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, 1998
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 11788
(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 5, 1999, is $12,818,705.
As of March 5, 1999, the registrant had 4,428,609 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.
Boundless principally designs, assembles, sells and supports (i)
desktop computer display terminals, which generally do not have graphics
capabilities, although some have limited graphics capabilities ("General Display
Terminals"); (ii) desktop display devices which enable simple, easy and
cost-effective access to corporate computing environments ("Windows(R)-based
Terminals" or "WBTs") and supporting software; 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.
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.
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On March 6, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission announcing, among other items, a one-for-ten
reverse split (the "Reverse Split") of the Company's Common Stock. As the
Reverse Split was effective as of March 26, 1998, information contained within
this Form 10-K has been presented to reflect retroactive application of the
Reverse Split.
Reference is made to Notes 1, 4, 8, and 16 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, 1998, the Company had
a tangible net worth of $9,307,000 and total liabilities of $29,136,000. The
Company's cash requirements at December 31, 1998 included repayment to The Chase
Manhattan Bank ("Chase") of a revolving loan under its bank credit line (the
"Chase Credit Line") of $5,500,000, plus interest; payment of an $8,000,000 note
(the "NCR Note") requiring quarterly interest payments and 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 with respect to preferred stock of Boundless (the "Boundless
Preferred Stock") issued to NCR in connection with the Boundless Acquisition;
and annual dividend payments to NCR with respect to the Boundless Preferred
Stock of $497,657 in cash or the Company's common stock, $.01 par value per
share ("Common Stock"). Subsequent to December 31, 1998, the Company negotiated
with NCR an extension of the NCR Note to April 30, 1999 to allow the Company to
complete the negotiations with mortgage lenders to refinance the NCR Note. In
addition, during January 1999, by utilizing availability under the Chase Credit
Line, the Company redeemed the Boundless Preferred Stock, thereby satisfying its
obligations to NCR under the put option and its obligations to make dividend
payments to NCR on such stock. On April 14, 1999, the Company signed an
agreement with Chase to replace the existing Chase Credit Line with a new
three-year $15,000,000 revolving line of credit on terms substantially similar
to those previously in effect. The new credit facility also provides for a
$4,000,000 term loan, payable over a three-year period in equal quarterly
installments beginning June 1999. 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; however, 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, 1998, 1997 and 1996
the Company recorded earnings/(loss) available to common shareholders of
approximately $4,411,000, $4,386,000, and ($11,736,000), respectively. The
Company recorded 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 the operations of a subsidiary, OTW Corp. ("OTW"). 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
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and Analysis of Financial Condition and Results of Operations - Results of
Operations."
Strategy. Approximately 85% of the Company's sales for the year ended
December 31, 1998 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, Digital and NCR were the
Company's most significant customers in 1998, accounting for approximately 15%,
9% 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 June 11, 1998, Compaq Computer Corp. ("Compaq") consummated its
acquisition 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
have employment contracts with Mr. J. Gerald Combs, its Chairman and Chief
Executive Officer, and with Mr. Kenneth East, its Chief Operating Officer. The
Company does not have employment contracts with any of their other 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
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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.
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 Wong
Electronics Corp., Advanced Scientific Corp. and Tonghah Electronics SDN.BHD,
which manufacture plug-in logic boards in China, Taiwan and Malaysia,
respectively, for the Company's General Display Terminals and Windows(R)-based
Terminals, accounted for approximately 22%, 17% and 12%, respectively, of the
dollar amount of the Company's total purchases in 1998 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."
Substantial Control by Morgan Kent Group. Morgan Kent Group owns
approximately 42% (approximately 47% on a fully diluted basis) of the
outstanding shares of the Company's Common Stock (including 457,502 shares
underlying warrants) and, accordingly, has the ability to significantly
influence the election of all directors and to otherwise control Company
policies. Morgan Kent Group's substantial ownership position of the
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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."
Forward-Looking Information May Prove Inaccurate. This Form 10-K
contains forward-looking statements and information that are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect," and similar expressions are intended to
identify forward-looking statements. Such statements reflect the Company's
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the specific risk factors described
above. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does not intend
to update these forward-looking statements and information.
Products and Services
General Display Terminals. The Company's General Display Terminals are
ANSI/ASCII desktop terminals, which generally do not have graphics capabilities,
although some have limited graphics capabilities. The Company offers standard
and custom models, primarily for data entry and point of sale activities.
General Display Terminals are sold by the Company under the Company's ADDS(R),
Dorio(R) and VT(R) trademarks. The ADDS, Dorio and VT brands are complementary
products, providing slightly different features to various user segments.
In connection with the Boundless Acquisition, the Company entered into
various agreements with NCR pursuant to which the Company will continue to
supply at least 90% of NCR's terminal requirements (including 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 1998, sales to NCR constituted approximately
4% 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 9% of total
General Display Terminal sales for 1998.
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
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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, where the applications execute 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. 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:
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.
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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.
During 1998 the Company signed an exclusive alliance agreement with
Infinite Solutions pertaining to its MultiConsole Terminals products. Under
terms of this alliance Infinite Solutions assumes responsibility for sales and
support, product development, maintenance and warranty logistics for the
MultiConsole Product. Boundless will continue to manufacture and service the
MultiConsole product exclusively for Infinite Solutions. Infinite Solutions has
been a Boundless channel partner for over a decade and involved with the
MultiConsole product since the product's development.
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 PCs (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.
Although the Company is entitled to distributions of between 7% to 12%
of the gross revenue of the GAI Partnership, no such distributions were made to
the Company during 1998, presumably due to significant operating losses reported
by GA as a result of its economic difficulties. The prospects for the
continuation of the GAI Partnership are uncertain. The Company is evaluating its
options regarding its relationship with GA and continues discussions with GA
regarding payment of the past due amount.
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 desktop 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.
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
a material portion of consolidated revenue in any of such years. Information for
the year ended December 31, 1996 is based upon the consolidated operations of
the Company excluding revenue generated by OTW.
General Windows(R)-
Display Based
Period Terminals Terminals
- ------ --------- ---------
1998 84.9% 9.3%
1997 83.6% 3.3%
1996 80.0% -
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Foreign Sales. Net foreign sales were approximately $29,544,000,
$30,911,000 and $47,500,000 for 1998, 1997 and 1996, 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
- ------ ----- ------
1998 32.8% 28.3%
1997 31.6% 27.0%
1996 33.9% 29.6%
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, 1998 totaled approximately
$7,145,000 as compared to $7,345,000 at December 31, 1997. Approximately
$7,051,000 of the Company's backlog at December 31, 1998 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 Wong
Electronics Corp., Advanced Scientific Corp. and Tonghah Electronics SDN.BHD
which manufacture in China, Taiwan and Malaysia, respectively, of plug-in logic
boards for the Company's General Display Terminals and Windows(R)-based
Terminals, accounted for approximately 22%, 17% and 12%, respectively, of the
total dollar amount of the Company's total purchases in 1998 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
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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 ten-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 ten years or can pay for repairs
on a time and materials basis. During 1996, 1997 and 1998, the Company's cost of
warranty repairs was approximately 2.4%, 2.0% and 2.0%, respectively, of the
Company's total revenues. Warranty expense was higher 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 through the Company's evaluation program.
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 1998, 1997 and 1996, the Company
expended approximately $3,666,000, $2,912,000 and $4,855,000, 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 Company's Windows(R)-based Terminals. The Company has devoted 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.
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.
9
<PAGE>
In 1998 the Company launched the VARiety Access program to address the
emerging Windows(R)-based terminal market. This program is designed to
facilitate the ease with which Microsoft Certified Solutions Providers and
Citrix Solutions Network Resellers market and sell WBTs. To date, the Company
has recruited over 250 Value Added Resellers into the program.
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, Windows 95
and Windows 98. 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 the total
year's revenue, 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 1999 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' 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.
10
<PAGE>
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, 1998, the Company had approximately 297 full-time
employees engaged as follows: 29 in product design and engineering, 189 in
manufacturing and repair services, 43 in sales, systems services and marketing
and 36 in administration. None of the Company's employees is covered by a
collective bargaining agreement. The Company considers relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES
----------
The Company owns a 155,000 square foot facility at 100 Marcus
Boulevard, Hauppauge, New York, the principal manufacturing, sales and
distribution facility of Boundless. The Company also leases approximately 11,743
square feet of office space in Austin, Texas. The lease for this facility
expires December 31, 1999. The Company's current annual rent for the Austin
facility is approximately $241,000. 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
-----------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted during the fourth quarter of 1998 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
---------------------------------------------------------------------
On March 6, 1998, the Company delivered to its shareholders and filed
with the Securities and Exchange Commission an Information Statement relating
to, among other matters, a one-for-ten reverse split (the "Reverse Split") of
the Common Stock. 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 24, 1999, there were approximately 954
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
for the one-for-ten reverse split.
11
<PAGE>
Year Ended December 31, 1998: High Low
---- ---
First quarter.................... $10.00 $ 6.25
Second quarter................... $ 9.09 $ 4.88
Third quarter.................... $ 6.38 $ 3.06
Fourth quarter................... $ 7.13 $ 3.00
Year Ended December 31, 1997:
First quarter................. $19.38 $10.31
Second quarter................ $15.94 $ 6.56
Third quarter................. $15.94 $ 7.19
Fourth quarter................ $16.25 $ 6.56
The last sale price of the Company's Common Stock on March 5, 1999 was $5.00.
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, 1998, 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 year ended December 31, 1994 set forth
below have been derived from the financial statements of the Company, which have
been audited by PricewaterhouseCoopers 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.
12
<PAGE>
Consolidated Statement of Operations Data
For the years ended December 31:
(000's omitted)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Total revenues $90,202 $98,271 $138,225 $94,957 $8,344
Gross margin 25,999 24,766 28,557 25,573 3,455
Operating expenses:
Sales and marketing 8,308 7,417 10,433 7,940 1,092
General and administrative 5,845 6,213 8,120 6,337 992
Research and development 3,666 2,912 4,855 4,569 990
Other nonrecurring charges (16) (255) 1,980 - -
------- ------- ------- ------ ------
Total operating expenses 17,803 16,287 25,388 18,846 3,074
------- ------- ------- ------ ------
Operating income 8,196 8,479 3,169 6,727 381
Interest expense (2,539) (3,730) (3,794) (1,907) (97)
Other 572 (61)
------- ------- ------- ------ ------
Income (loss) from continuing
operations 5,657 4,749 (625) 5,392 223
Income tax expense 749 (134) 962 (1,323) (185)
Loss from discontinued operations - - (9,652) (870) -
Loss on extinguishment of debt - - - (589) -
------ ------ ------ ------ ------
Net income (loss) $4,908 $4,883 $(11,239) $2,610 $38
====== ====== ========= ====== ===
Earnings (loss) per common share from
continuing operations:
Basic $.90 $.89 $(.44) $.37 $(.01)
==== ==== ====== ==== =====
Diluted $.90 $.86 $(.44) $.35 $(.01)
==== ==== ====== ==== =====
Earnings (loss) per common share:
Basic $.90 $.89 $(2.50) $.04 $(.01)
==== ==== ======= ==== =====
Diluted $.90 $.86 $(2.50) $.04 $(.01)
==== ==== ======= ==== =====
Consolidated Balance Sheet Data
At December 31:
(000's omitted)
Working capital $9,401 $8,780 $3,172 $15,416 $6,764
Total assets 49,348 54,548 69,525 75,856 37,171
Revolving credit loan (short-term) - 7,650 13,950 8,000 4,655
Long-term obligations 7,129 10,288 14,300 25,492 16,287
Mandatorily redeemable preferred stock 3,555 3,555 3,555 3,555 5,536
Stockholders' equity $16,657 $ 15,407 $8,802 $12,837 $2,386
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
General
Reference is made to Notes 1,4,8 and 16 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.
Years Ended December 31, 1998 and 1997
Revenues: Revenues for the year ended December 31, 1998 were $90,202,
as compared to $98,271 for the year ended December 31, 1997.
Sales of the Company's General Display Terminals declined by 6.8% to
$76,612 for the year ended December 31, 1998 from $82,200 for the year ended
December 31, 1997. The decline is primarily attributable to a reduction in sales
of the Company's VT/Dorio product line. Sales to Digital and to the Company's
distribution channel in the United States increased $8,640 offsetting, in part,
the decline in sales of VT/Dorio products.
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. The Company has increased its
market share 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 has leveraged its manufacturing expertise, installed customer base, and
distribution networks and shifted research and development to software and
hardware development that delivers Windows applications to the desktop by means
of Windows(R)-based Terminals. Sales of Network Graphics Displays were not
significant in 1998 and, due to the small customer base and low margins
associated with Network Graphics Displays and the emergence of WBTs, the Company
announced a discontinuation of this product family in the first quarter of 1998.
Sales of the Company's Windows(R)-based Terminals amounted to $8,409
versus $3,218 for the years 1998 and 1997, respectively. Despite the substantial
increase in 1998 sales over 1997 sales, the 1998 revenue levels are below the
Company's expectations. 1998 was marked, however, by a significant increase in
market acceptance of this computing technology as well as the release, in July,
of a key enabling server software from Microsoft(R) Corporation.
Net sales from the Company's repairs and spare parts business
decreased 26%, or $885, from $3,350 for the year ended December 31, 1997 to
$2,465 for the year ended December 31, 1998. An increase in the proportion of
the Company's sales to OEMs, who generally provide their own service, has
reduced the overall repairs revenue. Also, spare parts sales to Digital and NCR
decreased as a result of the overall decline in unit sales to each of them in
recent years. In addition, reliability improvements and enhanced product quality
have reduced the Company's spare parts revenues. Due to these factors and new
designs and engineering changes resulting in fewer components and increased
reliability, the Company anticipates reduced repairs and spare parts revenue in
the future.
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%. The Company has previously disclosed that GA is in
default of material obligations under the partnership agreement, including
payment of past due royalties and other fees which totaled $2,468 as of December
31, 1998. The Company reserved against all outstanding receivables during 1997,
and, since that time, has recorded revenue attributable to the partnership on a
cash basis only. The Company is evaluating its options regarding the
relationship with GA and continues discussions with GA regarding payment of the
past due amount.
IBM was the most significant customer for the Company's products,
accounting for 15% of revenues for the year ended December 31, 1998. Sales to
Digital and NCR accounted for 9% and 4%, respectively, of revenues in 1998. 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, 1998 was
$25,999 (28.8% of revenue), as compared to gross margin for the year ended
December 31, 1997 of $24,766 (25.2% of revenue). Cost reduction activities in
the Company's General Displays Terminals product line increased the gross margin
percent 6.4 points from 1997 to 1998. In addition, sales of the Company's
discontinued Network Graphics Displays accounted for a smaller percentage of the
Company's total revenues in 1998 as compared to 1997. 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.
