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 March 31, 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)
(516) 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 April 6, 2000, the Registrant had approximately 4,604,129 shares of Common
Stock, $.01 par value per share outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999 ................................................... 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2000 and 1999.................... 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2000 and 1999.................... 5
Notes to Consolidated Financial Statements (unaudited)................. 6
2
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 513 $ 1,285
Trade accounts receivable, net.................................... 12,290 12,378
Income tax refund................................................. - 833
Inventories....................................................... 15,743 13,751
Deferred income taxes............................................. 2,576 2,576
Prepaid expenses and other current assets......................... 1,808 1,039
-------- ---------
Total current assets........................................... 32,930 31,862
Property and equipment, net.......................................... 12,612 10,987
Goodwill, net........................................................ 5,996 6,272
Other assets......................................................... 1,477 1,339
-------- ---------
$ 53,015 $ 50,460
======== =========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................ $ 2,153 $ 1,650
Accounts payable................................................. 8,969 6,148
Accrued expenses................................................. 5,317 5,565
Deferred revenue................................................. 576 557
-------- ---------
Total current liabilities..................................... 17,015 13,920
-------- ---------
Long-term liabilities:
Long-term debt, less current maturities.......................... 15,098 14,206
Deferred income taxes............................................ 281 281
Other............................................................ 668 638
-------- ---------
Total long-term liabilities................................... 16,047 15,125
-------- ---------
Total liabilities............................................. 33,062 29,045
Stockholders' equity:
Preferred stock.................................................. - -
Common stock..................................................... 46 45
Additional paid-in capital....................................... 33,765 32,508
Accumulated deficit.............................................. (13,858) (11,138)
-------- ---------
Total stockholders' equity................................... 19,953 21,415
-------- ---------
$ 53,015 $ 50,460
======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
2000 1999
------------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue...................................................... $ 16,735 $ 21,056
Cost of revenue.............................................. 13,049 14,890
--------- ---------
Gross margin........................................ 3,686 6,166
Operating expense:
Sales and marketing..................................... 2,707 1,933
General and administrative.............................. 2,166 1,660
Research and development................................ 1,372 1,074
Other charges........................................... 6 59
--------- ---------
Total operating expenses............................ 6,251 4,726
--------- ---------
Operating income (loss)............................. (2,565) 1,440
Interest expense, net................................... 155 329
--------- ---------
Income (loss) before income taxes............................ (2,720) 1,111
Income tax expense........................................... - 422
--------- ---------
Net income (loss)............................................ (2,720) 689
Dividend on preferred stock of subsidiary.................... - 51
--------- ---------
Net income (loss) available for common stockholders.......... $ (2,720) $ 638
========= =========
Weighted average common shares outstanding................... 4,491 4,429
========= =========
Basic net income (loss) per common share..................... $ (0.61) $ 0.14
========= =========
Weighted average dilutive shares outstanding................. 4,491 4,447
========= =========
Diluted net income (loss) per common share................... $ (0.61) $ 0.14
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Three Months Ended March 31,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)......................................................... $(2,720) $ 689
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................................... 632 536
Loss from disposal of assets........................................... 3 -
Deferred revenues...................................................... 19 (30)
Provision for doubtful accounts........................................ (3) 35
Provision for excess and obsolete inventory............................ 61 279
Options and warrants issued for services............................... - 121
Changes in assets and liabilities:
Trade accounts receivable.............................................. 92 (1,112)
Income tax refunds..................................................... 833 -
Inventories............................................................ (2,054) 108
Other assets........................................................... (938) 189
Accounts payable and accrued expenses.................................. 2,602 260
------- -------
Net cash provided by (used in) operating activities.......................... (1,473) 1,075
------- -------
Cash flows from investing activities:
Capital expenditures...................................................... (1,954) (288)
------- -------
Cash flows from financing activities:
Payment of mandatorily redeemable preferred stock......................... (3,555)
Proceeds from exercise of stock options................................... 1,259 -
Net proceeds from issuance of debt....................................... 1,800 2,700
Payments on loans payable and capital leases.............................. (404)
Payment of preferred stock dividend....................................... - (51)
------- -------
Net cash provided by (used in) financing activities.......................... 2,655 (906)
------- -------
Net decrease in cash and cash equivalents.................................... (772) (119)
Cash and cash equivalents at beginning of year............................... 1,285 732
------- -------
Cash and cash equivalents at end of period................................... $ 513 $ 613
======= =======
Non-cash transactions:
Options, warrants and common stock issued for services.................... $ - $ 121
Cash paid for:
Interest.................................................................. 309 123
Taxes..................................................................... 38 -
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 three-month period
ended March 31, 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 will 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 will 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
will 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 will
license the software on a variety of operating systems- including Linux and
Microsoft Windows CE. Complimentary services will be offered 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
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials and purchased components................ $ 13,259 $ 11,620
Finished goods........................................ 1,956 1,719
Demonstration equipment............................... 32 51
Service parts......................................... 496 361
------------ ----------
Total inventories..................................... $ 15,743 $ 13,751
------------ ----------
4. Equity
At March 31, 2000 and December 31, 1999 stockholders' equity consisted of the following:
March 31, December 31,
2000 1999
----------- -----------
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued............................. $ - $ -
Common stock, $0.01 par value, 25,000,000 shares
authorized, 4,604,129 and 4,457,662 shares issued
at March 31, 2000 and December 31, 1999, respectively 46 45
Additional paid-in capital............................ 33,765 32,508
Accumulated deficit................................... (13,858) (11,138)
------------ ----------
Total stockholders' equity............................ $ 19,953 $ 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 first quarter ended March 31,
2000 and 1999, sales to two major OEMs as a percentage of total revenues were
19% and 25%, respectively.
