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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, 1997
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 33487
executive offices) (Zip Code)
Registrant's telephone number, including
area code: (561) 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, 1997
----- ---------------
Common stock, par value 8,725,079
$.01 per share
<PAGE> 2
BOCA RESEARCH, INC.
Form 10-Q For The Quarter Ended June 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of June 30, 1997 and
December 31, 1996 ................................... 3
Condensed Consolidated Statements of
Income (unaudited) for the three and six
months ended June 30, 1997 and 1996 ................. 4
.
Condensed Consolidated Statements of
Cash Flows (unaudited) for the six
months ended June 30, 1997 and 1996 ................. 5
Notes to Condensed Consolidated
Financial Statements (unaudited) .................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................... 12
PART II. OTHER INFORMATION
Items 1-3. Not applicable ........................................ 23
Item 4. Submission of Matters to a Vote of
Security Holders ...................................... 23
Item 5. Other Information ......................................... 23
.
Item 6. Exhibits and Reports on Forms 8-K. ........................ 23
Signatures ......................................................... 24
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PART I. ITEM 1.
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
June 30 , December 31,
1997 1996
------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $13,621 $ 7,826
Trade receivables, net ....................................... 15,677 27,167
Inventory, net ............................................... 11,217 18,381
Prepaid expenses and other current assets .................... 892 890
Prepaid and deferred income taxes ............................ 5,836 3,888
------- -------
Total current assets ...................................... 47,243 58,152
Property and equipment, net .................................. 5,815 7,052
Deferred income taxes, noncurrent ............................ 275 275
Other assets ................................................. 520 587
------- -------
Total assets .............................................. $53,853 $66,066
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 1,904 $ 7,314
Accrued expenses and other current liabilities ............... 2,445 3,590
------- -------
Total current liabilities ................................ $ 4,349 $10,904
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares authorized,
8,713,228 issued and outstanding at June 30, 1997,
8,678,883 issued and outstanding at December 31, 1996 ....... 87 87
Additional paid-in capital ................................... 25,816 25,574
Retained earnings ............................................ 23,601 29,501
------- -------
Total stockholders' equity ................................. 49,504 55,162
------- -------
Total liabilities and stockholders' equity ............. $53,853 $66,066
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 16,352 $46,661 $ 35,110 $91,596
Cost of goods sold ............................ 15,518 36,802 34,181 72,370
-------- ------- -------- -------
Gross profit .......................... 834 9,859 929 19,226
-------- ------- -------- -------
Operating expenses:
Research and development .............. 741 747 1,415 1,483
Selling, general and administrative ... 4,250 4,915 8,953 9,626
-------- ------- -------- -------
Total operating expenses .............. 4,991 5,662 10,368 11,109
-------- ------- -------- -------
Income (loss) from operations ................. (4,157) 4,197 (9,439) 8,117
Non-operating income, net ..................... 222 117 362 262
-------- ------- -------- -------
Income (loss) before income taxes ............. (3,935) 4,314 (9,077) 8,379
Income taxes (benefit) ........................ (1,377) 1,553 (3,177) 3,016
-------- ------- -------- -------
Net income (loss) ............................. (2,558) $ 2,761 ($ 5,900) $ 5,363
======== ======= ======== =======
Net income (loss) per share ................... $ (0.29) $ 0.31 $ (0.68) $ 0.60
======== ======= ======== =======
Weighted average shares outstanding ........... 8,713 8,994 8,711 9,001
======== ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net income (loss) $ (5,900) $ 5,363
Adjustments for non-cash charges 1,465 1,519
Changes in assets and liabilities 10,216 (1,462)
-------- -------
Net cash provided by operating activities 5,781 5,420
-------- -------
Investing activities - Capital expenditures (228) (1,971)
-------- -------
Financing activities - Exercise of options 242 985
-------- -------
Net increase in cash and cash equivalents 5,795 4,434
Cash and cash equivalents, beginning of period 7,826 477
-------- -------
Cash and cash equivalents, end of period $ 13,621 $ 4,911
======== =======
</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, 1997, and the results of its operations and its cash
flows for the three and six month periods ended June 30, 1997 and 1996. 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 1996 audited consolidated financial statements.
The accompanying financial statements should be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto for the year ended December 31, 1996. The results of operations for the
three and six month periods ended June 30, 1997 are not necessarily indicative
of the results to be expected for the full year.
