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 June 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 June 30, 2002, the Registrant had approximately 6,438,038 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 June 30, 2002 (unaudited) and
December 31, 2001 ......................................................... 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited) for the three and six months ended June 30, 2002 and 2001 ..... 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 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)
June 30 December 31,
2002 2001
------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents ............... $ 123 $ 25
Trade accounts receivable, net .......... 4,080 10,053
Income tax refund ....................... 13 13
Inventories ............................. 3,443 8,073
Prepaid expenses and other current assets 661 580
------------ ------------
Total current assets ................. 8,320 18,744
Property and equipment, net ................ 9,450 10,993
Goodwill, net .............................. 3,187 3,187
Other assets ............................... 527 291
------------ ------------
$ 21,484 $ 33,215
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt ....... $ 1,361 $ 15,362
Accounts payable ........................ 6,753 15,355
Convertible notes payable ............... 858 --
Accrued salaries ........................ 1,115 1,430
Accrued warranty ........................ 675 645
Accrued marketing programs .............. 74 100
Other accrued current liabilities ....... 2,286 2,015
Deferred revenue ........................ 279 310
------------ ------------
Total current liabilities ............ 13,401 35,217
------------ ------------
Long-term liabilities:
Long-term debt, less current maturities . 9,678 833
Other ................................... 322 1,308
------------ ------------
Total long-term liabilities .......... 10,000 2,141
------------ ------------
Total liabilities .................... 23,401 37,358
Mandatorily redeemable preferred stock ..... 1,406 --
Stockholders' deficit:
Common stock ............................ 64 57
Additional paid-in capital .............. 35,685 35,280
Accumulated deficit ..................... (39,049) (39,339)
Accumulated other comprehensive loss .... (23) (141)
------------ ------------
Total stockholders' deficit .......... (3,323) (4,143)
------------ ------------
$ 21,484 $ 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)
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue ..................................... $ 16,744 $ 27,886 $ 6,722 $ 14,897
Cost of revenue ............................. 16,538 25,296 7,181 13,855
-------- -------- -------- --------
Gross margin (loss) ................ 206 2,590 (459) 1,042
-------- -------- -------- --------
Operating expenses:
Sales and marketing ...................... 1,074 3,645 582 1,873
General and administrative ............... 1,611 3,588 792 1,741
Research and development ................. 551 753 244 352
Other (credits) charges .................. 548 (1,765) 887 (1,787)
-------- -------- -------- --------
Total operating expenses .............. 3,784 6,221 2,505 2,179
-------- -------- -------- --------
Operating (loss) ................... (3,578) (3,631) (2,964) (1,137)
Interest expense, net .................... 647 874 303 448
Net gain on the restructuring of payables (4,515) -- (4,515) --
-------- -------- -------- --------
Income (loss) before income taxes ........... 290 (4,505) 1,248 (1,585)
Income tax expense .......................... -- -- -- --
-------- -------- -------- --------
Income (loss) before discontinued operations 290 (4,505) 1,248 (1,585)
Loss from discontinued operations ........... -- (2,466) -- --
-------- -------- -------- --------
Net income (loss) ........................... $ 290 $ (6,971) $ 1,248 $ (1,585)
======== ======== ======== ========
Weighted average common shares outstanding .. 5,702 4,880 6,128 4,995
======== ======== ======== ========
Basic net income (loss) per common share:
Continuing operations .................... 0.05 (0.92) 0.20 (0.32)
Discontinued operations .................. -- (0.51) -- --
-------- -------- -------- --------
Basic net income (loss) per common share .... $ 0.05 $ (1.43) $ 0.20 $ (0.32)
======== ======== ======== ========
Weighted average dilutive shares outstanding 5,702 4,880 6,128 4,995
======== ======== ======== ========
Diluted net income (loss)per common share:
Continuing operations .................... 0.05 (0.92) 0.20 (0.32)
Discontinued operations .................. -- (0.51) -- --
-------- -------- -------- --------
Diluted net income (loss) per common share .. $ 0.05 $ (1.43) $ 0.20 $ (0.32)
======== ======== ======== ========
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 Six Months Ended June 30,
2002 2001
---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) ................................................. $ 290 $ (6,971)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations .............................. -- 2,466
