SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 September 30, 2002, the Registrant had approximately 6,705,613 shares of
Common Stock, $.01 par value per share outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 (unaudited) and
December 31, 2001..................................................... 3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2002 and 2001....... 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 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)
September 30, December 31,
2002 2002
------------ ------------
Current assets: (unaudited)
Cash and cash equivalents ................. $ 177 $ 25
Trade accounts receivable, net ............ 3,815 10,053
Income tax refund ......................... 11 13
Inventories ............................... 3,108 8,073
Prepaid expenses and other
Current assets ......................... 267 580
------------ ------------
Total current assets ................... 7,378 18,744
Property and equipment, net .................. 8,725 10,993
Goodwill, net ................................ 3,187 3,187
Other assets ................................. 614 291
------------ ------------
$ 19,904 $ 33,215
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt ......... $1,790 $ 15,362
Accounts payable .......................... 7,042 15,355
Convertible notes payable ................. 965 --
Accrued salaries .......................... 927 1,430
Accrued warranty .......................... 689 645
Accrued marketing programs ................ 30 100
Other accrued current liabilities ......... 2,113 2,015
Deferred revenue .......................... 250 310
------------ ------------
Total current liabilities .............. 13,806 35,217
------------ ------------
Long-term liabilities:
Long-term debt, less current maturities ... 9,181 833
Other ..................................... 250 1,308
------------ ------------
Total long-term liabilities ............ 9,431 2,141
------------ ------------
Total liabilities ...................... 23,237 37,358
Mandatorily redeemable preferred stock ....... 1,480 --
Stockholders' deficit:
Common stock .............................. 67 57
Additional paid-in capital ................ 35,844 35,280
Accumulated deficit ....................... (40,712) (39,339)
Accumulated other comprehensive loss ...... (12) (141)
------------ ------------
Total stockholders' deficit ............ (4,813) (4,143)
------------ ------------
$ 19,904 $ 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)
Nine Months Three Months
Ended Ended
September 30, September 30,
----------------------------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue ............................... $ 21,930 $ 45,960 $ 5,186 $ 18,074
Cost of revenue ....................... 21,749 40,901 5,211 15,605
-------- -------- -------- --------
Gross margin (loss) ........ 181 5,059 (25) 2,469
-------- -------- -------- --------
Operating expenses:
Sales and marketing ................ 1,421 4,813 347 1,168
General and administrative ......... 2,311 5,137 700 1,549
Research and development ........... 815 1,080 264 327
Other (credits) charges ............ 484 (2,097) (64) (332)
-------- -------- -------- --------
Total operating expenses ....... 5,031 8,933 1,247 2,712
-------- -------- -------- --------
Operating (loss) .......... (4,850) (3,874) (1,272) (243)
Interest expense, net .............. 964 1,210 317 336
Net gain on the restructuring
of payables ...................... (4,515) -- -- --
-------- -------- -------- --------
Loss before income taxes .............. (1,299) (5,084) (1,589) (579)
Income tax (credit) ................... -- (803) -- (803)
Income (loss) before discontinued
operations ....................... (1,299) (4,281) (1,589) 224
-------- -------- -------- --------
Loss from operations of
discontinued subsidiary .......... -- (2,466) -- --
Gain on disposal of
subsidiary ....................... -- 316 -- 316
-------- -------- -------- --------
Gain (loss) from
discontinued operations .......... -- (2,150) -- 316
-------- -------- -------- --------
Net income (loss) ..................... (1,299) (6,431) (1,589) 540
-------- -------- -------- --------
Accretion of preferred stock .......... 74 -- 74 --
Net income (loss) available
to common stockholders ............ $ (1,373) $ (6,431) $ (1,663) $ 540
======== ======== ======== ========
Weighted average common
shares outstanding ................ 6,365 5,022 6,488 5,087
======== ======== ======== ========
Basic net income (loss)
per common share:
Continuing operations ............ (0.22) (0.85) (0.26) 0.04
Discontinued operations .......... -- (0.43) -- 0.06
======== ======== ======== ========
Basic net income (loss)
per common share ................. $ (0.22) $ (1.28) $ (0.26) $ 0.10
======== ======== ======== ========
Weighted average dilutive
shares outstanding ............... 6,365 5,022 6,488 5,087
======== ======== ======== ========
Diluted net income
(loss) per common share:
Continuing operations .............. (0.22) (0.85) (0.26) 0.04
Discontinued operations - .......... (0.43) -- 0.06
-------- -------- -------- --------
Diluted net income (loss)
per common share ................. $ (0.22) $ (1.28) $ (0.26) $ 0.10
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4 OF 22
