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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 2004
Commission File Number 0-17977
BOUNDLESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3469637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Engineers Lane Farmingdale, NY 11735
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 962-1500
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act
Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sale price of the registrant's
Common Stock on December 31, 2005, is $0.
As of February 28, 2006 the registrant had 6,705,613 shares of Common Stock,
$.01 par value per share, outstanding.
Boundless Corporation and Subsidiary Companies Report on Form 10-K
For the Year Ended December 31, 2004
Included in Item 7 of this Annual Report on Form 10-K is management's discussion
and analysis of financial condition and results of operations applicable to the
three fiscal quarters ended March 31, June 30 and September 30, 2004, not
previously filed with the Securities and Exchange Commission. This Annual Report
on Form 10-K for the fiscal year ended December 31, 2004 is being filed
contemporaneously with the above mentioned quaterly reports on Form 10-Q.
Page
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PART I
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
Item 9A. Controls and Procedures 37
Item 9B Other Information 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 46
Item 14. Principal Accountant Fees and Services 46
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 48
Signatures 53
Section 302 Certification (Filed as Exhibit 31)
Section 906 Certification (Filed as Exhibit 32)
PART I
ITEM 1. BUSINESS
Boundless Corporation (the "Company") was incorporated in 1988 under the
laws of the State of Delaware. The Company through its subsidiaries, Boundless
Technologies, Inc. ("Boundless Technologies") and Boundless Manufacturing
Services, Inc. ("Boundless Manufacturing"), is a manufacturer of text terminals
and provider of manufacturing services. The Company's headquarters is located at
50 Engineers Lane, Farmingdale, New York 11735 (telephone number (631)
962-1500).
This Form 10-K contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent the Company's expectations and beliefs concerning future
events, based on information available to us on the date of the filing of this
Form 10-K, and are subject to various risks and uncertainties. We disclaim any
intent or obligation to update or revise any of the forward-looking statements,
whether in response to new information, unforeseen events or changed
circumstances except as required to comply with the disclosure requirements of
the federal securities laws.
Forward looking statements necessarily involve known and unknown risks,
uncertainties and other factors that may cause the actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievement expressed or
implied by such forward-looking statements. Readers are cautioned to review
carefully the discussion concerning these and other risks which can materially
affect the Company's business, operations, financial condition and future
prospects.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "intend," "expect," "anticipate,"
"assume", "hope", "plan," "believe," "seek," "estimate," "predict,"
"approximate," "potential," "continue", or the negative of such terms.
Statements including these words and variations of such words, and other similar
expressions, are forward-looking statements. Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable
based upon its knowledge of its business, the Company cannot absolutely predict
or guarantee its future results, levels of activity, performance, or
achievements. Moreover, neither the Company nor any other person assumes
responsibility for the accuracy and completeness of such statements.
The Company notes that a variety of factors could cause its actual results
and experience to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of its business include, but are not limited to, the following: changes
in spending patterns; changes in overall economic conditions; the impact of
competition and pricing; the financial condition of the suppliers and
manufacturers from whom the Company sources its merchandise; changes in tax
laws; the Company's ability to hire, train and retain a consistent supply of
reliable and effective participants in its marketing operations; general
economic, business and social conditions in the United States; the costs of
complying with changes in applicable labor laws or requirements, including
without limitation with respect to health care; changes in the costs of interest
rates, insurance, shipping and postage, energy, fuel and other business
utilities; the risk of non-payment by, and/or insolvency or bankruptcy of,
customers and others owing indebtedness to the Company; actions that may be
taken by creditors with respect to the Company's obligations that are subject to
default proceedings; threats or acts of terrorism or war; and strikes, work
stoppages or slow downs by unions affecting businesses which have an impact on
the Company's ability to conduct its own business operations.
Forward-looking statements that the Company makes, or that are made by
others on its behalf with its knowledge and express permission, are based on
knowledge of the Company's business and the environment in which it operates,
but
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because of the factors listed above, actual results may differ from those in the
forward-looking statements. Consequently, these cautionary statements qualify
all of the forward looking statements made herein. The Company cannot assure the
reader that the results or developments anticipated by it will be realized or,
even if substantially realized, that those results or developments will result
in the expected consequences for it or affect it, its business or operations in
the way the Company expects. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates, or on
any subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf, which are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or thereof or to
reflect the occurrence of unanticipated events, other than as required to comply
with the disclosure requirements of the federal securities laws.
Bankruptcy Considerations
The following discussion provides general background information regarding
our Chapter 11 cases, and is not intended to be an exhaustive summary.
A. Pre-Petition History
Boundless, a publicly-held Delaware corporation, was incorporated in 1988.
Through its subsidiaries, Boundless Technologies, Boundless Manufacturing and
Boundless Acquisition ("Acquisition"), Boundless provides text terminals and
manufacturing services.
Boundless Technologies principally designs, sells and supports desktop
computer display terminals without graphics' capabilities. It offers custom and
standard models of display terminals primarily to retail, financial,
telecommunications and wholesale distribution businesses which utilize them for
data entry and point-of-sale activities.
Boundless Manufacturing operates in the electronic manufacturing services
("EMS") marketplace. It provides services in supply chain optimization, global
supply base management, systems assembly and testing, distribution and
logistics, repair centers and end-of-life management. It offers in-house
engineering expertise, product design, test development and product development
for original equipment manufacturers ("OEM").
A fourth subsidiary, Merinta, Inc. ("Merinta"), commenced operations in
2000. Merinta created software and infrastructure for Internet use. Operating
losses generated by Merinta for 2001 were $2.15 million and for 2000, $14
million. Therefore, on or about May 11, 2001, the Company discontinued Merinta's
operations.
The operating losses generated by Boundless Manufacturing and Merinta, in
combination with the economic downturn following September 11, 2001, caused the
Company and its subsidiaries, on March 12, 2003, (the "Petition Date"), to seek
protection under Chapter 11 of the Bankruptcy Code.
B. Pre-Petition Credit Facility with CIT Group/Business Credit, Inc.
Pursuant to a Financing Agreement dated June 27, 2002, the Company entered
into a credit facility with the CIT Group/Business Credit, Inc. ("CIT"). Under
this credit facility, CIT agreed to make loans and advances to the Company in
amounts of up to 85% of their aggregate outstanding "eligible" accounts, plus
the lesser of 10% of the aggregate value of the Company's eligible inventory,
85% of the appraised inventory liquidation value or $200,000, whichever is less.
The credit facility also provided for revolving loans with a maximum
availability under the credit facility of $8.5 million. As security for the
aforementioned credit facility, the Company granted CIT a security interest in
and to substantially all of its personal property.
Prior to the Petition Date, CIT advised the Company that it would not make
any further advances (the "Notification"). At that time, the Company owed CIT
approximately $600,000. During the ten day period subsequent to the
Notification, payments of the Company's receivables to CIT satisfied all or
substantially all of the amounts due and owing to CIT. By
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assignment dated February 21, 2003, CIT assigned all of its right, title and
interest in and to the CIT Credit Facility to Valtec Capital Corporation
("Valtec"). Prior to this assignment, Valtec was a subordinated secured creditor
of the Company.
C. Pre-Petition Credit Facility with Valtec
By a loan and security agreement dated December 3, 2002 (the "Valtec Loan
Agreement"), the Company consolidated prior borrowings and received additional
borrowings from Valtec in the aggregate amount of approximately $1.2 million
(plus accrued and unpaid interest and other charges). Valtec agreed to provide
debtor-in-possession financing to the Company so that the Company could continue
to operate its respective businesses as going concerns, provided that the
Company filed a petition under Chapter 11 and scheduled a sale of all of its
assets pursuant to ss.363 of the Bankruptcy Code shortly after the filing of the
Company's Chapter 11 petitions.
D. Procedural History
The Company and its subsidiaries filed their respective petitions for
relief pursuant to the Bankruptcy Code on March 12, 2003 (the "Petition Date").
On March 14, 2003, the Bankruptcy Court signed an Order directing that the
bankruptcy cases be consolidated for procedural purposes and jointly
administered. On March 25, 2003, an Official Committee of Unsecured Creditors
(the "Committee") was appointed. The law firm of Platzer Swergold Karlin Levine
Goldberg & Jaslow, LLP was retained to represent the Committee.
E. The Company's Administrative Period
During the period from the Petition Date through and including January 28,
2005, Valtec provided debtor-in-possession financing ("Valtec DIP Financing") to
the Company. Pursuant to the Bankruptcy Court's Interim Order entered on April
17, 2003 (the "Interim Order"), the Bankruptcy Court approved: (i) the Company's
use of Valtec's cash collateral ("Valtec's Cash Collateral"); (ii) direct
borrowings from Valtec of an amount up to $1,500,000; and (iii) the
Debtor-in-Possession Financing and Security Agreement by and among Valtec and
the Company (the "DIP Financing Agreement").
As a condition to the Valtec DIP Financing, Valtec required the Company to
enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company. By
Order dated April 16, 2003, the Bankruptcy Court approved the Company's
execution of the Ansen Agreement.
Pursuant to the terms and conditions of the DIP Financing Agreement, on or
before April 30, 2003, the Company was obligated to seek an order pursuant to
ss. 363 of the Bankruptcy Code authorizing the sale of substantially all of
their personal property free and clear of liens, claims and encumbrances (the
"ss. 363 Motion"). On March 27, 2003, the Company filed the ss. 363 Motion.
However, prior to the scheduled auction sale date, Vision Technologies, Inc.
("Vision") submitted a written offer to the Company to provide replacement
debtor-in-possession financing in exchange for receiving seventy (70%) percent
of the Company's equity when the Company confirmed the Plan.
In an effort to reorganize the Company and provide a return to their
creditors, which the Company believed would not be effected through the proposed
ss.363 sale, on April 30, 2003, on the Company's motion (the "April 30th
Motion"), the Bankruptcy Court signed an Order to Show Cause that scheduled a
hearing on May 8, 2003, to consider, inter alia, the Company's request to: (i)
withdraw the ss. 363 Motion; (ii) obtain replacement debtor-in-possession
financing from Vision; (iii) utilize Valtec's Cash Collateral; and (iv) approve
an agreement among the Company, the Committee and Vision (the "Vision
Agreement").
Pursuant to Order of the Bankruptcy Court entered on May 1, 2003 (the "May
Order"), and upon the May 8, 2003 hearing (the "May 8 Hearing"), the Bankruptcy
Court authorized the Company to borrow a total of $375,000 from Vision on an
emergency basis pending the Bankruptcy Court's final determination of the April
30th Motion, pursuant to and conditioned upon the terms and conditions contained
in the May Order, and as supplemented by the record of the May 8 Hearing
(respectively, the "Vision Advances" and the "Vision Priming Orders").
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At a hearing held on May 14, 2003, the Court authorized the Company to
utilize up to $581,000 of Valtec's Cash Collateral (proceeds of collection of
receivables and sale of inventory) pursuant to and conditioned upon the terms
and conditions recited into the record of the May 8 Hearing (the "May 14th Cash
Collateral Order"). Pursuant to the May 14th Cash Collateral Order, the Company
paid Valtec $300,000 to reduce the Company's obligations to Valtec under the
Valtec DIP Financing Agreement (the "DIP Debt"), and additional amounts were
paid to Valtec as adequate protection for the Company's use of inventory which
was acquired by the Company post-petition and which collateralized in part the
DIP Debt.
After significant negotiations at a hearing held on May 28, 2003, the
parties (the Company, the Committee, Vision and Valtec) informed the Bankruptcy
Court that they had reached an agreement in principle for a settlement on the
terms and conditions read into the record on May 28, subject to a formal
stipulation subsequently prepared and executed by and between such parties.
Based upon the settlement and the terms and conditions recited into the record,
Valtec consented to, and the Bankruptcy Court authorized, the Company's use of
additional amounts of Valtec's Cash Collateral on the terms and conditions
contained in the May 14th Cash Collateral Order (together with the May 14th Cash
Collateral Order, the "Valtec Cash Collateral Orders").
F. Valtec Settlement and Agreement with Vision
The settlement stipulation dated June 11, 2003 (the "Settlement
Stipulation") by and among the Company, the Committee, Vision and Valtec
resolved all then outstanding issues with Valtec and incorporated by reference
an amended version of the Vision Agreement dated May 11, 2003 (the "Amended
Vision Agreement"). The Settlement Stipulation and the Amended Vision Agreement
were "So Ordered" by the Bankruptcy Court on June 18, 2003. Pursuant to the
Settlement Stipulation the parties agreed as follows:
1. As of the close of business May 27, 2003, the Company's total
obligation to Valtec was $1,592,000 comprised of: (i) $1,434,000 of
pre-petition debt ("Pre-Petition Obligations"); and (ii) the DIP
Debt of $158,000 (collectively, the "Valtec Obligations").
2. The pre-petition obligations to Valtec were valid, enforceable and
not subject to any claim, counterclaim, set-off or defense of any
kind or nature.
3. The Pre-Petition Obligations to Valtec were fully secured.
4. The DIP Debt was fully secured.
5. Payment of the DIP Debt, through a combination of amounts paid to
Valtec to reimburse it for inventory acquired by the Company, in
part utilizing financing provided by Vision, was to be made in
weekly payments of $13,000, plus payment for inventory at Company's
cost. As of December 31, 2005, the Company has made all of such
required payments.
6. Upon payment of the DIP Debt, the Pre-Petition Obligations will be
paid by a combination of equal weekly payments in the amount of
$7,500 through the Confirmation Date and subsequent to confirmation,
in equal monthly payments thereafter for a period of 30 months (or
34 months in the event that Valtec advanced the Professional Fees
Payment of $200,000 as defined herein) with interest at a rate of
8%, collateralized by a first lien on all of the Company's assets.
7. If on the Confirmation Date the Company does not have sufficient
cash to pay in full the allowed fees of the professionals retained
by the Company and the Committee, Valtec will advance up to $200,000
to the Company to be applied toward the payment of such fees (the
"Professional Fees Payment"), which amount shall be added to, and
become part of the Pre-Petition Debt.
8. Vision would provide supplemental financing to the Company in an
amount up to $650,000 plus interest (inclusive of the Vision
advances theretofore provided) as contemplated by the Amended Vision
Agreement. Payment of the Vision Debt will commence subsequent to
payment in full of the Valtec Obligations, and shall be secured by a
lien subordinate to the lien securing payment of the Valtec
Obligations. As of December 31, 2004, the amounts due under the
Valtec and Vision Claims were approximately $638,000 and $738,000
(with interest), respectively and the amount of the collateral (as
defined in the Settlement Stipulation) collateralizing these claims
amounted to approximately $2,225,000.
9. Valtec authorized the continued use of Valtec's Cash Collateral
during the pendency of the Plan.
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10. As required in the Settlement Stipulation, the Company is and shall
be required to maintain collateral margins of $100,000 in excess of
the Valtec Obligations, and provide Valtec with financial
information on a weekly basis. As of December 31, 2004, the Company
has met both the excess collateral margin and reporting
requirements.
Pursuant to the Amended Vision Agreement by and among the Company, the
Committee and Vision, the parties agreed as follows:
1. Vision would advance to the Company an amount up to $650,000 to be
secured by a security interest upon substantially all of the
Company's assets, subordinate to the security interest securing
payment of the Valtec Obligations.
2. The establishment of an executive committee acceptable to Vision.
There is no overlap in functions or duties between the executive
committee and the Board of Directors. The executive committee of the
Board of Directors is responsible for the creation and execution of
the Company's strategic business plan. As of February 10, 2006 the
executive committee was comprised of Mr. Frank Stephens, a current
member of the Company's Board of Directors; Mr. John Ryan, the
Company's Chief Operating Officer; and, Mr. Joseph Gardner, the
Company's Chief Financial Officer. No compensation is paid to any
member of the executive committee as a result of being a member of
the executive committee.
3. Cancellation of all existing capital stock of the Company, and
issuance of a new class of capital stock pursuant to the terms and
conditions of the Amended Vision Agreement or as otherwise agreed by
the parties.
4. Payment of Valtec's Pre-Petition obligations over a term of up to 34
months subsequent to Confirmation, and continued use of Valtec's
Cash Collateral.
5. Vision shall have the right to appoint all members of the board of
directors of the reorganized Company post-confirmation.
6. The Company would propose a joint plan of reorganization with Vision
(and the Committee if the Committee believes it to be in the best
interest of creditors).
7. In the event that any entity other than Vision shall acquire or be
entitled to acquire a majority of the Company's Capital Stock as a
going concern or acquire all or substantially all of the Company's
assets Vision shall receive a break-up fee in the amount of $100,000
pursuant to paragraph A(8) of the Amended Vision Agreement.
8. Upon the Bankruptcy Court's approval of the Settlement Stipulation,
Amended Vision Agreement and related documents on June 18, 2003,
Vision funded the remainder of the $650,000 ($100,000 of which was
held in escrow and utilized for payment of the fees and expenses of
the professionals for the Company and the Committee, which escrow
amount with the Vision Advances was the "Vision Funding").
9. If the Company files a plan other than as described hereinabove,
which does not provide Vision with the benefits of the Amended
Vision Agreement, then as a condition precedent to the confirmation
of any other Plan, Vision must be paid in full (together with a
break-up fee of $100,000) on the Effective Date, as set forth in
paragraph 8 of the Amended Vision Agreement.
G. Valtec Settlement and Agreement with Entrepreneur Growth Capital, LLC
On November 30, 2004, the Company filed a motion with the Bankruptcy Court
for an order authorizing the Company to (i) incur post-petition secured
indebtedness, and (ii) grant a security interest and priority claims pursuant to
Sections 364(c) and 364(d) of the Bankruptcy Code. On January 27, 2005, the
Bankruptcy Court approved the order.
As of January 31, 2005, the Company entered into an agreement with its
secured lender Valtec Capital, LLC, as assignee of Valtec Capital Corporation,
(the "Prior Lender") to terminate our debtor-in-possession ("DIP") financing and
to release their liens on our personal property. At the same time, the Company
entered into another secured DIP financing agreement (the "EGC Agreement") with
Entrepreneur Growth Capital, LLC ("EGC") pursuant to which EGC was granted a
lien on all of our personal property.
In general, the EGC Agreement permits us to borrow up to 80% of our
eligible accounts receivable. Under the EGC Agreement, the annual interest rate
is 6% above the prime rate announced by Citibank, N.A. and we are required to
pay a monthly service fee equal to three quarters of one percent (0.75%) of the
face value of invoices assigned to EGC for
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the preceding month. The EGC Agreement requires us to pay minimum monthly
interest of $7,500 even though our actual borrowings may result in a lesser
interest charge. The Company is responsible for certain fees and fees for early
termination of the facility. The maximum availability under the EGC Agreement is
$1,000,000 and the term is one year.
In return for termination of the prior DIP financing we also agreed to pay
Valtec Capital a total of $100,000 for legal fees they incurred during our
bankruptcy period. This amount is payable to Valtec Capital on the date that our
Plan of Reorganization becomes effective.
On February 2, 2005, the Company filed, as exhibits, the EGC Agreement on
Form 8-K with the Securities and Exchange Commission.
H. Sale of 100 Marcus Avenue, Hauppauge, New York
On or about September 17, 2003, pursuant to that certain Purchase and Sale
Agreement ("Purchase Agreement") by and among the Company, Independence
Community Bank ("ICB"), JPMorgan Chase and 100 Marcus LLC, the Company agreed to
transfer all of its right, title and interest in and to 100 Marcus Boulevard,
Hauppauge, New York, which had served as the Company's main operating facility
(the "Premises"). ICB and JPMorgan Chase held mortgages on the Premises and
participated in the sale transaction. The Company successfully negotiated a sale
of the Premises which provided for: (i) satisfaction of all liens and
encumbrances of ICB and JPMorgan Chase; (ii) payment of all outstanding real
estate tax obligations from the proceeds of the sale; (iii) the Company's use of
15,000 square feet, rent free, for a period of one (1) year post-closing; (iv)
the payment of $250,000 to the Company and (v) ICB and JP Morgan Chase retaining
unsecured claims against the Company for the difference between the Company's
Obligations to such banks and the amount of the proceeds of the sale of the
Premises remitted to such bank. As a result, such banks have pre-petition
unsecured claims against the Company aggregating approximately $2,271,000.
On or about September 17, 2003, the Company, ICB and JPMorgan Chase
entered into that certain Proceeds Distribution Agreement (the "Proceeds
Agreement), which provided for the distribution of the net proceeds of the sale
of the Premises between those parties. Notwithstanding that the outstanding
amounts of the mortgages far exceeded the sale proceeds of the Premises,
pursuant to the Proceeds Distribution Agreement, the Company received $250,000
from such proceeds of the sale of the Premises.
On or about December 9, 2003, the Court signed: (i) the Order approving
the Purchase Agreement with 100 Marcus LLC; and (ii) the Order approving the
Proceeds Agreement. The closing of the Premises took place on or about December
23, 2003, and on or about December 30, 2003, the Company received $190,000
pursuant to the Proceeds Agreement. On or about May, 2004 the remaining balance
in the escrow was released to the Company.
Pursuant to the Purchase Agreement and the Proceeds Agreement, the
remaining claims of ICB and JPMorgan Chase shall be treated as general unsecured
claims.
I. Miscellaneous
Immediately prior to the Petition Date, the Company reduced its staff from
125 to 70. Subsequent to the Petition Date, the Company further reduced the
number of its employees to 35. The Company's business plan focuses primarily on
the manufacturing, sale and support of its text terminal products, while
releasing a series of more modern replacement products. The Company plans to
exploit its history of success and well-established customer base in the
Point-of-Sale (POS) market. The Company further plans to capitalize on its
post-manufacturing services capability by expanding into the repair of
third-party products produced by its existing OEM customers (such as NCR, IBM
and Hewlett Packard). The Company presently has retained some, though greatly
reduced, research and development capability, and has reduced marketing
functions.
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We continue to operate our businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
applicable court orders. All vendors are being paid for all goods furnished and
services provided after the Petition Date in the ordinary course of business.
However, under Section 362 of the Bankruptcy Code, actions to collect most of
our pre-petition liabilities are automatically stayed. Most of these
pre-petition liabilities will be settled under a plan of reorganization which
must be approved by the Bankruptcy Court.
To successfully exit Chapter 11, we must obtain confirmation by the
Bankruptcy Court of a plan of reorganization. A plan of reorganization would,
among other things, resolve our pre-petition obligations, set forth our revised
capital structure and establish our corporate governance subsequent to exit from
bankruptcy. The decision as to when we will file a plan of reorganization
depends on the timing and outcome of numerous ongoing matters in the Chapter 11
process. We expect to file a plan of reorganization that provides for the
Company's emergence from bankruptcy, but there can be no assurance that the
creditors eligible to vote on our plan will support our positions or our plan of
reorganization (disagreements between us and those eligible to vote on our plan
could adversely affect our reorganization process, including our emergence from
Chapter 11). Nor can there be any assurance that the Bankruptcy Court will
confirm a plan of reorganization or that any such plan will be implemented
successfully. In addition, the Company is required to file with the Securities
and Exchange Commission delinquent financial reports prior to their removing
objections to the Company's plan of reorganization.
