SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30,2000
Commission File Number 0-17977
BOUNDLESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of Incorporation or Organization)
13-3469637
(I.R.S. Employer Identification No.)
100 Marcus Blvd.
Hauppauge, NY
(Address of principal executive offices)
11788
(Zip Code)
(631 342-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
As of September 30,2000, the Registrant had approximately 4,626,571 shares of
Common Stock, $.01 par value per share outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 .........................................................3
Consolidated Statements of Operations (unaudited)
for the threee and nie months ended September 30, 2000 and 1999 ...........4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and 1999 .....................5
Notes to Consolidtaed Financial Statements (unaudited) .......................6
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<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- ---------------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents ......................................................... $ 776 $ 1,285
Trade accounts receivable, net..................................................... 11,202 12,378
Income tax refund ................................................................. - 833
Inventories........................................................................ 9,890 13,751
Deferred income taxes.............................................................. 2,576 2,576
Prepaid expenses and other current assets.......................................... 2,176 1,039
------------------- ---------------------
Total current assets............................................................ 26,620 31,862
Property and equipment, net .......................................................... 11,508 10,987
Goodwill, net ........................................................................ 5,445 6,272
Other assets ......................................................................... 1,682 1,339
------------------- ---------------------
$ 45,255 $ 50,460
=================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................................. $ 2,346 $ 1,650
Accounts payable .................................................................. 7,588 6,148
Accrued expenses .................................................................. 5,441 5,565
Deferred revenue .................................................................. 658 557
------------------- ---------------------
Total current liabilities ...................................................... 16,033 13,920
------------------- ---------------------
Long-term liabilities:
Long-term debt, less current maturities ........................................... 16,174 14,206
Deferred income taxes ............................................................. 281 281
Other ............................................................................. 717 638
------------------- ---------------------
Total long-term liabilities .................................................... 17,172 15,125
------------------- ---------------------
Total liabilities .............................................................. 33,205 29,045
Stockholders' equity:
Preferred stock ................................................................... - -
Common stock ...................................................................... 46 45
Additional paid-in capital ........................................................ 34,073 32,508
Accumulated deficit ............................................................... (22,069) (11,138)
------------------- ---------------------
Total stockholders' equity ..................................................... 12,050 21,415
------------------- ---------------------
$ 45,255 $ 50,460
=================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
--------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue....................................... $ 56,190 $61,256 $16,047 $19,970
Cost of revenue............................... 46,947 43,610 13,530 14,011
--------------- ------------- ------------- -------------
Gross margin....................... 9,243 17,646 2,517 5,959
--------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing........................ 8,598 7,303 2,773 2,910
General and administrative................. 6,614 4,859 2,318 1,475
Research and development................... 4,738 3,884 1,863 1,489
Other (credits)............................ (499) (2,832) (488) (2,282)
--------------- ------------- ------------- -------------
Total operating expenses................ 19,451 13,214 6,466 3,592
--------------- ------------- ------------- -------------
Operating income (loss)............ (10,208) 4,432 (3,949) 2,367
Interest expense, net...................... 979 1,110 461 359
Other expense (credits).................... (256) 101 - -
--------------- ------------- ------------- -------------
Income (loss) before income taxes............. (10,931) 3,221 (4,410) 2,008
Income tax expense............................ - 1,226 - 765
--------------- ------------- ------------- -------------
Net income (loss)............................. (10,931) 1,995 (4,410) 1,243
Dividend on preferred stock of subsidiary..... - 51 - -
--------------- ------------- ------------- -------------
Net income (loss) available for common
stockholders................................ $(10,931) $ 1,944 $(4,410) $ 1,243
=============== ============= ============= =============
Weighted average common shares outstanding.... 4,532 4,432 4,542 4,438
=============== ============= ============= =============
Basic net income (loss) per common share...... $ (2.41) $ 0.44 $ (0.97) $0.28
=============== ============= ============= =============
Weighted average dilutive shares outstanding.. 4,532 4,456 4,542 4,461
=============== ============= ============= =============
Diluted net income (loss) per common share.... $ (2.41) $ 0.44 $ (0.97) $0.28
=============== ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................ $ (10,931) $ 1,995
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................................... 2,172 1,597
(Gain) loss on the disposition of assets .............................. (235) 22
Deferred revenue ...................................................... 101 318
Provision for doubtful accounts ....................................... 245 313
