SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
Commission File Number 0-17977
Boundless Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of Incorporation or Organization)
13-3469637
(I.R.S. Employer Identification No.)
100 Marcus Blvd.
Hauppauge, NY
(Address of principal executive offices)
11788
(Zip Code)
(516) 342-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of April 2, 2001, the Registrant had approximately 4,740,160 shares of Common
Stock, $.01 par value per share outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000...........................................................3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
for the three months ended March 31, 2001 and 2000..........................4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2001 and 2000..........................5
Notes to Consolidated Financial Statements (unaudited).........................6
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
March 31, December 31,
2001 2000
-------- --------
Current assets: (unaudited)
Cash and cash equivalents ................................................ $ 133 $ 3,697
Trade accounts receivable, net ........................................... 9,808 9,478
Income tax refund ........................................................ 303 303
Inventories .............................................................. 9,597 9,925
Deferred income taxes .................................................... 2,281 2,281
Prepaid software license fees ............................................ 54 1,777
Prepaid expenses and other current assets ................................ 299 377
-------- --------
Total current assets .................................................. 22,475 27,838
Property and equipment, net ................................................. 10,615 11,021
Goodwill, net ............................................................... 4,554 5,009
Prepaid software license fees ............................................... -- 1,914
Other assets ................................................................ 531 1,047
-------- --------
$ 38,175 $ 46,829
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................ $ 1,950 $ 2,273
Accounts payable ......................................................... 10,600 11,829
Accrued expenses and other current liabilities ........................... 8,082 7,547
Deferred revenue ......................................................... 280 308
Net liabilities of discontinued operations ............................... 1,927 --
-------- --------
Total current liabilities ............................................. 22,839 21,957
-------- --------
Long-term liabilities:
Long-term debt, less current maturities .................................. 14,124 13,442
Other .................................................................... 727 679
-------- --------
Total long-term liabilities ........................................... 14,851 14,121
-------- --------
Total liabilities ..................................................... 37,690 36,078
Minority interest ........................................................... -- 5,000
-------- --------
Stockholders' equity:
Preferred stock .......................................................... -- --
Common stock ............................................................. 47 46
Additional paid-in capital ............................................... 34,326 34,102
Accumulated deficit ...................................................... (33,783) (28,397
Accumulated other comprehensive loss ..................................... (105) --
-------- --------
Total stockholders' equity ............................................ 485 5,751
-------- --------
$ 38,175 $ 46,829
======== ========
See accompanying notes to condensed consolidated financial statements
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
(unaudited)
Revenue .............................................. $ 12,989 $ 16,733
Cost of revenue ...................................... 11,441 12,830
--------- ---------
Gross margin .............................. 1,548 3,903
--------- ---------
Operating expenses:
Sales and marketing ............................... 1,772 1,659
General and administrative ........................ 1,847 1,581
Research and development .......................... 401 351
Other charges ..................................... 22 6
--------- ---------
Total operating expenses ....................... 4,042 3,597
--------- ---------
Operating income (loss) ................... (2,494) 306
Interest expense, net ............................. 426 155
--------- ---------
Income (loss) before income taxes .................... (2,920) 151
Income tax expense ................................... -- --
--------- ---------
Income (loss) before discontinued operations ......... (2,920) 151
Loss from discontinued operations .................... (2,466) (2,871)
--------- ---------
Net (loss) ........................................... $ (5,386) $ (2,720)
========= =========
Other Comprehensive Loss:
Cumulative effect of adoption of FAS 133 .......... (30) --
Cash flow hedges .................................. (75) --
--------- ---------
Other comprehensive (loss) ..................... (105) --
--------- ---------
Total comprehensive (loss) ........................... $ (5,491) $ (2,720)
========= =========
Weighted average common shares outstanding ........... 4,667 4,491
========= =========
Basic net income (loss) per common share:
Continuing operations ............................. (0.63) 0.03
Discontinued operations ........................... (0.53) (0.64)
--------- ---------
Basic net income (loss) per common share ............. $ (1.16) $ (0.61)
========= =========
Weighted average dilutive shares outstanding ......... 4,667 4,491
========= =========
Diluted net income (loss) per common share
Continuing operation .............................. (0.63) 0.03
Discontinued operation ............................ (0.53) (0.64)
--------- ---------
Diluted net income (loss) per common share ........... $ (1.16) $ (0.61)
========= =========
See accompanying notes to condensed consolidated financial statements
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BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended March 31,