We are working towards emerging from Chapter 11 no later than April 30,
2006, but that timing is dependent on, among other things, the timely and
successful confirmation and implementation of a plan of reorganization. The
rights and claims of various creditors and security holders will be determined
by the plan as well. At this time, it is not possible to predict accurately the
effect of the Chapter 11 reorganization process on our business, nor can we make
any predictions concerning how each of these claims will be valued in the
bankruptcy proceedings. We believe that Boundless' presently outstanding equity
securities will have no value and it is expected that those securities will be
canceled under any plan of reorganization that we propose. For this reason, we
urge that caution be exercised with respect to existing and future investments
in any Boundless security.
For more information on our bankruptcy proceedings, see Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 1, "Voluntary Reorganization under Chapter 11" in the Notes to Consolidated
Financial Statements.
General
Boundless Technologies, a wholly-owned subsidiary, is engaged in supplying
computer terminals for commercial use. The Company's general strategy is to
provide fast, easy-to-use, and cost-effective products that enable access to
applications and data in commercial environments, as well as older "legacy"
applications, running on mainframes, mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports (i) desktop
computer display terminals, which generally do not have graphics capabilities,
("General Display Terminals"), and (ii) other products that are used in
multi-user computing environments. Boundless Technologies offers standard and
custom models of its General Display Terminals primarily to retail, financial,
telecommunications and wholesale distribution businesses requiring them for data
entry and point of sale activities.
Boundless Manufacturing is pursuing opportunities in the electronic
manufacturing services ("EMS") marketplace. As of December 31, 2003 and 2004,
the Company owned 75% of the outstanding shares of common stock of this
subsidiary. Services include supply chain optimization, global supply base
management, systems assembly and test, distribution and logistics, repair
centers and end-of-life management. Boundless Manufacturing also offers in-house
engineering expertise- product design, test development and product development-
to significantly reduce time-to-market for original equipment manufacturers
("OEM") customers. Boundless Manufacturing provides a complete supply chain that
is designed and built to each customer's specifications. Boundless Manufacturing
also has post-manufacturing support capability in New York and Atlanta.
8
Products and Services
General Display Terminals. The Company's General Display Terminals are
ANSI/ASCII desktop text terminals, which generally do not have graphics
capabilities. The Company offers standard and custom models, primarily for data
entry and point of sale activities. General Display Terminals are sold by the
Company under the Company's ADDS(R), Dorio(R) and VT(R) trademarks, as well as
under OEM customers' trademarks. The ADDS, Dorio and VT brands are complementary
products, providing slightly different features to various user segments.
Electronic Manufacturing Services. Boundless Manufacturing Services
participates in the EMS market space and provides services that include printed
circuit board assembly, build-to-order mass-customized manufacturing, supply
chain optimization, global supply base management, systems assembly and test,
distribution and logistics, repair centers and end-of-life management. Boundless
Manufacturing also offers in-house engineering expertise- product design, test
development, product development- to significantly reduce time-to-market for OEM
customers. Boundless Manufacturing provides a complete supply chain that is
designed and built to each customer's specifications.
Boundless Manufacturing is focused on delivering a level of service and
commitment, to both middle-market OEMs and start-up companies, that is currently
only available to top tier customers from the larger EMS companies. In addition,
it pursues smaller programs with larger OEM customers typically serviced by
larger competitors. Boundless Manufacturing will develop relationships with
those OEMs and ODMs whose supply chains can be completed or complemented by the
company's unique capabilities, and diversify revenue risk by winning customers
in several vertical markets including data storage, public and private
telecommunications systems, office technology products, industrial controls and
custom or embedded "PC" applications.
Percentage of Total Revenues. The table below sets forth, for each of the
three calendar years ended December 31 the percentage of total revenue
contributed by those classes of similar products or services which accounted for
a material portion of consolidated revenue in any of such years. Material
inter-company revenue has been eliminated.
General Display Electronic Manufacturing
Period Terminals Services
------ --------- --------
2004 87.6% 12.4%
2003 88.0% 12.0%
2002 64.2% 35.8%
9
Foreign Sales. Net foreign sales were approximately $1,929,000,
$3,473,000 and $7,430,000 for 2004, 2003 and 2002, respectively. The tables
below set forth, for each of the three calendar years ended December 31, the
approximate percentage of total revenue attributable to foreign sales and the
percentage attributable to the European region.
% of Total Revenue
------------------
Period Total Europe
------ ----- ------
2004 26.4% 20.9%
2003 29.6% 25.3%
2002 27.7% 16.9%
Manufacturing
Assembly Operations. The Company's manufacturing operations are
located in Farmingdale, New York, and include procurement of components and the
assembly and testing of its products. Investment in production equipment has not
been material to the Company's manufacturing operations. Semi-skilled and
skilled workers assemble products using a cell-based manufacturing process that
allows the Company to assemble various products at mass production costs. The
Company generally cross-trains its workers so that they are able to work at all
work stations. Once assembled, all systems undergo a test cycle, using
sophisticated diagnostic procedures and test equipment.
The Farmingdale facility has a flexible manufacturing control system
that is run by software developed by the Company. This system provides a
flexible, customer-focused manufacturing approach that enables the Company to
quickly customize products for orders of one to one thousand. Just-in-time
systems allow the Company to achieve efficient asset utilization and fast
response time to customers. The Company is generally able to fill orders within
three to five days after receipt of an order. Accordingly, backlog has not
traditionally been material to the Company.
The Company is using approximately 23,000 of its 32,000 square feet
of space in the Farmingdale, NY, facility for manufacturing and has the capacity
to meet its current and anticipated production needs.
Suppliers. The Company purchases subassemblies and components for
its products from more than 40 domestic and Far East suppliers. Purchases from
Radiance Electronics, Ansen Corporation and Video Display Corporation accounted
for approximately 33.5%, 20.2% and 8.9%, respectively, of the dollar amount of
the Company's total purchases of subassemblies and components in 2004. Purchases
from Radiance Electronics (formerly Goldtron Electric), Ansen Corporation and
Hewlett Packard, accounted for approximately 24%, 20% and 18%, respectively, of
the dollar amount of the Company's total purchases of subassemblies and
components in 2003. In 2002 Goldtron Electric, Arrow Electronics and Clinton
Electric Corp. accounted for approximately 22%, 9% and 6%, respectively, of the
dollar amount of the Company's total purchases of subassemblies and components.
As a condition to the Valtec DIP Financing, Valtec required the Company to
enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company.
The Company was subject to supply disruption due to the production transition;
however, as of July 1, 2003, Ansen had successfully transitioned production to
its manufacturing facility and had achieved mass-production capability.
The Company placed on Ansen initial purchase orders for certain components
with committed delivery dates beginning March 2003. The failure of Ansen to
timely deliver the components resulted in the cancellation or rescheduling of
customer orders placed on the Company; and generally resulted in a reduction of
the number of components required by
10
the Company with respect to the original delivery dates. On November 7, 2003,
Ansen notified the Company of its intention to terminate the Ansen Agreement due
to the alleged failure of the Company to accept and pay for the components as
originally scheduled. By subsequent agreement, the Company will continue to
purchase any remaining components from Ansen as needed; and, should any
components remain as of the Effective Date, the Company will purchase the then
remaining balance. As of December 31, 2005, Ansen continues to deliver the
components to the Company and the balance due Ansen is approximately $50,000.
While there are at least two qualified suppliers for the subassemblies and
components that are made to the Company's specifications, the Company generally
sources such items from a single supplier so that it can take advantage of
volume discounts and more easily ensure quality control. The Company estimates
that the lead-time required before an alternate supplier can begin providing the
necessary subassembly or component would generally be between six to ten weeks.
The disruption of the Company's business during such period of lead-time could
have a material adverse effect on its sales and results of operations. In the
event of a prolonged interruption in the supply chain, the Company's cash flow
and working capital position would be adversely affected.
Warranties. The Company provides a one-year warranty covering defective
materials and workmanship. The Company's products are serviced at depots that
are geographically dispersed throughout the world. Users can purchase extended
warranties of up to three years or can pay for repairs on a time and materials
basis. For the years 2004, 2003 and 2002, the Company's cost of warranty repairs
was less than 1%, respectively, of the Company's total revenues. The Company
does not warrant software, but users are permitted to return software for a
refund within 30 days after purchase. Accordingly, customers are afforded the
opportunity to use software on a trial basis through the Company's evaluation
program. A provision for potential warranty liability is recorded at the time
revenue is recognized.
Research and Development. During 2004, 2003 and 2002, the Company expended
approximately $150,000, $170,000 and $959,000, respectively, on research and
development activities. Boundless' research and development activities have
historically related primarily to General Display Terminals and Windows-based
terminals. As part of the Company's restructuring activities, significant
reductions in the staffing were implemented in March 2003, resulting in lower
research and development expenditures as compared to prior years. Additionally,
because General Display Terminals are mature products, development activities in
the recent past year have only included enhancements to the existing product
family.
Sales and Marketing
Boundless Technologies markets its terminal products through OEMs and
other multi-tier distribution channels. OEMs that do not want to maintain
engineering or manufacturing resources can obtain products with their brand name
from Boundless Technologies. Customers can buy Boundless Technologies' products
from an international network of value-added resellers (VARs) and regional
distributors. In order to reduce its dependence on existing OEM customers,
Boundless Technologies has been increasing its distribution channel marketing
and sales efforts and seeking additional OEM customers. Through its sales force,
Boundless Technologies sells directly to large VARs and regional distributors
and also sells to major national and international distributors. Boundless
Technologies' sales force operates out of two geographically dispersed locations
in the United States and a European office in the United Kingdom.
In selling its General Display Terminals, Boundless Technologies
emphasizes customization, reliability and compatibility with a broad range of
UNIX, Pick and other operating systems.
Boundless Technologies uses direct mail, telemarketing and cooperative
marketing to promote its products. The company believes the most effective way
to reach this market is via cooperative marketing with its channel partners.
Boundless Technologies' business is not seasonal. The third quarter of the
calendar year contributes slightly less revenue, as a percent of the total
year's revenue, due to extended vacation periods in Europe, where sales of the
company's VT/Dorio products are strong. Other fluctuations in quarterly sales
result from large orders that are unrelated to the time of year.
11
Boundless Manufacturing services include systems assembly, test,
distribution and logistics, repair centers and end-of-life management. Boundless
Manufacturing also offers in-house engineering expertise- product design, test
development, product development- to significantly reduce time-to-market for OEM
customers. Boundless Manufacturing provides a complete supply chain that is
designed and built to each customer's specifications.
The Company has effectively implemented an outsourcing strategy and cut
manufacturing costs for many prominent OEMs. Boundless Manufacturing is also
focused on delivering a level of service and commitment to middle-market OEMs
and start-up companies that is currently only available to top tier customers
from the larger EMS companies. Boundless Manufacturing's strategy, the
implementation of which is dependent on its ability to raise working capital,
includes aggressively expanding our geographic footprint, service offering,
technology base, and information technology infrastructure.
For 35 years, Boundless Technologies has manufactured high quality
products and offered a full suite of supporting services. In the last decade,
Boundless Technologies has specialized in build-to-order mass-customized
manufacturing, a capability that has evolved into a key core competency that we
believe offers a significant competitive advantage in its key markets.
The Company's Plan of Reorganization contemplates the consolidation of the
Boundless subsidiaries into one legal entity. The new entity will combine and
leverage the expertise and capabilities resident within the Boundless family to
deliver information access and control solutions through its distribution
networks.
During the year ended December 31, 2004, Hewlett Packard, Ingram Micro,
and Jetstar contributed 15.6%, 13.8% and 10.9%, respectively, of the Company's
total revenue. Hewlett Packard and NCR were the Company's most significant
customers in 2003, accounting for approximately 32% and 13%, respectively, of
the Company's total revenue. In 2002, Hewlett Packard contributed approximately
14% of the Company's total revenues. The Company believes a decline in the level
of sales to these customers, without growth in other areas of its business,
could adversely affect the Company's results of operations and liquidity.
During 2003 Hewlett Packard advised the Company of its intention to
discontinue the sale of certain of the Company's products to Hewlett Packard
customers. Hewlett Packard is transitioning its customers to newer technologies,
including thin client terminals. The Company continues to sell product to
Hewlett Packard, though in smaller volume, and has released the product for sale
to distributors who will sell to customers unwilling to transition to the newer
technologies.
Competition
The Company believes that alternative technologies, particularly
graphics-capable computers, together with the abandoning of text terminals by
both IBM and HP, have eroded the total available market. For 2004, the last year
for which the Company has data, annual units shipped into the text market was
estimated to be between 100,000 to 130,000 units. The Company believes the
market for general purpose text terminals will continue to erode at 20-30%
annually. The decline in text sales has resulted in a consolidation of former
competitors, as well as the outsourcing of production from original equipment
manufacturers to the remaining industry participants. Although industry data is
not available, the Company believes its market share to be approximately 25%,
with Wyse Technologies ("Wyse"), a Taiwanese company, holding an approximate 45%
market share. In the period just prior to the bankruptcy filing, the Company
believed the relative market shares of Boundless and Wyse were approximately
equal at 35% each. The Company believes that the market will continue to decline
and therefore lead to additional consolidation. Any market share increases for
the Company will come at the expense of current industry competitors. General
Display Terminal customer purchase criteria are based on quality, availability,
customization, compatibility with other terminals, and price. The Company holds
the leadership position in this market.
12
Patents, Trademarks and Licensing
The Company owns approximately 20 patents relating to General
Display Terminals issued in the United States and various foreign countries,
none of which is believed to be material to its business. The patents expire
during the next eight years, with expiration dates ranging from January 2006
through August 2013. The Company believes that the knowledge and experience of
its management and personnel and their ability to develop, manufacture and
market the Company's products in response to specific customer needs is more
significant than its patent rights.
The trademarks ADDS, Viewpoint, VT, and Dorio, are registered in the
United States Patent and Trademark Office and in a number of foreign countries.
Backlog
We believe that backlog is not a meaningful indicator of future business
prospects due to the build-to-order manufacturing processes employed by the
Company. This process allows the Company to manufacture product to customer
specification within three days of the receipt of the customer order. Therefore,
we believe that backlog information is not material to an understanding of our
overall business.
Environmental Regulation
Amounts incurred by Boundless in complying with federal, state and local
legislation pertaining to protection of the environment during the past three
years did not have a material effect upon capital expenditures or the financial
condition of the Company. It is our policy to apply strict standards for
environmental protection to sites inside and outside the U.S., even when not
subject to local government regulations. State and local agencies, as well as
federal lawmakers, may impose new laws and regulations that could have a
significant impact on our business.
Employees
At December 31, 2005 and December 31, 2004, the Company had approximately
31 full-time employees engaged as follows: 3 in product design and engineering,
21 in manufacturing and repair services, 2 in sales, systems services and
marketing and 5 in administration. At December 31, 2003, the Company had
approximately 57 full-time employees engaged as follows: 3 in product design and
engineering, 40 in manufacturing and repair services, 5 in sales, systems
services and marketing and 9 in administration. None of the Company's employees
is covered by a collective bargaining agreement. The Company considers relations
with its employees to be satisfactory.
13
ITEM 2. PROPERTIES
As of December 31, 2003, the Company's administrative offices were
located in a 15,000 square foot leased facility at 100 Marcus Boulevard,
Hauppauge, New York. Under the terms of sale of the Company's principal offices
previously located at this site, the Company was entitled to utilize the 15,000
square feet free of charge for a term of one year following the sale. Boundless'
manufacturing and service activities are currently conducted in a leased
facility of approximately 32,000 square feet of space in Farmingdale, New York.
The lease expires February 28, 2009, and calls for an annual base rent of
$216,000 in the first year of the agreement, escalating to $243,200 in the fifth
year. The Company leases one other small facility in Atlanta, Georgia for depot
repair and support services. The annual lease commitment for this facility is
not material.
In December 2004 the Company consolidated its administrative offices
into the Farmingdale facility.
ITEM 3. LEGAL PROCEEDINGS
In re: Boundless Corporation, et. al.
As discussed above, on the Petition Date, the Company, and its wholly and
majority owned subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases
are being jointly administered under the caption "In re Boundless Corporation,
et al., Case No. 03-81558-478." As debtors-in-possession, we are authorized
under Chapter 11 to continue to operate as an ongoing business, but may not
engage in transactions outside the ordinary course of business without the prior
approval of the Bankruptcy Court. As of the Petition Date, virtually all pending
litigation (including some of the actions described below) is stayed, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions,
may take any action, again subject to certain exceptions, to recover on
pre-petition claims against us. In addition, we may reject pre-petition
executory contracts and unexpired lease obligations, and parties affected by
these rejections may file claims with the Bankruptcy Court. At this time, it is
not possible to predict the outcome of the Chapter 11 process or its effect on
our business.
An action was commenced by Kareem Mangaroo, employed by Boundless
Technologies between February 1994 and April 1999 as a material handler
("Plaintiff"), on February 5, 2001, against Boundless Technologies, Boundless
Corporation, and four employees of the Company (Joseph Gardner, its CFO,
Michelle Flaherty, formerly manager of Human Resources, Thomas Iavarone,
director of Logistics, and Anthony San Martin, manager of Shipping), seeking
damages for the unlawful termination of Plaintiff's employment in violation of
Plaintiff's rights under Title VII of the Civil Rights Act of 1964, as amended;
the Equal Protection Clause and Due Process Clause, pursuant to the Civil Rights
Act of 1886, as amended, 42 U.S.C. ss. 1981; and for damages as a result of the
conspiratory actions of defendants to deprive Plaintiff of his equal protection
and due process rights pursuant to 42 U.S.C. ss. 1985 and for violation of
Plaintiff's rights under the Employee Retirement Income Security Act 29 U.S. C.
ss.1001. Plaintiff further alleges claims under State law for breach of
contract. The verified complaint was filed in the United States District Court,
Eastern District of New York. Plaintiff seeks (i) compensatory damages of $1
million from each of Boundless Technologies and four employees of the company
(jointly and severally), (ii) punitive damages of $2 million from each of
Boundless Technologies, the Company, and four employees of the Company (jointly
and severally), (iii) $1 million against Boundless Technologies for breach of
contract, and (iv) the value of forfeited options, attorney's fees, costs of the
action and other relief as the court deems necessary.
On February 17, 2003, the defendants' motion for summary judgment was
granted. On March 21, 2003, Plaintiff served Notice of Appeal to the United
States Court of Appeals for the Second Circuit in opposition to the granting of
defendants' motion for summary judgment. On October 15, 2003, the United States
Court of Appeal for the Second Circuit granted the defendants' motion to Stay
the appeal in accordance with 11 U.S.C. ss. 362, which Stay is still in effect.
The Company intends to vigorously defend this suit since it believes that it has
meritorious defenses to the action.
14
An action was commenced by Donald W. Lytle ("Plaintiff") on February 8,
2001, against Boundless Technologies, Inc., GN Netcom, Inc., Portal Connect,
Inc., and Wholesale Audio Video, Inc. in the Iowa District Court, Johnson
County; Law No. LACV061503 alleging negligence and products defects resulting in
injuries to Plaintiff's hearing as a result of the use of one model of the
Company's General Display Terminals. Plaintiff was suing for unspecified
damages. On January 17, 2003, Plaintiff filed a Dismissal with Prejudice
dismissing Plaintiff's claims against Boundless Technologies, Inc.
In November 2002, Comdial Corporation filed a demand for arbitration with
the American Arbitration Association against Boundless Manufacturing Services,
Inc. ("Boundless"). Among other things, Comdial contends that Boundless breached
its contractual obligations to Comdial by failing to meet Comdial's orders for
the delivery of products manufactured by Boundless. The Comdial demand seeks
damages in excess of $6.0 million. On February 6, 2003, Boundless responded to
the demand by denying substantially all of Comdial's claims and asserting
counterclaims totaling approximately $8.2 million, including approximately $0.8
million in past due invoiced amounts. On March 13, 2003, Boundless announced
that it has filed for protection pursuant to Ch. 11 of the U.S. Bankruptcy Code,
causing a stay in the arbitration matter. It is not known at this time whether
this filing will have any long-term impact on the arbitration, or whether the
arbitration will eventually proceed. No amounts have been accrued in the
Company's financial statements for any losses. In May 2005 Comdial Corporation
filed for protection under Ch. 11 of the U.S. Bankruptcy Code. Since the
Company's claims against Comdial accrued prior to Comdial's filing for
bankruptcy, any damages awarded to the Company will constitute pre-petition
claims against Comdial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders of the Company through
the solicitation of proxies or otherwise for the year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $.01 par value, ("Common Stock") had previously traded
on The American Stock Exchange ("AMEX") under the symbol BND. However, as a
result of the delisting of our securities, the last day of trading on the AMEX
was April 9, 2003. The Company's securities have traded on the pink sheets since
then under the symbol BDLSQ.PK.
As of December 31, 2005, and December 31, 2004 and 2003, there were
approximately 625 holders of record of the Company's Common Stock. The following
table sets forth the high and low last sale prices for the Company's Common
Stock, as reported by AMEX, for the first quarter of 2003. Price per share
information for the second, third and fourth quarters of 2003 and for all of
2004 were as reported by CBS Marketwatch.
Year Ended December 31, 2004: High Low
---- ---
First quarter............................. $ 0.01 $ 0.01
Second quarter............................ $ 0.05 $ 0.01
Third quarter............................. $ 0.01 $ 0.01
Fourth quarter............................ $ 0.01 $ 0.01
15
Year Ended December 31, 2003: High Low
---- ---
First quarter............................. $ 0.32 $ 0.06
Second quarter............................ $ 0.25 $ 0.01
Third quarter............................. $ 0.01 $ 0.01
Fourth quarter............................ $ 0.01 $ 0.01
The last sale price of the Company's Common Stock on December 31, 2005 was $
0.00.
The Company believes its presently outstanding equity securities will have
no value and it is expected that those securities will be canceled under any
plan of reorganization that we propose. For this reason, we urge that caution be
exercised with respect to existing and future investments in any Company
security.
Recent Sales of Unregistered Securities
None
Dividend Policy
The Company presently anticipates that all of its future earnings
will be retained for development of its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, restrictions on the payment of
dividends imposed by its lenders, future earnings, capital requirements, the
general financial condition of the Company, and general business conditions.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
for the Company for the periods and the dates indicated. The consolidated
balance sheet data and the consolidated statement of operations data as of and
for the years ended December 31, 2001 and December 31, 2000 are derived from the
consolidated financial statements which were audited by BDO Seidman, LLP, an
independent registered public accounting firm. The consolidated balance sheet
data and the consolidated statement of operations data as of and for the years
ended December 31, 2004, 2003, and 2002 are derived from the consolidated
financial statements which were audited by BP Audit Group, PLLC, an independent
registered public accounting firm. The selected financial data as of December
31, 2004 and 2003, and for each of the years in the three-year period ended
December 31, 2004 should be read in conjunction with, and are qualified in their
entirety by, the Consolidated Financial Statements of the Company and related
Notes and other financial information included elsewhere herein.
