SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number 0-17977
Boundless Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of Incorporation or Organization)
13-3469637
(I.R.S. Employer Identification No.)
100 Marcus Blvd.
Hauppauge, NY
(Address of principal executive offices)
11788
(Zip Code)
(631) 342-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
As of June 30, 2000, the Registrant had approximately 4,626,571 shares of Common
Stock, $.01 par value per share outstanding.
1 of 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999..................................... 3
Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2000 and 1999................ 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2000 and 1999....................... 5
Notes to Consolidated Financial Statements (unaudited)................... 6
2 of 18
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents.................................$ 651 $ 1,285
Trade accounts receivable, net............................ 14,129 12,378
Income tax refund......................................... - 833
Inventories............................................... 11,750 13,751
Deferred income taxes..................................... 2,576 2,576
Prepaid expenses and other current assets................. 2,301 1,039
----------- ----------
Total current assets.................................... 31,407 31,862
Property and equipment, net................................... 11,785 10,987
Goodwill, net................................................. 5,721 6,272
Other assets.................................................. 1,650 1,339
----------- ----------
$ 50,563 $ 50,460
=========== ==========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.........................$ 2,335 $ 1,650
Accounts payable.......................................... 6,781 6,148
Accrued expenses.......................................... 5,739 5,565
Deferred revenue.......................................... 215 557
----------- ----------
Total current liabilities...............................$ 15,070 $ 13,920
----------- ----------
Long-term liabilities:
Long-term debt, less current maturities................... 18,079 14,206
Deferred income taxes..................................... 281 281
Other .................................................... 673 638
----------- ----------
Total long-term liabilities............................. 19,033 15,125
----------- ----------
Total liabilities....................................... 34,103 29,045
Stockholders' equity:
Preferred stock........................................... - -
Common stock.............................................. 46 45
Additional paid-in capital................................ 34,073 32,508
Accumulated deficit....................................... (17,659) (11,138)
----------- ----------
Total stockholders' equity.............................. 16,460 21,415
----------- ----------
$ 50,563 $ 50,460
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3 of 18
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue.......................................$ 40,143 $ 41,286 $ 23,408 $ 20,230
Cost of revenue............................... 33,417 29,599 20,368 14,709
-------- -------- --------- --------
Gross margin....................... 6,726 11,687 3,040 5,521
-------- -------- --------- --------
Operating expenses:
Sales and marketing........................ 5,825 4,393 3,118 2,460
General and administrative................. 4,296 3,384 2,130 1,725
Research and development................... 2,875 2,395 1,503 1,321
Other (credits)............................ (11) (550) (17) (609)
-------- -------- --------- --------
Total operating expenses................ 12,985 9,622 6,734 4,897
-------- -------- --------- --------
Operating income (loss)............ (6,259) 2,065 (3,694) 624
Interest expense, net...................... 518 751 363 422
Other expense (credits).................... (256) 101 (256) 101
-------- -------- --------- --------
Income (loss) before income taxes............. (6,521) 1,213 (3,801) 101
Income tax expense............................ - 461 - 39
-------- -------- --------- --------
Net income (loss)............................. (6,521) 752 (3,801) 62
Dividend on preferred stock of subsidiary..... 51 -
Net income (loss) available for common .......
