SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
Commission File Number 0-17977
BOUNDLESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of Incorporation or Organization)
13-3469637
(I.R.S. Employer Identification No.)
100 Marcus Blvd.
Hauppauge, NY
(Address of principal executive offices)
11788
(Zip Code)
(631) 342-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of March 31, 2002, the Registrant had approximately 5,688,037 shares of
Common Stock, $.01 par value per share outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 ....................................................... 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2002 and 2001 ..................... 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2002 and 2001 ..................... 5
Notes to Consolidated Financial Statements (unaudited) ..................... 6
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
----------- ------------
Current assets: ................................ (unaudited)
Cash and cash equivalents .................... $ 18 $ 25
Trade accounts receivable, net ............... 6,392 10,053
Income tax refund ............................ 13 13
Inventories .................................. 5,805 8,073
Prepaid expenses and other current assets .... 468 580
-------- --------
Total current assets ....................... 12,696 18,744
Property and equipment, net .................... 10,687 10,993
Goodwill, net .................................. 3,187 3,187
Other assets ................................... 265 291
-------- --------
$ 26,835 $ 33,215
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt ............ $ 12,445 $ 15,362
Accounts payable ............................. 13,774 15,355
Accrued salaries ............................. 1,129 1,430
Accrued warranty ............................. 682 645
Accrued marketing programs ................... 100 100
Other accrued current liabilities ........... 1,494 2,015
Deferred revenue ............................. 303 310
-------- --------
Total current liabilities .................. 29,927 35,217
-------- --------
Long-term liabilities:
Long-term debt, less current maturities ...... 655 833
Other ........................................ 1,246 1,308
-------- --------
Total long-term liabilities ................ 1,901 2,141
-------- --------
Total liabilities .......................... 31,828 37,358
Stockholders' deficit:
Preferred stock .............................. -- --
Common stock ................................. 57 57
Additional paid-in capital ................... 35,280 35,280
Accumulated deficit .......................... (40,297) (39,339)
Accumulated other comprehensive loss ......... (33) (141)
-------- --------
Total stockholders' deficit ................ (4,993) (4,143)
-------- --------
$ 26,835 $ 33,215
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
--------------------------
2002 2001
-------- --------
(unaudited)
Revenue ........................................ $ 10,022 $ 12,989
Cost of revenue ................................ 9,357 11,441
-------- --------
Gross margin ............................. 665 1,548
-------- --------
Operating expenses:
Sales and marketing .......................... 492 1,772
General and administrative ................... 819 1,847
Research and development ..................... 307 401
Other expenses (credits) ..................... (339) 22
-------- --------
Total operating expenses ................... 1,279 4,042
-------- --------
Operating loss ........................... (614) (2,494)
Interest expense, net ........................ 344 426
-------- --------
Loss before income taxes ....................... (958) (2,920)
Income taxes ................................... -- --
-------- --------
Loss from continuing operations ................ (958) (2,920)
Loss from discontinued operations .............. -- (2,466)
-------- --------
Net loss ....................................... $ (958) $ (5,386)
======== ========
Weighted average common shares outstanding ..... 5,688 4,667
======== ========
Basic net (loss) per common share:
Continuing operations ........................ $ (0.17) $ (0.63)
Discontinued operations ...................... -- (0.53)
-------- --------
Basic net (loss) per common share .............. $ (0.17) $ (1.16)
======== ========
Weighted average dilutive shares outstanding ... 5,688 4,667
======== ========
Diluted net loss per common share:
Continuing operations ........................ $ (0.17) $ (0.63)
Discontinued operations ...................... -- (0.53)
-------- --------
Diluted net (loss)per common share ............. $ (0.17) $ (1.16)
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended March 31,
2002 2001
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss ................................................................ $ (958) $(5,386)
Adjustments to reconcile net (loss) to net cash provided by (used in)
operating activities:
Loss from discontinued operations ................................... -- 2,466
Depreciation and amortization ....................................... 470 888
Loss on the write down of debt financing costs ...................... 98 --
Loss on the disposition of assets ................................... -- 5
Deferred revenue .................................................... (7) (28)
Provision (credit) for doubtful accounts ............................ (17) 33
Provision (credit) for excess and obsolete inventory ................ (7) (3)
Changes in assets and liabilities:
Trade accounts receivable ........................................... 3,679 (556)
Inventories ......................................................... 2,274 331
Other assets ........................................................ 15 193
Accounts payable and accrued expenses ............................... (2,322) 1,471
Net change in assets and liabilities of discontinued operations ..... -- (3,386)
------- -------
Net cash provided by (used in) operating activities ....................... 3,225 (3,972)
------- -------
Cash flows from investing activities:
Capital expenditures .................................................... (121) (177)
------- -------
Net cash used in investing activities ..................................... (121) (177)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of debt ...................................... -- 936
Payments on loans payable and capital leases ............................ (3,111) (577)
Proceeds from issuance of common stock .................................. -- 226
------- -------
Net cash provided by (used in) financing activities ....................... (3,111) 585
------- -------
Net (decrease) in cash and cash equivalents ............................... (7) (3,564)
Cash and cash equivalents at beginning of year ............................ 25 3,697
------- -------
Cash and cash equivalents at end of period ................................ $ 18 $ 133
======= =======
Non-cash transactions:
Equipment acquisitions funded through debt .............................. $ 16 $ --
Cash paid for:
Interest ................................................................ 312 260
Taxes ................................................................... 5 11
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BOUNDLESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
1. Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information refer to
the consolidated financial statements and footnotes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. These financial
statements have been prepared assuming that the Company will continue as a going
concern and, accordingly, do not include any adjustments that might result from
the outcome of the uncertainties described herein. The audit opinion included in
the December 31, 2001 Form 10-K annual report contained an explanatory paragraph
regarding the Company's ability to continue as a going concern.