2001 2000
------- -------
(unaudited) (unaudited)
Cash flows from operating activities:
Net
(loss) ...................................................................... $(5,386) $(2,720)
Adjustments to reconcile net (loss) to net cash (used in) operating
activities:
Net loss from discontinued operations .................................... 2,466 2,871
Depreciation and amortization ............................................ 888 632
(Gain) loss on the disposition of assets ................................. 5 2
Deferred revenue ......................................................... (28) 19
Provision for doubtful accounts .......................................... 33 (3)
Provision for excess and obsolete inventory .............................. (3) 61
Changes in assets and liabilities:
Trade accounts receivable ................................................ (556) 92
Income tax refunds ....................................................... -- 833
Inventories .............................................................. 331 (2,053)
Other assets ............................................................. 193 (938)
Accounts payable and accrued expenses .................................... 1,471 2,602
Net change in assets and liabilities of discontinued operations .......... (3,386) (2,871)
------- -------
Net cash (used in) operating activities ....................................... (3,972) (1,473)
------- -------
Cash flows from investing activities:
Capital expenditures ........................................................ (177) (1,954)
------- -------
Net cash (used in) investing activities ........................................ (177) (1,954)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options ..................................... -- 1,259
Net proceeds from issuance of debt .......................................... 936 1,800
Payments on loans payable and capital leases ................................ (577) (404)
Proceeds from issuance of common stock ...................................... 226 --
------- -------
Net cash provided by financing activities ...................................... 585 2,655
------- -------
Net (decrease) in cash and cash equivalents .................................... (3,564) (772)
Cash and cash equivalents at beginning of year ................................. 3,697 1,285
------- -------
Cash and cash equivalents at end of period ..................................... $ 133 $ 513
======= =======
Cash paid for:
Interest .................................................................... 260 309
Taxes ....................................................................... 11 38
See accompanying notes to condensed consolidated financial statements
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BOUNDLESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
1. Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information refer to
the consolidated financial statements and footnotes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
2. Background
Boundless Corporation (the "Company") was incorporated in 1988 under the laws of
the State of Delaware. The Company through its subsidiaries- Boundless
Technologies, Inc. ("Boundless Technologies"), Boundless Manufacturing Services,
Inc. ("Boundless Manufacturing"), and Merinta Inc. ("Merinta")- is a provider of
text and thin client terminals, manufacturing services, and software for the
Internet appliances ("IA") market.
Boundless Technologies, a wholly-owned subsidiary, is engaged in supplying
computer terminals for commercial use. The Company's general strategy is to
provide fast, easy-to-use, and cost-effective products that enable access to
applications and data in commercial environments, including Windows-based
applications, as well as older "legacy" applications, running on mainframes,
mid-range, and Unix systems.
Boundless Technologies principally designs, sells and supports (i) desktop
computer display terminals, which generally do not have graphics capabilities,
("General Display Terminals"); (ii) thin client desktop display devices which
enable access to Windows(R) computing environments ("Windows(R)-based Terminals"
or "WBTs") and supporting software; and (iii) 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. Standard and custom model thin clients and Windows(R)-based
Terminals are being marketed by Boundless primarily to manufacturing, healthcare
and social assistance, financial and insurance, wholesale trade, educational
services and public administration businesses with light processing requirements
and the need to provide concurrent information to customers on a variety of
topics, such as billing and current and historical product and service
information.
Boundless Manufacturing is pursuing opportunities in the electronic
manufacturing services ("EMS") marketplace. As of March 31, 2001, the Company
owned approximately 55% of the outstanding shares of common stock of this
subsidiary. Boundless Manufacturing operates from state-of-the-art ISO 9002
certified manufacturing facilities in Hauppauge, NY, and Boca Raton, FL, and
will acquire additional manufacturing facilities as the business expands.
Services include supply chain optimization, global supply base management, PCBA
assembly and test, systems assembly and test, distribution and logistics, repair
centers and end-of-life management. Boundless Manufacturing also offers in-house
engineering expertise- product design, test development, product development- to
significantly reduce time-to-market for original equipment manufacturers ("OEM")
customers. Boundless Manufacturing provides a complete supply chain that is
designed and built to each customer's specifications. Boundless Manufacturing
also has post-manufacturing support capability in Chicago, Atlanta, Los Angeles
and The Netherlands.
Boundless Manufacturing is focused on delivering a level of service and
commitment, to both middle-market OEMs, and start-up companies, that is
currently only available to top
6 of 18
tier customers from the larger EMS companies. 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 premise telco, office technology products, industrial
controls and custom or embedded "PC" applications.
