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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 2005
Commission File Number 0-17977
BOUNDLESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3469637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Engineers Lane Farmingdale, NY 11735
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 962-1500
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the last sale price of the registrant's
Common Stock on December 31, 2005, is $0.
As of March 31, 2006 the registrant had 6,705,613 shares of Common Stock,
$.01 par value per share, outstanding.
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Boundless Corporation and Subsidiary Companies Report on Form 10-K
For the Year Ended December 31, 2005
Page
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PART I
Item 1. Business 2
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34
Item 9A. Controls and Procedures 35
Item 9B Other Information 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 41
Item 13. Certain Relationships and Related Transactions 43
Item 14. Principal Accountant Fees and Services 43
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 45
Signatures 50
Section 302 Certification (Filed as Exhibit 31)
Section 906 Certification (Filed as Exhibit 32)
PART I
ITEM 1. BUSINESS
Boundless Corporation (the "Company") was incorporated in 1988 under the
laws of the State of Delaware. The Company through its subsidiaries, Boundless
Technologies, Inc. ("Boundless Technologies") and Boundless Manufacturing
Services, Inc. ("Boundless Manufacturing"), is a manufacturer of text terminals
and provider of manufacturing services. The Company's headquarters is located at
50 Engineers Lane, Farmingdale, New York 11735 (telephone number (631)
962-1500).
This Form 10-K 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-K, 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 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
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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.
Bankruptcy Considerations
The following discussion provides general background information regarding
our Chapter 11 cases, and is not intended to be an exhaustive summary.
A. Pre-Petition History
Boundless, a publicly-held Delaware corporation, was incorporated in 1988.
Through its subsidiaries, Boundless Technologies and Boundless Manufacturing,
Boundless provides text terminals and manufacturing services.
Boundless Technologies principally designs, sells and supports desktop
computer display terminals without graphics' capabilities. It offers custom and
standard models of display terminals primarily to retail, financial,
telecommunications and wholesale distribution businesses which utilize them for
data entry and point-of-sale activities.
Boundless Manufacturing operates in the electronic manufacturing services
("EMS") marketplace. It provides services in supply chain optimization, global
supply base management, systems assembly and testing, distribution and
logistics, repair centers and end-of-life management. It offers in-house
engineering expertise, product design, test development and product development
for original equipment manufacturers ("OEM").
The operating losses generated by Boundless Manufacturing, in combination
with the economic downturn following September 11, 2001, caused the Company and
its subsidiaries, on March 12, 2003, (the "Petition Date"), to seek protection
under Chapter 11 of the Bankruptcy Code.
B. Pre-Petition Credit Facility with CIT Group/Business Credit, Inc.
Pursuant to a Financing Agreement dated June 27, 2002, the Company entered
into a credit facility with the CIT Group/Business Credit, Inc. ("CIT"). Under
this credit facility, CIT agreed to make loans and advances to the Company in
amounts of up to 85% of their aggregate outstanding "eligible" accounts, plus
the lesser of 10% of the aggregate value of the Company's eligible inventory,
85% of the appraised inventory liquidation value or $200,000, whichever is less.
The credit facility also provided for revolving loans with a maximum
availability under the credit facility of $8.5 million. As security for the
aforementioned credit facility, the Company granted CIT a security interest in
and to substantially all of its personal property.
Prior to the Petition Date, CIT advised the Company that it would not make
any further advances (the "Notification"). At that time, the Company owed CIT
approximately $600,000. During the ten day period subsequent to the
Notification, payments of the Company's receivables to CIT satisfied all or
substantially all of the amounts due and owing to CIT. By assignment dated
February 21, 2003, CIT assigned all of its right, title and interest in and to
the CIT Credit Facility to Valtec Capital Corporation ("Valtec"). Prior to this
assignment, Valtec was a subordinated secured creditor of the Company.
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C. Pre-Petition Credit Facility with Valtec
By a loan and security agreement dated December 3, 2002 (the "Valtec Loan
Agreement"), the Company consolidated prior borrowings and received additional
borrowings from Valtec in the aggregate amount of approximately $1.2 million
(plus accrued and unpaid interest and other charges). Valtec agreed to provide
debtor-in-possession financing to the Company so that the Company could continue
to operate its respective businesses as going concerns, provided that the
Company filed a petition under Chapter 11 and scheduled a sale of all of its
assets pursuant to ss.363 of the Bankruptcy Code shortly after the filing of the
Company's Chapter 11 petitions.
D. Procedural History
The Company and its subsidiaries filed their respective petitions for relief
pursuant to the Bankruptcy Code on March 12, 2003 (the "Petition Date"). On
March 14, 2003, the Bankruptcy Court signed an Order directing that the
bankruptcy cases be consolidated for procedural purposes and jointly
administered. On March 25, 2003, an Official Committee of Unsecured Creditors
(the "Committee") was appointed. The law firm of Platzer Swergold Karlin Levine
Goldberg & Jaslow, LLP was retained to represent the Committee.
E. The Company's Administrative Period
During the period from the Petition Date through and including January 28,
2005, Valtec provided debtor-in-possession financing ("Valtec DIP Financing") to
the Company. Pursuant to the Bankruptcy Court's Interim Order entered on April
17, 2003 (the "Interim Order"), the Bankruptcy Court approved: (i) the Company's
use of Valtec's cash collateral ("Valtec's Cash Collateral"); (ii) direct
borrowings from Valtec of an amount up to $1,500,000; and (iii) the
Debtor-in-Possession Financing and Security Agreement by and among Valtec and
the Company (the "DIP Financing Agreement").
As a condition to the Valtec DIP Financing, Valtec required the Company to
enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company. By
Order dated April 16, 2003, the Bankruptcy Court approved the Company's
execution of the Ansen Agreement.
Pursuant to the terms and conditions of the DIP Financing Agreement, on or
before April 30, 2003, the Company was obligated to seek an order pursuant to
ss. 363 of the Bankruptcy Code authorizing the sale of substantially all of
their personal property free and clear of liens, claims and encumbrances (the
"ss. 363 Motion"). On March 27, 2003, the Company filed the ss. 363 Motion.
However, prior to the scheduled auction sale date, Vision Technologies, Inc.
("Vision") submitted a written offer to the Company to provide replacement
debtor-in-possession financing in exchange for receiving seventy (70%) percent
of the Company's equity when the Company confirmed the Plan.
In an effort to reorganize the Company and provide a return to their
creditors, which the Company believed would not be effected through the proposed
ss.363 sale, on April 30, 2003, on the Company's motion (the "April 30th
Motion"), the Bankruptcy Court signed an Order to Show Cause that scheduled a
hearing on May 8, 2003, to consider, inter alia, the Company's request to: (i)
withdraw the ss. 363 Motion; (ii) obtain replacement debtor-in-possession
financing from Vision; (iii) utilize Valtec's Cash Collateral; and (iv) approve
an agreement among the Company, the Committee and Vision (the "Vision
Agreement").
Pursuant to Order of the Bankruptcy Court entered on May 1, 2003 (the "May
Order"), and upon the May 8, 2003 hearing (the "May 8 Hearing"), the Bankruptcy
Court authorized the Company to borrow a total of $375,000 from Vision on an
emergency basis pending the Bankruptcy Court's final determination of the April
30th Motion, pursuant to and conditioned upon the terms and conditions contained
in the May Order, and as supplemented by the record of the May 8 Hearing
(respectively, the "Vision Advances" and the "Vision Priming Orders").
At a hearing held on May 14, 2003, the Court authorized the Company to
utilize up to $581,000 of Valtec's Cash Collateral (proceeds of collection of
receivables and sale of inventory) pursuant to and conditioned upon the terms
and conditions recited into the record of the May 8 Hearing (the "May 14th Cash
Collateral Order"). Pursuant to the May 14th
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Cash Collateral Order, the Company paid Valtec $300,000 to reduce the Company's
obligations to Valtec under the Valtec DIP Financing Agreement (the "DIP Debt"),
and additional amounts were paid to Valtec as adequate protection for the
Company's use of inventory which was acquired by the Company post-petition and
which collateralized in part the DIP Debt.
After significant negotiations at a hearing held on May 28, 2003, the parties
(the Company, the Committee, Vision and Valtec) informed the Bankruptcy Court
that they had reached an agreement in principle for a settlement on the terms
and conditions read into the record on May 28, subject to a formal stipulation
subsequently prepared and executed by and between such parties. Based upon the
settlement and the terms and conditions recited into the record, Valtec
consented to, and the Bankruptcy Court authorized, the Company's use of
additional amounts of Valtec's Cash Collateral on the terms and conditions
contained in the May 14th Cash Collateral Order (together with the May 14th Cash
Collateral Order, the "Valtec Cash Collateral Orders").
F. Valtec Settlement and Agreement with Vision
The settlement stipulation dated June 11, 2003 (the "Settlement Stipulation")
by and among the Company, the Committee, Vision and Valtec resolved all then
outstanding issues with Valtec and incorporated by reference an amended version
of the Vision Agreement dated May 11, 2003 (the "Amended Vision Agreement"). The
Settlement Stipulation and the Amended Vision Agreement were "So Ordered" by the
Bankruptcy Court on June 18, 2003. Pursuant to the Settlement Stipulation the
parties agreed as follows:
1. As of the close of business May 27, 2003, the Company's total
obligation to Valtec was $1,592,000 comprised of: (i) $1,434,000 of
pre-petition debt ("Pre-Petition Obligations"); and (ii) the DIP
Debt of $158,000 (collectively, the "Valtec Obligations").
2. The pre-petition obligations to Valtec were valid, enforceable and
not subject to any claim, counterclaim, set-off or defense of any
kind or nature.
3. The Pre-Petition Obligations to Valtec were fully secured.
4. The DIP Debt was fully secured.
5. Payment of the DIP Debt, through a combination of amounts paid to
Valtec to reimburse it for inventory acquired by the Company, in
part utilizing financing provided by Vision, was to be made in
weekly payments of $13,000, plus payment for inventory at the
Company's cost. As of December 31, 2005, the Company has made all of
such required payments.
6. Upon payment of the DIP Debt, the Pre-Petition Obligations will be
paid by a combination of equal weekly payments in the amount of
$7,500 through the Confirmation Date and subsequent to confirmation,
in equal monthly payments thereafter for a period of 30 months (or
34 months in the event that Valtec advanced the Professional Fees
Payment of $200,000 as defined herein) with interest at a rate of
8%, collateralized by a first lien on all of the Company's assets.
7. If on the Confirmation Date the Company does not have sufficient
cash to pay in full the allowed fees of the professionals retained
by the Company and the Committee, Valtec will advance up to $200,000
to the Company to be applied toward the payment of such fees (the
"Professional Fees Payment"), which amount shall be added to, and
become part of the Pre-Petition Debt.
8. Vision would provide supplemental financing to the Company in an
amount up to $650,000 plus interest (inclusive of the Vision
advances theretofore provided) as contemplated by the Amended Vision
Agreement. Payment of the Vision Debt will commence subsequent to
payment in full of the Valtec Obligations, and shall be secured by a
lien subordinate to the lien securing payment of the Valtec
Obligations. As of December 31, 2004, the amounts due under the
Valtec and Vision Claims were approximately $638,000 and $738,000
(with interest), respectively and the amount of the collateral (as
defined in the Settlement Stipulation) collateralizing these claims
amounted to approximately $2,225,000. On January 31, 2005, we
entered into an agreement with Valtec to terminate our
debtor-in-possession ("DIP") financing and to release their liens on
our personal property. At the same time, we entered into another
secured DIP financing agreement with Entrepreneur Growth Capital,
LLC ("EGC") pursuant to which EGC was granted a lien on all of our
personal property.
9. Valtec authorized the continued use of Valtec's Cash Collateral
during the pendency of the Plan.
10. As required in the Settlement Stipulation, the Company is and shall
be required to maintain collateral margins of
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$100,000 in excess of the Valtec Obligations, and provide Valtec
with financial information on a weekly basis. As of December 31,
2004, the Company had met both the excess collateral margin and
reporting requirements. The termination of the Valtec DIP financing
on January 31, 2005, released the Company from its obligations with
respect to the excess collateral margin and reporting requirements.
Pursuant to the Amended Vision Agreement by and among the Company, the
Committee and Vision, the parties agreed as follows:
1. Vision would advance to the Company an amount up to $650,000 to be
secured by a security interest upon substantially all of the
Company's assets, subordinate to the security interest securing
payment of the Valtec Obligations.
2. The establishment of an executive committee acceptable to Vision.
There is no overlap in functions or duties between the executive
committee and the Board of Directors. The executive committee of the
Board of Directors is responsible for the creation and execution of
the Company's strategic business plan. As of March 31, 2006 the
executive committee was comprised of Mr. Frank Stephens, a current
member of the Company's Board of Directors; Mr. John Ryan, the
Company's Chief Operating Officer; and, Mr. Joseph Gardner, the
Company's Chief Financial Officer. No compensation is paid to any
member of the executive committee as a result of being a member of
the executive committee.
3. Cancellation of all existing capital stock of the Company, and
issuance of a new class of capital stock pursuant to the terms and
conditions of the Amended Vision Agreement or as otherwise agreed by
the parties.
4. Payment of Valtec's Pre-Petition obligations over a term of up to 34
months subsequent to Confirmation, and continued use of Valtec's
Cash Collateral.
5. Vision shall have the right to appoint all members of the board of
directors of the reorganized Company post-confirmation.
6. The Company would propose a joint plan of reorganization with Vision
(and the Committee if the Committee believes it to be in the best
interest of creditors).
7. In the event that any entity other than Vision shall acquire or be
entitled to acquire a majority of the Company's Capital Stock as a
going concern or acquire all or substantially all of the Company's
assets Vision shall receive a break-up fee in the amount of $100,000
pursuant to paragraph A(8) of the Amended Vision Agreement.
8. Upon the Bankruptcy Court's approval of the Settlement Stipulation,
Amended Vision Agreement and related documents on June 18, 2003,
Vision funded the remainder of the $650,000 ($100,000 of which was
held in escrow and utilized for payment of the fees and expenses of
the professionals for the Company and the Committee, which escrow
amount with the Vision Advances was the "Vision Funding").
9. If the Company files a plan other than as described hereinabove,
which does not provide Vision with the benefits of the Amended
Vision Agreement, then as a condition precedent to the confirmation
of any other Plan, Vision must be paid in full (together with a
break-up fee of $100,000) on the Effective Date, as set forth in
paragraph 8 of the Amended Vision Agreement.
G. Valtec Settlement and Agreement with Entrepreneur Growth Capital, LLC
On November 30, 2004, the Company filed a motion with the Bankruptcy Court
for an order authorizing the Company to (i) incur post-petition secured
indebtedness, and (ii) grant a security interest and priority claims pursuant to
Sections 364(c) and 364(d) of the Bankruptcy Code. On January 27, 2005, the
Bankruptcy Court approved the order.
On January 31, 2005, the Company entered into an agreement with its
secured lender Valtec Capital, LLC, as assignee of Valtec Capital Corporation,
(the "Prior Lender") to terminate our debtor-in-possession ("DIP") financing and
to release their liens on our personal property. At the same time, the Company
entered into another secured DIP financing agreement (the "EGC Agreement") with
Entrepreneur Growth Capital, LLC ("EGC") pursuant to which EGC was granted a
lien on all of our personal property. The original term of the EGC Agreement was
one year; and, on January 31, 2006, the EGC Agreement was extended for an
additional six months.
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In general, the EGC Agreement permits us to borrow up to 80% of our
eligible accounts receivable. Under the EGC Agreement, the annual interest rate
is 6% above the prime rate announced by Citibank, N.A. and we are required to
pay a monthly service fee equal to three quarters of one percent (0.75%) of the
face value of invoices assigned to EGC for the preceding month. The EGC
Agreement requires us to pay minimum monthly interest of $5,000 even though our
actual borrowings may result in a lesser interest charge. The Company is
responsible for certain fees and fees for early termination of the facility. The
maximum availability under the EGC Agreement is $1,000,000.
In return for termination of the prior DIP financing we also agreed to pay
Valtec Capital a total of $100,000 for legal fees they incurred during our
bankruptcy period. This amount is payable to Valtec Capital on the date that our
Plan of Reorganization becomes effective.
On February 2, 2005, the Company filed, as exhibits, the EGC Agreement on
Form 8-K with the Securities and Exchange Commission.
H. Sale of 100 Marcus Avenue, Hauppauge, New York
On or about September 17, 2003, pursuant to that certain Purchase and Sale
Agreement ("Purchase 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 $250,000 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 $2,271,000.
