renumbering clause "(6)" to become clause "(8)",
and (ii) inserting after "Documents;" in the twenty-second line thereof the
following:
"(6) change the definition of "Borrowing Base"; (7)
release any Guarantor from its obligations under
its Guaranty;"
SECTION 2. Conditions of Effectiveness. This Second Amendment
shall become effective on the date on which each party hereto shall have
executed and delivered this Second Amendment.
SECTION 3. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
<PAGE>
(b) The execution, delivery and effectiveness of this Second
Amendment shall not operate as a waiver of any right, power or remedy of the
Banks or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents, and, except as specifically provided
herein, the Credit Agreement and each other Loan Document shall remain in full
force and effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent on demand for all out-of-pocket costs, expenses and charges
(including, without limitation, all reasonable fees and charges of legal counsel
for the Agent, Chase and each Bank) incurred by the Agent, Chase or the Banks in
connection with the preparation, reproduction, execution and delivery of this
Second Amendment and any other instruments and documents to be delivered
hereunder. In addition, the Borrower shall pay any and all stamp and other taxes
and fees payable or determined to be payable in connection with the execution
and delivery, filing or recording of this Second Amendment and the other
instruments and documents to be delivered hereunder, and agrees to save the
Banks and the Agent harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 5. Governing Law. This Second Amendment shall be governed
by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Second Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose.
SECTION 7. Counterparts. This Second Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this Second Amendment
by signing any such counterpart.
[INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
SUNRIVER DATA SYSTEMS, INC.
By /s/
-------------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER ACQUISITION CORPORATION
By /s/
----------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER CORPORATION
By /s/
----------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER GROUP, INC.
By /s/
---------------------------
Name: Gerald Youngblood
Title: President
THE CHASE MANHATTAN BANK, N.A.,
as Agent
By /s/
--------------------------
Name: Gary R. Olson
Title: Vice President
3
<PAGE>
THE CHASE MANHATTAN BANK, N.A.,
as Bank
By /s/
-----------------------
Name: Gary R. Olson
Title: Vice President
4
<PAGE>
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT AND GUARANTY
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT AND GUARANTY
dated as of July 9, 1996 ("Third Amendment and Waiver") among SunRiver Data
Systems, Inc. ("Borrower"), SunRiver Acquisition Corporation ("SRAC"), SunRiver
Corporation (formerly known as All Quotes, Inc.; "SRC"), SunRiver Group, Inc.
("SRG"), The Chase Manhattan Bank, N.A. ("Chase"), The First National Bank of
Chicago ("FNBC"), Silicon Valley Bank ("SVB"), each other lender which may
hereafter execute and deliver an instrument of assignment with respect to the
Credit Facilities as defined in and under the Credit Agreement referred to below
(each a "Bank" and collectively, the "Banks"), and The Chase Manhattan Bank,
N.A., as agent for the Banks (in such capacity, together with its successors in
such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit
Agreement and Guaranty dated as of October 23, 1995 among the Borrower, SRAC,
SRC, SRG, Chase, FNBC, SVB and the Agent, as amended by the First Amendment to
Credit Agreement and Guaranty, Hypothecation Agreement and Loan Documents dated
as of February 2, 1996, and as further amended by the Second Amendment to Credit
Agreement and Guaranty dated as of May 22, 1996 (the "Credit Agreement"). Any
term used in this Third Amendment and Waiver and not otherwise defined in this
Third Amendment and Waiver shall have the meaning assigned to such term in the
Credit Agreement.
The parties hereto have agreed to amend and waive certain
provisions of the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, hereby amended as
follows:
(a) The following definitions are added in their proper
alphabetical order:
"'Additional Warrant Agreement' means the Additional
Warrant Agreement dated July 9, 1996 among TradeWave, the
Banks and the Agent."
"'Operating Investment' means a debt or equity
investment made by SRC in TradeWave the proceeds of which are
used by TradeWave for any purpose other than to fulfill its
obligation to redeem shares of TradeWave's stock pursuant to
the terms and provisions of the Redemption Agreements."
<PAGE>
"'Redemption Agreements' means each of the Redemption
Option Agreements by and among, TradeWave, SRC and each of the
Stockholders party thereto, each in substantially the form of
Exhibit A to the Third Amendment."
"'Redemption Investment' means a debt or equity
investment made by SRC in TradeWave the proceeds of which are
used by TradeWave to enable TradeWave to fulfill its
obligations to redeem shares of TradeWave's stock pursuant to
the terms and provisions of the Redemption Agreements."
"'SRC Issuance' means issuance by SRC on or after
July 9, 1996 and before December 31, 1996 of up to Eight
Hundred Thirty-Three Thousand Three Hundred Thirty-Three
(833,333) shares of its capital stock, the proceeds of which
are to be used by SRC to (1) make a Redemption Investment, (2)
purchase shares of stock of TradeWave to satisfy its
obligation to purchase such shares pursuant to the terms and
provisions of the Redemption Agreements or (3) make an
Operating Investment."
"'Third Amendment' means the Third Amendment and
Waiver to Credit Agreement and Guaranty dated as of July 9,
1996 among Borrower, the Guarantors, the Hypothecator, the
Banks, and the Agent."
"'TradeWave' means the TradeWave Corporation, a
Delaware corporation."
"'Warrants' means, collectively, each of the warrants
issued to each of the Banks by TradeWave in July 9, 1996 and
each of the warrants issued to the Banks by TradeWave pursuant
to the terms of Additional Warrant Agreement."
(b) Section 2.11, Mandatory Prepayments, is amended by
inserting at the end thereof the following:
"In addition, notwithstanding the foregoing, the
proceeds of any SRC Issuance are not required to be used to
make a Prepayment Obligation as required above. Finally, the
Borrower's obligation to make a Prepayment Obligation on or
about June 28, 1996 in the amount of Seven Hundred Thousand
Dollars ($700,000) is deferred until the earlier of (1)
December 31, 1996 or (2) the date on which either SRC or
TradeWave receives an aggregate amount for the issuance of
equity in either SRC
2
<PAGE>
or TradeWave, as the case may be, on or after July 9, 1996 in
an amount equal to or greater than One Million Five Hundred
Thousand Dollars ($1,500,000), provided, that, the Borrower
remains obligated to make all other Prepayment Obligations in
accordance with the terms of the Agreement."
(c) The following additional affirmative covenant is added at
the end of Article IX Affirmative Covenants:
"Section 9.10. Purchase of Warrants. Upon the request
of any Bank made at any time on or after January 1, 1997, SRC
agrees to purchase for cash within five (5) days of such
request all or any portion of the Warrants for a purchase
price of Five Dollars and Seventy-One Cents ($5.71) for each
share of TradeWave to be issued to the holder of the Warrant,
provided, however, SRC will only be required to pay the Banks,
in the aggregate, Three Hundred Thousand Dollars ($300,000)
for the purchase of Warrants pursuant to this Section.