The Company anticipates that increased sales of WBTs will negatively
affect gross margins due to the software license fees associated with the sale
of this product. 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 1998 or 1997. 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.
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, 1998,
operating expenses were $17,803 (19.7% of revenue), compared to expenses for
1997 of $16,287 (16.6% of revenue).
Sales and Marketing Expenses. Sales and marketing expenses increased
12.0% from $7,417 (7.5% of revenue) for the year ended 1997 to $8,308 (9.2% of
revenue) for the year ended December 31, 1998. The increase is attributable to
spending to develop the Windows(R)-based Terminal market, including increased
participation at important tradeshows throughout 1998, as well as expenses
relating to the introduction of the Company's new Capio WBT.
The Company promotes its products by means of a balanced 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 Company's Viewpoint(R) and
Capio WBTs. The Company's plan to reach this market is based on direct mail,
telemarketing and advertising and participating in events with its key partners,
including Microsoft.
15
<PAGE>
Recognizing the need to accelerate acceptance of WBTs, as well as spur
increased demand, the Company developed and implemented the VARiety Access
program in 1998. This program is intended to forge key alliances with many of
the MicroSoft Certified Solutions Providers and Citrix Solutions Network
Resellers who actively participate in this emerging market. Since its
initiation, the Company has signed over 250 new VARs to this program.
General and Administrative Expenses. General and administrative
expenses decreased 5.9% from $6,213 (6.3% of revenue), to $5,845 (6.5% of
revenue) for the periods ending December 31, 1997 and 1998, respectively. The
decline stems from reductions in spending for professional services including
legal and audit fees.
Research and Development Expenses. Research and development expenses
increased to $3,666 in 1998 from $2,912 in 1997. The increase is attributable to
the development efforts in software related to WBTs.
Research and development expenses will continue to shift 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 WBTs
are designed to offer customers simple, easy and cost-effective access to
current and emerging computing environments that include Windows NT, UNIX and
Java applications, corporate intranets and the Internet.
Other Charges. Interest expense (net of interest income) amounted to
$2,539 for the year ended December 31, 1998 compared to $3,730 for 1997. The
decline in interest expense stems from a reduction in the amount of the
Company's outstanding debt as well as a slight reduction in the rate of interest
applicable to the Company's debt obligations.
Income Tax Credit/Expense. The Company recorded income tax expense of
$749 for the year ended December 31, 1998 compared to an income tax credit of
$134 for the year ended December 31, 1997. In 1998 the Company released all of
the valuation allowance reserved against its net deferred tax asset, resulting
in an effective tax rate below the federal statutory rate. In 1997 the tax
credit resulted 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. At December 31, 1998, the Company had no net operating loss carryforward
credits remaining.
Net Income. For the year ended December 31, 1998, net income was
$4,908 (5.4% of revenue), compared to a net income of $4,883 (5.0% of revenue)
for the year ended December 31, 1997.
Years Ended December 31, 1997 and 1996
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.
16
<PAGE>
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 break-up of AT&TCorporation
and NCR's change in focus from Unix to NT-based servers.
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.
Sales of the Company's Windows(R)-based Terminals amounted to $3,218
in 1997 versus $747 in 1996. 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.
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
spare parts 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.
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 at the end of 1997. During the fourth quarter of 1997, the Company
began to record GAI Partnership revenue 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.
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 by 1.8 points.
However, 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 a 1.3 point increase in the 1997 gross margin percentage.
17
<PAGE>
Changes in retail pricing did not have a material adverse effect on
the Company's gross margin in 1997 or 1996.
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.
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 related to the Company's 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 include 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.
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.
Other Charges. 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. 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.
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.
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.
18
<PAGE>
Year 2000 Compliance
Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to process
accurately certain date-based information referencing the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company is addressing this
issue on several different fronts. With respect to products the Company offers
for sale, either to OEMs or through distribution, the Company has verified the
products are Year 2000 compliant. The Company has assigned a team to monitor
Year 2000 compliance. This team is charged with ensuring Year 2000 compliance
for all hardware and software products through its purchasing process, as well
as assessing Year 2000 readiness and risk to the Company with repsect to the
compliance of its critical vendors and suppliers. Finally, the Company has a
team assigned to coordinate the Year 2000 program for its internal systems and
devices. At present, Year 2000 compliance of the Company's internal systems and
devices is scheduled to be substantially complete by July of 1999, with
continued testing of compliance throughout 1999. The total costs related to the
Company's Year 2000 program are not estimated to be material to the Company's
financial position or results of operations, and are charged to expense as
incurred. The total cost estimate does not include potential costs related to
any customer or other claims or the cost of internal software and hardware
replaced in the normal course of business. The total cost estimate is based on
the current assessment of the Company's Year 2000 program and is subject to
change as it progresses. Based on current information and assessment, the
Company does not believe that the Year 2000 issue discussed above, as it relates
to products sold to customers or the Company's internal systems will be material
to its financial position or results of operations or that its business will be
adversely affected in any material respect. Nevertheless, achieving Year 2000
compliance is dependent on many factors, some of which are not completely within
the Company's control. Should either the Company's internal systems or one or
more critical vendors or suppliers fail due to Year 2000 issues, the Company's
business and its results of operations could be adversely affected.
Liquidity and Capital Resources
The discussion below regarding liquidity and capital resources should
be read together with the information included under Notes 5, 8 and 17 of Notes
to Consolidated Financial Statements.
Working capital was approximately $9,401 as of December 31, 1998,
compared to $8,780 as of December 31, 1997. Historically, the Company has relied
on cash flow 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, 1998, the Chase Credit Line consisted of a $15,000
revolving line of credit ("Revolving 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. At December 31, 1998, up to $7,500 was available under the Revolving
Loan for letters of credit. At December 31, 1998, the Company owed Chase $5,500
and had availability of $6,045 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.
The existing Revolving Loan with Chase, originally scheduled to expire
December 31, 1998, had been extended to April 15, 1999. On April 14, 1999, the
Company signed an agreement with Chase to replace the existing Chase Credit Line
with a new three-year $15,000 revolving line of credit on terms substantially
similar to those previously in effect. The new credit facility also provides for
a $4,000 term loan, payable over a three-year period in equal quarterly
installments beginning June 1999.
19
<PAGE>
Net cash provided by operating activities related to continuing
operations during the year ended December 31, 1998 was $7,461, principally
related to net income of $4,908 and non-cash expenses, principally depreciation
and amortization, of $3,293. These increases were partially offset by reductions
in accounts payable and other accrued expenses of $1,050 as well as a change in
the Company's deferred tax position of $1,338. Net cash used in investing
activities was comprised of capital expenditures of $754. Net cash used in
financing activities was principally comprised of repayments of outstanding
obligations under the Chase Credit Line of $5,400 and the repurchase of $3,500
of the Company's outstanding Common Stock.
In addition to obligations previously discussed, long-term capital
requirements at December 31, 1998 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 and secured by the Company's
facility in Hauppauge, New York; (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), which if exercised would require the Company to redeem
the Boundless Preferred Stock; and (iii) a lease commitment of $241 per year
through December 31, 1999 for the Company's Austin, Texas facility.
The Company negotiated an extension of the due date of the NCR Note to
April 30, 1999. Terms of the extension included an interest rate of 8% per annum
from the period January 1, 1999 through March 26, 1999, and 12% per annum
thereafter until the due date of the NCR Note. The Company is currently
negotiating with mortgage lenders to refinance the NCR Note. The Company is
presently evaluating several proposals, and believes that it is likely that a
refinancing agreement will be negotiated by April 30, 1999 or that an additional
extension could be obtained to allow such negotiations to be finalized.
During January 1999, by utilizing availability under the Chase Credit
Line, the Company redeemed the Boundless Preferred Stock, thereby satisfying its
obligations to NCR under the put option and its obligations to make dividend
payments to NCR on such stock.
At December 31, 1998, the Company's total long-term liabilities were
approximately $7,129 and its current portion of long-term debt was approximately
$8,000. The Company believes that cash generated by Boundless' operations will
be sufficient to pay the Company's current and long-term debts, when due, except
that the Company will be required to refinance the NCR Note, which is secured by
a mortgage on the Company's Hauppauge facility, by its April 30, 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.
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 should 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.
20
<PAGE>
Inventory turnover was 4.2 times in 1996 and 1997 versus 4.4 times in
1998. Inventory reserves at December 31, 1997 were $3,389 and were $3,273 for
the year ended December 31, 1998.
Accounts Receivable. The Company sells its products on prepayment and
net 30 day terms. Receivable turnover was 7.4 in 1996, 6.0 in 1997 and 6.2 in
1998.
New Accounting Pronouncement
Statement of Financial Accounting Standard No.133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company is assessing
the impact that the adoption of SFAS No. 133 will have, if any, on its
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's revolving credit facility and long-term debt
obligations. In the past, the Company managed this risk through utilization of
interest rate swap agreements in amounts not exceeding the principal amount of
its outstanding obligations. At December 31, 1998 there were no interest rate
swap agreements in place.
The Company places its investments with high credit quality issuers
and, by policy, is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. As of December 31, 1998 the Company's investments consisted
of the investment of excess cash balances in overnight time deposits offered by
Chase Manhattan Bank in London.
All sales arrangements with international customers are denominated in
U.S. dollars. These customers are permitted to elect payment of their next
month's orders in local currency based on an exchange rate provided one month in
advance from the Company. The Company does not use foreign currency forward
exchange contracts or purchased currency options to hedge local currency cash
flows or for trading purposes. Foreign currency transaction gains or losses have
not been material to the Company's results of operations.
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
---------------------------------------------------------------
None.
21
<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 49 Chairman of the Board of Directors, Chief
Executive Officer
Kenneth East 40 Chief Operating Officer
Jeffrey K. Moore 29 Vice President- Corporate Development, Director
Joseph Gardner 39 Vice President - Finance, Chief Financial Officer
Stephen Maysonave 52 Director
Gary Wood 55 Director
Daniel Matheson 49 Director
J. Gerald Combs has served as Chairman and Chief Executive Officer of
the Company and its subsidiaries since May 9, 1997. Mr. Combs has been the
Chairman and CEO of Morgan Kent Group, the largest 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.
Kenneth East has served as Chief Operating Officer of the Company
since September 1998. Mr. East joined the Company in February 1998 as Chief
Technology Officer. Prior to that time, from 1990 to 1998, Mr. East served as
Director of Software Development-Integrated Network Management Systems at NEC
America, Inc., a worldwide leader in high technology offering products and
systems in semiconductors, communications, computer peripherals, imaging, and
computers.
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 served as President and
Chairman of the Board, and since February 1999 has served as Assistant Secretary
and as a director, of Morgan Kent Group.
Joseph Gardner has served as Vice President- Finance and Chief
Financial Officer of the Company since 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.
Stephen Maysonave has been a member of the Company's Board of
Directors since September 1998. Mr. Maysonave has thirty years of experience in
the high technology business, including twenty years of international business
experience. Mr. Maysonave is currently the principal of Maysonave & Associates,
a consulting group specializing in high technology companies. Prior thereto Mr.
Maysonave was employed as Vice President, Global Partners, by Informix Software,
a worldwide supplier of database solutions. Mr. Maysonave is the voting trustee
of 3,330,000 shares of Series B Preferred Stock of Morgan Kent Group, Inc.
pursuant to a voting trust expiring April 30, 2000. (See Item 12).
22
<PAGE>
Gary E. Wood has been a member of the Company's Board of Directors
since November 1996 and has been serving since September 1, 1997 as Executive
Vice President and Chief Operating Officer of Collins Financial Services, Inc.
Collins purchases nationwide portfolios of consumer debt and either resells or
collects the accounts. He serves on the Board of Mental Health Association in
Texas, and has previously served on the Board of the Federal Reserve Bank of
Dallas and the Harry S. Truman Scholarship Foundation. From 1980 to 1982, he was
the Chief Economist of the Republican Policy Committee of the United States
Senate. From April 1988 to December 1995 he served as President of the 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.
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:
James Tillinghast has been serving as Vice President, Sales of
Boundless since January 1999. Prior to joining the Company Mr. Tillinghast was
employed by Informix Software and served as executive director for Global
Partners, responsible for managing sales and business development activities for
Informix's strategic software partners.
Brian L. Hann has been serving as Vice President of Operations of
Boundless since 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.
Non-employee members of the Company's Board of Directors receive
$12,000 annually, and $500 for each Board of Director meeting attended, 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. These options were subsequently repriced on May 18, 1998 to $5.63 per
share of Common Stock. Mr. Maysonave was granted 15,000 and 35,000 options,
respectively in October, 1998 to purchase shares of Common Stock at $3.00 per
share that expire October, 2003. The 15,000 options were granted for services
Mr. Maysonave provided as a member of the Board of Directors and vest
immediately. The 35,000 options were granted for services Mr. Maysonave provided
as a consultant to the Company and vest December, 1999. The Company recorded an
expense of $39,200 relating to the grant of the 35,000 options.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Forms 3 and 4 filed or due in 1998 relating to the
Company's securities indicates that the following filings made with the
Commission were not timely: a Form 4 relating to Mr. Maysonave's purchases of
5,000 shares of Common Stock in November 1998; a Form 4 relating to the
Company's purchase of 600,000 shares of Common Stock from Morgan Kent Group; and
a Form 4 relating to Jeffrey Moore's purchases of 15,000 shares of Common Stock
upon exercise of stock options and sales of 14,920 of such shares in October
1997. The Company has been advised that the tardiness of these filings was
inadvertent.
ITEM 11. EXECUTIVE COMPENSATION
The table below discloses all cash compensation awarded to, earned by
or paid to the Company's Chief Executive Officer, the executive officers 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, 1998, 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, 1998 (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 1997 and 1996.
23
<PAGE>
<TABLE>
Summary Compensation Table
Annual Compensation Long-Term
---------------------------
<CAPTION>
Compensation
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation Options(#) (4) Compensation
- ----------- ---- ------ ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Gerald Combs(1) 12/31/98 $291,462 $150,000 - 150,000 -
CEO and Chairman 12/31/97 $123,436 - $8,497 65,000 -
12/31/96 - - - - 11,546
Michael Stebel(2) 12/31/98 $126,557 $25,000 $2,706 - -
Vice President, 12/31/97 $95,000 - $8,259 10,000 -
Marketing 12/31/96 $93,654 $11,849 - - -
Kenneth East(3) 12/31/98 $137,489 $35,000 $17,130 30,000 -
Chief Operating Officer -
-
Joseph Gardner 12/31/98 $140,962 $25,000 - - -
Vice President-Finance 12/31/97 $100,000 $25,000 - 10,000 -
Chief Financial Officer 12/31/97 $99,673 $23,440 - 1,500 -
Brian Hann 12/31/98 $131,664 $25,000 - - -
Vice President 12/31/97 $119,788 - - 12,500 -
Operations 12/31/96 $111,577 $34,511 - 3,000 -
</TABLE>
(1) Other annual compensation for 1997 includes taxable fringe benefits. "All
Other Compensation" for 1996 consists of stock awards of registered shares
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.
