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 September 30, 2004
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.)
50 Engineers Lane Unit 2
Hauppauge, NY
(Address of principal executive offices)
11735
(Zip Code)
(631) 962-1500
(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 |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
As of February 28, 2006, the Registrant had approximately 6,705,613 shares of
Common Stock, $.01 par value per share outstanding.
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
INDEX
This Quarterly Report on Form 10-Q is for the quarterly period ended September
30, 2004. Comtemporaneously with the filing of this Quarterly Report, we are
filing our Annual Report on Form 10-K for the fiscal year ended December 31,
2004 and our Quarterly Report on Form 10-Q for the quarterly periods ended March
31, 2004 and June 30, 2004. This Quarterly Report should be read in conjunction
with our filed Annual Report on Form 10-K for the fiscal year ended December 31,
2004 with the Securities and Exchange Commission.
Page
No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2004 (Unaudited)
and December 31, 2003 3
Consolidated Condensed Statements of Operations for the three and nine months
ended September 30, 2004 and 2003 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits 19
Signature 20
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2004 2003*
------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 63 $ 373
Cash on deposit with lender 388 328
Trade accounts receivable, net 1,240 912
Affiliate receivables 134 --
Other receivables 83 143
Inventories (Note 3) 1,068 2,072
Prepaid expenses and other current assets 117 179
----------- -----------
Total current assets 3,093 4,007
Property and equipment, net (Note 4) 104 131
----------- -----------
Total assets $ 3,197 $ 4,138
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term debt $ 340 $ 837
Accounts payable 836 900
Accrued salaries 67 71
Accrued legal fees 856 756
Purchase order commitments 560 1,130
Accrued payroll and sales tax payable 29 212
Accrued warranty 58 59
Other accrued liabilities 144 81
----------- -----------
Total current liabilities 2,890 4,046
----------- -----------
Long-term debt, less current maturities 1,323 1,581
Deferred credits 83 181
Items subject to compromise:
Manditorily redeemable preferred stock 1,652 1,652
Liabilities subject to compromise (Note 5) 12,239 11,555
----------- -----------
Total liabilities 18,187 19,015
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
Stockholders' deficit: (Note 6)
Common stock 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,901) (50,788)
----------- -----------
Total stockholders' deficit (14,990) (14,877)
----------- -----------
Total liabilities and stockholders' deficit $ 3,197 $ 4,138
=========== ===========
* Condensed from audited financial statements
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
----------- ----------- ----------- -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue:
Product sales $ 1,203 $ 3,207 $ 4,763 $ 9,177
Services 209 254 643 762
----------- ----------- ----------- -----------
Total revenue 1,412 3,461 5,406 9,939
----------- ----------- ----------- -----------
Cost of revenue
Product sales 985 2,558 3,632 7,961
Services 92 212 354 596
----------- ----------- ----------- -----------
Total cost of revenue 1,077 2,770 3,986 8,557
----------- ----------- ----------- -----------
Gross margin 335 691 1,420 1,382
Other costs and expenses (income)
Selling, general and administrative 247 291 1,022 2,031
Research and development 19 43 107 93
Interest expense (excluding contractual interest of $16
and $15 not recognized in 2004 and 2003, respectively) 21 192 99 662
Loss on extinguishment of debt -- -- -- 289
Loss on reimbursement of employee services (net of --
reimbursement of $75 and $225) 15 -- 45 --
Other income (40) (30) (15) (180)
----------- ----------- ----------- -----------
262 496 1,258 2,895
----------- ----------- ----------- -----------
Income (loss) before reorganization items 73 195 162 (1,513)
Reorganization items (Note 7) 86 287 275 953
----------- ----------- ----------- -----------
Net loss (13) (92) (113) (2,466)
Accretion on preferred stock -- -- -- 99
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (13) $ (92) $ (113) $ (2,565)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (0.00) $ (0.01) $ (0.02) $ (0.38)
=========== =========== =========== ===========
Basic and diluted weighted average shares outstanding 6,706 6,706 6,706 6,706
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended
September 30,
-----------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Income (loss) before reorganization items 162 (1,513)
Adjustments to reconcile income (loss) before reorganization items
to net cash provided by (used in) operating activities:
Write-off of debt financing costs -- 289
Depreciation and amortization 42 682
Change in deferred credits (98) (189)
Provision (credit) for doubtful accounts (24) 159
Provision for excess and obsolete inventory -- 398
Changes in assets and liabilities:
Cash on deposit with lender (60) (677)
Trade accounts receivable (304) 99
Affiliate receivables (134) --
Other receivables 60 416
Inventories 1,004 122
Other assets 62 (12)
Accounts payable and accrued expenses (76) 1,653
----------- -----------
Net cash provided by operating activities excluding reorganization items 634 1,427
----------- -----------
Cash flows from reorganization activities:
Reorganization items, net (275) (953)
Gain on disposition of property and equipment (23) (54)
Proceeds from disposition of property 23 90
Increase in liabilities, net 100 452
----------- -----------
Net cash used in reorganization activities (175) (465)
----------- -----------
Cash flows from investing activities:
Capital expenditures (14) --
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of debt -- 1,572
Payments on loans payable and capital leases (755) (2,267)
----------- -----------
Net cash used in financing activities (755) (695)
----------- -----------
Net increase (decrease) in cash and cash equivalents (310) 267
Cash and cash equivalents at beginning of period 373 4
----------- -----------
Cash and cash equivalents at end of period $ 63 $ 271
=========== ===========
Cash paid for:
Interest $ 72 $ 96
Taxes -- --
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
1. Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code
The Company voluntarily petitioned for relief under Chapter 11 of the United
States Bankruptcy Code on March 12, 2003, (the "Petition Date") in the United
States Bankruptcy Court for the Eastern District of New York, Central Islip
The Debtor continues to operate its business as "debtor-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
applicable court orders. In general, as debtors-in-possession, the Debtor is
authorized under Chapter 11 to continue to operate as an ongoing business, but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court.