On or about September 17, 2003, the Company, ICB and JPMorgan Chase
entered into that certain Proceeds Distribution Agreement (the "Proceeds
Agreement), which provided for the distribution of the net proceeds of the sale
of the Premises between those parties. Notwithstanding that the outstanding
amounts of the mortgages far exceeded the sale proceeds of the Premises,
pursuant to the Proceeds Distribution Agreement, the Company received $250,000
from such proceeds of the sale of the Premises.
On or about December 9, 2003, the Court signed: (i) the Order approving
the Purchase Agreement with 100 Marcus LLC; and (ii) the Order approving the
Proceeds Agreement. The closing of the Premises took place on or about December
23, 2003, and on or about December 30, 2003, the Company received $190,000
pursuant to the Proceeds Agreement. On or about May, 2004 the remaining balance
in the escrow was released to the Company.
Pursuant to the Purchase Agreement and the Proceeds Agreement, the
remaining claims of ICB and JPMorgan Chase shall be treated as general unsecured
claims.
I. Miscellaneous
Immediately prior to the Petition Date, the Company reduced its staff from
125 to 70. Subsequent to the Petition Date, the Company further reduced the
number of its employees to 35. The Company's business plan focuses primarily on
the manufacturing, sale and support of its text terminal products, while
releasing a series of more modern replacement products. The Company plans to
exploit its history of success and well-established customer base in the
Point-of-Sale (POS) market. The Company further plans to capitalize on its
post-manufacturing services capability by expanding into the repair of
third-party products produced by its existing OEM customers (such as NCR, IBM
and Hewlett Packard). The Company presently
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has retained some, though greatly reduced, research and development capability,
and has reduced marketing functions.
We continue to operate our businesses as "debtors-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. All vendors are being paid for all goods furnished and
services provided after the Petition Date in the ordinary course of business.
However, under Section 362 of the Bankruptcy Code, actions to collect most of
our pre-petition liabilities are automatically stayed. Most of these
pre-petition liabilities will be settled under a plan of reorganization which
must be approved by the Bankruptcy Court.
To successfully exit Chapter 11, we must obtain confirmation by the
Bankruptcy Court of a plan of reorganization. A plan of reorganization would,
among other things, resolve our pre-petition obligations, set forth our revised
capital structure and establish our corporate governance subsequent to exit from
bankruptcy. The decision as to when we will file a plan of reorganization
depends on the timing and outcome of numerous ongoing matters in the Chapter 11
process. We expect to file a plan of reorganization that provides for the
Company's emergence from bankruptcy, but there can be no assurance that the
creditors eligible to vote on our plan will support our positions or our plan of
reorganization (disagreements between us and those eligible to vote on our plan
could adversely affect our reorganization process, including our emergence from
Chapter 11). Nor can there be any assurance that the Bankruptcy Court will
confirm a plan of reorganization or that any such plan will be implemented
successfully.
We are working towards emerging from Chapter 11 no later than April 30, 2006,
but that timing is dependent on, among other things, the timely and successful
confirmation and implementation of a plan of reorganization. The rights and
claims of various creditors and security holders will be determined by the plan
as well. At this time, it is not possible to predict accurately the effect of
the Chapter 11 reorganization process on our business, nor can we make any
predictions concerning how each of these claims will be valued in the bankruptcy
proceedings. We believe that Boundless' 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 investments in any
Boundless security.
The Company has commenced preliminary negotiations to have one of its inactive,
non-operating subsidiaries become acquired through a "reverse merger" by an
operating company organized in China which desires to become a public company.
If consummated, approximately 10% of the outstanding common stock of the
post-merged company will remain with Boundless, in which case approximately
one-half of that interest will be distributed to the unsecured creditors.
In the event that Boundless Technologies is the subsidiary that is "reverse
merged" then Boundless will transfer approximately 25,000 of the shares it
receives to each of Mr. Stephens and Mr. Bowman, currently directors of the
Company.
For more information on our bankruptcy proceedings, see Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 1, "Voluntary Reorganization under Chapter 11" in the Notes to Consolidated
Financial Statements.
General
Boundless Technologies, a wholly-owned subsidiary, is engaged in supplying
computer terminals for commercial use. The Company's general strategy is to
provide fast, easy-to-use, and cost-effective products that enable access to
applications and data in commercial environments, as well as older "legacy"
applications, running on mainframes, mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports (i) desktop
computer display terminals, which generally do not have graphics capabilities,
("General Display Terminals"), and (ii) other products that are used in
multi-user computing environments. Boundless Technologies offers standard and
custom models of its General Display Terminals primarily to retail, financial,
telecommunications and wholesale distribution businesses requiring them for data
entry and point of sale activities.
Boundless Manufacturing is pursuing opportunities in the electronic
manufacturing services ("EMS") marketplace. As of December 31, 2005 and 2004,
the Company owned 75% of the outstanding shares of common stock of this
subsidiary. Services include supply chain optimization, global supply base
management, systems assembly and test, distribution and logistics, repair
centers and end-of-life management. Boundless Manufacturing also offers in-house
engineering expertise- product design, test development and product development-
to significantly reduce time-to-market for original equipment manufacturers
("OEM") customers. Boundless Manufacturing provides a complete supply chain that
is designed and built to each customer's specifications. Boundless Manufacturing
also has post-manufacturing support
8
capability in New York and Atlanta.
Products and Services
General Display Terminals. The Company's General Display Terminals are
ANSI/ASCII desktop text terminals, which generally do not have graphics
capabilities. The Company offers standard and custom models, primarily for data
entry and point of sale activities. General Display Terminals are sold by the
Company under the Company's ADDS(R), Dorio(R) and VT(R) trademarks, as well as
under OEM customers' trademarks. The ADDS, Dorio and VT brands are complementary
products, providing slightly different features to various user segments.
Electronic Manufacturing Services. Boundless Manufacturing Services
participates in the EMS market space and provides services that include
build-to-order mass-customized manufacturing, supply chain optimization, global
supply base management, systems assembly and test, distribution and logistics,
repair centers and end-of-life management. Boundless Manufacturing also offers
in-house engineering expertise- product design, test development, product
development- to significantly reduce time-to-market for OEM customers. Boundless
Manufacturing provides a complete supply chain that is designed and built to
each customer's specifications.
Boundless Manufacturing is focused on delivering a level of service and
commitment, to both middle-market OEMs and start-up companies, that is currently
only available to top tier customers from the larger EMS companies. In addition,
it pursues smaller programs with larger OEM customers typically serviced by
larger competitors. Boundless Manufacturing will develop relationships with
those OEMs and ODMs whose supply chains can be completed or complemented by the
company's unique capabilities, and diversify revenue risk by winning customers
in several vertical markets including data storage, public and private
telecommunications systems, office technology products, industrial controls and
custom or embedded "PC" applications.
Percentage of Total Revenues. The table below sets forth, for each of the
three calendar years ended December 31 the percentage of total revenue
contributed by those classes of similar products or services which accounted for
a material portion of consolidated revenue in any of such years. Material
inter-company revenue has been eliminated.
General Display Electronic Manufacturing
Period Terminals Services
------ --------- --------
2005 89.7% 10.3%
2004 87.6% 12.4%
2003 88.0% 12.0%
9
Foreign Sales. Net foreign sales were approximately $1,527,000,
$1,929,000 and $3,473,000 for 2005, 2004 and 2003, respectively. The tables
below set forth, for each of the three calendar years ended December 31, the
approximate percentage of total revenue attributable to foreign sales and the
percentage attributable to the European region.
% of Total Revenue
------------------
Period Total Europe
------ ----- ------
2005 25.5% 23.7%
2004 26.4% 20.9%
2003 29.6% 25.3%
Manufacturing
Assembly Operations. The Company's manufacturing operations are
located in Farmingdale, New York, and include procurement of components and the
assembly and testing of its products. Investment in production equipment has not
been material to the Company's manufacturing operations. Semi-skilled and
skilled workers assemble products using a cell-based manufacturing process that
allows the Company to assemble various products at mass production costs. The
Company generally cross-trains its workers so that they are able to work at all
work stations. Once assembled, all systems undergo a test cycle, using
sophisticated diagnostic procedures and test equipment.
The Farmingdale facility has a flexible manufacturing control system
that is run by software developed by the Company. This system provides a
flexible, customer-focused manufacturing approach that enables the Company to
quickly customize products for orders of one to one thousand. Just-in-time
systems allow the Company to achieve efficient asset utilization and fast
response time to customers. The Company is generally able to fill orders within
three to five days after receipt of an order. Accordingly, backlog has not
traditionally been material to the Company.
The Company is using approximately 23,000 of its 32,000 square feet
of space in the Farmingdale, NY, facility for manufacturing and has the capacity
to meet its current and anticipated production needs.
Suppliers. The Company purchases subassemblies and components for
its products from more than 40 domestic and Far East suppliers. Purchases from
Radiance Electronics, Ansen Corporation and Video Display Corporation accounted
for approximately 39%, 18% and 9%, respectively, of the dollar amount of the
Company's total purchases of subassemblies and components in 2005. Purchases
from Radiance Electronics, Ansen Corporation and Video Display Corporation
accounted for approximately 34%, 20% and 9%, respectively, of the dollar amount
of the Company's total purchases of subassemblies and components in 2004. In
2003, Radiance Electronics, Ansen Corporation and Hewlett Packard accounted for
approximately 24%, 20% and 18%, respectively, of the dollar amount of the
Company's total purchases of subassemblies and components.
As a condition to the Valtec DIP Financing, Valtec required the Company to
enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company.
The Company was subject to supply disruption due to the production transition;
however, as of July 1, 2003, Ansen had successfully transitioned production to
its manufacturing facility and had achieved mass-production capability.
The Company placed on Ansen initial purchase orders for certain components
with committed delivery dates beginning March 2003. The failure of Ansen to
timely deliver the components resulted in the cancellation or rescheduling of
customer orders placed on the Company; and generally resulted in a reduction of
the number of components required by
10
the Company with respect to the original delivery dates. On November 7, 2003,
Ansen notified the Company of its intention to terminate the Ansen Agreement due
to the alleged failure of the Company to accept and pay for the components as
originally scheduled. By subsequent agreement, the Company will continue to
purchase any remaining components from Ansen as needed; and, should any
components remain as of the Effective Date, the Company will purchase the then
remaining balance. As of December 31, 2005, Ansen continues to deliver the
components to the Company and the balance due Ansen is approximately $50,000.
While there are at least two qualified suppliers for the subassemblies and
components that are made to the Company's specifications, the Company generally
sources such items from a single supplier so that it can take advantage of
volume discounts and more easily ensure quality control. The Company estimates
that the lead-time required before an alternate supplier can begin providing the
necessary subassembly or component would generally be between six to ten weeks.
The disruption of the Company's business during such period of lead-time could
have a material adverse effect on its sales and results of operations. In the
event of a prolonged interruption in the supply chain, the Company's cash flow
and working capital position would be adversely affected.
Warranties. The Company provides a one-year warranty covering defective
materials and workmanship. The Company's products are serviced at depots that
are geographically dispersed throughout the world. Users can purchase extended
warranties of up to three years or can pay for repairs on a time and materials
basis. For the years 2005, 2004 and 2003, the Company's cost of warranty repairs
was less than 1%, respectively, of the Company's total revenues. The Company
does not warrant software, but users are permitted to return software for a
refund within 30 days after purchase. Accordingly, customers are afforded the
opportunity to use software on a trial basis through the Company's evaluation
program. A provision for potential warranty liability is recorded at the time
revenue is recognized.
Research and Development. During 2005, 2004 and 2003, the Company expended
approximately $208,000, $150,000 and $170,000, respectively, on research and
development activities. Boundless' research and development activities have
historically related primarily to General Display Terminals and Windows-based
terminals. As part of the Company's restructuring activities, significant
reductions in the staffing were implemented in March 2003, resulting in lower
research and development expenditures as compared to the Company's historical
experience. Additionally, because General Display Terminals are mature products,
development activities in the recent past year have only included enhancements
to the existing product family. In addition, the Company incurred research and
development costs of $27,000 and $102,000, respectively; which expenses are
included in "Loss on reimbursement of employee services" on the Company's
statement of operations, as these costs were components of that reimbursement.
Sales and Marketing
Boundless Technologies markets its terminal products through OEMs and
other multi-tier distribution channels. OEMs that do not want to maintain
engineering or manufacturing resources can obtain products with their brand name
from Boundless Technologies. Customers can buy Boundless Technologies' products
from an international network of value-added resellers (VARs) and regional
distributors. In order to reduce its dependence on existing OEM customers,
Boundless Technologies has been increasing its distribution channel marketing
and sales efforts and seeking additional OEM customers. Through its sales force,
Boundless Technologies sells directly to large VARs and regional distributors
and also sells to major national and international distributors. Boundless
Technologies' sales force operates out of two geographically dispersed locations
in the United States and a European office in the United Kingdom.
In selling its General Display Terminals, Boundless Technologies
emphasizes customization, reliability and compatibility with a broad range of
UNIX, Pick and other operating systems.
Boundless Technologies uses direct mail, telemarketing and cooperative
marketing to promote its products. The company believes the most effective way
to reach this market is via cooperative marketing with its channel partners.
Boundless Technologies' business is not seasonal. The third quarter of the
calendar year contributes slightly less revenue, as a percent of the total
year's revenue, due to extended vacation periods in Europe, where sales of the
company's VT/Dorio products are strong. Other fluctuations in quarterly sales
result from large orders that are unrelated to the time of
11
year.
Boundless Manufacturing services include systems assembly, test,
distribution and logistics, repair centers and end-of-life management. Boundless
Manufacturing also offers in-house engineering expertise- product design, test
development, product development- to significantly reduce time-to-market for OEM
customers. Boundless Manufacturing provides a complete supply chain that is
designed and built to each customer's specifications.
The Company has effectively implemented an outsourcing strategy and cut
manufacturing costs for many prominent OEMs. Boundless Manufacturing is also
focused on delivering a level of service and commitment to middle-market OEMs
and start-up companies that is currently only available to top tier customers
from the larger EMS companies. Boundless Manufacturing's strategy, the
implementation of which is dependent on its ability to raise working capital,
includes aggressively expanding our geographic footprint, service offering,
technology base, and information technology infrastructure.
For 35 years, Boundless Technologies has manufactured high quality
products and offered a full suite of supporting services. In the last decade,
Boundless Technologies has specialized in build-to-order mass-customized
manufacturing, a capability that has evolved into a key core competency that we
believe offers a significant competitive advantage in its key markets.
The Company's Plan of Reorganization contemplates the consolidation of the
Boundless subsidiaries into one legal entity. The new entity will combine and
leverage the expertise and capabilities resident within the Boundless family to
deliver information access and control solutions through its distribution
networks.
For the year ended December 31, 2005, Ingram Micro and 1st Solutions
provided 19% and 11%, respectively, of the Company's total revenue. During the
year ended December 31, 2004, Hewlett Packard, Ingram Micro, and Jetstar
contributed 16%, 14% and 11%, respectively, of the Company's total revenue.
Hewlett Packard and NCR were the Company's most significant customers in 2003,
accounting for approximately 32% and 13%, respectively, of the Company's total
revenue. The Company believes a decline in the level of sales to these
customers, without growth in other areas of its business, could adversely affect
the Company's results of operations and liquidity.
During 2003 Hewlett Packard advised the Company of its intention to
discontinue the sale of certain of the Company's products to Hewlett Packard
customers. Hewlett Packard is transitioning its customers to newer technologies,
including thin client terminals. The Company continues to sell product to
Hewlett Packard, though in smaller volume, and has released the product for sale
to distributors who will sell to customers unwilling to transition to the newer
technologies.
Competition
The Company believes that alternative technologies, particularly
graphics-capable computers, together with the abandoning of text terminals by
both IBM and HP, have eroded the total available market. For 2004, the last year
for which the Company has data, annual units shipped into the text market was
estimated to be between 100,000 to 130,000 units. The Company believes the
market for general purpose text terminals will continue to erode at 20-30%
annually. The decline in text sales has resulted in a consolidation of former
competitors, as well as the outsourcing of production from original equipment
manufacturers to the remaining industry participants. Although industry data is
not available, the Company believes its market share to be approximately 30%,
with Wyse Technologies ("Wyse"), a Taiwanese company, holding an approximate 45%
market share. In the period just prior to the bankruptcy filing, the Company
believed the relative market shares of Boundless and Wyse were approximately
equal at 35% each. The Company believes that the market will continue to decline
and therefore lead to additional consolidation. Any market share increases for
the Company will come at the expense of current industry competitors. General
Display Terminal customer purchase criteria are based on quality, availability,
customization, compatibility with other terminals, and price. The Company holds
the leadership position in this market.
