<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-21138
June 30, 1996
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BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1377 Clint Moore Road
Boca Raton, Florida
(Address of principal 33847
executive offices) (Zip Code)
Registrant's telephone number, including
area code: (407) 997-6227
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of
Class August 12, 1996
----- ---------------
Common stock, par value 8,648,883
$.01 per share
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BOCA RESEARCH, INC.
Form 10-Q For The Quarter Ended June 30, 1996
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of June 30, 1996 and
December 31, 1995............................ 3
Condensed Consolidated Statements of
Income (unaudited) for the three and six
months ended June 30, 1996 and 1995 ......... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the six
months ended June 30, 1996 and 1995.......... 5
Notes to Condensed Consolidated
Financial Statements (unaudited)............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 10
PART II. OTHER INFORMATION
Items 1-3. Not applicable................................. 21
Item 4. Submission of Matters to a Vote of Security Holders..... 21
Item 5. Other Information....................................... 22
Item 6. Exhibits and Reports on Forms 8-K....................... 22
Signatures........................................................ 23
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PART I. ITEM 1.
BOCA RESEARCH, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
June 30, December 31,
1996 1995
------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 4,911 $ 477
Trade receivables, net ................................ 28,944 22,871
Inventory, net ........................................ 20,519 22,457
Prepaid expenses and other assets ..................... 1,218 890
Deferred and prepaid income taxes ..................... 2,323 2,230
------- -------
Total current assets ............................... 57,915 48,925
Property and equipment, net ........................... 8,257 7,722
Deferred income taxes, noncurrent ..................... 242 242
Goodwill, net ......................................... 83 166
Other assets .......................................... 746 623
------- -------
Total assets ....................................... $67,243 $57,678
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $10,745 $ 5,837
Accrued expenses and other current liabilities ........ 3,544 4,628
Income taxes payable .................................. 0 607
------- -------
Total current liabilities ........................... 14,289 11,072
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares
authorized, 8,634,307 issued and outstanding
at June 30, 1996, 8,522,759 issued and
outstanding at December 31, 1995 .................... 86 85
Additional paid-in capital ............................ 24,454 23,470
Retained earnings ..................................... 28,414 23,051
------- -------
Total stockholders' equity .......................... 52,954 46,606
------- -------
Total liabilities and stockholders' equity ...... $67,243 $57,678
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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Boca RESEARCH, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ......................................... $46,661 $33,196 $91,596 $60,465
Cost of goods sold ................................ 36,802 24,769 72,370 44,568
------- ------- ------- -------
Gross profit .............................. 9,859 8,427 19,226 15,897
------- ------- ------- -------
Operating expenses:
Research and development .................. 747 723 1,483 1,247
Selling, general and administrative ....... 4,915 4,467 9,626 8,466
------- ------- ------- -------
Total operating expenses .................. 5,662 5,190 11,109 9,713
------- ------- ------- -------
Income from operations ............................ 4,197 3,237 8,117 6,184
Non-operating income, net ......................... 117 174 262 356
------- ------- ------- -------
Income before income taxes ........................ 4,314 3,411 8,379 6,540
Income taxes ...................................... 1,553 1,228 3,016 2,354
------- ------- ------- -------
Net income ........................................ $ 2,761 $ 2,183 $ 5,363 $ 4,186
======= ======= ======= =======
Primary earnings per share ........................ $ 0.31 $ 0.25 $ 0.60 $ 0.48
======= ======= ======= =======
Shares used in primary per share calculation ...... 8,994 8,832 9,001 8,767
======= ======= ======= =======
Fully diluted earnings per share .................. $ 0.31 $ 0.24 $ 0.60 $ 0.46
======= ======= ======= =======
Shares used in fully diluted per share
calculation ..................................... 8,994 9,047 9,001 9,047
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Six Months
Ended June 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net income .................................... $ 5,363 $ 4,186
Adjustments for non-cash charges .............. 1,519 1,277
Changes in assets and liabilities ............. (1,462) (8,839)
------- -------
Net cash provided by (used in) operating
activities .................................. 5,420 (3,376)
------- -------
Investing activities:
Loan to related party ......................... 0 (205)
Loan repayment from related party ............. 0 500
Capital expenditures .......................... (1,971) (2,005)
------- -------
Net cash used in investing activities ....... (1,971) (1,710)
------- -------
Financing activities - Exercise of options ............. 985 291
------- -------
Net increase (decrease) in cash and cash equivalents ... 4,434 (4,795)
Cash and cash equivalents, beginning of period ......... 477 6,666
------- -------
Cash and cash equivalents, end of period ............... $ 4,911 $ 1,871
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
the Company in accordance with the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting and, accordingly, they
do not include all of the information and disclosures required by generally
accepted accounting principles. In the opinion of management, the condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of June 30, 1996, and the results of its operations and its cash
flows for the three and six month periods ended June 30, 1996 and 1995. These
results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's 1995 audited financial statements.
The accompanying financial statements should be read in conjunction with
the Company's most recent audited financial statements and notes thereto for the
year ended December 31, 1995. The results of operations for the three and six
month periods ended June 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," effective January 1, 1996. The adoption did not have
a significant effect on financial position or results of operations.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective January 1, 1996. The Company is continuing to measure
stock-based employee compensation using the intrinsic value method, and will
provide the pro forma disclosures required by SFAS No. 123 in its financial
statements for the year ending December 31, 1996.