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 ($1,228,982) and
$3,716,643 in the six month periods ended June 30, 1997 and 1996, respectively.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
CURRENT ASSETS
Accounts receivable are included in the condensed consolidated balance
sheets net of allowances and consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- ------------
<S> <C> <C>
Accounts receivable ............................ $18,958 $31,118
Allowance for sales returns, allowances and
price protection ............................. (1,400) (2,625)
Allowance for doubtful accounts ................ (1,881) (1,326)
------- -------
$15,677 $27,167
======= =======
</TABLE>
Included in the accounts receivable balance are: (a) $1,203,393 from
MBf/Boca Asia Pacific Sdn Bhd, a joint venture in Malaysia in which the Company
has a 50% ownership interest; and (b) $529,816 from PowerTelBOCA Pvt., Ltd.
("PowerTel"), 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, 1997 were approximately $1,328,000 and $1,809,000, respectively.
The Company has agreed to payment terms of 90 days for MBf/Boca Asia Pacific and
180 days for PowerTel.
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- -----------
<S> <C> <C>
Raw materials........................ $ 5,764 $13,541
Work in process...................... 5,052 5,779
Finished goods....................... 2,101 1,461
Inventory reserves .................. (1,700) (2,400)
------- -------
$11,217 $18,381
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is included in the condensed consolidated balance
sheets net of accumulated depreciation of $9,415,419 at June 30, 1997 and
$8,070,398 at December 31, 1996.
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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 May 31,
1998, which permits borrowings of the lesser of $12,000,000 or 60% 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 1 1/2%. 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, 1997.
COMMITMENTS AND CONTINGENCIES
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.
A former shareholder of the Company has filed an action in the United
States District Court for the Southern District of Florida against the Company
and Anthony F. Zalenski, its President and Chief Executive Officer. The former
shareholder claims that he relied on certain statements made directly to him by
Mr. Zalenski and certain other statements in deciding not to sell his shares of
the Company's Common Stock. The former shareholder claims that such statements
were false and misleading and give rise to claims under the Federal securities
law and Florida common law. The former shareholder is seeking damages for his
trading losses, which are alleged to be in excess of $1 million. Based on
information currently available to the Company, the Company does not believe
that this matter will have a material adverse effect on the Company's results of
operations or financial condition.
On October 4, 1996, the Company entered into a Consulting Agreement with
ARGOQUEST, Inc., a California corporation ("ArgoQuest") pursuant to which
ArgoQuest was retained to serve as a consultant to the Company with respect to
sales to retail accounts, wholesale distributors and original equipment
manufacturers. The Consulting Agreement provides ArgoQuest with the right to be
granted options to purchase shares of Common Stock of the Company, subject to
the Company achieving specified net sales, as defined in the
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
Consulting Agreement, during certain periods, in addition to receiving monthly
consulting fees, as more fully disclosed in the notes to the Company's
consolidated financial statements included in the Annual Report on Form 10-K for
the year ended December 31, 1996. For the quarters ended March 31, 1997 and June
30, 1997, the Company recorded $260,000 and $0 of expense, respectively,
representing the monthly consulting fees and expenses due under the Consulting
Agreement. The Company has provided notice to ArgoQuest that monthly consulting
fees will not be made subsequent to March 31, 1997, as provided in the
Consulting Agreement.
The Company had entered into a letter of intent to purchase the fixed and
certain current assets of Creatix, a German based company ("Creatix"), for
approximately $4,200,000, less the 18% subsidy noted below. Creatix filed for
bankruptcy under German law in late 1996 and is currently being operated by a
court appointed trustee. The letter of intent was with the court appointed
trustee and was subject to the Company receiving (a) bank financing for the
purchase price, (b) a firm commitment from the Government of Saarland to grant a
subsidy equal to 18% of the purchase price, and (c) good title to the trademark
Creatix and other intellectual property. The letter of intent also provided for
the execution of a definitive Transfer Agreement which would have incorporated
the terms of the letter of intent and contain representations and warranties on
the part of the seller, reasonably satisfactory to the Company. The definitive
agreement has not yet been executed and the Company has not received the
necessary bank financing nor the commitment for the subsidy from the Government
of Saarland. In light of these factors and the deterioration in the operating
results of Creatix, the Company will likely not complete the acquisition.