(3) Other annual compensation consisted of relocation expense reimbursement.
(4) With the exception of the 150,000 options granted to Mr. Combs in 1998,
which have a strike price of $4.88 per share of Common Stock, the Company
repriced the exercise price of all outstanding employee options on May 18,
1998 to $5.63 per share of Common Stock.
Employment Agreements and Change-in-Control Arrangements
The Company has entered into employment agreements with Mr. Combs, the
Company's Chairman of the Board and Chief Executive Officer, and Mr. East, the
Company's Chief Operating Officer. The term of these agreements, as described
below, may be extended beyond the initial term by the mutual agreement of Mr.
Combs and Mr. East, respectively, and the Company and on such basis as Mr. Combs
and Mr. East, respectively, and the Company shall agree. Each such extension,
unless expressly agreed otherwise, will be for one year commencing the year
following the expiration of the initial term or any renewal term. Both
agreements may be terminated at any time by the written mutual consent of the
Company and Mr. Combs and Mr. East, respectively. Both agreements may be
terminated by the Company for cause, as defined in the employment agreements,
and, in such event, the employee will be entitled to such salary and benefits as
have accrued under the employment agreements, respectively, through the
effective date of the termination.
24
<PAGE>
With respect to Mr. Combs, the agreement was entered into June 1, 1998
and expires May 31, 2001. The agreement calls for an annual salary of $325,000,
subject to an annual review by the Compensation Committee of the Board of
Directors; as well as the grant of 150,000 options to purchase shares of the
Company's Common Stock, such shares to vest pro rata on an annual basis over a
three-year period. Should Mr. Combs' employment with the Company be terminated
without cause, Mr. Combs would be entitled to deferred payments totaling two
years salary. In the event of a change-in-control, as defined in the agreement,
Mr. Combs would be entitled to deferred payments totaling two years salary, as
well as immediate vesting of all options.
Mr. East's employment agreement was entered into February 9, 1998 and
expires February 8, 2000. The agreement calls for an annual salary of $150,000,
subject to an annual review by the Chairman and Chief Executive of the Company;
as well as the grant of 30,000 options to purchase shares of the Company's
Common Stock, such shares to vest pro rata over a four-year period. Should Mr.
East's employment with the Company be terminated without cause, Mr. East would
be entitled to deferred payments totaling six-month's salary.
Compensation Committee Interlocks and Insider Participation
Mr. Combs and Mr. Jeffrey Moore, who were executive officers of the
Company during 1998, 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. Mr. Combs and Mr. Moore are also members of
the Board and officers of Morgan Kent Group which had certain relationships, and
entered into certain transactions, with the Company during 1998 as described
below under "Item 13- Certain Relationships and Related Transactions."
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, 1998,
regarding the outstanding options to purchase the Company's Common Stock granted
in 1998 under the Company's 1997 Incentive Plan ("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 (#) 1997 Plan ($/Sh) Date Option Term
---- ------------ ---------------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C> <C>
5% ($) 10% ($)
-------- --------
J.Gerald Combs (1) 150,000 21.6% $ 4.88 6/01/03 202,238 446,893
Kenneth East(2) 30,000 4.3% $ 5.63 2/16/03 46,664 103,115
</TABLE>
- ----------------------------
(1) Options were granted 6/01/98 and vest at 50,000 options per year,
on the anniversary of the date of grant, over a three year period.
(2) Options were granted 2/16/98 and vest 25% one year following the
grant date and the remainder on a pro rata monthly basis over the subsequent
three years.
25
<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, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 1998 (#) December 31, 1998 ($)(1)
----------------------------- ------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Gerald Combs $0 $0 142,500 162,500 $0 $18,000
Kenneth East 0 0 0 30,000 0 0
Michael Stebel 0 0 10,055 4,845 0 0
Joseph Gardner 0 0 10,717 5,283 0 0
Brian Hann 0 0 15,300 6,700 0 0
</TABLE>
(1) The last sale price of the Company's Common Stock on December 31, 1998, as
reported by The Nasdaq SmallCap Market, was $ 5.00.
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,
1999, 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, Fifth Floor, New York, NY
10022. The address of Stephen Maysonave is 3300 Bee Cave Road, Suite 650-221,
Austin, Texas 78746.
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
Morgan Kent Group, Inc. 2,317,370(1) 47.4%
Stephen Maysonave, Voting Trustee 2,317,370(1)(2) 47.4%
Stephen Maysonave 20,000(3) *
J. Gerald Combs 142,500(3) 3.1%
Gary Wood 15,000(3) *
Daniel Matheson 25,000(3) *
Jeffrey Moore 37,500(2)(3) *
Joseph Gardner 12,106(3) *
Kenneth East 7,500(3) *
Michael Stebel 11,288(3) *
Brian Hann 20,986(3) *
All current directors and executive
officers as a group
(seven individuals) 2,576,976(1)(3) 52.7%
- --------------------------------
* Less than 1%.
26
<PAGE>
(1) Includes 457,502 shares underlying the warrants held by Morgan Kent Group
(the "Morgan Kent Group Warrants") to purchase shares of Common Stock at an
exercise price of $7.50 per share as to a warrant for 307,502 shares and at
an exercise price of $5.82 as to a warrant for 150,000 shares.
(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 April 30, 2000. 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 be 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 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: 142,500; Mr. Wood: 15,000; Mr. Matheson:
25,000; Mr. Moore: 37,500; Mr. Maysonave: 15,000; Mr. Gardner: 12,106; Mr.
East: 7,500; Mr. Stebel: 11,288; and Mr. Hann: 16,986.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In 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 1997 the Company prepaid this fee in the
amount of $380,000 and for 1998 recorded an expense of $240,000.
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 such 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 and considering the expense of preparing and delivering
an information statement to shareholders prior to issuing 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
1998 such fees amounted to $210,000. The Pledge to Chase was cancelled December
1997. The Pledge to NCR remained in effect as of December 31, 1998.
27
<PAGE>
In May 1998 the Company repurchased 600,000 shares of the Company's
then outstanding Common Stock from Morgan Kent Group at $5.00 per share, or
approximately 14% below the closing market price on May 15, 1998 as reported on
the NASDAQ SmallCap Market. The Company repurchased these shares to reduce the
voting power of Morgan Kent Group from approximately 51% to 45% and to set aside
shares enabling the Company to issue up to 600,000 shares of its Common Stock in
acquisitive transactions without diluting public shareholders. As an inducement
to the repurchase transaction, the Company issued a warrant to Morgan Kent Group
to purchase 150,000 shares of the Company's Common Stock at an exercise price of
$5.80 per common share. The warrant is exercisable immediately and has a term of
seven years. The Company recorded an expense of $300,000 relating to the
issuance of the warrant.
Mr. Maysonave, a member of the Board of Directors, was granted 35,000
options in October 1998 to purchase shares of Common Stock at $3.00 per share
that expire October 2003. These options were granted for services Mr. Maysonave
provided as a consultant to the Company and vest December 1999. The Company
recorded an expense of $39,200 relating to the grant of the 35,000 options. In
addition, the Company paid Mr. Maysonave $64,000 during 1998 relating to Mr.
Maysonave's consulting services to the Company.
In December 1998 the Company repurchased 110,620 shares of the
Company's then outstanding Common Stock from Morgan Kent Group at $4.52 per
share, or approximately 20% below the average of the preceding five day trading
close as reported on the NASDAQ SmallCap Market.
In 1998, Morgan Kent paid the Company $4,000 in interest accruing on a
$50,000 loan from the Company to Morgan Kent.
28
<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 F-1
All other financial statements and schedules not listed have been
omitted since the required information is either included in the
Financial Statements and the Notes thereto as included in the Company's
Annual Report on Form 10-K for the Year ended December 31, 1998 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 1998.
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: April 15, 1999
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, April 15, 1999
- ----------------------- Chief Executive Officer
J. Gerald Combs
/s/ Vice President - Finance, Chief April 15, 1999
- ----------------------- Financial Officer (Principal Accounting
Joseph Gardner Officer)
/s/ Vice President, Director April 15, 1999
- -----------------------
Jeffrey K. Moore
/s/ Director April 15, 1999
- -----------------------
Daniel Matheson
/s/ Director April 15, 1999
- -----------------------
Gary Wood
/s/ Director April 15, 1999
- -----------------------
Stephen Maysonave
29
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No.* Description of Exhibit
- ------------ ----------------------
3.1[7] 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)[7] Amendments 1 through 6, 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).)
E-1
<PAGE>
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).)
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).)
10(aa)** Employment Agreement, dated June 1, 1998, among the Registrant,
Boundless Technologies, Inc. and J. Gerald Combs.
10(bb)** Employment Agreement, dated February 9, 1998, between Boundless
Technologies, Inc. and Kenneth East.
11** Statement re Computation of Per Share Earnings. See Consolidated
Financial Statements.
E-2
<PAGE>
21[7] List of Subsidiaries
23** Consent of BDO Seidman, LLP.
27** Financial Data Schedule.
- ----------------------
* Numbers inside brackets indicate documents from which exhibits have been
incorporated by reference.
Unless otherwise indicated, documents incorporated by reference refer to
the identical exhibit number in the 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.
[7] Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
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, 1998 and 1997 F-3
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 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, 1998 and 1997 S-1
Condensed Statements of Operations
for the years ended December 31, 1998, 1997 and 1996 S-2
Condensed Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 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, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 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
Melville, New York
February 12, 1999, except for Note 17
as to which the date is April 14, 1999
F-2
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
---------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 732 $ 2,929
Trade accounts receivable (including $232 and $224
from related parties), net (Notes 2, 8 and 17) 13,274 14,395
Income tax refunds 1,905 800
Inventories (Notes 5, 8 and 17) 12,565 13,682
Deferred income taxes (Note 7) 2,470 1,561
Prepaid expenses and other current assets 462 711
---------------- ----------------
Total current assets 31,408 34,078
Property and equipment, net (Note 6 and 8) 10,251 10,614
Goodwill, net (Note 2) 7,350 8,428
Other assets 339 1,428
---------------- ----------------
$ 49,348 $ 54,548
================ ================
</TABLE>
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Note payable (Note 8) $ - $ 7,650
Current portion of long-term debt (including $8,000 to
related party in 1998) (Notes 8 and 17) 8,000 3,250
Accounts payable 6,817 8,840
Accrued expenses 7,074 5,378
Deferred revenue 116 180
---------------- ----------------
Total current liabilities 22,007 25,298
---------------- ----------------
Long-term liabilities:
Long-term debt, less current maturities (including $8,000 to a
related party in 1997) (Notes 8 and 17) 5,500 8,000
Deferred income taxes (Note 7) 1,002 1,561
Other 627 727
---------------- ----------------
Total long-term liabilities 7,129 10,288
---------------- ----------------
Total liabilities 29,136 35,586
---------------- ----------------
Commitments and contingencies (Notes 1, 12 and 13) - -
Mandatorily redeemable preferred stock of subsidiary (Note 17) 3,555 3,555
---------------- ---------------
Stockholders' equity (Note 9):
Preferred stock
Common stock 44 51
Additional paid-in capital 30,940 34,094
Accumulated deficit (14,327) (18,738)
---------------- ----------------
Total stockholders' equity 16,657 15,407
---------------- ----------------
$ 49,348 $ 54,548
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years ended
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-------------- -----------------------------
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
Revenue:
Product sales (including sales to related
parties of $3,760, $6,476 and $21,855) $ 87,774 $ 94,607 $ 130,733
Services 2,428 3,664 7,492
-------------- --------------- -------------
Total revenue 90,202 98,271 138,225
-------------- --------------- -------------
Cost of revenue:
Product sales 62,267 71,477 107,029
Services 1,936 2,028 2,639
-------------- --------------- -------------
Total cost of revenue 64,203 73,505 109,668
-------------- --------------- -------------
Gross margin 25,999 24,766 28,557
-------------- --------------- -------------
Operating expenses:
Sales and marketing 8,308 7,417 10,433
General and administrative 5,845 6,213 8,120
Research and development 3,666 2,912 4,855
Other charges (credits) (16) (255) 1,980
-------------- --------------- -------------
Total operating expenses 17,803 16,287 25,388
-------------- --------------- -------------
Operating income 8,196 8,479 3,169
Interest expense, net 2,539 3,730 3,794
-------------- --------------- -------------
Income (loss) before income taxes
and discontinued operations 5,657 4,749 (625)
Income tax expense (recovery) 749 (134) 962
-------------- --------------- -------------
Income (loss) from continuing operations 4,908 4,883 (1,587)
Loss from discontinued operations - - (9,652)
-------------- --------------- -------------
Net income (loss) 4,908 4,883 (11,239)
Dividend on preferred stock of subsidiary 497 497 497
-------------- --------------- -------------
Earnings (loss) available for common stockholders $ 4,411 $ 4,386 $ (11,736)
============== =============== =============
Weighted average common shares outstanding 4,893 4,925 4,702
============== =============== =============
Earnings (loss) per common share from:
Continuing operations $ 0.90 $ 0.89 $ (0.44)
Discontinued operations 0.00 0.00 (2.06)
-------------- --------------- -------------
Basic earnings (loss) per common share $ 0.90 $ 0.89 $ (2.50)
============== =============== =============
Earnings (loss) available for common stockholders
adjusted for impact of assumed conversions $ 4,411 $ 4,426 $ (11,736)
============== =============== =============
Weighted average dilutive shares outstanding 4,926 5,103 4,702
============== =============== =============
Diluted earnings (loss) per common share $ 0.90 $ 0.86 $ (2.50)
============== =============== =============
</TABLE>
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)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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
Common stock repurchased and retired (710) (7) (3,493) (3,500)
Options and warrants issued for
services to non-employees 339 339
Dividend on preferred stock of subsidiary (497) (497)
Net income 4,908 4,908
------------------------------------------------------------------
Balance, December 31, 1998 4,429 $ 44 $ 30,940 $ (14,327) $ 16,657
==================================================================
</TABLE>
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)
<TABLE>
<CAPTION>
December 31,
----------- ----------------------------
1998 1997 1996
----------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,908 $ 4,883 $ (11,239)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operations - - 9,652
Depreciation and amortization 3,293 3,725 3,957
Loss from disposal of assets 160 - 133
Deferred revenues (64) - (647)
Provision (credits) for doubtful accounts 216 (20) 180
Provision (credit) for excess and obsolete inventory 808 (595) 3,845
Options and warrants issued for services 339 - -
Deferred taxes (1,338) - 358
Changes in assets and liabilities:
Trade accounts receivable (201) 6,872 (3,548)
Inventories 310 5,438 3,388
Other assets 80 (470) 1,592
Accounts payable and accrued expenses (553) (3,145) (76)
----------- ------------- --------------
Net cash:
Provided by continuing operations 7,958 16,688 7,595
Used in discontinued operations (4) (3,492) (6,160)
----------- ------------- --------------
Net cash provided by operating activities 7,954 13,196 1,435
Cash flows from investing activities:
Capital expenditures (754) (247) (1,384)
----------- ------------- --------------
Net cash used in investing activities (754) (247) (1,384)
----------- ------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 136 5,177
Proceeds from debt issuance - 1,700 1,500
Purchase and retirement of common stock (3,500) - (1,305)
Advances on loans payable - - 5,950
Payments on loans payable (5,400) (16,423) (6,526)
Costs associated with issuance of debt (497) (637) -
Payments on capital leases - (9) (3)
----------- ------------- --------------
Net cash provided by (used in) financing activities (9,397) (15,233) 4,793
----------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (2,197) (2,284) 4,844
Cash and cash equivalents at beginning of period 2,929 5,213 369
----------- ------------- --------------
Cash and cash equivalents at end of period $ 732 $ 2,929 $ 5,213
=========== ============= ==============
</TABLE>
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)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
----------- ------------- --------------
<S> <C> <C> <C>
Non-cash transactions:
Dividend on Preferred Stock of Subsidiary $ - $ 497 $ 497
Conversion of notes payable to common stock - 1,700 1,500
Issuance of common stock for Note Payment - - 300
Options, warrants and common stock issued for services 339 63 1,424
Equipment acquisitions funded through capital leases - - 107
Cash paid for:
Interest 2,200 2,742 4,293
Taxes 1,194 634 (794)
</TABLE>
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 per share data)
1. Background
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, Boundless Acquisition Corp. ("Acquisition"), purchased Applied
Digital Data Systems, Inc. ("ADDS") from NCR Corporation ("NCR"), (the
"Boundless Acquisition"). ADDS, renamed in 1996 to Boundless Technologies, Inc.