Certain prior year amounts have been reclassified to conform to the
current presentation.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments (net of refunds) for income taxes were $3,716,643 and
$2,940,000 in the six month periods ended June 30, 1996 and 1995, respectively.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
CURRENT ASSETS
<TABLE>
Accounts receivable are included in the condensed consolidated balance
sheets net of allowances and consist of the following (in thousands):
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Accounts receivable ................................. $33,244 $26,484
Allowance for sales returns, allowances and
price protection .................................. (2,800) (2,613)
Allowance for doubtful accounts ..................... (1,500) (1,000)
------- -------
$28,944 $22,871
======= =======
</TABLE>
Included in the accounts receivable balance are: (a) $1,618,000 from
MBf/Boca Asia Pacific Sdn Bhd, a joint venture in Malaysia in which the Company
has a 50% ownership interest; and (b) $228,000 from Powertel of India, a joint
venture in India in which the Company has a 20% ownership interest. Sales to
these related parties in the three and six month periods ended June 30, 1996
were approximately $2,200,000 and $3,600,000, respectively. The Company did not
have such investments in the six months ended June 30, 1995.
<TABLE>
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw materials ....................................... $14,919 $16,501
Work in process ..................................... 5,577 5,346
Finished goods ...................................... 2,023 1,690
Inventory reserves .................................. (2,000) (1,080)
------- -------
$20,519 $22,457
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is included in the condensed consolidated balance
sheets net of accumulated depreciation of $6,614,437 at June 30, 1996 and
$5,347,030 at December 31, 1995.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
LINE OF CREDIT
The Company has an unsecured revolving line of credit expiring April 30,
1997, which permits borrowings of the lesser of $7,000,000 or 50% of qualified
accounts receivable. Under the terms of the loan agreement relating to the line
of credit, the Company may elect the interest rate to be either the bank's prime
rate or the London InterBank Offered Rate (LIBOR) plus 2%. The loan agreement
requires the Company to maintain certain financial ratios, limits the incurrence
of additional debt, and prohibits payment of dividends without the bank's
consent. There were no borrowings outstanding at June 30, 1996.
COMMITMENTS AND CONTINGENCIES
Rent expense for the three month periods ended June 30, 1996 and 1995
was $199,149 and $304,807, respectively, and $406,504 and $808,084 for the six
month periods ended June 30, 1996 and 1995, respectively. In the three month
period ended March 31, 1995, the Company incurred additional rent expense of
approximately $269,000 to record the effect of vacating two leased facilities.
The Company is committed through 2000 for rents under noncancelable operating
leases for use of its offices, warehouses and manufacturing facilities. The
aggregate minimum annual payments under such leases for the years ending
December 31, 1996, 1997, 1998, 1999 and 2000 are $659,320, $543,426, $427,533,
$325,728, and $206,686, respectively.
The Company receives communications from time to time alleging that
certain of the Company's products infringe the patent rights of other parties.
Based on information currently available to the Company, it is the opinion of
the Company's management that the ultimate outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial position.
STOCKHOLDERS' EQUITY
During the six month period ended June 30, 1996, 102,046 shares were
issued to current employees in connection with the exercise of options granted
to the individuals under the Company's stock option plans. The aggregate
proceeds received from these exercises were $770,460.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
In January 1996, 9,502 options were exercised by employees under the
1992 Employee Stock Purchase Plan. Aggregate proceeds received from these
exercises were $214,033.
STOCK OPTION PLAN
During the six month period ended June 30, 1996, the Company granted
options to purchase 423,408 shares at prices ranging from $19.50 to $25.00 to
both new and existing employees.
During the six month period ended June 30, 1996, 67,902 stock options
were canceled.
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<PAGE> 10
ITEM 2.
BOCA RESEARCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors set forth below and
elsewhere in this Report.