STOCKHOLDERS' EQUITY
During the six month period ended June 30, 1997, 22,167 shares were issued
in connection with the exercise of options granted under the Company's stock
option plans. The aggregate proceeds received from these exercises were
$135,152.
In January 1997, 12,178 options were exercised by employees under the 1992
Employee Stock Purchase Plan. Aggregate proceeds received from these exercises
were $107,142.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
STOCK OPTION PLAN
During the six month period ended June 30, 1997, the Company granted
options to purchase 362,800 shares at exercise prices ranging from $5.25 to $10
to both new and existing employees.
During the six month period ended June 30, 1997, 213,749 stock options
were canceled.
In April 1997, the Company offered the holders of options to purchase an
aggregate of 715,097 shares of the Company's Common Stock with exercise prices
ranging from $7.125 to $27.50, the opportunity to exchange such options for
options to purchase a fewer number of shares at an exercise price of $6.75 per
share, the market value of the Common Stock on the date of such offer. The newly
issued options vest in three equal annual installments, commencing in April
1998. This offer was made as a result of the decline in the market price of the
Company's Common Stock in order to more effectively retain and motivate the
Company's key employees. As a result of this offer, options to purchase 465,689
shares were canceled in exchange for the issuance of options to purchase 314,416
shares priced at $6.75 per share. The holders of options representing 249,408
shares declined the offer to exchange their options.
NEW ACCOUNTING STANDARD
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" was issued. SFAS No. 128, which supersedes
Accounting Principles Board ("APB") Opinion No. 15, requires a dual presentation
of basic and diluted earnings per share on the face of the income statement.
Basic earnings per share excludes dilution and is computed by dividing income or
loss attributable to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted earnings per share is computed similarly to fully diluted earnings per
share under APB Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. When adopted, all prior-period
earnings per share data are required to be restated. As a result of the
Company's net loss for the three and six months ended June 30, 1997, basic and
diluted net loss per share, as computed under SFAS No. 128, would not differ
from the net loss per share shown in the accompanying condensed consolidated
statements of income. For the three months ended June 30, 1996, basic
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
and diluted net income per share, as computed under SFAS No. 128, would be $.32
and $.31, respectively. For the six months ended June 30, 1996, basic and
diluted net income per share, as computed under SFAS No. 128, would be $.63 and
$.60, respectively.
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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, 1997 and 1996, the following table sets forth the
financial information 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
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................. 100.0% 100.0% (65.0)% 100.0% 100.0% (61.7)%
Cost of goods sold........................... 94.9 78.9 (57.8) 97.4 79.0 (52.8)
------ ----- ------ -----
Gross profit............................. 5.1 21.1 (91.5) 2.6 21.0 (95.2)
------ ----- ------ -----
Operating expenses:
Research and development................. 4.5 1.6 (0.8) 4.0 1.6 (4.6)
Selling, general and administrative...... 26.0 10.5 (13.5) 25.5 10.5 (7.0)
------ ----- ------ -----
Total operating expenses............. 30.5 12.1 (11.9) 29.5 12.1 (6.7)
------ ----- ------ -----
Income (loss) from operations................ (25.4) 9.0 * (26.9) 8.9 *
Non-operating income, net.................... 1.4 0.2 89.7 1.0 0.3 38.2
------ ----- ------ -----
Income (loss) before income taxes........... (24.0) 9.2 * (25.9) 9.2 *
Income taxes (benefit)....................... (8.4) 3.3 * (9.1) 3.3 *
------ ----- ------ -----
Net income (loss)............................ (15.6)% 5.9% * (16.8)% 5.9% *
====== ===== ====== =====
</TABLE>
* Not applicable
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RESULTS OF OPERATIONS
NET SALES. The Company's net sales decreased by 65.0% to $16,352,000 in the
three months ended June 30, 1997 from $46,661,000 in the three months ended June
30, 1996. For the six months ended June 30, 1997, net sales decreased by 61.7%
to $35,110,000 from $91,596,000 for the comparable period in 1996. The sales
decrease for the three and six month periods ended June 30, 1997 over the
comparable periods in 1996 is shown below by product category.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C>
Data Communications.......... $13.4 $41.2 $28.3 $80.9
Multimedia................... -- -- 0.8 0.4
Networking................... 0.9 1.7 1.7 3.1
Video Graphics............... 0.5 1.7 0.9 3.3
I/O, IDE, & Multiport........ 1.5 1.9 3.0 3.7
Video Conferencing........... -- -- 0.3 --
ISDN......................... 0.1 0.2 0.1 0.2
----- ----- ----- -----
$16.4 $46.7 $35.1 $91.6
===== ===== ===== =====
</TABLE>
The sales decrease was primarily attributable to a decrease in sales of
data communications products, however, the product categories of networking,
video graphics, and I/O, IDE and multiport also experienced a decline in sales.