16
Consolidated Statement of Operations Data
For the years ended December 31:
(in thousands, except per share data)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Total revenues $ 7,309 $ 11,750 $ 26,843 $ 59,581 $ 64,544
Gross margin (loss) 1,852 788 (537) 6,283 15,500
Interest expense 129 804 1,402 1,599 1,455
Reorganization items 484 655 -- -- --
Gain on restructuring of payables -- -- (3,924) -- --
Income tax expense (credit) -- -- -- 1,383 (289)
Loss from continuing
operations (28) (3,579) (7,623) (8,792) (3,255)
Loss from discontinued operations -- -- -- (2,150) (14,004)
--------- --------- --------- --------- ---------
Net loss (28) (3,579) (7,623) (10,942) (17,259)
Accretion on preferred stock -- 99 148 -- --
--------- --------- --------- --------- ---------
Loss applicable to
common shareholders $ (28) $ (3,678) $ (7,771) $ (10,942) $ (17,259)
========= ========= ========= ========= =========
Loss per common share from
continuing operations:
Basic and diluted $ -- $ (0.55) $ (1.21) $ (1.74) $ (0.72)
========= ========= ========= ========= =========
Loss per common share:
Basic and diluted $ -- $ (0.55) $ (1.21) $ (2.17) $ (3.81)
========= ========= ========= ========= =========
Consolidated Balance Sheet Data
At December 31:
(in thousands)
Working capital (deficit) $ 632 $ (39) $ (9,775) $ (16,473) $ 3,435
Total assets 3,010 4,138 13,236 33,215 39,604
Revolving credit loan (short-term) -- -- -- 8,507 --
Current maturities of long-term debt 350 837 3,142 6,855 --
Liabilities and other items subject to
compromise 14,622 13,207 -- -- --
Long-term obligations 953 1,581 8,294 833 13,442
Mandatorily redeemable preferred
stock -- -- 1,554 -- --
Stockholder's equity (deficit) (14,905) (14,877) (11,199) (4,143) 5,751
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The numbers and percentages contained in this Item 7 are approximate.
Dollar amounts are stated in thousands.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K. Note that our
preparation of this Annual Report on Form 10-K requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
Bankruptcy Considerations- Financial Statement Presentation
The consolidated financial statements have been prepared in accordance
with American Institute of Certified Public Accountants' Statement of Position
90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," and on a going-concern basis, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business.
SOP 90-7 requires that the financial statements for periods subsequent to
the Chapter 11 filing petition distinguish transactions and events that are
directly associated with the reorganization from the operations of the business.
Accordingly, revenues, expenses (including professional fees), realized gains
and losses, and provisions for losses directly associated with the
reorganization and restructuring of the business are reported separately in the
financial statements. The Consolidated Balance Sheet distinguishes pre-petition
liabilities and other items subject to compromise from both those pre-petition
liabilities that are not subject to compromise and from post-petition
liabilities. Liabilities and other items subject to compromise are reported at
the amounts expected to be allowed, even if they may be settled for lesser
amounts.
In addition, as a result of the Chapter 11 filing, the realization of
assets and satisfaction of liabilities, without substantial adjustments or
changes in ownership, are subject to uncertainty. Given this uncertainty, there
is substantial doubt about the Company's ability to continue as a going concern.
While operating as debtors-in-possession under the protection of Chapter 11 of
the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise
as permitted in the ordinary course of business, the Debtors, or some of them,
may sell or otherwise dispose of assets and liquidate or settle liabilities for
some amounts other than those reflected in the consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications in the historical consolidated financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). The Company adopted SFAS 142 on January 1,
2002, eliminating the amortization of goodwill and other intangible assets that
have indefinite useful lives. SFAS 142 also requires at least an annual
impairment review of goodwill and other intangible assets and any asset deemed
to be impaired is to be written down to its fair value. Due to its March 2003
Chapter 11 proceedings, in December 2002, the Company recorded an expense of
$3,262 to remove the remaining book value of all goodwill and associated
intellectual property.
18
Basis of Presentation
Boundless Corporation is a holding company whose principal subsidiaries
are Boundless Technologies, Inc., Boundless Manufacturing Services, Inc., and
Merinta Inc. The consolidated financial statements include the accounts of all
of the Company's majority-owned subsidiaries. We sometimes collectively refer to
Boundless Corporation, together with our consolidated subsidiaries, as "we,"
"Boundless" or the "Company." All significant intercompany transactions are
eliminated. Certain prior year amounts have been reclassified to conform to the
current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents and Short-Term Investments
Cash in excess of operating requirements is invested in short-term, highly
liquid, income-producing investments. Investments with a maturity of three
months or less on their acquisition date are classified as cash and cash
equivalents. Other investments are classified as short-term investments.
We had $271,000 and $328,000 classified as "cash on deposit with lender"
at December 31, 2004 and 2003, respectively, representing cash on-hand in a
lockbox account under the control of the Company's DIP lender. On approval of
the DIP lender the Company accesses these funds; further, the lender withdraws
payments on terms of its DIP financing agreement as discussed above in
"Bankruptcy Considerations".
Machinery and Equipment
Owned machinery and equipment are stated at cost. Property under capital
leases, and the related obligation for future lease payments, is recorded at an
amount equal to the initial present value of those lease payments.
Depreciation and amortization of owned depreciable assets is based on the
straight-line method over the assets' estimated service lives. Leasehold
improvements are amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is less.
Properties under capital leases are amortized on the straight-line method
over the life of the lease or over their estimated service lives. Amortization
of capital leases is included in depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements, are
charged to maintenance expense as incurred. Costs of additions to and renewals
of units of property are capitalized as property and equipment additions.
Sales returns and other allowances, allowance for doubtful accounts.
The preparation of financial statements requires our management to make
estimates and assumptions that affect the reported amount of assets at the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. Specifically, our management must make estimates of
potential future product returns related to current period product revenue.
Management analyzes historical returns, current economic trends, and changes in
customer demand and acceptance of our products when evaluating the adequacy of
the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if management made
different judgments or utilized different estimates. Historically the Company
has not experienced material levels of product returns.
19
Similarly, our management must make estimates of the uncollectibility of
our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Management's review of this allowance could result in a reduction and
corresponding credit to the statement of operations.
Warranty and product guaranties.
We provide for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, our warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability may be required.
Inventory obsolescence.
We record inventory valuation allowances for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory valuation allowances may be
required. Management's review of this allowance could result in a reduction and
corresponding credit to the statement of operations.
Deferred Taxes
The carrying value of the Company's net deferred tax assets is based on
assumptions as to whether the Company will be able to generate sufficient future
taxable income in certain tax jurisdictions, based on applicable estimates and
assumptions to utilize its existing loss carry-forwards. If these estimates and
related assumptions change in the future, the Company may be required to record
applicable adjustments to the valuation allowances against its deferred tax
assets resulting in additional income tax expense or credits in the Company's
consolidated statement of operations. Management evaluates the realizability of
the deferred tax assets quarterly and assesses the need for changes in the
valuation allowances quarterly. For the years ended December 31, 2004, 2003 and
2002 the Company has recorded valuation allowances at 100% of its deferred tax
assets.
Results of Operations
First quarter of 2004 compared with first quarter of 2003
On March 12, 2003, the Company filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Prior to the filing, the Company's inability to obtain material
for production adversely impacted customer demand and the Company's ability to
satisfy existing customer orders.
Revenue - Revenue for the quarter ended March 31, 2004 was $2,183 as compared to
$2,470 for the quarter ended March 31, 2003.
Sales of the Company's General Display Terminals were $1,985 for the quarter
ended March 31, 2004 compared to $1,963 for the quarter ended March 31, 2003.
The first quarter of 2003 was adversely impacted by the Company's bankruptcy
filing. Stabilization of the Company's operations in the periods subsequent to
the filing allowed the Company to record revenues of General Display Terminals
during the first quarter of 2004 similar to recorded revenue in the first
quarter of
20
2003 despite the industry decline in demand for this product.
Net revenue from EMS activities, primarily logistics services sold to Unique
Co-operative Solutions, Inc. ("UCSI"), were $18. UCSI is wholly owned by Mr.
Oscar Smith, who also is the majority shareholder of Vision. Mr. Smith also owns
approximately 15% of the outstanding common stock of the Company. EMS revenue
for the quarter ended March 31, 2003 was $300. The revenue decline is wholly
attributable to the working capital constraints faced by the Company beginning
in the second quarter of 2002.
Net revenue from the Company's repairs and spare parts business for the quarter
ended March 31, 2004 was $179 as compared to $207 for the quarter ended March
31, 2003.
Hewlett-Packard contributed 34% of the Company's revenue in the quarter ended
March 31, 2004, and 26% of recorded revenues for the first quarter of 2003.
During 2003 Hewlett Packard informed the Company of its decision to discontinue
the sale of the Company's products. Sales to Hewlett Packard during the first
quarter of 2004 represented purchases for its immediate needs as well as product
purchases it anticipated needing for the transition of its customers to
alternative products.
Gross Margin - The Company recorded gross margin for the three months ended
March 31, 2004 of $644 (29.5% of revenue) compared to a gross margin loss of
$112 for the first quarter of 2003. The increase in gross margin is attributable
to the reduction in fixed overhead associated with the Company's manufacturing
facility in Hauppauge, New York, which the Company sold in December 2003. In
addition, General Display Terminals, which contribute higher gross margin as
compared to the Company's other sources of revenue, provided approximately 91%
of revenue in the first quarter of 2004 compared to 79% of revenue in the first
quarter of 2003.
Total Operating Expenses - For the quarter ended March 31, 2004, operating
expenses, excluding interest expense and reorganization expenses associated with
the Company's bankruptcy filing, decreased 5% to $513 (23% of revenue), compared
to expenses for the first quarter of 2003 of $537 (22% of revenue). This
decrease is attributable primarily to layoffs and other expense control
activities which the Company had begun implementing to align sales, marketing
and administrative expenses with the revenue decline.
Loss on reimbursement of employee services- Beginning in the first quarter of
2004 the Company agreed to provide UCSI resources, primarily Company employees,
to allow UCSI to pursue programs critical to their continued development of the
thin client market. UCSI is wholly-owned by Mr. Oscar Smith. Mr. Smith is also
the majority owner of Vision Technologies, Inc., the entity which will own 100%
of the Company upon confirmation of the Company's plan of reorganization. A
monthly charge to UCSI was agreed to based upon the Company's estimate of the
percentage of time its employees would be devoted to UCSI projects. For the
first quarter of 2004 the Company charged UCSI $75 and incurred estimated
expenses of $90, resulting in a loss on reimbursement of employee services of
$15.
Loss on extinguishment of debt- In connection with the bankruptcy filing, during
the quarter ended March 31, 2003, the Company obtained debtor-in-possession
financing with Valtec Capital, LLC and wrote off $289 of capitalized debt
financing costs associated with the asset-based lending agreement with the
Company's prior lender.
During the first quarter of 2004 the Company recorded net reorganization
expenses of $113; which amount included approximately $123 related to expenses
associated with the Company's relocating its manufacturing operations to
Farmingdale, New York. In addition, the Company recognized $23 from the sale of
excess assets. Reorganization expenses, primarily for legal fees, were $336
during the quarter ended March 31, 2003.
Other credits - Other credits for the quarter ended March 31, 2004 was $49
compared to credits of $129 for the period ended March 31, 2003. Credits
recorded in 2004 include $12 relating to return of premiums against the
Company's workers' compensation insurance due to a reduction in the Company's
experience rating.
21
The Company reviews its account receivable balances monthly to assess its
estimate of the collectability of such accounts. The Company utilizes ratios
based on its historical experience, as well as management's judgment, in its
assessment. For the first quarter of 2004 the Company recorded a reduction in
the reserve against its receivables in an amount of approximately $24.
Interest Expense - Interest expense for the quarter ended March 31, 2004 was $41
compared to $274 for the comparable period in 2003. The decline in interest
expense is attributable to the elimination of mortgage interest on the Company's
former manufacturing facility, sold in December of 2003, and the rejection of
certain capital leases as a result of the bankruptcy filing. Pursuant to a
Financing Agreement dated June 27, 2002, the Company entered into a credit
facility with the CIT Group/Business Credit, Inc. ("CIT"). By assignment dated
February 21, 2003, CIT assigned all of its right, title and interest in and to
the CIT Credit Facility to Valtec Capital Corporation ("Valtec"). Prior to this
assignment, the Company had been amortizing the capitalized debt financing costs
associated with the CIT agreement to interest expense. For the first quarter
ended March 31, 2003, the amortized capitalized debt financing costs were $42.
Income Tax Expense - For the first quarter of 2004 and 2003 the Company did not
record income tax expense or credit against the recorded results. The Company
recorded no income tax benefit for the quarter ended March 31, 2003, based on
the Company's estimate of its annual effective income tax rate to be zero. For
annual reporting purposes, the Company has provided a 100% valuation allowance
for its net deferred tax assets.
Net Income (Loss) - For the quarter ended March 31, 2004, the Company recorded
net income of $11, compared to net loss of $1,419 for the quarter ended March
31, 2003.
Second quarter of 2004 compared with second quarter of 2003
Revenue - Revenue for the quarter ended June 30, 2004, was $1,811 as compared to
$4,008 for the quarter ended June 30, 2003. Revenue for the six months ended
June 30, 2004 was $3,994 versus $6,478 for 2003.
Sales of the General Display Terminals declined 55% to $1,575 for the quarter
ended June 30, 2004 from $3,640 for the quarter ended June 30, 2003. Results for
the second quarter of 2003 include substantial conversion of backlog arising
from the interruption of manufacturing activities immediately following the
Company's filing for bankruptcy on March 12, 2003. On a year-to-date basis,
revenue for General Display Terminals declined 36% to $3,560 from $5,603 in
2003.
Electronic manufacturing services revenues for the quarter ended June 30, 2004,
were $64, excluding intercompany revenue, as compared to $68 for the quarter
ended June 30, 2003. As a result of the bankruptcy filing and the Company's
decision to close the Boca Raton manufacturing facility in June of 2002, the
Company's EMS customers had sought alternative suppliers. The Company completed
contractual production for its one remaining EMS customer from its Hauppauge,
New York facility during the second quarter of 2003.
Net revenue from the Company's repairs and spare parts business for the quarter
ended June 30, 2004 was $173 as compared to $300 for the quarter ended June 30,
2003.
Agilysis and 1st Solutions contributed 12.3% and 9.8%, respectively, of total
revenues during the second quarter of 2004. Hewlett Packard contributed 39% of
the Company's total revenue in the quarter ended June 30, 2003.
Gross Margin - Gross margin for the three months ended June 30, 2004 were $441,
as compared to gross margin of $803 for the comparable period in 2003. The
decline in gross margin is directly attributable to the decline in revenue.
Gross margin for the six months ended June 30, 2004 were $1,085 as compared to
$691 for the comparable period in 2003.
Total Operating Expenses - For the quarter ended June 30, 2004, operating
expenses, excluding interest expense and
22
reorganization expenses, were $350 (19% of revenue), compared to expenses for
the second quarter of 2003 of $1,253 (31% of revenue). For the six months ended
June 30, 2004, operating expenses were $863 compared to expenses in the
comparable period in 2003 of $1,790.
Loss on reimbursement of employee services- Beginning in the first quarter of
2004 the Company agreed to provide UCSI resources, primarily Company employees,
to allow UCSI to pursue programs critical to their continued development of the
thin client market. UCSI is wholly-owned by Mr. Oscar Smith. Mr. Smith is also
the majority owner of Vision Technologies, Inc., the entity which will own 100%
of the Company upon confirmation of the Company's plan of reorganization. A
monthly charge to UCSI was agreed to based upon the Company's estimate of the
percentage of time its employees would be devoted to UCSI projects. For the
quarter ended June 30, 2004, the Company charged UCSI $75 and incurred estimated
expenses of $90, resulting in a loss on reimbursement of employee services of
$15. For the six months ended June 30, 2004, the loss on reimbursement of
employee services was $30.
During the second quarter ended June 30, 2004, the Company recorded net
reorganization expenses of $76, primarily for legal fees, associated with its
bankruptcy filing. For the second quarter of 2003 reorganization expenses were
approximately $330. On a year-to-date basis reorganization expenses were $189
for the six months ended June 2004 compared to $666 for the comparable period in
2003.
Other Charges/Credits - The Company recorded charges of $74 during the quarter
ended June 30, 2004 compared to credits of $21 for the quarter ended June 30,
2003. Charges in the second quarter of 2004 include accruals of approximately
$58 associated with the lease obligations of the Company's depot repair center
in Illinois which the Company had decided to close. At that time, the Company's
lease on the facility had 18 months remaining until expiration. On a
year-to-date basis, other charges were $25 in 2004 compared to other credits of
$150 in 2003.
Interest Expense - Interest expense for the quarter ended June 30, 2004 was $37
compared to $196 for the comparable period in 2003. Mortgage interest on the
Company's former manufacturing facility, sold in December of 2003, was
approximately $112 for the quarter ended June 30, 2003. On a year-to-date basis,
interest expense was $78 in 2004 compared to $470 in 2003.
Income Tax Expense - For the second quarter of 2004 and 2003, the Company did
not record an income tax credit against the recorded losses before income taxes.
The Company recorded no income tax benefit for the quarter ended June 30, 2004
and 2003, based on the Company's estimate of its annual effective income tax
rate to be zero. For annual reporting purposes, the Company has provided a 100%
valuation allowance for its net deferred tax assets.
Net Loss- For the quarter ended June 30, 2004, the Company recorded a net loss
of $111, compared to a net loss of $955 for the quarter ended June 30, 2003. The
year-to-date loss in 2004 was $100 compared to $2,374 in 2003.
Third quarter of 2004 compared to third quarter of 2003
Revenue - Revenue for the quarter ended September 30, 2004, was $1,412 as
compared to $3,461 for the quarter ended September 30, 2003. Revenue for the
nine months ended September 30, 2004 was $5,406 versus $9,939 for 2003.
Sales of the Company's General Display Terminals were $1,203 for the quarter
ended September 30, 2004 compared to $3,207 for the quarter ended September 30,
2003. On a year-to-year basis, revenue for General Display Terminals declined
46% to $4,763 from $8,810 in year 2003.
The Company recorded EMS revenue of $32 for the third quarter of 2004. Due to
the Company's weak financial position no EMS activity or revenue was recorded in
the quarter ended September 30, 2003.
Net revenue from the Company's repairs and spare parts business for the quarter
ended September 30, 2004 was $177 as
23
compared to $253 for the quarter ended September 30, 2003.
Ingram Micro and Jetstar contributed 19.9% and 11.4%, respectively, of total
revenues for the quarter ending September 30, 2004. Hewlett Packard and NCR were
the most significant customers of the Company for the quarter ended September
30, 2003, contributing 33% and 27%, respectively, of total revenue.
Gross Margin - Gross margin for the three and nine months ended September 30,
2004 were $335 (23.7% of revenue) and $1,420 (26.3% of revenue) respectively, as
compared to gross margin of $691 (20% of revenue) for the third quarter of 2003
and $1,382 (14% of revenue) for the nine months ended September 30, 2003.
Total Operating Expenses - For the quarter ended September 30, 2004, operating
expenses, excluding interest expense and reorganization expenses, decreased 20%
to $266 (19% of revenue), compared to expenses for the third quarter of 2003 of
$334 (10% of revenue). For the nine months ended September 30, 2004, operating
expenses were $1,129 compared to expenses in the comparable period in 2003 of
$2,124.
Loss on reimbursement of employee services- Beginning in the first quarter of
2004 the Company agreed to provide UCSI resources, primarily Company employees,
to allow UCSI to pursue programs critical to their continued development of the
thin client market. UCSI is wholly-owned by Mr. Oscar Smith. Mr. Smith is also
the majority owner of Vision Technologies, Inc., the entity which will own 100%
of the Company upon confirmation of the Company's plan of reorganization. A
monthly charge to UCSI was agreed to based upon the Company's estimate of the
percentage of time its employees would be devoted to UCSI projects. For the
quarter ended September 30, 2004, the Company charged UCSI $75 and incurred
estimated expenses of $90, resulting in a loss on reimbursement of employee
services of $15. For the nine months ended September 30, 2004, the loss on
reimbursement of employee services was $45.
Net reorganization expenses were $86 and $275 for the three and nine months
ended September 30, 2004, respectively, as compared to expenses of $287 and $953
for the three and nine months ended September 30, 2003. Of the $85 recognized
during the third quarter of 2004, $75 represented legal expenses. During the
third quarter of 2003, the Company recognized gains of $48 from the sale of
excess assets and for the nine-month period the Company incurred $974
representing legal fees and fees due the U.S. Trustee administering the
bankruptcy case.
Other Charges/Credits - The Company recorded credits of $40 during the quarter
ended September 30, 2004 compared to credits of $30 for the quarter ended
September 30, 2003. Other credits in the third quarter of 2004 is composed of
the partial reversal of previously accrued expenses, originally in the amount of
approximately $58, and recorded during the second quarter of 2004 in connection
with the Company's decision to shut down its leased depot repair center in
Illinois. During the third quarter of 2004 the Company reached agreement with
the landlord of the Illinois facility releasing the Company from the then
remaining obligations under the lease. Other credits in 2003 include $26 related
to premium returns on the Company's workers' compensation insurance. On a
year-to-date basis, other credits were $15 in 2004 compared to other credits of
$180 in 2003.
Interest Expense - Interest expense for the quarter ended September 30, 2004 was
$21 compared to $192 for the comparable period in 2003. For the third quarter of
2003, the Company recorded interest expense of approximately $112 related to the
mortgage on its Hauppauge, NY, facility. Interest expense for the nine months
was $99 in 2004 versus $662 in 2003.
Income Tax Expense - For the third quarter of 2004 and 2003, the Company did not
record an income tax credit against the recorded losses before income taxes. The
Company recorded no income tax benefit for the quarter ended September 30, 2004
and 2003, based on the Company's estimate of its annual effective income tax
rate to be zero. For annual reporting purposes, the Company has provided a 100%
valuation allowance for its net deferred tax assets.
Net loss- For the quarter ended September 30, 2004, the Company recorded a net
loss of $13, compared to a net loss of $92 for the quarter ended September 30,
2003. For the nine months ended September 30, 2004 the net loss was $113
compared
24
to $2,466 for the nine months ended September 30, 2003.
Years Ended December 31, 2004 and 2003
Revenues: Revenues for the year ended December 31, 2004 were $7,309, as
compared to $11,750 for the year ended December 31, 2003. The decline in revenue
is attributable to a reduction in sales of the Company's text terminals
products, as customers moved to alternative technologies, including graphic
displays.
Text revenue includes sales of the Company's general-purpose display
terminals. The Company's product family falls into two general classes: ANSI or
ASCII display terminals. The general purpose segment of the Text market, whether
ANSI or ASCII, is primarily characterized as a "replacement sale" market. There
exists limited opportunities for sales of the general display terminal into new
installations. Text terminal customer purchasing criteria are based on quality,
customization, compatibility with other terminals, price and, as a result of the
markets replacement characterization, lead-times. Prior to its filing for
bankruptcy, the Company has been a leader in these categories.