As an aid to reviewing the Company's results of operations for the three
and six months ended June 30, 1996 and 1995, the following table sets forth the
items in the consolidated statements of income as a percent of net sales and as
a percent of change when compared to the earlier period:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ Percent ------------------ Percent
1996 1995 Change 1996 1995 Change
----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................................... 100.0% 100.0% 40.6% 100.0% 100.0% 51.5%
Cost of goods sold ........................... 78.9 74.6 48.6 79.0 73.7 62.4
----- ----- ----- -----
Gross profit ............................. 21.1 25.4 17.0 21.0 26.3 20.9
----- ----- ----- -----
Operating expenses:
Research and development ................. 1.6 2.2 3.3 1.6 2.1 18.9
Selling, general and administrative ...... 10.5 13.4 10.0 10.5 14.0 13.7
----- ----- ----- -----
Total operating expenses ............. 12.1 15.6 9.1 12.1 16.1 14.4
----- ----- ----- -----
Income from operations ....................... 9.0 9.8 29.7 8.9 10.2 31.3
Non-operating income, net .................... 0.2 0.5 (32.8) 0.3 0.6 (26.4)
----- ----- ----- -----
Income before income taxes ................... 9.2 10.3 26.5 9.2 10.8 28.1
Income taxes ................................. 3.3 3.7 26.5 3.3 3.9 28.1
----- ----- ----- -----
Net income ................................... 5.9% 6.6% 26.5 5.9% 6.9% 28.1
===== ----- ===== -----
</TABLE>
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RESULTS OF OPERATIONS
NET SALES. The Company's net sales increased by 40.6% to $46,661,000 in
the three months ended June 30, 1996 from $33,196,000 in the three months ended
June 30, 1995. For the six months ended June 30, 1996, net sales increased by
51.5% to $91,596,000 from $60,465,000 for the comparable period in 1995. The
sales increase for the three and six month periods ended June 30, 1996 over the
comparable periods in 1995 is shown below by product category.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
1996 1995 1996 1995
----- ----- ----- -----
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C>
Data Communications............ $41.2 $10.4 $80.9 $24.2
Multimedia..................... - 15.3 0.4 20.5
Networking..................... 1.7 2.0 3.1 4.0
Video Graphics................. 1.7 3.1 3.3 6.1
I/O, IDE, & Multiport.......... 1.9 2.4 3.7 5.6
Memory......................... - - - 0.1
ISDN........................... 0.2 - 0.2 -
----- ----- ----- -----
$46.7 $33.2 $91.6 $60.5
===== ===== ===== =====
</TABLE>
The sales increase was primarily attributable to increases in sales of
data communications products offset by a decline in sales of the Company's other
product categories. The increased sales of the Company's data communications
products in the three months and six months ended June 30, 1996 compared to the
comparable periods in 1995 was primarily due to the increase in demand for the
Company's 28.8 Kbps modem products. These higher speed modems are becoming
increasingly popular for accessing the Internet and connecting individuals and
information worldwide. The Company believes that the increased use of the
Internet and on-line services is fueling the demand for modem products. In
addition, a portion of the second quarter sales increase was attributable to the
Company's efforts to increase inventories of data communications products in the
Company's distribution channels and could adversely affect sales for the last
six months of 1996.
Sales of the Company's Sound Expression multimedia product declined by
$15,300,000 for the three months ended June 30, 1996 and declined by $20,100,000
for the six months ended June 30, 1996 compared to the comparable periods in
1995. This is a continuation of a decline in sales of the Sound Expression
product that occurred in the last six months of 1995 due to the increased use by
OEMs of a chipset incorporating sound on the system board of the PC. The Company
believes that there is a niche market for its 28.8 Sound Expression product and
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<PAGE> 12
anticipates sales in this category in the future, however, at gross margin
percentages below the Company's average. As of June 30, 1996, inventory includes
$1,500,000 of components and finished goods relating to this product line. The
decline in sales of networking, video and I/O, IDE and multiport products
reflects the Company's decision to focus its sales efforts for these categories
on products with value-added features and thus the potential of higher gross
profits.
A new OEM customer accounted for approximately $10,100,000 in sales,
representing 22% of net sales in the three months ended June 30, 1996, and
$17,500,000 in sales, representing 19% of net sales for the six months ended
June 30, 1996. As of June 30, 1996, the Company had an accounts receivable
balance of $6,700,000 from this customer and none of the balance was beyond the
agreed terms. An international OEM customer accounted for approximately
$7,500,000 in sales, representing 16% of net sales in the three months ended
June 30, 1996, and $13,700,000 in sales, representing 15% of net sales for the
six months ended June 30, 1996. As of June 30, 1996, the Company had an accounts
receivable balance of $5,200,000 from this customer and $1,000,000 of the
balance was beyond the agreed terms. This customer's inventory of products
purchased from the Company is at higher than normal levels and sales for the
last six months of 1996 to this customer will likely be adversely affected. A
delay or default in payment by any significant customer could have a material
adverse effect on the Company's results of operations or financial condition.
Also, a decline in sales to a significant customer could have a material
adverse effect on the Company's results of operations or financial condition.
International sales represented 35% of net sales for the three months
ended June 30, 1996 and 36% of net sales for the six months ended June 30, 1996.
International sales represented 15% of net sales for the three and six month
periods ended June 30, 1995.
The percentage of net sales attributable to OEM customers increased to
64% in the three months ended June 30, 1996 from 54% in the three months ended
June 30, 1995. For the six month period ended June 30, 1996, the percentage of
net sales to OEM customers increased to 62% from 43% in the comparable period in
1995. The Company believes that sales to OEM customers will continue to
represent a substantial portion of net sales.
GROSS PROFIT. Gross profit increased to $9,859,000 in the three months
ended June 30, 1996 from $8,427,000 in the three months ended June 30, 1995, but
decreased as a percentage of net sales to 21.1% in the three months ended June
30, 1996 from 25.4% in the three months ended June 30, 1995. As discussed above,
sales to OEM customers, for which gross profit margins are typically lower,
increased to 64% of net sales in the three months ended June 30, 1996 compared
to 54% of net sales in the three months ended June 30, 1995. Gross profit
percentage was also affected by increased inventory reserves of $501,000 and a
rapid decline in selling price of certain products due to their replacement with
later generation products. For the six months ended June 30, 1996, gross profit
increased to $19,226,000 from $15,897,000 for the six months ended June 30,
1995. Gross profit as a percentage of net sales decreased to 21.0% for the six
month period ended June 30, 1996 from 26.3% for the six month period ended June
30, 1995. The decrease in gross profit percentage for the six month period is
attributable to the increase in sales to OEM customers to 62% for the
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<PAGE> 13
six month period ended June 30, 1996, from 43% for the six month period ended
June 30, 1995. Gross profit percentage was also affected by a write down of DRAM
inventory components of $750,000, increased inventory reserves of $920,000 and a
rapid decline in selling price of certain products due to their replacement with
later generation products. These factors were partially offset by certain
manufacturing efficiencies. The gross profit percentage in the third quarter is
expected to be adversely affected by a high percentage of OEM sales and sales
of phase-out inventory.