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Nine Months Ended September 30,
2002 2001
------- -------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) ................................................ $(1,373) $(6,431)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations ............................. -- 2,150
Net (gain) on the restructuring of payables ................... (4,515) --
Depreciation and amortization ................................. 1,332 2,708
Loss on the write down of debt financing costs ................ 98 --
(Gain) loss on the disposition or writedown of assets ......... 708 (1,475)
Deferred revenue .............................................. (60) 3
Provision for doubtful accounts ............................... 126 609
Provision (credit) for excess and obsolete inventory .......... (50) 97
Changes in assets and liabilities:
Trade accounts receivable ..................................... 6,113 (1,348)
Income tax refunds ............................................ 2 7
Inventories ................................................... 5,014 607
Other assets .................................................. 300 185
Accounts payable and accrued expenses ......................... (2,756) 3,390
Net change in assets and liabilities of
discontinued operations -- (5,155)
------- -------
Net cash provided by (used in) operating activities ................. 4,939 (4,653)
------- -------
Cash flows from investing activities:
Capital expenditures ............................................. (124) (337)
Proceeds from the sale of assets ................................. 440 1,600
------- -------
Net cash provided by investing activities .......................... 316 1,263
------- -------
Cash flows from financing activities:
Net proceeds from issuance of debt ............................... 860 738
Payments on loans payable and capital leases ..................... (6,199) (2,208)
Proceeds from issuance of common stock ........................... 162 1,189
------- -------
Net cash (used in) financing activities ............................. (5,177) (281)
------- -------
Net increase (decrease) in cash and cash equivalents ................ 78 (3,671)
Cash and cash equivalents at beginning of year ...................... 25 3,697
------- -------
Cash and cash equivalents at end of period .......................... $ 103 $ 26
======= =======
Non-cash transactions:
Equipment acquisitions funded through debt ....................... $ 16 $ 267
Common stock issued in exchange for debt ......................... 412
Manditorily redeemable preferred stock issued in exchange for debt 1,406
Cash paid for:
Interest ......................................................... 739 1,045
Taxes ............................................................ 5 16
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5 of 22
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 nine-month period
ended September 30, 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 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 September 30, 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 original
design 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.
On May 11, 2001, management decided to discontinue Merinta, Inc.("Merinta"), a
subsidiary that provided software for the Internet appliances market. See Note
10.
6 of 22
3. Going Concern Considerations and Management's Plans
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 $6 million 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 affected in a
timely manner. Management believes that the following actions, in addition to
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 the 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 The reduction of operating expenses associated with the Company's
Hauppauge manufacturing facility. The Company has entered into an
agreement with a real estate firm to assist the company to either lease
excess space in this facility or arrange a transaction involving the sale
or sale/leaseback of the facility.
o Continue 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, 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. 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. The Company reached agreement with its unsecured creditors
representing approximately $10,235 of debt which requires the Company to
make cash payments totaling approximately $2,881 and to issue shares of
Preferred Stock with a stated value of approximately $3,115. The cash
payments are scheduled as follows: during calendar year 2002 - $1,439;
2003 - $585; 2004 - $644; 2005 - $143; and 2006 - $70.
o As of June 27, 2002, the Company had entered into a new secured revolving
credit facility (the "CIT Credit Line") with The CIT Group/Business
Credit, Inc., as a replacement of its then existing revolving credit
facility (which the Company had been calling the Chase Credit Line). The
terms of the CIT Credit Line require the Company to obtain additional cash
equity capital and/or additional subordinated debt in an amount not less
than two million dollars ($2,000) not later than the end of the nine month
anniversary of the closing date. The Company is evaluating various
alternatives to meeting this requirement; however, there can be no
assurance the Company will be successful in raising additional cash.