Sales of the Company's General Display Terminals declined by 38% to $6,400
for the year ended December 31, 2004 from $10,347 for the year ended December
31, 2003. The decline is attributable to a reduction in sales of the Company's
OEM products to Hewlett Packard and IBM, which, in combination, accounted for a
decline of approximately $2,477, or 62%, from sales in 2003.
The decline in text sales has resulted in a consolidation of former
competitors, as well as the outsourcing of production from original equipment
manufacturers to the remaining industry participants. Although industry data is
not available, the Company believes its market share to be approximately 25%,
with Wyse Technologies ("Wyse"), a Taiwanese company, holding an approximate 45%
market share. In the period just prior to the bankruptcy filing, the Company
believes the relative market shares of Boundless and Wyse were approximately
equal at 35% each. The Company believes that the market will continue to decline
and therefore lead to additional consolidation. Any market share increases for
the Company will come at the expense of current industry competitors.
Customer Services revenue for 2004 was $669 compared to $1,032 in 2003.
Customer services revenue includes the sale of spare parts, repair of product
outside of the warranty period, and the sale of multi-year warranty contracts.
Historically, customer service revenue has been driven from the sales of the
Company's text terminal products.
The Company's engineering efforts have focused on cost reduction and
reliability improvements. These efforts have decreased the average failure rate
of the Company's text terminals and extended the average useful life of the text
terminal. These improvements have reduced the Company's ability to generate
revenue from spare parts sales and repair activities. In addition, a substantial
market has evolved around the sale of used equipment, as customers trade in text
terminals when they switch to alternative technologies, thereby reducing the
Company's opportunity to sell new equipment.
During 2004 the Company recorded EMS revenue of $240, entirely for
logistics services provided to UCSI. During 2003 the Company recorded EMS
revenue of $371.
Hewlett Packard, Ingram Micro and Jetstar contributed 15.6%, 13.8% and
10.9%, respectively of Company revenues in 2004. Hewlett Packard and NCR were
the Company's most significant customers in 2003, accounting for approximately
32% and 13%, respectively, of the Company's total revenue.
During 2003 Hewlett Packard advised the Company of its intention to
discontinue the sale of certain of the Company's products to Hewlett Packard
customers. Hewlett Packard is transitioning its customers to newer technologies,
including thin client terminals. The Company continues to sell product to
Hewlett Packard, though in smaller volume, and has released the product for sale
to distributors who will sell to customers unwilling to transition to the newer
technologies.
25
Gross Margin. Gross margin for the year ended December 31, 2004 was $1,852
(25% of revenue), as compared to gross margin for the year ended December 31,
2003 of $788 (7% of revenue).
To reduce overhead expenses, in December 2003 the Company sold its
manufacturing facility in Hauppauge, New York, thereby eliminating $8,578 in
principal amount of secured debt and $634 of accrued property tax and interest.
Under the terms of the sales transaction, the Company leased 15,000 sq. feet of
administrative and engineering space at no out of pocket cost to it during the
first year of the lease. In accordance with generally accepted accounting
principles, a factor for reasonable rent expense was imputed to the sale
transaction. In February 2004 the Company executed a lease to rent 32,000 sq.
ft. of manufacturing space in a facility located in Farmingdale, New York. The
lease term is 5 years and calls for first year annual rent of $216, escalating
to $243 in the final year.
During the bankruptcy period, the supply chain disruption and the
Company's lack of adequate working capital caused the Company to incur
substantial airfreight expenses in order to accelerate receipt of raw materials
to meet customers' demands and the Company's commitments. For the year ended
2003, airfreight expense totaled $414. Had the Company been able to avoid this
expense, gross margin would have been improved by 3.5 points. As of December 31,
2003, the Company has restructured the supply chain for raw materials and
eliminated unfavorable airfreight expense.
In December 2003 the Company recorded a charge of $778, or 6.6 points of
gross margin, to reserve against excess and obsolete inventory. Of this amount,
$175 represents a reserve against exposure positions existing prior to the
Filing Date. In addition, the Company accrued $528 to reserve against a portion
of the inventory located at Ansen.
Gross margin in future periods may be affected by several factors such as
sales volume, shifts in product mix, pricing strategies and absorption of
manufacturing costs.
Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 2004 or 2003. In a continuing effort to maintain and
improve margins in an industry otherwise characterized by commodity pricing,
management has focused on quality, flexibility, and product cost reductions.
From time-to-time margins are adversely affected by industry shortages of
key components. The Company emphasizes product and cost reductions in its
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices available.
See "Asset Management."
Total Operating Expenses. For the year ended December 31, 2004, operating
expenses, excluding interest and reorganization expenses, were $1,434 (20% of
revenue), compared to expenses for 2003 of $2,812 (24% of revenue).
Sales and Marketing Expenses. Sales and marketing expenses decreased 52%
from $610 (5% of revenue) for the year ended 2003 to $295 (4% of revenue) for
the year ended December 31, 2004. The decrease is attributable to the
reorganization of the Company which resulted in a major reduction in personnel
and marketing programs.
Boundless Technologies promotes its products by means of a balanced mix of
direct mail, telemarketing and cooperative channel marketing programs. Boundless
Manufacturing promotes its services through its direct sales force.
General and Administrative Expenses. General and administrative expenses
decreased 51%, or $1,043, to $989 (14% of revenue), from $2,032 (17% of revenue)
for the periods ending December 31, 2004 and 2003, respectively. The decrease
stems from reductions in personnel costs, travel and professional services.
Research and Development Expenses. Research and development expenses
decreased to $150 in 2004 from $170 in 2003. Because General Display Terminals
are mature products, development activities over the past year have only
26
included enhancements to the existing product family.
Interest Expense. Interest expense amounted to $129 for the year ended
December 31, 2004 compared to $804 for 2003. The decrease is attributable to
lower levels of debt carried by the Company during 2004 and the elimination of
the mortgage interest due to the sale of the Company's Hauppauge facility in
December 2003. In addition, during the first quarter of 2003 the Company
assigned all of its right, title and interest in and to the CIT Credit Facility
to Valtec Capital Corporation ("Valtec"). Prior to this assignment, the Company
had been amortizing the capitalized debt financing costs associated with the CIT
agreement to interest expense. For the first quarter ended March 31, 2003, the
amortized capitalized debt financing costs were $63.
Loss on reimbursement of employee services. Beginning in the first quarter
of 2004 the Company agreed to provide UCSI resources, primarily Company
employees, to allow UCSI to pursue programs critical to their continued
development of the thin client market. UCSI is wholly-owned by Mr. Oscar Smith.
Mr. Smith is also the majority owner of Vision Technologies, Inc., the entity
which will own 100% of the Company upon confirmation of the Company's plan of
reorganization. A monthly charge to UCSI was agreed to based upon the Company's
estimate of the percentage of time its employees would be devoted to UCSI
projects. For 2004 the Company charged UCSI $255 and incurred estimated expenses
of $306, resulting in a loss on reimbursement of employee services of $51.
Loss on extinguishment of debt. In connection with the bankruptcy filing,
during the quarter ended March 31, 2003, the Company obtained
debtor-in-possession financing with Valtec Capital, LLC and wrote off $289 of
capitalized debt financing costs associated with the asset-based lending
agreement with the Company's prior lender.
Other Charges (Credits). Credits for the year ended 2004 were $218 and
included the reduction in reserves for trade receivables of $117 and inventory
of $109. Credits for the year ended December 31, 2003 were $193
Reorganization Items. For the year ended December 31, 2004 the Company
recorded net reorganization expenses of $485. The expenses for 2004 include $278
for legal fees associated with the Company's bankruptcy filing and $157 of
expenses relating to the relocation of the Company's manufacturing operations.
For the year ended December 31, 2003 the Company recorded net reorganization
expenses of $655. The expenses for 2003 include $1,298 for legal fees associated
with the Company's bankruptcy filing and $685 of gains from the sale of assets.
Income Tax Expense/Credit. Due to the net losses, the Company did not
record an income tax expense or credit for either of the years ended December
31, 2004 and 2003. The Company has provided a valuation allowance against the
total amount of the net deferred tax assets due to the uncertainty of future
realization.
Net Loss. For the year ended December 31, 2004, the net loss was $28,
compared to a net loss of $3,579 for the year ended December 31, 2003.
Accretion on Preferred Stock. Convertible preferred stock issued in
connection with the 2002 debt restructuring in the face amount of $4,365 was
recorded at its estimated fair value of $1,406. Assuming none of the holders of
the Preferred Stock convert to Common Stock of Boundless Corporation, the
Company would be required to record a charge to earnings available to
stockholders over the ten-year redemption period such that the carrying value of
the Preferred Stock equals its face value at the time of redemption.
Pre-petition, the difference between the carrying value of the preferred stock
and its face value was being treated as a dividend and charged to earnings
available to stockholders over the ten-year redemption period unless conversion
occurs, in which case accretion terminates at that point. As a result of the
bankruptcy, during 2003 the Company discontinued accreting to earnings the
difference between the carrying value and face amount of the preferred stock.
The aggregate accretion at the time of discontinuance was $247.
27
Net Loss Applicable to Common Shareholders. For the year ended December
31, 2004, the net loss applicable to common shareholders was $28, compared to a
net loss applicable to common shareholders of $3,678 for the year ended December
31, 2003.
Years Ended December 31, 2003 and 2002
Revenues: Revenues for the year ended December 31, 2003 were $11,750, as
compared to $26,843 for the year ended December 31, 2002. The decline in revenue
is attributable to a reduction in sales of the Company's text terminals
products, as customers moved to alternative technologies, including graphic
displays. In addition, revenue for 2002 included $7,781 from the Company's EMS
offerings, which services the Company did not perform during the bankruptcy
period due to their working capital deficit position.
Text revenue includes sales of the Company's general-purpose display
terminals. The Company's product family falls into two general classes: ANSI or
ASCII display terminals. The general purpose segment of the Text market, whether
ANSI or ASCII, is primarily characterized as a "replacement sale" market. Text
terminal customer purchasing criteria are based on quality, customization,
compatibility with other terminals, price and, as a result of the markets
replacement characterization, lead-times. Historically, the Company has been a
leader in these categories.
Sales of the Company's General Display Terminals declined by 40% to
$10,347 for the year ended December 31, 2003 from $17,248 for the year ended
December 31, 2002. The decline is attributable to a reduction in sales of the
Company's OEM products to Digital, Hewlett Packard and IBM, which, in
combination, accounted for a decline of approximately $1,897, or 34.8%, from
sales in 2002.
Actual Text revenue in 2003 is below that recorded by the Company in 2002,
even after considering the industry decline in demand for this product. The
abnormally high rate of decline in 2003 is attributable to: (i) the decline
related to the Company filing for bankruptcy; (ii) a one month disruption in the
Company's receipt of ANSI material; and, (iii) the failure of a key component
vendor to timely place orders for key ASCII components to its sub-suppliers.
This resulted in the delivery of product to the Company four months later than
the quoted delivery date. This delay further exacerbated lead-times, causing the
Company to attempt to reschedule its commitments to customers, as well as
raising customer concerns as to the Company's ability to continue to function as
a reliable source of text terminals. Therefore, customers cancelled orders and
did not place orders with the Company for additional product.
During 2003 the Company's ATFS/EMS services were adversely impacted by its
working capital constraints and bankruptcy filing. For the year ended December
31, 2003, the Company recorded EMS revenue of $371. In 2002 the Company recorded
ATFS/EMS revenue of $7,781. Participation in the EMS market requires a
substantial investment in working capital as well as a high level of trust
between the EMS provider and the customer; since, in effect, the customer's
success is directly linked to the EMS provider's ability to perform the
outsourced services. The inability of the Company to fund the start-up of
Merinta, combined with the decline in text terminal sales, adversely impacted
working capital. Lacking adequate working capital, the Company was not able to
maintain the EMS growth they had achieved during 2001; and in June 2002 closed
its manufacturing facility in Boca Raton, Florida, consolidating its operations
into the Hauppauge, New York, facility.
Customer Services revenue for 2003 was $1,032 compared to $1,814 in 2002.
Customer services revenue includes the sale of spare parts, repair of product
outside of the warranty period, and the sale of multi-year warranty contracts.
Historically, customer service revenue has been driven from the sales of the
Company's text terminal products.
The Company's engineering efforts have focused on cost reduction and
reliability improvements. These efforts have decreased the average failure rate
of the Company's text terminals and extended the average useful life of the text
terminal. These improvements have reduced the Company's ability to generate
revenue from spare parts sales and repair activities. In addition, a substantial
market has evolved around the sale of used equipment, as customers trade in text
28
terminals when they switch to alternative technologies, thereby reducing the
Company's opportunity to sell new equipment.
Spare parts sales in 2003 were also impacted by the Company's negative
working capital position and their inability to acquire material to satisfy
customer demand. Sales of spare parts in 2003 were $355 as compared to $598 in
2002.
Hewlett Packard and NCR were the Company's most significant customers in
2003, accounting for approximately 32% and 13%, respectively, of the Company's
total revenue. During 2002, Hewlett Packard contributed 14% of the Company's
revenue.
Gross Margin. Gross margin for the year ended December 31, 2003 was $788
(6.7% of revenue), as compared to a gross margin loss for the year ended
December 31, 2002 of $537.
To reduce overhead expenses, in December 2003 the Company sold its
manufacturing facility in Hauppauge, New York, thereby eliminating $8,578 in
principal amount of secured debt and $634 of accrued property tax and interest.
Under the terms of the sales transaction, the Company leased 15,000 sq. feet of
administrative and engineering space at no out of pocket cost to it during the
first year of the lease. In accordance with generally accepted accounting
principles, a factor for reasonable rent expense of $150 was imputed to the sale
transaction. In February 2004 the Company executed a lease to rent 32,000 sq.
ft. of manufacturing space in a facility located in Farmingdale, New York. The
lease term is 5 years and calls for first year annual rent of $216, escalating
to $243 in the final year.
During the bankruptcy period, the supply chain disruption and the
Company's lack of adequate working capital caused the Company to incur
substantial airfreight expenses in order to accelerate receipt of raw materials
to meet customers' demands and the Company's commitments. For the year ended
2003, airfreight expense totaled $414. Had the Company been able to avoid this
expense, gross margin would have been improved by 3.5 points. As of December 31,
2003, the Company has restructured the supply chain for raw materials and
eliminated unfavorable airfreight expense.
In December 2003 the Company recorded a charge of $778, or 6.6 points of
gross margin, to reserve against excess and obsolete inventory. Of this amount,
$175 represents a reserve against exposure positions existing prior to the
Filing Date. In addition, the Company accrued $528 to reserve against a portion
of the inventory located at Ansen.
Gross margin in future periods may be affected by several factors such as
sales volume, shifts in product mix, pricing strategies and absorption of
manufacturing costs.
Changes in retail pricing did not have a material adverse effect on the
Company's gross margin in 2003 or 2002. In a continuing effort to maintain and
improve margins in an industry otherwise characterized by commodity pricing,
management has focused on quality, flexibility, and product cost reductions.
From time-to-time margins are adversely affected by industry shortages of
key components. The Company emphasizes product and cost reductions in its
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices available.
See "Asset Management."
Total Operating Expenses. For the year ended December 31, 2003, operating
expenses, excluding interest expense, were $2,812 (24% of revenue), compared to
expenses for 2002 of $6,121 (23 % of revenue).
Sales and Marketing Expenses. Sales and marketing expenses decreased 72%
from $2,193 (8.2% of revenue) for the year ended 2002 to $610 (5.2% of revenue)
for the year ended December 31, 2003. The decrease is attributable to the
reorganization of the Company which resulted in a major reduction in personnel
and marketing programs.
Boundless Technologies promotes its products by means of a balanced mix of
direct mail, telemarketing and
29
cooperative channel marketing programs. Boundless Manufacturing promotes its
services through its direct sales force.
General and Administrative Expenses. General and administrative expenses
decreased 31.6%, or $937, to $2,032 (17.3% of revenue), from $2,969 (11.1% of
revenue) for the periods ending December 31, 2003 and 2002, respectively. The
decrease stems from reductions in personnel costs, travel and professional
services.
Research and Development Expenses. Research and development expenses
decreased to $170 in 2003 from $959 in 2002. Because General Display Terminals
are mature products, development activities over the past year have only
included enhancements to the existing product family.
Interest Expense. Interest expense amounted to $804 for the year ended
December 31, 2003 compared to $1,402 for 2002. The decrease is attributable to
lower levels of debt carried by the Company during 2003. Pursuant to a Financing
Agreement dated June 27, 2002, the Company entered into a credit facility with
the CIT Group/Business Credit, Inc. ("CIT"). Prior to the assignment of the
credit facility to Valtec Capital Corporation during the first quarter of 2003,
the Company had been amortizing the capitalized debt financing costs associated
with the CIT agreement to interest expense. For the first quarter ended March
31, 2003, the amortized capitalized debt financing costs were $63. For the year
ended December 31, 2002, amortized debt financing costs associated with the CIT
credit facility were $121.
Loss on extinguishment of debt. In connection with the bankruptcy filing,
during the quarter ended March 31, 2003, the Company obtained
debtor-in-possession financing with Valtec Capital, LLC and wrote off $289 of
capitalized debt financing costs associated with the asset-based lending
agreement with the Company's prior lender.
Write-off of Goodwill and Other Intangible Assets. In June 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). The Company adopted SFAS 142 on January 1, 2002, eliminating the
amortization of goodwill and other intangible assets that have indefinite useful
lives. SFAS 142 also requires at least an annual impairment review of goodwill
and other intangible assets and any asset deemed to be impaired is to be written
down to its fair value. Due to its March 2003 Chapter 11 proceedings, in
December 2002, the Company recorded an expense of $3,262 to remove the remaining
book value of all goodwill and associated intellectual property. Amortization
will continue to be recorded for intangible assets with definite useful lives
Gain on Restructuring of Payables. The net gain on debt restructuring
recognized in 2002 did not recur in 2003.
Other Charges (Credits). 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 March 2003, the Company recorded an expense of $67 for the
impairment of unique manufacturing machinery which became obsolete when that
mode of operations ceased. 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.
Reorganization Items. For the year ended December 31, 2003 the Company
recorded expenses $655 associated with the Company's bankruptcy case. Of this
amount, $1,298 of expense was recorded for legal fees and fees of the United
States Trustee, offset by $685 of gains associated with the sale of assets.
Income Tax Expense/Credit. Due to the net losses, the Company did not
record an income tax expense or credit for either of the years ended December
31, 2003 and 2002. The Company has provided a valuation allowance against the
total amount of the net deferred tax assets due to the uncertainty of future
realization.
Net Loss. For the year ended December 31, 2003, net loss was $3,579 (30.5%
of revenue), compared to a net loss
30
of $7,623 (28% of revenue) for the year ended December 31, 2002.
Accretion on Preferred Stock. Convertible preferred stock issued in
connection with the 2002 debt restructuring in the face amount of $4,365 was
recorded at its estimated fair value $1,406. Assuming none of the holders of the
Preferred Stock convert to Common Stock of Boundless Corporation, the Company
would be required to record a charge to earnings available to stockholders over
the ten-year redemption period such that the carrying value of the Preferred
Stock equals its face value at the time of redemption. Pre-petition, the
difference between the carrying value of the preferred stock and its face value
was being treated as a dividend and charged to earnings available to
stockholders over the ten-year redemption period unless conversion occurs, in
which case accretion terminates at that point. As of December 31, 2003, $247 was
accreted and added to losses attributable to common stockholders.
The Plan of Reorganization contemplates that all equity instruments of the
Company will be cancelled on the Effective Date. As a result, the conversion of
the preferred stock to shares of common equity is doubtful. Therefore, the
preferred stock is included on the consolidated balance sheet with "Items
subject to compromise" and the Company discontinued the accretion of the
difference between the carrying value of the preferred stock and its face value
to earnings available to stockholders.
Net Loss Applicable to Common Shareholders. For the year ended December
31, 2003, the net loss applicable to common shareholders was $3,678, compared to
a net loss applicable to common shareholders of $7,771 for the year ended
December 31, 2002.
Impact of Inflation
The Company has not been adversely affected by inflation because
technological advances and competition within the microcomputer industry have
generally caused prices of products sold by the Company to decline. The Company
has flexibility in its pricing and could, if necessary, pass along price changes
to most of its customers.
Liquidity and Capital Resources
The discussion below regarding liquidity and capital resources should be
read together with the information included in Item 1. Business- "Bankruptcy
Considerations", and Notes 1, 6, 7, 8 and 12 of Notes to Consolidated Financial
Statements.
The matters described in "Liquidity and Capital Resources," to the extent
that they relate to future events or expectations, may be significantly affected
by the Chapter 11 process. Those proceedings involve, or may result in, various
restrictions on the Company's activities, limitations on financing, the need to
obtain Bankruptcy Court and Creditors' Committee approval for various matters
and uncertainty as to relationships with vendors, suppliers, customers and
others with whom we may conduct or seek to conduct business.
Generally, under the Bankruptcy Code, most of a debtor's liabilities must
be satisfied in full before the debtor's stockholders can receive any
distribution on account of such shares. The rights and claims of our various
creditors and security holders will be determined by the confirmed plan of
reorganization. Further, it is also likely that pre-petition unsecured claims
against the Company will be substantially impaired in connection with our
reorganization. At this time we can make no prediction concerning how each of
these claims will be valued in the bankruptcy proceedings. We believe that the
Company's presently outstanding equity securities will have no value and it is
expected that those securities will be canceled under any plan of reorganization
that we propose. For this reason, we urge that caution be exercised with respect
to existing and future claims or investments in any Boundless security.
31
The Company is highly leveraged. As of December 31, 2004, the Company had
a tangible net worth deficit of $14,905 and total liabilities of $17,915. The
Company had a working capital deficit, inclusive of liabilities and other items
subject to compromise, of approximately $13,990 as of December 31, 2004,
compared to working capital deficit of $13,246 as of December 31, 2003.
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 a condition to the Valtec DIP Financing, Valtec required the Company to
enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company. By
Order dated April 16, 2003, the Bankruptcy Court approved the Company's
execution of the Ansen Agreement.
By letter dated October 5, 2003, Ansen purported to cancel the Ansen
Agreement. On November 13, 2003, Ansen filed a Request for Payment of
Administrative Claim pursuant to 11 U.S.C. ss. 503 in the amount of $1.3 million
("Ansen Administrative Claim"). At December 31, 2004 the balance due Ansen was
approximately $561. As of December 31, 2005 the Company estimates that its total
potential liability to Ansen is approximately $50.
On the Effective Date, the allowed amount of the Ansen Administrative
Claim, as determined by the Bankruptcy Court, will be paid in cash, in full.