Section 9.11. Compliance with Additional Warrant
Agreement. Take any and all actions required to ensure
that TradeWave complies with all the terms and provisions
of the Additional Warrant Agreement."
(d) Section 10.02., Guaranty, is amended by (i) deleting "and"
before clause "(4)" thereof and inserting after "($250,000)" at the end thereof
the following:
"and (5) the guaranty provided by SRC pursuant to the
Redemption Agreements of TradeWave's obligation to redeem its
stock pursuant to the terms of the Redemption Agreements."
(e) Section 12.01, Events of Default, is amended by (i)
deleting the brackets in clause "(3)" thereof, (ii) deleting clause "(10)"
thereof in its entirety, and (iii) deleting "or" after clause "(15)" thereof and
inserting after "manner" at the end of clause "(16)" thereof the following:
"; or (17) If at any time SRC enters into Redemption
Agreements, the collective effect of which could require SRC
in satisfaction of all of its obligations under all such
Agreements to issue more SRC shares than the total of (a)
Eight Hundred Thirty-Three Thousand Three Hundred Thirty-Three
(833,333) SRC shares, less (b) the number of SRC shares issued
by SRC the proceeds of which were used to make an Operating
Investment; or
3
<PAGE>
(18) The Additional Warrant Agreement shall, at any time after
its execution and delivery and for any reason, cease to be in
full force and effect or shall be declared null and void, or
the validity or enforceability thereof shall be contested by
TradeWave or TradeWave shall deny it has any further
obligation under such Agreement or TradeWave shall fail to
perform any of its obligations under such Agreement."
SECTION 2. Waiver. The Borrower has advised the Banks that
because the Borrower has failed or may fail, as the case may be, to deliver at
least twelve percent (12%) of the aggregate purchase price of Material scheduled
for delivery in each of the Measurement Periods ended March 31, 1996, April 30,
1996, May 31, 1996, and June 30, 1996 there exist or may exist, as the case may
be, Events of Default due to violations of clause "(16)" of Section 12.01,
Events of Default, of the Credit Agreement.
The Borrower has requested that both Banks waive such Events
of Default. Both Banks waive the Borrower's compliance with clause "(16)" of
Section 12.01, Events of Default for each of the Measurement Periods ended March
31, 1996, April 30, 1996, May 31, 1996, and June 30, 1996. Neither Bank waives
any future noncompliance by the Borrower with such Section.
SECTION 3. Conditions of Effectiveness. This Third Amendment
and Waiver shall become effective as of the date of this Third Amendment and
Waiver when and if the Agent shall have received on or before such date each of
the following documents, in form and substance satisfactory to the Agent, each
Bank, and their respective counsel, and each of the following conditions has
been fulfilled:
(1) Third Amendment and Waiver. This Third Amendment and Waiver
duly executed by each party hereto;
(2) First Amendment to Pledge Agreement (AQI). The execution
and delivery of the First Amendment to Pledge Agreement (AQI) in substantially
the form of Exhibit A hereto together with the certificates representing the
TradeWave shares pledged pursuant to such First Amendment and undated stock
powers executed in blank for each such certificate;
(3) Warrants and Additional Warrant Agreement. The execution
and delivery of each of the Warrants of TradeWave in substantially the form of
Exhibits B-1, B-2, and B-3 hereto and the execution and delivery of the
Additional Warrant Agreement;
(4) Consent of SRG. SRG's consent to this Third Amendment and
Waiver and all of the actions contemplated by this
4
<PAGE>
Third Amendment and Waiver, including but not limited to SRC's pledge of
one-third (1/3) of its shares of TradeWave pursuant to the First Amendment to
Pledge Agreement (AQI) and such consent shall be evidenced by SRG's signature on
the appropriate space on this Third Amendment and Waiver;
(5) Evidence of All Corporate Action by Borrower and SRC. The
Agent shall have received a certificate of the Secretary or Assistant Secretary
of Borrower and SRC (dated as of the date of this Third Amendment and Waiver)
attesting to all corporate action taken by Borrower and SRC including
resolutions of its respective Board of Directors, authorizing the execution,
delivery, and performance of this Third Amendment and Waiver and each other
document to be delivered pursuant to or in connection with this Third Amendment
and Waiver;
(6) Evidence of All Corporate Action by TradeWave. The Agent
shall have received a certificate of the Secretary or Assistant Secretary of
TradeWave (dated as of the date of this Third Amendment and Waiver) attesting to
all corporate action taken by TradeWave including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of both the
Warrants and each other document to be delivered pursuant to or in connection
with the Warrant and the Additional Warrant Agreement and each other document to
be delivered pursuant to or in connection with the Additional Warrant Agreement;
(7) Opinion of Counsel for Borrower. A favorable opinion of
Fischbein, Badillo, Wagner & Harding, counsel for Borrower, dated as of the date
of this Third Amendment and Wavier [sic], in a form acceptable to the Agent and
the Banks;
(8) Legal Bill. Dewey Ballantine has been paid in full
for all legal fees, costs and expenses in connection with the
preparation of the Third Amendment and Waiver and all past due
legal fees, costs and expenses;
(9) Officer's Certificate. The following statements shall be
true and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Third Amendment and Waiver and the transactions contemplated hereby:
(a) The representations and warranties contained
in the Credit Agreement and in each of the
other Loan Documents are correct on and as
of the date hereof as though made on and as
of such date; and
5
<PAGE>
(b) No Default or Event of Default has occurred
and is continuing; and
(10) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
SECTION 4. Reference to and Effect on the Loan Documents. a)Upon
the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) The execution, delivery and effectiveness of this Third
Amendment and Waiver shall not, except as specifically provided herein, operate
as a waiver of any right, power or remedy of the Banks or the Agent under any of
the Loan Documents, nor constitute a waiver of any provision of any of the Loan
Documents, and, except as specifically provided herein, the Credit Agreement and
each other Loan Document shall remain in full force and effect and are hereby
ratified and confirmed.
SECTION 5. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent, Chase, and the Banks on demand for all out-of-pocket costs,
expenses and charges (including, without limitation, all reasonable fees and
charges of legal counsel for the Agent, Chase and each Bank) incurred by the
Agent Chase or the Banks in connection with the preparation, reproduction,
execution and delivery of this Third Amendment and Waiver and any other
instruments and documents to be delivered hereunder. In addition, the Borrower
shall pay any and all stamp and other taxes and fees payable or determined to be
payable in connection with the execution and delivery, filing or recording of
this Third Amendment and Waiver and the other instruments and documents to be
delivered hereunder, and agrees to save the Banks and the Agent harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes or fees.
SECTION 6. Governing Law. This Third Amendment and Waiver shall
be governed by and construed in accordance with the laws of the State of New
York.
SECTION 7. Headings. Section headings in this Third Amendment
and Waiver are included herein for convenience of reference only and shall not
constitute a part of this Third Amendment and Waiver for any other purpose.