The modem market is experiencing changing dynamics in that the supply
of modem chips is more available in 1996 as contrasted to the short supply in
1995. Also, modem manufacturers are increasing production and seeking to expand
their market share. These circumstances will likely result in lower selling
prices and gross profit percentages for modems in the future.
The gross profit margins for the Company's products depend upon a
number of factors, such as the degree of competition in the market for such
products, the product and channel mix (wholesale distributors and retailers
versus OEMs), component costs, and manufacturing efficiencies. In general, gross
profit margins are higher on sales to wholesale distributors and retailers than
on sales to OEMs. In addition, gross profit margins on product categories
differ. Accordingly, the Company's gross profit margin has varied substantially
from quarter to quarter in the past, and can be expected to continue to do so in
the future. Management believes that the lower operating expenses typically
associated with OEM sales generally offset their corresponding lower gross
profit margins. There will be circumstances, which management anticipates will
occur in the third quarter, in which the Company accepts lower margin sales for
purposes such as to phase-out inventory, and to utilize manufacturing capacity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $747,000 in the three months ended June 30, 1996 from $723,000 in
the three months ended June 30, 1995. This represented a decrease in research
and development expenses as a percentage of net sales to 1.6% for the three
months ended June 30, 1996 from 2.2% of net sales for the comparable period in
1995. For the six months ended June 30, 1996, research and development expenses
increased to $1,483,000 from $1,247,000 for the six month period ended June 30,
1995. This represented a decrease in research and development expenses as a
percentage of net sales to 1.6% for the six months ended June 30, 1996 from 2.1%
of net sales for the comparable period in 1995. The decrease in research and
development expenses as a percentage of net sales was primarily attributable to
the fixed nature of certain research and development costs allocated over a
larger sales base. Also, the Company relies on license and royalty agreements
with third parties for much of its new product development. The Company has
formed alliances with Chase Research Plc, NetComm Limited, Viewpoint Systems, a
wholly owned subsidiary of Multimedia Access Computer and Telesoft
International, Inc. to develop ISDN, high-end network management products and
video conferencing products.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $4,915,000 in the three months ended June
30, 1996 from $4,467,000 in the three months ended June 30, 1995. Selling,
general and administrative expenses as a
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<PAGE> 14
percentage of net sales decreased to 10.5% in the three months ended June 30,
1996 from 13.4% in the three months ended June 30, 1995. Selling, general and
administrative expenses increased to $9,626,000 in the six months ended June 30,
1996 from $8,466,000 in the six months ended June 30, 1995. Selling, general and
administrative expenses as a percentage of net sales decreased to 10.5% in the
six months ended June 30, 1996 from 14.0% in the six months ended June 30, 1995.
The decrease in selling, general and administrative expenses as a percentage of
net sales is primarily the result of increased sales to OEM customers during the
three and six month periods ended June 30, 1996, as well as the non-variable
nature of certain expenses relative to sales increases. Certain selling, general
and administrative expenses associated with OEM sales are typically lower than
those expenses associated with sales to wholesale distributors and retailers.
Selling, general and administrative expenses as a percentage of net sales will
continue to fluctuate and will be influenced by the level of sales to the
various channels, and the particular sales and marketing requirements of each of
the channels.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 30, 1996, the Company's working capital
increased by $5,773,000 from December 31, 1995. This increase was represented by
increases in cash and cash equivalents of $4,434,000, trade receivables of
$6,073,000 and other current assets of $421,000; offset by a decrease in
inventories of $1,938,000 and an increase in current liabilities of $3,217,000
consisting primarily of an increase in trade payables. The Company's operations
provided cash of $5,420,000 for the six months ended June 30, 1996. The
Company's investing activities consisted of capital expenditures of $1,971,000
during the six months ended June 30, 1996.
The Company may from time to time experience periods of negative cash
flow from operations. The Company intends to borrow under its line of credit to
the extent necessary to finance cash needs. The Company has an unsecured
$7,000,000 line of credit with a commercial bank which expires on April 30,
1997. As of June 30, 1996, no borrowings were outstanding under this line of
credit, which permits borrowings of the lesser of $7,000,000 or 50% of qualified
accounts receivable. Under the terms of the loan agreement relating to the line
of credit, the Company may elect the interest rate to be either the bank's prime
rate or the London InterBank Offered Rate (LIBOR) plus 2%. The loan agreement
requires the Company to maintain certain financial ratios, limits the incurrence
of additional debt, and prohibits payment of dividends without the bank's
consent. The Company anticipates that borrowings will be made under the line of
credit in the third quarter of 1996 to finance the increase in working capital
to support an anticipated increase in net sales.