Provision for excess and obsolete inventory ........................... 911 1,462
Options and warrants issued for services .............................. 184 272
Changes in assets and liabilities:
Trade accounts receivable ............................................. 931 (3,528)
Income tax refunds .................................................... 833 555
Inventories ........................................................... 2,949 (595)
Other assets .......................................................... (1,661) (1,206)
Accounts payable and accrued expenses ................................. 1,407 307
------------- --------------
Net cash provided by (used in) operating activities ......................... (3,094) 1,512
------------- --------------
Cash flows from investing activities:
Capital expenditures ..................................................... (1,364) (753)
Proceeds from the sale of property ....................................... 1,538 -
------------- --------------
Net cash (used in) investing activities ..................................... 174 (753)
------------- --------------
Cash flows from financing activities:
Payment of mandatorily redeemable preferred stock......................... - (3,555)
Proceeds from exercise of stock options .................................. 1,383 55
Net proceeds from issuance of debt ....................................... 4,400 10,065
Payments on loans payable and capital leases ............................. (3,372) (8,000)
Payment of preferred stock dividend ...................................... - (51)
------------- --------------
Net cash provided by (used in) financing activities ......................... 2,411 (1,486)
------------- --------------
Net decrease in cash and cash equivalents ................................... (509) (727)
Cash and cash equivalents at beginning of year .............................. 1,285 732
------------- --------------
Cash and cash equivalents at end of period .................................. $ 776 $ 5
------------- --------------
Non-cash transactions:
Options, warrants and common stock issued for services ................... $ 184 $ 272
Equipment acquisitions funded through debt ............................... 1,636 -
Cash paid for:
Interest ................................................................. 952 1,035
Taxes .................................................................... 325 370
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
BOUNDLESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts 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 (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, 1999.
2. Background
Boundless Corporation (the "Company") is engaged, through its subsidiary,
Boundless Technologies, Inc. ("Boundless"), in designing and selling computer
terminals for business use. The Company's general strategy is to provide access
to corporate computing environments, including mainframes, LANs, WANs, intranets
and the Internet. Boundless principally designs, sells and supports (i) General
Display Terminals, (ii) Windows(R)-based Terminals ("WBTs"), sometimes referred
to as "thin clients", and (iii) other terminal products that are used in
multi-user, personal computer and mini-computer-based environments.
On September 23, 1999, the Company created a new subsidiary, Boundless
Manufacturing Services, Inc. ("Boundless Manufacturing"), which pursues
opportunities in the electronic manufacturing services ("EMS") marketplace.
Boundless Manufacturing utilizes the Company's state-of-the-art ISO 9002
certified manufacturing facility in Hauppauge and ISO 9002 compliant facility in
Boca Raton and will acquire additional manufacturing facilities as the business
expands. 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, 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.
On January 12, 2000, the Company created a new subsidiary, Merinta, Inc.
("Merinta"), a provider of enabling software and technologies for Internet
appliances ("IA"). Merinta develops solutions to offer end-users an easy,
enjoyable and visually rich Internet browsing experience while providing
companies with a revolutionary way to market and grow online business. Merinta
intends to initially market and sell software and services to corporations
including financial services institutions, service providers, and
telecommunications companies allowing these companies to provide their best
customers with a customized IA solution that should increase brand awareness,
customer loyalty and retention as well as decrease costs for acquiring
customers. Merinta intends to license the software on a variety of operating
systems- including Linux and Microsoft Windows CE. Merinta offers complementary
services to other consumer device manufacturers, accelerating the IA market for
these organizations.
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:
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<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Raw materials and purchased components ............. $ 7,750 $ 11,620
Finished goods ..................................... 1,494 1,719
Demonstration equipment ............................ 3 51
Service parts ...................................... 643 361
---------- -----------
Total inventories .................................. $ 9,890 13,751
========== ===========
</TABLE>
4. Equity
At September 30, 2000 and December 31, 1999 stockholders' equity consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued .......................... $ - $ -
Common stock, $0.01 par value, 25,000,000 shares
authorized, 4,626,571 and 4,457 662 shares issued
at September 30, 2000 and December 31, 1999,
respectively. .................................... 46 45
Additional paid-in capital ......................... 34,073 32,508
Accumulated deficit ................................ (22,069) (11,138)
---------- -----------
Total stockholders's equity ...................... $ 12,050 $ 21,415
========== ===========
</TABLE>
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 third quarter ended September
30, 2000 and 1999, sales to three major OEMs as a percentage of total revenues
were 30% and 23%, 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 the current year the Company has begun managing its operations and reporting
its financial results as three business segments. 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.