6
<PAGE>
SECTION 8. Counterparts. This Third Amendment and Waiver may
be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any party hereto may execute this
Third Amendment and Waiver by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused to be duly
executed as of this Third Amendment and Waiver the day and year first above
written.
SUNRIVER DATA SYSTEMS, INC.
By /s/
--------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER ACQUISITION CORPORATION
By /s/
-------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER CORPORATION (formerly
known as All Quotes, Inc.)
By /s/
-------------------------
Name: Gerald Youngblood
Title: President
7
<PAGE>
THE CHASE MANHATTAN BANK, N.A.,
as Bank
By /s/
--------------------------
Name: William A. DeMilt, Jr.
Title: Assistant Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as Bank
By /s/
--------------------------
Name: Anna R. Hoffman
Title: Authorized Agent
SILICON VALLEY BANK
By /s/
-------------------------
Name: J. Doug Mangum
Title: Senior Vice President
THE CHASE MANHATTAN BANK, N.A.,
as Agent
By /s/
-----------------------
Name: William A. DeMilt, Jr.
Title: Assistant Vice President
AGREED AND CONSENTED TO:
SUNRIVER GROUP, INC.
By /s/
----------------------------------
Name: Gerald Youngblood
Title: President
8
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
FOURTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
August 21, 1996 ("Fourth Amendment") among SunRiver Data Systems, Inc.
("Borrower"), SunRiver Acquisition Corporation ("SRAC"), Sunriver Corporation
(formerly known as All Quotes, Inc.; "SRC"), SunRiver Group, Inc. ("SRG"), The
Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank, N.A.;
"Chase"), The First National Bank of Chicago ("FNBC"), Silicon Valley Bank
("SVB"), each other lender which may hereafter execute and deliver an instrument
of assignment with respect to the Credit Facilities as defined in and under the
Credit Agreement referred to below (each a "Bank" and collectively, the
"Banks"), and The Chase Manhattan Bank (successor by merger to The Chase
Manhattan Bank, N.A.), as agent for the Banks (in such capacity, together with
its successors in such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit
Agreement and Guaranty dated as of October 23, 1995 among the Borrower, SRAC,
SRC, SRG, Chase, FNBC, SVB and the Agent, as amended by the First Amendment to
Credit Agreement and Guaranty, Hypothecation Agreement and Loan Documents dated
as of February 2, 1996, as further amended by the Second Amendment to Credit
Agreement and Guaranty dated as of May 22, 1996, and as further amended by the
Third Amendment to Credit Agreement and Guaranty dated as of July 9, 1996 (the
"Credit Agreement"). Any term used in this Fourth Amendment and not otherwise
defined in this Fourth Amendment shall have the meaning assigned to such term in
the Credit Agreement.
The parties hereto have agreed to amend a certain provision of
the Credit Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement
is, effective as of the Closing Date, hereby amended by deleting "Monthly Date"
in the third line of the third paragraph of Section 2.07, Interest, and
inserting in its place the following:
"Quarterly Date".
SECTION 2. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) The execution, delivery and effectiveness of this Fourth
Amendment shall not operate as a waiver of any right, power or remedy of the
<PAGE>
Banks or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents, and, except as specifically provided
herein, the Credit Agreement and each other Loan Document shall remain in full
force and effect and are hereby ratified and confirmed.
SECTION 3. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent, Chase, and the Banks on demand for all out-of-pocket costs,
expenses and charges (including, without limitation, all reasonable fees and
charges of legal counsel for the Agent, Chase and each Bank) incurred by the
Agent, Chase or the Banks in connection with the preparation, reproduction,
execution and delivery of this Fourth Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Fourth
Amendment and the other instruments and documents to be delivered hereunder, and
agrees to save the Banks and the Agent harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes or fees.
SECTION 4. Governing Law. This Fourth Amendment shall
be governed by and construed in accordance with the laws of the
State of New York.
SECTION 5. Headings. Section headings in this Fourth Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Fourth Amendment for any other purpose.
SECTION 6. Counterparts. This Fourth Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument and any party hereto may execute this Fourth Amendment
by signing any such counterpart.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused his Fourth
Amendment to be duly executed as of the day and year first above written.
SUNRIVER DATA SYSTEMS, INC.
By /s/
---------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER ACQUISITION CORPORATION
By /s/
---------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER CORPORATION (formerly known
as All Quotes, Inc.)
By /s/
---------------------------
Name: Gerald Youngblood
Title: President
SUNRIVER GROUP, INC.
By /s/
---------------------------
Name: Gerald Youngblood
Title: President
THE CHASE MANHATTAN BANK (successor
by merger to The Chase Manhattan Bank,
N.A.), as Bank
By /s/
-------------------------
Name: William A. DeMilt, Jr.
Title: Assistant Vice President
3
<PAGE>
FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT AND GUARANTY
FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT AND GUARANTY dated
as of March 31, 1997 ("Fifth Amendment and Waiver") among Boundless Technologies
(formerly known as SunRiver Data Systems, Inc.; "Borrower"), SunRiver
Acquisition Corporation ("SRAC") , SunRiver Corporation (formerly known as All
Quotes, Inc.; "SRC"), SunRiver Group, Inc. ("SRG"), The Chase Manhattan Bank
(successor by merger to The Chase Manhattan Bank, N.A.; "Chase"), The First
National Bank of Chicago ("FNBC"), Silicon Valley Bank ("SVB"), each other
lender which may hereafter execute and deliver an instrument of assignment with
respect to the Credit Facilities as defined in and under the Credit Agreement
referred to below (each a "Bank" and collectively, the "Banks"), and The Chase
Manhattan Bank (successor by merger to The Chase Manhattan Bank, N.A.), as agent
for the Banks (in such capacity, together with its successors in such capacity,
the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit Agreement
and Guaranty dated as of October 23, 1995 among the Borrower, SRAC, SRC, SRG,
Chase, FNBC, SVB and the Agent, as amended by the First Amendment to Credit
Agreement and Guaranty, Hypothecation Agreement and Loan Documents dated as of
February 2, 1996, as further amended by the Second Amendment to Credit Agreement
and Guaranty dated as of May 22, 1996, as further waived by a Waiver dated June,
1996, as further amended and waived by the Third Amendment and Waiver to Credit
Agreement and Guaranty dated as of July 9, 1996, and as further amended by a
Fourth Amendment to Credit Agreement and Guaranty dated as of August 21, 1996
(as so amended, the "Credit Agreement"). Any term used in this Fifth Amendment
and Waiver and not otherwise defined in this Fifth Amendment and Waiver shall
have the meaning assigned to such term in the Credit Agreement.
The parties hereto have agreed to amend and waive certain
provisions of the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3 hereof, hereby amended as follows:
(a) The following definitions are added in their proper
alphabetical order:
"Fifth Amendment" means the Fifth Amendment and
Waiver to Credit Agreement and Guaranty dated as of March 31,
1997 among Borrower, the Guarantors, the Hypothecator, the
Banks, and the Agent.