In order to successfully exit Chapter 11, the Company will need to propose, and
obtain confirmation by the Bankruptcy Court of, a plan of reorganization that
satisfies the requirements of the Bankruptcy Code.
Financial Statement Presentation.
The unaudited condensed consolidated interim financial statements, and
accompanying notes included herein, have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and reflect all adjustments which are of a normal recurring nature and which, in
the opinion of management, are necessary for the fair statement of the results
of the three and nine months ended September 30, 2004 and 2003. Certain
information and footnote disclosures have been condensed or omitted pursuant to
such regulations. The results for the current interim periods are not
necessarily indicative of the results for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto in the Company's latest annual report
filed with the SEC on Form 10-K for the year ended December 31, 2003. The
accompanying financial statements include the accounts of the Company and its
subsidiaries on a consolidated basis. All significant inter-company accounts and
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with American Institute of Certified Public Accountants' Statement of
Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," and on a going-concern basis, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business.
SOP 90-7 requires that the financial statements for periods subsequent to the
Chapter 11 filing petition distinguish transactions and events that are directly
associated with the reorganization from the operations of the business.
Accordingly, revenues, expenses (including professional fees), realized gains
and losses, and provisions for losses directly associated with the
reorganization and restructuring of the business are reported separately in the
financial statements. The Consolidated Balance Sheet distinguishes pre-petition
liabilities and other items subject to compromise from both those pre-petition
liabilities that are not subject to compromise and from post-petition
liabilities. Liabilities and other items subject to compromise are reported at
the amounts expected to be allowed, even if they may be settled for lesser
amounts.
In addition, as a result of the Chapter 11 filing, the realization of assets and
satisfaction of liabilities, without substantial adjustments or changes in
ownership, are subject to uncertainty. Given this uncertainty, there is
substantial doubt about the Company's ability to continue as a going concern.
While operating as debtors-in-possession under the protection of Chapter 11 of
the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise
as permitted in the ordinary course of business, the Debtors, or some of them,
may sell or otherwise dispose of assets and liquidate or settle liabilities for
some amounts other than those reflected in the consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications in the historical consolidated financial statements.
6 of 23
The primary issues management will focus on immediately following
confirmation of the Company's Plan of Reorganization include:
o Working with its secured lender on a restructuring of the terms of
the DIP debt which it holds, thereby reducing the Company's cost of
borrowing.
o Initiating negotiations with suppliers to secure trade financing of
working capital of approximately $1-2 million under terms and
conditions to be agreed upon. There can be no assurance that such
financing will materialize.
o The continual negotiation of material contracts for the sale of its
manufacturing services to customers which management believes will
provide additional liquidity for operations. There can be no
assurances that these contracts will materialize.
o The ability of the Company to generate cash from operations and to
maintain adequate cash on hand; and
o The ability of the Company to achieve profitability.
The Company believes that positive operating cash flows and profitability
will not come from the general purpose text terminal marketplace. The Company
has been and will continue to focus on the current business from the current
customers in order to provide a reliable cash flow with which to execute growth
plans. The paths to growth that the Company has developed include:
1. Repositioning the Company's business from a text terminal company to a
Point-of-Service/Point-of-Sale ("POS") technology company, and build upon the
Company's historical success in POS to establish a strong link between the
Company's and POS' applications. A key activity in support of the POS initiative
includes leveraging the Company's existing technology platforms
2. Gaining access to a more modern and growing market through new product
offerings including Web terminals and terminals utilizing the Linux operating
system which provide high security, high levels of productivity and high
reliability.