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 ( the "Digital Acquisition") 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).
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' and
GA's version of the database system licensed from Pick Systems.
In April 1995, the Company, through OTW Corporation ("OTW"), 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 16).
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.
F-8
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
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 considers undiscounted cash flows for each product that has
significant long-lived or intangible asset values associated with it. As of
December 31, 1998, management does not believe there is any indication of
impairment.
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.
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 $489 and $284 as of December 31, 1998 and
1997, 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 15% and 16% of total revenues in 1998 and
1997, respectively. Two customers represented 16% and 14% of total revenues in
1996.
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.
F-9
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
Advertising
- -----------
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $2,476, $1,826 and $1,631 for the years ended December 31, 1998,
1997 and 1996.
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, $1,078 and $1,117 for the years ended December 31,
1998, 1997 and 1996.
Earnings (Loss) Per Common Share
- --------------------------------
Earnings (loss) available for common stockholders includes the effects of the
accretion to the preferred stock of a subsidiary and preferred stock dividends.
SFAS No. 128, "Earnings Per Share" ("EPS") 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
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income $4,908
Preferred stock dividends (497)
-----------------
Basic earnings per share:
Income available to common stockholders 4,411 4,893 $0.90
=================
Effect of dilutive securities:
Options and warrants - 33
--------------- ----------------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $4,411 4,926 $0.90
================= ================= =================
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 stockholders 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 stockholders
plus assumed conversions $4,426 5,103 $0.86
================= ================= =================
For the Year Ended December 31, 1996
---------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------------- ----------------- -----------------
Loss from continuing operations ($1,587)
Discontinued operations (9,652)
Preferred stock dividends (497)
-----------------
Basic and diluted loss per share ($11,736) 4,702 ($2.50)
================= ================= =================
</TABLE>
F-11
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
Options to purchase 879,628 shares of common stock at a weighted average price
of $13.01 per share were not included in the computation of diluted earnings per
share in 1998 because the options' exercise price was greater than the average
market price of the common shares. The options, which range in expiration date
from January 1999 to December 2004, were still outstanding at December 31, 1998.
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 7, 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 Standard
- ------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company is assessing the impact that the adoption of SFAS No. 133 will have, if
any, on its consolidated financial statements.
3. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during fiscal 1998. SFAS No. 130
establishes new rules for the reporting and presentation of comprehensive income
and its components. The Company has no material items of comprehensive income
adjustments. Comprehensive income (loss) for the years ended December 31, 1998,
1997 and 1996 was equal to reported net income (loss).
F-12
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
4. GAI Partnership
Effective May 1995, Boundless and GA formed a limited liability company (the
"GAI Partnership") with GA owning 51% and Boundless owning 49%. 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.
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 or fails 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.
Boundless received cash distributions of $0, $1,459 and $2,473 for the years
ended December 31, 1998, 1997 and 1996, 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, 1998, the Company was owed $2,468 under the terms of the
Agreement and had not received required payments since 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 Operating Agreement, may assume the
management responsibilities of the GAI 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-13
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in first-out basis.
The major components of inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Raw materials and purchased components $ 10,264 $ 10,723
Finished goods 1,915 2,477
Demonstration equipment 71 135
Service parts 315 347
----------------- -----------------
$ 12,565 $ 13,682
================== =================
</TABLE>
6. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Land $ 3,780 $ 3,780
Buildings and improvements 6,271 6,193
Machinery and equipment 5,470 5,058
------------------ -----------------
15,521 15,031
Less accumulated depreciation and amortization 5,270 4,417
================== ==================
$ 10,251 $ 10,614
================== ==================
</TABLE>
7. Income Taxes
The provision for income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal $ 1,599 $ (347) $ (340)
State 618 213 413
------------------ ------------------ -----------------
2,217 (134) 73
------------------ ------------------ -----------------
Deferred:
Federal (1,248) - 889
State (220) - -
------------------ ------------------ -----------------
(1,468) - 889
------------------ ------------------ -----------------
$ 749 $ (134) $ 962
================== ================== =================
</TABLE>
F-14
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
The provision for income taxes differs from the amount of income tax determined
by applying the statutory federal income tax rate to operations before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 1,923 $ 1,615 $ (3,760)
Utilization of prior year net operating
loss carryforwards (531) (1,481) -
State income taxes, net of federal 379 278 273
income tax benefit
Other, net 37 754 609
Change in valuation allowance (1,059) (1,300) 3,840
on deferred tax assets
------------------ ------------------ -----------------
Income tax expense (benefit) $ 749 $ (134) $ 962
------------------ ------------------ -----------------
</TABLE>
F-15
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
The components of the net deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Current deferred tax assets:
Inventory $ 1,340 $ 1,759
Accounts receivable 186 108
Warranties 814 753
Other 130 -
------------------ ------------------
Total current deferred tax assets 2,470 2,620
------------------ ------------------
Noncurrent deferred tax assets - Other 448 307
Noncurrent deferred tax liabilities - Property
and equipment (1,450) (1,868)
------------------ ------------------
Net noncurrent deferred tax liabilities (1,002) (1,561)
------------------ ------------------
Net deferred tax assets 1,468 1,059
Less valuation allowance - (1,059)
------------------ ------------------
$ 1,468 $ -
================== ==================
</TABLE>
At December 31, 1997, the Company recorded a 100% valuation allowance on the net
deferred tax asset since it could not be determined if the asset was realizable.
At December 31, 1998, the valuation allowance was eliminated based on the
Company's improvements in operating results and its determination that the net
deferred tax assets are likely to be realized. The Company files a consolidated
federal income tax return. As of December 31, 1998 there are no remaining net
operating loss carryforwards.
8. Debt
Notes Payable
- -------------
Notes payable were $5,500 and $7,650 at December 31, 1998 and 1997 respectively,
under a $15,000 revolving credit agreement with Chase Manhattan Bank for loans
and letters of credit. There was a letter of credit outstanding totalling $1,000
at December 31, 1998 and 1997. The maximum amount of additional credit available
under the revolving loan at December 31, 1998 and December 31, 1997 was $6,045
and $1,094.
At the option of the Company, the interest rate is prime plus 1.25% or LIBOR
plus 2.5% (9.0% at December 31, 1998). See also Note 17.
The commitment fee is 0.5% per year on the average daily unused principal
balance of the revolving loan and the outstanding letters of credit. The
weighted average interest rate on short-term borrowings was 9.1%, 10.25% and
9.5% for the years ended December 31, 1998, 1997 and 1996, respectively.
F-16
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
Long-term Debt
- --------------
Long-term debt at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Note payable to NCR, bearing interest at 8% payable
quarterly, principal due on or before April 30, 1999,
collateralized by land and building $ 8,000 $ 8,000
Term loan - 3,250
Revolving loan 5,500 -
------------------ -----------------
13,500 11,250
Less current maturities on long-term debt 8,000 3,250
------------------ -----------------
$ 5,500 $ 8,000
================== =================
</TABLE>
F-17
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
Acquisition is the legal obligor of the note payable to NCR. The note is payable
on or before April 30, 1999. (See Note 17). However, the note and accrued
interest are 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 without obtaining bank approval. 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.
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, 1998 were as follows:
1999 $ 8,000
2002 5,500
----------
$ 13,500
==========
9. Equity
At December 31, 1998 and 1997, stockholders' equity consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued $ - $ -
Common stock, $0.01 par value, 25,000,000 shares
authorized, 4,428,609 and 5,139,228 shares issued
at December 31, 1998 and 1997, respectively 44 51
Additional paid-in capital 30,940 34,094
Accumulated deficit (14,327) (18,738)
================== =================
Total stockholders' equity $ 16,657 $ 15,407
================== =================
</TABLE>
F-18
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
During 1998 the Company repurchased from a stockholder shares of its outstanding
Common Stock as follows:
1. In May 1998 the Company repurchased 600,000 shares of the Company's then
outstanding Common Stock from Morgan Kent Group at $5.00 per share, or
approximately 14% below the closing market price on May 15, 1998 as
reported on the NASDAQ SmallCap Market. The Company repurchased these
shares to reduce the voting power of Morgan Kent Group from approximately
51% to 45% and to set aside shares enabling the Company to issue up to
600,000 shares of its Common Stock in acquisitive transactions without
diluting public stockholders. As an inducement to the repurchase
transaction, the Company issued a warrant to Morgan Kent Group to purchase
150,000 shares of the Company's Common Stock at an exercise price of $5.80
per common share. The warrant is exercisable immediately and has a term of
seven years. The Company recorded an expense of $300 relating to the
issuance of the warrant.
2. In December 1998 the Company repurchased 110,620 shares of the Company's
then outstanding Common Stock from Morgan Kent Group at $4.52 per share, or
approximately 20% below the average of the preceding five day trading close
as reported on the NASDAQ SmallCap Market.
In October 1998 the Company granted to Mr. Stephen Maysonave, a member of the
Board of Directors, 35,000 options to purchase shares of Common Stock at $3.00
per share that expire October 2003. These options were granted for services Mr.
Maysonave provided as a consultant to the Company and vest December 1999. The
Company recorded an expense of $39 relating to the grant of the 35,000 options.
10. Options and Warrants
On March 6, 1998, the Company filed an Information Statement on Schedule 14C
with the Securities and Exchange Commission in connection with, amongst other
items, the Board of Directors of the Company 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.
The Company had previously adopted its 1995 Incentive Plan which permitted up to
600,000 shares of Common Stock to be issued thereunder. As additional shares
were no longer available to be issued under the 1995 Incentive Plan, the Board
adopted the 1997 Incentive Plan. The maximum number of shares to be issued under
the 1997 Incentive Plan is not to exceed 1,000,000. The exercise price of each
option granted is to be equal to or greater 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, 1998 there were 115,100 fully vested options
under the 1991 Plan 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, 1998 and 1997, 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 earnings (loss) applicable to common stockholders and
earnings (loss) per share as if compensation cost for the Company's employee
F-19
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
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 1998
and 1997 as follows:
1. Dividend yield of 0% for all years
2. Expected volatility ranging from .59 to .78
3. Risk-free interest rates ranging from 4.58% to 5.83%
4. Expected terms ranging from 1 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:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net earnings (loss) applicable to common stockholders
As reported $ 4,411 $ 4,386 $(11,736)
Under SFAS No. 123 3,394 2,269 (13,263)
Earnings (loss) per share
As reported - basic $ 0.90 $ 0.89 $ (2.50)
As reported - diluted 0.90 0.86 (2.50)
Under SFAS No. 123-basic 0.69 0.46 (2.82)
Under SFAS No. 123-diluted 0.69 0.44 (2.82)
</TABLE>
A summary of the status of the Company's stock options and warrants as of
December 31, 1998 and 1997, and changes during the years ending on those dates
is presented below:
F-20
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
The following table summarizes information about fixed stock options and
warrants outstanding at December 31:
<TABLE>
<CAPTION>
Options 1998 1997
- ------- ------------------------------------- --------------------------------------
------------------- ----------------- ---------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 698,798 $ 11.98 526,515 $ 16.80
Granted 723,885 5.51 536,875 8.90
Exercised - - (16,529) (6.90)
Forfeited (498,967) (9.53) (348,063) (14.70)
------------------- ----------------- ---------------- -----------------
Outstanding at end of year 923,716 $ 8.26 698,798 $ 11.98
=================== ================= ================ =================
Options exercisable at end of year 617,131 $ 9.80 519,344 $ 12.26
=================== ================= ================ =================
Weighted average fair value
of options granted during the year $ 2.51 $ 4.86
================= =================
</TABLE>
<TABLE>
<CAPTION>
Warrants 1998 1997
- -------- ------------------------------------ --------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 475,609 $ 14.56 667,062 $ 24.40
Granted 150,826 5.82 397,017 8.60
Exercised - - (23,094) (7.50)
Forfeited (91,943) (36.75) (565,376) (22.40)
------------------- ----------------- ------------------- -----------------
Outstanding at end of year 534,492 $ 8.27 475,609 $ 14.56
=================== ================= =================== =================
Options exercisable at end of year 534,492 $ 8.27 475,609 $ 14.56
=================== ================= =================== =================
Weighted average fair value
of warrants granted during the year $ 1.86 $ 6.14
================= =================
</TABLE>
F-21
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Number Average Number
Outstanding at Remaining Exercisable at
December 31, Exercise Contractual Life December 31,
Options 1998 Price (Years) 1998
--------------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
58,220 $ 3.00 4.81 15,000
151,920 4.88 4.42 -
438,329 5.63 3.14 338,153
5,000 6.00 4.89 5,000
20,000 10.00 3.43 11,666
75,000 10.30 3.25 75,000
47,370 13.50 0.94 46,186
25,000 15.70 3.97 25,000
13,100 16.30 0.19 13,100
1,250 17.50 0.20 1,250
5,500 20.60 0.59 5,500
64,000 21.30 0.93 62,833
15,000 25.60 0.84 15,000
4,027 28.20 1.47 3,443
------------- ---------- ----------------- --------------
923,716 $ 8.26 3.13 617,131
============= ========== ================= ==============
Weighted
Number Average Number
Outstanding at Remaining Exercisable at
December 31, Exercise Contractual Life December 31,
Warrants 1998 Price (Years) 1998
--------------- ---------- ----------------- --------------
150,000 $ 5.80 6.38 150,000
307,502 7.50 5.95 307,502
731 8.63 0.46 731
31,375 10.00 1.80 31,375
1,134 13.75 1.44 1,134
2,500 18.40 5.59 2,500
30,000 18.60 3.39 30,000
3,750 26.88 0.10 3,750
7,500 26.90 0.14 7,500
-------------- ---------- ----------------- --------------
534,492 $ 8.27 5.54 534,492
-------------- ---------- ----------------- --------------
</TABLE>
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,
F-22
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
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.