Information for the current year by business segment is presented below (in
thousands):
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<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Boundless Boundless
Three Months Ended Elimi- Technol- Manufact-
September 30, 2000 Total nations ogies uring Merinta
--------------------------------------- ---------------- ---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Customer Revenue.................. $ 16,047 $13,160 $ 2,711 $ 176
Intersegment ..................... $ (8,876) 8,876
---------------- ---------------- --------------- -------------- -------------
Total Revenue..................... $ 16,047 $ (8,876) $13,160 $11,587 $ 176
================ ================ =============== ============== =============
Gross Margin...................... $ 2,517 $ 3,910 $ 77 $ (1,470)
================ =============== ============== =============
Gross Margin percent.............. 15.7% 29.7% 2.8% -835.2%
================ ============================================
Operating income (loss)........... $ (3,949) $ 1,351 $ (877) $ (4,423)
================ =============== ============== =============
<CAPTION>
Boundless Boundless
Nine Months Ended Elimi- Technol- Manufact-
September 30, 2000 Total nations ogies uring Merinta
--------------------------------------- ---------------- ---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Customer Revenue.................. $ 56,190 $42,993 $ 7,090 $ 6,107
--------------- -------------- -------------
Intersegment ..................... $(33,493) 33,493
---------------- ---------------- --------------- -------------- -------------
Total Revenue..................... $ 56,190 $(33,493) $42,993 $40,583 $ 6,107
================ ================ =============== ============== =============
Gross Margin...................... $ 9,243 $12,744 $ (360) $ (3,141)
================ --------------- -------------- -------------
Gross Margin percent.............. 16.4% 29.6% -5.1% -51.4%
================ ============================================
Operating income (loss)........... $(10,208) $ 3,832 $(2,591) $(11,449)
================ =============== ============== =============
Total assets by business segment $ 45,255 $22,079 $20,593 $ 2,583
================ =============== ============== =============
</TABLE>
7. Comprehensive Income
The Company has no material components of other comprehensive income and
accordingly, net income (loss) approximates comprehensive income (loss) for the
periods ended September 30, 2000 and 1999.
8. Subsequent Events
On November 8, 2000, the Company announced it had received a $5,000 equity
investment in its Merinta subsidiary from National Semiconductor Corporation
("National"). As part of a non-exclusive agreement, Merinta agreed to develop
and optimize its solutions for hardware platforms based on National's Geode(TM)
technologies, while National agreed to bundle Merinta's technology into upcoming
development kits sold to design houses and OEMs. The two companies will
co-market their solutions creating deployment programs tailored to meet their
customers' specific needs.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The numbers and percentages contained in this Item 2 are approximate. Dollar
amounts are stated in thousands.
For the Three and Nine Month Periods Ended September 30, 2000
Revenue - Revenue for the quarter ended September 30, 2000 was $16,047 as
compared to $19,970 for the quarter ended September 30,1999. Revenue for the
nine months ended September 30 was $56,190 for 2000 versus $61,256 for 1999.
Sales of the Company's General Display Terminals declined 33% to $10,719 for the
quarter ended September 30, 2000 from $16,043 for the quarter ended September
30, 1999. The decline for the latest quarter is principally attributable to a
decline of $1,733 in sales to VT and Dorio distributors and a decline of $1,074
in sales to IBM. On a year-to-date basis, revenue for General Display Terminals
declined 31% to $34,504 from $50,313 for the periods ended September 30,2000 and
1999 respectively. The Company believes the market for General Display Terminals
will continue to decline as customers move toward applications requiring
graphical user interfaces.
Sales of the Company's WBT hardware and software amounted to $2,441 versus
$3,325 for the periods ended September 30, 2000 and 1999, respectively. Revenue
for the nine months ended September 30, 2000 were $8,459 as compared to $9,253
for the nine months ended September 30, 1999. Discontinuation of the Viewpoint
TC product line, production delays associated with the Company's recently
announced Capio(R) II WBT, market driven pricing pressures and a general
slowdown in European sales have all contributed to the year-to-year decline.
During the third quarter the Company's Merinta subsidiary recognized revenues of
$176 from the shipment of its recently released IA solution. Revenue for the
nine months ended September 30, 2000 were $6,107. Of the total revenue
recognized, $5,452 represented hardware sales and $655 represented sales of
Merinta's software solution.