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:
September, 30 December 31,
2002 2001
------------- -------------
Raw materials and purchased components .............. $ 2,168 $ 6,329
Finished goods ...................................... 123 952
Service parts ....................................... 817 792
------------- -------------
Total inventories ......... ......................... $ 3,108 $ 8,073
============= =============
5. Mandatorily Redeemable Preferred Stock
During the second quarter ended June 30, 2002, the Company issued mandatorily
redeemable convertible preferred stock (the "Preferred Stock"), in the face
amount of $4,365, as
7 of 22
partial payment to our former lenders for removing the lien on our assets and to
certain vendors as settlement against the Company's trade payables. The Company
retained the services of an independent firm to determine the fair value of the
Preferred Stock for purposes of recording the transactions on the Company's book
of records.
The convertible preferred stock was valued as a combination of an unsecured
fixed income like security ("Debt Portion") and a warrant. The warrant was
valued at $329 using the Black-Scholes option pricing model, including the
following assumptions:
Exercise price $3.00
Fair market value of common stock $0.34
Option Life 10 years
Volatility rate 95%
Risk-free Rate 4.84%
Dividend Rate 0%
The Debt Portion was valued at $1,078 using the discounted future cash flow
method. The future cash flow from the debt portion is equal to the redemption
value of the face amount of the Preferred Stock, $4,365 in June 2012, discounted
at a discount rate of 15%.
The combination of the Debt Portion and warrant provided for an estimated value
of the Preferred Stock of $1,406, resulting in the Company's recognizing a gain
on the settlement of troubled debt of $2,960 in the second quarter ended June
30, 2002. Assuming none of the holders of the Preferred Stock convert to Common
Stock of Boundless Corporation, the Company will be required to record a charge
to earnings available to common 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. The difference between the carrying value of the preferred
stock and its face value will be accreted, treated as a dividend and charged to
earnings available to common stockholders over the ten-year redemption period
unless conversion occurs, in which case accretion terminates at that point.
As of September 30, 2002, $74 was accreted and charged to earnings available to
common stockholders.
6. Stockholders' Deficit
At September 30, 2002 and December 31, 2001 stockholders' deficit consisted of
the following:
September, 30 December 31,
2002 2001
------------- ------------
Common stock, $0.01 par value,
25,000,000 shares authorized,
6,705,613 and 5,688,037 shares
issued at September 30, 2002 and
December 31, 2001, respectively ....... $ 67 $ 57
Additional paid-in capital .............. 35,844 35,280
Accumulated deficit ..................... (40,712) (39,339)
Accumulated other comprehensive loss ..... (12) (141)
----------- -----------
Total stockholders' deficit .......... $ (4,813) $ (4,143)
=========== ===========
7. 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 third
quarter ended September 30, 2002 and 2001, sales to three major OEMs as a
percentage of total revenues were 39% and 63%, respectively.
8. Business Segments
The Company's manufacturing is conducted at its New York facility 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
8 of 22
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 10), 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.