3. Enter the Radio Frequency Identification ("RFID") market place with a
high value-to-cost offering. Position the company as a RFID provider to POS
integrators and OEMs. RFID Controllers - read/write RFID modules for both 13.56
mhz and 900 mhz- will be embedded into the Company's technology platforms.
4. Applying its robust Build-to-Order ("BTO") processes to growth products
and markets.
There is no assurance that the Company will be successful in obtaining
confirmation of their Plan of Reorganization. If it is not, liquidation of the
Company's assets would most likely ensue. If the Company does emerge from
Chapter 11, there is no assurance that our operations will be profitable and
cash flow positive; in the alternative, the scope of operations could be
severely curtailed or discontinued entirely. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
2. Certain Significant Accounting Policies
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 2004 included in the Company's Annual Report on Form 10-K. The accounting
policies used in preparing these consolidated financial statements are the same
as those described in the December 31, 2004 consolidated financial statements.
Cash and Cash Equivalents
All highly liquid investments with maturities at purchase of three months or
less are considered cash equivalents. We had $328 and $388 classified as "cash
on deposit with lender" at December 31, 2003 and September 30, 2004,
respectively, representing cash on-hand in a lockbox account under the control
of the Company's DIP lender.
Minority Interest
In the absence of a commitment by minority shareholders to fund losses in excess
of their equity, such losses have been attributed to the Company.
7 of 23
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer
or passage of title and assumption of risk. The Company monitors product returns
generally, which are for stock rotation with the coinciding replacement order,
and records provisions for estimated future returns and potential warranty
liability at the time revenue is recorded. Service revenue is recognized when
service is performed and billable. Revenue from maintenance and extended
warranty agreements is deferred and recognized ratably over the term of the
agreement.
Supplier Concentration
The Company purchases subassemblies and components for its products from more
than 40 domestic and Far East suppliers. During the third quarter of 2004
purchases from Radiance Electronics and Ansen Corporation accounted for 35% and
24%, respectively, of the Company's total purchases of material.
The balance due Ansen was approximately $560 at September 30, 2004 and $1,130 at
December 31, 2003; and such balance is included in "Purchase order commitments"
on the balance sheets.
Advertising
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $0 and $2 for the three and nine months ended September 30, 2004.
The Company did not record advertising expense during the first nine months of
2003.
Net Income (Loss) Per Common Share
SFAS No. 128, "Earnings Per Share," requires a reconciliation of the numerator
and denominator of the basic net income (loss) per share computation to the
numerator and denominator of the diluted net income (loss) per share
computation. There were no dilutive instruments for the three and nine month
period ending September 30, 2004 and 2003.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Based Compensation
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25 "Accounting for Stock Issued to Employees." The Company
follows SFAS No. 123 "Accounting for Stock Based Compensation" for financial
statement disclosure purposes and issuances of options and warrants to
non-employees for services rendered.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--An Amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by Boundless in the first quarter of fiscal 2006, beginning on
January 1, 2006. Boundless is currently evaluating the effect that the adoption
of SFAS 151 will have on its
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consolidated results of operations and financial condition but does not expect
SFAS 151 to have a material impact.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. As amended by an SEC
pronouncement, SFAS 123R is effective with the first annual period after June
15, 2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS 123, no longer will be an alternative to financial
statement recognition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for the fiscal
periods beginning after June 15, 2005 and is required to be adopted by Boundless
in the third quarter of fiscal 2005, beginning on July 1, 2005. Boundless is
currently evaluating the effect that the adoption of SFAS 153 will have on its
consolidated results of operations and financial condition but does not expect
it to have a material impact.
3. Inventories
Inventories are stated at the lower of cost or market with costs determined on a
first-in first-out basis. On a quarterly basis the Company reviews quantities on
hand and on order and records a provision for excess and obsolete inventory
based on forecasted demand. Should this analysis indicate that the demand for
product has increased from previous estimates, a decrease in the reserves would
be affected through a credit to the statement of operations.
September 30, December 31,
------------- ------------
2004 2003
------------ ------------
Raw materials and purchased components $ 1,645 $ 2,843
Finished goods 113 135
Manufacturing inventory reserves (1,027) (1,242)
Service parts 337 336
------------ ------------
$ 1,068 $ 2,072
============ ============
4. Property and equipment
Sale of facility
On or about September 17, 2003, pursuant to that certain Purchase and Sale
Agreement by and among the Company, Independence Community Bank ("ICB"),
JPMorgan Chase and 100 Marcus LLC, the Company agreed to transfer all of its
right, title and interest in and to 100 Marcus Boulevard, Hauppauge, New York,
which had served as the Company's main operating facility (the "Premises"). ICB
and JPMorgan Chase held mortgages on the Premises and participated in the sale
transaction. The Company successfully negotiated a sale of the Premises which
provided for: (i) satisfaction of all liens and encumbrances of ICB and JPMorgan
Chase; (ii) payment of all outstanding real estate tax obligations from the
proceeds of the sale; (iii) the Company's use of 15,000 square feet, rent free,
for a period of one (1) year post-closing; (iv) the payment of $250 to the
Company and (v) ICB and JP Morgan Chase retaining unsecured claims against the
Company for the difference between the Company's Obligations to such banks and
the amount of the proceeds of the sale of the Premises remitted to such bank. As
a result, such banks have pre-petition unsecured claims against the Company
aggregating approximately $2,271. The Company recognized a gain on the sale of
the building and other miscellaneous assets of $685;
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which gain includes approximately $150, representing the fair market rental
value of the premises for the one-year rent-free period.