Payment of the Ansen Administrative Claim shall be funded in cash by the
Company. If there should be a shortfall, Oscar Smith, a principal of Vision, has
agreed to provide the Company with sufficient funds, in cash, to satisfy the
remaining balance, if any, pursuant to a written agreement to provide funding in
an amount not to exceed $375 (the "Smith Agreement"). By letter dated September
23, 2004, Security Bank of Kansas City committed to advance to Oscar Smith up to
$375 to satisfy Smith's obligations under the Smith Agreement.
Any advances made by Smith and/or Vision to the Company to fund payment of
administrative claims ("Additional Vision Advances") shall be obligations of the
Company and shall be repaid to Vision, with interest at the rate of 8% per
annum, in equal monthly amortizing payments over a period of 36 months period
commencing on the first month subsequent to payment in full of the Valtec
Obligations, to which the Additional Vision Advances shall be subordinate in
right of repayment. The Additional Vision Advances shall be evidenced by a
promissory note to be issued to Vision by the Company on the Effective Date and
shall provide for the Company's right to prepay the note in full without premium
or penalty.
On the Effective Date, the Company shall issue, or cause to be issued for
Vision's benefit, and in its name, shares of Boundless Common Stock sufficient
to provide Vision with 100% of the Boundless Common Stock issued and
outstanding, or to be issued and outstanding, under the Plan (the "Vision
Shares"). Such issuance of the Vision Shares shall be deemed to be in full
satisfaction of the Vision Claim.
Pursuant to that certain Purchase and Sale Agreement ("Purchase
Agreement") by and among the Company, Independence Community Bank ("ICB"),
JPMorgan Chase and 100 Marcus LLC, the Company agreed to transfer all of its
right, title and interest in and to 100 Marcus Boulevard, Hauppauge, New York,
which had served as the Company's main operating facility (the "Premises"). As a
result of the Purchase Agreement, ICB and JPMorgan Chase will have pre-petition
unsecured claims against the Company aggregating approximately $2,271.
The Company's Plan of Reorganization contemplates an annual payment of
cash to holders of allowed unsecured claims (the "Claims"). The Company believes
that these Claims aggregate approximately $14,622. Holders of Claims shall
receive their Pro Rata share of cash payments in an amount equal to 2% of annual
revenues up to and including $7 million, on each of the first, second and third
anniversary dates of the Effective Date; and cash payments in an amount equal to
4% of annual revenues exceeding $7 million, on each of the first, second and
third anniversary dates of the Effective Date.
Payments of Claims shall be escrowed on a monthly basis, and the Company
must forward monthly sales reports and confirmation of the escrow to Committee
Counsel. Each of the annual payments to be distributed to holders of the
32
Claims shall be: (i) not less than $150 on each of the first and second
anniversary dates; and (ii) not less than $200 on the third anniversary dates.
The total amount to be distributed to holders of the Claims shall be not less
than $500 (the "Minimum Distribution").
If the Company merges with another entity or is acquired by another entity
prior to the payments of all amounts due and owing pursuant to the payment plan,
the remaining entity must assume the Company's obligations contained herein.
Annual revenues shall include only those revenues generated from sales of the
Company's product line existing prior to any merger or acquisition.
At December 31, 2004, the Company had accrued approximately $1,029
primarily for legal assistance throughout the bankruptcy period. As of December
31, 2004, outstanding professional fees, inclusive of legal fees, are estimated
to approximate $1,950 as of the Effective Date. Upon application for payment
pursuant to ss.ss. 330, 331 and 503(a) of the Bankruptcy Code and approval by
the Bankruptcy Court, any and all professional fees not paid on or before the
Effective Date shall be paid by the Company on such terms as the parties shall
agree. Interest shall accrue on any unpaid professional fees from the Effective
Date at a rate of eight (8%) percent per annum.
Since it is anticipated that professional fees shall not be paid in full
on the Effective Date, the Professionals (other than auditors) shall be granted
a security interest upon all of the Company's assets, junior to the security
interest thereon of Valtec but pari passu with the Vision security interest, if
any. When the Professionals shall have been paid in full, the security interest
in their favor shall be cancelled and be of no further force and effect.
Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
uncertainties related to global economies. In the event there is a decline in
the Company's sales and earnings and/or a decrease in availability under the
credit line, the Company's cash flow would be further adversely affected.
Accordingly, the Company may not have the necessary cash to fund all of its
obligations.
Net cash provided by operating activities during the year ended December
31, 2004 was $651, principally related to net income before reorganization
expenses of $456, reductions in inventory of $1,087, reductions in cash on
deposit with the Company's DIP lender of $57, reductions in prepaid expenses of
$120 and non-cash depreciation of $43. This amount was offset by non-cash
credits consisting of inventory provisions and accounts receivable doubtful
accounts allowances totaling $226. Net cash provided by operating activities was
further reduced by increases in accounts receivable and affiliate receivables of
$213 and decreases in accounts payable and other accrued expenses of $583.
Net cash used in reorganization activities during 2004 was $211 arising
from expenses associated with the relocation of the Company's manufacturing
facility in the amount of $184 and payments of fees to the United States Trustee
of $25.
Net cash used in investing activities during 2004 consisted of equipment
purchases of $15. Net cash used in financing activities was $674 consisting of
payments to Valtec.
Net cash used in operating activities during the year ended December 31,
2003 was $617, principally related to a net loss before reorganization expenses
of $2,924. This amount was offset by non-cash expenses consisting of
depreciation and amortization, inventory provisions, write-off of debt financing
costs, and accounts receivable doubtful accounts allowances totaling $2,362,
decreases in accounts receivable of $1,357 and decreases in accounts payable and
other accrued expenses of $763. Net cash used in operating activities for the
year ended December 31, 2003, also includes an increase in cash on deposit with
the Company's DIP lender of $328, increases in inventories of $198, decreases in
deferred revenues of $94, increases in other receivables of $60 and non-cash
gains on the disposition of assets of $44.
Net cash provided by reorganization activities during 2003 amounted to $25
principally from proceeds of $189 from the sale of the Company's Hauppauge
facility and payment of legal fees of professionals and fees of the United
States
33
Trustee. Net cash provided by investing activities during 2003 was comprised of
$117 stemming from the sale of miscellaneous equipment. Net cash provided by
financing activities during 2003 was $844 which includes proceeds of $1,572 from
DIP loans offset by payments on loans and capital leases of $728.
Net cash provided by operating activities during the year ended December
31, 2002 was $3,950, principally related to a reduction in accounts receivables
and inventory of $6,999 and $5,594, respectively; and offset by a gain on the
restructuring of accounts payable of $3,924. This amount was further reduced by
a reduction in accounts payable of $4,522, and $3,262 relating to the write-off
of goodwill. Other non-cash expenses included depreciation and amortization of
$1,709, inventory provisions of $565 and accounts receivable doubtful accounts
allowances of $599. Net cash provided by investing activities was comprised of
$443 from the sale of the assets at the Company's Boca Raton manufacturing
facility; offset by $127 in capital expenditures. Net cash used in financing
activities was $4,287 and included proceeds of $1,478, principally unsecured
loans from Valtec Capital, proceeds from the sale of the Company's common stock
in a private placement amounting to $162, and payments on loans of $5,927
Capital Commitments.
Following is a summary of our material contractual cash obligations,
including operating lease commitments and accrued interest (which are sometimes
referred to as "off-balance sheet debt") as of December 31, 2004. The amounts in
the table include $372 of accrued and contractual interest over the next five
years.
Less than Years Years
one year 2 and 3 4 and 5 Total
-------- ------- ------- -----
Long-term debt $390 $ 799 $486 $1,675
Operating leases 221 463 283 967
---- ------ ---- ------
Total contractual cash obligations $611 $1,262 $769 $2,642
==== ====== ==== ======
The Company is not generally permitted to make any payments on
pre-petition debt as a result of the bankruptcy filing. The Company has reached
repayment agreements with its secured lenders, as well as other administrative
creditors. The amounts included in the above table represent only those
obligations for which we have finalized an agreement; however, these numbers are
still subject to change until such time as the plan of reorganization is
approved and we emerge from bankruptcy. In addition, we may still assume, assume
and assign or reject certain executory contracts and unexpired leases pursuant
to the Bankruptcy Code. As a result, we anticipate that other lease obligations
as currently identified in the above table will continue to change as well.
Going Concern Comment and Management's Plan of Action
Our auditor's report on our financial statements includes a comment
regarding our ability to continue as a going concern.
The primary issues management will focus on immediately following
confirmation of the Company's Plan of Reorganization include:
o Working with its secured lender on a restructuring of the terms of
the DIP debt which it holds, thereby reducing the Company's cost of
borrowing.
o Initiating negotiations with suppliers to secure trade financing of
working capital of approximately $1-2 million under terms and
conditions to be agreed upon. There can be no assurance that such
financing will materialize.
o The continual negotiation of material contracts for the sale of its
manufacturing services to customers which management believes will
provide additional liquidity for operations. There can be no
assurances that these
34
contracts will materialize.
o The ability of the Company to generate cash from operations and to
maintain adequate cash on hand; and
o The ability of the Company to achieve profitability.
The Company believes that positive operating cashflows and profitability
will not come from the general purpose text terminal marketplace. The Company
has been and will continue to focus on the current business from the current
customers in order to provide a reliable cash flow with which to execute growth
plans. The paths to growth that the Company has developed include:
1. Repositioning the Company's business from a text terminal company to a
Point-of-Service/Point-of-Sale ("POS") technology company, and build upon our
historical success in POS to establish a strong link between the Company's and
POS' applications. A key activity in support of the POS initiative includes
leveraging the Company's existing technology platforms
2. Gaining access to a more modern and growing market through new product
offerings including Web terminals and terminals utilizing the Linux operating
system which provide high security, high levels of productivity and high
reliability.
3. Enter the Radio Frequency Identification ("RFID") market place with a
high value-to-cost offering. Position the company as a RFID provider to POS
integrators and OEMs. RFID Controllers - read/write RFID modules for both 13.56
mhz and 900 mhz- will be embedded into the Company's technology platforms.
4. Applying its robust Build-to-Order ("BTO") processes to growth products
and markets.
Asset Management
Inventory. Management has instituted policies and procedures to maximize
product availability and delivery while minimizing inventory levels so as to
lessen the risk of product obsolescence and price fluctuations. Most components
and sub-assemblies are stocked to provide for an order-to-ship cycle of seven
days.
Key metrics:
December 31, December 31, December 31,
------------ ------------ ------------
2004 2003 2002
------------ ------------ ------------
Days of sales outstanding in accounts receivable 59 28 26
Days of supply in inventory 72 68 25
Days of purchases outstanding in accounts payable (3) (30) (91)
------------ ------------ ------------
Cash conversion cycle 128 66 (39)
============ ============ ============
Days of sales outstanding in accounts receivable ("DSO") measures the
average number of days the Company's trade receivables are outstanding. DSO is
calculated by dividing trade accounts receivable, net of allowance for doubtful
accounts, by a 90-day average net revenue. Affiliate trade receivables and
revenue, primarily transactions with UCSI, are excluded from the calculation.
Days of supply in inventory ("DOS") measures the average number of days
from procurement to sale of the Company's product. DOS is calculated by dividing
inventory by a 90-day average cost of goods sold.
Days of purchases outstanding in accounts payable ("DPO") measures the
average number of days our accounts payable balances are outstanding. DPO is
calculated by dividing accounts payable by a 90-day average cost of goods sold.
35
The Company's working capital requirements depend upon our effective
management of the cash conversion cycle, which represents effectively the number
of days that elapse from the day the Company pays for the purchase of raw
materials to the collection of cash from our customers. The cash conversion
cycle is the sum of DSO and DOS less DPO.
The increase in DSO from 2002 through 2004 is a result in the decline in
sales to Hewlett Packard and IBM, both OEM customers of the Company, whose
payment terms were net 30 days. Additionally, in the fourth quarter of 2004,
Ingram Micro, which pays its obligations on net 60 day terms, contributed
approximately 19% of total revenue, resulting in an increase in the DSO for 2004
compared with 2003.
The decrease in DPO from 2002 through 2004 is a result of the bankruptcy
filing and the change in the Company's payment terms for material to
cash-in-advance.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Among other provisions, the new rule requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by Boundless in the first quarter of fiscal 2006, beginning on
January 1, 2006. Boundless is currently evaluating the effect that the adoption
of SFAS 151 will have on its consolidated results of operations and financial
condition but does not expect SFAS 151 to have a material impact.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. As amended by
an SEC pronouncement, SFAS 123R is effective with the first annual period after
June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123, no longer will be an alternative to
financial statement recognition. We are required to adopt SFAS 123R in the first
quarter of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive options,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. We are evaluating the
requirements of SFAS 123R and we expect that the adoption of SFAS 123R will not
have a material impact on our consolidated results of operations and earnings
per share. We have not yet determined the method of adoption or the effect of
adopting SFAS 123R, and we have not determined whether the adoption will result
in amounts that are similar to the current pro forma disclosures under SFAS 123.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from
36
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for the
fiscal periods beginning after June 15, 2005 and is required to be adopted by
Boundless in the third quarter of fiscal 2005, beginning on July 1, 2005.
Boundless is currently evaluating the effect that the adoption of SFAS 153 will
have on its consolidated results of operations and financial condition but does
not expect it to have a material impact.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates related
primarily to the Company's revolving credit facility and long-term debt
obligations. The Company managed this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value is
immediately recognized in earnings.
The Company places its investments with high credit quality issuers and,
by policy, is averse to principal loss and ensures the safety and preservation
of its invested funds by limiting default risk, market risk and reinvestment
risk. As of December 31, 2004 the Company's investments consisted of cash
balances maintained in its corporate account with the Chase Manhattan Bank.
The majority of sales arrangements with international customers are
denominated in U.S. dollars. International customers are permitted to elect
payment of their next month's orders in local currency based on an exchange rate
provided one month in advance from the Company. The Company does not use foreign
currency forward exchange contracts or purchased currency options to hedge local
currency cash flows or for trading purposes. Foreign currency transaction gains
or losses have not been material to the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a)(1) and (2) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
37
An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures as of December 31, 2004. Based on
that evaluation, the Company's management, including the CEO and CFO, has
concluded that the Company's disclosure controls and procedures were effective.
During the period covered by this report, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Positions and Offices
---- --- ---------------------
Frank Stephens 54 Chairman of the Board of Directors
Richard Bowman 45 Director
John D. Ryan 55 Acting Chief Executive Officer
Joseph Gardner 46 Vice President - Finance, Chief Financial Officer
J. Frank Stephens has been a member of the Board since July 2001. Mr.
Stephens has over 30 years domestic and international experience in the
consumer, food service, and industrial ingredients channels. Since April 1997
Mr. Stephens has held the office of President, Capital Sigma Investments
("CSI"), a privately funded equity group focused in the health and soyfoods
category. Since April 1998, concurrent with CSI's acquisition of Quong Hop &
Co., a regional soy foods company, Mr. Stephens has served as the Chief
Executive Officer of Quong Hop & Co. Prior to this, and from August 1996 until
March 1997, Mr. Stephens served as the Director of Strategic Planning for Global
Consumer Products, Inc., a company specializing in new product development and
branding for consumer-oriented companies.
Mr. Bowman has served on the Board of the company since February 2002. He
has extensive experience in agribusiness, technology development and the
financing of commercial agri-processing projects in lesser developed countries.
He is presently the President, Chief Executive Officer, and Corporate Director
of AgCheck Canada Ltd., a Canadian based firm specialized in the design,
implementation and marketing of carbon offset projects. He has served in this
position since January, 2003. Prior to this, from March 2000 until starting his
current position, Mr. Bowman served as
38
an executive consultant, advising select agribusiness and environmental firms in
North America in the areas of production management, environmental compliance,
and options for environmentally based financing.
John D. Ryan ("Jack") has served as the Vice President of Operations since
2000, and as the acting Chief Executive Officer since June 2004. Jack is a
manufacturing executive with over 30 years experience in Manufacturing
Operations, Supply Base Management, Quality Assurance and Product Development
within the Computer, Computer Peripheral, Microelectronics, and Communications
industries. He is currently the Chief Operating Officer for Boundless
Corporation.
Prior to joining Boundless Corporation, Jack held a variety of senior
management positions in Manufacturing, Supply Chain Management, Product
Outsourcing, and Quality Assurance for companies including Solectron, NCR and
AT&T. Jack has worked at the SUNY Stony Brook Harriman School of Management and
Policy as a lecturer on topics including High Velocity Flexible Manufacturing,
and Strategic Planning for Manufacturing.
Joseph Gardner has served as Vice President of Finance and Chief Financial
Officer of the Company since October 31, 1997. Mr. Gardner has been employed by
Boundless Technologies, Inc. since April of 1990. Prior to 1997, Mr. Gardner
served as the Controller and Vice President of Quality Assurance for Boundless
Technologies. Before joining Boundless, Mr. Gardner served in various executive
financial positions with NCR Corporation including Business Planning for the
Financial Systems Division and Cash Management/Foreign Exchange Exposure
Management. Mr. Gardner is also a Certified Public Accountant as well as a
Certified Management Accountant and received his MBA from Bowling Green State
University.
In June 2004 Mr. Joseph V. Joy, Jr. resigned from his position as
president and CEO of the Company and from his position on the Board of
Directors. The Company provided payments to Mr. Joy equal to four-months salary,
payable over six months, for consulting and transition services. The total
payments made to Mr. Joy under the period were approximately $72,000.
On September 30, 2004, Mr. John McGovern resigned from his position as the
Chairman of the Board of Directors. In October 2004 Mr. Anthony Giovaniello
resigned from his position as Senior Vice President- Business Development.
Audit Committee Financial Expert
The Board of Directors of Boundless Corporation has determined that J.
Frank Stephens, Chair of the Audit Committee, is an audit committee financial
expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is independent within the
meaning of Item 7(d)(3)(iv) of Schedule 14A and Items 401(h)(1)(ii) of
Regulation S-K of the Exchange Act.
Audit Committee
The Audit Committee consists of the Company's Board of Directors. The
members of the Audit Committee are J. Frank Stephens and Richard Bowman.
Code of Ethics
Information on Boundless' code of business conduct and ethics for
directors, officers and employees, also known as the "Code of Ethics and
Business Conduct Guidelines" is set forth under "Corporate Governance
Principles" on the Company's website at www.boundless.com.
39
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Forms 3, 4 and 5 filed or due with the Commission in 2004
indicates that each of Frank Stephens, Richard Bowman, John Ryan, and Joseph
Gardner did not file a Form 5 as required under section 16(b) of the Exchange
Act.
40
ITEM 11. EXECUTIVE COMPENSATION
The table below discloses all cash compensation awarded to, earned by or
paid to our Chief Executive Officer and our four most highly compensated
executive officers who earned more than $100,000 for services rendered in all
capacities to us during the fiscal year ended December 31, 2004 (collectively,
the "named executive officers"). In addition, it provides information with
respect to the compensation paid by us to the named executive officers during
2003 and 2002.
Summary Compensation Table
Annual Compensation
------------------- Long-Term
Compensation
------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation Options(#) (2) Compensation
-------- ---- ------ ----- ------------ -------------- ------------
Joseph V. Joy(3) 12/31/04 $134,982 -- -- -- --
Former President, and 12/31/03 $143,257 -- -- -- --
Chief Executive Officer 12/31/02 $136,327 -- -- 170,000 --
Anthony Giovaniello(4) 12/31/04 $112,074 -- -- -- --
Executive VP 12/31/03 $134,317 -- -- -- --
12/31/02 $130,326 -- -- 140,000 --
Joseph Gardner 12/31/04 $128,762 -- -- -- --
Vice President-Finance 12/31/03 $136,610 -- -- -- --
Chief Financial Officer 12/31/02 $134,574 -- -- 75,000 --
John D. Ryan 12/31/04 $128,762 -- -- -- --
Acting Chief Executive 12/31/03 $ 88,990 -- -- -- --
Officer 12/31/02 $126,989 -- -- 80,000 --
(2) Options granted in October 2002 to the named executive officers have a
strike price of $0.45 per share of Common Stock.
(3) Promoted to Chief Executive Officer and President January 2002. Resigned
from the company June 30, 2004
(4) Resigned from the Company October 2004.
41
Employment Agreements and Change-in-Control Arrangements
The Company and Boundless Manufacturing Services, Inc. had entered into
employment agreements with Messrs. Joseph Joy and Anthony Giovaniello,
respectively then the President of Boundless Manufacturing and Executive Vice
President, Business Development. The terms and conditions of the agreements for
each of Messrs. Joy and Giovaniello were substantially similar.
In June 2004 Mr. Joseph V. Joy, Jr. resigned from his position as
president and CEO of the Company and from his position on the Board of
Directors. The Company provided payments to Mr. Joy equal to four-months salary,
payable over six months, for consulting and transition services. The total
payments made to Mr. Joy under the period were approximately $72,000. In October
2004 Mr. Anthony Giovaniello resigned from his position as Senior Vice
President- Business Development. While each of Messrs. Joy and Giovaniello
retain their respective ownership position of Boundless Manufacturing, the
Company has no obligations resulting from the employment agreements.
1995/ 1997/ 2000 Incentive Plans
The Company's 1995 Incentive Plan covered the issuance of up to 600,000 shares
of Common Stock. As additional shares were no longer available to be issued
under the 1995 Incentive Plan, the Board adopted the 1997 Incentive Plan in July
1997 which covers the issuance of up to 1,000,000 shares of Common Stock. In
December 2000 the Board created the 2000 Incentive Plan which covers up to
1,000,000 shares of Common Stock. The number of shares granted on a calendar
year basis under the 2000 Incentive Plan is limited to 5% of the total number of
shares of Common Stock outstanding, or 10% of the outstanding Common Stock in
any five-year period.
Option Grants in Last Fiscal Year
The Company did not grant options to the named executive officers during
the fiscal years ending December 31, 2004.
42
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options to purchase shares of Common Stock at
December 31, 2004. No options were exercised during the year.
Value of Unexercised
Number of Unexercised Options at In-the-Money Options at
December 31, 2004 (#) December 31, 2004 ($)(1)
------------------------- -------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Joseph Gardner 0 0 102,624 14,376 -- --
John D. Ryan 0 0 72,624 14,376 -- --
(1) The last sale price of the Company's Common Stock on December 31, 2004, $
0.01.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding Common Stock as of December
31, 2005, by (i) each of the Company's directors and "named executive officers,"
(ii) directors and executive officers of the Company as a group and (iii) each
person believed by the Company to own beneficially more than 5% of its
outstanding shares of Common Stock. Except as indicated each such person has
sole voting and investment powers with respect to his and her shares. The
address of Unique Co-Operative Solutions Inc./ Oscar L. Smith is 9185 Bond,
Overland Park, KS 66214. The address of Neoware Systems, Inc. is 400 Feheley
Dr., King of Prussia, PA 19406.
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------ ------------------ ------------------
Unique Co-Operative Solutions,
Inc./ Oscar L. Smith 1,017,389(1)(3) 15.0%
J. Gerald Combs 905,923(2)(3)(6) 12.0%
JPMorganChase 750,000(5) 11.2%
Neoware Systems, Inc. 383,335(4) 5.7%
Valtec Capital Corp. 400,000(8) 5.6%
John D. Ryan 173,872 2.6%
Joseph Gardner 87,741(3) 1.3%
Frank Stephens 87,293(3)(7) 1.3%
Richard Bowman 75,000(3) 1.1%
All current directors and executive
officers as a group 423,906(3) 6.1%
(four individuals)
----------
* Less than 1%.