stockholders..................................$ (6,521) $ 701 $ (3,801) $ 62
======== ======== ========= ========
Weighted average common shares outstanding.... 4,524 4,430 4,535 4,431
======== ======== ========= ========
Basic net income (loss) per common share......$ (1.44) $ 0.16 $ (0.84) $ 0.01
======== ======== ========= ========
Weighted average dilutive shares outstanding.. 4,524 4,458 4,535 4,473
======== ======== ========= ========
Diluted net income (loss) per common share....$ (1.44) $ 0.16 $ (0.84) $ 0.01
======== ======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4 of 18
<PAGE>
<TABLE>
<CAPTION>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended June 30,
2000 1999
---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)......................................... $ (6,521) $ 752
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,375 1,084
(Gain) loss on the disposition of assets................ (240) 8
Deferred revenue........................................ (342) (22)
Provision for doubtful accounts......................... 309 206
Provision for excess and obsolete inventory............. 115 1,133
Options and warrants issued for services................ 184 251
Changes in assets and liabilities:
Trade accounts receivable............................... (2,059) (1,557)
Income tax refunds...................................... 833 555
Inventories............................................. 1,886 (1,370)
Other assets............................................ (1,664) (351)
Accounts payable and accrued expenses................... 841 611
--------- ---------
Net cash provided by (used in) operating activities........... (5,283) 1,300
--------- ---------
Cash flows from investing activities:
Capital expenditures....................................... (1,195) (502)
Proceeds from the sale of property......................... 1,538 -
--------- ---------
Net cash (used in) investing activities....................... (343) (502)
--------- ---------
Cash flows from financing activities:
Payment of mandatorily redeemable preferred stock.......... - (3,555)
Proceeds from exercise of stock options.................... 1,383 55
Net proceeds from issuance of debt......................... 4,400 10,416
Payments on loans payable and capital leases............... (1,477) (8,000)
Payment of preferred stock dividend........................ - (51)
--------- ---------
Net cash provided by (used in) financing activities........... 4,306 (1,135)
--------- ---------
Net decrease in cash and cash equivalents..................... (634) (337)
Cash and cash equivalents at beginning of year................ 1,285 732
--------- ---------
Cash and cash equivalents at end of period.................... $ 651 $ 395
========= =========
Non-cash transactions:
Options, warrants and common stock issued for services..... $ 184 $ 251
Equipment acquisitions funded through debt................. 1,636 -
Cash paid for:
Interest................................................... 671 804
Taxes...................................................... 91 9
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5 of 18
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
1. Condensed Consolidated Financial Statements
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information refer to
the consolidated financial statements and footnotes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2. Background
Boundless Corporation (the "Company") is engaged, through its subsidiary,
Boundless Technologies, Inc. ("Boundless"), in designing and selling computer
terminals for business use. The Company's general strategy is to provide access
to corporate computing environments, including mainframes, LANs, WANs, intranets
and the Internet. Boundless principally designs, sells and supports (i) General
Display Terminals, (ii) Windows(R)-based Terminals ("WBTs"), sometimes referred
to as "thin clients", and (iii) other terminal products that are used in
multi-user, personal computer and mini-computer-based environments.
On September 23, 1999, the Company announced the creation of a new subsidiary,
Boundless Manufacturing Services, Inc. ("Boundless Manufacturing"), which will
pursue opportunities in the electronic manufacturing services ("EMS")
marketplace. Boundless Manufacturing will utilize the Company's state-of-the-art
ISO 9002 certified manufacturing facility in Hauppauge and acquire additional
manufacturing facilities as the business expands. Services include supply chain
optimization, global supply base management, systems assembly and test,
distribution and logistics, repair centers and end-of-life management. Boundless
Manufacturing also offers in-house engineering expertise- product design, test
development, product development- to significantly reduce time-to-market for OEM
customers. Boundless Manufacturing intends to provide a complete supply chain
that is designed and built to each customer's specifications.
On January 12, 2000, the Company announced the creation of a new subsidiary,
Merinta, Inc. ("Merinta"), a provider of enabling software and technologies for
Internet appliances ("IA"). Merinta intends to develop solutions to offer
end-users an easy, enjoyable and visually rich Internet browsing experience
while providing companies with a revolutionary way to market and grow online
business. Merinta intends to initially market and sell software and services to
corporations including financial services institutions, service providers, and
telecommunications companies allowing these companies to provide their best
customers with a customized IA solution that should increase brand awareness,
customer loyalty and retention as well as decrease costs for acquiring
customers. Merinta intends to license the software on a variety of operating
systems- including Linux and Microsoft Windows CE. Merinta intends to offer
complementary services to other consumer device manufacturers, accelerating the
IA market for these organizations.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in first-out basis. The major components of inventories are as follows:
6 of 18
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials and purchased components................. $ 9,723 $ 11,620
Finished goods......................................... 1,500 1,719
Demonstration equipment................................ 13 51
Service parts.......................................... 514 361
--------------- ---------------
Total inventories ..................................... $ 11,750 $ 13,751
=============== ===============
</TABLE>
4. Equity
At June 30, 2000 and December 31, 1999 stockholders' equity consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
<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, 4,626,571 and 4,457,662 shares issued
at June 30, 2000 and December 31,1999, respectively. 46 45
Additional paid-in capital............................. 34,073 32,508
Accumulated deficit.................................... (17,659) (11,138)
-------------- --------------
Total stockholders' equity............................. $ 16,460 $ 21,415
============== ==============
</TABLE>
5. Major Customers
The Company markets its terminal products through original equipment
manufacturers ("OEMs") and reseller distribution channels. Customers can buy
Boundless' products from an international network of value-added resellers
(VARs) and regional distributors. Through its sales force, the Company sells
directly to large VARs and regional distributors and also sells to major
national and international distributors. For the second quarter ended June 30,
2000 and 1999, sales to three major OEMs as a percentage of total revenues were
20% and 21%, respectively. During the second quarter ended June 30, 2000 the
Company also made shipments against open orders from a value added reseller
("VAR") amounting to 25% of revenue for the quarter.