12
Patents, Trademarks and Licensing
The Company owns approximately 20 patents relating to General
Display Terminals issued in the United States and various foreign countries,
none of which is believed to be material to its business. The patents expire
during the next eight years, with expiration dates ranging from January 2006
through August 2013. The Company believes that the knowledge and experience of
its management and personnel and their ability to develop, manufacture and
market the Company's products in response to specific customer needs is more
significant than its patent rights.
The trademarks ADDS, Viewpoint, VT, and Dorio, are registered in the
United States Patent and Trademark Office and in a number of foreign countries.
Backlog
We believe that backlog is not a meaningful indicator of future business
prospects due to the build-to-order manufacturing processes employed by the
Company. This process allows the Company to manufacture product to customer
specification within three days of the receipt of the customer order. Therefore,
we believe that backlog information is not material to an understanding of our
overall business.
Environmental Regulation
Amounts incurred by Boundless in complying with federal, state and local
legislation pertaining to protection of the environment during the past three
years did not have a material effect upon capital expenditures or the financial
condition of the Company. It is our policy to apply strict standards for
environmental protection to sites inside and outside the U.S., even when not
subject to local government regulations. State and local agencies, as well as
federal lawmakers, may impose new laws and regulations that could have a
significant impact on our business.
Employees
At March 31, 2006, the Company had approximately 31 full-time employees
engaged as follows: 3 in product design and engineering, 21 in manufacturing and
repair services, 2 in sales, systems services and marketing and 5 in
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers relations with its employees to be
satisfactory.
ITEM 1A. RISK FACTORS
The following factors relating to the Company, its business and management
should carefully be considered in evaluating the Company and its prospects.
Organizational restructuring. The Company has undergone significant
organizational restructuring and it faces substantial operational challenges. We
are in the process of evaluating our future strategic direction. We have been
forced to take drastic actions to reduce operating costs and preserve our
remaining cash. For example, in March 2003 we effected a reduction in force that
reduced our workforce from approximately 125 to 70 employees. Subsequent actions
further reduced the number of employees to approximately 31. The elimination of
certain engineering and other personnel may have a negative effect on our future
revenues and growth prospects and our ability to support new product initiatives
and generate customer demand.
Going Concern Modification. The reports of our independent registered
public accounting firms contained in the Report on Form 10-K for the years ended
2001 through and including 2005 contain a going concern modification.
Recent Operating Losses. We have incurred operating losses in our last six
fiscal years. There can be no assurance
13
that we will be able to achieve or sustain profitable operations in the future.
Tax Implications of Bankruptcy. Certain tax implications of our bankruptcy
and reorganization may increase our tax liability. Certain U.S. tax attributes
of Boundless, including net operating loss carryovers, or NOLs, have been
reduced or eliminated as a consequence of our bankruptcy and reorganization. The
elimination or reduction of NOLs and such other tax attributes may increase the
amount of tax payable by Boundless following its reorganization as compared with
the amount of tax payable had no such reduction been required.
Debt Structure and Liquidity. As of December 31, 2005, we had a tangible
net worth deficit of $15,006,107 and total liabilities of $17,009,717. In
addition, as of December 31, 2005, we had a working capital deficit of $9,568
excluding $14,586,204 of liabilities subject to compromise in the bankruptcy.
Strategy. Industry-wide sales of general purpose text terminals have been
declining over the past years. Approximately 90% of the Company's sales for the
fiscal year ended December 31, 2005 were of general purpose text terminals.
Recognizing the impact of this decline on our profitability and liquidity, we
are advancing the strategies discussed above. There can be no assurance our
strategy will be successful.
Dependence Upon Key Personnel. Our success will depend upon our key
management, sales and technical personnel. We do not have employment contracts
with any of our employees. In addition, we believe that, to succeed in the
future, it will be required to continue to attract, retain and motivate
additional skilled executive and technical sales and engineering employees who
are in short supply because of great demand throughout the industry for their
services. The loss of any of our existing key personnel or the inability to
attract and retain key employees in the future could have a material adverse
effect on our business.
New Products and Technological Change. The computer industry is
characterized by a rapid rate of product improvement, technological change and
product obsolescence. Inventory management is critical to decreasing the risk of
being adversely affected by obsolescence and there is no assurance that our
inventory management and flexible manufacturing systems will adequately protect
against this risk.
Dependence Upon Suppliers; Trade Terms; Shortages of Subassemblies and
Components. We purchase subassemblies and components for our products almost
entirely from more than 40 domestic and Far East suppliers. As a result of our
financial condition, the majority of our purchases are transacted under
"cash-in-advance" terms. Prior to our reorganization, certain important
suppliers altered a number of ordinary trade terms, including shortening the
length of time required to pay for goods and services and the imposition of
restrictive credit requirements. We cannot assure that our suppliers will not
impose further restrictive pricing and trade terms and policies in the future.
Such terms could adversely affect our ability to grow our business.
While there are at least two qualified suppliers for the subassemblies and
components that are made to our specifications, we generally source such items
from a single supplier so that we can take advantage of volume discounts and
more easily ensure quality control. We estimate that the lead-time required
before an alternate supplier can begin providing the necessary subassembly or
component would generally be between six to ten weeks. The disruption of our
business during such period of lead-time could have a material adverse effect on
our sales and results of operations. Purchases from Radiance Electronics, Ansen
Corporation and Video Display Corporation accounted for approximately 39%, 18%
and 9%, respectively, of the dollar amount of the Company's total purchases of
subassemblies and components in 2005.
Our adoption of "fresh-start" accounting may make evaluating our financial
position and results of operations, as compared to prior periods, more
difficult. Upon our emergence from bankruptcy pursuant to the Plan of
Reorganization we will implement "fresh-start" accounting. In accordance with
"fresh-start" accounting, all assets and liabilities will be restated to reflect
their respective estimated fair values. As a result, the consolidated financial
statements for our reorganized
14
company starting on and going forward from our emergence from bankruptcy will
not be comparable to our consolidated financial statements for the periods prior
to our emergence. The change in our accounting principles may make it more
difficult to compare our operations to prior periods.
Fluctuations in Quarterly Results. Our quarterly operating results have
fluctuated in the past and may continue to fluctuate in the future due to a
number of factors, including: (i) timing of new product introductions by us and
our competitors; (ii) changes in the mix of products sold; (iii) availability
and pricing of subassemblies and components from third parties; (iv) timing of
orders; (v) difficulty in maintaining margins; and (vi) changes in pricing
policies by us, our competitors or suppliers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2005, the Company's administrative offices and
manufacturing and service activities are currently conducted in a leased
facility of approximately 32,000 square feet of space in Farmingdale, New York.
The lease expires February 28, 2009, and calls for an annual base rent of
$216,000 in the first year of the agreement, escalating to $243,200 in the fifth
year. The Company leases one other small facility in Atlanta, Georgia for depot
repair and support services. The annual lease commitment for this facility is
not material.
ITEM 3. LEGAL PROCEEDINGS
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
our business.
15
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"). 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders of the Company through
the solicitation of proxies or otherwise for the year ended December 31, 2005.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, $.01 par value, ("Common Stock") had previously traded
on The American Stock Exchange ("AMEX") under the symbol BND. However, as a
result of the delisting of our securities, the last day of trading on the AMEX
was April 9, 2003. The Company's securities have traded on the pink sheets since
then under the symbol BDLSQ.PK.
Our Common Stock is subject to the Penny Stock Rules of the SEC. Trading
in our securities has been conducted on the Pink Sheets. As a result, an
investor may find it more difficult to purchase, dispose of and obtain accurate
quotations as to the value of our securities.
In addition, as the trading price of our common stock has been less than
$5.00 per share, trading in our common stock is also subject to the requirements
of Rule 15g-9 under the Securities Exchange Act of 1934. Under that rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including (a) a requirement that they make an
individualized written suitability determination for the purchaser and (b)
receive the purchaser's written consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
also requires additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, any equity security not traded on an
exchange or quoted on The NASDAQ SmallCap Market that has a market price of less
than $5.00 per share), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks therewith. Such requirements could severely limit the market liquidity of
our securities and the ability of stockholders to sell their securities in the
secondary market.
As of March 31, 2006 there were approximately 625 holders of record of the
Company's Common Stock. Price per share information for all of 2004 and 2005
were as reported by CBS Marketwatch.
Year Ended December 31, 2005: High Low
---- ---
First quarter............................. Nil Nil
Second quarter............................ Nil Nil
Third quarter............................. Nil Nil
Fourth quarter............................ Nil Nil
Year Ended December 31, 2004: High Low
---- ---
First quarter............................. $ 0.01 $ 0.01
Second quarter............................ $ 0.05 $ 0.01
Third quarter............................. $ 0.01 $ 0.01
Fourth quarter............................ $ 0.01 $ 0.01
The last sale price of the Company's Common Stock on March 31, 2006 was $ 0.00.
17
The Company believes its 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 investments in any Company
security.
Recent Sales of Unregistered Securities
None
Dividend Policy
The Company presently anticipates that all of its future earnings, if any,
will be retained for development of its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, restrictions on the payment of
dividends imposed by its lenders, future earnings, capital requirements, the
general financial condition of the Company, and general business conditions.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the periods and the dates indicated. The consolidated balance
sheet data and the consolidated statement of operations data as of and for the
year ended December 31, 2001 are derived from the consolidated financial
statements which were audited by BDO Seidman, LLP, an independent registered
public accounting firm. The consolidated balance sheet data and the consolidated
statement of operations data as of and for the years ended December 31, 2005,
2004, 2003 and 2002 are derived from the consolidated financial statements which
were audited by BP Audit Group, PLLC, an independent registered public
accounting firm. The selected financial data as of December 31, 2005 and 2004,
and for each of the years in the three-year period ended December 31, 2005
should be read in conjunction with, and are qualified in their entirety by, the
Consolidated Financial Statements of the Company and related Notes and other
financial information included elsewhere herein.
18
Consolidated Statement of Operations Data
For the years ended December 31:
(in thousands, except per share data)
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Total revenues $ 5,989 $ 7,309 $ 11,750 $ 26,843 $ 59,581
Gross margin (loss) 1,448 1,852 788 (537) 6,283
Interest expense 185 129 804 1,402 1,599
Reorganization items 406 484 655 -- --
Gain on restructuring of payables -- -- -- (3,924) --
Income tax expense -- -- -- -- 1,383
Loss from continuing
operations (101) (28) (3,579) (7,623) (8,792)
Loss from discontinued operations -- -- -- -- (2,150)
-------- -------- -------- -------- --------
Net loss (101) (28) (3,579) (7,623) (10,942)
Accretion on preferred stock -- -- 99 148 --
-------- -------- -------- -------- --------
Loss applicable to
common shareholders $ (101) $ (28) $ (3,678) $ (7,771) $(10,942)
======== ======== ======== ======== ========
Loss per common share from
continuing operations:
Basic and diluted $ (0.02) $ -- $ (0.55) $ (1.21) $ (1.74)
======== ======== ======== ======== ========
Loss per common share:
Basic and diluted $ (0.02) $ -- $ (0.55) $ (1.21) $ (2.17)
======== ======== ======== ======== ========
Consolidated Balance Sheet Data
At December 31:
(in thousands)
Working capital (deficit) $ (10) $ 632 $ (39) $ (9,775) $(16,473)
Total assets 2,004 3,010 4,138 13,236 33,215
Revolving credit loan (short-term) -- -- -- -- 8,507
Current maturities of long-term debt -- 350 837 3,142 6,855
Liabilities and other items subject to
compromise 14,586 14,622 13,207 -- --
Long-term obligations 450 953 1,581 8,294 833
Mandatorily redeemable preferred
stock -- -- -- 1,554 --
Stockholder's deficit (15,006) (14,905) (14,877) (11,199) (4,143)
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The numbers and percentages contained in this Item 7 are approximate.
Dollar amounts are stated in thousands.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K. Note that our
preparation of this Annual Report on Form 10-K requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
Bankruptcy Considerations- Financial Statement Presentation
The 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.
Basis of Presentation
Boundless Corporation is a holding company whose principal subsidiaries
are Boundless Technologies, Inc. and Boundless Manufacturing Services, Inc. The
consolidated financial statements include the accounts of all of the Company's
majority-owned subsidiaries. We sometimes collectively refer to Boundless
Corporation, together with our consolidated
20
subsidiaries, as "we," "Boundless" or the "Company." All significant
intercompany transactions are eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Sales returns and other allowances, allowance for doubtful accounts.
Our management must make estimates of potential future product returns
related to current period product revenue. Management analyzes historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns and other
allowances. Significant management judgments and estimates must be made and used
in connection with establishing the sales returns and other allowances in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if management made different judgments or utilized
different estimates. Historically the Company has not experienced material
levels of product returns.
Similarly, our management must make estimates of the uncollectibility of
our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Management's review of this allowance could result in a reduction and
corresponding credit to the statement of operations.
During 2004 the Company reduced the allowance for doubtful accounts
by $117, due primarily to accounts receivable collection activity which reduced
the value of outstanding receivables aged greater than 90 days. In 2005, the
Company increased the allowance for doubtful accounts by $56 due to the aging of
receivables from UCSI. At December 31, 2005, the allowance for doubtful accounts
was $544 as compared to $501 at December 31, 2004.
Warranty and product guaranties.
We provide for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, our warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability may be required.
21
Inventory obsolescence.
We record inventory valuation allowances for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory valuation allowances may be
required. Management's review of this allowance could result in a reduction and
corresponding credit to the statement of operations.
In 2003 the Company placed non-cancellable purchase orders for components
in an amount which, based on the Company's policies, required the Company to
record additions to the inventory valuation allowance of $522. Continued
utilization of this component throughout 2004 and 2005 allowed the Company to
reduce the inventory valuation allowance by $109 in 2004 and $175 in 2005. At
December 31, 2005, the manufacturing inventory valuation allowance was $618.
Deferred Taxes
The carrying value of the Company's net deferred tax assets is based on
assumptions as to whether the Company will be able to generate sufficient future
taxable income in certain tax jurisdictions, based on applicable estimates and
assumptions to utilize its existing loss carry-forwards. If these estimates and
related assumptions change in the future, the Company may be required to record
applicable adjustments to the valuation allowances against its deferred tax
assets resulting in income tax credits in the Company's consolidated statement
of operations. Management evaluates the realizability of the deferred tax assets
quarterly and assesses the need for changes in the valuation allowances
quarterly. For the years ended December 31, 2005, 2004 and 2003 the Company has
recorded valuation allowances at 100% of its deferred tax assets.
Results of Operations
Years Ended December 31, 2005 and 2004
Revenues: Revenues for the year ended December 31, 2005 were $5,989, as
compared to $7,309 for the year ended December 31, 2004. The decline in revenue
is attributable to a reduction in sales of the Company's text terminals
products, as customers moved to alternative technologies, including graphic
displays.
Sales of the Company's General Display Terminals declined by 16% to $5,360
for the year ended December 31, 2005 from $6,400 for the year ended December 31,
2004.
Customer Services revenue for 2005 was $595 compared to $669 in 2004, a
decline of 11%. Customer services revenue includes the sale of spare parts,
repair of product outside of the warranty period, and the sale of multi-year
warranty contracts. 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 2004 the Company recorded EMS revenue of $240, entirely for
logistics services provided to UCSI.
22
During 2005 the Company recorded EMS revenue of $23.
Ingram Micro and 1st Solutions were the Company's most significant
customers in 2005, accounting for approximately 19% and 11%, respectively, of
the Company's total revenue. Hewlett Packard, Ingram Micro and Jetstar
contributed 16%, 14% and 11%, respectively of Company revenues in 2004.
Gross Margin. Gross margin for the year ended December 31, 2005 was $1,448
(24% of revenue), as compared to gross margin for the year ended December 31,
2004 of $1,852 (25% of revenue). Product margins and revenue mix remained
relatively constant between the two years; however, fixed overhead expenses in
2005, primarily non-direct labor personnel expenses and depreciation, were 16%
of Company revenue as compared to 15% of revenue in 2004, resulting in a decline
in gross margin as a percent of revenue from 2004 to 2005.
Gross margin in future periods may be affected by several factors such as
sales volume, shifts in product mix, pricing strategies and absorption of
manufacturing costs.
Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 2005 or 2004. In a continuing effort to maintain and
improve margins in an industry otherwise characterized by commodity pricing,
management has focused on quality, flexibility, and product cost reductions.
From time-to-time margins are adversely affected by industry shortages of
key components. The Company emphasizes product and cost reductions in its
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices available.
See "Asset Management."
Total Operating Expenses. For the year ended December 31, 2005, operating
expenses, excluding interest and reorganization expenses, were $1,146 (19% of
revenue), compared to expenses for 2004 of $1,434 (20% of revenue).