The Company's trade receivables have increased at June 30, 1996 as a
result of higher sales as well as increased penetration of the retail and
international markets in which extended credit terms are common. It is
anticipated that these extended terms will increase the Company's investment
in receivables in the future. In addition, while inventories decreased during
the six months ended June 30, 1996,
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<PAGE> 15
increases may occur in the future to support higher sales, particularly to OEMs
and management may make strategic investments in inventory to improve the flow
of components to manufacturing in order to assure timely delivery to customers.
The Company intends to finance these increases through existing cash balances,
cash generated from operations and borrowings under its line of credit. The
Company currently believes that the combination of cash generated from
operations, the Company's existing cash balances, and its line of credit will be
sufficient to meet its liquidity and capital requirements through at least
December 31, 1996. In light of increases in the Company's working capital
requirements, the Company may be required to increase the $7,000,000 line of
credit during the year ended December 31, 1996, which increase the Company
believes it could obtain based upon the Company's current financial condition.
The Company's management continually reviews its financing options. The
Company is considering and will continue to consider alternative financing
opportunities including the issuance of equity, debt or convertible debt, if
market conditions make such alternatives financially attractive methods of
funding the Company's short-term or long-term needs.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
In addition to the other information contained in this Report, the
following are important factors that should be considered carefully in
evaluating the Company and its business.
NEW PRODUCTS, TECHNOLOGICAL CHANGES AND INVENTORY MANAGEMENT. The
markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and short product life cycles. The
Company's success depends upon its ability to enhance its existing products and
to introduce new products with features that meet changing end user
requirements. Moreover, because of short product life cycles coupled with long
lead times for many components used in the Company's products, the Company may
not be able to quickly reduce its production or inventory levels in response to
unexpected shortfalls in sales or, conversely, to increase production or
inventory levels in response to unexpected demand. There can be no assurance
that the Company will be successful in identifying new markets, in developing,
manufacturing and marketing new products, or in enhancing its existing products,
either internally or through strategic relationships with third parties. The
Company's business would be adversely affected if the Company were to incur
delays in developing new products or enhancing existing products, if the Company
experiences delays in obtaining any required regulatory approvals for its
products or if such new products or enhancements did not gain market acceptance.
In addition, there can be no assurance that products or technologies developed
by others will not render the Company's products or technologies noncompetitive
or obsolete.
Sales of individual products and product lines are typically
characterized by rapid declines in sales, pricing and margins toward the end of
the respective product's life cycle, the precise timing of which may be
difficult to predict. As new products are planned and introduced, the Company
attempts to monitor closely the inventory of older products and to
- 15 -
<PAGE> 16
phase out their manufacture in a controlled manner. Nevertheless, the Company
could experience unexpected reductions in sales of older generation products as
customers anticipate the availability of new products. These reductions could
give rise to additional charges for obsolete or excess inventory, returns of
older generation products by distributors or substantial price protection
charges. To the extent that the Company is unsuccessful in managing product
transitions, its business and operating results could be materially adversely
affected.
Because all of the Company's products are used in PCs and computer
networks, the Company's future operating results could be adversely affected by
changes in the PC and computer networking markets, including major technological
developments or fluctuations in the growth rate. In addition, there is a trend
in original PC system manufacturing to integrate additional functionality onto
the system board of the PC or to utilize chipsets which incorporate additional
functionality, thereby decreasing the market for PC enhancement products. In
this regard, demand for the Company's SoundExpression multimedia products
declined in the last six months of 1995 and the first six months of 1996 due to
the increased use by OEMs of chipsets incorporating sound and modem features
which are integrated into the system board of the PC. Any decrease in the
markets for PC enhancement or networking products or reduction in the growth
rates in such markets could have a material adverse effect on the Company's
operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
operating results have varied significantly, and may continue to vary
significantly, depending on a number of factors, some of which could adversely
affect the Company's operating results and the trading price of the Company's
Common Stock. These factors include competitive pricing pressures, the timing of
orders from and shipments to major customers, the timing of new product
introductions by the Company and its competitors, the availability and pricing
of components for the Company's products, the timing of phase-outs of the
Company's products, variations in the Company's product mix and component costs,
variations in the proportion of sales made to wholesale distributors, OEMs and
retailers, product returns or price protection charges from customers, the
timing of sales of the Company's products to end users by the Company's
customers, seasonal promotions by the Company, its customers and competitors,
economic conditions prevailing within the computer industry and economic
conditions generally. Quarterly sales depend on the volume and timing of orders
received during a quarter, which are difficult to forecast. Customers generally
order products on an as-needed basis, and accordingly the Company has
historically operated with a relatively small backlog. Moreover, as is typical
for companies in the PC industry, a disproportionate percentage of the Company's
net sales in any quarter are typically generated in the last month of a quarter.
As a result, a shortfall in net sales in any quarter as compared to expectations
may not be identifiable until the end of the quarter. In addition, from time to
time, a significant portion of the Company's sales are derived from a limited
number of customers, the loss of one or more of which could adversely impact
operating results. There can be no assurance that the Company will be able to
continue its growth in sales or sustain its profitability on a quarterly or
annual basis. The Company's expense levels are based, in part, on its
expectations as to future sales. If sales
- 16 -
<PAGE> 17
levels are below expectations, operating results may be adversely affected,
which would likely have an adverse effect on the trading price of the Company's
Common Stock.