Depreciation expense for the nine months ending September 30, 2004 and 2003 was
$42 and $636, respectively. The Company recorded repairs and maintenance
expenses of $3 and $14 for the nine months ended March 31, 2004 and 2003.
5. Liabilities and Other Items Subject to Compromise
Liabilities and other items subject to compromise refers to liabilities incurred
and the issuance of preferred stock prior to the commencement of the Chapter 11
Cases. These amounts represent the Company's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such
claims remain subject to future adjustments. Adjustments may result from
negotiations, actions of the Bankruptcy Court, the determination as to the value
of any collateral securing claims, proofs of claim or other events. It is
anticipated that such adjustments may be material. Payment terms for these
amounts will be established in connection with the Chapter 11 Cases.
As a result of the bankruptcy proceedings, certain accounts payable have been
re-characterized as liabilities subject to compromise in 2004. In addition, as a
result of other bankruptcy proceedings certain capital lease obligations
previously reported in long-term debt are now re-characterized as liabilities
subject to compromise.
At September 30, 2004 and December 31, 2003, the Company had liabilities and
other items subject to compromise of approximately $13,891 and $13,207 which
consisted of the following:
September 30, December 31,
------------- ------------
2004 2003
------------ ------------
Liabilities:
Accounts payable $ 10,217 $ 9,971
Convertible notes payable, principally related to
prior separation agreements 965 965
Accrued salaries 397 397
Accrued warranty 222 222
Capital lease obligations 438 --
------------ ------------
12,239 11,555
Other:
Manditorily redeemable preferred stock 1,652 1,652
------------ ------------
$ 13,891 $ 13,207
============ ============
The mandatorily redeemable preferred stock is convertible into shares of common
stock of the Company at a conversion price of $3 per share. The Plan of
Reorganization contemplates that all equity instruments of the Company will be
cancelled on the Effective Date. As a result, the conversion of the preferred
stock to shares of common stock is doubtful and therefore the mandatorily
preferred stock is included with other items subject to compromise.
6. Stockholders' Deficit
At September 30, 2004 and December 31, 2003 stockholders' deficit consisted of
the following:
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September 30, December 31,
-----------------------------
2004 2003
------------ ------------
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued $ -- $ --
Common stock, $0.01 par value, 25,000,000 shares
authorized,6,705,613 shares issued and outstanding 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,901) (50,788)
------------ ------------
Total stockholders' deficit $ (14,990) $ (14,877)
============ ============
7. Reorganization Expenses
Reorganization expenses were as follows:
Nine months ended
September 30,
-----------------------------
2004 2003
------------ ------------
Professional fees $ 103 $ 950
United States District Court fees 19 24
Facility relocation expenses 176 33
Gain on the disposition of building and equipment (23) (54)
------------ ------------
$ 275 $ 953
============ ============
8. Major Customers
The Company markets its terminal products through OEMs and reseller distribution
channels. Customers can buy the Company's 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 quarter
ended September 30, 2004, the Company had two customers representing 20% and
11%, respectively revenue. For the quarter ended September 30, 2003 two
customers contributed 33% and 27%, respectively, of revenues.
9. Litigation and Contingencies
The Company is subject to lawsuits and claims that arose in the normal course of
business. Management is of the opinion that all such matters are without merit,
or are of such kind, or involve such amounts, as would not have a significant
effect on the financial position, results of operations or cash flows of the
Company if disposed unfavorably.
See Part II- Other Information, Item 1.-Legal Matters
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.
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Three and nine months ended September 30, 2004 and 2003
On March 12, 2003, the Company filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Prior to the filing, the Company's inability to obtain material
for production adversely impacted customer demand and the Company's ability to
satisfy existing customer orders.
Revenue - Revenue for the quarter ended September 30, 2004, was $1,412 as
compared to $3,461 for the quarter ended September 30, 2003. Revenue for the
nine months ended September 30, 2004 was $5,406 versus $9,939 for 2003.
Sales of the Company's General Display Terminals were $1,203 for the quarter
ended September 30, 2004 compared to $3,207 for the quarter ended September 30,
2003. On a year-to-year basis, revenue for General Display Terminals declined
46% to $4,763 from $8,810 in year 2003.