Information for the current and prior year by business segment is presented
below (in thousands):
9 of 22
Boundless
Three Months Ended Technologies/ Boundless
September 30, 2002 Total Eliminations Corp. Manufacturing
------------------------------------------------- -------- ----------- ------------ -------------
Customer Revenue ................................ $ 5,186 $ 3,241 $ 1,945
Intercompany Revenue ............................ $ (2,129) 2,129
-------- ---------- ---------- ----------
Total Revenue ................................... $ 5,186 $ (2,129) $ 3,241 $ 4,074
======== ========== ========== ==========
Gross Margin (loss) ............................. $ (25) $ (23) $ 903 $ (905)
======== ========== ========== ==========
Gross Margin percent ............................ -0.5% 27.9% -22.2%
-------- ---------- ----------
Operating income (loss) ......................... $ (1,272) $ 394 $ (1,666)
======== ========== ==========
Boundless
Three Months Ended Technologies/ Boundless
September 30, 2001 Total Eliminations Corp. Manufacturing
------------------------------------------------- -------- ----------- ------------ -------------
Customer Revenue ................................ $ 18,074 $ 7,384 $ 10,690
Intercompany Revenue ............................ $ (5,292) 5,292
-------- ---------- ---------- ----------
Total Revenue ................................... $ 18,074 $ (5,292) $ 7,384 $ 15,982
======== ========== ========== ==========
Gross Margin (loss) ............................. $ 2,469 $ (187) $ 2,131 $ 525
======== ========== ========== ==========
Gross Margin percent ............................ 13.7% 28.9% 3.3%
-------- ---------- ----------
Operating income (loss) ......................... $ (243) $ 756 $ (999)
======== ========== ==========
Boundless
Nine Months Ended Technologies/ Boundless
September 30, 2002 Total Eliminations Corp. Manufacturing
------------------------------------------------- -------- ----------- ------------ -------------
Customer Revenue ................................ $ 21,930 $ 13,549 $ 8,381
Intercompany Revenue ............................ $ (9,485) 9,485
-------- ---------- ---------- ----------
Total Revenue ................................... $ 21,930 $ (9,485) $ 13,549 $ 17,866
======== ========== ========== ==========
Gross Margin (loss) ............................. $ 181 $ (355) $ 3,500 $ (2,964)
======== ========== ========== ==========
Gross Margin percent ............................ 0.8% 25.8% -16.6%
-------- ---------- ----------
Operating income (loss) ......................... $ (4,850) $ 1,379 $ (6,229)
======== ========== ==========
Total assets by business segment ............... $ 19,904 $ 12,867 $ 7,037
======== ========== ==========
Boundless
Nine Months Ended Technologies/ Boundless
September 30, 2001 Total Eliminations Corp. Manufacturing
------------------------------------------------- -------- ----------- ------------ -------------
Customer Revenue ................................ $ 45,960 $ 25,657 $ 20,303
Intercompany Revenue ............................ -- $ (18,586) 18,586
-------- ---------- ---------- ----------
Total Revenue ................................... $ 45,960 $ (18,586) $ 25,657 $ 38,889
======== ========== ========== ==========
Gross Margin .................................... $ 5,059 $ (886) $ 5,870 $ 75
======== ========== ========== ==========
Gross Margin percent ............................ 11.0% 22.9% 0.2%
-------- ---------- ----------
Operating income (loss) ......................... $ (3,874) $ 785 $ (4,659)
======== ========== ==========
Total assets by business segment ............... $ 36,525 $ 14,564 $ 21,961
======== ========== ==========
Pertinent financial data by major geographic segments for the third quarter
ended September 30, 2002 and 2001 are:
10 OF 22
September, 30 September, 30
2002 2001
---------- ----------
Net sales to unaffiliated customers:
United States ............................ $ 4,038 $ 15,301
United Kingdom ........................... 183 1,217
Other European countries.................. 903 1,314
Other foreign countries................... 62 242
---------- ----------
Total sales .............................. $ 5,186 $ 18,074
========== ==========
9. 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 income (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 September 30, 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 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 1, 2001, resulted in recording $30 in
accumulated other comprehensive loss for the cumulative effect of the accounting
change. As of September 30, 2002, the Company had one interest rate swap
contract remaining, having a nominal principal amount of $916 with a maturity
date of March 2003. The aggregate fair market value of all interest rate swap
contracts was ($12) on September 30, 2002 and is included in accrued expenses
and other current liabilities on the Consolidated Balance Sheet.