Sales and Marketing Expenses. Sales and marketing expenses decreased 8% to
$271 (5% of revenue) for the year ended 2005 from $295 (4% of revenue) for the
year ended December 31, 2004. The decrease is attributable to the reorganization
of the Company which resulted in a major reduction in personnel and marketing
programs.
Boundless Technologies promotes its products by means of a balanced mix of
direct mail, telemarketing and cooperative channel marketing programs. Boundless
Manufacturing promotes its services through its direct sales force.
General and Administrative Expenses. General and administrative expenses
decreased 33%, or $322, to $667 (11% of revenue), from $989 (14% of revenue) for
the periods ending December 31, 2005 and 2004, respectively. The decrease stems
from reductions in personnel costs, travel and professional services.
Research and Development Expenses. Research and development expenses
increased to $208 in 2005 from $150 in 2004. Because General Display Terminals
are mature products, development activities over the past year have only
included enhancements to the existing product family. 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 is expected to own 100% of the Company upon confirmation of the Company's
plan of reorganization. In addition, the Company incurred research and
development costs of $27 and $102, respectively; which expenses are included in
"Loss on reimbursement of employee services" on the Company's statement of
operations, as these costs were components of that reimbursement.
23
Interest Expense. Interest expense amounted to $185 for the year ended
December 31, 2005 compared to $129 for 2004. During all of 2004 and through
January 31, 2005, the Company's working capital requirements were satisfied
through the use of cash collateral authorized by the bankruptcy court as part of
the settlement stipulation with Valtec. The settlement stipulation required
weekly cash payments to Valtec of $8 and annual interest on the outstanding
balance of the Valtec debt of 8%. As of January 31, 2005, the Company entered
into an agreement with Valtec to terminate its debtor-in-possession ("DIP")
financing and to release their liens on our personal property. At the same time,
the Company entered into another secured DIP financing agreement with
Entrepreneur Growth Capital, LLC ("EGC") pursuant to which EGC was granted a
lien on all of our personal property. The original term of the EGC Agreement was
one year; and, on January 31, 2006, the EGC Agreement was extended for an
additional six months.
Under the EGC Agreement, the annual interest rate is 6% above the prime
rate announced by Citibank, N.A. and we are required to pay a monthly service
fee equal to three quarters of one percent (0.75%) of the face value of invoices
assigned to EGC for the preceding month. The EGC Agreement required us to pay
minimum monthly interest of $8 even though our actual borrowings may have
resulted in a lesser interest charge. As part of the negotiations to extend the
EGC Agreement, the minimum monthly interest was reduced to $5 beginning February
1, 2006.
Loss on reimbursement of employee services. Beginning in the first quarter
of 2004 the Company agreed to provide resources, principally Company employees,
to UCSI to allow it 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 is
expected to 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 2004 the Company charged UCSI $255 and incurred estimated expenses
of $306, resulting in a loss on reimbursement of employee services of $51.
In May 2005 the Company discontinued the arrangement with UCSI, directing
its resources toward development of new products to address the emerging RFID
marketplace. For the period January 1, 2005 through May 31, 2005 the Company
charged UCSI $50 and incurred estimated expenses of $58, resulting in a loss on
reimbursement of employee services of $8.
Other Credits. Credits for the year ended December 31, 2005 were $197 and
include $20 from the overpayment in prior years of personal property taxes on
the Company's former manufacturing facility and equipment in Florida. In
addition, in 2003 the Company placed non-cancellable purchase orders for
components in an amount which, based on the Company's policies, required the
Company to record additions to the inventory valuation allowance of $522.
Continued utilization of this component throughout 2004 and 2005 allowed the
Company to reduce the inventory valuation allowance by $109 in 2004 and $175 in
2005. Credits for the year ended 2004 were $218 and included the reduction in
reserves for trade receivables of $117 and inventory of $109.
Reorganization Items. For the year ended December 31, 2005 the Company
recorded net reorganization expenses of $406. The expenses for 2005 include $300
for legal fees associated with the Company's bankruptcy filing, $30 in fees to
the United States Trustee administering the case and $37 relating to facility
relocation expenses. For the year ended December 31, 2004 the Company recorded
net reorganization expenses of $485. The expenses for 2004 include $278 for
legal fees associated with the Company's bankruptcy filing and $157 of expenses
relating to the relocation of the Company's manufacturing operations.
Income Tax Expense/Credit. Due to the net losses, the Company did not
record an income tax expense or credit for either of the years ended December
31, 2005 and 2004. The Company has provided a valuation allowance against the
total amount of the net deferred tax assets due to the uncertainty of future
realization.
Net Loss. For the year ended December 31, 2005, the net loss was $101,
compared to a net loss of $28 for the year ended December 31, 2004.
24
Years Ended December 31, 2004 and 2003
Revenues: Revenues for the year ended December 31, 2004 were $7,309, as
compared to $11,750 for the year ended December 31, 2003. The decline in revenue
is attributable to a reduction in sales of the Company's text terminals
products, as customers moved to alternative technologies, including graphic
displays.
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. There
exists limited opportunities for sales of the general display terminal into new
installations. 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. Prior to its filing for
bankruptcy, the Company has been a leader in these categories.
Sales of the Company's General Display Terminals declined by 38% to $6,400
for the year ended December 31, 2004 from $10,347 for the year ended December
31, 2003. The decline is attributable to a reduction in sales of the Company's
OEM products to Hewlett Packard and IBM, which, in combination, accounted for a
decline of approximately $2,477, or 62%, from sales in 2003.
The decline in text sales has resulted in a consolidation of former
competitors, as well as the outsourcing of production from original equipment
manufacturers to the remaining industry participants. Although industry data is
not available, the Company believes its market share to be approximately 25%,
with Wyse Technologies ("Wyse"), a Taiwanese company, holding an approximate 45%
market share. In the period just prior to the bankruptcy filing, the Company
believes the relative market shares of Boundless and Wyse were approximately
equal at 35% each. The Company believes that the market will continue to decline
and therefore lead to additional consolidation. Any market share increases for
the Company will come at the expense of current industry competitors.
Customer Services revenue for 2004 was $669 compared to $1,032 in 2003.
Customer services revenue includes the sale of spare parts, repair of product
outside of the warranty period, and the sale of multi-year warranty contracts.
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 2004 the Company recorded EMS revenue of $240, entirely for
logistics services provided to UCSI. During 2003 the Company recorded EMS
revenue of $371.
Hewlett Packard, Ingram Micro and Jetstar contributed 15.6%, 13.8% and
10.9%, respectively of Company revenues in 2004. Hewlett Packard and NCR were
the Company's most significant customers in 2003, accounting for approximately
32% and 13%, respectively, of the Company's total revenue.
25
During 2003 Hewlett Packard advised the Company of its intention to
discontinue the sale of certain of the Company's products to Hewlett Packard
customers. Hewlett Packard is transitioning its customers to newer technologies,
including thin client terminals. The Company continues to sell product to
Hewlett Packard, though in smaller volume, and has released the product for sale
to distributors who will sell to customers unwilling to transition to the newer
technologies.
Gross Margin. Gross margin for the year ended December 31, 2004 was $1,852
(25% of revenue), as compared to gross margin for the year ended December 31,
2003 of $788 (7% of revenue).
To reduce overhead expenses, in December 2003 the Company sold its
manufacturing facility in Hauppauge, New York, thereby eliminating $8,578 in
principal amount of secured debt and $634 of accrued property tax and interest.
Under the terms of the sales transaction, the Company leased 15,000 sq. feet of
administrative and engineering space at no out of pocket cost to it during the
first year of the lease. In accordance with generally accepted accounting
principles, a factor for reasonable rent expense was imputed to the sale
transaction. In February 2004 the Company executed a lease to rent 32,000 sq.
ft. of manufacturing space in a facility located in Farmingdale, New York. The
lease term is 5 years and calls for first year annual rent of $216, escalating
to $243 in the final year.
During the bankruptcy period, the supply chain disruption and the
Company's lack of adequate working capital caused the Company to incur
substantial airfreight expenses in order to accelerate receipt of raw materials
to meet customers' demands and the Company's commitments. For the year ended
2003, airfreight expense totaled $414. Had the Company been able to avoid this
expense, gross margin would have been improved by 3.5 points. As of December 31,
2003, the Company has restructured the supply chain for raw materials and
eliminated unfavorable airfreight expense.
In December 2003 the Company recorded a charge of $778, or 6.6 points of
gross margin, to reserve against excess and obsolete inventory. Of this amount,
$175 represents a reserve against exposure positions existing prior to the
Filing Date. In addition, the Company accrued $528 to reserve against a portion
of the inventory located at Ansen.
Gross margin in future periods may be affected by several factors such as
sales volume, shifts in product mix, pricing strategies and absorption of
manufacturing costs.
Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 2004 or 2003. In a continuing effort to maintain and
improve margins in an industry otherwise characterized by commodity pricing,
management has focused on quality, flexibility, and product cost reductions.
From time-to-time margins are adversely affected by industry shortages of
key components. The Company emphasizes product and cost reductions in its
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices available.
See "Asset Management."
Total Operating Expenses. For the year ended December 31, 2004, operating
expenses, excluding interest and reorganization expenses, were $1,434 (20% of
revenue), compared to expenses for 2003 of $2,812 (24% of revenue).
Sales and Marketing Expenses. Sales and marketing expenses decreased 52%
from $610 (5% of revenue) for the year ended 2003 to $295 (4% of revenue) for
the year ended December 31, 2004. The decrease is attributable to the
reorganization of the Company which resulted in a major reduction in personnel
and marketing programs.
Boundless Technologies promotes its products by means of a balanced mix of
direct mail, telemarketing and cooperative channel marketing programs. Boundless
Manufacturing promotes its services through its direct sales force.
General and Administrative Expenses. General and administrative expenses
decreased 51%, or $1,043, to $989 (14% of revenue), from $2,032 (17% of revenue)
for the periods ending December 31, 2004 and 2003, respectively. The
26
decrease stems from reductions in personnel costs, travel and professional
services.
Research and Development Expenses. Research and development expenses
decreased to $150 in 2004 from $170 in 2003. Because General Display Terminals
are mature products, development activities over the past year have only
included enhancements to the existing product family.
Interest Expense. Interest expense amounted to $129 for the year ended
December 31, 2004 compared to $804 for 2003. The decrease is attributable to
lower levels of debt carried by the Company during 2004 and the elimination of
the mortgage interest due to the sale of the Company's Hauppauge facility in
December 2003. In addition, during the first quarter of 2003 the Company
assigned all of its right, title and interest in and to the CIT Credit Facility
to Valtec Capital Corporation ("Valtec"). Prior to this assignment, the Company
had been amortizing the capitalized debt financing costs associated with the CIT
agreement to interest expense. For the first quarter ended March 31, 2003, the
amortized capitalized debt financing costs were $63.
Loss on reimbursement of employee services. Beginning in the first quarter
of 2004 the Company agreed to provide resources, principally Company employees,
to UCSI to allow it 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 is
expected to 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 2004 the Company charged UCSI $255 and incurred estimated expenses
of $306, resulting in a loss on reimbursement of employee services of $51.
Loss on extinguishment of debt. In connection with the bankruptcy filing,
during the quarter ended March 31, 2003, the Company obtained
debtor-in-possession financing with Valtec Capital, LLC and wrote off $289 of
capitalized debt financing costs associated with the asset-based lending
agreement with the Company's prior lender.
Other Credits. Credits for the year ended 2004 were $218 and included the
reduction in reserves for trade receivables of $117 and inventory of $109.
Credits for the year ended December 31, 2003 were $193
Reorganization Items. For the year ended December 31, 2004 the Company
recorded net reorganization expenses of $485. The expenses for 2004 include $278
for legal fees associated with the Company's bankruptcy filing and $157 of
expenses relating to the relocation of the Company's manufacturing operations.
For the year ended December 31, 2003 the Company recorded net reorganization
expenses of $655. The expenses for 2003 include $1,298 for legal fees associated
with the Company's bankruptcy filing and $685 of gains from the sale of assets.
Income Tax Expense/Credit. Due to the net losses, the Company did not
record an income tax expense or credit for either of the years ended December
31, 2004 and 2003. The Company has provided a valuation allowance against the
total amount of the net deferred tax assets due to the uncertainty of future
realization.
Net Loss. For the year ended December 31, 2004, the net loss was $28,
compared to a net loss of $3,579 for the year ended December 31, 2003.
Accretion on Preferred Stock. Convertible preferred stock issued in
connection with the 2002 debt restructuring in the face amount of $4,365 was
recorded at its estimated fair value of $1,406. Assuming none of the holders of
the Preferred Stock convert to Common Stock of Boundless Corporation, the
Company would be required to record a charge to earnings available to
stockholders over the ten-year redemption period such that the carrying value of
the Preferred Stock equals its face value at the time of redemption.
Pre-petition, the difference between the carrying value of the preferred stock
and its face value was being treated as a dividend and charged to earnings
available to stockholders over the ten-year redemption
27
period unless conversion occurs, in which case accretion terminates at that
point. As a result of the bankruptcy, during 2003 the Company discontinued
accreting to earnings the difference between the carrying value and face amount
of the preferred stock. The aggregate accretion at the time of discontinuance
was $247.
Net Loss Applicable to Common Shareholders. For the year ended December
31, 2004, the net loss applicable to common shareholders was $28, compared to a
net loss applicable to common shareholders of $3,678 for the year ended December
31, 2003.
Impact of Inflation
The Company has not been adversely affected by inflation because
technological advances and competition within the microcomputer industry have
generally caused prices of products sold by the Company to decline. The Company
has flexibility in its pricing and could, if necessary, pass along price changes
to most of its customers.
Liquidity and Capital Resources
The discussion below regarding liquidity and capital resources should be
read together with the information included in Item 1. Business- "Bankruptcy
Considerations", and Notes 1, 6, 7, 8 and 12 of Notes to Consolidated Financial
Statements.
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 our 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 our
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, 2005, the Company had
a tangible net worth deficit of $15,006 and total liabilities of $17,010. The
Company had a working capital deficit, inclusive of liabilities and other items
subject to compromise, of approximately $14,596 as of December 31, 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 $800, including accrued
interest, at December 31, 2005.
Pursuant to the sale of 100 Marcus Blvd, Hauppauge, New York, Independence
Community Bank and JPMorgan Chase will have pre-petition unsecured claims
against the Company aggregating approximately $2,271.
28
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. 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 December 31, 2005, the Company had accrued approximately $1,154
primarily for legal assistance throughout the bankruptcy period. As of March 31,
2006, outstanding professional fees, inclusive of legal fees, are estimated to
approximate $1,450 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.
Our 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.
As of January 31, 2005, the Company entered into an agreement with Valtec
to terminate our DIP financing and to release their liens on our personal
property. At the same time, the Company entered into another secured DIP
financing agreement with Entrepreneur Growth Capital, LLC ("EGC") pursuant to
which EGC was granted a lien on all of our personal property. The original term
of the EGC Agreement was one year; and, on January 31, 2006, the EGC Agreement
was extended for an additional six months.
Under the EGC Agreement, the annual interest rate is 6% above the prime
rate announced by Citibank, N.A. and we are required to pay a monthly service
fee equal to three quarters of one percent (0.75%) of the face value of invoices
assigned to EGC for the preceding month. The EGC Agreement required us to pay
minimum monthly interest of $8 even though our actual borrowings may have
resulted in a lesser interest charge. As part of the negotiations to extend the
EGC Agreement, the minimum monthly interest was reduced to $5 beginning February
1, 2006.
29
The Company's total cash and cash equivalents decreased approximately $110
to $14 at December 31, 2005 from $124 at the end of fiscal 2004. Income before
reorganization items of $305, net of non-cash effects of $92, provided $213 of
the $750 in cash generated from operating activities in fiscal 2005. Changes in
current assets and liabilities also contributed to the increase in cash from
operating activities by $537 as follows: reductions in trade and other
receivables of $459, cash on deposit with the Company's prior lender of $271,
and inventories of $399. These increases to cash provided by operations were
offset by a decline in accounts payable and accrued expenses of $505 and
increases in other assets of $87.
Net cash used in reorganization activities in fiscal 2005 was $274, composed of
$300 related to legal expenses, $30 in expenses associated with the U.S. Trustee
administering the bankruptcy case, $37 related to the relocation of the
Company's manufacturing facility and miscellaneous bankruptcy expenses of $39.
These expenses were offset by increases in accrued liabilities, principally for
legal expenses of $132.
Net cash used in investing activities in fiscal 2005 consisted of $29 for the
purchase of machinery and equipment.
Net cash used in financing activities amounted to $557 in fiscal 2005, which
amount included repayments of the Company's prior DIP debt in the amount of
$653, offset by net borrowings under the Company's current DIP financing
agreement in the amount of $96.