The Company recorded EMS revenue of $32 for the third quarter of 2004. Due to
the Company's weak financial position no EMS activity or revenue was recorded in
the quarter ended September 30, 2003.
Net revenue from the Company's repairs and spare parts business for the quarter
ended September 30, 2004 was $177 as compared to $253 for the quarter ended
September 30, 2003.
Ingram Micro and Jetstar contributed 20% and 11%, respectively, of total
revenues for the quarter ending September 30, 2004. Hewlett Packard and NCR were
the most significant customers of the Company for the quarter ended September
30, 2003, contributing 33% and 27%, respectively, of total revenue.
Gross Margin - Gross margin for the three and nine months ended September 30,
2004 were $335 (23.7% of revenue) and $1,420 (26.3% of revenue) respectively, as
compared to gross margin of $691 (20% of revenue) for the third quarter of 2003
and $1,382 (14% of revenue) for the nine months ended September 30, 2003.
Total Operating Expenses - For the quarter ended September 30, 2004, operating
expenses, excluding interest expense and reorganization expenses, decreased 20%
to $266 (19% of revenue), compared to expenses for the third quarter of 2003 of
$334 (10% of revenue). For the nine months ended September 30, 2004, operating
expenses were $1,129 (21% of revenue) compared to expenses in the comparable
period in 2003 of $2,124 (21% of revenue).
Loss on reimbursement of employee services- Beginning in the first quarter of
2004 the Company agreed to provide UCSI resources, primarily Company employees,
to allow UCSI to pursue programs critical to their continued development of the
thin client market. UCSI is wholly-owned by Mr. Oscar Smith. Mr. Smith is also
the majority owner of Vision Technologies, Inc., the entity which will own 100%
of the Company upon confirmation of the Company's plan of reorganization. A
monthly charge to UCSI was agreed to based upon the Company's estimate of the
percentage of time its employees would be devoted to UCSI projects. For the
quarter ended September 30, 2004, the Company charged UCSI $75 and incurred
estimated expenses of $90, resulting in a loss on reimbursement of employee
services of $15. For the nine months ended September 30, 2004, the loss on
reimbursement of employee services was $45.
Net reorganization expenses were $86 and $275 for the three and nine months
ended September 30, 2004, respectively, as compared to expenses of $287 and $953
for the three and nine months ended September 30, 2003. Of the $86 recognized
during the third quarter of 2004, $75 represented legal expenses. During the
third quarter of 2003, the Company recognized gains of $48 from the sale of
excess assets and for the nine-month period the Company incurred $974
representing legal fees and fees due the U.S. Trustee administering the
bankruptcy case.
Other Income - The Company recorded income of $40 during the quarter ended
September 30,
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2004 compared to income of $30 for the quarter ended September 30, 2003. Other
income in the third quarter of 2004 is composed of the partial reversal of
previously accrued expenses, originally in the amount of approximately $58, and
recorded during the second quarter of 2004 in connection with the Company's
decision to shut down its leased depot repair center in Illinois. During the
third quarter of 2004 the Company reached agreement with the landlord of the
Illinois facility releasing the Company from the then remaining obligations
under the lease. Other income in 2003 includes $26 related to premium returns on
the Company's workers' compensation insurance. On a year-to-date basis, other
income was $15 in 2004 compared to other income of $180 in 2003.
Interest Expense - Interest expense for the quarter ended September 30, 2004 was
$21 compared to $192 for the comparable period in 2003. For the third quarter of
2003, the Company recorded interest expense of approximately $112 related to the
mortgage on its Hauppauge, NY, facility. Interest expense for the nine months
was $99 in 2004 versus $662 in 2003.
Income Tax Expense - For the third quarter of 2004 and 2003, the Company did not
record an income tax credit against the recorded losses before income taxes. The
Company recorded no income tax benefit for the quarter ended September 30, 2004
and 2003, based on the Company's estimate of its annual effective income tax
rate to be zero. For annual reporting purposes, the Company has provided a 100%
valuation allowance for its net deferred tax assets.
Net loss- For the quarter ended September 30, 2004, the Company recorded a net
loss of $13, compared to a net loss of $92 for the quarter ended September 30,
2003. For the nine months ended September 30, 2004 the net loss was $113
compared to $2,466 for the nine months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The matters described in "Liquidity and Capital Resources," to the extent that
they relate to future events or expectations, may be significantly affected by
the Chapter 11 process. Those proceedings involve, or may result in, various
restrictions on the Company's activities, limitations on financing, the need to
obtain Bankruptcy Court and Creditors' Committee approval for various matters
and uncertainty as to relationships with vendors, suppliers, customers and
others with whom we may conduct or seek to conduct business.
Generally, under the Bankruptcy Code, most of a debtor's liabilities must be
satisfied in full before the debtor's stockholders can receive any distribution
on account of such shares. The rights and claims of various creditors and
security holders will be determined by the confirmed plan of reorganization.