The Company's comprehensive income (loss) for the third quarter and first nine
months of 2002 and 2001 is as follows:
Nine Months Three Months
Ended Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss) ......................... $(1,299) $(6,431) $(1,589) $ 540
Other comprehensive income (loss):
Cumulative effect of adoption
of FAS 133 ........................... -- (30) -- --
Cash flow hedges ....................... 129 (98) 11 (21)
------- ------- ------- -------
Other comprehensive income (loss): .. 129 (128) 11 (21)
------- ------- ------- -------
Total comprehensive income (loss) ......... $(1,170) $(6,559) $(1,578) $ 519
======= ======= ======= =======
10. 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,
under its then existing credit facility, 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 September 30, 2001 was $2,150.
11 of 22
11. 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.
12. 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 $1,398 in amortization for
the nine months ended September 30, 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. The Company has completed the first step of the
goodwill impairment test, having determined the fair value of the reporting
unit, as defined by SFAS 142, and compared it to the carrying value of its
allocated net assets. The Company used the present value of projected future
cash flows to estimate the fair value of the assets. The Company has determined
there had been no goodwill impairment as of January 1, 2002 or as of September
30, 2002.
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.
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported net loss ......................... $ (6,431) $ 540
add back: goodwill amortization .......... 1,398 466
------------- -------------
Adjusted net loss ........................ $ (5,033) $ 1,006
============= =============
Basic earnings per share:
Reported net loss ...................... $ (1.28) $ 0.10
Goodwill amortization .................. 0.28 0.07
------------- -------------
Adjusted net loss per common share ....... $ (1.00) $ 0.17
============= =============
Diluted earnings per share:
Reported net loss ...................... $ (1.28) $ 0.10
Goodwill amortization .................. 0.28 0.07
------------- -------------
Adjusted diluted net loss per common share $ (1.00) $ 0.17
============= =============
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. In June 2002, the Company
recorded an expense of $778 for the impairment of the carrying value of
machinery and equipment, which was sold in July 2002, upon closing of the
Florida manufacturing facility. The actual loss incurred upon disposal in July
was $708, resulting in a third quarter recovery of $70.
On April 30, 2002 the Financial Accounting Standards Board issued SFAS No.
145,"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No.13, and Technical Corrections". Among other provisions, SFAS 145 rescinds
SFAS 4 "Reporting Gains and Losses from Extinguishment of Debt." Accordingly,
gains or losses from extinguishment of debt shall not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary item
under the criteria of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Gains or losses from extinguishment of debt that do
not meet the criteria of APB 30 should be reclassified to income from continuing
operations in all prior periods presented. The applicable provisions of SFAS 145
are not effective until the Company's fiscal year end 2003. However, the Company
has elected early adoption, and therefore, has reclassified gains on early
extinguishment of debt and the related taxes to other income.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 will spread out the reporting of
expenses related to
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restructurings initiated after 2002, since commitment to a plan to exit an
activity or dispose of long-lived assets will no longer be enough to record a
liability for the anticipated costs. Instead, companies will record exit and
disposal costs when they are "incurred" and can be measured at fair value, and
they will subsequently adjust the recorded liability for changes in estimated
cash flows. The provisions of SFAS 146 are effective for exit and disposal
activities that are initiated after December 31, 2002. The Company does not
believe that the adoption of this statement will have any impact on the
Company's consolidated financial statements as no planned restructuring charges
currently exist.
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.
For the Three and Nine Month Periods Ending September 30, 2002
Revenue - Revenue for the quarter ended September 30, 2002, was $5,186 as
compared to $18,074 for the quarter ended September 30, 2001. Revenue for the
nine months ended September 30, 2002 was $21,930 versus $45,960 for 2001.
Sales of the Company's General Display Terminals declined 58% to $3,212 for the
quarter ended September 30, 2002 from $7,636 for the quarter ended September 30,
2001. On a year-to-year basis, revenue for General Display Terminals declined
40% to $13,470 from $22,474 in year 2001. The Company believes demand for
General Display Terminals will continue to decline at a rate of approximately
30% annually. The larger decline experienced by the Company in the current
quarter is a result of material shortages resulting from the Company's tight
cash position. Backlog for the Company's General Display Terminals as of
September 30, 2002, was approximately $4,000.
