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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1935 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM
-------------------- TO
--------------------
COMMISSION FILE NUMBER 0-21138
BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
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FLORIDA 59-2479377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1377 CLINT MOORE ROAD
BOCA RATON, FLORIDA 33487
(407) 997-6227
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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.
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Yes X No
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Aggregate market value of voting stock by non-affiliates as of March 28, 1997:
$58,134,395
COMMON STOCK OUTSTANDING AS OF MARCH 28, 1997: 8,713,228 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Specifically identified information in the definitive Proxy Statement for
the 1996 Annual Meeting of Shareholders to be held on May 13, 1997, is
incorporated by reference into Part III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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BOCA RESEARCH, INC. ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
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PART I
ITEM 1. BUSINESS.................................................................. 1
ITEM 2. PROPERTIES................................................................ 11
ITEM 3. LEGAL PROCEEDINGS......................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 12
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................... 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................... 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 42
ITEM 11. EXECUTIVE COMPENSATION.................................................... 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........... 42
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PART I
ITEM 1: BUSINESS
Boca Research, Inc. ("Boca" or the "Company") designs, manufactures,
markets and supports data communications, videoconferencing, multimedia and
networking products to facilitate the transmission of information on personal
computers ("PCs") and computer networks. The Company provides products for use
in the corporate, consumer and small office/home office ("SOHO") marketplaces.
The Company believes that the consumer and SOHO markets are the fastest growing
segments of the market for PC data communications and multimedia products.
Boca's current product categories include: data communications (fax/data/voice
modems and ISDN terminal adapters); videoconferencing; multimedia (telephony,
sound, voice and data); networking; video graphics; and I/0, IDE, and multiport
products. The Company sells its products worldwide to OEMs, wholesale
distributors, retailers and catalog companies. The Company markets its products
under the "Boca Research" brand name.
The Company has successfully introduced new product categories and enhanced
its existing products to respond to market opportunities and to address changing
end user requirements. Market demand for the Company's products has been driven
by increases in requirements for higher speed data communications products such
as V.34 modems, the growth in the installed base of PCs worldwide, the
significant increase in the use of the Internet and on-line services resulting
in a need for speed, increased telecommuting and developments in video and
videoconferencing capabilities. The market demand for networking products has
increased because of the need to link computers and peripherals enabling users
and corporations to share resources such as processing power, software and
peripherals cost effectively.
STRATEGY
The Company's strategy is to design, manufacture, market and support data
communications, videoconferencing, multimedia and networking products that offer
a high degree of functionality at attractive prices. The Company primarily
utilizes third parties to develop new technologies for use in the Company's
products. Once the new technology is made available to the Company and the
Company believes that there is market demand for the technology, the Company
applies its design expertise to integrate the new technology in its products.
This strategy enables the Company to respond to technological advances and
changing end user requirements by introducing new products in a timely manner.
The Company is transitioning to more advanced technologies and
repositioning itself as an industry leader. The Company believes that through
the use of new and proven product technologies, a high level of parts
commonality and manufacturing efficiencies, it can provide data communications,
videoconferencing, multimedia and networking products with a superior
combination of price and performance characteristics. The Company intends to
continue to be a leader in cost-effective engineering and manufacturing to
produce low cost, quality products as the Company adds higher end products to
its portfolio. The Company differentiates itself from its competitors through
value-added engineering and U.S.-based manufacturing and its ability to
integrate new technologies into new products rapidly and at a low cost. The
Company entered 1997 anticipating that changing industry conditions could
adversely impact sales of its core product lines. Therefore the Company
recognizes the need to evolve into a full complement data communications company
from its current position as a hardware provider with a heavy concentration on
modems. Key elements of the Company's strategy are to:
Identify Attractive Markets. The Company has historically sought to
identify markets with established demand and target these markets by delivering
products with a superior combination of price and performance characteristics.