ACQUISITIONS. The Company may from time to time pursue the acquisition
of other companies, assets, technologies or product lines that would complement
or expand its existing business. Certain of these acquisitions may involve
businesses in which the Company lacks experience. Acquisitions involve a number
of risks that could adversely affect the Company's operating results, including
the diversion of management's attention, the assimilation of the operations,
products and personnel of the acquired companies, the amortization of acquired
intangible assets and the potential loss of key employees of the acquired
companies. There can be no assurance that the Company will be able to identify
businesses that would complement or expand its existing business or complete
such acquisitions, manage one or more acquisitions successfully, or that the
Company will be able to integrate the operations, products or personnel gained
through such acquisition without a material adverse impact on the Company's
business, financial condition and results of operations, particularly in the
quarters immediately following such acquisitions.
INTERNATIONAL OPERATIONS. The Company's international sales are subject
to the risks inherent in international sales, including various regulatory
requirements (including the need to obtain certifications for the Company's data
communications products), political and economic changes and disruptions,
tariffs or other barriers, difficulties in staffing and managing foreign
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render the Company's products less competitive relative to
local product offerings or expose the Company to foreign currency exchange
losses. One or more of these factors may have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
operating results.
DEPENDENCE ON SUPPLIERS. The major components of the Company's products
include circuit boards, microprocessors, chipsets and memory components. Most of
the components used in the Company's products are available from multiple
sources. However, certain components used in the Company's products are
currently obtained from single sources. Certain modem chipsets used in the
Company's data communications products have been in short supply and are
frequently on allocation by semiconductor manufacturers. Similar to others in
the computer industry, the Company has, from time to time, experienced
difficulty in obtaining certain components. The Company has no guaranteed supply
arrangements with any of its suppliers and there can be no assurance that these
suppliers will continue to meet the Company's requirements. Shortages of
components not only limit the Company's production capacity but also could
result in higher costs due to the higher costs of components in short supply or
the need to utilize higher cost substitute components. An extended interruption
in the supply of any of these components or a reduction in their quality or
reliability would have a material adverse effect on the Company's operating
results. While the Company believes that with respect to its single source
components it could obtain similar components from other sources, it could be
required to alter product designs to use alternative components. There can
- 17 -
<PAGE> 18
be no assurance that severe shortages of components will not occur in the future
which could increase the cost or delay the shipment of the Company's products
and have a material adverse effect on the Company's operating results.
Significant increases in the prices of these components could also have a
material adverse effect on the Company's operating results since the Company may
not be able to adjust product pricing to reflect the increases in component
costs. Moreover, a number of components for the Company's products are obtained
from foreign suppliers. Increases in tariffs on such components or fluctuations
in exchange rates could result in increases in the prices paid by the Company
for these components, which could impact the Company's ability to compete with
foreign manufacturers and have a material adverse effect on the Company's
operating results.
SALES CHANNEL RISKS. The Company sells its products to OEMs, national,
regional and international wholesale distributors and retailers and catalog
companies. Sales to OEMs accounted for approximately 62% of net sales in the six
months ended June 30, 1996. OEMs have significantly different requirements, and
in most cases, more stringent purchasing procedures and quality standards than
wholesale distributors and other resellers. There can be no assurance that the
Company will continue to be successful in developing products for, and
delivering products to, the OEM market, or that it will be successful in
establishing and maintaining an effective distribution and customer support
system for OEMs. The Company's business could be adversely affected if it is
unsuccessful in developing, manufacturing and marketing products for sale to
OEMs. In addition, OEMs may require special distribution arrangements and
product pricing, which could have a material adverse effect on the Company's
operating results. In the six months ended June 30, 1996, the Company's two
largest OEM customers accounted for approximately 34% of the Company's net
sales. A decline in sales to either of these customers or a delay or default in
payment by either customer could have a material adverse effect on the
Company's results or operations or financial condition.
The Company's three largest wholesale distributors accounted for
approximately 13% of the Company's net sales in the six months ended June 30,
1996. The PC distribution industry has been characterized by rapid change,
including consolidations and financial difficulties of wholesale distributors
and the emergence of alternative distribution channels. The Company is dependent
upon the continued viability and financial stability of its wholesale
distributors. The loss or ineffectiveness of any of the Company's three largest
wholesale distributors or a number of its smaller wholesale distributors could
have a material adverse effect on the Company's operating results. In addition,
an increasing number of vendors are competing for access to wholesale
distributors which could adversely affect the Company's ability to maintain its
existing relationships with its wholesale distributors or could negatively
impact sales to such distributors.
COMPETITION. The markets for the Company's products are intensely
competitive resulting in constant pricing pressures. Some of the Company's
competitors have significantly greater financial, technical, product
development, manufacturing or marketing resources than the Company. The Company
believes that its ability to compete depends on a number of factors, including
price, product quality and reliability, product availability, credit terms, name
recognition, delivery time, and post-sale service and support. There can be no
assurance that the Company will be able to continue to compete successfully with
respect to these factors. A
- 18 -
<PAGE> 19
variety of companies currently offer products that compete directly with the
Company's products. These competitors could introduce additional products or add
features to their existing products that are superior to the Company's products
or that achieve greater market acceptance. In addition to U.S.-based firms, the
Company faces competition from Pacific Rim suppliers which generally offer
products at significantly lower prices. The introduction of lower priced
competitive products or significant price reductions by the Company's
competitors would result in price reductions in the Company's products that
could have a material adverse effect on the Company's operating results. In
addition, as the Company enters into new product markets, such as ISDN, cable
modems and videoconferencing, the Company anticipates that it will encounter
competition from a number of well-established companies, many of which have
greater financial, technical, product development, manufacturing or marketing
resources and experience.