6. Business Segments
The Company's manufacturing is conducted at its New York and Florida facilities
and its sales force operates from six geographically dispersed locations in the
United States and European offices in the Netherlands and United Kingdom.
Operating segments are identified as components of an enterprise about which
separate financial information is available for evaluation by its decision
making group. In line with the formation of its two new subsidiaries, effective
in the current year the Company has begun managing its operations and reporting
its financial results as three business segments. The results of the reportable
segments are derived from Boundless' management reporting system. These results
are based on Boundless' method of internal reporting and are not necessarily in
conformity with generally accepted accounting principles. These results are used
to evaluate the performance of each segment and determine the appropriate
resource allocation mix.
Information for the current year by business segment is presented below (in
thousands):
7 of 18
<PAGE>
<TABLE>
<CAPTION>
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
June 30, 2000 Total nations ogies uring Merinta
------------------------------------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Customer Revenue..................... $ 23,408 $ 14,504 $ 2,975 $ 5,929
Intersegment ........................ $ (15,241) $ 15,241
-------- --------- -------- --------- --------
Total Revenue........................ $ 23,408 $ (15,241) $ 14,504 $ 18,216 $ 5,929
======== ========= ======== ========= =========
Gross Margin......................... $ 3,040 $ 4,648 $ (154) $ (1,454)
======== ======== ========= =========
Gross Margin percent................. 13.0% 32.0% -5.2% -24.5%
======== ======== ========= =========
Operating income (loss).............. $ (3,694) $ 1,583 $ (866) $ (4,155)
======== ======== ========= =========
Boundless Boundless
Six Months Ended Elimi- Technol- Manufact-
June 30, 2000 Total nations ogies uring Merinta
------------------------------------- --------- ----------- --------- ---------- -----------
Customer Revenue..................... $ 40,143 $ 29,833 $ 4,379 $ 5,931
Intersegment ........................ $(24,617) $ 24,617
-------- --------- -------- -------- ---------
Total Revenue........................ $ 40,143 $(24,617) $ 29,833 $ 28,996 $ 5,931
======== ========= ======== ======== =========
Gross Margin......................... $ 6,726 $ 8,834 $ (437) $ (1,671)
-------- -------- -------- ---------
Gross Margin percent................. 16.8% 29.6% -10.0% -28.2%
-------- -------- -------- - ---------
Operating income (loss).............. $ (6,259) $ 2,737 $ (1,714) $ (7,026)
======== ======== ======== =========
Total assets by business segment $ 50,563 $ 22,906 $ 23,372 $ 4,285
======== ======== ======== =========
</TABLE>
Pertinent financial data by major geographic segments for the second quarter
ended June 30, 2000 and 1999 are:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Net sales to unaffiliated customers:
United States.......................................... $ 18,075 $ 12,779
United Kingdom......................................... 868 3,125
Other European countries............................... 2,209 3,108
Other foreign areas.................................... 2,256 1,218
---------------- ----------------
Total sales ........................................... $ 23,408 $ 20,230
================ ================
</TABLE>
7. Comprehensive Income
The Company has no material components of other comprehensive income and
accordingly, net income (loss)approximates comprehensive income (loss)for the
periods ended June 30, 2000 and 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The numbers and percentages contained in this Item 2 are approximate. Dollar
amounts are stated in thousands.