2. 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 and thin
client 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, including Windows-based
applications, as well as older "legacy" applications, running on mainframes,
mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports desktop computer
display terminals, which generally do not have graphics capabilities, ("General
Display Terminals and 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 March 31, 2002, the Company
owned approximately 75% of the outstanding shares of common stock of this
subsidiary. Boundless Manufacturing is utilizing the Company's state-of-the-art
ISO 9002 certified manufacturing facilities in Hauppauge, NY, and may acquire
additional manufacturing facilities as the business expands. Services include
supply chain optimization, global supply base management, PCBA assembly and
test, 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 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 Chicago, Atlanta, Los Angeles
and The Netherlands.
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.
Boundless Manufacturing will develop relationships with those OEMs and on-demand
manufacturers ("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 premise
telco, office technology products, industrial controls and custom or embedded
"PC" applications.
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On May 11, 2001, management decided to discontinue Merinta, Inc.("Merinta"), a
subsidiary that provided software for the Internet appliances market. See Note
9.
3. Going Concern Considerations and Management's Plans
As of March 31, 2002, the Company was in violation of certain covenants of the
Chase Credit Line. On April 24, 2002 the Company entered into a Forbearance
Agreement (the "Agreement") relating to the Chase Credit Line with our secured
lenders. Under the Agreement, our lenders agreed not to exercise their remedies
under the Chase Credit Line, under which we are in default, until May 31, 2002
unless we default under the Agreement or a new default arises under the Chase
Credit Line.
During the forbearance period, we are required to pay our lenders $50 per week
against our loan balance and to continue to pay interest under the Chase Credit
Line. The Agreement in general allows us to use our collections during the
forbearance period to make these payments, to pay a $120 commitment fee to a
potential replacement lender for a replacement line of credit and to make the
payments set forth in our budget of weekly expenses which must be approved by
the lenders. However, the Agreement caps the Chase Credit Line at $5,400, to be
reduced by our weekly $50 payments, and modifies our borrowing base in several
ways including by capping our eligible inventory at $1,600. Our collections
during the forbearance period that are available for our use will depend on our
borrowing base as may be applicable from time to time. As of April 29, 2002, the
Company's outstanding debt under the Chase Credit Line was $5,350.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has incurred
significant losses from operations, has a working capital deficit totaling
approximately $17 million, resulting primarily from the classification of debt
under the Company's loan and mortgage agreements to current liabilities as a
result of loan covenant violations and it requires new financing to meet its
current cash requirements. These factors raise substantial doubt about the
Company's ability to continue as a going concern, unless management's plans are
effected in a timely manner. Management believes that the following actions, in
addition to the continued profitable growth of the Company's operating
subsidiaries, will afford the Company the ability to fund its daily operations
and service its remaining debt obligations. No adjustments have been made to the
carrying value of assets or liabilities as a result of the uncertainty about
obtaining cash required
The primary issues management will focus on in the immediate future to address
this matter include:
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 Completing negotiations with a lender to provide an asset-based
revolving line of credit as a replacement of the Company's existing
revolving line of credit. There can be no assurance that these
negotiations will be successful.
o Working with its existing secured lender on a restructuring of the
terms of the debt which it holds to allow for the closing of an
agreement with a replacement lender. While management is hopeful an
arrangement can be achieved, it can give no assurance an agreement
will be reached.
o Negotiating with the Company's unsecured creditors a restructuring
of the Company's debt to settle our debt to each of them in one of
three ways: (1) creditors who meet certain investor eligibility
requirements can receive shares of our convertible preferred stock
with a stated value equal to the face amount of the debt, or (2) any
creditor can receive cash payment of a percentage of the amount of
the debt, with payment over a 120-day period commencing promptly
after we complete a refinancing of our credit facility, or (3)
creditors who are owed $10 or less (and those who voluntarily reduce
their claim to $10) can receive an amount equal to a certain higher
percentage of their claim. Our offer is contingent upon acceptance
by our creditors holding at least 75% of our unsecured debt.
There are no assurances that management will be successful in negotiating
with its remaining creditors or raising sufficient capital to continue as a
going concern.