On May 11, 2001, management decided to discontinue Merinta. See Note 8.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in first-out basis. The major components of inventories are as follows:
March 31, December 31,
2001 2001
------------ ------------
Raw materials and purchased components ............................................... $ 7,808 $ 8,006
Finished goods ....................................................................... 1,112 1,233
Service parts ........................................................................ 677 686
------------ ------------
Total inventories .................................................................... $ 9,597 $ 9,925
============ ============
4. Equity
At March 31, 2001 and December 31, 2000 stockholders' equity consisted of the
following:
March 31, December 31,
2001 2001
------------ ------------
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued .......................................................... $ -- $ --
Common Stock, $0.01 par value, 1,000,000 shares
authorized, 4,740,160 and 4,630,160 shares issued
at March 31, 2001 and December 31, 2000, respectively ............................ 47 46
Additional paid-in capital ........................................................... 34,326 34,102
Accumulated devicit .............................................................. (33,783) (28,397)
Accumulated other comprehensive loss ............................................. (105 --
------------ ------------
Total stockholders' equity ....................................................... $ 485 $ 5,751
============ ============
5. Major Customers
The Company markets its terminal products through original equipment
manufacturers ("OEMs") and reseller distribution channels. Customers can buy
Boundless' products from an international network of value-added resellers
(VARs) and regional distributors. Through its sales force, the Company sells
directly to large VARs and regional distributors and also sells to major
national and international distributors. For the first quarter ended March 31,
2001 and 2000, sales to two major OEMs as a percentage of total revenues were
16% and 19%, respectively.
6. Business Segments
The Company's manufacturing is conducted at its New York and Florida facilities
and its sales force operates from six geographically dispersed locations in the
United States and European offices in the Netherlands and United Kingdom.
Operating segments are identified as components of an enterprise about which
separate financial information is available for evaluation by its decision
making group. In line with the formation of its two new subsidiaries, effective
in 2000 the Company began managing its operations and reporting its financial
results as three business segments. However, due to the decision to discontinue
Merinta (see Note 8), only two continuing business segments remain. The results
of the reportable segments are derived from Boundless' management reporting
system. These results are based on Boundless' method of internal reporting and
are not necessarily in conformity with generally accepted accounting principles.
These results are used to evaluate the performance of each segment and determine
the appropriate resource allocation mix.
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Information for the current and prior year by business segment is presented
below (in thousands):
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
31-Mar-01 Total nations ogies/Corp. uring
--------------------------------------------------------------- ------------ ------------ ------------ ------------
Customer Revenue ............................................. $ 12,989 $ 9,472 $ 3,517
Intercompany Revenue ......................................... $ (6,556) 6,556
------------ ------------ ------------ ------------
Total Revenue ................................................ $ 12,989 $ (6,556) $ 9,472 $ 10,073
============ ============ ============ ============
Gross Margin ................................................. $ 1,548 $ (286) $ 2,165 $ (331)
============ ------------ ============ ============
Gross Margin percent ......................................... 11.9% 22.9% -3.3%
============ ============ ============
------------
Operating loss ............................................... $ (2,494) $ (458) $ (2,036)
============ ============ ============
Total assets by business segment ............................ $ 38,175 $ 16,884 $ 21,291
============ ============ ============
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
31-Mar-00 Total nations ogies/Corp. uring
--------------------------------------------------------------- ------------ ------------ ------------ ------------
Customer Revenue ............................................. $ 16,733 $ 15,329 $ 1,404
Intercompany Revenue ......................................... $ (9,376) 9,376
------------ ------------ ------------ ------------
Total Revenue ................................................ $ 16,733 $ (9,376) $ 15,329 $ 10,780
============ ============ ============ ============
Gross Margin ................................................. $ 3,903 $ -- $ 4,186 $ (283)
============ ------------ ============ ============
Gross Margin percent ......................................... 23.3% 27.3% -2.6%
============ ============ ============
------------
Operating income (loss) ...................................... $ 306 $ 1,154 $ (848)
============ ============ ============
Total assets by business segment ............................ $ 51,259 $ 25,883 $ 25,376
============ ============ ============
Pertinent financial data by major geographic segments for the first quarter
ended March 31, 2001 and 2000 are:
March 31, March 31,
2001 2000
------------ ------------
Net sales to unaffiliated customers:
United States .................................................................. $ 9,291 $ 12,184
United Kingdom ................................................................. 1,557 1,370
Other European countries ....................................................... 1,936 2,169
Other foreign areas ............................................................ 205 1,010
------------ ------------
Total sales .................................................................... $ 12,989 $ 16,733
============ ============
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7. Derivative Instruments
Effective January 1, 2001, the Company adopted FAS 133 as amended and
interpreted. FAS 133 requires that all derivative instruments, such as interest
rate swap contracts, be recognized in the financial statements and measured at
their fair market value. Changes in the fair market value of derivative
instruments are recognized each period in current operations or stockholders'
equity (as a component of accumulated other comprehensive loss), depending on
whether a derivative instrument qualifies as a hedge transaction.