For the fiscal years ended December 31,
2005 2004 2003
--------- --------- ---------
Net cash provided by (used in) operating activities $ 750 $ 651 $ (617)
Net cash provided by (used in) reorganization activities (274) (211) 25
Net cash provided by (used in) investing activities (29) (15) 117
Net cash provided by (used in) financing activities (557) (674) 844
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents $ (110) $ (249) $ 369
========= ========= =========
Net cash provided by operating activities during the year ended December
31, 2004 was $651, principally related to net income before reorganization
expenses of $456, reductions in inventory of $1,087, reductions in cash on
deposit with the Company's DIP lender of $57, reductions in prepaid expenses of
$120 and non-cash depreciation of $43. This amount was offset by non-cash
credits consisting of inventory provisions and accounts receivable doubtful
accounts allowances totaling $226. Net cash provided by operating activities was
further reduced by increases in accounts receivable and affiliate receivables of
$213 and decreases in accounts payable and other accrued expenses of $583.
Net cash used in reorganization activities during 2004 was $211 arising
from expenses associated with the relocation of the Company's manufacturing
facility in the amount of $184 and payments of fees to the United States Trustee
of $25.
Net cash used in investing activities during 2004 consisted of equipment
purchases of $15. Net cash used in financing activities was $674 consisting of
payments to Valtec.
Net cash used in operating activities during the year ended December 31,
2003 was $617, principally related to a net loss before reorganization expenses
of $2,924. This amount was offset by non-cash expenses consisting of
depreciation and amortization, inventory provisions, write-off of debt financing
costs, and accounts receivable doubtful accounts allowances totaling $2,362,
decreases in accounts receivable of $1,357 and decreases in accounts payable and
other accrued expenses of $763. Net cash used in operating activities for the
year ended December 31, 2003, also includes an increase in cash on deposit with
the Company's DIP lender of $328, increases in inventories of $198, decreases in
deferred revenues of $94, increases in other receivables of $60 and non-cash
gains on the disposition of assets of $44.
Net cash provided by reorganization activities during 2003 amounted to $25
principally from proceeds of $189 from the sale of the Company's Hauppauge
facility and payment of legal fees of professionals and fees of the United
States Trustee. Net cash provided by investing activities during 2003 was
comprised of $117 stemming from the sale of miscellaneous equipment. Net cash
provided by financing activities during 2003 was $844 which includes proceeds of
$1,572 from DIP loans offset by payments on loans and capital leases of $728.
Capital Commitments.
Following is a summary of our material contractual cash obligations,
including operating lease commitments and accrued interest (which are sometimes
referred to as "off-balance sheet debt") as of December 31, 2005.
Less than Years Years
one year 2 and 3 4 and 5 Total
----------- ----------- ----------- -----------
Long-term debt $ 296 $ 450 $ -- $ 746
Operating leases 228 477 41 746
----------- ----------- ----------- -----------
Total contractual cash obligations $ 524 $ 927 $ 41 $ 1,492
=========== =========== =========== ===========
30
The Company is not generally permitted to make any payments on
pre-petition debt as a result of the bankruptcy filing. The Company has reached
repayment agreements with its secured lenders, as well as other administrative
creditors. The amounts included in the above table represent only those
obligations for which we have finalized an agreement; however, these numbers are
still subject to change until such time as the plan of reorganization is
approved and we emerge from bankruptcy. In addition, we may still assume, assume
and assign or reject certain executory contracts and unexpired leases pursuant
to the Bankruptcy Code. As a result, we anticipate that other lease obligations
as currently identified in the above table will continue to change as well.
Going Concern Comment and Management's Plan of Action
Our auditor's report on our financial statements includes a comment
regarding our ability to continue as a going concern.
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 cashflows 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 our
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.
31
Asset Management
Inventory. Management has instituted policies and procedures to maximize
product availability and delivery while minimizing inventory levels so as to
lessen the risk of product obsolescence and price fluctuations. Most components
and sub-assemblies are stocked to provide for an order-to-ship cycle of seven
days.
Key metrics:
December 31, December 31, December 31,
-------------- -------------- -------------
2005 2004 2003
-------------- -------------- -------------
Days of sales outstanding in accounts receivable 40 59 28
Days of supply in inventory 69 72 68
Days of purchases outstanding in accounts payable (4) (3) (30)
-------------- -------------- -------------
Cash conversion cycle 105 128 66
============== ============== =============
Days of sales outstanding in accounts receivable ("DSO") measures the
average number of days the Company's trade receivables are outstanding. DSO is
calculated by dividing trade accounts receivable, net of allowance for doubtful
accounts, by a 90-day average net revenue. Affiliate trade receivables and
revenue, primarily transactions with UCSI, are excluded from the calculation.
Days of supply in inventory ("DOS") measures the average number of days
from procurement to sale of the Company's product. DOS is calculated by dividing
inventory by a 90-day average cost of goods sold.
Days of purchases outstanding in accounts payable ("DPO") measures the
average number of days our accounts payable balances are outstanding. DPO is
calculated by dividing accounts payable by a 90-day average cost of goods sold.
The Company's working capital requirements depend upon our effective
management of the cash conversion cycle, which represents effectively the number
of days that elapse from the day the Company pays for the purchase of raw
materials to the collection of cash from our customers. The cash conversion
cycle is the sum of DSO and DOS less DPO.
The increase in DSO from 2003 to 2004 is a result of increased sales to
Ingram Micro, which pays its obligations on net 60 day terms, and who
contributed approximately 14% of total revenue for the year ended December 31,
2004 as compared to 6% of revenue for the year ended December 31, 2003. During
2005 collection efforts with Ingram Micro resulted in reducing the percentage of
its receivables aged greater than 60 days from 51% to 20%.
The decrease in DPO from 2003 through 2005 is a result of the bankruptcy
filing and the change in the Company's payment terms for material to
cash-in-advance.
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
32
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 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 our 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 FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143". FIN No. 47 clarifies that conditional asset retirement
obligations meet the definition of liabilities and should be recognized when
incurred if their fair values can be reasonably estimated. The Interpretation is
effective no later than December 31, 2005. The cumulative effect of initially
applying the Interpretation will be recognized as a change in accounting
principle. The Company does not believe that FIN No. 47 will have a material
effect on its consolidated financial statements.
In June 2005, the FASB issued FASB Staff Position (FSP) No. FAS 143-1,
"Accounting for Electronic Equipment Waste Obligations," that provides guidance
on how commercial users and producers of electronic equipment should recognize
and measure asset retirement obligations associated with the European Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the "Directive"). In
the second quarter of 2005, the company adopted FSP FAS 143-1 in those European
Union (EU) member countries that transposed the Directive into country-specific
laws. In the third quarter of 2005, the company adopted FSP FAS 143-1 in several
additional EU-member countries that enacted country-specific laws
33
in the current reporting period. The adoption of the FSP in the second and third
quarter of 2005 did not have a material effect on the company's consolidated
financial statements. As of the end of the current quarter, the majority of the
EU-member countries have transposed the Directive into country-specific laws.
The effect of applying FSP FAS 143-1 in the remaining countries in future
periods is not expected to have a material effect on the company's consolidated
financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 will become effective for accounting changes and corrections of errors
made in fiscal year 2006. The adoption of this statement is not expected to
effect the company's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 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 JPMorganChase Bank.
The majority of sales arrangements with international customers are
denominated in U.S. dollars. International customers are permitted to elect
payment of their next month's orders in local currency based on an exchange rate
provided one month in advance from the Company. The Company does not use foreign
currency forward exchange contracts or purchased currency options to hedge local
currency cash flows or for trading purposes. Foreign currency transaction gains
or losses have not been material to the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a)(1) and (2) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
ITEM 9A. 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 December 31, 2005. Based on
that evaluation, the Company's management, including the CEO and CFO, has
concluded that the Company's disclosure controls and procedures were 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.
ITEM 9B. OTHER
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Positions and Offices
---- --- ---------------------
Frank Stephens 54 Chairman of the Board of Directors
Richard Bowman 45 Director
John D. Ryan 55 Acting Chief Executive Officer
Joseph Gardner 46 Vice President - Finance, Chief Financial Officer
J. Frank Stephens has been a member of the Board since July 2001. Mr.
Stephens has over 30 years domestic and international experience in the
consumer, food service, and industrial ingredients channels. Since April 1997
Mr. Stephens has held the office of President, Capital Sigma Investments
("CSI"), a privately funded equity group focused in the health and soyfoods
category. Since April 1998, concurrent with CSI's acquisition of Quong Hop &
Co., a regional soy foods company, Mr. Stephens has served as the Chief
Executive Officer of Quong Hop & Co. Prior to this, and from August 1996 until
March 1997, Mr. Stephens served as the Director of Strategic Planning for Global
Consumer Products, Inc., a company specializing in new product development and
branding for consumer-oriented companies.
Mr. Bowman has served on the Board of the company since February 2002. He
has extensive experience in agribusiness, technology development and the
financing of commercial agri-processing projects in lesser developed countries.
He is presently the President, Chief Executive Officer, and Corporate Director
of AgCheck Canada Ltd., a Canadian based firm specialized in the design,
implementation and marketing of carbon offset projects. He has served in this
position since January, 2003. Prior to this, from March 2000 until starting his
current position, Mr. Bowman served as an executive consultant, advising select
agribusiness and environmental firms in North America in the areas of production
management, environmental compliance, and options for environmentally based
financing.
John D. Ryan ("Jack") has served as the Vice President of Operations since
2000, and as the acting Chief Executive Officer since June 2004. Jack is a
manufacturing executive with over 30 years experience in Manufacturing
Operations, Supply Base Management, Quality Assurance and Product Development
within the Computer, Computer Peripheral, Microelectronics, and Communications
industries. He is currently the Chief Operating Officer for Boundless
Corporation.
Prior to joining Boundless Corporation, Jack held a variety of senior
management positions in Manufacturing, Supply Chain Management, Product
Outsourcing, and Quality Assurance for companies including Solectron, NCR and
AT&T. Jack has worked at the SUNY Stony Brook Harriman School of Management and
Policy as a lecturer on topics including High Velocity Flexible Manufacturing,
and Strategic Planning for Manufacturing.
36
Joseph Gardner has served as Vice President of Finance and Chief Financial
Officer of the Company since October 31, 1997. Mr. Gardner has been employed by
Boundless Technologies, Inc. since April of 1990. Prior to 1997, Mr. Gardner
served as the Controller and Vice President of Quality Assurance for Boundless
Technologies. Before joining Boundless, Mr. Gardner served in various executive
financial positions with NCR Corporation including Business Planning for the
Financial Systems Division and Cash Management/Foreign Exchange Exposure
Management. Mr. Gardner is also a Certified Public Accountant as well as a
Certified Management Accountant and received his MBA from Bowling Green State
University.
Audit Committee Financial Expert
The Board of Directors of Boundless Corporation has determined that J.
Frank Stephens, Chair of the Audit Committee, is an audit committee financial
expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is independent within the
meaning of Item 7(d)(3)(iv) of Schedule 14A and Items 401(h)(1)(ii) of
Regulation S-K of the Exchange Act.
Audit Committee
The Audit Committee consists of the Company's Board of Directors. The
members of the Audit Committee are J. Frank Stephens and Richard Bowman.
Code of Ethics
Information on Boundless' code of business conduct and ethics for directors,
officers and employees, also known as the "Code of Ethics and Business Conduct
Guidelines" is set forth under "Corporate Governance Principles" on the
Company's website at www.boundless.com.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Forms 3, 4 and 5 filed or due with the Commission in 2005
indicates that each of Frank Stephens, Richard Bowman, John Ryan, and Joseph
Gardner did not file a Form 5 as required under section 16(a) of the Exchange
Act.
37
ITEM 11. EXECUTIVE COMPENSATION
The table below discloses all cash compensation awarded to, earned by or
paid to our Chief Executive Officer and our Chief Financial Officer, each of
whom earned more than $100,000 for services rendered in all capacities to us
during the fiscal year ended December 31, 2005 (collectively, the "named
executive officers"). In addition, it provides information with respect to the
compensation paid by us to the named executive officers during 2004 and 2003.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
---------------------------------------- ------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation Options(#) Compensation
-------- ---- ------ ----- ------------ ---------- ------------
Joseph Gardner 12/31/05 $133,954 -- -- -- --
Vice President-Finance 12/31/04 $128,762 -- -- -- --
Chief Financial Officer 12/31/03 $136,610 -- -- -- --
John D. Ryan 12/31/05 $133,954 -- -- -- --
Acting Chief Executive 12/31/04 $128,762 -- -- -- --
Officer 12/31/03 $ 88,990 -- -- -- --
Employment Agreements and Change-in-Control Arrangements
None
1995/ 1997/ 2000 Incentive Plans
The Company's 1995 Incentive Plan covered the issuance of up to 600,000 shares
of Common Stock. As additional shares were no longer available to be issued
under the 1995 Incentive Plan, the Board adopted the 1997 Incentive Plan in July
1997 which covers the issuance of up to 1,000,000 shares of Common Stock. In
December 2000 the Board created the 2000 Incentive Plan which covers up to
1,000,000 shares of Common Stock. The number of shares granted on a calendar
year basis under the 2000 Incentive Plan is limited to 5% of the total number of
shares of Common Stock outstanding, or 10% of the outstanding Common Stock in
any five-year period.
38
Option Grants in Last Fiscal Year
The Company did not grant options to the named executive officers during
the fiscal years ending December 31, 2005.
39
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options to purchase shares of Common Stock at
December 31, 2005. No options were exercised during the year.
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 2005 (#) December 31, 2005 ($)(1)
------------------------------ ------------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Joseph Gardner 0 0 72,833 4,167 -- --
John D. Ryan 0 0 82,833 4,167 -- --
(1) The last sale price of the Company's Common Stock on December 31, 2005,
$0.00.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding Common Stock as of March 31,
2006, by (i) each of the Company's directors and "named executive officers,"
(ii) directors and executive officers of the Company as a group and (iii) each
person believed by the Company to own beneficially more than 5% of its
outstanding shares of Common Stock. Except as indicated each such person has
sole voting and investment powers with respect to his and her shares. The
address of Unique Co-Operative Solutions Inc./ Oscar L. Smith is 9185 Bond,
Overland Park, KS 66214. The address of Neoware Systems, Inc. is 400 Feheley
Dr., King of Prussia, PA 19406.
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------ ------------------ ------------------
Unique Co-Operative Solutions, Inc./
Oscar L. Smith 1,002,389 (1)(3) 14.8%
J. Gerald Combs 905,923 (2)(3)(6) 12.0%
JPMorganChase 750,000 (5) 11.2%
Neoware Systems, Inc 383,335 (4) 5.7%
Valtec Capital Corp. 400,000 (8) 5.6%
John D. Ryan 173,122 (3) 2.5%
Joseph Gardner 86,991 (3) 1.3%
J. Frank Stephens 87,293 (3)(7) 1.3%
Richard Bowman 60,000 (3) 0.9%
All current directors and executive 407,406 5.9%
officers as a group
(four individuals)
----------
(1) Includes 41,667 shares issuable upon the exercise of a warrant. The
warrant was granted June 4, 2001, in connection with a sale of our common
stock. The warrant vested immediately, has an exercise price per share of
common stock of $1.30, and expires five years following the date of grant.
(2) Resigned as the Chief Executive Officer of the Company effective January
2002.
(3) Includes or consists of shares of Common Stock issuable upon exercise of
options as follows: Mr. Smith: 25,000; Mr. Combs: 480,000; Mr. Ryan:
82,083; Mr. Gardner: 72,083; Mr. Bowman: 25,000; and Mr. Stephens: 43,000.
Includes or consists of shares of Common Stock issuable upon exercise of
warrants as follows: Mr. Combs: 5,834; Mr. Ryan: 3,889; and Mr. Gardner:
1,945.
(4) Includes 50,001 shares issuable upon the exercise of a warrant. The
warrant was issued June 29, 2001, in connection with a sale of our common
stock. The warrant has an exercise price per share of common stock of
$1.10, and the warrant expires five years following the date of grant. In
June 2001 Neoware Systems Inc. purchased our Windows-based terminal
product line for $1,600,000. As part of the transaction, we secured an
agreement to manufacture certain products for Neoware Systems, Inc.
(5) On June 27, 2002, the Company entered into an agreement with its then
secured lenders to terminate its revolving line of credit (the "Chase
Credit Line"). In return for termination of the Chase Credit Line, the
Company, amongst other consideration, agreed to issue 750,000 shares of
its common stock and shares of its newly-created convertible preferred
stock (the "Preferred Stock") with a stated value of $1,250,000. The
41
Company had agreed to register under the Securities Act of 1933 such
common stock and the shares into which the Preferred Stock may be
converted. The lenders have certain anti-dilution protection for their
shares of common stock. The Preferred Stock may be converted after the
first anniversary of their issuance into shares of the Company's common
stock at $3.00 per share and, unless sooner converted into common stock,
must be redeemed by the Company on June 30, 2012 for their stated value.