8 of 18
<PAGE>
FOR THE THREE AND SIX MONTH PERIODS ENDING JUNE 30, 2000
Revenue - Revenue for the quarter ended June 30, 2000 was $23,408 as compared to
$20,230 for the quarter ended June 30, 1999. Revenue for the six months ended
June 30 was $40,143 for 2000 versus $41,286 for 1999.
Sales of the Company's General Display Terminals declined 32% to $11,300 for the
quarter ended June 30, 2000 from $16,548 for the quarter ended June 30, 1999.
The decline for the latest quarter is principally attributable to a decline of
$1,776 in sales to VT and Dorio distributors and a decline of $2,410 in sales to
IBM. On a year-to-date basis revenue for General Display Terminals declined 31%
to $23,785 from $34,271 for the periods ended June 30, 2000 and 1999
respectively. While the demand for General Display Terminals has been declining,
the Company believes the substantial decline in the most recent quarters is
attributable to Y2K residual effects on the sales of servers and other computing
devices which drive demand for the Company's products. Additionally, sales to
IBM have been particularly weak in Europe due to regional issues including the
introduction of the Euro. The Company believes the market for General Display
Terminals will continue to decline as customers move toward applications
requiring graphical user interfaces.
Sales of the Company's WBT hardware and software amounted to $3,204 versus
$3,146 for the periods ended June 30, 2000 and 1999, respectively. The Company
believes this increase from the prior year would have been greater but for the
production delays associated with the Company's recently announced Capio(R) II
WBT. Revenue for the six months ended June 30, 2000 were $6,049 as compared to
$5,927 for the six months ended June 30, 1999. The Company anticipates a higher
year-to-year increase for the remainder of this year as the overall market
acceptance of thin client computing continues to grow.
During the second quarter the Company's Merinta subsidiary recognized revenues
of $5,929 (25% of total revenue) from the shipment of its recently released IA
solution. Of the total revenue recognized, $5,346 represented hardware sales and
$583 represented sales of Merinta's software solution.
Net revenue from the Company's repairs and spare parts business was $448 for the
quarter ended June 30, 1999, down from $536 for the quarter ended June 30, 1998.
For the six months ended June 30, 2000, repairs and spare parts sales were $953
versus $1,037 for the comparable period in 1999. The decline in the current year
for both the three and six-month periods compared to 1999 stems from the overall
decline in sales of General Display terminals over the past years as well as an
increase in the reliability of the Company's product offerings.
Boca Research, Digital and IBM were the most significant customers for the
Company's products, accounting for 11%, 5% and 4% of revenue respectively, for
the quarter ended June 30, 2000. The loss of any of these as a customer, and as
a distribution channel for the Company's products, would have a material adverse
effect on the Company's results of operations and liquidity.
Gross Margin - Gross margins for the three and six months ended June 30, 2000
were $3,040 (13% of revenue) and $6,726 (17% of revenue) respectively, as
compared to gross margins of $5,521 (28% of revenue) and $11,687(28% of revenue)
for the comparable periods in 1999. The decrease in gross margin as a percent of
revenue is attributable to startup costs for the IA segment as well as the new
Boundless Manufacturing operations in Boca Raton, Florida.
The gross margin loss associated with the sale of IA software and solutions
during the second quarter was $(1,454) or 24.5% of IA revenue. This loss stemmed
in part from component price increases from the supply chain which could not be
passed to the customer as well as a decision by Merinta to subsidize the
hardware in order to build an installed base of customers from which the IA
concept and solution could be validated. Manufacturing costs and variances
associated with the Company's new subsidiaries are expected to cause continued
margin pressure until the later part of this year.
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 cost reductions in its research and development activities
and frequently reviews its supplier relationships with the view to obtaining the
best component prices available.
Total Operating Expenses - For the quarter ended June 30, 2000, operating
expenses were $6,734 (29% of revenue), compared to expenses for the second
quarter of 1999 of $4,897 (24% of revenue). For the six months ended June 30,
2000, operating expenses were $12,985 (32% of revenue) compared to expenses in
the comparable period in 1999 of $9,622
9 of 18
<PAGE>
(23% of revenue). The year-to-year increases for the first six months are
attributable to $1,506 of expenses associated with the Company's Boundless
Manufacturing subsidiary, as well as $2,009 of expenses associated with the
Company's Merinta subsidiary. These operating expense increases were
anticipated, and are necessary to position the Company to exploit the growth
opportunities in both the IA and EMS markets. These operating expense increases
were anticipated, and are necessary to exploit the growth opportunities in both
the IA and EMS markets.