MANAGEMENT OF GROWTH. In recent years, the Company has experienced
significant growth and expansion in the overall level of its business and scope
of operations, including sales and distribution, research and development,
marketing and technical support. The Company's ability to manage its growth will
require it to continue to invest in its operations and to retain, motivate and
effectively manage its employees. If the Company's management is unable to
manage growth effectively, the Company's results of operations could be
materially and adversely affected.
PROPRIETARY RIGHTS; DEPENDENCE ON SOFTWARE LICENSES. Although the
Company has not historically been the subject of significant claims of
infringement by third parties, the Company receives from time to time, and may
receive in the future, communications from third parties asserting intellectual
property rights relating to the Company's products and technologies. There can
be no assurance that in the future the Company will be able to obtain licenses
of any intellectual property rights owned by third parties with respect to the
Company's products or that any such licenses can be obtained on terms favorable
to the Company. If the Company is unable to obtain licenses of protected
technology, it could be prohibited from manufacturing and marketing products
incorporating that technology. The Company could also incur substantial costs in
redesigning its products or in defending any legal action taken against it.
Should the Company be found to infringe the proprietary rights of others, the
Company could be required to pay damages to the infringed party which could have
a material adverse effect on the Company's operating results.
In certain of its products, the Company includes software licensed from
third parties. The Company's operating results could be adversely affected by a
number of factors relating to this third party software, including lack of
market acceptance, failure by the licensors to promote or support the software,
delays in shipment of the Company's products as a result of delays in the
introduction of licensed software or errors in the licensed software, or excess
customer support costs or product returns experienced by the Company due to
errors in the licensed software. Moreover, any impairment or termination of the
Company's relationship
- 19 -
<PAGE> 20
with any licensors of third party software could have a material adverse effect
on the Company's operating results.
RELIANCE ON CENTRALIZED MANUFACTURING. All of the Company's
manufacturing occurs at its leased headquarters facility in Boca Raton, Florida.
The Company's manufacturing operations utilize certain equipment which, if
damaged or otherwise rendered inoperable, would result in the disruption of the
Company's manufacturing operations. Although the Company maintains business
interruption insurance which the Company believes is adequate, any extended
interruption of the operations at this facility would have a material adverse
effect on the Company's operating results.
PRODUCT RETURNS, PRICE PROTECTION AND WARRANTY CLAIMS. Like other
manufacturers of computer products, the Company is exposed to the risk of
product returns from wholesale distributors and retailers, either through
contractual stock rotation privileges or as a result of the Company's interest
in assisting customers in balancing inventories. Although the Company attempts
to monitor and manage the volume of sales to wholesale distributors and
retailers, large shipments in anticipation of sales by wholesale distributors
and retailers can lead to substantial overstocking by the Company's wholesale
distributors and retailers and to higher than normal returns. Moreover, the risk
of product returns may increase if demand for the Company's products declines.
When the Company reduces its prices, the Company credits its wholesale
distributors and retailers for the difference between the purchase price of
products remaining in their inventory and the Company's reduced price for such
products on terms negotiated with the Company, the result of which could have a
material adverse effect on the Company's operating results. The Company's
limited five-year warranty permits customers to return any product for repair or
replacement if the product does not perform as warranted. The Company to date
has not encountered material warranty claims or liabilities. The Company seeks
to continually introduce new and enhanced products, which could result in higher
product returns and warranty claims due to the risks inherent in the
introduction of such products. The Company has established reserves for product
returns, price protection and warranty claims which management believes are
adequate. There can be no assurance that product returns, price protection and
warranty claims will not have a material adverse effect on future operating
results.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock
historically has been volatile due to fluctuations in operating results and
other factors relating to the Company's operations, the market's changing
expectations for the Company's growth, overall equity market conditions relating
to the market for technology stocks generally and other factors unrelated to the
Company's operations, including announcements by or relating to the Company's
competitors. Such fluctuations are expected to continue. In addition, stock
markets have experienced more price volatility in recent years. This volatility
has had a substantial effect on the market prices of securities issued by many
technology companies, often for reasons unrelated to the operating performance
of the specific companies.
- 20 -
<PAGE> 21
PART II.
BOCA RESEARCH, INC.
OTHER INFORMATION
Items 1-3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 20, 1996, the Company's
nominees for directors to serve until the 1997 Annual Meeting of Shareholders
were elected, and the following proposals were approved: (i) an amendment to the
Boca Research, Inc. 1992 Stock Option Plan to increase the number of shares
covered thereby from 1,300,000 to 1,700,000, and (ii) the adoption of the Boca
Research, Inc. 1996 Non-Employee Director Stock Option Plan.