A warrant to purchase 150,000 shares of Common Stock at an exercise price of
$5.80 per share, exercisable through May 18, 2005 was granted to a stockholder
as an inducement to allow the Company to purchase shares of Common Stock from
the stockholder thereby reducing the stockholder's percentage ownership in the
Company below 50%. This warrant was valued at $300. (See Note 11).
An option to purchase 35,000 shares of Common Stock at an exercise price of
$3.00 per share, exercisable through October 21, 2003 was granted in October
1998 in consideration for consulting services. The option is valued at
approximately $39.
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.
11. Related Party Transactions
NCR is the holder of Boundless' mandatorily redeemable preferred stock. 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 $3,760,
$5,858, and $15,454 for 1998, 1997 and 1996 respectively. Purchases from NCR and
its subsidiaries were $73, $87, and $2,440 for those same periods, respectively.
The Company had accounts receivable outstanding from NCR and its subsidiaries of
approximately $232 and $224 at December 31, 1998 and 1997, respectively. In
addition, the Company received cash distributions from GAI of $0, $1,459 and
$2,473 for the years ended December 31, 1998, 1997 and 1996.
The Company has entered into agreements with NCR, which have an initial term of
approximately five years, under which NCR will purchase display desktop devices
from the Company, which NCR will market and sell under its own logo. NCR will
supply computer system platform products to the Company for resale with its
system software. To support this ongoing relationship, NCR will also provide
field support services to the Company's customers. Under the agreements, NCR
must purchase from the Company a minimum percentage of the Seller's total volume
of purchases of this type of desktop device for domestic delivery. Pricing of
the product sold under the agreements is a specified percentage of list prices,
such percentage to be negotiated annually.
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 1998 such fees amounted to $210. At
December 31, 1998, 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 1998 under this agreement were $240.
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
F-23
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
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 8) 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 the
Company's Board upon consideration of the cost to the Company to effect the
issuance of such warrant.
In May 1998 the Company repurchased 600,000 shares of the Company's then
outstanding Common Stock from Morgan Kent Group at $5.00 per share, or
approximately 14% below the closing market price on May 15, 1998 as reported on
the NASDAQ SmallCap Market. The Company repurchased these shares to reduce the
voting power of Morgan Kent Group from approximately 51% to 45% and to set aside
shares enabling the Company to issue up to 600,000 shares of its Common Stock in
acquisitive transactions without diluting public stockholders. As an inducement
to the repurchase transaction, the Company issued a warrant to Morgan Kent Group
to purchase 150,000 shares of the Company's Common Stock at an exercise price of
$5.80 per common share. The warrant is exercisable immediately and has a term of
seven years. The Company recorded an expense of $300 relating to the issuance of
the warrant.
In December 1998 the Company repurchased 110,620 shares of the Company's then
outstanding Common Stock from Morgan Kent Group at $4.52 per share, or
approximately 20% below the average of the preceding five day trading close as
reported on the NASDAQ SmallCap Market.
In October 1998 the Company granted to Mr. Stephen Maysonave, a member of the
Board of Directors, 35,000 options to purchase shares of Common Stock at $3.00
per share that expire October 2003. These options were granted for services Mr.
Maysonave provided as a consultant to the Company and vest December 1999. The
Company recorded an expense of $39 relating to the grant of the 35,000 options.
In addition, the Company paid Mr. Maysonave $64 during 1998 relating to Mr.
Maysonave's consulting efforts.
12. 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 $680, $572, and $636 in 1998, 1997 and 1996,
respectively.
Future minimum rental commitments as of December 31, 1998 were as follows:
1999 $ 466
2000 106
2001 40
2002 11
--------
$ 623
========
F-24
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
13. 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.
14. Segment Reporting and Geographic Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in financial reports issued to stockholders. SFAS
No. 131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate financial information is available for
evaluation by its decision making group. To date, the Company has viewed its
operations and manages its business in principally one segment, hardware sales
of computer terminals and associated services. As a result , the financial
information disclosed herein represents all of the material information related
to the Company's principal operating segment.
Foreign sales were approximately $29,544, $30,911 and $47,500 for 1998, 1997 and
1996, 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:
1998 1997 1996
--------------------------------------------
United Kingdom 11% 12% 9%
Other European countries 17% 15% 21%
Other foreign countries 5%` 5% 4%
--------------------------------------------
Total foreign sales 33% 32% 34%
============================================
15. 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, 1998, 1997 and 1996 the Company made contributions
of $69, $33 and $17 to the plan.
16. 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.
17. Subsequent Events- Credit Facilities/Debt Agreements
On January 22, 1999, Boundless Technologies entered into an agreement with the
Chase Manhattan Bank extending, to April 15, 1999, a revolving line of credit
which expired December 31, 1998. On April 14, 1999, Boundless Technologies and
Chase signed an agreement for a new, three-year, $15,000 revolving credit
facility. Terms of the new revolving credit agreement are substantially similar
to terms of the expired agreement, allowing for loans and letters of credit,
F-25
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(In thousands, except per share data)
based upon the availability of collateral, generally a percentage of inventory
and accounts receivable as specified in the agreement. The interest rate is the
prime rate or LIBOR plus 2.0%. Borrowings outstanding as of December 31, 1998
under the revolving loan have been classified as long-term debt based on
management's ability and intent to refinance such borrowings on a long-term
basis.
The revised credit agreement also provides for a $4,000 term loan, payable in
equal quarterly installments plus accrued interest beginning June 1999, over a
three-year period. The interest rate applicable to the term loan is LIBOR plus
300 basis points. Proceeds from the term loan will be used to reduce the
outstanding balance of Boundless Technologies revolving credit line.
Under the terms of a related interest rate swap agreement, the Company fixed its
interest rate as to $4,200 under the revolving credit line and the entire term
loan at 7.64% and 8.68%, respectively.
On January 26, 1999 Boundless Technologies retired the mandatorily redeemable
preferred stock, payable to NCR Corp. in an amount of approximately $3,600 due
January 31, 1999, through utilization of borrowing available to it under its
then existing revolving line of credit. Proceeds from the term loan, referred to
above, will be used to reduce the balance of the revolving line of credit.
On January 31, 1999 the Company and NCR Corporation agreed to extend the
maturity date of an existing $8,000 note (the "NCR Note") originally due January
31, 1999, to April 30, 1999, to allow the Company to complete negotiations with
mortgage lenders to refinance the NCR Note. The Company is presently evaluating
several proposals, and believes that it is likely that a refinancing agreement
will be negotiated by April 30, 1999 or that an additional extension could be
obtained to allow such negotiations to be finalized. The rate of interest
applicable to the NCR Note is 8% per annum from January 1, 1999 through March
26, 1999 and 12% per annum thereafter until April 30, 1999.
F-26
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-------------------------
ASSETS 1998 1997
-------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable 50 50
Other current assets 130 403
-------------------------
Total current assets 180 453
Investments in and advances to subsidiaries
(eliminated in consolidation) 17,300 15,750
Other assets 6 45
-------------------------
$ 17,486 $ 16,248
=========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 829 $ 841
-------------------------
Total current liabilities 829 841
-------------------------
Total liabilities 829 841
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, 4,428,609 and 5,139,228 shares issued
at December 31, 1998 and 1997, respectively 44 51
Additional paid-in capital 30,940 34,094
Accumulated deficit (14,327) (18,738)
-------------------------
Total stockholder's equity 16,657 15,407
-------------------------
$ 17,486 $ 16,248
-------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
Sales $ - $ - $ -
Cost of sales - - -
------------ ----------- -------------
Gross margin - - -
Expenses:
Operating 684 234 2,367
Interest 32 98 52
Other (income) and expenses 510 250 (323)
------------ ----------- -------------
1,226 582 2,096
------------ ----------- -------------
Loss before benefit for income taxes and other items below (1,226) (582) (2,096)
Benefit (provision) for income taxes 162 198 (191)
------------ ----------- -------------
Loss before equity in income of consolidated subsidiaries (1,064) (384) (2,287)
Equity in income of consolidated subsidiaries, net of preferred stock
dividend of $497 in 1998, 1997 and 1996 5,475 4,770 203
------------ ----------- -------------
Income (loss) from continuing operations 4,411 4,386 (2,084)
Equity in loss from discontinued operations - - (9,652)
------------- ----------- -------------
Earnings (loss) available for common stockholders $ 4,411 $ 4,386 $ (11,736)
============= =========== =============
</TABLE>
S-2
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997 1996
-------------------------- -----------
<S> <C> <C> <C>
Net cash flows provided by operating activities $ 5,050 $ 5,497 $ (10,747)
------------ ------------ -----------
Cash flows from investing activities:
Decrease (increase) in investments in subsidiaries (1,550) (7,152) 5,211
Payments for other assets - - (44)
------------ ------------ -----------
Net cash provided by (used in )investing activities (1,550) (7,152) 5,167
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from sale of convertible notes - 1,700 1,500
Costs associated with issuance of debt - (187) -
Purchase and retirement of common stock (3,500) - -
Proceeds from issuance of common stock - 136 3,980
-------------------------- -----------
Net cash provided by (used in) financing activities (3,500) 1,649 5,480
-------------------------- -----------
Net decrease in cash and cash equivalents - (6) (100)
Cash and cash equivalents at beginning of year - 6 106
-------------------------- -----------
Cash and cash equivalents at end of year $ - $ - $ 6
========================== ===========
Non-cash transactions:
Conversion of convertible notes into common stock $ - $ 1,700 $ 1,500
Options, warrants and common stock issued for services 339 63 1,424
Issuance of common stock for preferred dividend of subsidiary - 497 497
Issuance of common stock for TradeWave obligation - - 300
</TABLE>
S-3
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
(In thousands, except per share data)
Balance at Balance at
Beginning of End of
Description Period Additions Deductions Period
- ------------------- ---------------- ----------- -------------- ------------
Allowances:
Doubtful accounts:
1998 $ 284 $ 209 $ 4 (A) $ 489
1997 1,227 (20) 923 (A) 284
1996 1,407 150 330 (A) 1,227
Inventory reserves:
1998 $ 3,996 $ 808 $ 1,531 (B) $ 3,273
1997 5,853 (595) 1,262 (B) 3,996
1996 3,032 3,845 1,024 (B) 5,853
(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
- ----------- -----------------------
10(aa) Employment Agreement, dated June 1, 1998, among
the Registrant, Boundless Technologies, Inc.
and J. Gerald Combs.
10(bb) Employment Agreement, dated February 9, 1998,
between Boundless Technologies, Inc.
and Kenneth East.
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
Exhibit 10(aa) to 1998 10-K
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of June 1,
1998, (the "Effective Date"), by and between Boundless Technologies, Inc. and
Boundless Corporation, both Delaware corporations, ("Company") and James Gerald
Combs ("Employee").
RECITALS
--------
A. Company desires to employ Employee as its Chief Executive Officer
because of his experience and expertise and to secure his services upon the
terms and subject to the conditions set forth in this Agreement.
B. Employee desires and is willing to accept such employment upon such
terms and subject to the conditions set forth in this Agreement.
THEREFORE, for and in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, Company and Employee agree
as follows;
1. Employment. Upon the terms and subject to the conditions contained in
this Agreement, Company hereby employs Employee; and the Employee hereby accepts
such employment, upon such terms and subject to such conditions.
2. Duties and Authority.
2.1 Duties of Employee. During the term of this Agreement, Employee
will serve as Company's Chief Executive Officer and will faithfully and to the
best of his ability perform such duties consistent with the Position as are
determined and directed by the Board of Directors. In his capacity as Chief
Executive Officer, Employee will be generally responsible for the conception and
implementation of the overall strategy and direction of the Company. In
performing his duties under this Agreement, Employee will fully support and
cooperate with Company's efforts to develop its markets, expand its business,
and operate profitably and in conformity with business and strategic plans
approved from time to time by Company's Board of Directors.
2.2 Direction from Board of Directors. Employee will look primarily to
the Board of Directors for direction and guidance as to the performance of
Employee's duties under this Agreement. To facilitate communication between
Employee and the Board of Directors, Employee will report on the status of
Employee's activities and the performance of Employee's duties to the Board of
Directors at such times as he may be requested to do so by the Board of
Directors.
2.3 Employees Authority. In performing his duties under this
Agreement, Employee will have such authority as is necessary for him to
implement the directives of, and policies and procedures adopted by the Board of
Directors.
2.4 Time and Attention to Services. Employee will devote substantially
all of his time and attention to the performance of his duties to Company during
the term of this Agreement. Company, however, recognizes that Employee may be
engaged in other non-conflicting passive business investments and in community
activities unrelated to his duties under this Agreement that will require some
portion of his time, and Company hereby consents to Employee's attention to such
other activities so long as such activities (a) do not hinder Employee's ability
to perform his duties under this Agreement and (b) do not represent a conflict
of interest in contravention of the agreements contained in paragraph 7 or a
competitive activity in contravention of the agreements contained in paragraph
5.5 of this Agreement.
1
<PAGE>
3. Term and Termination.
3.1 Term. This Agreement is effective as of the Effective Date and
will continue in effect through May 31, 2001, (the "Initial Term") unless it is
(a) terminated in accordance with paragraph 3.2 or (b) extended in accordance
with paragraph 3.3.
3.2 Termination. This Agreement may be terminated prior to May 31,
2001, or during any extension provided by paragraph 3.3, as follows:
(a) Termination by Mutual Consent. This Agreement may be terminated at
any time by the written mutual consent of Company and Employee.