Sales and Marketing Expenses - Sales and marketing expenses increased 27% to
$3,118 (13% of revenue) for the quarter ended June 30, 2000 from $2,460 (12% of
revenue) for the quarter ended June 30, 1999. Expenses for the first six months
were $5,825 in 2000 versus $4,393 in 1999. This year-to-year increase is
attributable to expanded marketing programs and personnel needed to launch our
new Internet appliances subsidiary. Total Sales and Marketing expenses for this
segment amounted to $999 for the quarter ended June 30, 2000 and $2,046 for the
first six months of the year.
The Company promotes its products using media advertising, direct mail,
telemarketing, public relations and cooperative channel marketing programs. The
Company's installed base of over five million units of General Display Terminals
is the primary target market for its WBTs. The Company's plan to reach this
market is based on direct mail, telemarketing and advertising.
General and Administrative Expenses - General and administrative expenses
increased to $2,130 (9% of revenue), from $1,725 (9% of revenue) for the three
months ended June 30, 2000 and 1999, respectively. Expenses for the six-month
period were $4,296 in 2000 versus $3,384 in 1999. The increase is mainly due to
the hiring of additional executive personnel for management of the Company's
newly created subsidiary, Boundless Manufacturing.
Research and Development Expenses - Research and development expenses for the
second quarter increased 14% to $1,503 in 2000 from $1,321 in 1999. Expenses for
the six-month period ended June 30, 2000 were $2,875, compared to $2,395 in the
comparable period in 1999. The increase in the first six months is related to
$2,137 of development expenses associated with the Company's IA segment offset
in part, by reductions in development work being done on the Company's terminals
business.
Interest Expense, net - Interest expense, net for the quarter ended June 30,
2000 was $363 compared to $422 for the comparable period in 1999. Interest
expense, net for the six months was $518 in 2000 versus $751 in 1999. This
decrease was mainly due to interest income earned from both an IRS refund and on
a note receivable.
Income Tax Expense - In the first and second quarters of 2000, the Company did
not record an income tax credit against the recorded loss before income taxes of
$(2,720) and $(3,801) during those periods, respectively. Given the short
operating history of the Company's new subsidiaries, there can be no assurance
that the deferred tax asset resulting from the losses would result in future tax
benefits. As a result, the Company has provided for a 100% valuation allowance
against the deferred tax asset attributable to these respective losses.
Net Income (Loss)- For the quarter ended June 30, 2000, the Company recorded a
net loss of $(3,801) compared to $62 of net income for the comparable period in
1999. The net loss for the six months ended June 30 was $ (6,521) compared to
$701 of net income in 1999.
Impact of Inflation - The Company has not been adversely affected by inflation
because technological advances and competition within the microcomputer industry
have generally caused prices of products sold by the Company to decline. The
Company has flexibility in its pricing and could, if necessary, pass along price
changes to most of its customers.
LIQUIDITY AND CAPITAL RESOURCES
The discussion below regarding liquidity and capital resources should be read
together with the information included in the Notes to Consolidated Financial
Statements.
As of June 30, 2000, the Company had working capital of $16,337 as compared to
$17,942 at December 31, 1999. 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 is highly leveraged. As of June 30, 2000, the Company had tangible
net worth of $10,188 and total liabilities of $34,103. The Company's cash
requirements at June 30, 2000 included repayment of a revolving loan of $9,900
plus interest, a term loan in the amount of $2,333 plus interest and a ten-year
promissory note in the amount of $6,166 which requires monthly principal and
interest payments through July 1, 2009.
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-
10 of 18
<PAGE>
delineated eligible inventory. Up to $5,000 is available under the revolving
loan for letters of credit. 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 Company's revolving credit line.
Boundless has an agreement with a commercial lender for a loan secured by a
mortgage on the Boundless facility located in Hauppauge, NY. The loan, which is
in the principal amount of $6,166 and carries a fixed interest rate of 7.75%, is
being amortized over a 25-year period with a balloon payment due on July 1,
2009. The monthly payments are approximately $50. To induce the lender to make
the loan, the Company executed and delivered a guaranty of Boundless'
obligations to the lender.
