SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
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
Page
No.
---
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2005 (Unaudited)
and December 31, 2004 3
Consolidated Condensed Statements of Operations for the three and nine months
ended September 30, 2005 and 2004 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits 20
Signature 21
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BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2005 2004*
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 0 $ 124
Cash on deposit with lender 0 271
Trade accounts receivable, net 1,018 1,150
Affiliate receivables 84 92
Other receivables 145 117
Inventories (Note 3) 845 1,094
Prepaid expenses and other current assets 204 59
------------ ------------
Total current assets 2,296 2,907
Property and equipment, net (Note 4) 120 103
------------ ------------
Total assets $ 2,416 $ 3,010
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term debt $ 285 $ 350
Accounts payable 28 44
Accrued salaries 67 86
Accrued legal fees 1,179 1,029
Purchase order commitments 246 561
Accrued payroll and sales tax payable 28 30
Accrued warranty 30 18
Other accrued liabilities 166 157
------------ ------------
Total current liabilities 2,029 2,275
------------ ------------
Long-term debt, less current maturities 650 953
Deferred credits 84 65
Items subject to compromise:
Manditorily redeemable preferred stock 1,652 1,652
Liabilities subject to compromise (Note 5) 12,976 12,970
------------ ------------
Total liabilities 17,391 17,915
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
Stockholders' deficit: (Note 6)
Common stock 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,886) (50,816)
------------ ------------
Total stockholders' deficit (14,975) (14,905)
------------ ------------
Total liabilities and stockholders' deficit $ 2,416 $ 3,010
============ ============
* 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 Six Months Ended
June 30 June 30
-------------------- --------------------
-------- -------- -------- --------
2005 2004 2005 2004
-------- -------- -------- --------
Revenue:
Product sales $ 1,350 $ 1,575 $ 2,794 $ 3,560
Services 186 236 357 434
-------- -------- -------- --------
Total revenue 1,536 1,811 3,151 3,994
-------- -------- -------- --------
Cost of revenue
Product sales 1,137 1,242 2,262 2,647
Services 55 128 129 262
-------- -------- -------- --------
Total cost of revenue 1,192 1,370 2,391 2,909
-------- -------- -------- --------
Gross margin 344 441 760 1,085
Other costs and expenses (income)
Selling, general and administrative 210 307 456 775
Research and development 47 43 103 88
Interest expense (excluding contractual interest of $17
and $17 not recognized in 2005 and 2004, respectively) 54 37 92 78
Loss on reimbursement of employee services (net of
reimbursement of $20 and $75) 4 15 9 30
Other costs (income) (17) 74 (22) 25
-------- -------- -------- --------
298 476 638 996
-------- -------- -------- --------
Income (loss) before reorganization items 46 (35) 122 89
Reorganization items (Note 7) 96 76 192 189
-------- -------- -------- --------
Net loss $ (50) $ (111) $ (70) $ (100)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.01) $ (0.02) $ (0.01) $ (0.01)
======== ======== ======== ========
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)
Six months ended
June 30,
--------------------
2005 2004
-------- --------
Cash flows from operating activities:
Income before reorganization items 122 89
Adjustments to reconcile income before reorganization items
to net cash provided by (used in) operating activities:
Depreciation and amortization 1 41
Change in deferred credits 19 (74)
Provision (credit) for doubtful accounts 10 (24)
Changes in assets and liabilities:
Cash on deposit with lender 271 16
Trade accounts receivable 122 (202)
Affiliate receivables 8 (202)
Other receivables (28) 60
Inventories 249 730
Other assets (145) 39
Accounts payable and accrued expenses (324) 82
-------- --------
Net cash provided by operating activities excluding reorganization items 305 556
-------- --------
Cash flows from reorganization activities:
Reorganization items, net (192) (189)
Gain on disposition of property and equipment -- (23)
Proceeds from disposition of property -- 23
Increase in liabilities, net 150 27
-------- --------
Net cash used in reorganization activities (42) (162)
-------- --------
Cash flows from investing activities:
Capital expenditures (18) (14)
-------- --------
Net cash used in investing activities (18) (14)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of debt 3,211 --
Payments on loans payable and capital leases (3,580) (645)
-------- --------
Net cash used in financing activities (369) (645)
-------- --------
Net decrease in cash and cash equivalents (124) (265)
Cash and cash equivalents at beginning of period 124 373
-------- --------
Cash and cash equivalents at end of period $ 0 $ 108
======== ========
Cash paid for:
Interest $ 65 $ 51
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 six months ended June 30, 2005 and 2004. 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, 2004. 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
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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.