In the normal course of business, the Company is exposed to changes in interest
rates. The objective in managing its exposure to interest rates is to decrease
the volatility that changes in interest rates might have on operations and cash
flows. To achieve this objective, the Company uses interest rate swaps to hedge
a portion of total long-term debt that is subject to variable interest rates and
designates these instruments as cash flow hedges. Under these swaps, the Company
agrees to pay fixed rates of interest. These contracts are considered to be a
hedge against changes in the amount of future cash flows associated with the
interest payments on variable-rate debt obligations. Accordingly, the interest
rate swaps are reflected at fair value in the Consolidated Balance Sheet and the
related gains or losses on these contracts, net of related income tax effect,
are recorded as a component of accumulated other comprehensive loss. The Company
does not enter into such contracts for speculative purposes and currently these
are the only derivative instruments held by the Company as of March 31, 2001.
The fair value of interest rate swap contracts are determined based on the
discounted estimated cash flows derived from the forward yield curve at the
inception of the swap versus the forward yield curve at the end of the reporting
period.
To the extent that any of these swaps are not completely effective in offsetting
the change in interest cash flows being hedged, the ineffective portion is
immediately recognized in interest expenses. Effectiveness is measured on a
quarterly basis using the cash flow method. No other cash payments are made
unless the contract is terminated prior to maturity, in which case, the amount
paid or received in settlement is established by agreement at the time of
termination.
The adoption of FAS 133 at January 31, 2001, resulted in recording $30 in
accumulated other comprehensive loss for the cumulative effect of the accounting
change. As of March 31, 2001, the Company had interest rate swap contracts to
pay fixed rates of interest (ranging from 8.18% to 9.35%) and receive variable
rates of interest based on LIBOR on an aggregate of $6,444 notional amount of
indebtedness with maturity dates ranging from March 2002 through March 2003. The
aggregate fair market value of all interest rate swap contracts was ($105) on
March 31, 2001 and is included in accrued expenses and other current liabilities
on the Consolidated Balance Sheet.
8. Discontinued Operations
On May 11, 2001, the Board of Directors of the Company formally approved a plan
to discontinue the operations of Merinta. Since November 2000, following an
investment by National Semiconductor in Merinta, the Company was prohibited from
contributing cash to the subsidiary. As a result, Merinta was required to fund
its working capital needs from the proceeds of the National Semiconductor
investment, cash generated from operations, and proceeds from any additional
investments. However, the cash generated from operations was not sufficient to
cover its operating needs and the Company was not successful in raising
additional equity investments to supplement the proceeds from National
Semiconductor. As of May 11, 2001, Merinta had cash on hand which the Company
believes is sufficient to execute an orderly shutdown of the subsidiary by June
17, 2001. The loss from discontinued operations for the period January 1
through March 31, 2001 was $2,466, compared to a loss of $2,871 for the same
three month period in 2000. The Company does not expect to record a loss on the
disposal of Merinta.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The numbers and percentages contained in this Item 2 are approximate. Dollar
amounts are stated in thousands.
First quarter of 2001 compared with first quarter of 2000
Revenue - Revenue for the quarter ended March 31, 2001 was $12,989 as compared
to $16,733 for the quarter ended March 31, 2000.
Sales of the Company's General Display Terminals declined 41% to $7,280 for the
quarter
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ended March 31, 2001 from $12,396 for the quarter ended March 31, 2000.
Declining demand for General Display Terminals as well as a disruption in the
supply chain causing component shortages were the main reasons for the decrease
in revenue.
During February 2001 the Company was advised that a majority ownership interest
in its primary supplier of plug-in logic boards, Tongkah, was being sold and
that new management desired to change the manufacturing profile of the company,
requiring that Tongkah eliminate the services provided to the Company. As a
result, the Company was required to move the production of its plug-in logic
boards to a new supplier, Goldtron (HK) Limited, located in mainland China. The
Company was subject to supply disruption due to the production transition;
however, as of April 17, 2001, Goldtron had successfully transitioned production
to its manufacturing facility and had achieved mass-production capability.
The Company believes the market for General Display Terminals will continue to
decline as customers move toward applications requiring graphical user
interfaces.
Revenues for the period ending March 31, 2001, from Boundless Manufacturing were
$3,517, excluding intercompany revenue, as compared to $1,404 for the period
ending March 31, 2000. The revenue growth is attributable both to the start-up
nature of Boundless Manufacturing during the first quarter of 2000, as well as
the beginning of production for significant customers during the first quarter
of 2001. The Company anticipates continued growth in revenues from this segment
of the business as Boundless Manufacturing executes its plan of offering a
complete and complementary line of services to both middle-market OEMs, and
start-up companies.
Sales of the Company's WBT hardware and software amounted to $2,167 versus
$2,845 for the periods ended March 31, 2001 and 2000, respectively. The Company
believes this decrease from the prior year is attributable to the lack of price
competitiveness of its product offering. The Company anticipates a year-to-year
increase for the remainder of this year as the Company introduces aggressive
targeted marketing programs, lower-priced products due to initiated cost
reduction programs, as well as increases due to the continued growth in the
overall market acceptance of thin client computing.