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4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in first-out basis. The major components of inventories are as follows:
March 31, December 31,
2002 2001
--------- ------------
Raw materials and purchased components ......... $4,326 $6,329
Finished goods ................................. 655 952
Service parts .................................. 824 792
------ ------
Total inventories .............................. $5,805 $8,073
====== ======
5. Stockholders' Deficit
At March 31, 2002 and December 31, 2001 stockholders' deficit consisted of the
following:
March 31, December 31,
2002 2001
--------- ------------
Common stock, $0.01 par value, 25,000,000 shares
authorized,5,688,037 and 5,688,037 shares issued
at March 31, 2002 and December 31, 2001, respectively ... $ 57 $ 57
Additional paid-in capital ................................ 35,280 35,280
Accumulated deficit ....................................... (40,297) (39,339)
Accumulated other comprehensive loss ...................... (33) (141)
-------- --------
Total stockholders' deficit ........................... $ (4,993) $ (4,143)
======== ========
6. Major Customers
The Company markets its terminal products through OEMs and reseller distribution
channels. Customers can buy the Company's products from an international network
of value-added resellers (VARs) and regional distributors. Through its sales
force, the Company sells directly to large VARs and regional distributors and
also sells to major national and international distributors. For the first
quarter ended March 31, 2002 and 2001, sales to three major OEMs as a percentage
of total revenues were 28% and 19%, respectively.
7. Business Segments
The Company's manufacturing is conducted at its New York and Florida facilities
(through April 16, 2002 - see Note 12) and its sales force operates from five
geographically dispersed locations in the United States and the United Kingdom.
Operating segments are identified as components of an enterprise about which
separate financial information is available for evaluation by its decision
making group. In line with the formation of its two new subsidiaries, effective
in 2000 the Company began managing its operations and reporting its financial
results as three business segments. However, due to the decision to discontinue
Merinta (see Note 9), only two continuing business segments remain. The results
of the reportable segments are derived from Boundless' management reporting
system. These results are based on the Company's method of internal reporting
and are not necessarily in conformity with generally accepted accounting
principles. These results are used to evaluate the performance of each segment
and determine the appropriate resource allocation mix.
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Information for the current and prior year by business segment is presented
below (in thousands):
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
31-Mar-02 Total nations ogies/Corp. uring
------------------------------------- -------- --------- ----------- ---------
Customer Revenue .................... $ 10,022 $ 5,965 $ 4,057
Intercompany Revenue ................ $ (4,276) 4,276
-------- -------- -------- --------
Total Revenue ....................... $ 10,022 $ (4,276) $ 5,965 $ 8,333
======== ======== ======== ========
Gross Margin ........................ $ 665 $ (221) $ 1,539 $ (653)
======== ======== ======== ========
Gross Margin percent ................ 6.6% 25.8% -7.8%
--------
Operating income (loss) ............. $ (614) $ 652 $ (1,266)
======== ======== ========
Total assets by business segment .. $ 26,835 $ 13,943 $ 12,892
======== ======== ========
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
31-Mar-01 Total nations ogies/Corp. uring
------------------------------------- -------- --------- ----------- ---------
Customer Revenue .................... $ 12,989 $ 9,472 $ 3,517
Intercompany Revenue ................ $ (6,556) 6,556
-------- -------- -------- --------
Total Revenue ....................... $ 12,989 $ (6,556) $ 9,472 $ 10,073
======== ======== ======== ========
Gross Margin ........................ $ 1,548 $ (286) $ 2,165 $ (331)
======== -------- ======== ========
Gross Margin percent ................ 11.9% 22.9% -3.3%
========================
Operating income (loss) ............. $ (2,494) $ (458) $ (2,036)
======== ======== ========
Total assets by business segment .. $ 38,175 $ 16,884 $ 21,291
======== ======== ========
Pertinent financial data by major geographic segments for the first quarter
ended March 31, 2002 and 2001 are:
March 31, March 31,
2002 2001
--------- ---------
Net sales to unaffiliated customers:
United States ................................ $ 8,507 $ 9,291
United Kingdom ............................... 279 1,557
Other European countries ..................... 1,038 1,936
Other foreign countries ...................... 198 205
------- -------
Total sales .................................. $10,022 $12,989
======= =======
8. Comprehensive Income
Effective January 1, 2001, the Company adopted FAS 133 which requires that all
derivative instruments, such as interest rate swap contracts, be recognized in
the financial statements and measured at their fair market value.
The Company uses interest rate swaps to hedge a portion of total debt that is
subject to variable interest rates and designates these instruments as cash flow
hedges. These contracts are considered to be a hedge against changes in the
amount of future cash flows associated with the interest payments on
variable-rate debt obligations. Accordingly, the interest rate swaps are
reflected at fair value in the Consolidated Balance Sheet and the related gains
or losses on these contracts, net of related income tax effect, are recorded as
a component of accumulated other comprehensive loss. The Company does not enter
into such contracts for speculative purposes and currently these are the only
derivative instruments held by the Company as of March 31, 2002. The fair value
of interest rate swap contracts are determined based on the discounted estimated
cash flows derived from the forward yield curve at the inception of the swap
versus the forward yield curve at the end of the reporting period.
To the extent that any of these swaps are not completely effective in offsetting
the change in interest cash flows being hedged, the ineffective portion is
immediately recognized in interest expenses. Effectiveness is measured on a
quarterly basis using the
9 of 19
cash flow method. No other cash payments are made unless the contract is
terminated prior to maturity, in which case, the amount paid or received in
settlement is established by agreement at the time of termination.