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. Summary of Certain 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 $271 classified as "cash on deposit
with lender" at December 31, 2004, representing cash on-hand in a lockbox
account under the control of the Company's DIP lender.
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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.
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. For the quarter ended June 30, 2005,
purchases from Radiance Electronics and Ansen Corporation accounted for
approximately 29% and 24%, respectively, of total purchases. During the second
quarter of 2004 purchases from Radiance Electronics, Ansen Corporation, and
Video Display Corporation accounted for 23%, 20%, and 12%, respectively, of the
Company's total purchases of material.
The balance due Ansen was approximately $246 and $561 at June 30, 2005 and
December 31, 2004, respectively; 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 immaterial for the three and six months ended June 30, 2005 and
2004, respectively.
Net Loss Per Common Share
Net loss attributable to common stockholders includes the accretion of
mandatorily redeemable preferred stock.
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.
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.
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
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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 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. We are required to adopt SFAS 123R in the first quarter
of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we must determine
the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
used at date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive options, prior periods may
be restated either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. We are evaluating the requirements of
SFAS 123R and we expect that the adoption of SFAS 123R will not have a material
impact on the Company's consolidated results of operations and earnings per
share. We have not yet determined the method of adoption or the effect of
adopting SFAS 123R, and we have not determined whether the adoption will result
in amounts that are similar to the current pro forma disclosures under SFAS 123.
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.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"),
which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 is effective for fiscal years ending
after December 15, 2005 and is required to be adopted by Boundless in the first
quarter of fiscal 2006. Boundless is currently evaluating the effect that the
adoption of FIN 47 will have on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No.
20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements--An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by Boundless in the first quarter of
fiscal 2006. Boundless is currently evaluating the effect that the adoption of
SFAS 154 will have on its consolidated results of operations and financial
condition but does not expect it to have a material impact.
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In June 2005, the FASB issued FSP FAS 143-1, "Accounting for Electronic
Equipment Waste Obligations" ("FSP 143-1"), which provides guidance on the
accounting for certain obligations associated with the Directive on Waste
Electrical and Electronic Equipment (the "Directive"), which was adopted by the
European Union ("EU"). Under the Directive, the waste management obligation for
historical equipment (products put on the market on or prior to August 13, 2005)
remains with the commercial user until the equipment is replaced. FSP 143-1 is
required to be applied to the later of the first reporting period ending after
June 8, 2005 or the date of the Directive's adoption into law by the applicable
EU member countries in which we have significant operations. Boundless is
currently evaluating the effect that the adoption of FSP 143-1 will have on its
consolidated results of operations and financial condition. Such effects will
depend on the respective laws adopted by the EU member countries.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is 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 effected through a credit to the statement of operations.
The major components of inventories are as follows:
June 30, December 31,
------------- -------------
2005 2004
------------- -------------
Raw materials and purchased components $ 1,204 $ 1,584
Finished goods 156 126
Manufacturing inventory reserves (837) (935)
Service parts 322 319
------------- -------------
$ 845 $ 1,094
============= =============
4. Property and equipment
Property and equipment consists of the following:
June 30, December 31,
------------------------------
2005 2004
------------- -------------
Buildings and improvements $ 17 $ 14
Machinery and equipment 6,520 6,505
------------- -------------
6,537 6,519
Less accumulated depreciation and amortization 6,417 6,416
------------- -------------
$ 120 $ 103
============= =============
Depreciation expense for the six months ended June 30, 2005 and 2004 was $1 and
$41, respectively. The Company recorded repairs and maintenance expenses of $2
and $2 for the six months ended June 30, 2005 and 2004.
The Company discontinued recording depreciation expense on its machinery and
equipment in the first quarter of 2005 as those assets had reached their
estimated salvage value.