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
<PAGE>
<TABLE>
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
March 31, 2000 Total nations ogies uring Merinta
- -------------- ----- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Customer Revenue........................ $16,735 $15,329 $ 1,404 $ 2
Intersegment ........................... $(9,376) 9,376
------- ------- ------- ------- -------
Total Revenue........................... $16,735 $(9,376) $15,329 $10,780 $ 2
======= ======= ======= ======= =======
Gross Margin............................ $ 3,686 $ 4,186 $ (283) $ (217)
======= ======= ======= =======
Operating income (loss)................. $(2,565) $ 1,154 $ (848) $(2,871)
======= ======= ======= =======
Total assets by business segment $53,015 $25,883 $25,376 $ 1,756
======= ======= ======= =======
</TABLE>
Pertinent financial data by major geographic segments for the first quarter
ended March 31, 2000 and 1999 are:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
------------ -----------
Net sales to unaffiliated customers:
<S> <C> <C>
United States......................................... $ 12,186 $ 13,875
United Kingdom........................................ 1,370 3,456
Other European countries.............................. 2,169 2,727
Other foreign areas................................... 1,010 998
---------- ------------
Total sales........................................... $ 16,735 $ 21,056
---------- ------------
</TABLE>
7. Comprehensive Income (Loss)
The Company has no material components of other comprehensive income and
accordingly, net income (loss) approximates comprehensive income (loss) for the
periods ended March 31, 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.
First quarter of 2000 compared with first quarter of 1999
- ---------------------------------------------------------
Revenue - Revenue for the quarter ended March 31, 2000 was $16,735 as compared
to $21,056 for the quarter ended March 31, 1999.
Sales of the Company's General Display Terminals declined 29% to $12,396 for the
quarter ended March 31, 2000 from $17,548 for the quarter ended March 31, 1999.
The decline for the latest quarter is principally attributable to a decline of
$1,614 in sales to VT and Dorio distributors and a decline of $1,798 to IBM.
While the demand for General Display Terminals has been declining, the Company
believes the substantial decline in the current quarter is attributable to Y2K
residual effects on the sales of servers and other computing devices which drive
demand for the Company's products. 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 $2,845 versus
$2,781 for the periods ended March 31, 2000 and 1999, respectively. The Company
believes this modest increase from the prior year is attributable to both the
Y2K residual effect as well as market anticipation of the release of Windows
- -Registered Trademark- 2000. 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. The Company also believes its unique ability
to customize its WBT products to meet specific end-customer needs will give it a
sustainable competitive advantage. Historically, this ability has been of great
value to the Company's terminal customers and the Company believes that this
strategy will be equally advantageous in the corporate thin client marketplace.
8
<PAGE>
Net revenue from the Company's repairs and spare parts business for the quarter
ended March 31, 2000 was $505 as compared to $501 for the quarter ended March
31, 1999.
IBM and Digital were the most significant customers for the Company's products,
accounting for 11% and 8% of revenue respectively, for the quarter ended March
31, 2000. The loss of IBM or Digital 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 margin for the three months ended March 31, 2000 was $3,686
(22% of revenue) compared to gross margin of $6,166 (29% of revenue) for the
first quarter of 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. 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 March 31, 2000, operating
expenses increased 32% to $6,251 (37% of revenue), compared to expenses for the
first quarter of 1999 of $4,726 (22% of revenue). The year-to-year increases are
attributable to $3,310 of expenses associated with the Company's two newly
formed business segments.
Sales and Marketing Expenses - Sales and marketing expenses increased 40% to
$2,707 (16% of revenue) for the quarter ended March 31, 2000 from $1,933 (9% of
revenue) for the quarter ended March 31, 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 $1,048 for the quarter ended March 31, 2000.