The adoption of FAS 133 at January 31, 2001, resulted in recording $30 in
accumulated other comprehensive loss for the cumulative effect of the accounting
change. As of March 31, 2002, the Company had one interest rate swap contract
remaining, having a nominal principal amount of $1,222 with a maturity date of
March 2003. The aggregate fair market value of all interest rate swap contracts
was ($33) on March 31, 2002 and is included in accrued expenses and other
current liabilities on the Consolidated Balance Sheet.
The Company's comprehensive income (loss) for the first quarter of 2002 and 2001
is as follows:
March 31, March 31,
2002 2001
--------- ---------
Net loss ......................................... $(958) $(5,386)
Other comprehensive income (loss):
Cumulative effect of adoption of FAS 133 ....... -- (30)
Cash flow hedges ............................... 108 (75)
----- -------
Other comprehensive income (loss): ........... 108 (105)
----- -------
Total comprehensive loss ......................... $(850) $(5,491)
===== =======
9. Discontinued Operations
On May 11, 2001, the Board of Directors of the Company formally approved a plan
to discontinue the operations of Merinta. Since November 2000, following an
investment by National Semiconductor in Merinta, the Company was prohibited from
contributing cash to the subsidiary. As a result, Merinta was required to fund
its working capital needs from the proceeds of the National Semiconductor
investment, cash generated from operations, and proceeds from any additional
investments. However, the cash generated from operations was not sufficient to
cover its operating needs and the Company was not successful in raising
additional equity investments to supplement the proceeds from National
Semiconductor. The loss from discontinued operations for the period January 1
through March 31, 2001 was $2,466.
10. Sale of Product Line
On June 29, 2001 the Company completed the sale of its thin client business to
Neoware Systems, Inc. ("Neoware"). The sale included the Company's Capio(R)
product line, SAM Remote Administrator Software, associated intellectual
properties and access to the existing thin client distribution and customer
databases. The sale also included an outsourcing arrangement to continue to
produce, service, and support the Capio family of products for Neoware.
11. Recent Accounting Pronouncements
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" in the
first quarter of 2002. Effective January 1, 2002, the Company ceased
amortization of goodwill resulting in a decrease of $466 in amortization for the
three months ended March 31, 2002 compared to the same period in 2001. Instead
of amortizing goodwill over a fixed period of time, the Company will measure the
fair value of the acquired business at least annually to determine if goodwill
has been impaired. In addition, the Company will complete the first step of the
goodwill impairment test by June 30, 2002, which requires determining the fair
value of the reporting unit, as defined by SFAS 142, and comparing it to the
carrying value of the net assets allocated to the reporting unit. The Company
will not be able to determine the impact of SFAS 142 on its Consolidated
Financial Statements until such time as it applies all of its provisions. And
there are no assurances that the application of SFAS 142 will not result in a
material impairment charge.
The following schedule presents net income, basic earnings per share and diluted
earnings per share, exclusive of goodwill amortization expense for the periods
in which the standard had not been adopted.
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March 31,
2001
----------
Reported net loss ............................................. $ (5,386)
add back: goodwill amortization ............................... 466
---------
Adjusted net loss ............................................. $ (4,920)
=========
Basic earnings per share:
Reported net loss .......................................... $ (1.16)
Goodwill amortization ...................................... 0.10
---------
Adjusted net loss per common share ............................ $ (1.06)
=========
Diluted earnings per share:
Reported net loss .......................................... $ (1.16)
Goodwill amortization ...................................... 0.10
---------
Adjusted diluted net loss per common share .................... $ (1.06)
=========
In October 2001 the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective
for fiscal years beginning after December 15, 2001. The Company has not yet
estimated if subsequent events (Note 12) will result in any impairment of
long-lived assets
12. Subsequent Events
On April 16, 2002, the Company announced that its subsidiary, Boundless
Manufacturing, will relocate its Printed Circuit Board Assembly (PCBA)
operations from Boca Raton, FL, into its Long Island manufacturing campus in
Hauppauge, NY. The Company believes the move will result in overall expense
reduction and increased efficiencies in the New York systems assembly operation.
The Company anticipates that the relocation will occur in phases with completion
scheduled by the beginning of its third quarter. The Company also anticipates
there will be some losses incurred for the disposal of assets which will not be
part of the relocation. The Company expects these charges to be recorded in the
second quarter of 2002 but has not yet determined what the amount will be or if
it will have a material effect on its Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The numbers and percentages contained in this Item 2 are approximate. Dollar
amounts are stated in thousands.
First quarter of 2002 compared with first quarter of 2001
Revenue - Revenue for the quarter ended March 31, 2002 was $10,022 as compared
to $12,989 for the quarter ended March 31, 2001.
Sales of the Company's General Display Terminals declined 18% to $5,965 for the
quarter ended March 31, 2002 from $7,280 for the quarter ended March 31, 2001.
Declining demand for General Display Terminals was the main reason for the
decrease in revenue. The Company believes the market for General Display
Terminals will continue to decline as customers move toward applications
requiring graphical user interfaces.
Revenue in the first quarter of 2001 for the Capio product line which was sold
in June 2001 (Note 10) was $2,167.