Further, it is also likely that pre-petition unsecured claims against the
Company will be substantially impaired in connection with the Company's
reorganization. At this time we can make no prediction concerning how each of
these claims will be valued in the bankruptcy proceedings. We believe that the
Company's presently outstanding equity securities will have no value and it is
expected that those securities will be canceled under any plan of reorganization
that we propose. For this reason, we urge that caution be exercised with respect
to existing and future claims or investments in any Boundless security.
The Company is highly leveraged. As of December 31, 2003, the Company had a
tangible net worth deficit of $14,877 and total liabilities of $19,015. As of
September 30, 2004, the Company had a tangible net worth deficit of $14,990 and
total liabilities of $18,187. The Company had a working capital deficit,
inclusive of liabilities and other items subject to compromise, of approximately
$13,688 as of September 30, 2004, compared to working capital deficit of $13,246
as of December 31, 2003. 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.
On the Effective Date, the Company shall issue, or cause to be issued for
Vision's benefit, and in its name, shares of Boundless Common Stock sufficient
to provide Vision with 100% of the Boundless Common Stock issued and
outstanding, or to be issued and
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outstanding, under the Plan (the "Vision Shares"). Such issuance of the Vision
Shares shall be deemed to be in full satisfaction of the Vision Claim, which
claim was $724, with accrued interest, at September 30, 2004.
The Company's Plan of Reorganization contemplates an annual payment of cash to
holders of allowed unsecured claims (the "Claims"). The Company believes that
these Claims aggregate approximately $14,586 as of December 31, 2005. Holders of
Claims shall receive their Pro Rata share of cash payments in an amount equal to
2% of annual revenues up to and including $7 million, on each of the first,
second and third anniversary dates of the Effective Date; and cash payments in
an amount equal to 4% of annual revenues exceeding $7 million, on each of the
first, second and third anniversary dates of the Effective Date.
Payments of Claims shall be escrowed on a monthly basis, and the Company must
forward monthly sales reports and confirmation of the escrow to Committee
Counsel. Each of the annual payments to be distributed to holders of the Claims
shall be: (i) not less than $150 on each of the first and second anniversary
dates; and (ii) not less than $200 on the third anniversary dates. The total
amount to be distributed to holders of the Claims shall be not less than $500
(the "Minimum Distribution").
If the Company merges with another entity or is acquired by another entity prior
to the payments of all amounts due and owing pursuant to the payment plan, the
remaining entity must assume the Company's obligations contained herein. Annual
revenues shall include only those revenues generated from sales of the Company's
product line existing prior to any merger or acquisition.
At September 30, 2004, the Company had accrued approximately $856 for legal
assistance throughout the bankruptcy period. As of December 31, 2005,
outstanding professional fees, inclusive of legal fees, are estimated to
approximate $1,430 as of the Effective Date. Upon application for payment
pursuant to ss.ss. 330, 331 and 503(a) of the Bankruptcy Code and approval by
the Bankruptcy Court, any and all professional fees not paid on or before the
Effective Date shall be paid by the Company on such terms as the parties shall
agree. Interest shall accrue on any unpaid professional fees from the Effective
Date at a rate of eight (8%) percent per annum.
Since it is anticipated that professional fees shall not be paid in full on the
Effective Date, the Professionals (other than auditors) shall be granted a
security interest upon all of the Company's assets, junior to the security
interest thereon of Valtec but pari passu with the Vision security interest, if
any. When the Professionals shall have been paid in full, the security interest
in their favor shall be cancelled and be of no further force and effect.
The Company's liquidity is affected by many factors, some of which are based on
the normal ongoing operations of our businesses and some of which arise from
uncertainties related to global economies. 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 further adversely affected.
Accordingly, the Company may not have the necessary cash to fund all of its
obligations.
Net cash provided by operating activities during the nine months ended September
30, 2004 was $634, principally related to net income before reorganization
expenses of $162, reductions in inventories and other receivables of $1,004 and
$60, respectively, and reductions in other assets, principally prepaid expenses,
of $62. In addition, non-cash expenses, principally depreciation and
amortization were $42. These items were offset by increases in receivables,
including trade receivables and affiliate receivables of $438, increases in cash
on deposit with lenders of $60, decreases in deferred credits of $98, decreases
in accounts payable and accrued expenses of $76 and non-cash credits of $24. Net
cash provided by operating activities during the nine months ended September 30,
2003 was $1,427, principally related to increases in accounts payable and
accrued expenses of $1,653, decreases in inventories of $122, other receivables
of $416, and trade receivables of $99. In addition, during the nine months ended
September 30, 2003, the Company
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recorded non-cash charges of $398 for inventory reserves, $682 of depreciation
and amortization, bad debt expense of $159 and $289 relating to the write-off of
debt financing costs. Net cash provided from operating activities during the
first three quarters of 2003 were reduced by a net loss before reorganization
expenses of $1,513, increases in cash on deposit with lenders of $677, and
decreases in deferred revenues of $189.