In connection with the acquisition of the manufacturing assets of Boca Research,
Inc. on March 6, 2000, Boundless Manufacturing issued a $1,000 note bearing
interest at 6% per annum and due March 6, 2002. The note is payable in equal
quarterly amounts plus accrued interest.
In connection with the creation of the Company's Merinta and Boundless
Manufacturing subsidiaries as well as the acquisition of the manufacturing
assets of Boca Research, Inc., the Company amended its revolving line of credit
(the "Agreement") to, amongst other things, add both Merinta and Boundless
Manufacturing as co-borrowers under the Agreement. The Agreement was executed
May 25, 2000 and extended the termination date of the Agreement to
April 14, 2003.
In the event there is a decline in the Company's sales and earnings and/or a
decrease in availability under the 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.
Due to the level of investment made in the Merinta subsidiary, the Company had
violated certain financial covenants as of the quarter ended June 30, 2000. The
Company's lenders have indicated that they will waive the violations. Although
the Company anticipates that it will receive the waiver shortly, there can be no
absolute assurance that such waiver will be forthcoming.
Net cash used in operating activities for the six months ended June 30, 2000 was
$5,603, attributable to a net loss of $6,521, an increase in accounts receivable
of $2,059, and increases in other assets of $1,664. These uses of cash were
partially offset by a reduction in inventories of $1,886, non-cash expenses
(principally depreciation) of $1,401, an income tax refund of $833 and increases
in payables of $841. Net cash used in investing activities was comprised of
capital expenditures of $1,195, of which $733 relates to the acquisition of the
manufacturing assets of Boca Research, Inc. and offset by proceeds from the sale
of five acres of excess land of $1,538. Net cash provided by financing
activities included funding from the Company's revolving loan, which had a net
increase of $4,400, and proceeds from the exercise of common stock options in
the amount of $1,383. This was partially offset by payments on other loans and
lease obligations in the amount of $1,477.
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.
Factors That Could Affect Future Results
Competition. The Company encounters aggressive competition in all areas of its
business. The Company has numerous competitors, ranging from some of the world's
largest corporations to many relatively small and highly specialized firms. The
Company competes primarily on the basis of technology, performance, price,
quality, reliability, distribution and customer service and support. Product
life cycles are short. To remain competitive, the Company must be able to
develop new products and periodically enhance its existing products. In
particular, the Company anticipates that it will have to continue to lower the
prices of many of its products to stay competitive and effectively manage
financial returns with resulting reduced gross margins. In some of the Company's
markets, it may not be able to compete successfully against current and future
competitors, and the competitive pressures it faces could harm its business and
prospects.
New Product Introductions. If the Company cannot continue to rapidly develop,
manufacture and market innovative products and services that meet customer
requirements for performance and reliability, it may lose market share and its
future revenue and earnings may suffer. The process of developing new high
technology products and services is complex and uncertain. The Company must
accurately anticipate customers' changing needs and emerging technological
trends. The Company consequently must make long-term investments and commit
significant resources before knowing whether its predictions will eventually
result in products that the market will accept. After a product is developed,
the Company must be able to manufacture sufficient volumes quickly at low enough
costs. To do this, the Company must accurately forecast volumes, mix of products
and configurations. Additionally, the supply and timing of a new product or
service must match customers'
11 of 18
<PAGE>
demand and timing for the particular product or service. Given the wide variety
of systems, products and services that Boundless offers, the process of planning
production and managing inventory levels becomes increasingly difficult.
Reliance on Third Party Distribution Channels and Inventory Management. The
Company uses third-party distributors to sell its products. As a result, the
financial soundness of its wholesale and retail distributors, and its continuing
relationships with these distributors, are important to the Company's success.
Some of these distributors may have insufficient financial resources and may not
be able to withstand changes in business conditions. The Company's revenue and
earnings could suffer if its distributors' financial condition or operations
weaken or if its relationship with them deteriorates. Additionally, inventory
management becomes increasingly complex as the Company continues to sell a
significant mix of products through distributors. Third party distributors
constantly adjust their product orders from the Company in response to:
o The supply of the Company's and its competitors' products available to the
distributor, and
o The timing of new product introductions and relative features of the
products.