Revenues for the period ending March 31, 2002, from Boundless Manufacturing were
$4,057, excluding intercompany revenue, as compared to $3,517 for the period
ending March 31, 2001. The revenue growth is attributable to the introduction of
new customers in the second half of 2001. The Company anticipates continued
growth in revenues from this segment of the business as Boundless Manufacturing
executes its plan of offering a complete and complementary line of services to
both middle-market OEMs, and start-up companies.
Net revenue from the Company's repairs and spare parts business for the quarter
ended March 31, 2002 was $548 as compared to $551 for the quarter ended March
31, 2001.
Comdial, IBM and Compaq were the most significant customers for the Company's
products, accounting for 12%, 8% and 8% of revenue, respectively, for the
quarter ended March 31, 2002.
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Gross Margin - Gross margin for the three months ended March 31, 2002 was $665
(7% of revenue) compared to gross margin of $1,548(12% of revenue) for the first
quarter of 2001. The decrease in gross margin as a percent of revenue is
attributable to the decline in the General Display Terminals revenue, which
yields higher gross profits than Boundless Manufacturing. As of March 31, 2002,
Boundless Manufacturing was operating with two manufacturing facilities, both of
which were underutilized and resulted in $648 of excess fixed overhead costs in
the gross margin.
In a continuing effort to maintain and improve margins in an industry otherwise
characterized by commodity pricing, management has focused on quality,
flexibility, and product cost reductions. From time-to-time margins are
adversely affected by industry shortages of key components. The Company
emphasizes product cost reductions in its research and development activities
and frequently reviews its supplier relationships with the view to obtaining the
best component prices available.
Total Operating Expenses - For the quarter ended March 31, 2002, operating
expenses decreased 68% to $1,279 (13% of revenue), compared to expenses for the
first quarter of 2001 of $4,042(31% of revenue). This decrease is attributable
to the Company's aggressive efforts to align sales, marketing and administrative
expenses with the revenue decline as well as the need for lower expenditures in
these areas for the emerging Boundless Manufacturing business. Specific
year-to-year decreases are explained below.
Sales and Marketing Expenses - Sales and marketing expenses decreased 72% to
$492 (5% of revenue) for the quarter ended March 31, 2002 from $1,772 (14% of
revenue) for the quarter ended March 31, 2001. This decrease was mainly due to
the elimination of expenditures for sales and marketing programs related to the
Capio product line, which was sold to Neoware Systems, Inc. in June 2001. The
Company promotes its products using media advertising, direct mail,
telemarketing, public relations and cooperative channel marketing programs.
General and Administrative Expenses - General and administrative expenses
decreased to $819 (8% of revenue), from $1,847 (14% of revenue) for the three
months ended March 31, 2002 and 2001, respectively. The elimination of goodwill
amortization in accordance with SFAS 142 accounted for $466 of the decrease.
Employee compensation and travel reductions accounted for $550 of the
year-to-year reduction in expenditures.
Research and Development Expenses - Research and development expenses for the
first quarter decreased to $307 in 2002 from $401 in 2001. Personnel expense
reductions were attributable for this decrease.
Other expenses (credits) - Other credits for the quarter ended March 31, 2002
was $(339) compared to expenses of $22 for the period ended March 31, 2001. In
the first quarter of 2002, the Company reversed $450 of prior years' bonus
accruals. This reversal stemmed from several employees' waiver of their 2000
bonus awards in 2002. This credit was partially offset by a charge of $98 for
the write down of debt financing costs.
Interest Expense, net - Interest expense, net for the quarter ended March 31,
2002 was $344 compared to $426 for the comparable period in 2001. This reduction
is attributable to the Company's lower outstanding debt.
Loss From Discontinued Operations- The loss from March 31, 2001 was $2,466
relating to the Company's decision to discontinue the operations of Merinta.
Income Tax Expense - For the first quarter of 2002 and 2001, the Company did not
record an income tax credit against the recorded loss before income taxes of
$958 and $5,386 respectively. As a result of uncertainties as to whether the
related future tax benefits will be realized, the Company has provided for a
100% valuation allowance against the deferred tax assets attributable to these
losses.
Net Income (Loss) - For the quarter ended March 31, 2002, the Company recorded a
net loss of $958, compared to net loss of $5,386 for the quarter ended March 31,
2001.
LIQUIDITY AND CAPITAL RESOURCES
The discussion below regarding liquidity and capital resources should be read
together with the information included in the Notes to Consolidated Financial
Statements.
As of March 31, 2002 the Company had a working capital deficiency of $17,231 as
compared to a deficiency of $16,473 at December 31, 2001. 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 May 25, 2000, the Company signed an agreement with The Chase Manhattan Bank
("Chase") amending and restating the existing credit line to add as co-borrowers
Boundless
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Manufacturing and Merinta. Terms of the credit line (the "Chase Credit Line")
were substantially similar to those previously in effect. The credit line
expires April 14, 2003. On November 16, 2000, in connection with the equity
investment secured for Merinta, the Company amended the revolving credit line
entered into May 25, 2000. On April 17, 2001, the Chase Credit Line was further
amended, including a reduction in the overall amount of the line from $15,000 to
$12,000 as well as an immediate reduction in the amount of the line which could
be collateralized by inventory from $5,000 to $3,800, to be reduced further by
$100 per month beginning August 1, 2001.