<TABLE>
With respect to the election of directors, the voting was as follows:
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Timothy Farris 7,286,975 120,163
Robert W. Ferguson 7,287,771 119,367
George Gan Chee Wai 7,287,771 119,367
Patrick J. Keenan 7,287,771 119,367
W. James Price 7,287,771 119,367
E. Roe Stamps, IV 7,287,771 119,367
Anthony F. Zalenski 7,287,771 119,367
</TABLE>
Mr. Farris resigned as a director on August 9, 1996.
<TABLE>
With respect to the approval of the amendment to the Boca Research, Inc.
1992 Stock Option Plan to increase the number of shares covered thereby from
1,300,000 to 1,700,000, the voting was as follows:
<CAPTION>
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C>
3,507,861 487,331 20,415 3,391,531
</TABLE>
With respect to the approval of the Boca Research, Inc. 1996 Non-Employee
Director Stock Option Plan, the voting was as follows:
- 21 -
<PAGE> 22
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C>
3,182,398 849,413 30,304 3,345,023
</TABLE>
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Calculation of shares used in determining earnings per share.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during
the quarter ended June 30, 1996.
- 22 -
<PAGE> 23
BOCA RESEARCH, INC.
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 of the
undersigned thereunto duly authorized.
Dated: August 14, 1996 /s/ Anthony F. Zalenski
--------------------- ------------------------------------------
Anthony F. Zalenski
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 1996 /s/ R. Michael Brewer
--------------------- ------------------------------------------
R. Michael Brewer
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- 23 -
<PAGE> 24
BOCA RESEARCH, INC.
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Pages
-----
<S> <C>
Exhibit 11 Calculation of shares used in determining earnings per share 25-26
</TABLE>
- 24 -
<PAGE> 1
BOCA RESEARCH, INC.
<TABLE>
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING PRIMARY EARNINGS PER SHARE
(Unaudited)
<CAPTION>
JUNE 30, 1996
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30 1996
------------------ ----------------
<S> <C> <C>
Shares outstanding at January 1, 1996 ......................... 8,522,759 8,522,759
Shares issued January 1, 1996 in
connection with the 1992 Employee
Stock Purchase Plan ......................................... 9,502 9,502
Shares issued in connection with a
non-qualified stock option plan ............................. 50,552 30,590
Weighted average of optioned shares
using the treasury stock method ............................. 411,141 438,285
--------- ---------
Weighted average primary shares
outstanding ................................................. 8,993,954 9,001,136
========= =========
<CAPTION>
JUNE 30, 1995
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------------ ----------------
<S> <C> <C>
Shares outstanding at January 1, 1995 ......................... 8,424,685 8,424,685
Shares issued January 1, 1995 in
connection with the 1992 Employee
Stock Purchase Plan ......................................... 4,932 4,932
Shares issued in connection with a
non-qualified stock option plan ............................. 14,110 14,211
Weighted average of optioned shares
using the treasury stock method ............................. 388,397 323,563
--------- ---------
Weighted average primary shares
outstanding ................................................. 8,832,124 8,767,391
========= =========
</TABLE>
- 25 -
<PAGE> 2
BOCA RESEARCH, INC.
<TABLE>
CALCULATION OF SHARES USED IN
DETERMINING FULLY-DILUTED EARNINGS PER SHARE
(Unaudited)
<CAPTION>
JUNE 30, 1996
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30 1996
------------------ ----------------
<S> <C> <C>
Shares outstanding at January 1, 1996 ................. 8,522,759 8,522,759
Shares issued January 1, 1996 in
connection with the 1992 Employee
Stock Purchase Plan ................................. 9,502 9,502
Shares issued in connection with a
non-qualified stock option plan ..................... 50,552 30,590
Weighted average of optioned shares
using the treasury stock method ..................... 411,141 438,285
--------- ---------
Weighted average fully-diluted shares
outstanding ......................................... 8,993,954 9,001,136
========= =========
<CAPTION>
JUNE 30, 1995
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------------ ----------------
<S> <C> <C>
Shares outstanding at January 1, 1995 ................. 8,424,685 8,424,685
Shares issued January 1, 1995 in
connection with the 1992 Employee
Stock Purchase Plan ................................. 4,932 4,932
Shares issued in connection with a
non-qualified stock option plan ..................... 14,110 14,211
Weighted average of optioned shares
using the treasury stock method ..................... 602,921 602,921
--------- ---------
Weighted average fully-diluted shares
outstanding ......................................... 9,046,648 9,046,749
========= =========
</TABLE>
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,911,000
<SECURITIES> 0
<RECEIVABLES> 33,244,000
<ALLOWANCES> 4,300,000
<INVENTORY> 20,519,000
<CURRENT-ASSETS> 57,915,000
<PP&E> 14,871,000
<DEPRECIATION> 6,614,000
<TOTAL-ASSETS> 67,243,000
<CURRENT-LIABILITIES> 14,289,000
<BONDS> 0
<COMMON> 86,000
0
0
<OTHER-SE> 52,868,000
<TOTAL-LIABILITY-AND-EQUITY> 67,243,000
<SALES> 46,661,000
<TOTAL-REVENUES> 46,661,000
<CGS> 36,802,000
<TOTAL-COSTS> 36,802,000
<OTHER-EXPENSES> 5,662,000
<LOSS-PROVISION> 252,000
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> 4,314,000
<INCOME-TAX> 1,553,000
<INCOME-CONTINUING> 2,761,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,761,000
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