Distributors may increase orders during times of product shortages, cancel
orders if their inventory is too high or delay orders in anticipation of new
products. If the Company has excess inventory, the Company may have to reduce
its prices and write down inventory, which in turn could result in lower gross
margins.
Short Product Life Cycles. The short life cycles of many of the Company's
products pose a challenge for it to manage effectively the transition from
existing products to new products. If the Company does not manage the transition
effectively, its revenue and earnings could suffer. Among the factors that make
a smooth transition from current products to new products difficult are delays
in product development or manufacturing, variations in product costs and delays
in customer purchases of existing products in anticipation of new product
introductions. The Company's revenue and earnings could also suffer due to the
timing of product or service introductions by its suppliers and competitors.
Further, the Company's new products may replace or compete with certain of its
own current products.
Intellectual Property. The Company generally relies upon patent, copyright,
trademark and trade secret laws in the United States and in certain other
countries, and agreements with its employees, customers and partners, to
establish and maintain its proprietary rights in its technology and products.
However, any of the Company's intellectual proprietary rights could be
challenged, invalidated or circumvented. The Company's intellectual property may
not necessarily provide significant competitive advantages. Also, because of the
rapid pace of technological change in the information technology industry, many
of the Company's products rely on key technologies developed by third parties,
and the Company may not be able to continue to obtain licenses from these third
parties. Third parties may claim that the Company is infringing their
intellectual property. Even if the Company does not believe that its products
are infringing third parties' intellectual property rights, the claims can be
time-consuming and costly to defend and divert management's attention and
resources away from its business. Claims of intellectual property infringement
might also require the Company to enter into costly royalty or license
agreements. If the Company cannot or does not license the infringed technology
or substitute similar technology from another source, its business could suffer.
Reliance on Suppliers. The Company's manufacturing operations depend on its
suppliers' ability to deliver quality components and products in time for it to
meet critical manufacturing and distribution schedules. The Company sometimes
experiences a short supply of certain component parts as a result of strong
demand in the industry for those parts. If shortages or delays persist, its
operating results could suffer until other sources can be developed. In order to
secure components for the production of new products, at times the Company makes
advance payments to suppliers, or the Company may enter into noncancelable
purchase commitments with vendors. If the prices of these component parts then
decrease after the Company has entered into binding price agreements, its
earnings could suffer. Further, the Company may not be able to secure enough
components at reasonable prices to build new products in a timely manner in the
quantities and configurations needed. Conversely, a temporary oversupply of
these parts could also affect its operating results.
International. Sales outside the United States make up more than 25% of the
Company's revenues. In addition, key suppliers are also located outside of the
United States. The Company's future earnings or financial position could be
adversely affected by a variety
12 of 18
<PAGE>
of international factors, including:
o Changes in a country or region's political or economic conditions,
o Trade protection measures,
o Import or export licensing requirements,
o The overlap of different tax structures,
o Unexpected changes in regulatory requirements,
o Differing technology standards,
o Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section below), and
o Natural disasters.
Market Risk. The Company is exposed to foreign currency exchange rate risk
inherent in the Company's sales commitments, anticipated sales and assets and
liabilities denominated in currencies other than the U.S. dollar. The Company is
also exposed to interest rate risk inherent in its debt and investment
portfolios. The Company's risk management strategy uses derivative financial
instruments, primarily interest rate swaps, to hedge certain foreign currency
and interest rate exposures. The Company's intent is to offset gains and losses
that occur on the underlying exposures, with gains and losses on the derivative
contracts hedging these exposures. The Company does not enter into derivatives
for trading purposes.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. In the
normal course of business, the Company frequently engages in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The completion of any one transaction may have a
material effect on the Company's financial position, results of operations or
cash flows taken as a whole. Divestiture of a part of the Company's business may
result in the cancellation of orders and charges to earnings. Acquisitions and
strategic alliances may require the Company to integrate with a different
company culture, management team and business infrastructure. The Company may
also have to develop, manufacture and market products with its products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, the Company's successful
integration of the entity into the Company depends on a variety of factors,
including:
o The hiring and retention of key employees,
o Management of facilities in separate geographic areas, and
o The integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which may
divert the Company's attention from other business operations.