Net (gain) on the restructuring of payables .................... (4,515) --
Depreciation and amortization .................................. 914 1,806
Loss on the write down of debt financing costs ................. 98 --
(Gain) loss on the disposition or writedown of assets .......... 797 (1,504)
Deferred revenue ............................................... (31) (8)
Provision for doubtful accounts ................................ 104 222
Provision for excess and obsolete inventory .................... 17 524
Changes in assets and liabilities:
Trade accounts receivable ...................................... 5,869 793
Inventories .................................................... 4,613 171
Other assets ................................................... (88) 309
Accounts payable and accrued expenses .......................... (4,457) 1,902
Net change in assets and liabilities of discontinued operations -- (3,538)
---------- ----------
Net cash provided by (used in) operating activities .................. 3,611 (3,828)
---------- ----------
Cash flows from investing activities:
Capital expenditures .............................................. (124) (251)
Proceeds from the sale of assets .................................. -- 1,600
---------- ----------
Net cash provided by (used in) investing activities .................. (124) 1,349
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of debt ................................ 400 --
Payments on loans payable and capital leases ...................... (3,789) (2,308)
Proceeds from issuance of common stock ............................ 1,189
---------- ----------
Net cash (used in) financing activities .............................. (3,389) (1,119)
---------- ----------
Net (decrease) in cash and cash equivalents .......................... 98 (3,598)
Cash and cash equivalents at beginning of year ....................... 25 3,697
---------- ----------
Cash and cash equivalents at end of period ........................... $ 123 $ 99
========== ==========
Non-cash transactions:
Equipment acquisitions funded through debt ........................ $ 16 $ 234
Common stock issued in exchange for debt .......................... 412
Manditorily redeemable preferred stock issued in exchange for debt 1,406
Cash paid for:
Interest .......................................................... 579 732
Taxes ............................................................. 5 12
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six-month period
ended June 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 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 June 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 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"
6 of 20
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.
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 $5 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 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 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 successful integration of the manufacturing operations of the
Company's Boca Raton, Florida, facility into its Hauppauge, New York,
campus resulting in increased capacity utilization and lower operating
costs. As of July 31, 2002, the Company had shut down the Boca Raton
facility, sold the excess assets located there and terminated its
remaining lease obligations with respect to that facility. There can be no
assurance that these actions will result in lower operating costs.
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 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. 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:
7 of 20
June 30, December 31,
2002 2001
------------ ------------
Raw materials and purchased components $ 2,161 $ 6,329
Finished goods ....................... 460 952
Service parts ........................ 822 792
------------ ------------
Total inventories .................... $ 3,443 $ 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 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 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 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 stockholders over the ten-year redemption period unless
conversion occurs, in which case accretion terminates at that point.
6. Stockholders' Deficit
At June 30, 2002 and December 31, 2001 stockholders' deficit consisted of the
following:
June 30, December 31,
2002 2001
------------ ------------
Common stock, $0.01 par value, 25,000,000 shares
authorized, 6,438,037 and 5,688,037 shares issued
at June 30, 2002 and December 31, 2001, respectively $ 64 $ 57
Additional paid-in capital ........................... 35,685 35,280
Accumulated deficit .................................. (39,049) (39,339)
Accumulated other comprehensive loss ................. (23) (141)
------------ ------------
Total stockholders' deficit ....................... $ (3,323) $ (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 second
quarter ended June 30, 2002 and 2001, sales to three major OEMs as a percentage
of total revenues were 30% and 44%, respectively.