The Company has recently revised its strategy to include markets that the
Company believes have potential but do not have known demand. The Company also
assesses the needs of PC users and incorporates value-added features which are
expected to appeal to the majority of PC users.
Develop New Products Quickly. Once the Company selects an identified
market, it seeks to either develop or license from a third party a product for
introduction into that product's market generally within three to four months.
However, as the Company moves into more advanced products such as
videoconferenc-
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ing, the lead time for introduction of the product takes longer. Also, in light
of the rapid evolution of the data communications industry, product life cycles
have shortened. The Company has integrated its engineering and manufacturing
functions to simplify the design and manufacture of new products. This approach
allows for the utilization of proven product technologies, a high level of parts
commonality and increased manufacturing efficiencies. As a result, the Company
can introduce cost competitive products in a timely manner.
Pursue Strategic Partnerships and Acquisitions. The Company's strategy is
to offer a broad range of data communications, videoconferencing, multimedia and
networking products that provide a high degree of functionality at attractive
prices. The Company seeks to enhance its products by entering into technology
partnerships or joint ventures with third parties. The Company believes that
establishing strategic relationships with third parties will enable it to gain
access to emerging technologies at an earlier date than otherwise possible and
expand its market penetration. In January 1997, the Company announced that it
had signed a letter of intent to acquire certain assets of Creatix, a
German-based manufacturer of modems, ISDN equipment and other communications
products. If the acquisition of certain assets of Creatix is completed, the
Company will have manufacturing capacity in Germany which will enable the
Company to reduce delivery time to its European customers. In light of the
deterioration in the operating results of Creatix, the Company is evaluating
whether to complete the acquisition.
Expand International Operations. The Company's international strategy is
to focus on selected countries and to capitalize on increased international
demand for data communications, videoconferencing, multimedia and networking
products in those countries. The Company is focusing its international sales and
marketing efforts primarily in the European market and the emerging markets of
the Pacific Rim and Latin America/Caribbean. In 1994, 1995 and 1996,
international sales comprised approximately 16%, 21% and 29%, respectively, of
the Company's net sales. The Company's international sales and marketing
strategy focuses on the development of products and technologies which address
end user requirements in the countries where its products are marketed. In
addition, the Company offers product packaging and user manuals written in the
local language and conformed to local regulations.
Continue Low Cost Manufacturing. The Company anticipates that it will
continue to invest in surface mount technology ("SMT") manufacturing operations
which have enabled the Company to reduce costs, increase capacity and improve
the quality of its products. The Company's manufacturing operations also provide
the Company with the flexibility to meet demanding customer delivery and quality
requirements. The Company plans to make additional capital expenditures to
increase the productivity of its manufacturing equipment. The Company received
in November 1996 unconditional ISO 9002 certification through TUV Bayem, a
premier European certification body. ISO 9002 certification is recognized
internationally under the guidelines of the 90-country International
Organization which requires the Company to meet stringent standards in all
activities related to product quality and reliability.
Maintain Balance of Distribution Channels. The Company continually seeks
to expand its distribution channels in order to reach a broad range of end users
and to minimize its reliance on any single channel. The Company's products are
currently sold through wholesale distributors, OEMs, retailers, and catalog
companies. The Company's strategy is to continue to sell its products through
these distribution channels with emphasis on sales to OEMs, retailers and
catalog companies.
Provide Quality Customer Service. The Company seeks to differentiate
itself, particularly from its Pacific Rim competitors, through the quality of
its products and the level of its technical support and customer service. The
Company designs its products for high reliability, compatibility with existing
and emerging industry standards, ease of use and support. In addition, the
Company believes its five-year limited warranty and technical support programs
provide a broad level of customer service.