Environmental. Some of the Company's operations use substances regulated under
various federal and state laws governing the environment. It is the Company's
policy to apply strict standards for environmental protection to sites inside
and outside the U.S., even when not subject to local government regulations. The
Company records a liability for environmental remediation and related costs when
the Company considers the costs to be probable and the amount of the costs can
be reasonably estimated. Environmental costs are presently not material to the
Company's results of operations or financial position.
Profit Margin. The Company's profit margins vary somewhat among its products,
customer groups and geographic markets. Consequently, the Company's overall
profitability in any given period is partially dependent on the product,
customer and geographic mix reflected in that period's net revenue.
Stock Price. The Company's stock price, like that of other technology companies,
can be volatile. Some of the factors that can affect its stock price are:
o The Company's, or a competitor's, announcement of new products, services or
technological innovations,
o Quarterly increases or decreases in the Company's earnings,
13 of 18
<PAGE>
o Changes in revenue or earnings estimates by the investment community, and
o Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect the Company's stock
price. For these reasons, investors should not rely on recent trends to predict
future stock prices or financial results. In addition, following periods of
volatility in a company's securities, securities class action litigation against
a company is sometimes instituted. This type of litigation could result in
substantial costs and the diversion of management time and resources.
Earnings Fluctuations. Although the Company believes that it has the products
and resources needed for continuing success, the Company cannot reliably predict
future revenue and margin trends. Actual trends may cause the Company to adjust
its operations, which could cause period-to-period fluctuations in its earnings.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Form 10-Q 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," "expect," and, depending on the context,
"will," 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 in the Company's Form 10-K for the
year ended December 31, 1999. 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.
Year 2000 Compliance
Year 2000 Update
Through the first six months of the year 2000, the Company's operations around
the world are functioning and have not experienced any significant issues
associated with the Year 2000 problem (as described below). Boundless' customers
have not reported any Year 2000 incidents. The Company has not experienced any
significant Year 2000-related issue that would affect our ability to
manufacture, ship, sell, or service our products.
Year 2000 Readiness
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 respect 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. Year 2000 compliance of the Company's internal systems and devices was
substantially tested and complete by November of 1999, with continued testing of
compliance throughout 1999. To date, the total costs related to the Company's
Year 2000 program have not been material to the Company's financial position or
results of operations, and have been charged to expense as incurred. 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.
While the Company is encouraged by the success of its Year 2000 efforts and that
of its customers and partners, the Company will continue to offer any needed
Year 2000 support to customers. Plans are in place to manage any outstanding
Year 2000 support issues through the Company's regular support and service
activities around the world.
14 of 18
<PAGE>
Adoption of the Euro
Boundless has established a dedicated task force to address the issues raised by
the introduction of a European single currency, the Euro. The Euro's initial
implementation was effective as of January 1, 1999, and the transition period
will continue through January 1, 2002. On January 1, 1999, the Company began
offering its European customers the option of purchasing its products with
either local currencies or Euros as desired. The Company also is implementing
system changes to give multi-currency capability to internal applications. In
addition, the Company has implemented design changes to support display and
printing of the Euro character by impacted Boundless products.
The introduction and use of the Euro has not had a material effect on the
Company's foreign exchange and hedging activities or its use of derivative
instruments, and the Company does not presently expect that it will. All costs
associated with the conversion to the Euro are expensed to operations as
incurred. While the Company will continue to evaluate the impact of the Euro
over time, based on currently available information, the Company does not
believe that the introduction of the Eurocurrency will have a material adverse
impact on our consolidated financial condition, cash flows or results of
operations.
Item 3. Quantitative and Qualitative Disclosures 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. The Company manages this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. At June 30, 2000 the Company had in place interest rate swap
agreements in the amount of $7,361 at an effective average interest rate of
9.65%. Of this dollar amount, $2,333 represents an effective hedge of the
Company's exposure to interest rate changes against the outstanding balance of
the term loan; and such swap amount shall amortize in concert with the term loan
payment schedule. The remaining balance of the swap agreement is intended as an
effective hedge to interest rate changes against the outstanding balance of the
company's Revolving Loan.
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 June 30, 2000 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.
15 of 18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement Concerning Computation of Per Share Earnings is hereby
incorporated by reference to "Condensed Consolidated Statements of Operations"
in the Form 10-Q.
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K - None
16 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 2000
Boundless Corporation
By: /s/Joseph Gardner
----------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
17 of 18