<PAGE>
"SRC" means SunRiver Corporation (formerly known as
All Quotes, Inc.).
(b) The definition of "Applicable Margin" is amended by adding at
the end thereof the following:
"Notwithstanding the foregoing, for the period from
April 1, 1997 to and including November 30, 1997, Applicable
Margin means: (1) with respect to a Revolving Credit Loan
which is a Base Rate Loan, one and three quarters percent
(1.75%), and (2) with respect to a Term Loan which is a Base
Rate Loan, one and three quarters percent (1.75%); provided,
however, if on December 1, 1997 the aggregate principal amount
of the Revolving Credit Loans exceeds the Revolving Credit
Facility (Loans) then the Applicable Margin shall remain at
the rates set forth in this paragraph until the aggregate
principal amount of the Revolving Credit Loans is equal to or
less than the Revolving Credit Facility (Loans). Neither a
Revolving Credit Loan nor a Term Loan shall be outstanding as
a LIBOR Loan during this period."
(c) The definition of "Borrowing Base Certificate" is amended in
its entirety to read as follows:
"Borrowing Base Certificate" means a certificate in
substantially the form of Exhibit A to the Fifth Amendment,
certified by the chief financial officer of the Borrower, with
respect to the Borrowing Base.
(d) The definition of "Eligible Account" is amended by adding
after "Banks" in the last line of clause "(9)" thereof the following: "or the
obligations of the Account Debtor on such Account are fully covered by credit
insurance policies issued by insurance companies acceptable to the Required
Banks and such policy is in form and substance acceptable to the Required
Banks".
(e) The definition of "Revolving Credit Facility" is amended by
deleting "Twenty Million Dollars ($20,000,000)" in the first and second lines
thereof and inserting in its place the following: "Eighteen Million Dollars
($18,000,000)".
(f) The definition of "Revolving Credit Facility (Loans)" is
amended in its entirety to read as follows:
"Revolving Credit Facility (Loans)" means (1) from
March 31, 1997 to and including August 29, 1997, the lesser of
(a) the Revolving Credit Facility less the aggregate amount of
all outstanding Letter of Credit Obligations or (b) the
Borrowing Base less the aggregate
2
<PAGE>
amount of all outstanding Letter of Credit Obligations, (2)
from August 30, 1997 to and including November 29, 1997, the
lesser of (a) the Revolving Credit Facility less the aggregate
amount of all outstanding Letter of Credit Obligations or (b)
the Borrowing Base less the sum of (i) the aggregate amount of
all outstanding Letter of Credit Obligations plus (ii) fifty
percent (50%) of the outstanding Term Loan, and (3) from
August 30, 1997 at all times thereafter, the lesser of (a) the
Revolving Credit Facility less the aggregate amount of all
outstanding Letter of Credit Obligations or (b) the Borrowing
Base less the sum of (i) the aggregate amount of all
outstanding Letter of Credit Obligations plus (ii) one hundred
percent (100%) of the outstanding Term Loan.
(g) Section 2.11. Mandatory Prepayment is amended by deleting the
last paragraph therein and inserting in its place the following:
"To the extent that the aggregate principal amount of
the Revolving Credit Loans exceeds the Revolving Credit
Facility (Loans), Borrower shall immediately prepay the
Revolving Credit Loans over the then effective Revolving
Credit Facility (Loans)."
(h) Article IX. Affirmative Covenants is amended by adding at the
end thereof the following:
"Section 9.12. Payment of Fees. The Borrower shall
pay to the Agent amendment fees in connection with the Fifth
Amendment in the amount of (1) Two Hundred Thousand Dollars
($200,000) on September 1, 1997 and (2) Two Hundred Thousand
Dollars ($200,000) on March 6, 1998, such fees are for the
account of the Banks, and the Agent will deliver to each Bank
its Pro Rata Share of such fees."
(i) Section 10.04. Investments is amended by deleting clause
"(5)" in its entirety and inserting in its place the following:
"(5) loans or advances by the Borrower to SRC, provided that
the aggregate amount of all such loans or advances made in any
Fiscal Year will not exceed Five Hundred Thousand Dollars
($500,000) less the aggregate amount of all cash dividends
paid by the Borrower in such Fiscal Year;".
3
<PAGE>
(j) Section 11.01. Minimum Tangible Net Worth is amended by
(i) deleting each "Period" and its corresponding "Minimum Amount" and inserting
in their place the following:
"Period Minimum Amount
From March 31, 1997 to and
including June 29, 1997 $3,000,000
From June 30, 1997 to and
including September 29, 1997 $3,400,000
From September 30, 1997 to and
including December 30, 1997 $4,100,000
From December 31, 1997 to and
including March 30, 1998 $6,900,000
From March 31, 1998 to and
including June 29, 1998 $8,000,000
From June 30, 1998 to and
including September 30, 1998 $9,500,000
and (ii) by deleting the second paragraph thereof in its entirety.
(k) Section 11.02. Fixed Charge Coverage Ratio is amended in
its entirety to read as follows:
"Section 11.02. Fixed Charge Coverage Ratio. Borrower
will have for each period specified below a ratio of (1) the
sum of (a) Earnings Before Interest, Taxes, Depreciation and
Amortization for such period minus (b) Capital Expenditures
for such period, to (2) the sum of (a) Cash Interest Expense
for such period, plus (b) the Current Portion of Long Term
Debt as of the last day of such period, plus (c) Dividends
Paid during such period, of not less than the ratio specified
below for such period:
4
<PAGE>
"Period Ratio
For the four quarters (taken together
as a whole) ending on March 31, 1997 .50 to 1
For the four quarters (taken together
as a whole) ending on June 30, 1997 .50 to 1
For the four quarters (taken together
as a whole) ending on September 30, 1997 .75 to 1
For the four quarters (taken together
as a whole) ending on each Quarterly Date
during the period from and including
December 31, 1997 to and including
September 30, 1998 1.25 to 1"
(l) Section 11.03. Interest Coverage Ratio is amended by (i)
deleting each "Period" and its corresponding "Ratio" and inserting in their
place the following:
"Period Ratio
For the four quarters (taken together
as a whole) ending on March 31, 1997 1.50 to 1
For the four quarters (taken together
as a whole) ending on June 30, 1997 1.75 to 1
For the four quarters (taken together
as a whole) ending on September 30, 1997 2.25 to 1
For the four quarters (taken together
as a whole) ending on December 31, 1997 3.50 to 1
For the four quarters (taken together
as a whole) ending on each Quarterly Date
during the period from and including
March 30, 1998 to and including
September 30, 1998 4.00 to 1"
(m) Section 11.04. Cash Flow Coverage Ratio is amended by (i)
deleting each "Date" and its corresponding "Ratio" and inserting in their place
the following:
5
<PAGE>
"Date Ratio
March 30, 1997 4.50 to 1
June 30, 1997 3.75 to 1
September 30, 1997 3.00 to 1
Each Quarterly Date between
and including December 31, 1997
and September 30, 1998 2.50 to 1"
(n) Section 12.01. Events of Default is amended by deleting
"or" after clause "(17)" thereof and inserting after "Agreement" at the end of
clause "(18)" thereof the following:
"; or (19) the Borrower fails to pay either of the fees set forth in Section
9.12 hereof."