The video conferencing product category was introduced in the third quarter of
1996. Sales in this category were below expectations for the three months and
the six months ended June 30, 1997. Sales were adversely affected by several
factors in the three months and the six months ended June 30, 1997, including
the technology migration to 56Kbps modems, slower than anticipated sales volume
of new products, aggressive channel pricing due to excess inventories of older
generation products, and weak PC demand experienced by many of the Company's OEM
customers. In 1996, the Company's three largest OEM customers accounted for
approximately 42.0% of the Company's net sales. Sales to these three OEM
customers during the three months and six months ended June 30, 1997 represented
approximately 7.0% of the Company's net sales. Included in net sales for the six
months ended June 30, 1997 were sales of components to Creatix, in the amount of
$2,996,000. See Commitments and Contingencies in the Notes to the Condensed
Consolidated Financial Statements and the discussion under "Liquidity and
Capital Resources" for further information.
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<PAGE> 14
International sales were approximately $4.2 million for the three
months ended June 30, 1997 and $8.5 million for the six months ended June 30,
1997, compared to $16.4 million for the three months ended June 30, 1996 and $33
million for the six months ended June 30, 1996. The decline is partially due to
the decreased sales to Hucom of approximately $7.5 million for the three months
ended June 30, 1997 and $13.7 million for the six months ended June 30, 1997.
The decrease in sales to large OEM customers, such as Hucom and AST Research,
also accounted for the decrease in net sales to OEM customers to approximately
$5.0 million for the three months ended June 30, 1997 and $11 million for the
six months ended June 30, 1997 from $29.9 million for the three months ended
June 30, 1996 and $57.0 million for the six months ended June 30, 1996.
It is anticipated that sales in the third quarter ending September 30,
1997 will continue to be soft and will be substantially less than the comparable
period ending September 30, 1996. This reflects continued weak industry
conditions resulting in lower unit volumes and lower average selling prices of
approximately 38.0% for the Company's products when compared to the comparable
period in 1996.
GROSS PROFIT. Gross profit decreased to $834,000 in the three months
ended June 30, 1997 from $9,859,000 in the three months ended June 30, 1996, and
decreased as a percentage of net sales to 5.1% in the three months ended June
30, 1997 from 21.1% for the three months ended June 30, 1996. For the six months
ended June 30, 1997, gross profit decreased to $929,000 from $19,226,000 in the
six months ended June 30, 1996. Gross profit as a percentage of net sales
decreased to 2.6% for the six months ended June 30, 1997 from 21.0% for the six
months ended June 30, 1996. The gross profit percentage for the three months
ended June 30, 1997 and six months ended June 30, 1997 compared to the
comparable period in the prior year was adversely affected by several factors,
including low utilization of the Company's manufacturing facilities, aggressive
pricing to reduce channel inventories resulting in price protection, low prices
on older generation product and aggressive pricing to the retail channel to
obtain shelf space. The average selling price on the Company products has
declined approximately 38.0% for the three month period ended June 30, 1997
compared to the three month period ended June 30, 1996 which was not offset by a
comparable decrease in costs and resulted in a lower gross profit percentage. It
is anticipated that gross profit percentage in the third quarter will continue
to be adversely affected by the negative factors that occurred in the first and
second quarters of 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $741,000 in the three months ended June 30, 1997 from $747,000 in
the three months ended June 30, 1996. This represented an increase in research
and development expenses as a percentage of net sales to 4.5% for the three
months ended June 30, 1997 from 1.6% for the three months ended June 30, 1996.
For the six months ended June 30, 1997 research and development expenses
decreased to $1,415,000 from $1,483,000 for the six months ended June 30, 1996.