As of March 31, 2002, the Company was in violation of certain covenants of the
Chase Credit Line. On April 24, 2002 the Company entered into a Forbearance
Agreement (the "Agreement") relating to the Chase Credit Line with our secured
lenders. Under the Agreement, our lenders agreed not to exercise their remedies
under the Chase Credit Line, under which we are in default, until May 31, 2002
unless we default under the Agreement or a new default arises under the Chase
Credit Line.
During the forbearance period, we are required to pay our lenders $50 per week
against our loan balance and to continue to pay interest under the Chase Credit
Line. The Agreement in general allows us to use our collections during the
forbearance period to make these payments, to pay a $120 commitment fee to a
potential replacement lender for a replacement line of credit and to make the
payments set forth in our budget of weekly expenses which must be approved by
the lenders. However, the Agreement caps the Chase Credit Line at $5,400, to be
reduced by our weekly $50 payments, and modifies our borrowing base in several
ways including by capping our eligible inventory at $1,600. Our collections
during the forbearance period that are available for our use will depend on our
borrowing base as may be applicable from time to time. As of April 29, 2002, the
Company's outstanding debt under the Chase Credit Line was $5,350.
The Company is highly leveraged. As of March 31, 2002, the Company had negative
tangible net worth of $8,422 and total liabilities of $31,828. The Company's
liabilities at March 31, 2002 included repayment of a revolving loan of $5,561
plus interest maturing April 2003, a ten-year promissory note in the amount of
$5,908 which requires monthly principal and interest payments through July 1,
2009 and capital leases in the amount of $1,631 which require monthly payments
plus interest through February 2006.
Boundless Technologies has an agreement with a commercial lender for a loan
secured by a mortgage on the Boundless facility located in Hauppauge, NY. The
loan, which is in the principal amount of $5,908 and carries a fixed interest
rate of 7.75%, is being amortized over a 25-year period with a balloon payment
due on July 1, 2009. The monthly payments are approximately $50. To induce the
lender to make the loan, the Company executed and delivered a guaranty of
Boundless' obligations to the lender. Due to cross-default provisions within the
agreement, the Company is also in default with respect to the mortgage.
In the event there is a further decline in the Company's sales and earnings
and/or a decrease in availability under the credit line, the Company's cash flow
would be adversely affected. Accordingly, the Company may not have the necessary
cash to fund all of its obligations or execute its business plan.
Net cash provided by operating activities for the three months ended March 31,
2002 was $3,225 attributable to non-cash expenses (principally depreciation) of
$444, a reduction in accounts receivable of $3,679 and a reduction of
inventories of $2,274. This increase in cash was offset by a reduction of
accounts payable and accrued liabilities of $2,322. Net cash used in investing
activities was comprised of capital expenditures of $121. Net cash used in
financing activities included repayment on the Company's revolving loan in the
amount of $2,946 and payments on other loans in the amount of $165.
Impact of Inflation - The Company has not been adversely affected by inflation
because technological advances and competition within the microcomputer industry
have generally caused prices of products sold by the Company to decline. The
Company has flexibility in its pricing and could, if necessary, pass along price
changes to most of its customers.
Factors That Could Affect Future Results
Competition. The Company encounters aggressive competition in all areas of its
business. The Company has numerous competitors, ranging from some of the world's
largest corporations to many relatively small and highly specialized firms. The
Company competes primarily on the basis of technology, performance, price,
quality, reliability, distribution and customer service and support. Product
life cycles are short. To remain competitive, the Company must be able to
develop new products and periodically enhance its existing products. In
particular, the Company anticipates that it will have to continue to lower the
prices of many of its products to stay competitive and effectively manage
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financial returns with resulting reduced gross margins. In some of the Company's
markets, it may not be able to compete successfully against current and future
competitors, and the competitive pressures it faces could harm its business and
prospects.
New 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 the Company's
inventory management and flexible manufacturing systems will adequately protect
against this risk.
Reliance on Third Party Distribution Channels and Inventory Management. The
Company uses
third-party distributors to sell its products. As a result, the financial
soundness of its wholesale and retail distributors, and its continuing
relationships with these distributors, are important to the Company's success.
Some of these distributors may have insufficient financial resources and may not
be able to withstand changes in business conditions. The Company's revenue and
earnings could suffer if its distributors' financial condition or operations
weaken or if its relationship with them deteriorates. Additionally, inventory
management becomes increasingly complex as the Company continues to sell a
significant mix of products through distributors. Third party distributors
constantly adjust their product orders from the Company in response to:
o The supply of the Company's and its competitors' products available to the
distributor, and
o The timing of new product introductions and relative features of the
products.
Distributors may increase orders during times of product shortages, cancel
orders if their inventory is too high or delay orders in anticipation of new
products. If the Company has excess inventory, the Company may have to reduce
its prices and write down inventory, which in turn could result in lower gross
margins.
Intellectual Property. The Company generally relies upon patent, copyright,
trademark and trade secret laws in the United States and in certain other
countries, and agreements with its employees, customers and partners, to
establish and maintain its proprietary rights in its technology and products.