SECTION 2. Waiver. The Borrower has advised each Bank and the
Agent that because (1) SRC issued $1,400,000 of notes convertible into common
stock of SRC in two separate Regulation S transactions on February 28, 1997 and
March 14, 1997 and SRC received $300,000 in February, 1997 with respect to the
sale of shares of common stock to Cook Capital Corp. (of which shares equal in
value to $71,657.88 will be issued in the future) and failed to make a mandatory
prepayment in an amount equal to 80% of the proceeds of such issuances in excess
of $1,500,000, (2) the Borrower made repeated advances to TradeWave on and prior
to February 27, 1997, (3) the Borrower made advances to SRC in excess of
$200,000 for the Fiscal Year ended December 31, 1996, (4) the Borrower had a
Tangible Net Worth of (a) $4,112,000 for the period from September 30, 1996 to
and including December 30, 1996 and (b) $4,227,000 for the period from December
31, 1996 to and including March 30, 1996, (5) the Borrower had for the four
quarters (taken together as a whole) ended on June 30, 1996, September 30, 1996
and on December 31, 1996 a ratio of (a) the sum of (i) Earnings Before Interest,
Taxes, Depreciation and Amortization for such period minus (ii) Capital
Expenditures for such period, to (b) the sum of (i) Cash Interest Expenses for
such period, plus (ii) the Current Portion of Long Term Debt as of September 30,
1996 and December 31, 1996, plus (iii) Dividends Paid during such period, of
3.08 to 1, 3.14 to 1 and 3.57 to 1, respectively, (6) the Borrower had for the
four quarters (taken together as a whole) ended on September 30, 1996 and on
December 31, 1996, a ratio of (a) Earnings Before Interest, Taxes, Depreciation
and Amortization for such periods to (b) the sum of (i) Cash Interest Expenses
for such periods plus (ii) Dividends Paid during such periods, of 3.17 to 1 and
2.14 to 1, respectively, (7) the Borrower had for the four quarters (taken
6
<PAGE>
together as a whole) ended on June 30, 1996, September 30, 1996 and on December
31, 1996, a ratio of (a) Funded Debt as of such dates, to (b) Earnings Before
Interest, Taxes, Depreciation and Amortization for such periods, of 1.04 to 1,
.93 to 1 and .73 to 1, respectively, (8) several modifications were made to the
Basic Order Agreement for Text Terminal Products and Parts dated October 20,
1995, (9) an amendment was made to the Borrower's certificate of incorporation
reflecting the Borrower's name change to Boundless Technologies, and (10)
TradeWave failed to fulfill its obligations under the Additional Warrant
Agreement, there are Events of Default due to violations of Section 2.11,
Mandatory Prepayment, Section 10.04, Investments, Section 10.10, Changes,
Amendments or Modifications, Section 11.01, Minimum Tangible Net Worth, Section
11.02, Fixed Charge Coverage Ratio, Section 11.03, Interest Coverage Ratio,
Section 11.04, Cash Flow Leverage Ratio, and clause (18) of Section 12.01,
Events of Default, of the Credit Agreement.
The Borrower has requested that each Bank and the Agent waive
such Events of Default. Each Bank and the Agent waives the Borrower's compliance
with each of the aforementioned Sections of the Credit Agreement for the periods
set forth in the preceding paragraph. None of the Banks nor the Agent waive any
future noncompliance by the Borrower with such Sections or any other provision
of the Loan Documents.
SECTION 3. Conditions of Effectiveness. This Fifth Amendment and
Waiver shall become effective as of the date of this Fifth Amendment and Waiver
when and if the Agent shall have received on or before such date each of the
following documents, in form and substance satisfactory to the Agent, each Bank,
and their respective counsel, and each of the following conditions has been
fulfilled:
(1) Fifth Amendment and Waiver. This Fifth Amendment and Waiver
duly executed by each party hereto;
(2) Borrowing Base Certificate. A Borrowing Base Certificate
substantially in the form of Exhibit A hereto;
(3) Purchase of Warrants. SRC will pay to the Agent for the
benefit of the Banks a fee of Two Hundred Seventy Thousand Eight Hundred
Forty-Eight Dollars ($270,848) in connection with SRC's purchase of the
Warrants;
(4) Amendment Fee. The Borrower shall have paid to the Agent an
amendment fee in the amount of One Hundred Thousand Dollars ($100,000) for the
account of the Banks, and the Agent will deliver to each Bank its Pro Rata Share
of such fee;
7
<PAGE>
(5) Evidence of All Corporate Action by Borrower. The Agent
shall have received a certificate of the Secretary or Assistant Secretary of
Borrower (dated as of the date of this Fifth Amendment and Waiver) attesting to
all corporate action taken by Borrower including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of this Fifth
Amendment and Waiver and each other document to be delivered pursuant to or in
connection with this Fifth Amendment and Waiver;
(6) Officer's Certificate. The following statements shall be
true and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Fifth Amendment and Waiver and the transactions contemplated hereby:
(a) The representations and warranties contained in the
Credit Agreement and in each of the other Loan
Documents are correct on and as of the date hereof as
though made on and as of such date; and
(b) No Default or Event of Default has occurred and is
continuing; and
(7) Legal Bill. Dewey Ballantine has been paid in full for all
legal fees, costs and expenses in connection with the preparation of this Fifth
Amendment and Waiver and all past due legal fees, costs and expenses; and
(8) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
SECTION 4. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) The execution, delivery and effectiveness of this Fifth
Amendment and Waiver shall not, except as specifically provided herein, operate
as a waiver of any right, power or remedy of the Banks or the Agent under any of
the Loan Documents, nor constitute a waiver of any provision of any of the Loan
Documents, and, except as specifically provided herein, the Credit Agreement and
each other Loan Document shall remain in full force and effect and are hereby
ratified and confirmed.
8
<PAGE>
SECTION 5. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent, Chase, and the Banks on demand for all out-of-pocket costs,
expenses and charges (including, without limitation, all reasonable fees and
charges of legal counsel for the Agent, Chase and each Bank) incurred by the
Agent, Chase or the Banks in connection with the preparation, reproduction,
execution and delivery of this Fifth Amendment and Waiver and any other
instruments and documents to be delivered hereunder. In addition, the Borrower
shall pay any and all stamp and other taxes and fees payable or determined to be
payable in connection with the execution and delivery, filing or recording of
this Fifth Amendment and Waiver and the other instruments and documents to be
delivered hereunder, and agrees to save the Banks and the Agent harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes or fees.
SECTION 6. Governing Law. This Fifth Amendment and Waiver shall
be governed by and construed in accordance with the laws of the State of New
York.