Net revenue from the Company's repairs and spare parts business was $537 for the
quarter ended September 30, 2000, down from $602 for the quarter ended September
30, 1999. For the nine months ended September 30, 2000, repairs and spare parts
sales were $1,490 versus $1,640 for the comparable period in 1999. The decline
in the current year compared to 1999 stems from the overall decline in sales of
General Display terminals over the past years as well as an increase in the
reliability of the Company's product offerings.
Boca Research, IBM and Digital were the most significant customers for the
Company's products, accounting for 12%, 11% and 6% of revenue respectively, for
the quarter ended September 30, 2000. The loss of any of these as a customer,
and as a distribution channel for the Company's products, would have a material
adverse effect on the Company's results of operations and liquidity.
Gross Margin - Gross margins for the three and nine months ended September 30,
2000 were $2,517 (16% of revenue) and $9,243 (16% of revenue) respectively, as
compared to gross margins of $5,959 (30% of revenue) and $17,646 (29% of
revenue) for the comparable periods in 1999. The decrease in gross margin as a
percent of revenue is attributable to startup costs for the IA segment as well
as the new Boundless Manufacturing operations in Boca Raton, Florida.
The gross margin loss associated with the sale of IA software and solutions
during the nine months ending September 30, 2000 was $(3,141) or 51.4% of IA
revenue. During the third quarter of 2000 the Company recorded an expense of
$1,207 to reserve for potential excess IA inventory which was uniquely designed
for one customer. Also contributing to the nine-month gross margin loss are
component price increases from the supply chain which could not be passed to the
customer as well as a decision by Merinta to subsidize the hardware in order to
build an installed base of customers from which the IA concept and solution
could be validated. Manufacturing costs and variances associated with the
Company's new subsidiaries are expected to cause continued margin pressure for
the remainder of this year.
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
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<PAGE>
research and development activities and frequently reviews its supplier
relationships with the view to obtaining the best component prices available.
Total Operating Expenses - For the quarter ended September 30, 2000, operating
expenses were $6,466 (40% of revenue), compared to expenses for the third
quarter of 1999 of $3,592 (18% of revenue). For the nine months ended September
30, 2000, operating expenses were $19,451 (35% of revenue) compared to expenses
in the comparable period in 1999 of $13,214 (22% of revenue). The year-to-year
increases for the first nine months are attributable to $2,628 of expenses
associated with the Company's Boundless Manufacturing subsidiary, as well as
$6,468 of expenses associated with the Company's Merinta subsidiary. Operating
expenses for the first nine months of 1999 also included income of $2,324 for a
recovery on a partnership settlement.
Sales and Marketing Expenses - Sales and marketing expenses were $2,773 (17% of
revenue) for the quarter ended September 30, 2000 versus $2,910 (15% of revenue)
for the quarter ended September 30, 1999. Expenses for the first nine months
were $8,598 in 2000 versus $7,303 in 1999. This year-to-year increase is
attributable to expanded marketing programs and personnel needed to launch our
new Internet appliances subsidiary. Total Sales and Marketing expenses for this
segment amounted to $947 for the quarter ended September 30, 2000 and $2,993 for
the first nine months of the year.
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 of General Display Terminals
is the primary target market for its WBTs. The Company's plan to reach this
market is based on direct mail, telemarketing and advertising.
General and Administrative Expenses - General and administrative expenses
increased to $2,318 (14% of revenue), from $1,475 (7% of revenue) for the three
months ended September 30, 2000 and 1999, respectively. Expenses for the
nine-month period were $6,614 in 2000 versus $4,859 in 1999. The increase is
mainly due to the hiring of additional executive personnel for management of the
Company's newly created subsidiary, Boundless Manufacturing and provisions for a
newly instituted Company-wide employee bonus program.
Research and Development Expenses - Research and development expenses for the
third quarter increased 25% to $1,863 in 2000 from $1,489 in 1999. Expenses for
the nine-month period ended September 30, 2000 were $4,738, compared to $3,884
in the comparable period in 1999. The increase in the first nine months is
related to $3,474 of development expenses associated with the Company's IA
segment offset in part, by reductions in development work being done on the
Company's terminals business.
Other (credits) - During the third quarter of 2000 the Company reduced Compaq
warranty liabilities amounting to $326 due to expiration of the warranty period
and $206 of unused 1999 accrued cooperative marketing programs. Other credits
for the third quarter of 1999 also included income of $2,324 for a recovery on a
partnership settlement.