5. Liabilities and Other Items Subject to Compromise
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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.
At June 30, 2005 and December 31, 2004, the Company had liabilities and other
items subject to compromise of approximately $14,628 and $14,622 which consisted
of the following:
June 30, December 31,
------------- -------------
2005 2004
------------- -------------
Liabilities:
Accounts payable $ 10,954 $ 10,948
Convertible notes payable, principally related to
prior separation agreements 965 965
Accrued salaries 397 397
Accrued warranty 222 222
Capital lease obligations 438 438
------------- -------------
12,976 12,970
Other:
Manditorily redeemable preferred stock 1,652 1,652
------------- -------------
$ 14,628 $ 14,622
============= =============
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 June 30, 2005 and December 31, 2004 stockholders' deficit consisted of the
following:
June 30, December 31,
------------------------------
2005 2004
------------- -------------
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 (50,886) (50,816)
Accumulated other comprehensive loss -- --
------------- -------------
Total stockholders' deficit $ (14,975) $ (14,905)
============= =============
7. Reorganization Expenses
Reorganization expenses were as follows:
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Six months ended
June 30,
------------------------------
2005 2004
------------- -------------
Professional fees $ 150 $ 28
United States District Court fees 14 16
Facility relocation expenses 20 168
Other expenses 8 --
Gain on the disposition of equipment -- (23)
------------- -------------
$ 192 $ 189
============= =============
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. Ingram Micro and
CDG Management, LLC contributed approximately 17% and 13%, respectively, of
revenues for the three months ended June 30, 2005. Ingram Micro contributed 21%
of revenues for the six months ended June 30, 2005. For the quarter ended June
30, 2004, the Company had two customers representing 12% and 10%, respectively,
of revenue.
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.
Three and Six Months Ended June 30, 2005 and 2004.
Revenue - Revenue for the quarter ended June 30, 2005 was $1,536 as compared to
$1,811 for the quarter ended June 30, 2004. For the six months ended June 30,
2005, the Company recorded revenue of $3,151 versus revenue of $3,994 for the
six months ended June 30, 2004.
Sales of the Company's General Display Terminals were $1,344 and $2,788,
respectively, for the three and six months ended June 30, 2005. During 2004,
General Display Terminal Revenue was $1,575 and $3,560, respectively, for the
three and six months ended June 30. During 2003, Hewlett Packard announced the
discontinuation of sales of its General Display Terminal, sourced from the
Company, in favor of technologically newer desktop terminal devices. As a result
of this transition, Hewlett Packard's purchases during the first quarter of 2004
included the acquisition of product quantities sufficient to meet its then
current needs, as well as its near-term projected needs during the product
transition period. For the first quarter of 2004, purchases from Hewlett Packard
amounted to
12 of 24
approximately $748 as compared to purchases of approximately $143 for the first
quarter of 2005. Sales to HP in the second quarter of 2005 amounted to $94
versus $166 in 2004.
Text revenue includes sales of the Company's general-purpose display terminals.
The Company's product family falls into two general classes: ANSI or ASCII
display terminals. The general purpose segment of the Text market, whether ANSI
or ASCII, is primarily characterized as a "replacement sale" market. Text
terminal customer purchasing criteria are based on quality, customization,
compatibility with other terminals, price and, as a result of the markets
replacement characterization, lead-times. Historically, the Company has been a
leader in these categories.
The Company anticipates sales of its General Display Terminals will continue to
decline as customers transition to newer technologies with graphical
capabilities.
Net revenue from EMS activities, primarily logistics services sold to Unique
Co-operative Solutions, Inc. ("UCSI"), were $11 for the six months ended June
30, 2005, as compared to $82 in the comparable period of 2004. UCSI is wholly
owned by Mr. Oscar Smith, who also is the majority shareholder of Vision
Technologies, Inc. ("Vision"). The Company's Plan of Reorganization, assuming
approval by the Bankruptcy Court, contemplates that Vision will own 100% of the
Company, and will receive this ownership in settlement of the $650 note payable
due to him plus accrued interest of $118. Mr. Smith currently owns approximately
15% of the outstanding common stock of the Company.