SECTION 7. Headings. Section headings in this Fifth Amendment and
Waiver are included herein for convenience of reference only and shall not
constitute a part of this Fifth Amendment and Waiver for any other purpose.
SECTION 8. Counterparts. This Fifth Amendment and Waiver may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any party hereto may execute this
Fifth Amendment and Waiver by signing any such counterpart.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth
Amendment and Waiver to be duly executed as of the day and year first above
written.
BOUNDLESS TECHNOLOGIES, INC.
(formerly known as Sunriver Data
Systems, Inc.)
By: /s/
-----------------------------
Name: Wayne Schroeder
Title: V.P. Finance
SUNRIVER ACQUISITION CORPORATION
By: /s/
---------------------------
Name: Wayne Schroeder
Title: V.P. Finance
SUNRIVER CORPORATION
(formerly known as All
Quotes, Inc.)
By: /s/
--------------------------
Name: Wayne Schroeder
Title: V.P. Finance
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank, N.A.), as
Bank
By: /s/
------------------------
Name: William A. DeMilt, Jr.
Title: Assistant Vice President
10
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
as Bank
By: /s/
-----------------------------
Name: Phillip D. Martin
Title: Vice President
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank, N.A.), as Agent
By:
-------------------------
Name:
Title:
AGREED AND CONSENTED TO:
SUNRIVER GROUP, INC.
By: -----------------------------
Name:
Title:
11
<PAGE>
SIXTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
AND SECOND AMENDMENT TO HYPOTHECATION AGREEMENT
SIXTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY AND SECOND
AMENDMENT TO HYPOTHECATION AGREEMENT dated as of December 22, 1997 ("Amendment
Agreement") among Boundless Technologies, Inc. (formerly known as SunRiver Data
Systems, Inc.; "Borrower"), SunRiver Acquisition Corporation ("SRAC"), Boundless
Corporation (formerly known as SunRiver Corporation; "BC"), Morgan Kent Group,
Inc. (formerly known as SunRiver Group, Inc.; "MKG"), The Chase Manhattan Bank
(successor by merger to The Chase Manhattan Bank, N.A.; "Chase"), Silicon Valley
Bank ("SVB"), each other lender which may hereafter execute and deliver an
instrument of assignment with respect to the Credit Facilities as defined in and
under the Credit Agreement referred to below (each a "Bank" and collectively,
the "Banks"), and The Chase Manhattan Bank (successor by merger to The Chase
Manhattan Bank, N.A.), as agent for the Banks (in such capacity, together with
its successors in such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit
Agreement and Guaranty dated as of October 23, 1995 among the Borrower, SRAC,
BC, MKG, Chase, The First National Bank of Chicago, SVB and the Agent, as
amended by the First Amendment to Credit Agreement and Guaranty, Hypothecation
Agreement and Loan Documents dated as of February 2, 1996, as further amended by
the Second Amendment to Credit Agreement and Guaranty dated as of May 22, 1996,
as further waived by a Waiver dated June, 1996, as further amended and waived by
the Third Amendment and Waiver to Credit Agreement and Guaranty dated as of July
9, 1996, as further amended by a Fourth Amendment to Credit Agreement and
Guaranty dated as of August 21, 1996, and as further amended by a Fifth
Amendment and Waiver to Credit Agreement and Guaranty dated as of March 31, 1997
(as so amended, the "Credit Agreement"). Any term used in this Amendment
Agreement and not otherwise defined in this Amendment Agreement shall have the
meaning assigned to such term in the Credit Agreement.
The parties hereto have agreed to amend certain provisions of
each of the Credit Agreement and the Hypothecation Agreement as hereinafter set
forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, hereby amended as
follows:
<PAGE>
(1) The following definitions are added in their proper
alphabetical order:
"Amendment Agreement" means the Sixth Amendment to
Credit Agreement and Guaranty and the Second Amendment to
Hypothecation Agreement dated as of December 22, 1997 among
Borrower, the Guarantors, the Hypothecator, the Banks and the
Agent."
"Amendment Agreement Date" means December 22,
1997.
(2) The definition of "Applicable Margin" is amended by adding
at the end thereof the following:
"In addition, notwithstanding the foregoing, if on
and after December 1, 1997, the aggregate amount of
Outstanding Credit Facilities is less than eighty percent
(80%) of the face amount of Eligible Accounts, then during
such period the "Applicable Margin" shall mean: (1) with
respect to a Revolving Credit Loan which is a Base Rate Loan,
three quarters of one percent (.75%), (2) with respect to a
Revolving Credit Loan which is a LIBOR Rate Loan, two percent
(2.00%), (3) with respect to a Term Loan which is a Base Rate
Loan, three quarters of one percent (.75%), and (4) with
respect to a Term Loan which is a LIBOR Rate Loan, two percent
(2.00%).
(3) The definition of "Revolving Credit Facility" is amended
in its entirety to read as follows:
"Revolving Credit Facility" means Fifteen Million
Dollars ($15,000,000), less the total of (1) an amount equal
to the aggregate of any and all mandatory prepayments of the
Revolving Credit Loans made pursuant to any and all of the
first four (4) paragraphs of Section 2.11, plus (2) the amount
of the Letter of Indemnity Obligations.
(4) The definition of "Revolving Credit Facility (Loans)" is
amended in its entirety to read as follows:
"Revolving Credit Facility (Loans)" means (1) from
the Amendment Agreement Date to and including November 29,
1997, the lesser of (a) the Revolving Credit Facility less the
aggregate amount of all outstanding Letter of Credit
Obligations or (b) the Borrowing Base less the sum of (i) the
aggregate amount of all outstanding Letter of Credit
Obligations plus
2
<PAGE>
(ii) fifty percent (50%) of the outstanding Term Loan, and (2)
from November 30, 1997 and at all times thereafter, the lesser
of (a) the Revolving Credit Facility less the aggregate amount
of all outstanding Letter of Credit Obligations or (b) the
Borrowing Base less the sum of (i) the aggregate amount of all
outstanding Letter of Credit Obligations plus (ii) one hundred
percent (100%) of the outstanding Term Loan.
(5) The definition of "Termination Date" is amended by
deleting "September 30, 1998" and inserting in its place the following:
"December 31, 1998".
(6) Section 2.02, Term Loan, is amended in its entirety to
read as follows:
"Borrower and each Bank acknowledge that Three
Million Two Hundred Fifty Thousand Dollars ($3,250,000)
of the Term Loan remains outstanding as of the
Amendment Agreement Date. Amounts prepaid on the Term
Loan cannot be reborrowed."