Net revenue from the Company's repairs and spare parts business for the quarter
ended March 31, 2001 was $551 as compared to $505 for the quarter ended March
31, 2000.
IBM and Compaq were the most significant customers for the Company's products,
accounting for 8% and 8% of revenue, respectively, for the quarter ended March
31, 2001.
Gross Margin - Gross margin for the three months ended March 31, 2001 was $1,548
(12% of revenue) compared to gross margin of $3,903(23% of revenue) for the
first quarter of 2000. The decrease in gross margin as a percent of revenue is
attributable to the decline in the General Display Terminals revenue, which
yields higher profit margins than the other product lines and business segments
of the Company. In addition, excess capacity at the Company's manufacturing
facilities resulted in under-absorbed overhead expenses of $536, or 4% of
revenue.
In a continuing effort to maintain and improve margins in an industry otherwise
characterized by commodity pricing, management has focused on quality,
flexibility, and product cost reductions. From time-to-time margins are
adversely affected by industry shortages of key components. The Company
emphasizes product cost reductions in its research and development activities
and frequently reviews its supplier relationships with the view to obtaining the
best component prices available.
The Company anticipates that increased sales of WBTs will negatively impact
gross margin due to the software license fees associated with the sale of this
product. Although asset management is a stronger indication of ultimate
profitability, the shift in revenue mix toward electronic manufacturing services
will also adversely affect gross margin as a percent of revenue. 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.
Total Operating Expenses - For the quarter ended March 31, 2001, operating
expenses increased 12% to $4,042 (31% of revenue), compared to expenses for the
first quarter of 2000 of $3,597(21% of revenue). This increase is attributable
to $695 in additional expenses associated with the Company's Boundless
Manufacturing subsidiary.
Sales and Marketing Expenses - Sales and marketing expenses increased 7% to
$1,772 (14% of revenue) for the quarter ended March 31, 2001 from $1,659 (10% of
revenue) for the quarter ended March 31, 2000. This increase was mainly due to
additional sales and program
10 of 18
management personnel needed for the newly formed Boundless Manufacturing
business.
The Company promotes its products using media advertising, direct mail,
telemarketing, public relations and cooperative channel marketing programs. The
Company's installed base of over five million units is the primary target market
for its new line of WBTs. The Company's plan to reach this market is based on
direct mail, telemarketing and advertising and an aggressive public relations
campaign, including several domestic and international press tours.
General and Administrative Expenses - General and administrative expenses
increased to $1,847 (14% of revenue), from $1,581 (9% of revenue) for the three
months ended March 31, 2001 and 2000, respectively. Additional goodwill
amortization in the amount of $179 was recorded in the first quarter of 2001 as
compared to the first quarter of 2000.
Research and Development Expenses - Research and development expenses for the
first quarter increased slightly to $401 in 2001 from $351 in 2000.
Interest Expense, net - Interest expense, net for the quarter ended March 31,
2001 was $426 compared to $155 for the comparable period in 2000. This
year-to-year variance is mainly due to $197 of interest income received from the
IRS during the first quarter of 2000.
Loss From Discontinued Operations- The loss from discontinued operations, net of
applicable income taxes, for the period January 1 through March 31, 2001 was
$2,466 relating to the Company's decision to discontinue the operations of
Merinta. For the period ending March 31, 2000, the loss from discontinued
operations, net of applicable income taxes was $2,871. The period ending March
31, 2000, represented Merinta's first quarter of operation. The Company believes
that the net liabilities related to discontinued operations approximates the
liabilities that the parent company has guaranteed to third parties. The Company
does not expect to record a loss on the disposal of Merinta.
Income Tax Expense - For the first quarter of 2001 and 2000, the Company did not
record an income tax credit against the recorded loss before income taxes of
$5,386 and $2,720, respectively. As a result of uncertainties as to whether the
related future tax benefits will be realized, the Company has provided for a
100% valuation allowance against the deferred tax assets attributable to these
losses.
Net Income (Loss)- For the quarter ended March 31, 2001, the Company recorded a
net loss of $(5,386), compared to net loss of $(2,720) for the quarter ended
March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The discussion below regarding liquidity and capital resources should be read
together with the information included in the Notes to Consolidated Financial
Statements.
As of March 31, 2001, the Company had a working capital deficiency of $364 as
compared to working capital of $5,881 at December 31, 2000. Historically, the
Company has relied on cash flow from operations, bank borrowings and sales of
its common stock to finance its working capital, capital expenditures and
acquisitions.