Interest Expense, net - Interest expense, net for the quarter ended September
30, 2000 was $461 compared to $359 for the comparable period in 1999. This
increase was mainly due to an increase in the amount of outstanding debt.
Interest expense, net for the nine months was $979 in 2000 versus $1,110 in
1999. This decrease was mainly due to interest income earned from both an IRS
refund and on two notes receivable.
Income Tax Expense - For the first nine months of 2000, the Company did not
record an income tax credit against the recorded loss before income taxes of
$(10,931). Given the short operating history of the Company's new subsidiaries,
there can be no assurance that the deferred tax asset resulting from the losses
would result in future tax benefits. As a result, the Company has provided for a
100% valuation allowance against the deferred tax asset attributable to these
respective losses.
Net Income (Loss)- For the quarter ended September 30, 2000, the Company
recorded a net loss of $(4,410) compared to $1,243 of net income for the
comparable period in 1999. The net loss for the nine months ended September 30
was $(10,931) compared to $1,995 of net income in 1999.
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.
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<PAGE>
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 September 30, 2000, the Company had working capital of $10,587 as compared
to $17,942 at December 31, 1999. 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.
The Company is highly leveraged. As of September 30, 2000, the Company had
tangible net worth of $6,065 and total liabilities of $33,205. The Company's
cash requirements at September 30, 2000 included repayment of a revolving loan
of $9,000 plus interest, a term loan in the amount of $1,600 plus interest and a
ten-year promissory note in the amount of $6,142 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.
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 $6,142 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, Boundless Manufacturing issued 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 September 30, 2000 the remaining
balance on the note payable was $750.
In connection with the equity investment secured for Merinta, the Company is in
the process of amending the revolving credit line entered into May 25, 2000. The
amendment will, amongst other things, exclude Merinta's accounts receivable and
inventory from the borrowing base formula and prohibit the company from
contributing cash toward Merinta's operating expenses.
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
adversely affected. Accordingly, the Company may not have the necessary cash to
fund all of its obligations.
Due to the level of investment made in Merinta during the current year, the
Company violated certain financial covenants as of the quarter ended September
30, 2000. The Company's lenders have waived the violations contingent on the
successful completion of the amendment to the current revolving credit agreement
and the delivery to the lenders, by December 15, 2000, of the Company's
financial plan and outlook for the calendar year 2001 from which revised
financial covenants will be determined. The Company anticipates it will meet the
conditions of the waiver; however, there can be no assurance that such
conditions will be met.
Net cash used in operating activities for the nine months ended September 30,
2000 was $3,094, attributable to a net loss of $10,931 and increases in other
assets of $1,661. These uses of cash were partially offset by a reduction in
accounts receivable of $931 and in inventories of $2,949, non-cash expenses of
$3,378, an income tax refund of $833 and increases in payables of $1,407. Net
cash used in investing activities was comprised of capital expenditures of
$1,364, of which $733 relates to the acquisition of the manufacturing assets of
Boca Research, Inc. and offset by proceeds from the sale of five acres of excess
land of $1,538. Net cash provided by financing activities included funding from
the Company's revolving loan, which had a net increase of $4,400 and proceeds
from the exercise of common stock options in the amount of $1,383. This was
partially offset by payments on other loans and lease obligations in the amount
of $3,372.
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.
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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.
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
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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:
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 foreign currency
and 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 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 the Company 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
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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. The Company's stock price, like that of other technology companies,
can be volatile. Some of the factors that can affect its stock price are:
o The Company's, or a competitor's, announcement of new products, services or
technological innovations,
o Quarterly increases or decreases in the Company's earnings,
o Changes in revenue or earnings estimates by the investment community, and
o Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect the Company's 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, 1999. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements and
information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's revolving credit facility and long-term debt
obligations. The Company manages this risk through utilization of interest rate
swap agreements in amounts not exceeding the principal amount of its outstanding
obligations. At September 30, 2000 the Company had in place interest rate swap
agreements in the amount of $7,361 at an effective average interest rate of
9.3%. Of this dollar amount, $2,333 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
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limiting default risk, market risk and reinvestment risk. As of September 30,
2000 the Company's investments consisted of the investment of excess cash
balances in overnight time deposits offered by Chase Manhattan Bank in London.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K - None
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(B) SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2000
Boundless Corporation
By: /s/Joseph Gardner
--------------------------------------------
Joseph Gardner
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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