Net revenue from the Company's repairs and spare parts business for the quarter
ended June 30, 2005 was $180 as compared to $173 for the quarter ended June 30,
2004. This revenue includes the sale of spare parts, repair of product outside
of the warranty period, and the sale of multi-year warranty contracts.
Year-to-date revenue in 2005 was $347 versus $352 in 2004. Historically,
customer service revenue has been driven from the sales of the Company's text
terminal products.
The Company's engineering efforts have focused on cost reduction and
reliability improvements. These efforts have decreased the average failure rate
of the Company's text terminals and extended the average useful life of the text
terminal. These improvements have reduced the Company's ability to generate
revenue from spare parts sales and repair activities. In addition, a substantial
market has evolved around the sale of used equipment, as customers trade in text
terminals when they switch to alternative technologies, thereby reducing the
Company's opportunity to sell new equipment.
During the second quarter of 2005, Ingram Micro contributed 17%, and CDG
Management, LLC contributed 13%, of total revenues.
Gross Margin - The Company recorded gross margin for the three months ended June
30, 2005 of $344 (22.4% of revenue) compared to gross margin of $441 (24.4% of
revenue) for the second quarter of 2004. On a year-to-date basis, gross margin
decline by $325, or 30%, from $1,085 in 2004 to $760 in 2005. The decrease in
total gross margin as a percentage of revenue for the second quarter of 2005 as
compared to the second quarter of 2004 is attributable to the reduction in the
Company's revenue without a corresponding reduction in the Company's
manufacturing overhead expenses, which expenses include fixed costs such as rent
for the manufacturing facility. Manufacturing overhead expenses in the second
quarter of 2005 were $256, or 17% of revenue, as compared to $277, or 15% of
revenue, for the second quarter of 2004.
Total Operating Expenses - For the quarter ended June 30, 2005, operating
expenses, excluding interest expense and reorganization expenses associated with
the Company's bankruptcy filing, decreased 27% to $257 (17% of revenue),
compared to expenses for the second quarter of 2004 of $350 (19% of revenue).
Year-to-date operating expenses decreased $304, or 35%, from $863 in 2004 to
$559 in 2005.
The decrease in total operating expenses is attributable to layoffs and other
expense control activities implemented by the Company in order to align its
expense structure with its revenue. These layoffs included the elimination of
senior management, including the
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Company's chief executive officer, and a restructuring of the Company's sales
group.
The Company reviews its account receivable balances monthly to assess its
estimate of the collectability of such accounts. The Company utilizes ratios
based on its historical experience, as well as management's judgment, in its
assessment. For the second quarter of 2005 the Company recorded bad debt
reserves against its receivables in an amount of approximately $10. No reserve
or accrual was recorded during the second quarter of 2004.
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. During the
second quarter of 2005 the Company charged UCSI $20 and incurred expenses of
$24, resulting in a loss on reimbursement of $4. For the quarter ended June 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 six
months ended June 30, 2005 and 2004 the loss on reimbursement of employee
services was $9 and $30, respectively.
Other costs/income - Other income for the quarter ended June 30, 2005 was $17
compared to other costs of $74 for the period ended June 30, 2004. Other income
recorded in 2005 includes $20 relating to refunds of prior years' personnel
property tax assessments against the Company's former manufacturing facility in
Boca Raton, Florida. Other costs in the second quarter of 2004 include accruals
of approximately $58 associated with the Company's decision to shut down its
depot repair center in Illinois. For the six months ended June 30, 2005, other
income was $22. For the six months ended June 30, 2004, other costs were $25.
Interest Expense - Interest expense for the three and six months ended June 30,
2005, was $54 and $92, respectively. Interest expense was $37 for the quarter
ended June 30, 2004 and $78 for the six months ended June 30, 2004. In
connection with the bankruptcy filing, during the quarter ended March 31, 2003,
the Company obtained debtor-in-possession ("DIP") financing with Valtec Capital,
LLC. At June 30, 2004, the balance owed Valtec was approximately $1,125, and
carried an interest rate of 8% per annum. In January 2005, the Company replaced
the Valtec Capital DIP financing with DIP financing provided by Entrepreneur
Growth Capital, LLC ("EGC"). At June 30, 2005, the balance due EGC was $285, and
carried an interest rate of the prime rate plus 6%. In addition, in June 2003
the Bankruptcy Court authorized the Company to secure $650 of junior secured DIP
financing from Vision. The Vision DIP financing carries interest at 8% per
annum.