(1) Includes 41,667 shares issuable upon the exercise of a warrant. The
warrant was granted June 4, 2001, in connection with a sale of our common
stock. The warrant vested immediately, has an exercise price per share of
common stock of $1.30, and expires five years following the date of grant.
(2) Resigned as the Chief Executive Officer of the Company effective January
2002.
(3) Includes or consists of shares of Common Stock issuable upon exercise of
options as follows: Mr. Smith: 40,000; Mr. Combs: 480,000; Mr. Ryan:
82,833; Mr. Gardner: 72,833; Mr. Bowman: 40,000; and Mr. Stephens: 43,000.
Includes or consists of shares of Common Stock issuable upon exercise of
warrants as follows: Mr. Combs: 5,834; Mr. Ryan: 3,889; and Mr. Gardner:
1,945.
(4) Includes 50,001 shares issuable upon the exercise of a warrant. The
warrant was issued June 29, 2001, in connection with a sale of our common
stock. The warrant has an exercise price per share of common stock of
$1.10, and the warrant expires five years following the date of grant. In
June 2001 Neoware Systems Inc. purchased our Windows-based terminal
product line for $1,600,000. As part of the transaction, we secured an
agreement to manufacture certain products for Neoware Systems, Inc.
(5) On June 27, 2002, the Company entered into an agreement with its then
secured lenders to terminate its revolving line of credit (the "Chase
Credit Line"). In return for termination of the Chase Credit Line, the
Company, amongst other consideration, agreed to issue 750,000 shares of
its common stock and shares of its newly-created convertible preferred
stock (the "Preferred Stock") with a stated value of $1,250,000. The
Company had agreed to register under the Securities Act of 1933 such
common stock and the shares into which
44
the Preferred Stock may be converted. The lenders have certain
anti-dilution protection for their shares of common stock. The Preferred
Stock may be converted after the first anniversary of their issuance into
shares of the Company's common stock at $3.00 per share and, unless sooner
converted into common stock, must be redeemed by the Company on June 30,
2012 for their stated value.
(6) Includes 380,000 shares of Common Stock issuable upon the conversion of a
convertible promissory note. The principal amount of the note is $475,000
and may be converted into shares of Common Stock of the Company, at the
option of Mr. Combs, at a conversion price of $1.25 per share of Common
Stock.
(7) Includes 19,905 shares of Common Stock issuable upon the conversion of a
convertible promissory note. The principal amount of the note is $18,667
and may be converted into shares of Common Stock of the Company, at the
option of Mr. Stephens, at a conversion price of $1.05 per share of Common
Stock. See Item 10- "Directors and Executive Officers of the Registrant"
for additional information concerning the issuance of the promissory note
to Mr. Stephens.
(8) By a Loan and Security Agreement dated December 3, 2002 (the "Valtec Loan
Agreement"), the Company consolidated prior borrowings and received
additional borrowings from Valtec in the aggregate amount of approximately
$1.2 million (plus accrued and unpaid interest and other charges). In
connection with the Valtec Loan Agreement, the Company issued a warrant to
Valtec to purchase 400,000 shares of the Company's Common Stock. The
common shares underlying the warrant, have an exercise price per share of
common stock of $0.36, and the warrant expires five years following the
date of grant.
Under the Plan of Reorganization, all outstanding common stock and derivative
securities of the Company will be cancelled upon the Company's emergence from
bankruptcy. It is highly unlikely the promissory notes issued to Mssrs. Combs
and Stephens will be converted to common stock of the Company. As a result, the
principal and accrued interest thereon are included with liabilities subject to
compromise.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the period from the Petition Date through and January 28, 2005,
Valtec provided debtor-in-possession financing ("Valtec DIP Financing") to the
Company. As a condition to the Valtec DIP Financing, Valtec required the Company
to enter into the Ansen Corporation Manufacturing Services Agreement ("Ansen
Agreement"), pursuant to which, Ansen Corporation ("Ansen") would provide
post-petition manufacturing, production and delivery services to the Company.
Ansen is majority owned by Valtec. By Order dated April 16, 2003, the Bankruptcy
Court approved the Company's execution of the Ansen Agreement.
Net revenue from EMS activities, primarily logistics services sold to
Unique Co-operative Solutions, Inc. ("UCSI"), were $240 for the year ended
December 31, 2004. Net revenue from UCSI during 2003 and 2002 was not material.
UCSI is wholly owned by Mr. Oscar Smith, who also is the majority shareholder of
Vision Technologies, Inc. ("Vision"). The Company's Plan of Reorganization,
assuming approval by the Bankruptcy Court, contemplates that Vision will own
100% of the Company. Mr. Smith currently owns approximately 15% of the
outstanding common stock of the Company.
Beginning in the first quarter of 2004, the Company recognized that
certain of its employees were underutilized, and outsourced a portion of this
underutilization to UCSI. In the absence of this arrangement, the Company would
have absorbed the entire expense of the underutilization. For the year ended
December 31, 2004, these costs were estimated to be $306 for which the Company
charged UCSI $255. The $255 charged by the Company was less than the estimated
personnel and personnel related expenses. The resulting loss of $51 is reported
in the statement of operations.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Independent Accountant Fees
The aggregate fees billed for professional services rendered by BP Audit
Group and by BDO Seidman, LLP for the years ended December 31, 2004, 2003 and
2002 are as follows (amounts in dollars):
46
2004 2003 2002
---------- ---------- ----------
BP Audit Group
Audit fees $ 55,250 $ 71,863 $ 55,893
Audit-related fees 8,639 -- --
Tax fees 15,384 -- --
All other fees 1,788 -- --
---------- ---------- ----------
81,061 71,863 55,893
---------- ---------- ----------
BDO Seidman, LLP
Audit fees 2,500 42,050
Audit-related fees -- 18,000
Tax fees -- 66,792
All other fees -- 41,924
---------- ---------- ----------
-- 2,500 168,766
---------- ---------- ----------
Total Independent Accountant Fees
Audit fees 55,250 74,363 97,943
Audit-related fees 8,639 -- 18,000
Tax fees 15,384 -- 66,792
All other fees 1,788 -- 41,924
---------- ---------- ----------
$ 81,061 $ 74,363 $ 224,659
========== ========== ==========
Fees for audit services consist of audits of the Company's consolidated
financial statements and limited reviews of the Company's consolidated quarterly
financial statements.
Fees for audit-related services consist of statutory audits of the
Company's 401K plan.
Fees for tax services consisted of assistance with preparation of state
and federal tax returns.
All Other Fees billed in 2004 consisted of consulting services related to
the Company's bankruptcy filing. All Other Fees billed in 2002 consisted of
review of the Company's registration statement on Form S-3 and reorganization
consulting.
All of the services under the Audit Related, Tax and All Other Fees
categories above have been approved by the Audit Committee pursuant to paragraph
(c)(7)(i)(c) of Rule 2-01 of Regulation S-X of the Exchange Act.
Audit Committee Pre-Approval Policy and Procedures.
The Audit Committee of the Boundless Board of Directors adopted the policy
on pre-approval of services of independent accountants in October 2003. The
policy provides that the Audit Committee shall pre-approve all audit and
non-audit services to be provided to the Company and its subsidiaries and
affiliates by its auditors. The process by which this is carried out is as
follows:
For recurring services, the Audit Committee reviews and pre-approves BP
Audit Group's annual audit services and employee benefit plan audits in
conjunction with the Committee's annual appointment of the outside auditors. The
materials include a description of the services along with related fees. The
Committee also reviews and pre-approves other classes of recurring services
along with fee thresholds for pre-approved services. In the event that the
pre-approval fee thresholds are met and additional services are required prior
to the next scheduled Committee meeting, pre-approvals of additional services
follow the process described below.
Any requests for audit, audit-related, tax and other services not
contemplated with the recurring services approval described above must be
submitted to the Audit Committee for specific pre-approval and cannot commence
until such approval has been granted. Normally, pre-approval is provided at
regularly scheduled meetings. However, the authority to grant specific
pre-approval
47
between meetings, as necessary, has been delegated to the Chairman of the Audit
Committee. The Chairman must update the Committee at the next regularly
scheduled meeting of any services that were granted specific pre-approval.
On a periodic basis, the Audit Committee reviews the status of services
and fees incurred year-to-date and a list of newly pre-approved services since
its last regularly scheduled meeting
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page No.
--------
(a) (1)(2) Financial Statements and Schedules
Index to Consolidated Financial Statements and Financial Statement Schedules F-1
All other financial statements and schedules not listed have been omitted since the required
information is either included in the Financial Statements and the Notes thereto as included in
the Company's Annual Report on Form 10-K for the Year ended December 31, 2004 or is not
applicable or required.
(b) Reports on Form 8-K
On February 2, 2005, we filed a current report on Form 8-K disclosing we
entered into a secured post-petition financing agreement with Entrepreneur
Growth Capital, LLC ("EGC") pursuant to which EGC was granted a lien on all of
our personal property
EXHIBIT INDEX
Exhibit No.* Description of Exhibit
------------ ----------------------
3.1[2] Certificate of Incorporation of Registrant and Certificates of
Amendment thereto.
3.2[1] By-Laws of Registrant.
48
Exhibit No.* Description of Exhibit
------------ ----------------------
10(a) Registrant's 1995 Incentive Plan (Incorporated by reference to
and filed as Exhibit E to Registrant's Information Statement,
dated September 28, 1995).
10(b) Registrant's 1997 Incentive Plan (Incorporated by reference to
and filed as Exhibit A to Registrant's Information Statement,
dated March 6, 1998).
10(c)[6] Registrant's 2000 Incentive Plan.
10(d)[4] Restatement, Extension, Assumption and Modification Agreement,
dated June 24, 1999, between Boundless Technologies, Inc. and
Independence Community Bank (Originally filed as Exhibit
10(a)).
10(e)[4] Restated Business Installment Promissory Note, dated June 24,
1999, from Boundless Technologies, Inc. to Independence
Community Bank (Originally filed as Exhibit 10(b)).
10(f)[4] Restated Mortgage and Security Agreement, dated June 24, 1999,
between Boundless Technologies, Inc. and Independence
Community Bank (Originally filed as Exhibit 10(c)).
10(g)[5] Promissory Note, dated September 30, 1999, in the amount of
$500,000 from General Automation, Inc. to Boundless
Technologies, Inc. (Originally filed as Exhibit 10(p)).
10(h)[5] Secured Convertible Promissory Note from General Automation,
Inc. to Boundless Technologies, Inc (Originally filed as
Exhibit 10(o)).
10(i)[5] Warrant issued by General Automation, Inc. to Boundless
Technologies, Inc (Originally filed as Exhibit 10(q)).
10(j)[5] Employment Agreement, dated July 1, 1999, among Registrant,
Boundless Manufacturing Services, Inc. and Joseph Joy
(Originally filed as Exhibit 10(f)).
10(k)[5] Employment Agreement, dated July 1, 1999, among Registrant,
Boundless Manufacturing Services, Inc. and Anthony Giovaniello
(Originally filed as Exhibit 10(g)).
10(l)[6] Employment Agreement, dated March 1, 2000, among Registrant,
Boundless Technologies, Inc. and James Gerald Combs.
10(m)[6] Employment Agreement, dated March 1, 2000, among Registrant,
Boundless Technologies, Inc. and Jeffrey K. Moore.
10(n)[6] Second Amended and Restated Credit Agreement and Guaranty
(plus exhibits thereto) dated as of May 25, 2000 among
Boundless Technologies, Inc., Boundless Manufacturing
Services, Inc. and Merinta as co-borrowers, Boundless
Acquisition Corp. and Boundless Corporation, as guarantors,
and The Chase Manhattan Bank, Silicon Valley Bank and National
Bank of Canada as the Banks and The Chase Manhattan Bank, as
Administrative Agent for the Banks.
49
Exhibit No.* Description of Exhibit
------------ ----------------------
10(o)[6] First Amendment, dated as of July 31, 2000, to Second Amended
and Restated Credit Agreement and Guaranty with Chase.
10(p)[6] Second Amendment, dated as of November 7, 2000, to Second
Amended and Restated Credit Agreement and Guaranty with Chase.
10(q)[6] Third Amendment, dated as of November 16, 2000, to Second
Amended and Restated Credit Agreement and Guaranty with Chase.
10(r)[6] Form of Warrant issued by Merinta Inc. to the Chase Manhattan
Bank, Silicon Valley Bank and National Bank of Canada for the
purchase of a total of 100,000 shares of Merinta common stock
(40,000 shares on May 25, 2000, 25,000 shares on July 31, 2000
and 35,000 shares on November 7, 2000).
10(s)[3] Common Stock Purchase Warrant dated as of April 14, 1999
issued to Chase Manhattan Bank for the purchase of
Registrant's common stock (Originally filed as Exhibit 10(b)).
10(t)[6] Common Stock Purchase Warrant, dated as of May 25, 2000,
issued to Chase Manhattan Bank for the purchase of
Registrant's common stock.
10(u)[6] Merinta Inc.'s Amended and Restated Certificate of
Incorporation, effective November 6, 2000, including the terms
of Merinta's Series A Convertible Preferred Stock issued to
National Semiconductor Corporation.
10(v)[7] Registrant's 2001 Incentive Plan. (Incorporated by reference
to and filed as Appendix B to Definitive Proxy Statement,
dated January 31, 2002).
10(w)[8] Separation Agreement and General Release, effective as of
January 1, 2002, with Mr. J. Gerald Combs.
10(x)[8] Consulting Agreement, effective as of January 1, 2002, with
Mr. J. Gerald Combs.
10(y)[8] Non-negotiable Convertible Note by and between the Registrant
and Mr. J. Gerald Combs.
10(z)[8] List of Stock Options held by Jeffrey K. Moore and list of
additional consideration or benefits to be provided to him
pursuant to the Separation Agreement and General Release,
dated as of January 1, 2002, by and between him and the
Registrant (including the Registrant's subsidiaries)
(constituting Exhibits B and E to such Agreement).
10(aa)[9] Seventh Amendment, dated as of March 27, 2002, to Second
Amended and Restated Credit Agreement and Guaranty with Chase.
10(ab)[10] Letter Agreement, dated January 27, 2005, from Entrepreneur
Growth Capital LLC to Boundless Corporation and its
subsidiaries.
10(ac)[10] Loan and Security Agreement, dated January 27, 2005, by and
among Entrepreneur Growth Capital LLC and Boundless
Corporation and its subsidiaries.
50
Exhibit No.* Description of Exhibit
------------ ----------------------
10(ad)[10] Corporate Guaranty of All Liability with Collateral, dated
January 27, 2005, by Boundless Corporation and its
subsidiaries in favor of Entrepreneur Growth Capital LLC.
10(ae)[10] Certificate of Corporate Resolutions, dated January 27, 2005,
of Boundless Corporation, Boundless Acquisition Corp.,
Boundless Technologies, Inc., and Boundless Manufacturing
Services, Inc.
10(af)[10] Intercreditor and Subordination Agreement, dated January 27,
2005, by and between Vision Technologies, Inc. and
Entrepreneur Growth Capital.
11** Statement re Computation of Per Share Earnings. See
Consolidated Financial Statements.
21[5] List of Subsidiaries
31 Section 302 Certification
32 Section 906 Certification
----------
[1] Incorporated by reference to Registrant's Registration
Statement on Form S-18 (File No. 33-32396-NY).
[2] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
[3] Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
[4] Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.
[5] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999.
[6] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000.
[7] Incorporated by reference to the Registrant's Definitive Proxy
Statement on Form DEF 14A, filed January 31, 2002.
[8] Incorporated by reference to the Registrant's Report on Form
8-K filed January 23, 2002.
[9] Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001.
51
Exhibit No.* Description of Exhibit
------------ ----------------------
[10] Incorporated by reference to the Registrant's Report on Form
8-K filed February 2, 2005. Originally filed as exhibits
12.1-12.5
* Numbers inside brackets indicate documents from which exhibits have been
incorporated by reference. Unless otherwise indicated, documents
incorporated by reference refer to the identical exhibit number in the
original documents from which they are being incorporated.
** Filed herewith
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2006
BOUNDLESS CORPORATION
By: /s/ John D. Ryan
------------------------------------
John D. Ryan
Acting Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John D. Ryan Acting Chief Executive Officer February 28, 2006
--------------------------
John D. Ryan
/s/ Joseph Gardner Vice President - Finance, Chief Financial
-------------------------- Officer (Principal Accounting Officer) February 28, 2006
Joseph Gardner
/s/ Richard Bowman Director February 28, 2006
--------------------------
Richard Bowman
/s/ Frank Stephens Chairman, Board of Directors February 28, 2006
--------------------------
Frank Stephens
53
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-3
Consolidated Statements of Operations
for the years ended December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Comprehensive Loss
for the years ended December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F- 9-25
Schedule II - Valuation and Qualifying Accounts S-1
F-1
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
To the Board of Directors and Stockholders
Boundless Corporation (Debtor-in-Possession)
Farmingdale, New York
We have audited the accompanying consolidated balance sheets of Boundless
Corporation and Subsidiaries (Debtor and Debtors-in-Possession) as of December
31, 2004 and 2003 and the related consolidated statements of operations,
comprehensive loss, changes in stockholders' deficit and cash flows for each of
the years in the three-year period then ended. We have also audited the schedule
of valuation and qualifying accounts for each of the years ended December 31,
2004, 2003 and 2002. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boundless
Corporation and Subsidiaries (Debtor and Debtors-in-Possession) as of December
31, 2004 and 2003 and the consolidated results of their operations and their
cash flows for each of the years in the three-year period then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the schedule of valuation and qualifying accounts
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company and its subsidiaries filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on March 12, 2003. The Company has
suffered substantial losses from operations in each of its last four fiscal
years. In addition, as of December 31, 2004, the Company has a stockholders'
deficit of $14,905,000 and has working capital of $632,000, excluding
liabilities and other items subject to compromise of $14,622,000. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Although the Company and its subsidiaries are currently operating as
debtors-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of the business as a going concern is first contingent upon the
ability of the Company to confirm a plan of reorganization under the Bankruptcy
Code and emerge from bankruptcy protection and then subsequently, among other
things: (1) the ability of the Company to restructure the terms of its secured
debtors-in-possession financing, thereby reducing its cost of borrowing; (2) the
ability of the Company to negotiate trade financing with suppliers at acceptable
terms; (3) the ability of the Company to negotiate contracts for the sale of its
manufacturing services to customers to provide additional liquidity for
operations; (4) the ability of the Company to generate cash from operations and
to maintain adequate cash on hand; and (5) the ability of the Company to achieve
profitability. Management's plans in regard to these matters are also described
in Note 1. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BP Audit Group, PLLC
Farmingdale, NY
September 28, 2005
F-2
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
At December 31, 2004 and 2003
(in thousands)
ASSETS -------- --------
2004 2003
-------- --------
Current assets:
Cash and cash equivalents $ 124 $ 373
Cash on deposit with lender 271 328
Trade accounts receivable, net 1,150 912
Affiliate receivables 92 --
Other receivables 117 143
Inventories (Note 3) 1,094 2,072
Prepaid expenses and other current assets 59 179
-------- --------
Total current assets 2,907 4,007
Property and equipment, net (Note 4) 103 131
-------- --------
Total assets $ 3,010 $ 4,138
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term debt $ 350 $ 837
Accounts payable 44 900
Accrued salaries 86 71
Accrued legal fees 1,029 756
Purchase order commitments 561 1,130
Accrued payroll and sales tax payable 30 212
Accrued warranty 18 59
Other accrued liabilities (Note 6) 157 81
-------- --------
Total current liabilities 2,275 4,046
-------- --------
Long-term debt, less current maturities (Note 8) 953 1,581
Deferred credits 65 181
Items subject to compromise:
Manditorily redeemable preferred stock (Notes 7 & 9) 1,652 1,652
Liabilities subject to compromise (Note 7) 12,970 11,555
-------- --------
Total liabilities 17,915 19,015
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
Stockholders' deficit: (Note 9)
Common stock 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,816) (50,788)
-------- --------
Total stockholders' deficit (14,905) (14,877)
-------- --------
Total liabilities and stockholders' deficit $ 3,010 $ 4,138
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-3
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except per share data)
2004 2003 2002
----------- ----------- -----------
Revenue:
Product sales $ 6,400 $ 10,718 $ 25,029
Services 909 1,032 1,814
----------- ----------- -----------
Total revenue 7,309 11,750 26,843
----------- ----------- -----------
Cost of revenue
Product sales 5,010 10,165 25,651
Services 447 797 1,729
----------- ----------- -----------
Total cost of revenue 5,457 10,962 27,380
----------- ----------- -----------
Gross margin (loss) 1,852 788 (537)
----------- ----------- -----------
Operating expenses
Sales and marketing 295 610 2,193
General and administrative 989 2,032 2,969
Research and development 150 170 959
Interest expense (excluding contractual interest of $64
and $49 not recognized in 2004 and 2003, respectively) 129 804 1,402
----------- ----------- -----------
1,563 3,616 7,523
----------- ----------- -----------
289 (2,828) (8,060)
Other expense (income)
Loss on reimbursement of employee services
(net of reimbursement of $255) 51 -- --
Loss on extinguishment of debt -- 289 --
Write-off of goodwill and other intangible assets -- -- 3,262
Net gain on restructuring of payables -- -- (3,924)
Other charges (credits) (218) (193) 225
----------- ----------- -----------
Income (loss) before reorganization items 456 (2,924) (7,623)
Reorganization items (Note 15) (484) (655) --
----------- ----------- -----------
Net loss (28) (3,579) (7,623)
Accretion of preferred stock -- 99 148
----------- ----------- -----------
Net loss attributable to common stockholders $ (28) $ (3,678) $ (7,771)
=========== =========== ===========
Basic and diluted loss per common share $ -- $ (0.55) $ (1.21)
=========== =========== ===========
Basic and diluted weighted average shares outstanding 6,706 6,706 6,430
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-4
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except per share data)
----------- ----------- -----------
2004 2003 2002
----------- ----------- -----------
Net loss $ (28) $ (3,579) $ (7,623)
Other comprehensive income:
Cash flow hedges, net of taxes -- -- 141
----------- ----------- -----------
Total comprehensive loss $ (28) $ (3,579) $ (7,482)
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-5
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
Accumulated
Common Stock Additional other
---------------------- Paid-in Accumulated comprehensive
Shares Amount Capital Deficit (loss) Total
-------- ------- ---------- ----------- ------------- ----------
Balance, January 1, 2002 5,688 $ 57 $ 35,280 $ (39,339) $ (141) $ (4,143)
Common stock sold 267 2 160 162
Common stock issued in consideration of --
debt modification 750 8 404 412
Net loss (7,623) (7,623)
Preferred stock accretion (148) (148)
Other comprehensive loss -- 141 141
-------- ------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 6,705 67 35,844 (47,110) -- (11,199)
Net loss (3,579) (3,579)
Preferred stock accretion (99) (99)
-------- ------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 6,705 67 35,844 (50,788) -- (14,877)
Net loss (28) (28)
-------- ------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 6,705 $ 67 $ 35,844 $ (50,816) $ -- $ (14,905)
======== ======= ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-6
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
----------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) before reorganization items 456 (2,924) (7,623)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Gain on restructuring of payables -- -- (3,924)
Depreciation and amortization 43 800 1,709
Write-off of debt financing costs -- 289 98
Write-off of goodwill -- -- 3,262
Loss (gain) on the disposition of assets -- (44) 713
Change in deferred revenues (116) (94) (91)
Provision (credit) for doubtful accounts (117) 104 599
Provision (credit) for excess and obsolete inventory (109) 1,169 565
Changes in assets and liabilities:
Cash on deposit with lender 57 (328) --
Trade accounts receivable (121) 1,357 6,999
Affiliate receivables (92) -- --
Other receivables 26 (60) --
Income tax refunds -- 4 9
Inventories 1,087 (198) 5,594
Other assets 120 71 562
Accounts payable and accrued expenses (583) (763) (4,522)
--------- --------- ---------
Net cash provided by (used in) operating activities 651 (617) 3,950
--------- --------- ---------
Cash flows provided by (used in) reorganization activities:
Reorganization expenses (484) (655) --
Gain on disposition of property and equipment (23) (685) --
Proceeds from disposition of property 23 189
Increase in liabilities, net 273 1,176 --
--------- --------- ---------
Net cash provided by (used in) reorganization activities (211) 25 --
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (15) -- (127)
Proceeds from sale of assets 117 443
--------- --------- ---------
Net cash provided by (used in) investing activities (15) 117 316
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt -- 1,572 1,478
Proceeds from issuance of common stock -- -- 162
Payments on loans payable and capital leases (674) (728) (5,927)
--------- --------- ---------
Net cash provided by (used in) financing activities (674) 844 (4,287)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (249) 369 (21)
Cash and cash equivalents at beginning of year 373 4 25
--------- --------- ---------
Cash and cash equivalents at end of year $ 124 $ 373 $ 4
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-7
BOUNDLESS CORPORATION AND SUBSIDIARIES
(Debtor and Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
--------- --------- ---------
Non-cash transactions:
Asset sale proceeds paid directly to creditors $ -- $ 7,000 $ --
Equipment acquisitions funded through debt -- -- 16
Common stock issued in exchange for debt -- -- 412
Manditorily redeemable preferred stock issued in exchange for debt -- -- 1,406
Cash paid for:
Interest 91 123 1,737
Taxes 4 -- 12
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-8
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code
The Company voluntarily petitioned for relief under Chapter 11 of the United
States Bankruptcy Code on March 12, 2003, (the "Petition Date") in the United
States Bankruptcy Court for the Eastern District of New York, Central Islip.