For the first nine months of 2004 and 2003, net cash used in reorganization
activities was $175 and $465, respectively. During the first nine months of 2004
the Company incurred expenses of $176 in connection with the relocation of its
manufacturing facility and $122 in professional fees. These expenses were offset
by increases in liabilities of $100 and proceeds from the sale of excess assets
of $23. During the first nine months of 2003 professional fees, primarily for
legal expenses were $974 and relocation expenses were $32. These items were
offset by increases in liabilities of $452 and cash proceeds from the
disposition of assets of $90.
Net cash used in investing activities for the nine months ended September 30,
2004, consisted of equipment purchases of $14.
During the first nine months of 2004, net cash used in financing activities was
$755, consisting of net payments to Valtec under the respective DIP financing
agreement. Net payments to CIT and Valtec amounted to $695 during the nine
months ended September 30, 2003.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Form 10-Q contains various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements
represent the Company's expectations and beliefs concerning future events, based
on information available to us on the date of the filing of this Form 10-Q, and
are subject to various risks and uncertainties. We disclaim any intent or
obligation to update or revise any of the forward-looking statements, whether in
response to new information, unforeseen events or changed circumstances except
as required to comply with the disclosure requirements of the federal securities
laws.
Forward looking statements necessarily involve known and unknown risks,
uncertainties and other factors that may cause the actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievement expressed or
implied by such forward-looking statements. Readers are cautioned to review
carefully the discussion concerning these and other risks which can materially
affect the Company's business, operations, financial condition and future
prospects.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "intend," "expect," "anticipate,"
"assume", "hope", "plan," "believe," "seek," "estimate," "predict,"
"approximate," "potential," "continue", or the negative of such terms.
Statements including these words and variations of such words, and other similar
expressions, are forward-looking statements. Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable
based upon its knowledge of its business, the Company cannot absolutely predict
or guarantee its future results, levels of activity, performance, or
achievements. Moreover, neither the Company nor any other person assumes
responsibility for the accuracy and completeness of such statements.
The Company notes that a variety of factors could cause its actual results
and experience to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of its business include, but are not limited to, the following: changes
in spending patterns; changes in overall economic conditions; the impact of
competition and pricing; the financial condition of the suppliers and
manufacturers from whom the Company sources its merchandise; changes in tax
laws; the Company's ability to hire, train and retain a consistent supply of
reliable and effective participants in its marketing operations; general
economic, business and social
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conditions in the United States; the costs of complying with changes in
applicable labor laws or requirements, including without limitation with respect
to health care; changes in the costs of interest rates, insurance, shipping and
postage, energy, fuel and other business utilities; the risk of non-payment by,
and/or insolvency or bankruptcy of, customers and others owing indebtedness to
the Company; actions that may be taken by creditors with respect to the
Company's obligations that are subject to default proceedings; threats or acts
of terrorism or war; and strikes, work stoppages or slow downs by unions
affecting businesses which have an impact on the Company's ability to conduct
its own business operations.
Forward-looking statements that the Company makes, or that are made by
others on its behalf with its knowledge and express permission, are based on
knowledge of the Company's business and the environment in which it operates,
but because of the factors listed above, actual results may differ from those in
the forward-looking statements. Consequently, these cautionary statements
qualify all of the forward looking statements made herein. The Company cannot
assure the reader that the results or developments anticipated by it will be
realized or, even if substantially realized, that those results or developments
will result in the expected consequences for it or affect it, its business or
operations in the way the Company expects. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates, or on any subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf, which are expressly
qualified in their entirety by these cautionary statements. The Company does not
undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or thereof or to reflect the occurrence of unanticipated events, other
than as required to comply with the disclosure requirements of the federal
securities laws.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates is related
primarily to the Company's revolving credit facility and long-term debt
obligations. The Company managed this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value is
immediately recognized in earnings.
The Company places its investments with high credit quality issuers and, by
policy, is averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk and reinvestment risk.
As of December 31, 2005 the Company's investments consisted of cash balances
maintained in its corporate account with the JPMorganChase Bank.
All sales arrangements with international customers are denominated in U.S.
dollars. These customers are permitted to elect payment of their next month's
orders in local currency based on an exchange rate provided one month in advance
from the Company. The Company does not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows or
for trading purposes. Foreign currency transaction gains or losses have not been
material to the Company's results of operations.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures
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as of September 30, 2004. Based on that evaluation, the Company's management,
including the CEO and CFO, has concluded that the Company's disclosure controls
and procedures are effective. During the period covered by this report, there
was no change in the Company's internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Matters
In re: Boundless Corporation, et. al.