8. Business Segments
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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 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):
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Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
June 30, 2002 Total nations ogies/Corp. uring
----------------------- ------------ ------------ ------------ ------------
Customer Revenue ...... $ 6,722 $ 4,343 $ 2,379
Intercompany Revenue .. $ (3,080) 3,080
------------ ------------ ------------ ------------
Total Revenue ......... $ 6,722 $ (3,080) $ 4,343 $ 5,459
============ ============ ============ ============
Gross Margin (loss) ... $ (459) $ (111) $ 1,058 $ (1,406)
============ ============ ============
Gross Margin percent .. -6.8% 24.4% -25.8%
------------
Operating income (loss) $ (2,964) $ 333 $ (3,297)
============ ============ ============
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
June 30, 2001 Total nations ogies/Corp. uring
----------------------- ------------ ------------ ------------ ------------
Customer Revenue ...... $ 14,897 $ 8,801 $ 6,096
Intercompany Revenue .. $ (6,738) 6,738
------------ ------------ ------------ ------------
Total Revenue ......... $ 14,897 $ (6,738) $ 8,801 $ 12,834
============ ============ ============ ============
Gross Margin (loss) ... $ 1,042 $ (413) $ 1,574 $ (119)
============ ------------ ============ ============
Gross Margin percent .. 7.0% 17.9% -0.9%
============================
Operating income (loss) $ (1,137) $ 488 $ (1,625)
============ ============ ============
Boundless Boundless
Six Months Ended Elimi- Technol- Manufact-
June 30, 2002 Total nations ogies/Corp. uring
-------------------------------- ------------ ------------ ------------ ------------
Customer Revenue ............... $ 16,744 $ 10,308 $ 6,436
Intercompany Revenue ........... $ (7,356) 7,356
------------ ------------ ------------ ------------
Total Revenue .................. $ 16,744 $ (7,356) $ 10,308 $ 13,792
============ ============ ============ ============
Gross Margin (loss) ............ $ 206 $ (332) $ 2,597 $ (2,059)
============ ============ ============ ============
Gross Margin percent ........... 1.2% 25.2% -14.9%
------------
Operating income (loss) ........ $ (3,578) $ 985 $ (4,563)
============ ============ ============
Total assets by business segment $ 21,484 $ 13,284 $ 8,200
============ ============ ============
Boundless Boundless
Six Months Ended Elimi- Technol- Manufact-
June 30, 2001 Total nations ogies/Corp. uring
-------------------------------- ------------ ------------ ------------ ------------
Customer Revenue ............... $ 27,886 $ 18,273 $ 9,613
Intercompany Revenue ........... $ (13,294) 13,294
------------ ------------ ------------ ------------
Total Revenue .................. $ 27,886 $ (13,294) $ 18,273 $ 22,907
============ ============ ============ ============
Gross Margin (loss) ............ $ 2,590 $ (699) $ 3,739 $ (450)
============ ============ ============ ============
Gross Margin percent ........... 9.3% 20.5% -2.0%
------------
Operating income (loss) ........ $ (3,631) $ 29 $ (3,660)
============ ============ ============
Total assets by business segment $ 35,548 $ 15,202 $ 20,346
============ ============ ============
Pertinent financial data by major geographic segments for the second quarter
ended June 30, 2002 and 2001 are:
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June 30, June 30,
2002 2001
-------- --------
Net sales to unaffiliated customers:
United States ...................... $ 5,378 $ 11,828
United Kingdom ..................... 149 929
Germany ............................ 433 1,002
Other European countries ........... 652 587
Other foreign countries ............ 110 551
-------- --------
Total sales ........................ $ 6,722 $ 14,897
======== ========
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 June 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 31, 2001, resulted in recording $30 in
accumulated other comprehensive loss for the cumulative effect of the accounting
change. As of June 30, 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 ($23) on June 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 first six months of 2002 and
2001 is as follows:
Six Months Ended
June 30,
-------------------
2002 2001
-------- --------
Net income (loss) ......................... $ 290 $ (6,971)
Other comprehensive income (loss):
Cumulative effect of adoption of FAS 133 -- (30)
Cash flow hedges ....................... 118 (77)
-------- --------
Other comprehensive income (loss): .. 118 (107)
-------- --------
Total comprehensive income (loss) ......... $ 408 $ (7,078)
======== ========
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 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 June 30, 2001 was
11 of 20
$2,466.
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 $932 in amortization for the
six months ended June 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 June 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.
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2001
---------------- ------------------
Reported net loss ......................... $ (6,971) $ (1,585)
add back: goodwill amortization ........... 932 466
---------------- ------------------
Adjusted net loss ......................... $ (6,039) $ (1,119)
================ ==================
Basic earnings per share:
Reported net loss ...................... $ (1.43) $ (0.32)
Goodwill amortization .................. 0.19 0.08
---------------- ------------------
Adjusted net loss per common share ........ $ (1.24) $ (0.24)
================ ==================
Diluted earnings per share:
Reported net loss ...................... $ (1.43) $ (0.32)
Goodwill amortization .................. 0.19 0.08
---------------- ------------------
Adjusted diluted net loss per common share $ (1.24) $ (0.24)
================ ==================
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 estimated impairment carrying value of
machinery and equipment, which was anticipated to be sold or disposed of in July
2002, upon closing of the Florida manufacturing facility.