(b) Termination by Company for Cause. This Agreement may be terminated
by Company at any time for Cause by the delivery to Employee of a written notice
of termination stating the effective date of termination and the basis upon
which this Agreement is being terminated. As used in this Agreement, the term
"Cause" means (a) a material default in the performance of Employees duties
under this Agreement, or (b) Employee's dishonesty, willful misconduct, breach
of fiduciary duty involving personal profit, willful violation of any law, rule,
or regulation, action (or omission) involving moral turpitude and reflecting
unfavorably upon the public image of Company or its Affiliates, or action (or
omission) abiding or abetting a competitor, supplier or customer of Company or
its Affiliates to the material disadvantage of Company or its Affiliates; and
the term Affiliates means any other person or entity who directly controls, is
controlled by, or is under common control with Company or any Affiliate of
Company (means possession, directly or indirectly, of power to direct or cause
the direction of management or policies, whether through ownership of voting
securities or otherwise). In the event of termination for Cause, Employee will
be entitled to such salary and benefits as have accrued under this Agreement
through the effective date of termination, but will not be entitled to any other
salary, benefits, or other compensation after such date.
(c) Termination by Company Without Cause. This Agreement may be
terminated by Company at any time without Cause by the delivery to Employee of a
written notice of termination not less than two weeks prior to the effective
date of termination. Upon such termination, Employee will be paid (I) such
salary, vacation, and other benefits as have accrued under this Agreement
through the effective date of termination and (ii) for a period of twenty four
(24) months after the date of termination, Company shall pay Employee the
equivalent of Employee's monthly base annual salary (the "Severance Payment")
provided that employee complies with the provisions of paragraphs 5 and 7 of
this Agreement. The Severance Payment less applicable withholding for federal
taxes shall be paid in semi-monthly installments or otherwise in such manner as
the salaries of other executive officers of the company paid in accordance with
Company policy. Under no circumstances, however will company be obligated to pay
any bonus or other compensation after the date of termination except as provided
herein.
(d) Termination by Employee. This Agreement may be terminated by
Employee at any time, with or without Cause, by the delivery to Company of a
written notice of termination not less than two weeks prior to the effective
date of termination. In the event of termination by Employee, Employee will be
paid such salary, vacation and other benefits as have accrued under this
Agreement through the effective date of termination, but will not be entitled to
any other salary, benefits, or other compensation after such date.
(e) Termination Upon Death or Disability of Employee This Agreement
will be terminated immediately upon the death or permanent disability (which
shall be determined in good faith by Company's Board of Directors as such time
as Employee becomes physically or mentally incapable of properly performing his
duties under this Agreement and such incapacity will exist or can reasonably be
expected to exist for a period of one hundred and twenty days or more) of
Employee. Upon such determination the employee or his beneficiary will be paid
(I) such salary, vacation, and other benefits as have accrued under this
Agreement through the effective date of termination and (ii) for a period of
2
<PAGE>
twenty four (24) months after the date of termination, Company shall pay
Employee or his beneficiary the equivalent of Employee's monthly base annual
salary provided that employee complies with the provisions of paragraphs 5 and 7
of this Agreement. In addition, Employee or his beneficiary as designated in
writing to Company (or his estate, if no such beneficiary has been designated)
will be entitled to such benefits (I) as are consistent with Company policy then
if in effect or (ii) as are determined by Company's Board of Directors in its
sole discretion.
3.3 Extension of Term. The term of this Agreement may be extended
beyond the Initial Term, by the mutual agreement of Employee and Company and on
such basis as employee and Company shall agree. Each such extension, unless
expressly agreed otherwise by Employee and Company, will be for one (1) year
commencing on June 1 of the year following the expiration of the Initial Term or
any renewal term. Mutual agreement to extend the term of this Agreement shall be
evidenced by either (a) a written agreement executed by Company and Employee or
(b) the continuation of Employee's performance of services under this Agreement
with the approval of Company and without notice of termination given by Company
or Employee. Any extended term of this Agreement may be terminated as set forth
in paragraph 3.2 above, unless otherwise agreed in writing by Company and
Employee.
3.4 Salary, Performance Award and Bonus Payments. In the event the
Employee's employment with the company is terminated within three years
following the occurrence of a Change of Control (other than as a consequence of
his death or disability, or of his normal retirement under the company's
retirement plans and practices) either (I) by the Company for any reason other
than for Cause in accordance with paragraph 3.2(b), or (ii) by the Employee in
accordance with the provisions of Paragraph 3.2(d) hereof, then the Employee
shall be entitled to receive from the Company, the following:
(a) Base Salary. The Employee's annual base salary as in effect at the
date of termination, multiplied by two, shall be paid on the date of
termination;
(b) Stock Options. Unvested stock options will vest and be exercisable
immediately upon the date of termination.
(c) Noncompetition/Nonsolicitation Period: In the event of a
termination under the circumstances described in Paragraph 3.4, the provisions
of Paragraphs 5 and 6 shall be without force and effect and shall not apply to
the Employee.
(d) For purposes of this Agreement, the term "change of control" shall
mean:
(i) The acquisition, other than from the Company, by any
Individual, entity or group (within the meaning of Rule 13d-3 promulgated under
the Exchange Act or any successor provision) (any of the foregoing described in
this Paragraph 9.c.i hereafter a "Person") of 33% or more of either (a) the then
outstanding shares of Capital Stock of the Company (the "Outstanding Capital
Stock") or (b) the combined voting power by the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Voting Securities"), provided, however, that any acquisition by
(x) the company or any of its subsidiaries, or any the Employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its subsidiaries
or (y) any Person that is eligible, pursuant to Rule 13d-1(b) under the Exchange
Act, to file a statement on Schedule 13G with respect to its beneficial
ownership of Voting Securities, whether or not such Person shall have filed a
statement on Schedule 13G, unless such Personal shall have filed a statement on
Schedule 13D with respect to beneficial ownership of 33% or more of the Voting
Securities or (z) any corporation wit respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
3
<PAGE>
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such acquisition in substantially the same proportion as
their ownership, immediately prior to such acquisition of the Outstanding
Capital Stock and Voting Securities, as the case may be, shall not constitute a
Change of Control; or
ii. Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the Effective Date whose election or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of Regulation
14A, or any successor section, promulgated under the Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in each
case, with respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially own,
directly or indirectly, more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from the Business Combination; or
iv. (a) a completed liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the assets of the
Company other than to a corporation with respect to which, following such sale
or disposition, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively of the
Outstanding Capital Stock and Voting Securities immediately prior to such sale
or disposition in substantially the same proportion as their ownership of the
Outstanding Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
4. Compensation.
4.1 Base Annual Salary. In consideration for the performance of his
duties under this Agreement, Employee will be paid a base annual salary of Three
Hundred Twenty Five Thousand Dollars ($325,000.00), which shall be payable (less
applicable withholding for federal taxes) in semi-monthly installments or
otherwise in such manner as the salaries of other executive officers of Company
are paid in accordance with Company policy.
4.2 Annual Salary Review. Company's President and CEO will review
Employee's base annual salary level on an annual basis and may elect, on the
basis of such review, to increase Employee's base annual salary and award a
performance bonus on the basis of Company's profitability and Employee's
individual performance; but any such increase in Employee's base annual salary
or the awarding of a bonus will be made solely at the discretion of Company's
Board of Directors.
4.3 Expenses and Reimbursements. Employee will be entitled to
reimbursement for reasonable out-of-pocket expenses incurred by Employee that
are directly attributable to the performance of Employee's duties under this
Agreement. Employee will adhere to Company's customary practices and procedures
with respect to incurring out-of-pocket expenses and will present such expense
statements, receipts, vouchers, or other evidence supporting expenses incurred
by Employee as Company may from time to time request. Employee will be
4
<PAGE>
reimbursed for car expenses including lease payments, parking and insurance.
4.4 Benefits. During the term of this Agreement, Employee will be
entitled to the benefits generally provided or made available to other executive
officers of Company, including, but without limitation, such group medical
(including dental) insurance and life insurance benefits as are made available
to employees of Company generally and participation in any "cafeteria" plan or
retirement plan that may be available to employees of Company (subject, however,
to (i) eligibility and (ii) modification or elimination in accordance with
Company's standard policies as in effect from time to time) and to the following
specific benefits:
(a) Vacation. Employee will be entitled to six weeks vacation.
(b) Sick Leave. Employee will be entitled to six months sick
leave.
4.5 Stock Options. As a material inducement to Employee to enter into
this Agreement, as soon after the Effective Date as practicable and subject to
approval of the Board of Directors, Company agrees that it will grant an option
(the "Option") to Employee to purchase up to 150,000 shares of common capital
stock of Company (the "Option Shares") pursuant to the terms of the Company's
stock option plan (the "Option Plan"). The Option will be evidenced by a written
agreement (the "Option Agreement") executed by Company and Employee. The Option
Agreement (a) will specify the purchase price to be paid by Employee for the
Option Shares upon his exercise of the Option (which will be the fair market
value of the Option Shares); (b) will provide that Employee may exercise the
option over a three year period as follows: (i) as to thirty three (33%) of the
Option Shares, on and after May 31, 1999 and, (b) will provide for such
restrictions on transferability as may be reasonably required by Company; and
(c) will set forth other terms and conditions related to the Option agreed upon
by Company and Employee. If Employee is terminated without cause, or there is a
change of control, all option shares will vest and be exercisable.
4.6 Relocation Reimbursement. Upon Company's request to Employee to
relocate, Company shall reimburse Employee for reasonable relocation expenses.
5. Confidentiality and Non-Disclosure.
5.1 Detrimental Statements. For so long as this Agreement remains in
effect and for a period of 18 months after the date of termination or expiration
of this Agreement (the "Applicable Period"), Employee will not, directly or
indirectly, in any individual or representative capacity whatsoever, make any
statement, oral or written, or perform any act or omission which is or could be
detrimental in any material respect to the goodwill of Company, provided that
any truthful statement made by Employee in good faith shall not violate this
subparagraph.
5.2 Covenant of Confidentiality. The Employee recognizes and
acknowledges that he will be provided access to confidential information and
trade secrets of the Company, and other entities doing business with the Company
relating to research, development, manufacturing, marketing, financial and other
business-related activities or may discover, conceive, perfect or develop,
solely or jointly with others, inventions, discoveries, improvements, know-how,
computer programs, or other technical, manufacturing, marketing, customer,
and/or financial data and information, including without limitation, access to
information regarding the upgrading of current Company products and the
development of new products (hereinafter "CONFIDENTIAL INFORMATION"). Such
CONFIDENTIAL INFORMATION constitutes valuable, special, and unique property of
the Company, and/or other entities doing business with the Company. In
consideration of such access to Confidential Information, Employee will not,
during or after the term of his employment by the Company, make any use of, or
disclose any of such CONFIDENTIAL INFORMATION to any person or firm,
corporation, association, or other entity for any reason or purpose whatsoever,
except as is generally available to the public or as specifically allowed in
writing by an authorized representative of the Company.
5
<PAGE>
5.3 No Use of Confidential Information of Others. The Employee agrees
not to make use of or disclose any confidential information, including trade
secrets, of prior employers in carrying out Employee's duties for Company.
5.4 Return of Confidential Information. Upon the expiration of the
term or termination of this Agreement, Employee will surrender to Company all
tangible Confidential Information in the possession of, or under the control of,
Employee, including, but without limitation, the originals and all copies of all
software, drawings, manuals, letters, notes, notebooks, reports and all other
media, material and records of any kind, and all copies thereof pertaining to
Confidential Information acquired or developed by the Employee during the term
of Employee's employment. Employee further agrees that upon termination of
Employee's employment, for any reason, and at the request of the Company,
Employee shall make himself available and shall meet with representatives of the
Company. At such meeting, Employee shall fully disclose and deliver any of the
above described materials in Employee's possession and, at the Company's
request, shall execute any and all documents reasonably necessary to ensure and
verify compliance with this paragraph 5.
5.5 Right to Injunctive Relief. Employee acknowledges that a violation
or attempted violation on his part of any agreement in this paragraph 5 will
cause irreparable damage to Company and its Affiliates, and accordingly Employee
agrees that Company shall be entitled as a manner of right to an injunction, out
of any court of competent jurisdiction, restraining any violation or further
violation of such agreements by Employee; such right to an injunction, however,
shall be cumulative and in addition to whatever other remedies Company may have.
Furthermore, Employee shall be entitled to seek a declaratory judgment regarding
any conduct or enterprise to determine whether or not such conduct or violation
is violative of the terms of this Agreement; provided however, that no suit
shall be filed until Employee has given Company at least 15 days to respond to
Employee's written request for permission to undertake certain requested acts.
The terms and agreements set forth in this paragraph 5 shall survive the
expiration of the term or termination of this Agreement for any reason. The
existence of any claim of Employee, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Company of the
agreements contained in this paragraph 5.
6. Conflict of Interest. In keeping with Employee's fiduciary duties to
Company, Employee agrees that while employed by Company he will not, acting
alone or in conjunction with others, directly or indirectly, become involved in
a conflict of interest or, upon discovery thereof, allow a conflict of interest
to continue. Moreover, Employee agrees that he will immediately disclose to the
Board of Directors of Company any facts which might involve any reasonable
possibility of a conflict of interest. It is agreed that any direct or indirect
interest in, connection with, or benefit from any outside activities, where such
interest might in any way adversely affect Company, involves a possible conflict
of interest. Circumstances in which a conflict of interest on the part of
Employee might arise, and which must be reported immediately by Employee to the
Board of Directors of Company, include, but are not limited to, the following:
(a) ownership of a material interest in any supplier, contractor, subcontractor,
customer, or other entity with which Company does business; (b) acting in any
capacity, including director, officer, partner, consultant, employee,
distributor, agent, or the like, for a supplier, contractor, subcontractor,
customer, or other entity with which Company does business; (c) accepting,
directly or indirectly, payment, service, or loans from a supplier, contractor,
subcontractor, customer, or other entity with which Company does business,
including, but not limited to, gifts, trips, entertainment, or other favors of
more than a nominal value; (d) misuse of Company's information or facilities to
which Employee has access in a manner which will be detrimental to Company's
interest, such as utilization for Employee's own benefit of know-how,
inventions, or information developed through Company's business activities; (e)
disclosure or other misuse of Confidential Information of any kind obtained
through Employee's connection with Company; (f) the ownership, directly or
indirectly, of a material interest in an enterprise in competition with Company,
or acting as an owner, director, principal, officer, partner, consultant,
employee, agent, servant, or otherwise of any enterprise which is in competition
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with Company; and (g) appropriation of a Corporate Opportunity, as defined in
paragraph 8 of this Agreement.