The Debtor will continue to operate its business as "debtor-in-possession" under
the jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
applicable court orders. In general, as debtors-in-possession, the Debtor is
authorized under Chapter 11 to continue to operate as an ongoing business, but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court.
In order to successfully exit Chapter 11, the Company will need to propose, and
obtain confirmation by the Bankruptcy Court of, a plan of reorganization that
satisfies the requirements of the Bankruptcy Code. Additionally, the Company is
delinquent in its filings with the Securities and Exchange Commission and is
required to file those delinquent reports prior to gaining confirmation.
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. The Company's headquarters is located at 50 Engineers
Lane, Farmingdale, New York 11735 (telephone number (631) 962-1500).
Boundless Technologies, a wholly-owned subsidiary, is engaged in supplying
computer terminals for commercial use. The Company's general strategy is to
provide fast, easy-to-use, and cost-effective products that enable access to
applications and data in commercial environments, as well as older "legacy"
applications, running on mainframes, mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports (i) desktop
computer display terminals, which generally do not have graphics capabilities,
("General Display Terminals"), and (ii) other products that are used in
multi-user computing environments. Boundless Technologies offers standard and
custom models of its General Display Terminals primarily to retail, financial,
telecommunications and wholesale distribution businesses requiring them for data
entry and point of sale activities.
Boundless Manufacturing is pursuing opportunities in the electronic
manufacturing services ("EMS") marketplace. As of December 31, 2004 and 2003,
the Company owned 75% of the outstanding shares of common stock of this
subsidiary. Services include supply chain optimization, global supply base
management, systems assembly and test, distribution and logistics, repair
centers and end-of-life management. Boundless Manufacturing also offers in-house
engineering expertise- product design, test development and product development-
to significantly reduce time-to-market for original equipment manufacturers
("OEM") customers. Boundless Manufacturing provides a complete supply chain that
is designed and built to each customer's specifications. Boundless Manufacturing
also has post-manufacturing support capability in New York and Atlanta.
Financial Statement Presentation.
The accompanying consolidated financial statements have been prepared in
accordance with American Institute of Certified Public Accountants' Statement of
Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," and on a going-concern basis, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business.
SOP 90-7 requires that the financial statements for periods subsequent to the
Chapter 11 filing petition distinguish transactions and events that are directly
associated with the reorganization from the operations of the business.
Accordingly, revenues, expenses (including professional fees), realized gains
and losses, and provisions for losses directly associated with the
reorganization and restructuring of the business are reported separately in the
financial statements. The Consolidated Balance Sheet distinguishes pre-petition
liabilities and other items subject to compromise from both those pre-petition
liabilities that are not subject to compromise and from post-petition
liabilities. Liabilities and other items subject to compromise are reported at
the amounts expected to be allowed, even if they may be settled for lesser
amounts.
F-9
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, as a result of the Chapter 11 filing, the realization of assets and
satisfaction of liabilities, without substantial adjustments or changes in
ownership, are subject to uncertainty. Given this uncertainty, there is
substantial doubt about the Company's ability to continue as a going concern.
While operating as debtors-in-possession under the protection of Chapter 11 of
the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise
as permitted in the ordinary course of business, the Debtors, or some of them,
may sell or otherwise dispose of assets and liquidate or settle liabilities for
some amounts other than those reflected in the consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications in the historical consolidated financial statements.
The primary issues management will focus on immediately following
confirmation of the Company's Plan of Reorganization include:
o Working with its secured lender on a restructuring of the terms of
the DIP debt which it holds, thereby reducing the Company's cost of
borrowing.
o Initiating negotiations with suppliers to secure trade financing of
working capital of approximately $1-2 million under terms and
conditions to be agreed upon. There can be no assurance that such
financing will materialize.
o The continual negotiation of material contracts for the sale of its
manufacturing services to customers which management believes will
provide additional liquidity for operations. There can be no
assurances that these contracts will materialize.
o The ability of the Company to generate cash from operations and to
maintain adequate cash on hand; and o The ability of the Company to
achieve profitability.
The Company believes that positive operating cashflows and profitability
will not come from the general purpose text terminal marketplace. The Company
has been and will continue to focus on the current business from the current
customers in order to provide a reliable cash flow with which to execute growth
plans. The paths to growth that the Company has developed include:
1. Repositioning the Company's business from a text terminal company to a
Point-of-Service/Point-of-Sale ("POS") technology company, and build upon its
historical success in POS to establish a strong link between the Company's and
POS' applications. A key activity in support of the POS initiative includes
leveraging the Company's existing technology platforms
2. Gaining access to a more modern and growing market through new product
offerings including Web terminals and terminals utilizing the Linux operating
system which provide high security, high levels of productivity and high
reliability.
3. Enter the Radio Frequency Identification ("RFID") market place with a
high value-to-cost offering. Position the company as a RFID provider to POS
integrators and OEMs. RFID Controllers - read/write RFID modules for both 13.56
mhz and 900 mhz- will be embedded into the Company's technology platforms.
4. Applying its robust Build-to-Order ("BTO") processes to growth products
and markets.
There is no assurance that the Company will be successful in obtaining
confirmation of its Plan of Reorganization. If not, liquidation of the Company's
assets would most likely ensue. If the Company does emerge from Chapter 11,
there is no assurance that its operations will be profitable and cash flow
positive; in the alternative, the scope of operations could be severely
curtailed or discontinued entirely. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
DIP Financing
During the period from the Petition Date through and including January 2005,
Valtec Capital Corporation ("Valtec"). provided debtor-in-possession financing
to the Company. Pursuant to the Bankruptcy Court's Interim Order entered on
April 17, 2003, the Bankruptcy Court approved: (i) the Company's use of Valtec's
cash collateral ; (ii) direct borrowings from Valtec of an amount up to $1,500;
and (iii) the Debtor-in-Possession Financing and Security Agreement by and among
Valtec and the Company. See "Cash and Cash Equivalents" below.
See Note 19- Subsequent Events, of Notes to Consolidated Financial Statements,
for additional information concerning the Company's DIP financing.
F-10
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Basis of Presentation
Boundless Corporation is a holding company whose principal subsidiaries are
Boundless Technologies, Inc., Boundless Manufacturing Services, Inc., and
Merinta Inc. The consolidated financial statements include the accounts of all
of the majority-owned subsidiaries.
All significant intercompany transactions are eliminated. Certain prior year
amounts, specifically the presentation of cash, trade accounts receivable, and
interest expense have been reclassified to conform to the current year's
presentation. These reclassifications had no effect on the Company's income or
loss before reorganization items, net loss, or related per share amounts for any
period presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, after
elimination of intercompany accounts and transactions. As of December 31, 2004
the Company owned 100%, 84%, and 75% of the outstanding common stock of
Boundless Technologies, Merinta and Boundless Manufacturing, respectively. Due
to the equity deficits of the latter two companies, no minority interest is
reflected.
Cash and Cash Equivalents
All highly liquid investments with maturities at purchase of three months or
less are considered cash equivalents. The Company had $271 and $328 classified
as "cash on deposit with lender" at December 31, 2004 and 2003, respectively,
representing cash on-hand in a lockbox account under the control of the
Company's DIP lender. On approval of the DIP lender the Company accesses these
funds, further, the lender withdraws payments on terms of its DIP financing
agreement discussed above.
Allowance for Doubtful Accounts
An allowance for uncollectible trade receivables is provided based on
management's analysis of write-off history, aging analysis, and any specific,
known troubled accounts. Periodically management's review of this allowance
could result in a reduction and corresponding credit to the statement of
operations. The Company recorded a credit to bad debt expense of $117 in 2004,
and recorded bad debt expense of $104 and $599 for the years ended December 31,
2003 and 2002, respectively. The allowance for doubtful accounts was $501 and
$623 at December 31, 2004 and 2003, respectively.
Inventory
Boundless values inventory at the lower of cost or market, with cost computed on
a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets. Buildings
and improvements are depreciated over a 25-year period, and machinery and
equipment are depreciated over periods ranging from 2 to 15 years. Expenditures
that increase the value or extend the life of an asset are capitalized, while
costs of maintenance and repairs are expensed as incurred. Gains or losses upon
disposal of assets are recognized in the statements of operations.
Long-Lived Assets
In 2002, the Company recorded an expense of $775 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 loss is included in other
charges for the year ended 2002.
Goodwill
Due to its March 2003 Chapter 11 proceedings, in December 2002, the Company
recorded an expense of $3,262 to remove the remaining unamortized book value of
all goodwill and associated intellectual property.
Minority Interest
In the absence of a commitment by minority shareholders to fund losses in excess
of their equity, such losses have been attributed to the Company.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, current liabilities and
long-term debt reported on the balance sheets approximate their fair value. The
Company estimated the fair value of long-term debt by comparing the carrying
amount to the future cash flows of the instrument, discounted using the
Company's incremental rate of borrowing for a similar instrument. The Company
believes the
F-11
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of liabilities and other items subject to compromise is not
determinable.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer
or passage of title and assumption of risk. The Company monitors product
returns, generally which are for stock rotation with a coinciding replacement
order, and records provisions for estimated future returns and potential
warranty liability at the time revenue is recorded. Service revenue is
recognized when services are performed and billable. Revenue from maintenance
and extended warranty agreements is deferred and recognized ratably over the
term of the agreement.
Supplier Concentration
The Company purchases subassemblies and components for its products from more
than 40 domestic and Far East suppliers. In 2004 purchases from Radiance
Electronics, Ansen Corporation and Video Display Corporation accounted for 34%,
20%, and 9%, respectively, of the Company's total purchases of material.
Purchases from Radiance Electronics (formerly Goldtron Electric), Ansen
Corporation and Hewlett Packard, accounted for approximately 24%, 20% and 18%,
respectively, of the dollar amount of the Company's total purchases of
subassemblies and components in 2003.
As a condition to the Valtec DIP Financing, Valtec required the Company to enter
into the Ansen Corporation Manufacturing Services Agreement ("Ansen Agreement"),
pursuant to which, Ansen Corporation would provide post-petition manufacturing,
production and delivery services to the Company. The Company placed with Ansen
initial purchase orders for certain components with committed delivery dates
beginning March 2003. The failure of Ansen to timely deliver the components
resulted in the cancellation or rescheduling of customer orders placed with the
Company; and generally resulted in a reduction of the number of components
required by the Company with respect to the original delivery dates. On November
7, 2003, Ansen notified the Company of its intention to terminate the Ansen
Agreement due to the alleged failure of the Company to accept and pay for the
components as originally scheduled. By subsequent agreement, the Company will
continue to purchase any remaining components from Ansen as needed; and, should
any components remain as of the Effective Date, the Company will purchase the
then remaining balance. Ansen continues to deliver the components to the
Company. The balance due Ansen was approximately $561 and $1,130 at December 31,
2004 and 2003, respectively; and such balance is included in "Purchase order
commitments" on the balance sheets.
Due to the Company's poor working capital position immediately preceding its
bankruptcy filing, Hewlett Packard agreed to provide the cash the Company needed
to purchase components necessary for the manufacturing of Hewlett Packard's
product requirements. During the period from December 2002 through July 2003
Hewlett Packard purchased approximately $1,493 of components.
Concentration of Credit Risk
The Company is required by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk," to disclose
concentrations of credit risk regardless of the degree of such risk. The
Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company's cash policy limits credit exposure; however, for
limited periods of time during the year bank balances may exceed the FDIC
insurance coverage. The Company routinely assesses the financial strength of its
customers and as a consequence, believes that its accounts receivable credit
risk exposure is limited. No collateral is required. The Company extends credit
in the normal course of business to a number of distributors and value-added
resellers in the computer industry. The Company had three customers representing
16%, 14% and 11% of revenues, respectively, in 2004, two customers representing
32% and 13% of revenues, respectively, in 2003, and one customer representing
14% of revenues in 2002.
Shipping and Handling
The Company records as revenue all amounts billed to customers for out-bound
shipping and handling. All costs associated with in-bound and out-bound shipping
and handling are included in cost of revenue.
Advertising
Advertising costs are expensed as incurred. The amount charged to advertising
expense was $0, $12 and $94 for the years ended December 31, 2004, 2003 and
2002.
Income Taxes
As more fully discussed in Note 5, income taxes are provided in accordance with
the liability method of accounting for income taxes
F-12
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pursuant to SFAS No. 109. Accordingly, deferred income taxes are recorded to
reflect the future tax consequences of differences between the tax basis of
assets and liabilities and their financial amounts at year-end. Deferred tax
assets are reduced by an estimated valuation allowance.
Stock Based Compensation
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25 "Accounting for Stock Issued to Employees." The Company
follows SFAS No. 123 "Accounting for Stock Based Compensation" for financial
statement disclosure purposes and issuances of options and warrants to
non-employees for services rendered.
Net Loss Per Common Share
Net loss attributable to common stockholders includes the accretion of
mandatorily redeemable preferred stock.
SFAS No. 128, "Earnings Per Share," requires a reconciliation of the numerator
and denominator of the basic net income (loss) per share computation to the
numerator and denominator of the diluted net income (loss) per share
computation. There were no dilutive instruments for 2004, 2003 or 2002.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Income (Loss)
The adoption of FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," at January 1, 2001, resulted in recording $30 in accumulated other
comprehensive loss for the cumulative effect of the accounting change. At
December 31, 2002, the Company had in place an interest rate swap agreement in
the amount of $306 bearing three-month LIBOR interest of 1.4%. The interest rate
swap agreement expired March 31, 2003. The deferred loss resulting from the swap
agreements, as calculated using the mark-to-market method, was not material. At
December 31, 2002, the Company's interest rate swap, a cash flow hedge, was
closed out to the statement of operations.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for the fiscal
periods beginning after June 15, 2005 and is required to be adopted by Boundless
in the third quarter of fiscal 2005, beginning on July 1, 2005. Boundless is
currently evaluating the effect that the adoption of SFAS 153 will have on its
consolidated results of operations and financial condition but does not expect
it to have a material impact.
3. Inventories
Inventories are stated at the lower of cost or market with costs determined on a
first-in first-out basis. On a quarterly basis the Company reviews quantities on
hand and on order and records a provision for excess and obsolete inventory
based on forecasted demand. Should this analysis indicate that the demand for
product has increased from previous estimates, a decrease in the reserves would
be affected through a credit to the statement of operations. For the year ended
December 31, 2004 the Company recorded a credit of $109 for excess and obsolete
inventory as compared to a provision of $1,169 and $565 in 2003 and 2002,
respectively.
The major components of inventories are as follows:
F-13
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, December 31,
------------ ------------
2004 2003
------------ ------------
Raw materials and purchased components $ 1,584 $ 2,843
Finished goods 126 135
Manufacturing inventory reserves (935) (1,242)
Service parts 319 336
------------ ------------
$ 1,094 $ 2,072
============ ============
4. Property and Equipment
Property and equipment consists of the following:
December 31, December 31,
------------ ------------
2004 2003
------------ ------------
Machinery and equipment $ 6,519 $ 6,605
Less accumulated depreciation and amortization 6,416 6,474
------------ ------------
$ 103 $ 131
============ ============
On or about September 17, 2003, pursuant to that certain Purchase and Sale
Agreement by and among the Company, Independence Community Bank ("ICB"),
JPMorgan Chase and 100 Marcus LLC, the Company agreed to transfer all of its
right, title and interest in and to 100 Marcus Boulevard, Hauppauge, New York,
which had served as the Company's main operating facility (the "Premises"). ICB
and JPMorgan Chase held mortgages on the Premises and participated in the sale
transaction. The Company successfully negotiated a sale of the Premises which
provided for: (i) satisfaction of all liens and encumbrances of ICB and JPMorgan
Chase; (ii) payment of all outstanding real estate tax obligations from the
proceeds of the sale; (iii) the Company's use of 15,000 square feet, rent free,
for a period of one (1) year post-closing; (iv) the payment of $250 to the
Company and (v) ICB and JP Morgan Chase retaining unsecured claims against the
Company for the difference between the Company's Obligations to such banks and
the amount of the proceeds of the sale of the Premises remitted to such bank. As
a result, such banks have pre-petition unsecured claims against the Company
aggregating approximately $2,271. The Company recognized a gain on the sale of
the building and other miscellaneous assets of $685; which gain includes
approximately $150, representing the fair market rental value of the premises
for the one-year rent-free period.
Depreciation expense for the years ending December 31, 2004, 2003 and 2002 was
$43, $752 and $1,557, respectively. The Company recorded repairs and maintenance
expenses of $13, $26 and $102 for the years ended December 31, 2004, 2003 and
2002.
5. Income Taxes
F-14
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to the reported net losses, there were no provisions for current or
deferred federal or state income taxes for the years ended December 31, 2004,
2003 or 2002.
The benefit from income taxes differs from the amount of income tax determined
by applying the statutory federal income tax rate to continuing operations
before income taxes as a result of the following:
2004 2003 2002
----------- ----------- -----------
Federal income tax benefit at statutory rate $ (10) $ (1,217) $ (2,592)
Losses not producing tax benefits 10 1,217 2,592
----------- ----------- -----------
Income tax benefit $ -- $ -- $ --
=========== =========== ===========
The Company has provided a valuation allowance against the total amount of the
net deferred tax assets due to the uncertainty of future realization.
The components of the net deferred tax assets and liabilities were as follows:
2004 2003
---------- ----------
Current deferred tax assets:
Inventory $ 702 $ 702
Accounts receivable 259 321
Warranties 79 145
Other deferred tax assets 679 676
Less valuation allowance (1,719) (1,844)
---------- ----------
Total current deferred tax assets $ -- $ --
========== ==========
Noncurrent deferred tax assets- Goodwill
and other $ 828 $ 835
Noncurrent deferred tax liabilities- Property
and equipment (675) (588)
Net operating loss carryforwards 15,955 15,726
Less valuation allowance (16,108) (15,973)
---------- ----------
Net noncurrent deferred tax assets $ -- $ --
========== ==========
The increase (decrease) in the valuation allowance for deferred tax assets for
the years ending December 31 was as follows:
2004 2003
---------- ----------
Current deferred tax asset valuation allowance $ (125) $ (175)
Long-term deferred tax asset valuation allowance 135 1,390
---------- ----------
$ 10 $ 1,215
========== ==========
6. Other accrued liabilities
At December 31, 2004 and 2003 other accrued liabilities consisted of the
following:
F-15
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 2003
----------- -----------
Accrued interest expense $ 100 $ 60
Accrued audit expense 1 12
Other accrued expenses 56 9
----------- -----------
$ 157 $ 81
=========== ===========
7. Liabilities and Other Items Subject to Compromise
Liabilities and other items subject to compromise refers to liabilities incurred
and the issuance of preferred stock prior to the commencement of the Chapter 11
Cases. These amounts represent the Company's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such
claims remain subject to future adjustments. Adjustments may result from
negotiations, actions of the Bankruptcy Court, the determination as to the value
of any collateral securing claims, proofs of claim or other events. It is
anticipated that such adjustments may be material. Payment terms for these
amounts will be established in connection with the Chapter 11 Cases.
As a result of the bankruptcy proceedings, certain accounts payable have been
re-characterized as liabilities subject to compromise in 2004. In addition, as a
result of other bankruptcy proceedings certain capital lease obligations
previously reported in long-term debt are now re-characterized as liabilities
subject to compromise. See Note 8- Debt.
At December 31, 2004 and 2003, the Company had liabilities and other items
subject to compromise of approximately $14,622 and $13,207 which consisted of
the following:
2004 2003
----------- -----------
Liabilities:
Accounts payable $ 10,948 $ 9,971
Convertible notes payable, principally related to
prior separation agreements 965 965
Accrued salaries 397 397
Accrued warranty 222 222
Capital lease obligations 438 --
----------- -----------
12,970 11,555
Other:
Manditorily redeemable preferred stock 1,652 1,652
----------- -----------
$ 14,622 $ 13,207
=========== ===========
Pursuant to the separation arrangements described below, the Board of
Directors of the Company accepted the resignations, effective as of January 1,
2002, of J. Gerald Combs, its Chairman and Chief Executive Officer, and Jeffrey
K. Moore, its Vice President of Corporate Development, from all of their
positions with the Company and its subsidiaries.