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 pprovisions 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.
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12. Subsequent Events
On July 19, 2002, the Company completed the sale of substantially all its
machinery and equipment located at its leased manufacturing facility in Boca
Raton, Fl. The Company received proceeds, net of expenses, of approximately $425
from the sale. During the second quarter of 2002, the Company recorded a loss of
$778 relating to its decision to close the facility in Boca Raton and
consolidate that facility's operations into its Hauppauge, NY, facility. The
Company had previously negotiated a settlement of its remaining lease
obligations with the landlord of the Boca Raton facility and, as of June 18,
2002, the Company had met its obligations under the settlement.
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 Six Month Periods Ending June 30, 2002
Revenue - Revenue for the quarter ended June 30, 2002, was $6,722 as compared to
$14,897 for the quarter ended June 30, 2001. Revenue for the six months ended
June 30, 2002 was $16,744 versus $27,886 for 2001.
Sales of the Company's General Display Terminals declined 43% to $4,343 for the
quarter ended June 30, 2002 from $7,558 for the quarter ended June 30, 2001. On
a year-to-year basis, revenue for General Display Terminals declined 31% to
$10,308 from $14,838 in year 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 second quarter of 2001 for the Capio product line, which was sold
in June 2001 (Note 11), was $1,213.
Revenues for the quarter ended June 30, 2002, from Boundless Manufacturing were
$2,379, excluding intercompany revenue, as compared to $6,096 for the quarter
ended June 30, 2001. Revenue for the six-month period for Boundless
Manufacturing was $6,436 in 2002 versus $9,613 for the comparable period in
2001. The revenue decline is 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 June 30, 2002 was $458 as compared to $570 for the quarter ended June 30,
2001.
Comdial, Hewlett Packard and Compaq were the most significant customers for the
Company's products, each accounting for 10% of revenue for the quarter ended
June 30, 2002.
Gross Margin - Gross margin for the three and six months ended June 30, 2002
were $(459) and $206 respectively, as compared to gross margins of $1,042 and
$2,590 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 profits than Boundless Manufacturing. In addition, excess
capacity at the Company's manufacturing facilities resulted in under-absorbed
overhead expenses of $1,457, or 22% of revenue for the first six months of 2002.
Included in the gross margin for the second quarter of 2002 is $260 of expenses,
which relate to the closing of the Florida manufacturing operations.
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 June 30, 2002, operating
expenses increased 15% to $2,505 (37% of revenue), compared to expenses for the
second quarter of 2001 of $2,179 (15% of revenue). For the six months ended June
30, 2002, operating expenses were $3,784 compared to expenses in the comparable
period in 2001 of $ 6,221. This increase in the second quarter of 2002 was a
result of recording $778 in other charges for asset impairments. The
year-to-year decrease is attributable to the Company's aggressive efforts to
align sales, marketing and administrative expenses with the revenue
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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 69% to $582 (9% of revenue) for the quarter ended June 30,
2002 from $1,873 (13% of revenue) for the quarter ended June 30, 2001. Expenses
for the first six months were $1,074 in 2002 versus $3,645 in 2001. This
decrease was mainly due to a significant reduction in expenditures for marketing
programs related to the Capio product line, which was sold in June 2001.
General and Administrative Expenses - General and administrative expenses
decreased to $792 (12% of revenue), from $1,741 (12% of revenue) for the three
months ended June 30, 2002 and 2001, respectively. Expenses for the six-month
period ended June 30 2002, were $1,611 versus $3,588 in 2001. The elimination of
goodwill amortization in accordance with SFAS 142 accounted for $932 of the
decrease from the six-month period in 2001. Employee compensation and travel
reductions accounted for $915 of the year-to-year reductions.