This represents an increase in research and development expenses as a percentage
of net sales to 4.0% for the six months ended June 30, 1997 from 1.6% for the
six months ended
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<PAGE> 15
June 30, 1996. The increase in research and development expenses as a percentage
of net sales was primarily attributable to the fixed nature of certain research
and development expenses allocated over a lower sales base. It is anticipated
that research and development expenses will increase in absolute dollars in
future quarters as the Company continues to diversify its product line and to
meet the requirements to recertify each increase in modem speeds such as 56Kbps
product in the international markets. Research and development expenses are
expected to continue to be a higher percentage of sales in 1997 than the
historical level of approximately 2.0% because of lower sales and higher
expenditures.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $4,250,000 in the three months ended June
30, 1997 from $4,915,000 in the three months ended June 30, 1996. Selling,
general and administrative expenses as a percentage of net sales increased to
26.0% in the three months ended June 30, 1997 from 10.5% in the three months
ended June 30, 1996. Selling, general and administrative expenses decreased to
$8,953,000 in the six months ended June 30, 1997 from $9,626,000 in the six
months ended June 30, 1996. Selling, general and administrative expenses as a
percentage of net sales increased to 25.5% in the six months ended June 30, 1997
from 10.5% in the six months ended June 30, 1996. The increase in selling,
general and administrative expenses as a percentage of net sales for the three
months and six months ended June 30, 1997 compared to the comparable period in
1996 is primarily the result of the substantial decline in net sales as well as
the fixed nature of many of the selling, general and administrative expenses.
The decline in absolute dollars of selling, general and administrative expenses
in the three months and six months ended June 30, 1997 compared to the
comparable period in 1996 was related to reduced spending on advertising and
lower sales commissions which vary with sales.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 30, 1997, the Company's working capital
decreased by $4,354,000 from December 31, 1996. This decrease was represented by
increases in cash of $5,795,000 and other current assets of $1,950,000 and a
decrease in current liabilities of $6,555,000 offset by decreases in inventories
of $7,164,000 and trade receivables of $11,490,000. The Company's operations
provided cash of $5,781,000 for the six months ended June 30, 1997. The
Company's investing activities consisted of capital expenditures of $228,000
during the six months ended June 30, 1997.
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
$12,000,000 line of credit with a commercial bank which expires on May 31, 1998.
As of June 30, 1997, no borrowings were outstanding under this line of credit,
which permits borrowings of the lesser of $12,000,000 or 60% of qualified
accounts receivable. Based on this formula, the amount of borrowing permitted
would be approximately $8,000,000 as of June 30, 1997. Under the terms of the
loan agreement relating to the line of credit, the Company may elect the
interest rate to be either the
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<PAGE> 16
bank's prime rate or the London InterBank Offered Rate (LIBOR) plus 1 1/2%. 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 does not anticipate that borrowings will be made
under the line of credit in the third quarter of 1997.
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, 1997.
The Company's trade receivables as of June 30, 1997 were $15,677,000
which represents an average days outstanding of approximately 90 days. The trade
receivables include an outstanding past due receivable from Packard Bell/NEC in
the amount of $1,944,000. Subsequent to June 30, 1997, Packard Bell has remitted
$1,655,000 and the balance is expected to be paid by September 30, 1997. The
Company also has a receivable outstanding in the amount of $2,390,000 from
Creatix. The Company had entered into a letter of intent to purchase Creatix but
the definitive agreement has not yet been executed and the Company has not
received the necessary bank financing nor the commitment for the subsidy from
the Government of Saarland. In light of these factors and the deterioration in
the operating results of Creatix, the Company will likely not complete the
acquisition. The receivable is the result of the Company selling modem chips to
Creatix. The trustee managing the operations of Creatix has indicated that the
receivable balance will be paid as Creatix collects receivables and reduces
inventories. Based on information provided to the Company by Creatix, the
Company believes that Creatix has the financial resources to pay the receivable
balance. However, further operating losses being incurred by Creatix may impact
its ability to pay the full balance. The inability of the Company to collect the
Creatix receivable could adversely affect the liquidity of the Company and
future financial results.