The Company entered into a Separation Agreement and General Release (the
"Separation Agreement") with each of Mr. Combs and Mr. Moore and issued a 6%
Convertible Promissory Note (the "Note") to each of them, with a principal
amount of $475,000 for Mr. Combs and $382,600 for Mr. Moore, representing the
separation payments. The principal amount of the notes include a bonus
previously awarded by the Company for the year 2000 ($75,000 for Mr. Combs and
$25,000 for Mr. Moore), which had not been paid by the Company. Simultaneously,
the Company entered into a Consulting Agreement with Mr. Combs and an Employment
and Consulting Agreement with Mr. Moore (together, the "Consulting Agreements").
Mr. Combs was to serve as a consultant to the Company until March 31, 2003, and
Mr. Moore was to remain as an employee of the Company at a reduced salary and in
a non-officer capacity until March 31, 2002 and thereafter serve as a consultant
to the Company until February 27, 2003. Under the Consulting Agreements the
Company agreed to pay a total of $241,056 to Mr. Combs and $137,500 to Mr.
Moore. The Company agreed that, to the extent not already vested, all stock
options held by Mr. Combs (480,000) and Mr. Moore (205,000) would be fully
vested immediately and such options would be exercisable for five years from
January 1, 2002. The exercise prices of such stock options were not changed. The
Company (including its subsidiaries) granted releases to Mr. Combs and Mr.
Moore, each of whom
F-16
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
granted reciprocal releases to the Company (and its subsidiaries).
Each Note was payable on February 27, 2003 and entitled the holder to
convert it at the price of $1.25 per share into restricted shares of the
Company's common stock at any time prior to such maturity date. However, if the
Notes were not converted and the Company had not raised equity financing of at
least $2,500,000 prior to such maturity date, the Company had the option to
extend the Notes for two years and to pay the Notes in 24 monthly installments.
The Company's obligations to make payments under the Notes were subordinated to
its current or future obligations to repay all other indebtedness for borrowed
money. The shares into which the Notes could have been converted were
accompanied by "piggyback" registration rights. As a result of the bankruptcy
filing, the obligations to both Messrs. Combs and Moore are unsecured and
subject to compromise.
The mandatorily redeemable preferred stock is convertible into shares of
common stock of the Company at a conversion price of $3 per share. The Plan of
Reorganization contemplates that all equity instruments of the Company will be
cancelled on the Effective Date. As a result, the conversion of the preferred
stock to shares of common stock is doubtful and therefore the mandatorily
preferred stock is included with other items subject to compromise.
The preferred stock was issued in connection with the 2002 debt
restructuring in the face amount of $4,365 and was recorded at its estimated
fair value $1,406. Assuming none of the holders of the Preferred Stock convert
to Common Stock of Boundless Corporation, the Company would be required to
record a charge to earnings available to stockholders over the ten-year
redemption period such that the carrying value of the Preferred Stock equals its
face value at the time of redemption. Pre-petition, the difference between the
carrying value of the preferred stock and its face value was being treated as a
dividend and charged to earnings available to stockholders over the ten-year
redemption period unless conversion occurs, in which case accretion terminates
at that point. As of December 31, 2003, $247 was accreted and added to losses
attributable to common stockholders.
Since the Plan of Reorganization contemplates that all equity instruments
of the Company will be cancelled on the Effective Date, the Company discontinued
the accretion of the difference between the carrying value of the preferred
stock and its face value to earnings available to stockholders.
As of the Petition Date, and absent further order of the Bankruptcy Court,
no party, subject to certain exceptions, may take any action, again subject to
certain exceptions, to recover on pre-petition claims.. The Company has rejected
pre-petition executory contracts and unexpired lease obligations, and they are
included with liabilities subject to compromise. The parties affected by these
rejections may file claims with the Bankruptcy Court. At this time, it is not
possible to predict the outcome of the Chapter 11 process or its effect on the
Company's business.
The Company's statement of operations for the years ended December 31,
2004 and 2003 do not include interest expense on debt subject to compromise
subsequent to the Petition Date. If the Company had reported interest on the
basis of the amounts it was contractually required to pay, additional interest
expense of $64 and $49 would have been recorded in 2004 and 2003, respectively.
8. Debt
Long-term debt at December 31, 2004 and 2003 consisted of the following:
2004 2003
----------- -----------
Note payable toValtec Capital Corporation, bearing interest at
8%, collateralized by receivables, inventory and equipment $ 653 $ 1,321
Notes payable toVision Technologies, Inc., bearing interest at
8%, payable in 36 equal monthly installments, commencing the
month following payment in full of the Valtec Capital note
collateralized by receivables, inventory and equipment,
subordinate to Valtec Capital 650 650
Capital lease obligations, secured by underlying assets -- 447
----------- -----------
1,303 2,418
Less current maturities on long-term debt 350 837
----------- -----------
$ 953 $ 1,581
=========== ===========
F-17
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate debt schedule maturities is as follows:
2005 $ 350
2006 351
2007 204
2008 221
2009 177
-----------
$ 1,303
===========
In connection with the bankruptcy filing, during the quarter ended March 31,
2003, the Company obtained debtor-in-possession financing with Valtec Capital,
LLC and wrote off $289 of capitalized debt financing costs associated with the
asset-based lending agreement with the Company's prior lender.
As a result of other bankruptcy proceedings certain capital lease obligations
previously reported in long-term debt are now re-characterized as liabilities
subject to compromise. See Note 7- Liabilities Subject to Compromise.
9. Equity
At December 31, 2004 and 2003, stockholders' deficit consisted of the following:
2004 2003
----------- -----------
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued $ -- $ --
Common stock, $0.01 par value, 25,000,000 shares
authorized,6,705,613 shares issued and outstanding 67 67
Additional paid-in capital 35,844 35,844
Accumulated deficit (50,816) (50,788)
----------- -----------
Total stockholders' deficit $ (14,905) $ (14,877)
=========== ===========
Mandatorily Redeemable Preferred Stock and Related Gain on Debt Settlement.
During the second quarter of 2002, the Company issued mandatorily redeemable
convertible preferred stock (the "Preferred Stock"), in the respective face
amounts of $1,250 and $3,115 as part of two debt settlements. The Company
retained the services of an independent firm to determine the fair value of the
aggregate face value of $4,365 of the Preferred Stock for purposes of recording
the transactions on the Company's books.
The convertible preferred stock was valued as a combination of an unsecured
fixed income like security ("Debt Portion") and a warrant. The combination of
the Debt Portion and warrant provided for an estimated fair value of the
Preferred Stock of $1,406, resulting in the Company's recognizing a gain in the
second quarter ended June 30, 2002 of $846 and $2,113 respectively on the
portion of troubled debt attributable to the issuance of the Preferred Stock.
In satisfying the secured debt and in return for removing the lien on our
assets, the Company, amongst other consideration, also agreed to issue 750,000
shares of its common stock to the lenders and shares of the Preferred Stock
referred to above with a stated value of $1,250 and a carrying value of $404,
resulting in the recognition of gain of $846 as reflected above. The Company had
agreed to register under the Securities Act of 1933 such common stock and the
shares into which the Preferred Stock may be converted. The lenders have certain
anti-dilution protection for their shares of common stock.
The Company also reached agreement with its unsecured creditors representing
approximately $10,237 of debt which required the Company to make cash payments
totaling approximately $2,878, issue shares of Preferred Stock as discussed
above with a stated value of approximately $3,115 and a carrying value of
$1,002, allow offsets of receivables in the amount of $301 otherwise due the
Company and agree to price increases in the total amount of $820 on future
purchases of components. The Company recognized a gain on the restructuring of
these payables to creditors of $5,236 including the gain attributable directly
to the Preferred stock in the amount of $2,113 as shown above. Subsequently, the
Company failed to meet its payment obligations under the agreements, resulting
in a reversal during the fourth quarter of 2002 of $2,158 of gain on the
settlement of unsecured trade debt previously
F-18
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded. As a result, the gain of $6,082 from the second quarter was reduced to
a net gain of $3,924 for the full year.
The Preferred Stock issued to the lenders and unsecured creditors was
convertible 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. As part of the Company's Plan of Reorganization, which requires
Bankruptcy Court approval, it is contemplated that the shares issuable under the
Preferred Stock will be cancelled. The carrying value of the mandatorily
redeemable stock is included in other items subject to compromise at December
31, 2004 and 2003.
Assuming none of the holders of the Preferred Stock convert to Common Stock of
Boundless Corporation, the Company would be required to record a charge to
earnings available to stockholders over the ten-year redemption period such that
the carrying value of the Preferred Stock equals its face value at the time of
redemption. Pre-petition, the difference between the carrying value of the
preferred stock and its face value was being treated as a dividend and charged
to earnings available to stockholders over the ten-year redemption period unless
conversion occurs, in which case accretion terminates at that point. As a result
of the bankruptcy, in the third quarter of 2003 the Company discontinued
accreting the difference. As of December 31,2004, $247 was accreted and charged
to losses attributable to common stockholders. Since the Plan of Reorganization
contemplates that all equity instruments of the Company will be cancelled on the
Effective Date, the Company discontinued the accretion of the difference between
the carrying value of the preferred stock and its face value.
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 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.
10. Options and Warrants
The Company believes its presently outstanding equity securities will have no
value and it is expected that those securities will be canceled under any plan
of reorganization.
On March 6, 1998, the Company filed an Information Statement on Schedule 14C
with the Securities and Exchange Commission in connection with, amongst other
items, the Board of Directors of the Company approving the Company's 1997
Incentive Plan permitting the grant of stock options, stock appreciation rights,
performance shares, stock awards, stock units and incentive awards to employees,
directors and others.
The Company had previously adopted its 1995 Incentive Plan which permitted up to
600,000 shares of Common Stock to be issued thereunder. As additional shares
were no longer available to be issued under the 1995 Incentive Plan, the Board
adopted the 1997 Incentive Plan. The maximum number of shares to be issued under
the 1997 Incentive Plan is not to exceed 1,000,000. The exercise price of each
option granted is to be equal to or greater than the market price of the
Company's stock on the date of grant. The terms of the options are generally
over five years with vesting occurring in 25% increments beginning one year
after the grant date. In December 2000 the Board created the 2000 Incentive Plan
that covers up to 1,000,000 shares of Common Stock. The number of shares granted
on a calendar year basis under the 2000 Incentive Plan is limited to 5% of the
total number of shares of Common Stock outstanding, or 10% in any five-year
period.
The Company has elected to continue to account for stock options issued to
employees in accordance with APB 25, "Accounting for Stock Issued to Employees".
During the year ended December 31, 2002, all options issued to officers and
employees were granted at an exercise price which equaled or exceeded the market
price per share at the date of grant and accordingly, no compensation was
recorded.
The Company follows the disclosure requirements of FASB Statement 123,
"Accounting for Stock-Based Compensation". This statement requires the Company
to provide pro forma information regarding net income and net income per share
as if compensation
F-19
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost for the Company's employee stock options granted had been determined in
accordance with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model. No options or warrants were granted in
2004 or 2003. The following weighted average assumptions were used for grants in
2002:
1. Dividend yield of 0%
2. Expected volatility of 114%.
3. Risk-free interest rates ranging from 1.47% to 2.1%
4. Expected term of 3 years
Under the accounting provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been equal to the pro forma amounts indicated below:
2004 2003 2002
--------- --------- ---------
Net loss
As reported $ (28) $ (3,579) $ (7,623)
Under SFAS No. 123 (28) (3,696) (8,096)
Net loss per share
As reported - basic $ (0.00) $ (0.55) $ (1.21)
As reported - diluted (0.00) (0.55) (1.21)
Under SFAS No. 123 - basic (0.00) (0.55) (1.26)
Under SFAS No. 123 - diluted (0.00) (0.55) (1.26)
A summary of the status of the Company's stock options and warrants as of
December 31, 2004 and 2003, and changes during the years ending on those dates
is as follows:
Options -Boundless Corporation 2004 2003
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at beginning of year 1,992,715 $ 2.50 2,326,247 $ 2.42
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (587,265) (1.94) (333,532) (1.92)
---------- ---------- ---------- ----------
Outstanding at end of year 1,405,450 $ 2.74 1,992,715 $ 2.50
========== ========== ========== ==========
Options exercisable at end of year 1,362,032 $ 2.81 1,653,171 $ 2.92
========== ========== ========== ==========
Weighted average fair value
of options granted during the year N/A N/A
========== ==========
F-20
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants- Boundless Corporation 2004 2003
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at beginning of year 1,463,560 $ 3.27 1,530,900 $ 3.55
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (380,002) (7.30) (67,340) (9.69)
---------- ---------- ---------- ----------
Outstanding at end of year 1,083,558 $ 1.86 1,463,560 $ 3.27
========== ========== ========== ==========
Warrants exercisable at end of year 1,083,558 $ 1.86 1,463,560 $ 3.27
========== ========== ========== ==========
Weighted average fair value
of warrants granted during the year N/A N/A
========== ==========
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 2004:
Weighted
Number Weighted Average Number
Outstanding at Average Remaining Exercisable at
December 31, Exercise Contractual December 31,
Options - Boundless Corp. 2004 Price Life (Years) 2004
-------------- ---------- ------------ ------------
207,400 $ 0.45 2.83 163,982
215,000 1.03 1.81 215,000
148,000 1.05 2.14 148,000
220,000 1.50 1.45 220,000
30,050 2.60 1.15 30,050
130,000 4.50 2.00 130,000
150,000 4.88 2.00 150,000
100,000 5.00 2.00 100,000
205,000 5.62 2.00 205,000
------------ ---------- --------- -----------
1,405,450 $ 2.74 2.01 1,362,032
============ ========== ========= ===========
Weighted
Number Weighted Average Number
Outstanding at Average Remaining Exercisable at
December 31, Exercise Contractual December 31,
Warrants - Boundless Corp. 2004 Price Life (Years) 2004
-------------- ---------- ------------ ------------
400,000 $ 0.36 2.92 400,000
172,430 0.65 2.51 172,430
144,939 0.84 2.17 144,939
64,409 1.30 1.42 64,409
6,946 1.33 1.43 6,946
20,834 1.36 1.41 20,834
27,500 2.40 0.15 27,500
46,500 5.00 1.01 46,500
150,000 5.80 0.38 150,000
50,000 6.88 0.40 50,000
------------ ---------- --------- -----------
1,083,558 $ 1.86 2.01 1,083,558
============ ========== ========= ===========
F-21
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with SFAS No. 123, the Company is required to account for options
issued to non-employees for services rendered using the fair value method over
their vesting period.
In connection with a sale of the Company's common stock in September 2001, 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.
Due to the expected cancellation of all of the Company's outstanding equity
securities, including the mandatorily redeemable Preferred Stock, as a result of
the Chapter 11 proceedings, none of the outstanding warrants or options is
believed to have any economic or dilutive effect on the Company's finances.
11. Related Party Transactions
In 2002 the Company issued certain convertible notes in connection with
separation agreements. These are included in liabilities subject to compromise.
See Note 7- Liabilities Subject to Compromise.
Net revenue from EMS activities, primarily logistics services sold to Unique
Co-operative Solutions, Inc. ("UCSI"), was $240 for the year ended December 31,
2004. Net revenue from UCSI during 2003 and 2002 was not material. UCSI is
wholly owned by Mr. Oscar Smith, who also is the majority shareholder of Vision
Technologies, Inc. ("Vision"). The Company's Plan of Reorganization, assuming
approval by the Bankruptcy Court, contemplates that Vision will own 100% of the
Company. Mr. Smith currently owns approximately 15% of the outstanding common
stock of the Company.
Beginning in the first quarter of 2004, the Company recognized that certain of
its employees were underutilized, and outsourced a portion of this
underutilization to UCSI. In the absence of this arrangement, the Company would
have absorbed the entire expense of the underutilization. For the year ended
December 31, 2004, these costs were estimated to be $306 for which the Company
charged UCSI $255. The $255 charged by the Company was less than the estimated
personnel and personnel related expenses. The resulting loss of $51 is reported
in the statement of operations.
12. Commitments
Leases
The Company leases certain manufacturing, sales and administrative facilities
and office equipment under operating lease agreements, which expire at various
times through February 2009.
Total rent expense was $336 and $91 in 2004 and 2003, respectively.
Future minimum rental commitments as of December 31, 2004 were as follows:
2005 $ 221
2006 228
2007 235
2008 242
2009 41
--------
$ 967
========
13. Contingencies
The Company is subject to lawsuits and claims that arose in the normal course of
business. Management is of the opinion that all such matters are without merit,
or are of such kind, or involve such amounts, as would not have a significant
effect on the financial position, results of operations or cash flows of the
Company if disposed unfavorably.
F-22
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Segment Reporting and Geographic Information
Operating segments are identified as components of an enterprise about which
separate financial information is available for evaluation by its decision
making group. For 2002, the Company had two reportable segments. With the
Company's restructuring in conjunction with Chapter 11 filing on March 12, 2003,
the business segment reporting ceased.
The Company's manufacturing is conducted at its New York facility and its sales
force operates from three geographically dispersed locations in the United
States and United Kingdom.
Foreign sales were approximately $1,929, $3,473 and $7,430 for 2004, 2003 and
2002, respectively. The following table shows the approximate percentage of
total revenue attributable to export sales to the regions described for each of
the years ended December 31:
2004 2003 2002
---------- ---------- ----------
Western Europe 21% 25% 17%
Other European countries 1% 0% 0%
Other foreign countries 5% 4% 11%
---------- ---------- ----------
Total 27% 29% 28%
========== ========== ==========
All significant long-lived assets of the Company are in the United States.
15. Defined Contribution Plan
Concurrent with its filing for protection under Chapter 11, the Company ceased
providing a 401(k) retirement savings plan (the "401(k) Plan") for its full-time
employees. Effective March 1, 2002, the Company had terminated its contributions
to the 401(k) plan, with only employee contributions remaining. During 2003, the
Company discontinued employee contributions.
16. Reorganization Expenses
The Company voluntarily petitioned for relief under Chapter 11 of the United
States Bankruptcy Code on March 12, 2003, (the "Petition Date") in the United
States Bankruptcy Court for the Eastern District of New York, Central Islip. The
Company has retained the law firm of Ruskin, Moscou, Faltischek, P.C. as counsel
in the bankruptcy proceedings. On March 14, 2003, the Bankruptcy Court signed an
Order directing that the bankruptcy cases be consolidated for procedural
purposes and jointly administered. On March 25,2003, an Official Committee of
Unsecured Creditors (the "Committee") was appointed. The law firm of Platzer
Swergold Karlin Levine Goldberg & Jaslow, LLP was retained to represent the
Committee.
Reorganization expenses for the years ended December 31, 2004 and 2003 were as
follows:
2004 2003
---------- ----------
Professional fees $ 298 $ 1,266
United States District Court fees 25 32
Facility relocation expenses 184 42
Gain on the disposition of building and equipment (23) (685)
---------- ----------
$ 484 $ 655
========== ==========
17. Selected Quarterly Financial Data - (unaudited)
Provided below is the selected unaudited quarterly financial data from 2004 and
2003.
F-23
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended
December 31, September 30, June 30, March 31,
--------------------------------------------------------
2004 2004 2004 2004
----------- ---------- ---------- ----------
Net revenue $ 1,903 $ 1,412 $ 1,811 $ 2,183
Cost of product sold and services 1,471 1,077 1,370 1,539
Gross profit 432 335 441 644
Net income (loss) $ 85 $ (13) $ (111) $ 11
Per share amounts:
Basic and diluted net income (loss) per common share $ 0.01 $ (0.00) $ (0.02) $ 0.00
For the three months ended
December 31, September 30, June 30, March 31,
--------------------------------------------------------
2003 2003 2003 2003
----------- ---------- ---------- ----------
Net revenue $ 1,811 $ 3,461 $ 4,008 $ 2,470
Cost of product sold and services 2,405 2,770 3,205 2,582
Gross profit (loss) (594) 691 803 (112)
Net loss $ (1,113) $ (92) $ (955) $ (1,419)
Per share amounts:
Basic and diluted net loss per common share $ (0.17) $ (0.01) $ (0.15) $ (0.22)
For the six months ended
June 30, June 30,
--------------------------
2004 2003
----------- -----------
Net revenue $ 3,994 $ 6,478
Cost of product sold and services 2,909 5,787
Gross profit (loss) 1,085 691
Net income (loss) $ (100) $ (2,374)
Per share amounts:
Basic and diluted net loss per common share $ (0.01) $ (0.37)
For the nine months ended
September 30, September 30,
------------- -------------
2004 2003
------------- -------------
Net revenue $ 5,406 $ 9,939
Cost of product sold and services 3,986 8,557
Gross profit 1,420 1,382
Net income (loss) $ (113) $ (2,466)
Per share amounts:
Basic and diluted net loss per common share $ (0.02) $ (0.38)
F-24
BOUNDLESS CORPORATION AND SUBSIDIARIES
(DEBTOR AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Subsequent Events
On November 30, 2004, the Company filed a motion with the Bankruptcy Court
for an order authorizing the Company to (i) incur post-petition secured
indebtedness, and (ii) grant a security interest and priority claims pursuant to
Sections 364(c) and 364(d) of the Bankruptcy Code. On January 27, 2005, the
Bankruptcy Court approved the order.
As of January 31, 2005, the Company entered into an agreement with its
secured lender Valtec Capital, LLC, as assignee of Valtec Capital Corporation,
(the "Prior Lender") to terminate its debtor-in-possession ("DIP") financing and
to release its liens on the Company's personal property. At the same time, the
Company entered into another secured DIP financing agreement with Entrepreneur
Growth Capital, LLC ("EGC") pursuant to which EGC was granted a lien on all of
the Company's personal property.
In general, the new agreement permits us to borrow up to 80% of our
eligible accounts receivable. Under the agreement, the annual interest rate is
6% above the Citibank, N.A. prime rate. The Company is required to pay a monthly
service fee equal to three quarters of one percent (0.75%) of the face value of
invoices assigned to EGC for the preceding month. The agreement requires minimum
monthly interest of approximately $8 even though actual borrowings may result in
a lesser interest charge. The Company is responsible for certain fees and fees
for early termination of the facility. The maximum availability under the
agreement is $1,000 and the term is one year.
In return for termination of the prior DIP financing the Company also
agreed to pay Valtec Capital a total of $100 for legal fees they incurred during
the bankruptcy period. This amount is payable to Valtec Capital on the date that
the Plan of Reorganization becomes effective.
F-25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
(In thousands)
Balance at
Beginning of Balance at End
Description Period Additions Deductions of Period
----------------------------------- -------------- ----------- ---------- --------------
Allowances:
Doubtful accounts:
2004 $ 623 $ (117) $ 5 (A) $ 501
2003 763 $ 104 244 (A) $ 623
2002 1,348 599 1,184 (A) 763
Manufacturing inventory reserves:
2004 1,242 (109) 198 (B) 935
2003 789 1,169 716 (B) 1,242
2002 3,451 565 3,227 (B) 789
(A) Includes accounts written off during the period.
(B) Includes inventory written off during the period.
S-1