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 is the primary target market
for its new line of WBTs. The Company's plan to reach this market is based on
direct mail, telemarketing and advertising and an aggressive public relations
campaign, including several domestic and international press tours.
General and Administrative Expenses - General and administrative expenses
increased to $2,166 (13% of revenue), from $1,660 (8% of revenue) for the three
months ended March 31, 2000 and 1999, respectively. The increase is mainly due
to the hiring of additional executive personnel for management of our newly
created subsidiary, Boundless Manufacturing.
Research and Development Expenses - Research and development expenses for the
first quarter increased 28% to $1,372 in 2000 from $1,074 in 1999. The increase
is related to $1,021 of development expenses associated with the Company's IA
segment.
Interest Expense, net - Interest expense, net for the quarter ended March 31,
2000 was $155 compared to $329 for the comparable period in 1999. This decrease
was mainly due to $197 of interest income received from the IRS during the
quarter.
Income Tax Expense - For the first quarter of 2000 the Company did not record an
income tax credit against the recorded loss before income taxes of $(2,720).
Given the short operating history of the Company's new subsidiaries there can be
no assurance that the deferred tax asset resulting from the current period
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 losses.
Net Income (Loss)- For the quarter ended March 31, 2000, the Company recorded a
net loss of $(2,720), compared to net income of $689 for March 31, 1999.
9
<PAGE>
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 March 31, 2000, the Company had working capital of $15,915 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 March 31, 2000, the Company had tangible
net worth of $13,573 and total liabilities of $33,062. The Company's cash
requirements at March 31, 2000 included repayment of a revolving loan of $6,300
plus interest, a term loan in the amount of $2,667 plus interest and a ten-year
promissory note in the amount of $6,689 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-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 $6,689 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 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.
Net cash used in operating activities for the three months ended March 31, 2000
was $1,473, attributable to a net loss of $2,720, an increase in inventories of
$2,054 and increases in other assets of $938. These uses of cash were partially
offset by non-cash expenses (principally depreciation) of $712 an income tax
refund of $833 and increases in payables of $2,602. Net cash used in investing
activities was comprised of capital expenditures of $1,954, of which $1,733
relates to the acquisition of the manufacturing assets of Boca Research, Inc.
Net cash provided by financing activities included funding from the Company's
revolving loan, which had a net increase of $800, issuance of a $1,000
promissory note and proceeds from the exercise of common stock options in the
amount of $1,259. This was partially offset by payments on other loans and lease
obligations in the amount of $404.
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.
10
<PAGE>
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' 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.
11
<PAGE>
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 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 Boundless 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.
12
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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. Boundless' 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,
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 Boundless' 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 four 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
13
<PAGE>
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.
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.
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, 2000. The
Company is assessing the impact that the adoption of SFAS No. 133 will have, if
any, on its consolidated financial statements.
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 March 31, 2000 the Company had in place interest rate swap
agreements in the amount of $6,667 at an effective average interest rate of
8.66%. Of this dollar amount, $2,667 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.
14
<PAGE>
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 March 31, 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10(a): Asset Purchase Agreement, dated as of January 24, 2000, by and
between Boundless Technologies, Inc. and Boca Research, Inc. *Exhibit 10.27.
Exhibit 10(b): Assignment and Assumption Agreement, dated as of March 3, 2000,
between Boundless Technologies, Inc. and Boundless Manufacturing Services, Inc.
*Exhibit 10.28.
Exhibit 10(c): Promissory Note, dated March 3, 2000, in the principal amount of
$1,000,000 made by Boundless Manufacturing Services, Inc. to Boca Research, Inc.
*Exhibit 10.29.
Exhibit 10(d): **Supply Agreement, dated as of March 3, 2000, by and between
Boundless Manufacturing Services, Inc. and Boca Research, Inc. *Exhibit 10.30.
Exhibit 11: Statement Concerning Computation of Per Share Earnings is hereby
incorporated by reference to "Condensed Consolidated Statements of Operations"
of Part I-Financial Information, Item 1 - Financial Statements, contained in
this Form 10-Q.
Exhibit 27: Financial Data Schedule for the quarter ended March 31, 2000.
(b) Reports on Form 8-K - None
- --------------------
* Incorporated herein by reference to Boca Research, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The
exhibit references following the (*) are the exhibit numbers in Boca Research's
Form 10-K report by reference to which the exhibits of Boundless Corporation are
being incorporated herein.
** Portions of this Exhibit have been omitted pursuant to an application
for an order declaring confidential treatment filed by Boca Research, Inc. with
the Securities and Exchange Commission.
15
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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: May 12, 2000
Boundless Corporation
By: /s/ Joseph Gardner
- --------------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
16
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