7. Corporate Opportunities. Employee acknowledges that during the course of
his employment by Company he may be offered or become aware of business or
investment opportunities in which Company may or might have an interest (a
"Corporate Opportunity") and that he has a duty to advise Company of any such
Corporate Opportunities before acting upon them. Accordingly, Employee agrees
(a) that he will disclose to Company's Board of Directors any Corporate
Opportunity offered to Employee or of which Employee becomes aware, and (b) that
he will not act upon any Corporate Opportunity for his own benefit or for the
benefit of any person or entity other than Company without first obtaining the
consent or approval of Company's Board of Directors (whose consent or approval
may be granted or denied solely at the discretion of Company's Board of
Directors).
8. Company's Right of Offset. Should Employee at any time be indebted to
Company, or otherwise obligated to pay money to Company for any reason, Company,
at its election, may offset amounts otherwise payable to Employee under this
Agreement, including, but without limitation, salary and bonus payments, against
any such indebtedness or amounts due from Employee to Company.
9. Miscellaneous.
9.1 Governing Law. This agreement shall be governed by and construed
in accordance with the substantive laws of the State of Texas.
9.2 Entirety and Amendments. This Agreement embodies the entire
agreement between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof; provided, however, that
this Agreement does not supersede or terminate the obligations and assignments
of Employee arising under the Assignment and Nondisclosure Agreement. This
Agreement may be amended or modified only in writing executed by Employee and
another officer of Company expressly authorized by Company's Board of Directors.
9.3 Notices. Any notice or other communication hereunder must be in
writing to be effective and shall be deemed to have been given when personally
delivered to Employee or Company or, if mailed, on the third day after it is
enclosed in an envelope and sent certified mail/return receipt requested in the
United States mail. Either party may from time to time change its address for
notification purposes by giving the other party written notice of the new
address and the date upon which it will become effective. The address for each
party for notices hereunder is as follows:
Employee: J. Gerald Combs
200 Central Park South
New York, New York 10019
Company: Boundless Technologies, Inc.
Attn: President and CEO
100 Marcus Boulevard
Hauppauge, New York 11788-3762
9.4 Attorney's Fees. In the event that either party is required to
obtain the services of an attorney in order to enforce any right or obligation
hereunder, the prevailing party shall be entitled to recover reasonable
attorney's fees and court costs from the other party.
9.5 Assignability; Binding Nature. This Agreement is binding upon
Company and Employee and their respective successors, heirs and assigns. The
rights and obligations of Employer hereunder may be assigned by Employer to any
entity that succeeds to all or substantially all of the assets of Employer
through merger, consolidation, liquidation, acquisition of assets, or otherwise.
9.6 Headings. The headings of paragraphs contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
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9.7 Severability. If, but only to the extent that, any provision of
this Agreement is declared or found to be illegal, unenforceable, or void, so
that both Company and Employee would be relieved of all obligations arising
under such provision, it is the agreement of Company and Employee that this
Agreement shall be deemed amended by modifying such provision to the extent
necessary to make it legal and enforceable while preserving its intent. If such
amendment is not possible, another provision that is legal and enforceable and
achieves the same objective shall be substituted therefor. If the remainder of
this Agreement is not affected by such declaration or finding and is capable of
substantial performance by both Company and Employee, then the remainder shall
be enforced to the extent permitted by law.
9.8 Arbitration. Any and all controversies, claims, disputes, or
questions arising out of or relating to this agreement shall be submitted to
binding arbitration in Austin, Texas and shall be conducted pursuant to the
commercial arbitration rules of the American Arbitration Association; provided,
however, that Company shall also be permitted to seek judicial relief as
provided in paragraph 5.6.
9.9 Survival of Terms. The terms and agreements set forth in
paragraphs 5 and 7 shall survive the expiration of the term or termination of
this Agreement regardless of the reason. The existence of any claim of Employee,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Company of the agreements contained in paragraphs
5 and 7.
9.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be part of the same instrument.
Executed as of the Effective Date set forth above by:
Boundless Technologies, Inc. Employee
By: /s/ /s/
------------------------------- -----------------------
Daniel Matheson James Gerald Combs
Title: Chairman, Compensation Committee
8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of February
9, 1998, (the "Effective Date"), by and between Boundless Technologies, Inc., a
Delaware corporation ("Company"), and Kenneth Hayes East, ("Employee").
RECITALS
A. Company desires to employ Employee as its Chief Technology Officer
because of his experience and expertise and to secure his services upon the
terms and subject to the conditions set forth in this Agreement.
D. Employee desires and is willing to accept such employment upon such
terms and subject to the conditions set forth in this Agreement.
THEREFORE, for and in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, Company and Employee agree
as follows:
1. Employment. Upon the terms and subject to the conditions contained
in this Agreement, Company hereby employs Employee; and Employee hereby accepts
such employment, upon such terms and subject to such conditions.
2. Duties and Authority.
2.1 Duties of Employee. During the term of this Agreement, Employee
will serve as Company's Chief Technology Officer and will faithfully and to the
best of his ability perform such duties consistent with the position as are
determined and directed by the President and Chief Executive Officer. In his
capacity as Chief Technology Officer, Employee will be generally responsible for
the development of new technology and the enhancement of existing technology
products of the Company. In performing his duties under this Agreement, Employee
will fully support and cooperate with Company's efforts to develop its markets,
expand its business, and operate profitably and in conformity with business and
strategic plans approved from time to time by Company's Board of Directors.
2.2 Direction from President and Chief Executive Officer. Employee
will look primarily to the President and Chief Executive Officer of Company for
direction and guidance as to the performance of Employee's duties under this
Agreement. To facilitate communication between Employee and the President and
Chief Executive Officer, Employee will report on the status of Employee's
activities and the performance of Employee's duties to the President and Chief
Executive Officer at such times as he may be requested to do so by the President
and Chief Executive Officer.
2.3 Employee's Authority. In performing his duties under this
Agreement, Employee will have such authority as is necessary for him to
implement the directives of, and policies and procedures adopted by, the
President and Chief Executive Officer of Company and to oversee the development
of new technology and enhancement of existing products.
2.4 Time and Attention to Services. Employee will devote substantially
all of his time and attention to the performance of his duties to Company during
the term of this Agreement. Company, however, recognizes that Employee may be
engaged in other non-conflicting passive business investments and in community
activities unrelated to his duties under this Agreement that will require some
portion of his time, and Company hereby consents to Employee's attention to such
other activities so long as such activities (a) do not hinder Employee's ability
to perform his duties under this Agreement and (b) do not represent a conflict
of interest in contravention of the agreements contained in paragraph 7 or a
competitive activity in contravention of the agreements contained in paragraph
5.5 of this Agreement.
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3. Term and Termination.
3.1 Term. This Agreement is effective as of the Effective Date and
will continue in effect through February 8, 2000, ( the "Initial Term") unless
it is (a) terminated in accordance with paragraph 3.2 or (b) extended in
accordance with paragraph 3.3.
3.2 Termination. This Agreement may be terminated prior to February 9,
2000, or during any extension provided by paragraph 3.3, as follows:
(a) Termination by Mutual Consent. This Agreement may be
terminated at any time by the written mutual consent of Company and Employee.
(b) Termination By Company for Cause. This Agreement may be
terminated by Company at any time for Cause by the delivery to Employee of a
written notice of termination stating the effective date of termination and the
basis upon which this Agreement is being terminated. As used in this Agreement,
the term "Cause" means (a) a material default in the performance of Employee's
duties under this Agreement, or (b) Employee's dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, willful violation of any
law, rule, or regulation, action (or omission) involving moral turpitude and
reflecting unfavorably upon the public image of Company or its Affiliates, or
action (or omission) abiding or abetting a competitor, supplier or customer of
Company or its Affiliates to the material disadvantage of Company or its
Affiliates; and the term "Affiliate" means any other person or entity who
directly controls, is controlled by, or is under common control with Company or
any Affiliate of Company (and "control" means possession, directly or
indirectly, of power to direct or cause the direction of management or policies,
whether through ownership of voting securities or otherwise). In the event of
termination for Cause, Employee will be entitled to such salary and benefits as
have accrued under this Agreement through the effective date of termination, but
will not be entitled to any other salary, benefits, or other compensation after
such date.
(c) Termination By Company Without Cause. This Agreement may be
terminated by Company at any time without Cause by the delivery to Employee of a
written notice of termination not less than two weeks prior to the effective
date of termination. Upon such termination, Employee will be paid (i) such
salary, vacation, and other benefits as have accrued under this Agreement
through the effective date of termination and (ii) for a period of six (6)
months after the date of termination, Company shall pay Employee the equivalent
of Employee's monthly base annual salary (the "Severance Payment") provided that
Employee complies with the provisions of paragraphs 5, 6 and 7 of this
Agreement. The Severance Payment less applicable withholding for federal taxes
shall be paid in semi-monthly installments or otherwise in such manner as the
salaries of other executive officers of Company are paid in accordance with
Company policy. Under no circumstances, however will Company be obligated to pay
any bonus or other compensation after the date of termination except as provided
herein.
(d) Termination by Employee. This Agreement may be terminated by
Employee at any time, with or without Cause, by the delivery to Company of a
written notice of termination not less than two weeks prior to the effective
date of termination. In the event of termination by Employee, Employee will be
paid such salary, vacation and other benefits as have accrued under this
Agreement through the effective date of termination, but will not be entitled to
any other salary, benefits, or other compensation after such date.
(e) Termination Upon Death or Disability of Employee. This
Agreement will be terminated immediately upon the death or permanent disability
(which shall be determined in accordance with Company's disability plan as then
in effect, or if no such plan is then in effect, as determined in good faith by
Company's Board of Directors at such time as Employee becomes physically or
mentally incapable of properly performing his duties under this Agreement and
such incapacity will exist or can reasonably be expected to exist for a period
of ninety days or more) of Employee. In either such event, Employee or his
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beneficiary as designated in writing to Company (or his estate, if no such
beneficiary has been designated) will be entitled to such benefits (i) as are
consistent with Company policy then if in effect or (ii) as are determined by
Company's Board of Directors in its sole discretion.
3.3 Extension of Term. The term of this Agreement may be extended
beyond the Initial Term, by the mutual agreement of Employee and Company and on
such basis as Employee and Company shall agree. Each such extension, unless
expressly agreed otherwise by Employee and Company, will be for one (1) year
commencing on January 1 of the year following the expiration of the Initial Term
or any renewal term. Mutual agreement to extend the term of this Agreement shall
be evidenced by either (a) a written agreement executed by Company and Employee
or (b) the continuation of Employee's performance of services under this
Agreement with the approval of Company and without notice of termination given
by Company or Employee. Any extended term of this Agreement may be terminated as
set forth in paragraph 3.2 above, unless otherwise agreed in writing by Company
and Employee.
4. Compensation.
4.1 Base Annual Salary. In consideration for the performance of his
duties under this Agreement, Employee will be paid a base annual salary of One
Hundred Fifty Thousand Dollars ($150,000.00), which shall be payable (less
applicable withholding for federal taxes) in semi-monthly installments or
otherwise in such manner as the salaries of other executive officers of Company
are paid in accordance with Company policy.
4.2 Annual Salary Review. Company's President and CEO will review
Employee's base annual salary level on an annual basis and may elect, on the
basis of such review, to increase Employee's base annual salary and award a
performance bonus (ranging from 0% to 66% of Employee's base annual salary) on
the basis of Company's profitability and Employee's individual performance; but
any such increase in Employee's base annual salary or the awarding of a bonus
will be made solely at the discretion of Company's President and CEO.
4.3 Sign-In Bonus. Company shall pay Employee a sign-in bonus of
Thirty-Five Thousand Dollars ($35,000) less applicable withholding for federal
taxes upon Employee's commencement of full-time employment with the Company.
4.4 Expenses and Reimbursements. Employee will be entitled to
reimbursement for reasonable out-of-pocket expenses incurred by Employee that
are directly attributable to the performance of Employee's duties under this
Agreement. Employee will adhere to Company's customary practices and procedures
with respect to incurring out-of-pocket expenses and will present such expense
statements, receipts, vouchers, or other evidence supporting expenses incurred
by Employee as Company may from time to time request.
4.5 Benefits. During the term of this Agreement, Employee will be
entitled to the benefits generally provided or made available to other executive
officers of Company, including, but without limitation, such group medical
(including dental) insurance and life insurance benefits as are made available
to employees of Company generally and participation in any "cafeteria" plan or
retirement plan that may be available to employees of Company (subject, however,
to (i) eligibility and (ii) modification or elimination in accordance with
Company's standard policies as in effect from time to time) and to the following
specific benefits:
(a) Vacation. Employee will be entitled to such vacation time as
is allotted to other executive officers of Company.
(b) Sick Leave. Employee will be entitled to the benefits, and
subject to all provisions of, Company's standard policies and procedures
regarding sick leave and time off.
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4.6 Stock Options. As a material inducement to Employee to enter into
this Agreement, as soon after the Effective Date as practicable and subject to
approval of the Board of Directors, Company agrees that it will grant an option
(the "Option") to Employee to purchase up to 300,000 shares of common capital
stock of Company (the "Option Shares") pursuant to the terms of the Company's
stock option plan (the "Option Plan"). The Option will be evidenced by a written
agreement (the "Option Agreement") executed by Company and Employee. The Option
Agreement (a) will specify the purchase price to be paid by Employee for the
Option Shares upon his exercise of the Option (which will be the fair market
value of the Option Shares); (b) will provide that Employee may exercise the
option over a five year period as follows: (i) as to twenty-five percent (25%)
of the Option Shares, on and after February 9, 1999 and (ii) as to the remaining
percent of the Option Shares, in accordance with the terms of the Company's
Option Plan (provided, that Employee remains employed by Company on each of such
dates); (c) will provide for such restrictions on transferability as may be
reasonably required by Company; and (d) will set forth other terms and
conditions related to the Option agreed upon by Company and Employee. If
Employee is terminated without cause, Option Shares which had vested before the
date of termination, may be exercised by Employee in accordance with the Option
Plan.
4.7 Relocation Reimbursement. Upon Company's request to Employee to
relocate, Company shall reimburse Employee for reasonable relocation expenses.
5. Confidentiality and Non-Disclosure.
5.1 Detrimental Statements. For so long as this Agreement remains in
effect and for a period of 18 months after the date of termination or expiration
of this Agreement (the "Applicable Period"), Employee will not, directly or
indirectly, in any individual or representative capacity whatsoever, make any
statement, oral or written, or perform any act or omission which is or could be
detrimental in any material respect to the goodwill of Company, provided that
any truthful statement made by Employee in good faith shall not violate this
subparagraph.