As discussed above, on the Petition Date, the Company, and its wholly and
majority owned subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases
are being jointly administered under the caption "In re Boundless Corporation,
et al., Case No. 03-81558-478." As debtors-in-possession, we are authorized
under Chapter 11 to continue to operate as an ongoing business, but may not
engage in transactions outside the ordinary course of business without the prior
approval of the Bankruptcy Court. As of the Petition Date, virtually all pending
litigation (including some of the actions described below) is stayed, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions,
may take any action, again subject to certain exceptions, to recover on
pre-petition claims against us. In addition, we may reject pre-petition
executory contracts and unexpired lease obligations, and parties affected by
these rejections may file claims with the Bankruptcy Court. At this time, it is
not possible to predict the outcome of the Chapter 11 process or its effect on
the Company's business.
An action was commenced by Kareem Mangaroo, employed by Boundless Technologies
between February 1994 and April 1999 as a material handler ("Plaintiff"), on
February 5, 2001, against Boundless Technologies, Boundless Corporation, and
four employees of the Company (Joseph Gardner, its CFO, Michelle Flaherty,
formerly manager of Human Resources, Thomas Iavarone, director of Logistics, and
Anthony San Martin, manager of Shipping), seeking damages for the unlawful
termination of Plaintiff's employment in violation of Plaintiff's rights under
Title VII of the Civil Rights Act of 1964, as amended; the Equal Protection
Clause and Due Process Clause, pursuant to the Civil Rights Act of 1886, as
amended, 42 U.S.C. ss. 1981; and for damages as a result of the conspiratory
actions of defendants to deprive Plaintiff of his equal protection and due
process rights pursuant to 42 U.S.C. ss. 1985 and for violation of Plaintiff's
rights under the Employee Retirement Income Security Act 29 U.S. C. ss.1001.
Plaintiff further alleges claims under State law for breach of contract. The
verified complaint was filed in the United States District Court, Eastern
District of New York. Plaintiff seeks (i) compensatory damages of $1 million
from each of Boundless Technologies and four employees of the company (jointly
and severally), (ii) punitive damages of $2 million from each of Boundless
Technologies, the Company, and four employees of the Company (jointly and
severally), (iii) $1 million against Boundless Technologies for breach of
contract, and (iv) the value of forfeited options, attorney's fees, costs of the
action and other relief as the court deems necessary.
On February 17, 2003, the defendants' motion for summary judgment was granted.
On March 21, 2003, Plaintiff served Notice of Appeal to the United States Court
of Appeals for the Second Circuit in opposition to the granting of defendants'
motion for summary judgment. On October 15, 2003, the United States Court of
Appeal for the Second Circuit granted the defendants' motion to Stay the appeal
in accordance with 11 U.S.C. ss. 362, which Stay is still in effect. The Company
intends to vigorously defend this suit since it believes that it has meritorious
defenses to the action.
An action was commenced by Donald W. Lytle ("Plaintiff") on February 8, 2001,
against Boundless Technologies, Inc., GN Netcom, Inc., Portal Connect, Inc., and
Wholesale Audio Video, Inc. in the Iowa District Court, Johnson County; Law No.
LACV061503 alleging negligence and products defects resulting in injuries to
Plaintiff's hearing as a result of the use of one model of the Company's General
Display Terminals. Plaintiff was suing for unspecified damages. On January 17,
2003, Plaintiff filed a Dismissal with Prejudice dismissing Plaintiff's claims
against Boundless Technologies, Inc.
In November 2002, Comdial Corporation filed a demand for arbitration with the
American Arbitration Association against Boundless Manufacturing Services, Inc.
("Boundless").
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Among other things, Comdial contends that Boundless breached its contractual
obligations to Comdial by failing to meet Comdial's orders for the delivery of
products manufactured by Boundless. The Comdial demand seeks damages in excess
of $6.0 million. On February 6, 2003, Boundless responded to the demand by
denying substantially all of Comdial's claims and asserting counterclaims
totaling approximately $8.2 million, including approximately $0.8 million in
past due invoiced amounts. On March 13, 2003, Boundless announced that it has
filed for protection pursuant to Ch. 11 of the U.S. Bankruptcy Code, causing a
stay in the arbitration matter. It is not known at this time whether this filing
will have any long-term impact on the arbitration, or whether the arbitration
will eventually proceed. No amounts have been accrued in the Company's financial
statements for any losses. In May 2005 Comdial Corporation filed for protection
under Ch. 11 of the U.S. Bankruptcy Code. Since the Company's claims against
Comdial accrued prior to Comdial's filing for bankruptcy, any damages awarded to
the Company will constitute pre-petition claims against Comdial.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1: Certification of Acting Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Exhibit 31.2: Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Exhibit 32: Certification of Acting Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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: March 3, 2006
Boundless Corporation
By: /s/Joseph Gardner
--------------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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