(6) Includes 380,000 shares of Common Stock issuable upon the conversion of a
convertible promissory note. The principal amount of the note is $475,000
and may be converted into shares of Common Stock of the Company, at the
option of Mr. Combs, at a conversion price of $1.25 per share of Common
Stock.
(7) Includes 19,905 shares of Common Stock issuable upon the conversion of a
convertible promissory note. The principal amount of the note is $18,667
and may be converted into shares of Common Stock of the Company, at the
option of Mr. Stephens, at a conversion price of $1.05 per share of Common
Stock. See Item 10- "Directors and Executive Officers of the Registrant"
for additional information concerning the issuance of the promissory note
to Mr. Stephens.
(8) By a Loan and Security Agreement dated December 3, 2002 (the "Valtec Loan
Agreement"), the Company consolidated prior borrowings and received
additional borrowings from Valtec in the aggregate amount of approximately
$1.2 million (plus accrued and unpaid interest and other charges). In
connection with the Valtec Loan Agreement, the Company issued a warrant to
Valtec to purchase 400,000 shares of the Company's Common Stock. The
common shares underlying the warrant, have an exercise price per share of
common stock of $0.36, and the warrant expires five years following the
date of grant.
Under the Plan of Reorganization, all outstanding common stock and derivative
securities of the Company will be cancelled upon the Company's emergence from
bankruptcy. It is highly unlikely the promissory notes issued to Mssrs. Combs
and Stephens will be converted to common stock of the Company. As a result, the
principal and accrued interest thereon are included with liabilities subject to
compromise.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Net revenue from EMS activities, primarily logistics services sold to
Unique Co-operative Solutions, Inc. ("UCSI"), were $240 for the year ended
December 31, 2004, and $23 for the year ended December 31, 2005. 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. Mr. Smith currently owns approximately 15% of the outstanding common
stock of the Company.
Beginning in the first quarter of 2004, the Company recognized that
certain of its employees were underutilized, and outsourced a portion of this
underutilization to UCSI. In the absence of this arrangement, the Company would
have absorbed the entire expense of the underutilization. For the year ended
December 31, 2004, these costs were estimated to be $306 for which the Company
charged UCSI $255. The $255 charged by the Company was less than the estimated
personnel and personnel related expenses. The resulting loss of $51 is reported
in the statement of operations. The Company discontinued its arrangement with
UCSI in May 2005. For the period January 1, 2005 through May 31, 2005, the
Company charged UCSI $50 and incurred personnel and personnel related expenses
of $58. The resulting loss of $8 is reported in the statement of operations.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Independent Accountant Fees
The aggregate fees billed for professional services rendered by BP Audit
Group and by BDO Seidman, LLP for the years ended December 31, 2005, 2004 and
2003 are as follows (amounts in dollars):
2005 2004 2003
--------- --------- ---------
BP Audit Group
Audit fees $ 52,250 $ 58,356 $ 71,863
Audit-related fees 15,893 10,427 --
Tax fees 7,127 15,384 --
--------- --------- ---------
75,270 84,167 71,863
--------- --------- ---------
BDO Seidman, LLP
Audit fees 2,500
Audit-related fees --
Tax fees --
--------- --------- ---------
-- -- 2,500
--------- --------- ---------
Total Independent Accountant Fees
Audit fees 52,250 58,356 74,363
Audit-related fees 15,893 10,427 --
Tax fees 7,127 15,384 --
--------- --------- ---------
$ 75,270 $ 84,167 $ 74,363
========= ========= =========
43
Fees for audit services consist of audits of the Company's consolidated
financial statements and limited reviews of the Company's consolidated quarterly
financial statements.
Fees for audit-related services consist of statutory audits of the
Company's 401K plan.
Fees for tax services consisted of assistance with preparation of state
and federal tax returns.
All of the services under the Audit Related, Tax and All Other Fees
categories above have been approved by the Audit Committee pursuant to paragraph
(c)(7)(i)(c) of Rule 2-01 of Regulation S-X of the Exchange Act.
Audit Committee Pre-Approval Policy and Procedures.
The Audit Committee of the Boundless Board of Directors adopted the policy
on pre-approval of services of independent accountants in October 2003. The
policy provides that the Audit Committee shall pre-approve all audit and
non-audit services to be provided to the Company and its subsidiaries and
affiliates by its auditors. The process by which this is carried out is as
follows:
For recurring services, the Audit Committee reviews and pre-approves BP
Audit Group's annual audit services and employee benefit plan audits in
conjunction with the Committee's annual appointment of the outside auditors. The
materials include a description of the services along with related fees. The
Committee also reviews and pre-approves other classes of recurring services
along with fee thresholds for pre-approved services. In the event that the
pre-approval fee thresholds are met and additional services are required prior
to the next scheduled Committee meeting, pre-approvals of additional services
follow the process described below.
Any requests for audit, audit-related, tax and other services not
contemplated with the recurring services approval described above must be
submitted to the Audit Committee for specific pre-approval and cannot commence
until such approval has been granted. Normally, pre-approval is provided at
regularly scheduled meetings. However, the authority to grant specific
pre-approval between meetings, as necessary, has been delegated to the Chairman
of the Audit Committee. The Chairman must update the Committee at the next
regularly scheduled meeting of any services that were granted specific
pre-approval.
On a periodic basis, the Audit Committee reviews the status of services
and fees incurred year-to-date and a list of newly pre-approved services since
its last regularly scheduled meeting
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
Page No.
-------
(a) (1)(2) Financial Statements and Schedules
Index to Consolidated Financial Statements and
Financial Statement Schedules F-1
All other financial statements and schedules not listed have been omitted
since the required information is either included in the Financial
Statements and the Notes thereto as included in the Company's Annual
Report on Form 10-K for the Year ended December 31, 2005 or is not
applicable or required.
(b) Reports on Form 8-K
On February 2, 2005, we filed a current report on Form 8-K disclosing we
entered into a secured post-petition financing agreement with Entrepreneur
Growth Capital, LLC ("EGC") pursuant to which EGC was granted a lien on all of
our personal property
45
EXHIBIT INDEX
Exhibit No.* Description of Exhibit
------------ ----------------------
3.1[2] Certificate of Incorporation of Registrant and Certificates of
Amendment thereto.
3.2[1] By-Laws of Registrant.
10(a) Registrant's 1995 Incentive Plan (Incorporated by reference to
and filed as Exhibit E to Registrant's Information Statement,
dated September 28, 1995).
10(b) Registrant's 1997 Incentive Plan (Incorporated by reference to
and filed as Exhibit A to Registrant's Information Statement,
dated March 6, 1998).
10(c)[6] Registrant's 2000 Incentive Plan.
10(d)[4] Restatement, Extension, Assumption and Modification Agreement,
dated June 24, 1999, between Boundless Technologies, Inc. and
Independence Community Bank (Originally filed as Exhibit
10(a)).
10(e)[4] Restated Business Installment Promissory Note, dated June 24,
1999, from Boundless Technologies, Inc. to Independence
Community Bank (Originally filed as Exhibit 10(b)).
10(f)[4] Restated Mortgage and Security Agreement, dated June 24, 1999,
between Boundless Technologies, Inc. and Independence
Community Bank (Originally filed as Exhibit 10(c)).
10(g)[5] Promissory Note, dated September 30, 1999, in the amount of
$500,000 from General Automation, Inc. to Boundless
Technologies, Inc. (Originally filed as Exhibit 10(p)).
10(h)[5] Secured Convertible Promissory Note from General Automation,
Inc. to Boundless Technologies, Inc (Originally filed as
Exhibit 10(o)).
10(i)[5] Warrant issued by General Automation, Inc. to Boundless
Technologies, Inc (Originally filed as Exhibit 10(q)).
10(j)[5] Employment Agreement, dated July 1, 1999, among Registrant,
Boundless Manufacturing Services, Inc. and Joseph Joy
(Originally filed as Exhibit 10(f)).
10(k)[5] Employment Agreement, dated July 1, 1999, among Registrant,
Boundless Manufacturing Services, Inc. and Anthony
Giovaniello (Originally filed as Exhibit 10(g)).
10(l)[6] Employment Agreement, dated March 1, 2000, among Registrant,
Boundless Technologies, Inc. and James Gerald Combs.
10(m)[6] Employment Agreement, dated March 1, 2000, among Registrant,
Boundless Technologies, Inc. and Jeffrey K. Moore.
46
Exhibit No.* Description of Exhibit
------------ ----------------------
10(n)[6] Second Amended and Restated Credit Agreement and Guaranty (plus
exhibits thereto) dated as of May 25, 2000 among Boundless
Technologies, Inc., Boundless Manufacturing Services, Inc.
and Merinta as co-borrowers, Boundless Acquisition Corp. and
Boundless Corporation, as guarantors, and The Chase Manhattan
Bank, Silicon Valley Bank and National Bank of Canada as the
Banks and The Chase Manhattan Bank, as Administrative Agent
for the Banks.
10(o)[6] First Amendment, dated as of July 31, 2000, to Second Amended
and Restated Credit Agreement and Guaranty with Chase.
10(p)[6] Second Amendment, dated as of November 7, 2000, to Second
Amended and Restated Credit Agreement and Guaranty with
Chase.
10(q)[6] Third Amendment, dated as of November 16, 2000, to Second
Amended and Restated Credit Agreement and Guaranty with
Chase.
10(r)[6] Form of Warrant issued by Merinta Inc. to the Chase Manhattan
Bank, Silicon Valley Bank and National Bank of Canada for the
purchase of a total of 100,000 shares of Merinta common stock
(40,000 shares on May 25, 2000, 25,000 shares on July 31,
2000 and 35,000 shares on November 7, 2000).
10(s)[3] Common Stock Purchase Warrant dated as of April 14, 1999 issued
to Chase Manhattan Bank for the purchase of Registrant's
common stock (Originally filed as Exhibit 10(b)).
10(t)[6] Common Stock Purchase Warrant, dated as of May 25, 2000, issued
to Chase Manhattan Bank for the purchase of Registrant's
common stock.
10(u)[6] Merinta Inc.'s Amended and Restated Certificate of
Incorporation, effective November 6, 2000, including the
terms of Merinta's Series A Convertible Preferred Stock
issued to National Semiconductor Corporation.
10(v)[7] Registrant's 2001 Incentive Plan. (Incorporated by reference
to and filed as Appendix B to Definitive Proxy Statement,
dated January 31, 2002).
10(w)[8] Separation Agreement and General Release, effective as of
January 1, 2002, with Mr. J. Gerald Combs.
10(x)[8] Consulting Agreement, effective as of January 1, 2002, with
Mr. J. Gerald Combs.
10(y)[8] Non-negotiable Convertible Note by and between the Registrant
and Mr. J. Gerald Combs.
10(z)[8] List of Stock Options held by Jeffrey K. Moore and list of
additional consideration or benefits to be provided to him
pursuant to the Separation Agreement and General Release,
dated as of January 1, 2002, by and between him and the
Registrant (including the Registrant's subsidiaries)
(constituting Exhibits B and E to such Agreement).
10(aa)[9] Seventh Amendment, dated as of March 27, 2002, to Second Amended
and Restated Credit Agreement and Guaranty with Chase.
47
Exhibit No.* Description of Exhibit
------------ ----------------------
10(ab)[10] Letter Agreement, dated January 27, 2005, from Entrepreneur
Growth Capital LLC to Boundless Corporation and its
subsidiaries.
10(ac)[10] Loan and Security Agreement, dated January 27, 2005, by and
among Entrepreneur Growth Capital LLC and Boundless
Corporation and its subsidiaries.
10(ad)[10] Corporate Guaranty of All Liability with Collateral, dated
January 27, 2005, by Boundless Corporation and its
subsidiaries in favor of Entrepreneur Growth Capital LLC.
10(ae)[10] Certificate of Corporate Resolutions, dated January 27, 2005, of
Boundless Corporation, Boundless Acquisition Corp., Boundless
Technologies, Inc., and Boundless Manufacturing Services,
Inc.
10(af)[10] Intercreditor and Subordination Agreement, dated January 27,
2005, by and between Vision Technologies, Inc. and
Entrepreneur Growth Capital.
11** Statement re Computation of Per Share Earnings. See Consolidated
Financial Statements.
21[5] List of Subsidiaries
31 Section 302 Certification
32 Section 906 Certification
----------
[1] Incorporated by reference to Registrant's Registration Statement
on Form S-18 (File No. 33-32396-NY).
[2] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
[3] Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
[4] Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.
[5] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999.
[6] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000.
[7] Incorporated by reference to the Registrant's Definitive Proxy
Statement on Form DEF 14A, filed January 31, 2002.
48
Exhibit No.* Description of Exhibit
------------ ----------------------
[8] Incorporated by reference to the Registrant's Report on Form 8-K
filed January 23, 2002.
[9] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001.
[10] Incorporated by reference to the Registrant's Report on Form 8-K
filed February 2, 2005. Originally filed as exhibits 12.1-12.5
* Numbers inside brackets indicate documents from which exhibits have been
incorporated by reference. Unless otherwise indicated, documents
incorporated by reference refer to the identical exhibit number in the
original documents from which they are being incorporated.