Revenues for the quarter ended September 30, 2002, from Boundless Manufacturing
were $1,945, excluding intercompany revenue, as compared to $10,690 for the
quarter ended September 30, 2001. Revenue for the nine-month period for
Boundless Manufacturing was $8,381 in 2002 versus $20,303 for the comparable
period in 2001. Sales to Comdial Corporation were $1,119 in the quarter ended
September 30, 2002, as compared to sales of $7,239 in the quarter ended
September 30, 2001. To diversify its risk, Boundless began to sub-contract
Comdial's production requirements during the third quarter. Since the
sub-contract model implemented by Boundless was effective, and in consideration
of Comdial's business decline and both companies' financial position, Boundless
and Comdial have worked together to move Comdial's business from Boundless
directly to these second-source manufacturing relationships. This will eliminate
the need for Boundless to fund the Comdial supply chain for which the cash cycle
had become quite extended over the past year. Boundless' revenue from Comdial
will end during the fourth quarter of 2002 as the relationship is transitioned.
At its current levels, the Comdial business was not contributing profit to the
Company.
In addition, the revenue decline for the third quarter was impacted by the
shutdown of the Boca Raton facility in July 2002, which caused a disruption of
printed circuit board assembly as it transitioned to the New York facility. Some
revenue decline is also attributable to the effects of the economic downturn,
particularly with respect to its impact on the telecommunications industry, an
industry segment from which the Company had previously recorded a substantial
portion of its revenue.
Net revenue from the Company's repairs and spare parts business for the quarter
ended September 30, 2002 was $435 as compared to $499 for the quarter ended
September 30, 2001.
Comdial and Hewlett Packard were the most significant customers for the
Company's products, accounting for 22% and 16% of revenue respectively, for the
quarter ended September 30, 2002.
Gross Margin - Gross margin for the three and nine months ended September 30,
2002 were $(25) and $181 respectively, as compared to gross margins of $2,469
and $5,059 for the comparable periods in 2001. The decrease in gross margin is
primarily attributable to the decline in the General Display Terminals revenue,
which yields higher profit margins than Boundless Manufacturing. In addition,
excess capacity at the Company's manufacturing
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facilities resulted in under-absorbed overhead expenses of $2,535, or 12% of
revenue for the first nine months of 2002. For the quarter ended September 30,
2002, under-absorbed overhead expenses were $1,078.
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 September 30, 2002, operating
expenses decreased 54% to $1,247 (24% of revenue), compared to expenses for the
third quarter of 2001 of $2,712 (15% of revenue). For the nine months ended
September 30, 2002, operating expenses were $5,031 compared to expenses in the
comparable period in 2001 of $ 8,933. 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
decreases are further explained below.
Sales and Marketing Expenses - The Company promotes its products and services
using direct sales, media advertising, direct mail, telemarketing, public
relations and cooperative channel marketing programs. Sales and marketing
expenses decreased 70% to $347 (7% of revenue) for the quarter ended September
30, 2002 from $1,168 (6% of revenue) for the quarter ended September 30, 2001.
Expenses for the first nine months were $1,421 in 2002 versus $4,813 in 2001.
This decrease was mainly due to a significant reduction in expenditures,
including personnel, for marketing programs related to the Capio product line,
which was sold in June 2001. In addition, improvement in customer accounts
receivable collections resulted in a year-to-year reduction in allowances for
doubtful accounts of $299.
General and Administrative Expenses - General and administrative expenses
decreased to $700 (13% of revenue), from $1,549 (9% of revenue) for the three
months ended September 30, 2002 and 2001, respectively. Expenses for the
nine-month period ended September 30, 2002, were $2,311 versus $5,137 in 2001.
The elimination of goodwill amortization in accordance with SFAS 142 accounted
for $1,398 of the decrease from the nine-month period in 2001. Employee
compensation and travel reductions accounted for $1,220 of the year-to-year
reductions.
Research and Development Expenses - Research and development expenses for the
third quarter decreased to $264 in 2002 from $327 in 2001. For the nine-month
period ended September 30, 2002 expenses were $815 compared to $1,080 in 2001.