(7) Section 2.09, Notes, is amended by deleting the second
paragraph therein in its entirety and inserting in its place the following:
"The Term Loan made by each Bank under this Agreement
shall be evidenced by, and repaid with interest in accordance
with a single form of promissory note of Borrower in
substantially the form of Exhibit B to the Amendment Agreement
duly completed and payable to the order of such Bank for the
account of its Applicable Lending Office (each a "Term Loan
Note"). Each of the Term Loan Notes evidencing the Term Loan
shall be dated the Amendment Agreement Date. The Term Loan
will be repaid in four (4) consecutive quarterly installments,
where the first installment is in an amount equal to Two
Hundred Fifty Thousand Dollars ($250,000) and the remaining
three (3) installments are each in an amount equal to One
Million Dollars ($1,000,000). The first installment is due on
March 31, 1998, with subsequent installments on each Quarterly
Date thereafter, to and including December 31, 1998; provided,
however, that the last such installment shall be in the amount
necessary to repay in full the unpaid principal amount of the
Term Loan and any accrued interest and fees."
(8) Section 2.11, Mandatory Prepayment, is amended by deleting
"One Million Five Hundred Thousand Dollars ($1,500,000)" in the twelfth line of
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<PAGE>
the fourth paragraph thereof and inserting in its place the following: "Five
Million Dollars ($5,000,000) on and after the Amendment Agreement Date".
SECTION 2. Amendment to Hypothecation Agreement. The
Hypothecation Agreement is, effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 3 hereof, hereby
amended by deleting Section 15, Termination and Release of Hypothecation
Agreement, in its entirety and inserting in its place the following:
"Section 15. Termination and Release of Hypothecation
Agreement. On the Amendment Agreement Date, the Agent on
behalf of the Banks shall release Eight Million (8,000,000) of
the Pledged Shares to the Hypothecator. If at any time after
December 1, 1997 there are no outstanding Defaults or Events
of Default, then the Hypothecator is released from its pledge
and hypothecation under this Hypothecation Agreement and this
Hypothecation Agreement is terminated."
SECTION 3. Conditions of Effectiveness. This Amendment Agreement
shall become effective as of the date of this Amendment Agreement when and if
the Agent shall have received on or before such date each of the following
documents, in form and substance satisfactory to the Agent, each Bank, and their
respective counsel, and each of the following conditions has been fulfilled:
(1) Amendment Agreement. This Amendment Agreement duly executed
by each party hereto and consented to by MKG;
(2) Prepayment of Loans. Borrower shall prepay the Loans so that
the outstanding principal amount of the Term Loan is equal to Three Million Two
Hundred Fifty Thousand Dollars ($3,250,000) and the outstanding principal amount
of the Revolving Credit Facility (Loans) is less than or equal to Fifteen
Million Dollars ($15,000,000);
(3) Notes. Borrower shall have duly executed and delivered to
each Bank a Revolving Credit Note in the form of Exhibit A hereto and a Term
Loan Note in the form of Exhibit B hereto;
(4) Assignment and Assumption Agreement. An Assignment and
Assumption Agreement duly executed by SVB and The First National Bank of
Chicago;
(5) Evidence of All Corporate Action by Borrower. The Agent shall
have received a certificate of the Secretary or Assistant Secretary of Borrower
4
<PAGE>
(dated as of the date of this Amendment Agreement) attesting to all corporate
action taken by Borrower including resolutions of its Board of Directors,
authorizing the execution, delivery, and performance of this Amendment Agreement
and each other document to be delivered pursuant to or in connection with this
Amendment Agreement;
(6) Amendment Fee. The Borrower shall have paid to the Agent an
amendment fee in an amount equal to Fifty Thousand Dollars ($50,000) for the
account of the Banks, and the Agent will deliver to each Bank its Pro Rata Share
of such fee;
(7) Officer's Certificate. The following statements shall be true
and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Amendment Agreement and the transactions contemplated hereby:
(a) The representations and warranties contained
in the Credit Agreement and in each of the
other Loan Documents are correct on and as
of the date hereof as though made on and as
of such date; and
(b) No Default or Event of Default has occurred
and is continuing; and
(8) Legal Bill. Dewey Ballantine has been paid in full for all
legal fees, costs and expenses in connection with the preparation of this
Amendment Agreement and all past due legal fees, costs and expenses; and
(9) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
SECTION 4. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) The execution, delivery and effectiveness of this Amendment
Agreement shall not operate as a waiver of any right, power or remedy of the
Banks or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents, and, except as specifically provided
herein, the Credit Agreement and each other Loan Document shall remain in full
force and effect and are hereby ratified and confirmed.
5
<PAGE>
SECTION 5. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent, Chase, and the Banks on demand for all out-of-pocket costs,
expenses and charges (including, without limitation, all reasonable fees and
charges of legal counsel for the Agent, Chase and each Bank) incurred by the
Agent, Chase or the Banks in connection with the preparation, reproduction,
execution and delivery of this Amendment Agreement and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this
Amendment Agreement and the other instruments and documents to be delivered
hereunder, and agrees to save the Banks and the Agent harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes or fees.
SECTION 6. Governing Law. This Amendment Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 7. Headings. Section headings in this Amendment Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Amendment Agreement for any other purpose.
SECTION 8. Counterparts. This Amendment Agreement may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this Amendment
Agreement by signing any such counterpart.
[INTENTIONALLY LEFT BLANK.]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed as of the day and year first above written.
BOUNDLESS TECHNOLOGIES, INC.
(formerly known as SunRiver
Data Systems, Inc.)
By /s/
--------------------------
Name: Joseph Gardner
Title: VP Finance and
Administration
SUNRIVER ACQUISITION CORPORATION
By /s/
--------------------------
Name: Joseph Gardner
Title: VP Finance
BOUNDLESS CORPORATION (formerly
known as SunRiver Corporation)
By /s/
------------------------
Name: Joseph Gardner
Title: VP Finance and CFO
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank,
N.A.), as Bank
By /s/
----------------------
Name: William A. DeMilt, Jr.
Title: Assistant VP
7
<PAGE>
SILICON VALLEY BANK,
as Bank
By /s/
--------------------------
Name: J. Doug Mangum
Title: Senior Vice President
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank,
N.A.), as Agent
By
---------------------------
Name:
Title:
AGREED AND CONSENTED TO:
MORGAN KENT GROUP, INC.
(formerly known as
Sunriver Group, Inc.)
By____________________________
Name:
Title:
8
<PAGE>
SEVENTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
SEVENTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
February 24, 1998 ("Seventh Amendment") among Boundless Technologies, Inc.