** Filed herewith
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 13, 2006
BOUNDLESS CORPORATION
By: /s/ John D. Ryan
-----------------------------------
John D. Ryan
Acting Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John D. Ryan Acting Chief Executive Officer April 13, 2006
---------------------
John D. Ryan
/s/ Joseph Gardner Vice President - Finance, Chief Financial
--------------------- Officer (Principal Accounting Officer) April 13, 2006
Joseph Gardner
/s/ Richard Bowman Director April 13, 2006
---------------------
Richard Bowman
/s/ Frank Stephens Chairman, Board of Directors April 13, 2006
---------------------
Frank Stephens
50
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations
for the years ended December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended December 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-8-22
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Boundless Corporation (Debtor-in-Possession)
Farmingdale, New York
We have audited the accompanying consolidated balance sheets of Boundless
Corporation and Subsidiaries (Debtor and Debtors-in-Possession) as of December
31, 2005 and 2004 and the related consolidated statements of operations, changes
in stockholders' deficit and cash flows for each of the years in the three-year
period then ended. We have also audited the schedule of valuation and qualifying
accounts for each of the years ended December 31, 2005, 2004 and 2003. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boundless
Corporation and Subsidiaries (Debtor and Debtors-in-Possession) as of December
31, 2005 and 2004 and the consolidated results of their operations and their
cash flows for each of the years in the three-year period then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the schedule of valuation and qualifying accounts
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company and its subsidiaries filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on March 12, 2003. The Company has
suffered substantial losses from operations in each of its last six fiscal
years. In addition, as of December 31, 2005, the Company has a stockholders'
deficit of $15,006,107 and has a working capital deficit of $9,568, excluding
liabilities and other items subject to compromise of $14,586,204. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Although the Company and its subsidiaries are currently operating as
debtors-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of the business as a going concern is first contingent upon the
ability of the Company to confirm a plan of reorganization under the Bankruptcy
Code and emerge from bankruptcy protection and then subsequently, among other
things: (1) the ability of the Company to restructure the terms of its secured
debtors-in-possession financing, thereby reducing its cost of borrowing; (2) the
ability of the Company to negotiate trade financing with suppliers at acceptable
terms; (3) the ability of the Company to negotiate contracts for the sale of its
manufacturing services to customers to provide additional liquidity for
operations; (4) the ability of the Company to generate cash from operations and
to maintain adequate cash on hand; and (5) the ability of the Company to achieve
profitability. Management's plans in regard to these matters are also described
in Note 1. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BP Audit Group, PLLC
Farmingdale, NY
March 31, 2006
F-2
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
At December 31, 2005 and 2004
(in thousands)
ASSETS
----------- -----------
2005 2004
----------- -----------
Current assets:
Cash and cash equivalents $ 14 $ 124
Cash on deposit with lender -- 271
Trade accounts receivable, net 657 1,150
Acounts receivable affiliates 92 92
Other receivables 95 117
Inventories (Note 3) 870 1,094
Prepaid expenses and other current assets 146 59
----------- -----------
Total current assets 1,874 2,907
Property and equipment, net (Note 4) 130 103
----------- -----------
Total assets $ 2,004 $ 3,010
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term debt $ 296 $ 350
Accounts payable 50 44
Accrued salaries 73 86
Accrued legal fees 1,154 1,029
Purchase order commitments 50 561
Accrued payroll and sales tax payable 28 30
Accrued warranty 30 18
Other accrued liabilities (Note 6) 203 157
----------- -----------
Total current liabilities 1,884 2,275
Long-term liabilities:
Long-term debt, less current maturities (Note 8) 450 953
Deferred credits 90 65
Items subject to compromise:
Manditorily redeemable preferred stock (Note 7 & 9) 1,652 1,652
Liabilities subject to compromise (Note 7) 12,934 12,970
----------- -----------
Total liabilities 17,010 17,915
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 12 and 13)
Stockholders' deficit: (Note 9)
Common stock 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,917) (50,816)
----------- -----------
Total stockholders' deficit (15,006) (14,905)
----------- -----------
Total liabilities and stockholders' deficit $ 2,004 $ 3,010
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-3
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands, except per share data)
---------- ---------- ----------
2005 2004 2003
---------- ---------- ----------
Revenue:
Product sales $ 5,371 $ 6,400 $ 10,718
Services 618 909 1,032
---------- ---------- ----------
Total revenue 5,989 7,309 11,750
---------- ---------- ----------
Cost of revenue
Product sales 4,298 5,010 10,165
Services 243 447 797
---------- ---------- ----------
Total cost of revenue 4,541 5,457 10,962
---------- ---------- ----------
Gross margin 1,448 1,852 788
---------- ---------- ----------
Operating expenses
Sales and marketing 272 295 610
General and administrative 667 989 2,032
Research and development 208 150 170
Interest expense (excludes contractual interest of $67,
$64 and $49 not recognized in 2005, 2004 and 2003) 185 129 804
---------- ---------- ----------
1,332 1,563 3,616
---------- ---------- ----------
116 289 (2,828)
Other expense (credits)
Loss on reimbursement of employee services
(net of reimbursement of $50 and $255 in
2005 and 2004) 8 51 --
Loss on extinguishment of debt -- -- 289
Other credits (197) (218) (193)
---------- ---------- ----------
Income (loss) before reorganization items 305 456 (2,924)
Reorganization items (Note 16) (406) (484) (655)
---------- ---------- ----------
Net loss (101) (28) (3,579)
Accretion of preferred stock -- -- 99
---------- ---------- ----------
Net loss attributable to common stockholders $ (101) $ (28) $ (3,678)
========== ========== ==========
Basic and diluted loss per common share $ (0.02) $ -- $ (0.55)
========== ========== ==========
Basic and diluted weighted average shares outstanding 6,706 6,706 6,706
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-4
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ---------- ---------- ----------- ----------
Balance, January 1, 2003 6,705 67 35,844 (47,110) (11,199)
Net loss (3,579) (3,579)
Preferred stock accretion (99) (99)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 6,705 67 35,844 (50,788) (14,877)
Net loss (28) (28)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 6,705 67 35,844 (50,816) (14,905)
Net loss (101) (101)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2005 6,705 $ 67 $ 35,844 $ (50,917) $ (15,006)
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-5
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) before reorganization items 305 456 (2,924)
Adjustments to reconcile income (loss) before reorganization
items to net cash provided by (used in) operating activities:
Depreciation and amortization 2 43 800
Write-off of debt financing costs -- -- 289
Gain on the disposition of assets -- -- (44)
Change in deferred credits 25 (116) (94)
Provision (credit) for doubtful accounts 56 (117) 104
Provision (credit) for excess and obsolete inventory (175) (109) 1,169
Changes in assets and liabilities:
Cash on deposit with lender 271 57 (328)
Trade accounts receivable 437 (121) 1,357
Accounts receivable affiliates 0 (92) --
Other receivables 22 26 (60)
Income tax refunds -- -- 4
Inventories 399 1,087 (198)
Other assets (87) 120 71
Accounts payable and accrued expenses (505) (583) (763)
----------- ----------- -----------
Net cash provided by (used in) operating activities
excluding reorganization items 750 651 (617)
----------- ----------- -----------
Cash flows from reorganization activities:
Reorganization expenses (406) (484) (655)
Gain on disposition of property and equipment -- (23) (685)
Proceeds from disposition of property -- 23 189
Increase in liabilities, net 132 273 1,176
----------- ----------- -----------
Net cash provided by (used in) reorganization activities (274) (211) 25
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (29) (15) --
Proceeds from sale of assets -- -- 117
----------- ----------- -----------
Net cash provided by (used in) investing activities (29) (15) 117
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under new DIP/AR financing 96 -- 1,572
Repayments of prior DIP debt (653) (674) (728)
----------- ----------- -----------
Net cash provided by (used in) financing activities (557) (674) 844
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (110) (249) 369
Cash and cash equivalents at beginning of year 124 373 4
----------- ----------- -----------
Cash and cash equivalents at end of year $ 14 $ 124 $ 373
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-6
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
2005 2004 2003
--------- --------- ---------
Non-cash investing and financing transactions:
Refininancing of DIP debt $ 599 $ -- $ --
Asset sale proceeds paid directly to creditors -- -- 7,000
Equipment acquisitions funded through debt -- -- --
Common stock issued in exchange for debt -- -- --
Manditorily redeemable prefered stock issued in exchange for debt -- -- --
Cash paid for:
Interest 126 91 123
Taxes -- 4 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-7
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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.
The Company has commenced preliminary negotiations to have one of its inactive,
non-operating subsidiaries become acquired through a "reverse merger" by an
operating company organized in China which desires to become a public company.
If consummated, approximately 10% of the outstanding common stock of the
post-merged company will remain with Boundless, in which case approximately
one-half of that interest will be distributed to the unsecured creditors.
In the event that Boundless Technologies is the subsidiary that is "reverse
merged" then Boundless will transfer approximately 25,000 of the shares it
receives to each of Mr. Stephens and Mr. Bowman, currently directors of the
Company.
Background
Boundless Corporation (the "Company") was incorporated in 1988 under the laws of
the State of Delaware. The Company through its subsidiaries, Boundless
Technologies, Inc. ("Boundless Technologies") and Boundless Manufacturing
Services, Inc. ("Boundless Manufacturing"), is a provider of text terminals and
manufacturing services.
Boundless Technologies, a wholly-owned subsidiary, is engaged in supplying
computer terminals for commercial use. The Company's general strategy is to
provide fast, easy-to-use, and cost-effective products that enable access to
applications and data in commercial environments, as well as older "legacy"
applications, running on mainframes, mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports (i) desktop
computer display terminals, which generally do not have graphics capabilities,
and (ii) other products that are used in multi-user computing environments.
Boundless Technologies offers standard and custom models of its general display
terminals primarily to retail, financial, telecommunications and wholesale
distribution businesses requiring them for data entry and point of sale
activities.
Boundless Manufacturing is pursuing opportunities in the electronic
manufacturing services ("EMS") marketplace. As of December 31, 2005 and 2004,
the Company owned 75% of the outstanding shares of common stock of this
subsidiary. Services include supply chain optimization, global supply base
management, systems assembly and test, distribution and logistics, repair
centers and end-of-life management. Boundless Manufacturing also offers in-house
engineering expertise- product design, test development and product development-
to significantly reduce time-to-market for original equipment manufacturers
("OEM") customers. Boundless Manufacturing provides a complete supply chain that
is designed and built to each customer's specifications. Boundless Manufacturing
also has post-manufacturing support capability in New York and Atlanta.
Financial Statement Presentation.
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
F-8
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 cashflows 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 its
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 its Plan of Reorganization. If not, liquidation of the Company's
assets would most likely ensue. If the Company does emerge from Chapter 11,
there is no assurance that its 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.
DIP Financing
During the period from the Petition Date through and including January 2005,
Valtec Capital Corporation ("Valtec"). provided debtor-in-possession financing
to the Company. Pursuant to the Bankruptcy Court's Interim Order entered on
April 17, 2003, the Bankruptcy Court approved: (i) the Company's use of Valtec's
cash collateral ; (ii) direct borrowings from Valtec of an amount up to $1,500;
and (iii) the Debtor-in-Possession Financing and Security Agreement by and among
Valtec and the Company. See "Cash and Cash Equivalents" below.
On November 30, 2004, the Company filed a motion with the Bankruptcy Court for
an order authorizing the Company to (i) incur post-petition secured
indebtedness, and (ii) grant a security interest and priority claims pursuant to
Sections 364(c) and 364(d) of the Bankruptcy Code. On January 27, 2005, the
Bankruptcy Court approved the order.
On January 31, 2005, the Company entered into an agreement with its secured
lender Valtec Capital, LLC, as assignee of Valtec Capital Corporation, to
terminate its debtor-in-possession ("DIP") financing and to release its liens on
the Company's personal property. At the same time, the Company entered into
another secured DIP financing agreement with Entrepreneur Growth Capital, LLC
("EGC") pursuant to which EGC was granted a lien on all of the Company's
personal property.
F-9
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In general, the new agreement permits the Company to borrow up to 80% of our
eligible accounts receivable. Under the agreement, the annual interest rate is
6% above the Citibank, N.A. prime rate. The Company is required to pay a monthly
service fee equal to three quarters of one percent (0.75%) of the face value of
invoices assigned to EGC for the preceding month. The agreement, which had a
term of one year but which was extended for an additional six months, requires
minimum monthly interest of approximately $5 even though actual borrowings may
result in a lesser interest charge. The Company is responsible for certain fees
and fees for early termination of the facility. The maximum availability under
the agreement is $1,000.
In return for termination of the prior DIP financing the Company also agreed to
pay Valtec Capital a total of $100 for legal fees they incurred during the
bankruptcy period. This amount is payable to Valtec Capital on the date that the
Plan of Reorganization becomes effective.
2. Summary of Significant Accounting Policies
Principles of Consolidation
Boundless Corporation is a holding company whose principal subsidiaries are
Boundless Technologies, Inc. and Boundless Manufacturing Services, Inc. The
consolidated financial statements include the accounts of all of the
majority-owned subsidiaries. Due to the equity deficits in less than 100% owned
subsidiaries, no minority interest is reflected.
All significant intercompany transactions are eliminated. Certain prior year
amounts, specifically the presentation of interest expense, have been
reclassified to conform to the current year's presentation. These
reclassifications had no effect on the Company's income or loss before
reorganization items, net loss, or related per share amounts for any period
presented.
Cash and Cash Equivalents
All highly liquid investments with maturities at purchase of three months or
less are considered cash equivalents. The Company had $271 classified as "cash
on deposit with lender" at December 31, 2004, respectively, representing cash
on-hand in a lockbox account under the control of the Company's then lender.
Allowance for Doubtful Accounts
An allowance for uncollectible trade receivables is provided based on
management's analysis of write-off history, aging analysis, and any specific,
known troubled accounts. Periodically management's review of this allowance
could result in a reduction and corresponding credit to the statement of
operations. The Company recorded bad debt expense of $56 in 2005, recorded a
credit to bad debt expense of $117 in 2004, and recorded bad debt expense of
$104 for the year ended December 31, 2003. The allowance for doubtful accounts
was $544 and $501 at December 31, 2005 and 2004, respectively.
Inventory
Boundless values inventory at the lower of cost or market, with cost computed on
a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are depreciated over the shorter of the life of the lease or the
estimated useful life of the improvement; and machinery and equipment are
depreciated over periods ranging from 2 to 15 years. Expenditures that increase
the value or extend the life of an asset are capitalized, while costs of
maintenance and repairs are expensed as incurred. Gains or losses upon disposal
of assets are recognized in the statements of operations.
Beginning January 2005 the Company discontinued recording depreciation expense
against machinery and equipment as those assets had reached their estimated
salvage value. The Company continues to record depreciation expense against its
leasehold improvements.
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
F-10
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, current liabilities and
long-term debt reported on the balance sheets approximate their fair value. The
Company estimated the fair value of long-term debt by comparing the carrying
amount to the future cash flows of the instrument, discounted using the
Company's incremental rate of borrowing for a similar instrument. The Company
believes the fair value of liabilities and other items subject to compromise is
not determinable.
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 a 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 services are 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. In 2005 purchases from Radiance
Electronics, Ansen Corporation and Video Display Corporation accounted for 39%,
18%, and 9%, respectively, of the Company's total purchases of material.
Purchases from Radiance Electronics, Ansen Corporation and Video Display
Corporation, accounted for approximately 34%, 20% and 9%, respectively, of the
dollar amount of the Company's total purchases of subassemblies and components
in 2004. Purchases from Radiance Electronics, Ansen Corporation and Hewlett
Packard, accounted for approximately 24%, 20% and 18%, respectively, of the
dollar amount of the Company's total purchases of subassemblies and components
in 2003.
Concentration of Credit Risk
The Company is required by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk," to disclose
concentrations of credit risk regardless of the degree of such risk. The
Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company's cash policy limits credit exposure; however, for
limited periods of time during the year bank balances may exceed the FDIC
insurance coverage. The Company routinely assesses the financial strength of its
customers and as a consequence, believes that its accounts receivable credit
risk exposure is limited. No collateral is required. The Company extends credit
in the normal course of business to a number of distributors and value-added
resellers in the computer industry. The Company had two customers representing
19% and 11% of revenues, respectively, in 2005, three customers representing
16%, 14% and 11% of revenues, respectively, in 2004, and two customer
representing 32% and 13% of revenues, respectively, in 2003.
Shipping and Handling
The Company records as revenue all amounts billed to customers for out-bound
shipping and handling. All costs associated with in-bound and out-bound shipping
and handling are included in cost of revenue.
Advertising
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $0, $3 and $12 for the years ended December 31, 2005, 2004 and 2003.
Income Taxes
As more fully discussed in Note 5, income taxes are provided in accordance with
the liability method of accounting for income taxes pursuant to SFAS No. 109.
Accordingly, deferred income taxes are recorded to reflect the future tax
consequences of differences between the tax basis of assets and liabilities and
their financial amounts at year-end. Deferred tax assets are reduced by an
estimated valuation allowance.
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
F-11
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purposes and issuances of options and warrants to non-employees for services
rendered.
Net Loss Per Common Share
Net loss attributable to common stockholders includes the accretion of
mandatorily redeemable preferred stock in 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. Material reductions in
estimated valuation allowances related to accounts receivable and inventory are
reported as "other credits" in the statement of operations.
New Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143". FIN No. 47 clarifies that conditional asset retirement obligations
meet the definition of liabilities and should be recognized when incurred if
their fair values can be reasonably estimated. The Interpretation is effective
no later than December 31, 2005. The cumulative effect of initially applying the
Interpretation will be recognized as a change in accounting principle. The
Company does not believe that FIN No. 47 will have a material effect on its
consolidated financial statements.
In June 2005, the FASB issued FASB Staff Position (FSP) No. FAS 143-1,
"Accounting for Electronic Equipment Waste Obligations," that provides guidance
on how commercial users and producers of electronic equipment should recognize
and measure asset retirement obligations associated with the European Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the "Directive"). In
the second quarter of 2005, the company adopted FSP FAS 143-1 in those European
Union (EU) member countries that transposed the Directive into country-specific
laws. In the third quarter of 2005, the company adopted FSP FAS 143-1 in several
additional EU-member countries that enacted country-specific laws in the current
reporting period. The adoption of the FSP in the second and third quarter of
2005 did not have a material effect on the company's consolidated financial
statements. As of the end of the current quarter, the majority of the EU-member
countries have transposed the Directive into country-specific laws. The effect
of applying FSP FAS 143-1 in the remaining countries in future periods is not
expected to have a material effect on the company's consolidated financial
statements.
In the third quarter of 2005, the company adopted SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires
that exchanges of productive assets be accounted for at fair value unless fair
value cannot be reasonably determined or the transaction lacks commercial
substance. The adoption of SFAS No. 153 did not have a material effect on the
company's consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 will become effective for accounting changes and corrections of errors
made in fiscal year 2006. The adoption of this statement is not expected to
effect the company's consolidated financial statements.
3. Inventories
Inventories are stated at the lower of cost or market with costs determined on a
first-in first-out basis. On a periodic 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. For the year ended
December 31, 2005 the Company recorded a credit of $175 for excess and obsolete
inventory. For the year ended December 31, 2004 the Company recorded a credit of
$109 for excess and obsolete inventory as compared to a provision of $1,169 in
2003.
The major components of inventories are as follows:
F-12
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, December 31,
------------ ------------
2005 2004
----------- -----------
Raw materials and purchased components $ 1,004 $ 1,584
Finished goods 169 126
Manufacturing inventory reserves (618) (935)
Service parts 315 319
----------- -----------
$ 870 $ 1,094
=========== ===========
4. Property and Equipment
Property and equipment consists of the following:
December 31, December 31,
------------ ------------
2005 2004
----------- -----------
Leasehold improvements $ 17 $ 14
Machinery and equipment 6,531 6,505
----------- -----------
6,548 6,519
Less accumulated depreciation and amortization 6,418 6,416
----------- -----------
$ 130 $ 103
=========== ===========
Depreciation expense for the years ending December 31, 2005, 2004 and 2003 was
$3, $43 and $752, respectively. The Company recorded repairs and maintenance
expenses of $3, $13 and $26 for the years ended December 31, 2005, 2004 and
2003.