However, any of the Company's intellectual proprietary rights could be
challenged, invalidated or circumvented. The Company's intellectual property may
not necessarily provide significant competitive advantages. Also, because of the
rapid pace of technological change in the information technology industry, many
of the Company's products rely on key technologies developed by third parties,
and the Company may not be able to continue to obtain licenses from these third
parties. Third parties may claim that the Company is infringing their
intellectual property. Even if the Company does not believe that its products
are infringing third parties' intellectual property rights, the claims can be
time-consuming and costly to defend and divert management's attention and
resources away from its business. Claims of intellectual property infringement
might also require the Company to enter into costly royalty or license
agreements. If the Company cannot or does not license the infringed technology
or substitute similar technology from another source, its business could suffer.
Reliance on Suppliers. The Company's manufacturing operations depend on its
suppliers' ability to deliver quality components and products in time for it to
meet critical manufacturing and distribution schedules. The Company sometimes
experiences a short supply of certain component parts as a result of strong
demand in the industry for those parts. If shortages or delays persist, its
operating results could suffer until other sources can be developed. In order to
secure components for the production of new products, at times the Company makes
advance payments to suppliers, or the Company may enter into noncancelable
purchase commitments with vendors. If the prices of these component parts then
decrease after the Company has entered into binding price agreements, its
earnings could suffer. Further, the Company may not be able to secure enough
components at reasonable prices to build new products in a timely manner in the
quantities and configurations needed. Conversely, a temporary oversupply of
these parts could also affect its operating results.
International. Sales outside the United States make up more than 10% of the
Company's revenues. In addition, key suppliers are also located outside of the
United States. The Company's future earnings or financial position could be
adversely affected by a variety of international factors, including:
o Changes in a country or region's political or economic conditions,
o Trade protection measures,
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o Import or export licensing requirements,
o The overlap of different tax structures,
o Unexpected changes in regulatory requirements,
o Differing technology standards,
o Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section below), and
o Natural disasters.
Market Risk. The Company is exposed to foreign currency exchange rate risk
inherent in the Company's sales commitments, anticipated sales and assets and
liabilities denominated in currencies other than the U.S. dollar. The Company is
also exposed to interest rate risk inherent in its debt and investment
portfolios. The Company's risk management strategy uses derivative financial
instruments, primarily interest rate swaps, to hedge certain interest rate
exposures. The Company's intent is to offset gains and losses that occur on the
underlying exposures, with gains and losses on the derivative contracts hedging
these exposures. The Company does not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows;
however, foreign currency transaction gains or losses have not been material to
the Company's results of operations. The Company does not enter into derivatives
for trading purposes.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. In the
normal course of business, the Company frequently engages in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The completion of any one transaction may have a
material effect on the Company's financial position, results of operations or
cash flows taken as a whole. Divestiture of a part of the Company's business may
result in the cancellation of orders and charges to earnings. Acquisitions and
strategic alliances may require the Company to integrate with a different
company culture, management team and business infrastructure. The Company may
also have to develop, manufacture and market products with its products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, the Company's successful
integration of the entity into Boundless depends on a variety of factors,
including:
o The hiring and retention of key employees,
o Management of facilities in separate geographic areas, and
o The integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which may
divert the Company's attention from other business operations.
Environmental. Some of the Company's operations use substances regulated under
various federal and state laws governing the environment. It is the Company's
policy to apply strict standards for environmental protection to sites inside
and outside the U.S., even when not subject to local government regulations. The
Company records a liability for environmental remediation and related costs when
the Company considers the costs to be probable and the amount of the costs can
be reasonably estimated. Environmental costs are presently not material to the
Company's results of operations or financial position.
Profit Margin. The Company's profit margins vary somewhat among its products,
customer groups and geographic markets. Consequently, the Company's overall
profitability in any given period is partially dependent on the product,
customer and geographic mix reflected in that period's net revenue.
Stock Price. Boundless' stock price, like that of other technology companies,
can be volatile. Some of the factors that can affect its stock price are:
o The Company's, or a competitor's, announcement of new products, services
or technological innovations,
o Quarterly increases or decreases in the Company's earnings,
o Changes in revenue or earnings estimates by the investment community, and
o Speculation in the press or investment community.
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General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect Boundless' stock price.
For these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted. This type of litigation could result in substantial
costs and the diversion of management time and resources.
Earnings Fluctuations. Although the Company believes that it has the products
and resources needed for continuing success, the Company cannot reliably predict
future revenue and margin trends. Actual trends may cause the Company to adjust
its operations, which could cause period-to-period fluctuations in its earnings.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Form 10-Q contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will," and similar expressions are intended to identify forward-looking
statements. Such statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described in the Company's Form 10-K for the
year ended December 31, 2001. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements and
information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's revolving credit facility and long-term debt
obligations. The Company manages this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. At March 31, 2002 the Company had in place an interest rate swap
agreement in the amount of $1,222,000 at an effective interest rate of 8.9%. The
swap agreement is intended as an effective hedge to interest rate changes
against the outstanding balance of the Company's Revolving Loan.
The Company places its investments with high credit quality issuers and, by
policy, is averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk and reinvestment risk.
As of March 31, 2002 the Company's investments consisted of cash balances
maintained in its corporate account with the Chase Manhattan Bank.