On May 25, 2000, the Company signed an agreement with The Chase Manhattan Bank
("Chase") amending and restating the existing credit line to add as co-borrowers
Boundless Manufacturing and Merinta. Terms of the credit line (the "Chase Credit
Line") were substantially similar to those previously in effect. The Chase
Credit Line also provides for a $4,000 term loan, payable over a three-year
period in equal quarterly installments beginning June 1999. The credit line
expires April 14, 2003. On November 16, 2000, in connection with the equity
investment secured for Merinta, the Company amended the revolving credit line
entered into May 25, 2000. The amendment, amongst other things, excluded
Merinta's accounts receivable and inventory from the borrowing base formula and
prohibited the company from contributing cash toward Merinta's operating
expenses. On April 17, 2001, the Chase Credit Line was further amended,
including a reduction in the overall amount of the line from $15,000 to $12,000
as well as an immediate reduction in the amount of the line which could be
collateralized by inventory from $5,000 to $3,800, to be reduced further by $100
per month beginning August 1, 2001.
The Company is highly leveraged. As of March 31, 2001, the Company had negative
tangible net worth of $4,384 and total liabilities of $37,690. The Company's
liabilities at March 31, 2001 included repayment of a revolving loan of $7,710
plus interest maturing April 2003, a term loan in the amount of $933 plus
interest due in equal monthly installments through December 2001, and a ten-year
promissory note in the amount of $6,093 which requires monthly principal and
interest payments through July 1, 2009.
Borrowing under the revolving loan is based on a borrowing base formula of up to
80% of eligible receivables, plus 50% of delineated eligible inventory, plus 30%
of non-delineated eligible inventory. Up to $5,000 is available under the
revolving loan for letters of credit. As a result of the borrowing base formula,
the credit available to the Company could be adversely restricted in the event
of further declines in the Company's sales and increases in orders may not be
able to be financed under the Company's revolving credit line.
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Boundless has an agreement with a commercial lender for a loan secured by a
mortgage on the Boundless facility located in Hauppauge, NY. The loan, which is
in the principal amount of $6,689 and carries a fixed interest rate of 7.75%, is
being amortized over a 25-year period with a balloon payment due on July 1,
2009. The monthly payments are approximately $50. To induce the lender to make
the loan, the Company executed and delivered a guaranty of Boundless'
obligations to the lender.
In connection with the acquisition of the manufacturing assets of Boca Research,
Inc. on March 6, 2000 the Company signed a $1,000 note bearing interest at 6%
per annum and due March 6, 2002. The note is payable in equal quarterly amounts
plus accrued interest. As of March 31, 2001, the balance of the note was $500.
In connection with the creation of Merinta, the Company assigned certain
contracts, to which it was a party, to Merinta. In some instances the Company,
to accomplish the assignment, guaranteed Merinta's performance of the contract.
Particularly, the Company is a guarantor of a software license contract
requiring monthly payments by Merinta of approximately $148 throughout 2001. As
of May 7, 2001, Merinta was in default of the agreement, having not made the
mandatory monthly payment since January 2001. The Company is currently
negotiating a paydown schedule with the software vendor. The Company leases
approximately 15,630 square feet of office space in Austin, Texas, utilized by
Merinta. The lease for this facility expires December 31, 2005. The current
annual rent for the Austin facility is approximately $359. The Company is
negotiating a sublease of this facility; but there can be no assurance the
company will sublease the Austin space.
In the event there is a further decline in the Company's sales and earnings
and/or a decrease in availability under the credit line, the Company's cash flow
would be adversely affected. Accordingly, the Company may not have the necessary
cash to fund all of its obligations.
Net cash used in operating activities before discontinued operations for the
three months ended March 31, 2001 was $3,972 attributable to a loss of $2,920, a
net change in assets and liabilities of discontinued operations of $3,386, an
increase in accounts receivable of $556 and increases other assets of $26. These
uses of cash were partially offset by non-cash expenses (principally
depreciation) of $895, a reduction of inventory of $331 and increases in
payables and accrued expenses of $1,471. Net cash used in investing activities
was comprised of capital expenditures of $177. Net cash provided by financing
activities included funding from the Company's revolving loan, which had a net
increase of $936 and issuance of common stock in the amount of $226. This was
partially offset by payments on other loans and lease obligations in the amount
of $577.
Impact of Inflation - The Company has not been adversely affected by inflation
because technological advances and competition within the microcomputer industry
have generally caused prices of products sold by the Company to decline. The
Company has flexibility in its pricing and could, if necessary, pass along price
changes to most of its customers.
Factors That Could Affect Future Results
Competition. The Company encounters aggressive competition in all areas of its
business. The Company has numerous competitors, ranging from some of the world's
largest corporations to many relatively small and highly specialized firms. The
Company competes primarily on the basis of technology, performance, price,
quality, reliability, distribution and customer service and support. Product
life cycles are short. To remain competitive, the Company must be able to
develop new products and periodically enhance its existing products. In
particular, the Company anticipates that it will have to continue to lower the
prices of many of its products to stay competitive and effectively manage
financial returns with resulting reduced gross margins. In some of the Company's
markets, it may not be able to compete successfully against current and future
competitors, and the competitive pressures it faces could harm its business and
prospects.