(formerly known as SunRiver Data Systems, Inc.; "Borrower"), SunRiver
Acquisition Corporation ("SRAC"), Boundless Corporation (formerly known as
SunRiver Corporation; "BC"), The Chase Manhattan Bank (successor by merger to
The Chase Manhattan Bank, N.A.; "Chase"), Silicon Valley Bank ("SVB"), National
Bank of Canada ("NBC") each other lender Which may hereafter execute and deliver
an instrument of assignment with respect to the Credit Facilities as defined in
and under the Credit Agreement referred to below (each a "Bank" and
collectively, the "Banks"), and The Chase Manhattan Bank (successor by merger to
The Chase Manhattan Bank, N.A.), as agent for the Banks (in such capacity,
together with its successors in such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Credit Agreement
and Guaranty dated as of October 23, 1995 among the Borrower, SRAC, BC, Morgan
Kent Group, Inc. (formerly known as SunRiver Group, Inc.; "MKG"), Chase, The
First National Bank of Chicago, SVB and the Agent, as amended by the First
Amendment to Credit Agreement and Guaranty, Hypothecation Agreement and Loan
Documents dated as of February 2, 1996, as further amended by the Second
Amendment to Credit Agreement and Guaranty dated as of May 22, 1996, as further
waived by a Waiver dated June, 1996, as further amended and waived by the Third
Amendment and Waiver to Credit Agreement and Guaranty dated as of July 9, 1996,
as further amended by a Fourth Amendment to Credit Agreement and Guaranty dated
as of August 21, 1996, as further amended by a Fifth Amendment and Waiver to
Credit Agreement and Guaranty dated as of March 31, 1997, and as further amended
by a Sixth Amendment and Waiver to Credit Agreement and Guaranty and Second
Amendment to Hypothecation Agreement dated as of December 22, 1997 (as so
amended, the "Credit Agreement"). Any term used in this Seventh Amendment and
not otherwise defined in this Seventh Amendment shall have the meaning assigned
to such term in the Credit Agreement.
The parties hereto have agreed to amend certain provisions of
each of the Credit Agreement and the Hypothecation Agreement as hereinafter set
forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
<PAGE>
(1) Section 10.09, Dividends, is amended by adding after
"Year" in the last line thereof the following:
"and (2) the Borrower can declare and pay cash dividends in
connection with the repurchase of fractional shares with
respect to the Borrower's March 1998 one-for-ten reverse stock
split of its common shares, provided that the aggregate amount
of all such dividends declared and paid in connection with
such stock split shall not exceed Two Hundred Fifty Thousand
Dollars ($250,000).
(2) Section 10.10, Changes, Amendments or Modifications, is
amended by inserting after "Agreements" in the last line thereof the following:
"; provided that the Borrower can amend its certificate of
incorporation to permit the Borrower's March 1998 one-for-ten
reverse stock split of its common shares."
SECTION 2. Conditions of Effectiveness. This Seventh Amendment
shall become effective as of the date of this Seventh Amendment when and if the
Agent shall have received on or before such date each of the following
documents, in form and substance satisfactory to the Agent, each Bank, and their
respective counsel, and each of the following conditions has been fulfilled:
(1) Seventh Amendment. This Seventh Amendment duly executed by
each party hereto;
(2) Officer's Certificate. The following statements shall be
true and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Seventh Amendment and the transactions contemplated hereby:
(a) The representations and warranties contained in the
Credit Agreement and in each of the other Loan
Documents are correct on and as of the date hereof as
though made on and as of such date; and
(b) No Default or Event of Default has occurred and is
continuing; and
(3) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
2
<PAGE>
SECTION 3. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) The execution, delivery and effectiveness of this Seventh
Amendment shall not operate as a waiver of any right, power or remedy of the
Banks or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents, and, except as specifically provided
herein, the Credit Agreement and each other Loan Document shall remain in full
force and effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent, Chase, and the Banks on demand for all out-of-pocket costs,
expenses and charges (including, without limitation, all reasonable fees and
charges of legal counsel for the Agent, Chase and each Bank) incurred by the
Agent, Chase or the Banks in connection with the preparation, reproduction,
execLution and delivery of this Seventh Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Seventh
Amendment and the other instruments and documents to be delivered hereunder, and
agrees to save the Banks and the Agent harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes or fees.
SECTION 5. Governing Law. This Seventh Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Seventh Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Seventh Amendment for any other purpose.
SECTION 7. Counterparts. This Seventh Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this Seventh Amendment
by signing any such counterpart.
[INTENTIONALLY LEFT BLANK.]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Seventh Amendment to be duly executed as of the day and year first above
written.
BOUNDLESS TECHNOLOGIES, INC.
(formerly known as SunRiver
Data Systems, Inc.)
By /s/
-------------------------------
Name: Joseph Gardner
Title: VP Finance and
Administration
SUNRIVER ACQUISITION CORPORATION
By
------------------------------
Name: Joseph Gardner
Title: CFO
BOUNDLESS CORPORATION (formerly
known as SunRiver Corporation)
By /s/
----------------------------
Name: Joseph Gardner
Title: CFO
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank,
N.A.), as Bank
By
-------------------------
Name:
Title:
4
<PAGE>
SILICON VALLEY BANK, as Bank
By
--------------------------
Name:
Title:
NATIONAL BANK OF CANADA, as Bank
By
-------------------------
Name:
Title:
By
--------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
(successor by merger to The
Chase Manhattan Bank,
N.A.), as Agent
By
--------------------------
Name:
Title:
5
EXHIBIT 21
LIST OF SUBSIDIARIES OF
BOUNDLESS CORPORATION
Boundless Acquisition Corp. (a Delaware corporation), a
non-operating subsidiary of Boundless Corporation.
Boundless Technologies, Inc. (a Delaware corporation),
a subsidiary of Boundless Acquisition Corp.
Boundless Technologies International, B.V. (a
Netherlands corporation), a subsidiary of Boundless
Technologies, Inc.
OTW Corporation (a Delaware corporation), a non-operating
subsidiary of Boundless Corporation.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
Boundless Corporation
We hereby consent to the incorporation by reference in the registration
statements of Boundless Corporation on Form S-8 (File Nos. 33-95846, 33-81106
and 33-86896) of our report dated February 28, 1998 (except for Notes 1, 11 and
19 as to which the date is March 26, 1998) on our audits of the consolidated
financial statements and schedules of Boundless Corporation and Subsidiaries as
of December 31, 1997 and for the year ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
BDO Seidman, LLP
Dallas, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS. "EPS-PRIMARY" and "EPS-DILUTED" give
effect to a one-for-ten reverse split of the Registrant's common stock which
became effective on March 26, 1998. Financial Data Schedules previously filed by
the Registrant have not been restated to give effect to such reverse split.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 2,929
<SECURITIES> 0
<RECEIVABLES> 14,679
<ALLOWANCES> 284
<INVENTORY> 13,682
<CURRENT-ASSETS> 34,078
<PP&E> 15,031
<DEPRECIATION> (4,417)
<TOTAL-ASSETS> 54,548
<CURRENT-LIABILITIES> 25,298
<BONDS> 8,000
3,555
0
<COMMON> 51
<OTHER-SE> 15,356
<TOTAL-LIABILITY-AND-EQUITY> 54,548
<SALES> 98,271
<TOTAL-REVENUES> 98,271
<CGS> 73,505
<TOTAL-COSTS> 73,505
<OTHER-EXPENSES> 20,017
<LOSS-PROVISION> (20)
<INTEREST-EXPENSE> 3,730
<INCOME-PRETAX> 4,749
<INCOME-TAX> (134)
<INCOME-CONTINUING> 4,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,883
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.86
</TABLE>