All sales arrangements with international customers are denominated in U.S.
dollars. These customers are permitted to elect payment of their next month's
orders in local currency based on an exchange rate provided one month in advance
from the Company. The Company does not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows or
for trading purposes. Foreign currency transaction gains or losses have not been
material to the Company's results of operations.
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PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
As of March 31, 2002, the Company was in violation of certain covenants of the
Chase Credit Line. On April 24, 2002 the Company entered into a Forbearance
Agreement (the "Agreement") relating to the Chase Credit Line with our secured
lenders. Under the Agreement, our lenders agreed not to exercise their remedies
under the Chase Credit Line, under which we are in default, until May 31, 2002
unless we default under the Agreement or a new default arises under the Chase
Credit Line.
During the forbearance period, we are required to pay our lenders $50,000 per
week against our loan balance and to continue to pay interest under the Chase
Credit Line. The Agreement in general allows us to use our collections during
the forbearance period to make these payments, to pay a $120,000 commitment fee
to a potential replacement lender for a replacement line of credit and to make
the payments set forth in our budget of weekly expenses which must be approved
by the lenders. However, the Agreement caps the Chase Credit Line at $5,400,000
to be reduced by our weekly $50,000 payments, and modifies our borrowing base in
several ways including by capping our eligible inventory at $1,600,000. Our
collections during the forbearance period that are available for our use will
depend on our borrowing base as may be applicable from time to time. As of April
29, 2002, the Company's outstanding debt under the Chase Credit Line was
$5,350,000.
Boundless Technologies has an agreement with a commercial lender for a loan
secured by a mortgage on the Boundless facility located in Hauppauge, NY. The
loan, which is in the principal amount of $5,908,000 and carries a fixed
interest rate of 7.75%, is being amortized over a 25-year period with a balloon
payment due on July 1, 2009. The monthly payments are approximately $50,000. To
induce the lender to make the loan, the Company executed and delivered a
guaranty of Boundless' obligations to the lender. Due to cross-default
provisions within the agreement, the Company is also in default with respect to
the mortgage.
Item 4. Submission of Matters to a Vote of Security Holders
On February 28, 2002, the Company held its annual meeting of stockholders for
the year ending December 31, 2000. The purpose of the meeting was (i)to elect
directors to serve until the next stockholders' meeting; (ii)to approve the
adoption of our 2001 Incentive Plan, permitting the issuance of up to 284,000
shares of our Common Stock pursuant to grants of stock options and stock awards
to our employees, directors and others; and (iii)to ratify the appointment of
BDO Seidman, LLP as our independent auditors for the 2001 fiscal year.
The following tables provide information including the number of votes "For",
"Against" or "Withheld", and the number of abstentions and broker non-votes, for
each matter voted on and for each director nominee:
Table 1. Election of Directors
Nominee Votes Received (net of all Votes Withheld
------- -------------- --------------
votes withheld)
Richard Bowman 4,631,271 107,657
Gary Brooks 4,630,121 108,807
J. Gerald Combs 4,267,642 471,286
Anthony Giovaniello 4,631,432 107,496
Joseph V. Joy, Jr. 4,631,231 107,697
Safwan Masri 4,631,667 107,261
John J. McGovern 4,631,321 107,607
Oscar L. Smith 4,630,121 108,807
J. Frank Stephens 4,631,226 107,702
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Table 2. Adoption of the 2001 Incentive Plan
Votes "For" Votes "Against" Votes "Withheld"
----------- --------------- ----------------
4,534,331 181,875 22,722
Table 3. Ratification of BDO Seidman, LLP as the Company's certified
independent public accountants for the 2001 calendar year.
Votes "For" Votes "Against" Votes "Withheld"
----------- --------------- ----------------
4,700,239 29,061 9,628
Item 5. Other Information
On April 16, 2002, the Company announced that its subsidiary, Boundless
Manufacturing, will relocate its Printed Circuit Board Assembly (PCBA)
operations from Boca Raton, FL, into its Long Island manufacturing campus in
Hauppauge, NY. The Company believes the move will result in overall expense
reduction and increased efficiencies in the New York systems assembly operation.
The Company anticipates that the relocation will occur in phases with completion
scheduled by the beginning of its third quarter.
The Company also anticipates there will be some losses incurred for the disposal
of assets which will not be part of the relocation. The Company expects these
charges to be recorded in the second quarter of 2002 but has not yet determined
what the amount will be or if it will have a material effect on its Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement Concerning Computation of Per Share Earnings is hereby
incorporated by reference to "Condensed Consolidated Statements of Operations"
of Part I-Financial Information, Item 1 - Financial Statements, contained in
this Form 10-Q.
(b) Reports on Form 8-K
On April 30, 2002, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K disclosing that the Company had entered into with
its secured lenders a Forbearance Agreement (the "Agreement") relating to its
credit line with such lenders (the "Chase Credit Line"). Under the Agreement,
the Company's lenders agreed not to exercise their remedies under the Chase
Credit Line, under which the Company is in default, until May 31, 2002 unless
the Company defaults under the Agreement or a new default arises under the Chase
Credit Line.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 2002
Boundless Corporation
By: /s/ Joseph Gardner
----------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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