New Product Introductions. If the Company cannot continue to rapidly develop,
manufacture and market innovative products and services that meet customer
requirements for performance and reliability, it may lose market share and its
future revenue and earnings may suffer. The process of developing new high
technology products and services is complex and uncertain. The Company must
accurately anticipate customers' changing needs and emerging technological
trends. The Company consequently must make long-term investments and commit
significant resources before knowing whether its predictions will eventually
result in products that the market will accept. After a product is developed,
the Company must be able to manufacture sufficient volumes quickly at low enough
costs. To do this, the Company must accurately forecast volumes, mix of products
and configurations. Additionally, the supply and timing of a new product or
service must match customers' demand and timing for the particular product or
service. Given the wide variety of systems, products and services that Boundless
offers, the process of planning production and managing inventory levels becomes
increasingly difficult.
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Reliance on Third Party Distribution Channels and Inventory Management. The
Company uses third-party distributors to sell its products. As a result, the
financial soundness of its wholesale and retail distributors, and its continuing
relationships with these distributors, are important to the Company's success.
Some of these distributors may have insufficient financial resources and may not
be able to withstand changes in business conditions. The Company's revenue and
earnings could suffer if its distributors' financial condition or operations
weaken or if its relationship with them deteriorates. Additionally, inventory
management becomes increasingly complex as the Company continues to sell a
significant mix of products through distributors. Third party distributors
constantly adjust their product orders from the Company in response to:
o The supply of the Company's and its competitors' products available to the
distributor, and
o The timing of new product introductions and relative features of the
products.
Distributors may increase orders during times of product shortages, cancel
orders if their inventory is too high or delay orders in anticipation of new
products. If the Company has excess inventory, the Company may have to reduce
its prices and write down inventory, which in turn could result in lower gross
margins.
Short Product Life Cycles. The short life cycles of many of the Company's
products pose a challenge for it to manage effectively the transition from
existing products to new products. If the Company does not manage the transition
effectively, its revenue and earnings could suffer. Among the factors that make
a smooth transition from current products to new products difficult are delays
in product development or manufacturing, variations in product costs and delays
in customer purchases of existing products in anticipation of new product
introductions. The Company's revenue and earnings could also suffer due to the
timing of product or service introductions by its suppliers and competitors.
Further, the Company's new products may replace or compete with certain of its
own current products.
Intellectual Property. The Company generally relies upon patent, copyright,
trademark and trade secret laws in the United States and in certain other
countries, and agreements with its employees, customers and partners, to
establish and maintain its proprietary rights in its technology and products.
However, any of the Company's intellectual proprietary rights could be
challenged, invalidated or circumvented. The Company's intellectual property may
not necessarily provide significant competitive advantages. Also, because of the
rapid pace of technological change in the information technology industry, many
of the Company's products rely on key technologies developed by third parties,
and the Company may not be able to continue to obtain licenses from these third
parties. Third parties may claim that the Company is infringing their
intellectual property. Even if the Company does not believe that its products
are infringing third parties' intellectual property rights, the claims can be
time-consuming and costly to defend and divert management's attention and
resources away from its business. Claims of intellectual property infringement
might also require the Company to enter into costly royalty or license
agreements. If the Company cannot or does not license the infringed technology
or substitute similar technology from another source, its business could suffer.
Reliance on Suppliers. The Company's manufacturing operations depend on its
suppliers' ability to deliver quality components and products in time for it to
meet critical manufacturing and distribution schedules. The Company sometimes
experiences a short supply of certain component parts as a result of strong
demand in the industry for those parts. If shortages or delays persist, its
operating results could suffer until other sources can be developed. In order to
secure components for the production of new products, at times the Company makes
advance payments to suppliers, or the Company may enter into noncancelable
purchase commitments with vendors. If the prices of these component parts then
decrease after the Company has entered into binding price agreements, its
earnings could suffer. Further, the Company may not be able to secure enough
components at reasonable prices to build new products in a timely manner in the
quantities and configurations needed. Conversely, a temporary oversupply of
these parts could also affect its operating results.
International. Sales outside the United States make up more than 25% of the
Company's revenues. In addition, key suppliers are also located outside of the
United States. The Company's future earnings or financial position could be
adversely affected by a variety of international factors, including:
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o Changes in a country or region's political or economic conditions,
o Trade protection measures,
o Import or export licensing requirements,
o The overlap of different tax structures,
o Unexpected changes in regulatory requirements,
o Differing technology standards,
o Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section below), and
o Natural disasters.