5.2 Covenant of Confidentiality. The Employee recognizes and
acknowledges that he will be provided access to confidential information and
trade secrets of the Company, and other entities doing business with the Company
relating to research, development, manufacturing, marketing, financial and other
business-related activities or may discover, conceive, perfect or develop,
solely or jointly with others, inventions, discoveries, improvements, know-how,
computer programs, or other technical, manufacturing, marketing, customer,
and/or financial data and information, including without limitation, access to
information regarding the upgrading of current Company products and the
development of new products (hereinafter "CONFIDENTIAL INFORMATION"). Such
CONFIDENTIAL INFORMATION constitutes valuable, special, and unique property of
the Company, and/or other entities doing business with the Company. In
consideration of such access to Confidential Information, Employee will not,
during or after the term of his employment by the Company, make any use of, or
disclose any of such CONFIDENTIAL INFORMATION to any person or firm,
corporation, association, or other entity for any reason or purpose whatsoever,
except as is generally available to the public or as specifically allowed in
writing by an authorized representative of the Company.
5.3 No Use of Confidential Information of Others. The Employee agrees
not to make use of or disclose any confidential information, including trade
secrets, of prior employers in carrying out Employee's duties for Company.
5.4 Return of Confidential Information. Upon the expiration of the
term or termination of this Agreement, Employee will surrender to Company all
tangible Confidential Information in the possession of, or under the control of,
Employee, including, but without limitation, the originals and all copies of all
software, drawings, manuals, letters, notes, notebooks, reports and all other
media, material and records of any kind, and all copies thereof pertaining to
Confidential Information acquired or developed by the Employee during the term
of Employee's employment. Employee further agrees that upon termination of
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Employee's employment, for any reason, and at the request of the Company,
Employee shall make himself available and shall meet with representatives of the
Company. At such meeting, Employee shall fully disclose and deliver any of the
above described materials in Employee's possession and, at the Company's
request, shall execute any and all documents reasonably necessary to ensure and
verify compliance with this paragraph 5.
5.5 Covenant Not to Compete. As an ancillary covenant to the terms and
conditions set forth elsewhere in this Agreement, and in particular the
covenants set forth in paragraph 5.2, paragraph 5.3, and paragraph 5.4 above,
and in consideration of the mutual promises set forth in this Agreement and
other good and valuable consideration received and to be received, Employee
agrees that, during the term of this Agreement, and throughout the Applicable
Period, Employee will not, directly or indirectly, own or become employed by or
otherwise provide consulting services to, any business engaged or planning to
become engaged in the business of providing or marketing ANSI/ASCII character
terminals; thin client devices including network computers; Windows based
terminals; thin clients; Internet terminals; CITRIX based remote clients;
clients utilizing the ICA protocol; or X terminals in the United States of
America, Europe, Asia, Mexico, Brazil, Venezuela, and India, or any business
competitive with Company prior to the date of termination of this Agreement in
the United States of America, Europe, Asia, Mexico, Brazil, Venezuela, or India.
Employee understands that the current business activities of Company and its
Affiliates include the business of providing or marketing computer based systems
or services which relate to ANSI/ASCII character terminals; thin client devices
including network computers; Windows based terminals; thin clients; Internet
terminals; CITRIX based remote clients; clients utilizing the ICA protocol; or X
terminals in the United States of America, Europe, Asia, Mexico, Brazil,
Venezuela, and India, and that Company and its Affiliates have plans to expand
the scope of such activities and the geographic area of operations of Company
and its Affiliates in the near future with the direct involvement of Employee,
therefore, Employee agrees that the limitations as to time, geographical area,
and scope of activity contained in this covenant do not impose a greater
restraint than is necessary to protect the goodwill and other business interests
of Company, and are therefore reasonable. If any provision of this covenant is
found to be invalid in part or in whole, Company may elect, but shall not be
required, to have such provision reformed, whether as to time, area covered, or
otherwise, as and to the extent required for its validity under applicable law
and, as so reformed, such provision shall be enforceable.
5.6 Right to Injunctive Relief. Employee acknowledges that a violation
or attempted violation on his part of any agreement in this paragraph 5 will
cause irreparable damage to Company and its Affiliates, and accordingly Employee
agrees that Company shall be entitled as a manner of right to an injunction, out
of any court of competent jurisdiction, restraining any violation or further
violation of such agreements by Employee; such right to an injunction, however,
shall be cumulative and in addition to whatever other remedies Company may have.
Furthermore, Employee shall be entitled to seek a declaratory judgment regarding
any conduct or enterprise to determine whether or not such conduct or violation
is violative of the terms of this Agreement; provided however, that no suit
shall be filed until Employee has given Company at least 15 days to respond to
Employee's written request for permission to undertake certain requested acts.
The terms and agreements set forth in this paragraph 5 shall survive the
expiration of the term or termination of this Agreement for any reason. The
existence of any claim of Employee, whether predicated on this Agreement or
otherwise shall not constitute a defense to the enforcement by Company of the
agreements contained in this paragraph 5.
6. Inventions or Discoveries.
6.1 Inventions.
(a) The Employee recognizes and acknowledges that during the term
of his employment he may, either individually or jointly with others, and either
on behalf of the Company or on his own, discover, conceive, make, perfect, or
develop inventions, discoveries, improvements, computer programs, know-how, and
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data that result from his employment or that are related to the business or
activities of the Company (hereinafter collectively referred to as
"INVENTIONS"). INVENTIONS which are related to the business or activities of the
Company include any business or activity in progress at the Company at the date
of or during the Employee's employment with the Company and projects or other
operations at the Company planned for the future. Employee agrees to advise and
disclose said INVENTIONS to the Company.
(b) The Employee further recognizes and agrees that any and all
such INVENTIONS, including all rights in patents, patent applications, design
patents, models, prototypes, and trade secrets, are the sole and exclusive
property of the Company. Employee agrees to assign and does hereby assign to the
Company, all his right, title and interest in and to any and all INVENTIONS and
related intellectual property rights. The Employee's obligations herein apply
without regard to whether an idea for an INVENTION or the solution to a problem
occurs to him on the job, at home, or elsewhere.
(c) Employee shall promptly execute and deliver all papers and
documents necessary to vest all right, title and interest in and to INVENTIONS
in the Company and, at the Company's request and expense, shall assist Company
in obtaining any patents, or semiconductor mask registrations, or any other form
of protection accorded to such INVENTIONS in the United States or anywhere
throughout the world, and shall assign the same and any patents or copyright and
semiconductor mask registrations granted thereon, to the Company.
6.2 Copyright. Employee agrees that the Company shall be the copyright
owner of all copyrightable works of every kind and description (including
computer programs, mask works, internal reports, compilations of data, and
publications) created or developed by Employee, either individually or jointly
with others, during the term of Employee's employment, where such works are
created pursuant to the performance of Employee's duties. Employee further
agrees, if so requested by the Company, at no expense to the Company, to execute
such written acknowledgments or assignments of copyright ownership of works
covered by the Agreement as may be necessary to preserve or vest such rights in
the Company.
6.3 Prior Inventions or Discoveries. As a matter of record, the
Employee has set out in Schedule 1, attached hereto, a complete list and
description of all ideas, inventions, improvements, discoveries, computer
programs, semiconductor chip designs, or mask works, previously conceived,
reduced to practice, perfected, or developed by Employee, either wholly or in
part (hereinafter "PREVIOUS INVENTIONS") and any patents, patent applications,
or registration issued thereon. Only such PREVIOUS INVENTIONS and accompanying
intellectual property rights, and no other, shall be excluded from this
Agreement.
7. Conflict of Interest. In keeping with Employee's fiduciary duties to
Company, Employee agrees that while employed by Company he will not, acting
alone or in conjunction with others, directly or indirectly, become involved in
a conflict of interest or, upon discovery thereof, allow a conflict of interest
to continue. Moreover, Employee agrees that he will immediately disclose to the
Board of Directors of Company any facts which might involve any reasonable
possibility of a conflict of interest. It is agreed that any direct or indirect
interest in, connection with, or benefit from any outside activities, where such
interest might in any way adversely affect Company, involves a possible conflict
of interest. Circumstances in which a conflict of interest on the part of
Employee might arise, and which must be reported immediately by Employee to the
Board of Directors of Company, include, but are not limited to, the following:
(a) ownership of a material interest in any supplier, contractor, subcontractor,
customer, or other entity with which Company does business; (b) acting in any
capacity, including director, officer, partner, consultant, employee,
distributor, agent, or the like, for a supplier, contractor, subcontractor,
customer, or other entity with which Company does business; (c) accepting,
directly or indirectly, payment, service, or loans from a supplier, contractor,
subcontractor, customer, or other entity with which Company does business,
including, but not limited to, gifts, trips, entertainment, or other favors of
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more than a nominal value; (d) misuse of Company's information or facilities to
which Employee has access in a manner which will be detrimental to Company's
interest, such as utilization for Employee's own benefit of know-how,
inventions, or information developed through Company's business activities; (e)
disclosure or other misuse of Confidential Information of any kind obtained
through Employee's connection with Company; (f) the ownership, directly or
indirectly, of a material interest in an enterprise in competition with Company,
or acting as an owner, director, principal, officer, partner, consultant,
employee, agent, servant, or otherwise of any enterprise which is in competition
with Company; and (g) appropriation of a Corporate Opportunity, as defined in
paragraph 8 of this Agreement.
8. Corporate Opportunities. Employee acknowledges that during the course of
his employment by Company he may be offered or become aware of business or
investment opportunities in which Company may or might have an interest (a
"Corporate Opportunity") and that he has a duty to advise Company of any such
Corporate Opportunities before acting upon them. Accordingly, Employee agrees
(a) that he will disclose to Company's Board of Directors any Corporate
Opportunity offered to Employee or of which Employee becomes aware, and (b) that
he will not act upon any Corporate Opportunity for his own benefit or for the
benefit of any person or entity other than Company without first obtaining the
consent or approval of Company's Board of Directors (whose consent or approval
may be granted or denied solely at the discretion of Company's Board of
Directors).
9. Company's Right of Offset. Should Employee at any time be indebted to
Company, or otherwise obligated to pay money to Company for any reason, Company,
at its election, may offset amounts otherwise payable to Employee under this
Agreement, including, but without limitation, salary and bonus payments, against
any such indebtedness or amounts due from Employee to Company.
10. Miscellaneous.
10.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS.
10.2 Entirety and Amendments. This Agreement embodies the entire
agreement between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof; provided, however, that
this Agreement does not supersede or terminate the obligations and assignments
of Employee arising under the Assignment and Nondisclosure Agreement. This
Agreement may be amended or modified only in writing executed by Employee and
another officer of Company expressly authorized by Company's Board of Directors.
10.3 Notices. Any notice or other communication hereunder must be in
writing to be effective and shall be deemed to have been given when personally
delivered to Employee or Company or, if mailed, on the third day after it is
enclosed in an envelope and sent certified mail/return receipt requested in the
United States mail. Either party may from time to time change its address for
notification purposes by giving the other party written notice of the new
address and the date upon which it will become effective. The address for each
party for notices hereunder is as follows:
Employee: Kenneth Hayes East
4689 Adrian Way
Plano, Texas 75024
Company: Boundless Technologies, Inc.
Attn: President and CEO
100 Marcus Boulevard
Hauppage, New York 11788-3762
10.4 Attorney's Fees. In the event that either party is required to
obtain the services of an attorney in order to enforce any right or obligation
hereunder, the prevailing party shall be entitled to recover reasonable
attorney's fees and court costs from the other party.
7
<PAGE>
10.5 Assignability; Binding Nature. This Agreement is binding upon
Company and Employee and their respective successors, heirs and assigns. The
rights and obligations of Employer hereunder may be assigned by Employer to any
entity that succeeds to all or substantially all of the assets of Employer
through merger, consolidation, liquidation, acquisition of assets, or otherwise.
10.6 Headings. The headings of paragraphs contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
10.7 Severability. If, but only to the extent that, any provision of
this Agreement is declared or found to be illegal, unenforceable, or void, so
that both Company and Employee would be relieved of all obligations arising
under such provision, it is the agreement of Company and Employee that this
Agreement shall be deemed amended by modifying such provision to the extent
necessary to make it legal and enforceable while preserving its intent. If such
amendment is not possible, another provision that is legal and enforceable and
achieves the same objective shall be substituted therefor. If the remainder of
this Agreement is not affected by such declaration or finding and is capable of
substantial performance by both Company and Employee, then the remainder shall
be enforced to the extent permitted by law.
10.8 Arbitration. Any and all controversies, claims, disputes, or
questions arising out of or relating to this agreement shall be submitted to
binding arbitration in Austin, Texas and shall be conducted pursuant to the
commercial arbitration rules of the American Arbitration Association; provided,
however, that Company shall also be permitted to seek judicial relief as
provided in paragraph 5.6.
10.9 Survival of Terms. The terms and agreements set forth in
paragraphs 5, 6, and 7 shall survive the expiration of the term or termination
of this Agreement regardless of the reason. The existence of any claim of
Employee, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Company of the agreements contained
in paragraphs 5, 6 and 7.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be part of the same instrument.
Executed as of the Effective Date set forth above by:
Boundless Technologies, Inc. Employee
By: /s/ /s/
----------------------------- --------------------------
Jeffrey K. Moore Kenneth Hayes East
Title: Vice President
--------------------------
8
<PAGE>
SCHEDULE 1
PRIOR INVENTIONS, IDEAS, CONCEPTS*
- ---------------------------------
TWO PATENTS ISSUED PRIOR TO JANUARY 30, 1998 RELATING TO ELECTRONIC SAFETY
DEVICES FOR THE PREVENTION OF INFANT DROWNINGS.
*Employee understands, agrees and represents that the above disclosure, as may
be continued on additional pages attached hereto, includes all his prior
inventions, discoveries, improvements, computer programs, patents, and pending
patent applications, and any other subject matter described at paragraph 5.
Employee Initials:
------
9
Exhibit 23 to 1998 10-K
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 12, 1999 (except for Note 17 as to
which the date is April 14, 1999) on our audits of the consolidated financial
statements and schedules of Boundless Corporation and Subsidiaries, which report
is included in this Annual Report on Form 10-K for the year ended December 31,
1998.
BDO Seidman, LLP
Melville, New York
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 732
<SECURITIES> 0
<RECEIVABLES> 13,763
<ALLOWANCES> 489
<INVENTORY> 12,565
<CURRENT-ASSETS> 31,408
<PP&E> 15,521
<DEPRECIATION> 5,270
<TOTAL-ASSETS> 49,348
<CURRENT-LIABILITIES> 22,007
<BONDS> 5,500
3,555
0
<COMMON> 44
<OTHER-SE> 16,613
<TOTAL-LIABILITY-AND-EQUITY> 49,348
<SALES> 90,202
<TOTAL-REVENUES> 90,202
<CGS> 64,203
<TOTAL-COSTS> 64,203
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 209
<INTEREST-EXPENSE> 2,539
<INCOME-PRETAX> 5,657
<INCOME-TAX> 749
<INCOME-CONTINUING> 4,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,908
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