Reorganization Expenses- During the second quarter of 2005 the Company recorded
reorganization expenses of $96, primarily for legal fees incurred in the
bankruptcy. For the quarter ended June 30, 2004, reorganization expenses were
$76. For the six months ended June 30, 2005, reorganization expenses were $192,
compared to $189 for the comparable period in 2004. The 2004 year-to-date amount
includes approximately $168 related to expenses associated with the Company's
relocating its manufacturing operations to Farmingdale, New York, and a credit
of $23 from the sale of excess assets.
Income Tax Expense/Credit - For the second quarter of 2005 and 2004 the Company
did not record income tax expense or credit against the recorded results. The
Company recorded no income tax benefit for the respective quarters 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 June 30, 2005, the Company recorded a net loss
of $50, compared to a net loss of $111 for the quarter ended June 30, 2004. On a
year-to-date basis the net loss was $70 in 2005 compared to $100 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
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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, 2004, the Company had a
tangible net worth deficit of $14,905 and total liabilities of $17,915. As of
June 30, 2005, the Company had a tangible net worth deficit of $14,975 and total
liabilities of $17,391. The Company had a working capital deficit, inclusive of
liabilities and other items subject to compromise, of approximately $14,361 as
of June 30, 2005, compared to working capital deficit of $13,990 as of December
31, 2004. 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 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 $768, including accrued
interest, at June 30, 2005.
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 at 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 June 30, 2005, the Company had accrued approximately $1,179 for legal
assistance throughout the bankruptcy period. As of December, 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 Sections 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
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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 EGC, 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 six months ended June 30,
2005 was $305, principally related to net income before reorganization expenses
of $122 and reductions in trade accounts receivable, affiliate receivables and
inventories of $122, $8 and $249, respectively. Non-cash charges during the
second quarter of 2005 were $10 and deferred revenues increased by $19. In
addition, cash on deposit with the Company's lender declined by $271. These
amounts were offset by reductions in accounts payable and accrued expenses of
$324, increases in other assets, principally cash collateral, of $145 and
increases in other receivables of $28. Net cash provided by operating activities
during the six months ended June 30, 2004 was $556, principally related to
reductions in inventories of $730, income before reorganization expenses of $89
and increases in accounts payable and accrued expenses of $82. This amount was
offset by increases in trade accounts receivable and affiliate receivables of
$404, a reduction in the balance of deferred revenues of $74, and non-cash
credits of $24 relating to the reversal of previously accrued reserves against
trade accounts receivable.
For the six months ended June 30, 2005, net cash used in reorganization
activities was $42 composed primarily of professional expenses of $150, fees of
the U.S. Trustee administering the bankruptcy case of $14 and facility
relocation expenses of $20. These expenses were offset by increases in accrued
liabilities of $150, principally for legal expenses. Net cash used in
reorganization activities for the six months ended June 30, 2004 was $162, which
amount included $189 of expenses primarily related to the Company's relocation
of its manufacturing facility, offset by increases in accrued liabilities of
$27, principally for legal expenses, and cash proceeds of $23 from the sale of
excess machinery and equipment.
Net cash used in investing activities for the six months ended June 30, 2005 and
2004, consisted of equipment purchases of $18 and $14, respectively.
During the first and second quarters of 2005 and 2004, net cash used in
financing activities was $369 and $645, respectively, consisting of net payments
to EGC and Valtec under the respective DIP financing agreements.
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,
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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 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
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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 places its investments with high credit quality issuers and, by
policy, is averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk and reinvestment risk.
As of June 30, 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 as of June 30, 2005. 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
Plaintiff's rights under the Employee Retirement Income Security Act 29 U.S. C.
of 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. Section 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 6, 2006
Boundless Corporation
By: /s/ Joseph Gardner
--------------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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