PRODUCT DEVELOPMENT
The Company believes that its ability to respond quickly to market demand,
technological advances and changes in industry standards is critical to its
success. Traditionally, the Company's strategy has been to develop products for
markets with established demand. During 1996, the Company entered into new
markets where it anticipates there will be significant product demand. Through
its planned acquisition of Creatix, the
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Company also plans to leverage the engineering expertise and transition to more
advanced product technologies. Boca's engineering expertise has enabled it to
bring new products to market quickly and, through product redesign, reduce the
manufacturing costs of more mature products. During 1994, 1995 and 1996,
research and development expenses were $1,438,000, $2,679,000 and $3,073,000,
respectively. It is anticipated that research and development expense will
increase in both absolute dollars and as a percent of net sales in the future.
The increase will be more dramatic if the Company acquires certain assets of
Creatix since Creatix has placed emphasis on product development. This is
necessary to support new markets, new products and new technologies in an
industry with fast changing technologies. Several of the Company's products
incorporate software which the Company licenses from third parties in exchange
for the payment of a royalty based on the number of units sold. The Company
includes royalty expense in costs of goods sold. In 1994, 1995 and 1996, royalty
expense was approximately $528,000, $708,000 and $517,000, respectively. The
decrease in royalty expense in 1996 is due to increased sales to OEM customers
which typically incorporate their own software in the modem.
The Company relies primarily on third parties to develop new technologies
for use in the Company's products. However, the Company plans to be less
dependent on outside technology partners by developing and sourcing more of its
technology internally. Boca believes it can continue to successfully integrate
new technologies into new products rapidly and at a competitive cost. The
Company is focusing its development efforts primarily on expanding its product
offerings within existing product categories and developing new data
communications, videoconferencing, multimedia and networking products. The
Company's design expertise has enabled it to use fewer components in its
products resulting in a high level of parts commonality across the product lines
and increased manufacturing efficiencies.
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PRODUCTS
The Company designs, manufactures, markets and supports primarily six
product categories representing over 50 separate major products that address
most of the data communications, videoconferencing, multimedia and networking
needs of PC users. The following table lists a representative sample of the
Company's current products.
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MARKET
PRODUCT CATEGORY DESCRIPTION PRODUCTS INTRODUCTION
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Data Communications Modems enable the end user to send and Webglider -460 (ISDN Terminal
(Fax/ Data/ Voice receive data across standard telephone Adapter) March 1996
Modems and ISDN lines and to send and receive facsimiles V-34 28.8Kbps On-line Express
terminal adapters) directly from the PC as well as offering Modem November 1995
the end user voicemail, speakerphone and BOCACOMBOcards - PC April 1995
Plug and Play capabilities. The Company's BOCAMODEMcardi -PC April 1995
modem products won several industry BOCACELLcards - PC April 1995
awards in 1994, including PC Magazine's V-34 Boca Office Communicator January 1995
"Editor's Choice," PC Computing's "Best V-34 28.8 Kbps BOCAMODEM September
200 Hardware Products," BYTE's "Best 14.4Kbps Multimedia Voice 1994
Value," and a four-star rating from PC Modem with Voiceview
Digest. In 1995, the 14.4 Kbps Multimedia 14.4Kbps DatalFax BocaModem April 1995
Voice Modem won the American Facsimile March 1993
Association's award for Best
Fax/Voice/Data Modem (PC), Computer
Telephony's "Editors' Choice",
VARBusiness "Editors' Choice" and
Computer Telephony's -1995 Product of the
Year" and the 28.8 Kbps External
BOCAMODEM won Key Solutions' "Editors'
Award".
Multimedia Multimedia products convert ordinary PCs SoundExpression 28.8SVD September
(Faxl Data/ Voicemail into multimedia PCs by adding sound, SoundExpreision 28.8SRS 1995
Speak.erpbonelSound) voice and data capabilities. The SoundExpression 14.4VSp June 1995
Company's SoundExpression products December 1994
feature a high speed data/fax modem,
voicemail, speakerphone and 16-bit/32-bit
Soundblaster Pro compatible sound.
SoundExpression 28.8SRS won Byte Informat
'95's "Best Product".