Research and Development Expenses - Research and development expenses for the
second quarter decreased to $244 in 2002 from $352 in 2001. For the six-month
period ended June 30, 2002 expenses were $551 compared to $753 in 2001. Research
and development efforts relate primarily to cost reduction activity associated
with the Company's General Display Terminals and to product design activities
for customers of Boundless Manufacturing.
Other operating charges- In the quarter ended June 30, 2002, the Company
recorded a charge of $778 for the impairment of long-lived assets, specific to
the relocation of Florida manufacturing to New York.
Interest Expense, net - Interest expense, net for the quarter ended June 30,
2002 was $303 compared to $448 for the comparable period in 2001. Interest
expense, net for the six months was $647 in 2001 versus $874 in 2001. This
year-to-year decline is due to reductions in outstanding debt.
Net gain on the restructuring of payables - For the quarter ended June 30, 2002,
the Company recorded a credit of $4,515 for gains on the restructuring of
troubled debt. As part of the restructuring of the debt, 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. The Company is continuing to negotiate with other unsecured creditors to
restructure its obligations to them.
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.
Income Tax Expense - For the second quarter of 2002, the Company did not record
an income tax expense against the recorded profit before income taxes of $1,248.
As of June 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 June 30, 2002, the Company recorded net
income of $1,248, compared to a net loss of $1,585 for the quarter ended June
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.
As of June 30, 2002 the Company had a working capital deficiency of $5,081 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
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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 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 June 30, 2002, the Company had negative
tangible net worth of $6,997 and total liabilities of $23,401. The Company's
liabilities at June 30, 2002 included the CIT Credit Line in the amount of $754
plus interest maturing June 26, 2006, a ten-year promissory note in the amount
of $5,870 which requires monthly principal and interest payments through July 1,
2009, term notes ("Term Notes") totaling $2,950 and capital leases in the amount
of $1,465 which require monthly payments plus interest through February 2006.
In return for the termination of the Chase Credit Line, the Company issued the
Term Notes to the Prior Lenders in the aggregate principal amount of $2,950, of
which $2,570 is secured by a second mortgage on the Company's Hauppauge, New
York, facility and $380 was required to be paid on the earlier of the 90th day
after the date of the Term Notes or upon the completion of the sale of certain
machinery, equipment and assets relating to printed circuit board assembly
located in the Company's Boca Raton, Florida, facility. The Company completed
the sale July 19, 2002, and paid the Prior Lenders $380.
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 $5,908 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.
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 six months ended June 30, 2002
was $3,611 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 $5,869 and a reduction of inventories of $4,613. This increase in
cash was offset by a reduction of accounts payable and accrued liabilities of
$4,457 and an increase in other assets of $88. Net cash used in investing
activities was comprised of capital expenditures of $124. Net cash used in
financing activities included repayment on the Company's revolving loans in the
amount of $3,419 and payments on other loans in the amount of $370.
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 June 30, 2002 the Company had in place an interest rate swap
agreement in the amount of $1,222,000 at an effective interest rate of 8.7%. 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 June 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.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 27, 2002, the Company entered into an agreement with its then secured
lenders to terminate its revolving line of credit (the "Chase Credit Line"). In
return for termination of the Chase Credit Line, the Company, amongst other
consideration, agreed to issue 750,000 shares of its common stock and shares of
its newly-created convertible preferred stock (the "Preferred Stock") with a
stated value of $1,250,000. The Company has agreed to register under the
Securities Act of 1933 such common stock and the shares into which the Preferred
Stock may be converted. The lenders have certain anti-dilution protection for
their shares of common stock. The Preferred Stock may be converted after the
first anniversary of their issuance into shares of the Company's common stock at
$3.00 per share and, unless sooner converted into common stock, must be redeemed
by the Company on June 30, 2012 for their stated value.
During the second quarter of 2002, and as part of the restructuring of the
Company's debt, the Company reached agreement with its unsecured creditors
representing approximately $10,234,965 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 Preferred Stock
may be converted after the first anniversary of their issuance into shares of
the Company's common stock at $3.00 per share and, unless sooner converted into
common stock, must be redeemed by the Company on June 30, 2012 for their stated
value.
If all of such Preferred Stock, including the Preferred Stock which the Company
is required to issue to the lenders, are converted, the Company would be
required to issue approximately 1,455,073 shares of its common stock, subject to
adjustment.
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.
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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: August 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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