Market Risk. The Company is exposed to foreign currency exchange rate risk
inherent in the Company's sales commitments, anticipated sales and assets and
liabilities denominated in currencies other than the U.S. dollar. The Company is
also exposed to interest rate risk inherent in its debt and investment
portfolios. The Company's risk management strategy uses derivative financial
instruments, primarily interest rate swaps, to hedge certain interest rate
exposures. The Company's intent is to offset gains and losses that occur on the
underlying exposures, with gains and losses on the derivative contracts hedging
these exposures. The Company does not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows;
however, foreign currency transaction gains or losses have not been material to
the Company's results of operations. The Company does not enter into derivatives
for trading purposes.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. In the
normal course of business, the Company frequently engages in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The completion of any one transaction may have a
material effect on the Company's financial position, results of operations or
cash flows taken as a whole. Divestiture of a part of the Company's business may
result in the cancellation of orders and charges to earnings. Acquisitions and
strategic alliances may require the Company to integrate with a different
company culture, management team and business infrastructure. The Company may
also have to develop, manufacture and market products with its products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, the Company's successful
integration of the entity into Boundless depends on a variety of factors,
including:
o The hiring and retention of key employees,
o Management of facilities in separate geographic areas, and
o The integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which may
divert the Company's attention from other business operations.
Environmental. Some of the Company's operations use substances regulated under
various federal and state laws governing the environment. It is the Company's
policy to apply strict standards for environmental protection to sites inside
and outside the U.S., even when not subject to local government regulations. The
Company records a liability for environmental remediation and related costs when
the Company considers the costs to be probable and the amount of the costs can
be reasonably estimated. Environmental costs are presently not material to the
Company's results of operations or financial position.
Profit Margin. The Company's profit margins vary somewhat among its products,
customer groups and geographic markets. Consequently, the Company's overall
profitability in any given period is partially dependent on the product,
customer and geographic mix reflected in that period's net revenue.
Stock Price. Boundless' stock price, like that of other technology companies,
can be volatile. Some of the factors that can affect its stock price are:
o The Company's, or a competitor's, announcement of new products, services or
technological innovations,
o Quarterly increases or decreases in the Company's earnings,
o Changes in revenue or earnings estimates by the investment community, and
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o Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect Boundless' stock price.
For these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted. This type of litigation could result in substantial
costs and the diversion of management time and resources.
Earnings Fluctuations. Although the Company believes that it has the products
and resources needed for continuing success, the Company cannot reliably predict
future revenue and margin trends. Actual trends may cause the Company to adjust
its operations, which could cause period-to-period fluctuations in its earnings.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Form 10-Q contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will," and similar expressions are intended to identify forward-looking
statements. Such statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described in the Company's Form 10-K for the
year ended December 31, 2000. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements and
information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's revolving credit facility and long-term debt
obligations. The Company manages this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. At March 31, 2001 the Company had in place interest rate swap
agreements in the amount of $6,444 at an effective average interest rate of
8.62%. Of this dollar amount, $933 represents an effective hedge of the
Company's exposure to interest rate changes against the outstanding balance of
the term loan; and such swap amount shall amortize in concert with the term loan
payment schedule. The remaining balance of the swap agreement is intended as an
effective hedge to interest rate changes against the outstanding balance of the
Company's Revolving Loan.
The Company places its investments with high credit quality issuers and, by
policy, is averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk and reinvestment risk.
As of March 31, 2001 the Company's investments consisted of cash balances
maintained in its corporate account with the Chase Manhattan Bank.
All sales arrangements with international customers are denominated in U.S.
dollars. These customers are permitted to elect payment of their next month's
orders in local currency based on an exchange rate provided one month in advance
from the Company. The Company does not use foreign currency forward exchange
contracts or purchased currency options to hedge local currency cash flows or
for trading purposes. Foreign currency transaction gains or losses have not been
material to the Company's results of operations.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On February 23, 2001, the Company sold to three individuals 110,000 shares
of unregistered Common Stock of the Company for proceeds of $225,000. Of
the 110,000 shares, 85,612 shares were sold to two employees of the
Company, one of whom was an executive officer. In connection with this
sale, the Company granted to the three individuals warrants to purchase
27,500 shares of the Company's Common Stock. The warrants are exercisable
at $2.40 per share of Common Stock and expire on the fourth anniversary
from the date of issuance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1: Fourth Amendment, dated as of March 21, 2001, to Second Amended
and Restated Credit Agreement and Guaranty with Chase.
Exhibit 10.2: Fifth Amendment and Waiver, dated as of April 17, 2001, to
Second Amended and Restated Credit Agreement and Guaranty with Chase.
Exhibit 11: Statement Concerning Computation of Per Share Earnings is
hereby incorporated by reference to "Condensed Consolidated Statements of
Operations" of Part I-Financial Information, Item 1 - Financial Statements,
contained in this Form 10-Q.
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 2001
Boundless Corporation
By: /s/Joseph Gardner
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Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)