Networking Networking products for Ethernet networks BOCAHUB-24 Plus October 1994
provide workstation and server BOCAHUB-16 Plus February i994
connectivity. The Company offers a full BOCAHUB-8 March 1993
range of Plug and Play Ethernet cards as BOCALANcard-1001 10 April 1994
well as interfaces to ISA, VESA and PCI BOCALANcard 2000 + Combo September
Bus interfaces. BOCALANcard 2000 + 1994
BOCALANcat-d-Combo September
BOCALANcard-TP 1994
BOCALANcard-PCI May 1994
May 1994
April 1994
Video Video graphics adapters provide enhanced Voyager Movie Player November 1995
resolution and increased performance Voyager 64 April 1995
within both Windows and non-Windows-based PCI-Bus SuperX VGA July 1994
environments as well as advanced maging SuperX VGA September
capabilities. Super VGA 1991
October 1990
The Company's video graphics products
offer a variety of capabilities ranging
from basic VGA through 32 and 64-bit
graphical user interface ("GUI-)
accelerators. These products are
available for ISA, VESA and PCI Bus
interfaces. In 1994, the Company won PC
World's "Best Buy" award for its Voyager
product and in 1995, Voyager 64 won
Window Magazine's "Win95 Winner"
I/O, IDE, & Multiport I/O devices allow additional ports to be Complete 1/0 Model 650 April 1995
Products added to a PC enabling the end user to IDE Plus Controller-VL July 1994
connect peripheral equipment, such as IDE Plus Controller July 1994
modems and printers to the PC. IDE IOAT66 May 1993
products are used to control mass storage IOAT55 January 1993
devices such as hard and floppy disk Boca I/O 2 BY 4 March 1992
drives.
Multiport products allow for the
connection of multiple PCs and terminals
to a single host PC utilizing multiuser
operating systems such as SCO UNIX,
XENIX, and PC-MOS.
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Data Communications Products. Modems are used to send and receive data
between PCs and other systems, and in the transmission of information in
facsimile format. In addition to traditional modems, Boca offers modems with
voicemail capability which allow the user to create an inexpensive message
handling system. The Company markets both internal and external versions of its
modem products. The Company has established itself as a leader in telephony
modems with enhanced capabilities such as data, fax, voice and speakerphone. The
Company offers modems with such functions as Plug and Play and Digital
Simultaneous Voice over Data ("DSVD"). The Company's DSVD products enable the
end user to interact with on-line services on a standard telephone line, thereby
delivering such services as electronic merchandising, technical support/trouble
shooting and interactive games.
The Company continues to be a leader in adopting new data communications
technologies such as V.34bis (33.6Kbps), 56Kbps, DSVD and Plug and Play. The
Company currently markets its modem products worldwide and is certified in
certain countries in Europe and the Pacific Rim, including Germany, Holland,
Denmark, Finland, Norway, Sweden, United Kingdom, Japan, Singapore and South
Korea, as well as in Canada and Israel. The Company also markets on a limited
basis its PCMCIA (credit card size) modem products for laptop and notebook
computers to include cellular/wireless and V.34 products with international
certification to the expanding mobile computing market.
The Company's Webglider, the first in the Company's line of ISDN products,
was shipped in March 1996. The Webglider is an external terminal adapter
designed to provide users the option of connecting existing telephone-type
(phone, fax and modem) devices as well as computer equipment to ISDN networks.
The Webglider offers users network connect speeds of up to 128Kbps as compared
to speeds of 33.6Kbps offered by the Company's analog V.34bis modems. Net sales
were $550,000 in 1996 or 0.4% of net sales.
The Company introduced its first data communications products in the fourth
quarter of 1991, and, according to an independent market research firm, the
Company is ranked fourth in modem vendor market share in North America, based
upon units shipped in 1995. Sales of data communications products accounted for
approximately 56%, 58% and 85%, respectively, of the Company's net sales in
1994, 1995 and 1996.