Research and development efforts relate primarily to customer support and cost
reduction activity associated with the Company's General Display Terminals and
to product design activities for customers of Boundless Manufacturing.
Interest Expense, net - Interest expense, net for the quarter ended September
30, 2002 was $317 compared to $336 for the comparable period in 2001. Interest
expense, net for the nine months was $964 in 2002 versus $1,210 in 2001. This
year-to-year decline is due to reductions in outstanding debt under its credit
facility.
Net gain on the restructuring of payables - In the second quarter of 2002, the
Company recorded a credit of $4,515 for gains on the restructuring of troubled
debt.
Loss From Discontinued Operations- During the first quarter, 2001 the Company
recorded a loss of $2,466, relating to the Company's decision to discontinue the
operations of Merinta. In the third quarter of 2001, a gain on disposal of $316
was recorded, resulting in a net loss from discontinued operations of $2,150.
Income Tax Expense - For the third quarter of 2002, the Company did not record
an income tax credit against the recorded loss before income taxes of $1,589. As
of September 30, 2002, the Company had not utilized all its available net
operating losses. 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 September 30, 2002, the Company
recorded a net loss of $1,589, compared to net income of $540 for the quarter
ended September 30, 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.
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As of September 30, 2002 the Company had a working capital deficiency of $6,428
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.
As of June 27, 2002, we entered into agreements with our then secured lenders (
the "Prior Lenders") to terminate our revolving credit facility (which we have
been calling our Chase Credit Line) and to release their liens on our personal
property. At the same time, we entered into another secured revolving credit
facility (the "CIT Credit Line") with The CIT Group/Business Credit, Inc.
("CIT") pursuant to which CIT was granted a lien on all of our personal property
and was pledged substantially all of the outstanding capital stock of our
subsidiaries.
In general, the CIT Credit Line permits us to borrow up to (a) 85% of our
eligible accounts receivable, plus (b) the lesser of (i) 10% of our eligible
inventory, (ii) 85% of our appraised inventory liquidation value or (iii) $2,000
less (c) $880 (which amount was subsequently reduced to $500 upon completing,
during July 2002, the sale of the Company's machinery and equipment located in
its Boca Raton facility). Under the CIT Credit Line, the annual interest rate is
1-1/2% above the prime rate announced by JPMorgan Chase Bank and we are required
to pay interest on a minimum of $2,000 even though our actual borrowings may be
less than $2,000. We are responsible for certain fees for unused credit and
early termination of the facility. The maximum availability under the CIT Credit
Line is $8,500 and the term of the facility is three years, subject to annual
renewals thereafter.
The Company is highly leveraged. As of September 30, 2002, the Company had
negative tangible net worth of $8,574 and total liabilities of $23,237. The
Company's liabilities at September 30, 2002 included the CIT Credit Line in the
amount of $588 plus interest maturing June 26, 2006, a ten-year promissory note
in the amount of $5,843` which requires monthly principal and interest payments
through July 1, 2009, term notes ("Term Notes") totaling $2,570, capital leases
in the amount of $1,219 which require monthly payments plus interest through
February 2006 and short-term promissory notes in the amount of $750.
Only payments for interest, at the rate of 5% per annum, are required to be made
on the Term Notes until the earlier of April 1, 2003 or the date on which we
receive equity capital investments of at least $2,000. Thereafter, we are
required to pay off the Term Notes by making 51 consecutive monthly payments of
principal and interest based on a 60-month amortization schedule, except that
the 51st payment will include the balance due on the Term Notes.
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 $5,843 and carries a fixed interest
rate of 7.75%, is being amortized over a 25-year period with a balloon payment
due on July 1, 2009. The monthly payments are approximately $50. To induce the
lender to make the loan, the Company executed and delivered a guaranty of
Boundless' obligations to the lender.