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
-16-
<PAGE> 17
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. The recent introduction of competing technologies on the 56Kbps
modem and the marketing activities to promote the advantages of such technology
has heightened the competitive pressures in the industry. The Company's
operating results will depend on its ability to compete using the Rockwell
technology (K56 flex(TM)). Each increase in speed in modem technology has had
transition issues; however, the Company believes that the transition to 56Kbps
technology is resulting in more extensive upgrade policies which may result in
lower gross margins than new sales of 56Kbps modems. Moreover, price decreases
have occurred earlier in the 56Kbps product cycle than occurred with 14.4Kbps
and 28.8Kbps products.
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 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, throughout 1996 and the first six
months of 1997 due to the increased use by OEMs of chipsets incorporating sound
and modem features which are integrated into the system board of the PC.
Moreover, it is a concern in the PC industry that the penetration of PCs into
the home has flattened at 40% and that PC growth will slow as PCs become more of
a replacement market. Any decrease in the markets for PC enhancement or
networking products
-17-
<PAGE> 18
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. The Company's expense levels are based, in part, on its
expectations as to future sales. If sales 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.
-18-
<PAGE> 19
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. The strength of the U.S. dollar in early 1997 may have a negative impact
for 1997. 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 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 31% of net sales in the six
months ended June 30, 1997. 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
-19-
<PAGE> 20
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 1996, the Company's three largest OEM
customers accounted for approximately 42% of the Company's net sales. Sales to
these three OEM customers during the first six months of 1997 declined to
approximately 7% of the Company's net sales. A decline in sales to any of the
Company's significant OEM customers or a delay or default in payment by these
customers could have a material adverse effect on the Company's results of
operations or financial condition.
The Company's three largest wholesale distributors accounted for
approximately 17% of the Company's net sales in the six months ended June 30,
1997. 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. The Company's sales to wholesale distributors
declined in absolute dollars from 1995 to 1996 and this trend continued during
the first six months of 1997.
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 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 considers entry 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,
-20-
<PAGE> 21
many of which have greater financial, technical, product development,
manufacturing or marketing resources and experience.
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 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
-21-
<PAGE> 22
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.
-22-
<PAGE> 23
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 22, 1997, the Company's
nominees for directors to serve until the 1998 Annual Meeting of Shareholders
were elected.
With respect to the election of directors, the voting was as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Robert W. Ferguson 7,879,544 168,210
George Gan Chee Wai 7,879,403 168,351
Patrick J. Keenan 7,837,928 209,826
Joseph M. O'Donnell 7,884,028 163,726
W. James Price 7,880,455 167,299
Anthony F. Zalenski 7,883,121 164,633
</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, 1997.
-23-
<PAGE> 24
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 13, 1997 -------------------------------------
Anthony F. Zalenski
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 1997 -------------------------------------
R. Michael Brewer
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-24-
<PAGE> 25
BOCA RESEARCH, INC.
INDEX TO EXHIBITS
Page
----
Exhibit 11 Calculation of shares used in determining earnings per share 26
-25-
<PAGE> 1
BOCA RESEARCH, INC.
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, 1997
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------ ----------------
<S> <C> <C>
Shares outstanding at January 1, 1997............. 8,678,883 8,678,883
Shares issued January 1, 1997 in
connection with the 1992 Employee
Stock Purchase Plan............................. 12,178 12,178
Shares issued in connection with a
non-qualified stock option plan................. 22,167 20,037
--------- ---------
Weighted average shares outstanding............... 8,713,228 8,711,098
========= =========
<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
========= =========
</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-31-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 13,621,000
<SECURITIES> 0
<RECEIVABLES> 18,958,000
<ALLOWANCES> 3,281,000
<INVENTORY> 11,217,000
<CURRENT-ASSETS> 47,243,000
<PP&E> 15,230,000
<DEPRECIATION> 9,415,000
<TOTAL-ASSETS> 53,853,000
<CURRENT-LIABILITIES> 4,349,000
<BONDS> 0
0
0
<COMMON> 87,000
<OTHER-SE> 49,417,000
<TOTAL-LIABILITY-AND-EQUITY> 53,853,000
<SALES> 16,352,000
<TOTAL-REVENUES> 16,352,000
<CGS> 15,518,000
<TOTAL-COSTS> 15,518,000
<OTHER-EXPENSES> 4,991,000
<LOSS-PROVISION> (73,000)
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (3,935,000)
<INCOME-TAX> (1,377,000)
<INCOME-CONTINUING> (2,558,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,558,000)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