Networking Products. The use of networking products enables a variety of
computers to be linked and has increased with the growth of client-server
software. The Company's Ethernet adapter and hub products are designed to
provide high performance, cost effective connectivity solutions for small to
medium sized businesses. The Company's adapters support Industry Standard
Architecture ("ISA"), Peripheral Component Interconnect ("PCI") and local bus
systems. The Company has secured Novell certification for its networking
products which ensures its customers that its products will be compatible with
other Novell certified NetWare network operating system products. The Company's
products interface with other networking operating systems including Windows,
Windows NT, OS/2, Windows for Workgroups and Lantastic. The Company product line
includes 8, 16 and 24-port hubs, as well as a range of plug and play adapter
cards. The Company intends to continue to expand its product line with such
offerings as 100 Mbps Ethernet cards and Single Network Management Protocol
("SNMP") hubs. Sales of networking products accounted for approximately 9%, 6%
and 4%, respectively, of the Company's net sales in 1994, 1995, and 1996.
Video Graphics Products. Video graphics adapters afford the user a variety
of capabilities to enhance both Windows and non-Windows display performances.
These products range from basic VGA through 64-bit GUI accelerators for Windows,
CAD and DOS applications. These capabilities will enable the user to view movies
and play games on CD ROM utilizing the Motion Picture Experts Group ("MPEG")
standard. This marketplace is expanding rapidly with new applications for
providing video processing capabilities to the desktop computer, including such
features as video scaling, video playback and video capture. The Company
believes that enhancements to its current products will respond to these new
applications by providing 64-bit video, video scaling, play back and MPEG
features. In November 1995, the Company introduced the Voyager Movie Player, an
integrated video graphics card which provides high-speed graphics and CD-quality
videos utilizing the MPEG standard. Sales were minimal on this product because
of lack of movies on the CD format. Sales of this product category have declined
due to the increased video capability that PC manufacturers are building into
the system's motherboards. Also, since this market is perceived as a niche
market with fast changing technology requirements, the Company has not placed
significant emphasis on this
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product category. Sales of video graphics products accounted for approximately
19%, 10% and 4%, respectively, of the new product category's net sales in 1994,
1995 and 1996.
I/O,IDE and Multiport Products. I/O and multiport products allow
additional serial and parallel ports to be added to a single IBM-compatible PC.
These additional ports are used to connect peripheral computer equipment such as
modems, terminals, and printers to the PC. Boca offers a variety of 1/0 boards
that support combinations of up to two parallel ports and up to six serial
ports. In 1995, the Company introduced a new version of high speed serial I/O
cards, which maximize performance in Windows 95, Windows NT, UNIX and Xenix
operating systems without the hardware costs and burdens of a microprocessor.
Boca's IDE adapter products are used to control mass storage devices such
as hard and floppy disk drives. The IDE Controller allows the PC user to attach
up to two IDE hard drives and two floppy drives made by different manufacturers;
this adapter also permits simple connection of tape backup subsystems for
restoration of end user data. The IDE Plus Controller provides all the features
of the IDE Controller as well as an additional user-configurable bidirectional
parallel port, two serial ports and a game adapter which supports an
IBM-compatible analog joystick.
Multiport BocaBoards are available in 4, 8, or 16 serial ports with driver
support for SCO UNIX, Xenix, and PC-MOS applications. These boards are typically
used where several terminals and printers are required such as a store point of
sale terminal.
Sales of I/0, IDE, and multiport products are primarily to an installed
base and accounted for approximately 14%, 8% and 5%, respectively, of the
Company's net sales in 1994, 1995, and 1996. The Company has not placed
significant emphasis on this product category.