In 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 nine months ended September
30, 2002 was $5,013 attributable to a gain on debt settlements of $1,555, a gain
on preferred stock of $2,960, non-cash expenses of $1,899, a reduction in
accounts receivable of $6,113, a reduction of inventories of $5,014 and a
reduction of other assets of $300. This increase in cash was offset by a
reduction of accounts payable and accrued liabilities of $2,756. Net cash
provided by investing activities was comprised of capital expenditures of $124
and proceeds from the sale of assets of $440. Net cash used in financing
activities included repayment on the Company's revolving loans in the amount of
$5,557 and payments on other loans in the amount of $642.
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
15 of 22
primarily on the basis of technology, performance, price, quality, reliability,
distribution and customer service and support. The EMS business in particular,
has become increasingly price competitive with an increasing proportion of the
market moving to low-cost production in areas such as Mexico and Mainland China.
As the revenue mix switches from General Display Terminals to EMS and
considering the margin pressure within the EMS market, there can be no assurance
the Company can sustain a competitive price position.
New Products and Technological Change. Computer and technology industries are
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 non-cancelable
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:
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o Changes in a country or region's political or economic conditions,
o Trade protection measures,
o Import or export licensing requirements,
o The overlap of different tax structures,
o Unexpected changes in regulatory requirements,
o Differing technology standards,
o Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section below), and
o Natural disasters.
Market Risk. The Company is exposed to foreign currency exchange rate risk
inherent in the Company's sales commitments, anticipated sales and assets and
liabilities denominated in currencies other than the U.S. dollar. The Company is
also exposed to interest rate risk inherent in its debt and investment
portfolios. The Company's risk management strategy uses derivative financial
instruments, primarily interest rate swaps, to hedge certain 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 Changes in the Company's working capital position,
17 of 22
o Quarterly increases or decreases in the Company's earnings,
o Changes in revenue or earnings estimates by the investment community, and
o Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect Boundless' stock price.
For these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted. This type of litigation could result in substantial
costs and the diversion of management time and resources.
Earnings Fluctuations. Although the Company believes that it has the products
and resources needed for continuing success, the Company cannot reliably predict
future revenue and margin trends. Actual trends may cause the Company to adjust
its operations, which could cause period-to-period fluctuations in its earnings.
Forward-looking Information May Prove Inaccurate
This Form 10-Q contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will," and similar expressions are intended to identify forward-looking
statements. Such statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described in the Company's Form 10-K for the
year ended December 31, 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 September 30, 2002 the Company had in place an interest rate
swap agreement in the amount of $916,000 at an effective interest rate of 8.6%.
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 September 30, 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.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our President
and Chief Executive Officer and our Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our President and Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC filings and that
information required to be disclosed by us in these periodic filings is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. There have been no significant changes in our
internal controls or in other
18 of 22
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
19 of 22
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended September 30, 2002, the Company sold to nine
individuals (the "Subscribers") 267,367 shares of unregistered Common Stock of
the Company for proceeds of $162. Proceeds of the offering were used for general
working capital purposes. The purchase price was calculated by taking the
average closing price of the Common Stock on the American Stock Exchange during
the five (5) consecutive trading days ending on the trading date immediately
preceding the purchase date. In connection with this sale, the Company granted
to the Subscribers 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.
The Company believes that the issuances of the securities described above were
exempt from registration under Section 4 (2) of the Securities Act of 1933 as
amended.
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.
99.1: Certificate of Boundless Corporation Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 10, 2002, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K disclosing that the Company had, on June 27, 2002,
entered into with its then secured lenders an agreement to terminate its
revolving credit facility and to release their liens on the Company's personal
property. At the same time, the Company entered into another secured revolving
credit facility (the "CIT Credit Line") with The CIT Group/Business Credit, Inc.
("CIT") pursuant to which CIT was granted a lien on all of our personal property
and was pledged substantially all of the outstanding capital stock of our
subsidiaries.
20 of 22
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: November 14, 2002
Boundless Corporation
By: /s/Joseph Gardner
--------------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
CERTIFICATIONS
I, Joseph V. Joy, Jr., President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boundless Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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Date: November 14, 2002
/s/ Joseph V. Joy, Jr.
----------------------
President and Chief Executive Officer
I, Joseph Gardner, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boundless Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Joseph Gardner
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Chief Financial Officer
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