5. Income Taxes
F-13
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to the reported net losses, there were no provisions for current or
deferred federal or state income taxes for the years ended December 31, 2005,
2004 or 2003.
The benefit from income taxes differs from the amount of income tax determined
by applying the statutory federal income tax rate to continuing operations
before income taxes as a result of the following:
----------- ----------- -----------
2005 2004 2003
----------- ----------- -----------
Federal income tax benefit at statutory rate $ (34) $ (10) $ (1,217)
Losses not producing tax benefits 34 10 1,217
----------- ----------- -----------
Income tax benefit $ -- $ -- $ --
=========== =========== ===========
The Company has provided a valuation allowance against the total amount of the
net deferred tax assets due to the uncertainty of future realization.
The components of the net deferred tax assets and liabilities were as follows:
----------- -----------
2005 2004
----------- -----------
Current deferred tax assets:
Inventory $ 642 $ 702
Accounts receivable 278 259
Warranties 83 79
Other deferred tax assets 679 679
Less valuation allowance (1,682) (1,719)
----------- -----------
Total current deferred tax assets $ -- $ --
=========== ===========
Non-current other deferred tax assets $ 828 $ 828
Non-current deferred tax liabilities- property
and equipment (758) (675)
Net operating loss carryforwards 16,110 15,955
Less valuation allowance (16,180) (16,108)
----------- -----------
Net non-current deferred tax assets $ -- $ --
=========== ===========
The increase (decrease) in the valuation allowance for deferred tax assets for
the years ending December 31 was as follows:
----------- -----------
2005 2004
----------- -----------
Current deferred tax asset valuation allowance $ (37) $ (125)
Long-term deferred tax asset valuation allowance 72 135
----------- -----------
$ 35 $ 10
=========== ===========
F-14
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Other accrued liabilities
At December 31, 2005 and 2004 other accrued liabilities consisted of the
following:
----------- -----------
2005 2004
----------- -----------
Accrued interest expense $ 152 $ 100
Accrued audit expense 10 1
Other accrued expenses 41 56
----------- -----------
$ 203 $ 157
=========== ===========
7. 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.
At December 31, 2005 and 2004, the Company had liabilities and other items
subject to compromise of approximately $14,586 and $14,622 which consisted of
the following:
December 31, December 31,
------------ ------------
2005 2004
------------ ------------
Liabilities:
Accounts payable $ 10,912 $ 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
------------ ------------
12,934 12,970
Other:
Manditorily redeemable preferred stock 1,652 1,652
------------ ------------
$ 14,586 $ 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.
The preferred stock was issued in connection with the 2002 debt
restructuring in the face amount of $4,365 and was recorded at its estimated
fair value $1,406. Assuming none of the holders of the Preferred Stock convert
to Common Stock of Boundless Corporation, the Company would be required to
record a charge to earnings available to stockholders over the ten-year
redemption period such that the carrying value of the Preferred Stock equals its
face value at the time of redemption. Pre-petition, the difference between the
carrying value of the preferred stock and its face value was being treated as a
dividend and charged to earnings available to stockholders over the ten-year
redemption period unless conversion occurs, in which case accretion terminates
at that point. As a result of the bankruptcy, during 2003 the Company
discontinued accreting to earnings the difference between the carrying value and
face amount of the preferred stock. The aggregate accretion at the time of
discontinuance was $247.
F-15
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If all of such Preferred Stock, including the Preferred Stock which the
Company is required to issue to the lenders, are converted, the Company would be
required to issue approximately 1,455,073 shares of its common stock, subject to
adjustment. As part of the Company's Plan of Reorganization, which requires
Bankruptcy Court approval, it is contemplated that the shares issuable under the
Preferred Stock will be cancelled. The carrying value of the mandatorily
redeemable stock is included in other items subject to compromise at December
31, 2005 and 2004.
As of the Petition Date, 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.. The Company has rejected
pre-petition executory contracts and unexpired lease obligations, and they are
included with liabilities subject to compromise. The 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.
The Company's statement of operations for the years ended December 31,
2005, 2004 and 2003 do not include interest expense on debt subject to
compromise subsequent to the Petition Date. If the Company had reported interest
on the basis of the amounts it was contractually required to pay, additional
interest expense of $67, $64 and $49 would have been recorded in 2005, 2004 and
2003, respectively.
8. Debt
Long-term debt, as described in Note 1, consisted at December 31, 2005 and 2004
of the following:
---------- ----------
2005 2004
---------- ----------
Note payable toValtec Capital Corporation, bearing interest at
8%, collateralized by receivables, inventory and equipment $ -- $ 653
Notes payable toVision Technologies, Inc., bearing interest at
8%, payable in 36 equal monthly installments, commencing the
month following payment in full of the Valtec Capital note
collateralized by receivables, inventory and equipment,
subordinate to Valtec Capital and Entrepreneur Growth Capital 650 650
Revolving loan payable to Entrepreneur Growth Capital, bearing
interest at the prime rate plus 6%, collateralized by receivables
inventory and equipment, due July 2006 96
---------- ----------
$ 746 $ 1,303
Less current maturities on long-term debt 296 350
---------- ----------
$ 450 $ 953
========== ==========
The aggregate debt schedule maturities is as follows:
2006 $ 296
2007 216
2008 234
2009
2010
----------
$ 746
==========
As part of the Plan of Reorganization, the Company is proposing that the note
payable to Vision Technologies, Inc., including accrued interest thereon, be
exchanged for equity in the Reorganized Debtor. Accordingly, payments have not
commenced even though the Valtec debt has been extinguished.
9. Equity
At December 31, 2005 and 2004, stockholders' deficit consisted of the following:
F-16
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (50,917) (50,816)
---------- ----------
Total stockholders' deficit $ (15,006) $ (14,905)
========== ==========
In 2002, the Company sold to nine individuals 267,367 shares of
unregistered Common Stock of the Company for proceeds of $162. In connection
with this sale, the Company granted to these individuals warrants to purchase
267,367 shares of the Company's Common Stock. The warrants are exercisable at
between $0.47 and $0.70 per share of Common Stock and expire on the fifth
anniversary from the date of issuance.
10. Options and Warrants
The Company believes its presently outstanding equity securities will have no
value and it is expected that those securities will be canceled under any plan
of reorganization.
In 1997 the Board adopted the 1997 Incentive Plan. The maximum number of shares
to be issued under the 1997 Incentive Plan is not to exceed 1,000,000. The
exercise price of each option granted is to be equal to or greater than the
market price of the Company's stock on the date of grant. The terms of the
options are generally over five years with vesting occurring in 25% increments
beginning one year after the grant date. In December 2000 the Board created the
2000 Incentive Plan that covers up to 1,000,000 shares of Common Stock. The
number of shares granted on a calendar year basis under the 2000 Incentive Plan
is limited to 5% of the total number of shares of Common Stock outstanding, or
10% in any five-year period.
The Company has elected to continue to account for stock options issued to
employees in accordance with APB 25, "Accounting for Stock Issued to Employees".
The Company follows the disclosure requirements of FASB Statement 123,
"Accounting for Stock-Based Compensation". This statement requires the Company
to provide pro forma information regarding net income and net income per share
as if compensation cost for the Company's employee stock options granted had
been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model. No options or
warrants were granted in 2005, 2004 or 2003.
F-17
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the accounting provisions of SFAS No. 123, the effective options granted
prior to 2003 on the Company's net loss and net loss per share would have been
equal to the pro forma amounts indicated below:
---------- ---------- ----------
2005 2004 2003
---------- ---------- ----------
Net loss
As reported $ (101) $ (28) $ (3,579)
Under SFAS No. 123 (104) (28) (3,696)
Net loss per share
As reported - basic and diluted $ (0.02) $ (0.00) $ (0.55)
Under SFAS No. 123 - basic and diluted (0.02) (0.00) (0.55)
A summary of the status of the Company's stock options and warrants outstanding
as of December 31, 2005 and 2004, and changes during the years ending on those
dates is as follows:
-------------------------- ---------------------------
Options -Boundless Corporation 2005 2004
-------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning of year 1,405,450 $ 2.74 1,992,715 $ 2.50
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (142,800) (1.38) (587,265) (1.94)
----------- ----------- ----------- -----------
Outstanding at end of year 1,262,650 $ 2.89 1,405,450 $ 2.74
=========== =========== =========== ===========
Options exercisable at end of year 1,250,898 $ 2.91 1,362,032 $ 2.81
=========== =========== =========== ===========
Weighted average fair value
of options granted during the year N/A N/A
=========== ===========
-------------------------- ---------------------------
Warrants- Boundless Corporation 2005 2004
-------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning of year 1,083,558 $ 1.86 1,463,560 $ 3.27
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (227,500) (5.63) (380,002) (7.30)
----------- ----------- ----------- -----------
Outstanding at end of year 856,058 $ 0.85 1,083,558 $ 1.86
=========== =========== =========== ===========
Warrants exercisable at end of year 856,058 $ 0.85 1,083,558 $ 1.86
=========== =========== =========== ===========
Weighted average fair value
of warrants granted during the year N/A N/A
=========== ===========
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 2005:
F-18
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Number Weighted Average Number
Outstanding Average Remaining Exercisable
at December Exercise Contractual at December
Options - Boundless Corp. 31, 2005 Price Life (Years) 31, 2005
----------- ---------- ----------- -----------
187,900 $ 0.45 1.83 176,148
215,000 1.03 0.81 215,000
148,000 1.05 1.14 148,000
100,000 1.50 1.00 100,000
26,750 2.60 0.15 26,750
130,000 4.50 1.00 130,000
150,000 4.88 1.00 150,000
100,000 5.00 1.00 100,000
205,000 5.62 1.00 205,000
---------- ---------- ---------- ----------
1,262,650 $ 2.89 1.09 1,250,898
========== ========== ========== ==========
Weighted
Number Weighted Average Number
Outstanding Average Remaining Exercisable
at December Exercise Contractual at December
Warrants - Boundless Corp. 31, 2005 Price Life (Years) 31, 2005
----------- ---------- ----------- -----------
400,000 $ 0.36 1.92 400,000
95,632 0.63 1.52 95,632
76,798 0.67 1.51 76,798
94,938 0.70 1.52 94,938
50,001 1.10 0.49 50,001
1,737 1.26 0.43 1,737
62,672 1.30 0.42 62,672
6,946 1.33 0.43 6,946
20,834 1.36 0.41 20,834
46,500 5.00 0.01 46,500
---------- ---------- ---------- ----------
856,058 $ 0.85 1.45 856,058
========== ========== ========== ==========
In accordance with SFAS No. 123, the Company is required to account for options
issued to non-employees for services rendered using the fair value method over
their vesting period.
Due to the expected cancellation of all of the Company's outstanding equity
securities, including the mandatorily redeemable Preferred Stock, as a result of
the Chapter 11 proceedings, none of the outstanding warrants or options is
believed to have any economic or dilutive effect on the Company's finances.
11. Related Party Transactions
Net revenue from EMS activities, primarily logistics services sold to Unique
Co-operative Solutions, Inc. ("UCSI"), was $23 for the year ended December 31,
2005. Net revenue from UCSI during 2004 was $240 and immaterial in 2003. UCSI is
wholly owned by
F-19
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the issuance to Vision of new shares of common
stock, representing 100% of the new shares issued, in full satisfaction of the
Vision note payable and accrued interest thereon. Mr. Smith currently owns
approximately 15% of the outstanding common stock of the Company.
Beginning in the first quarter of 2004, the Company outsourced certain employees
to UCSI. For the year ended December 31, 2004, these costs were estimated to be
$306 for which the Company charged UCSI $255. The $255 charged by the Company
was less than the estimated personnel and personnel related expenses. The
resulting loss of $51 is reported in the statement of operations. The Company
discontinued the arrangement with UCSI in May 2005. From January 1, 2005 through
May 31, 2005 the Company charged UCSI $50 and incurred estimated personnel and
personnel related expenses of $58. The resulting loss of $8 is reported in the
statement of operations.
12. Commitments
Leases
The Company leases certain manufacturing, sales and administrative facilities
and office equipment under operating lease agreements, which expire at various
times through February 2009.
Total rent expense was $261 and $336 in 2005 and 2004, respectively.
Future minimum rental commitments as of December 31, 2005 were as follows:
2006 $ 228
2007 235
2008 242
2009 41
-----------
$ 746
===========
13. Contingencies
The Company is subject to lawsuits and claims that arose in the normal course of
business. Management is of the opinion that all such matters are without merit,
or are of such kind, or involve such amounts, as would not have a significant
effect on the financial position, results of operations or cash flows of the
Company if disposed unfavorably.
14. Segment Reporting and Geographic Information
Operating segments are identified as components of an enterprise about which
separate financial information is available for evaluation by its decision
making group. For 2002, the Company had two reportable segments. With the
Company's restructuring in conjunction with Chapter 11 filing on March 12, 2003,
the business segment reporting ceased.
The Company's manufacturing is conducted at its New York facility and its sales
force operates from three geographically dispersed locations in the United
States and United Kingdom.
Foreign sales were approximately $1,527, $1,929 and $3,473 for 2005, 2004 and
2003, respectively. The following table shows the approximate percentage of
total revenue attributable to export sales to the regions described for each of
the years ended December 31:
---------- ---------- ----------
2005 2004 2003
---------- ---------- ----------
Western Europe 24% 21% 25%
Other European countries 0% 1% 0%
Other foreign countries 2% 5% 4%
---------- ---------- ----------
Total 26% 27% 29%
========== ========== ==========
F-20
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All significant long-lived assets of the Company are in the United States.
15. Defined Contribution Plan
Concurrent with its filing for protection under Chapter 11, the Company ceased
providing a 401(k) retirement savings plan (the "401(k) Plan") for its full-time
employees. Effective March 1, 2002, the Company had terminated its contributions
to the 401(k) plan, with only employee contributions remaining. During 2003, the
Company discontinued employee contributions.
16. Reorganization Expenses
Reorganization expenses for the years ended December 31, 2005, 2004 and 2003
were as follows:
2005 2004 2003
---------- ---------- ----------
Professional fees $ 300 $ 298 $ 1,266
United States District Court fees 30 25 32
Facility relocation expenses 37 184 42
Other expenses 39 -- --
Gain on the disposition of building and equipment -- (23) (685)
---------- ---------- ----------
$ 406 $ 484 $ 655
========== ========== ==========
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; which gain includes
approximately $150, representing the fair market rental value of the premises
for the one-year rent-free period.
17. Selected Quarterly Financial Data - (unaudited)
Provided below is the selected unaudited quarterly financial data from 2005 and
2004.
F-21
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended
December 31, September 30, June 30, March 31,
------------ ------------- ----------- -----------
2005 2005 2005 2005
----------- ----------- ----------- -----------
Net revenue $ 1,427 $ 1,411 $ 1,536 $ 1,615
Cost of product sold and services 1,095 1,055 1,192 1,199
Gross margin 332 356 344 416
Net income (loss) $ 70 $ (101) $ (50) $ (20)
Per share amounts:
Basic and diluted net income (loss) per common share $ 0.01 $ (0.02) $ (0.01) $ (0.00)
For the three months ended
December 31, September 30, June 30, March 31,
------------ ------------- ----------- -----------
2004 2004 2004 2004
----------- ----------- ----------- -----------
Net revenue $ 1,903 $ 1,412 $ 1,811 $ 2,183
Cost of product sold and services 1,471 1,077 1,370 1,539
Gross margin 432 335 441 644
Net income (loss) $ 85 $ (13) $ (111) $ 11
Per share amounts:
Basic and diluted net income (loss) per common share $ 0.01 $ (0.00) $ (0.02) $ 0.00
18. Subsequent Events
On January 31, 2006, the Company extended its expiring DIP financing agreement
with EGC for six months. Terms of the new agreement are substantially similar to
the expiring agreement, except that the minimum monthly interest payable under
the agreement is reduced to $5 per month from $8 per month.
F-22
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
(In thousands)
Balance at Balance
Beginning at End
Description of Period Additions Deductions of Period
-------------------------------- ------------ ----------- ------------ ----------
Allowances:
Doubtful accounts:
2005 $ 501 $ 56 $ 13 $ 544
2004 623 (117) 5 (A) 501
2003 763 104 244 (A) 623
Manufacturing inventory reserves:
2005 935 (175) 142 618
2004 1,242 (109) 198 (B) 935
2003 789 1,169 716 (B) 1,242
(A) Includes accounts written off during the period.
(B) Includes inventory written off during the period.
S-1