Multimedia Products. Multimedia products convert ordinary PCs into
multimedia PCs by adding sound, voice and data communications capabilities. The
Company was one of the first companies to introduce a multimedia product with an
integrated speakerphone-sound modem when it introduced its SoundExpression
product in December 1994. The SoundExpression products feature a high speed data
and fax modem, voicemail system with 1,000 password-protected mailboxes, full
duplex speakerphone, CD-ROM interface, caller ID support, DSVD capabilities, and
16-bit Soundblaster Pro compatible sound, all on a single board. Since the
introduction of the first generation SoundExpression 14.4 VSp product in 1994,
the Company has integrated new functions and features in the product, including
DSVD capabilities, 32-bit sound, and speeds of up to 28.8Kbps. Sales of
multimedia products accounted for approximately 1% and 18%, respectively, of the
Company's net sales in 1994 and 1995. Sales of the Company's SoundExpression
multimedia products declined in 1996 to less than 1% of net sales or
approximately $1,000,000 due to the increased use by OEMs of chipsets
incorporating sound and modem features which are integrated onto the system
board of the PC.
VideoConferencing. In 1996 the Company introduced the video phone, desktop
consumer oriented two-way videoconferencing, for video over regular phone lines.
The video phones feature real-time video with full duplex audio, hands-free
speakerphone operation, a self view window and simultaneous audio and video. The
video phone is compliant with the ITU H.324 international videoconferencing
standard. The Boca Video Phone Elite offers superior audio, up to 15 frames per
second video and a high speed PCI interface. The Boca Video Phone Classic is
lower cost and is targeted for families and home or small office users. Sales of
this product category started in the third quarter and were approximately
$1,000,000 for the year or 0.7% of net sales.
New Products. The Company continues to review opportunities for the
development and introduction of new products and new product categories that
meet changing end user requirements. Currently, the Company is developing
products to expand existing product categories. The Company's modem products
will be enhanced to provide transmission speeds of up to 56Kbps. In 1997, the
Company plans to introduce an Internet TV Adapter which allows consumers to use
their home televisions to surf the Internet for information such as the latest
news and weather updates, sport scores, business briefs and entertainment and
variety news as well as send and receive e-mail -- all from the comfort of their
living room using a standard remote control that will display the information on
the TV screen. In 1997, the Company plans to compliment its hardware offerings
with value added software products. In April 1997, it plans to introduce a
privacy and anti-virus
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protection software called Data Secure!. Data Secure! is a software package
designed to protect the privacy of a user's PC data by preventing virus
contamination and unauthorized access to data files, messages, PC vital system
(i.e., hard drive, e-mail communication and the Internet). This product was
developed by Nisita Software & Applications (1995) Ltd., an Israel corporation.
The Company in 1996 entered into a OEM agreement with NetComm Limited, an
Australian manufacturer and supplier of modems, software and services for PC
communications and the Internet, pursuant to which, among other things, the
Company has purchased and branded a new BocaPro 16 Corporate and BocaPro 16 Rack
System. These two new high-end modems are designed specifically for large
corporate environments needing optimum business and network managed
communications features. These new high-end offerings round out the Company's
modem product line by providing quality feature-rich product for large
organizations and expands its modem offerings beyond the consumer and SOHO
marketplace. Introduced in late 1996, the product has had limited market
acceptance.
Boca continues to believe that the diversification of its product
categories is one of the cornerstones of its future success. In 1997, Boca plans
to move into ancillary modem businesses such as software and higher-margined
products such as intelligent I/O devices, a broader range of networking
products, and internationally certified ISDN equipment. Although the Company
believes that to date it has been able to respond on a timely basis to market
changes by drawing upon its engineering expertise, there can be no assurance
that the Company will be able to anticipate future market developments or
develop products to meet those needs on a timely basis with price and
performance characteristics which would permit those products to compete
successfully. For example, sales of the movie player, ISDN Webglider, and Pro 16
high-end modems have been below expectation.
SALES CHANNELS
The Company sells its products worldwide to OEMs, wholesale distributors,
retailers, and catalog companies. To strengthen its international sales efforts,
the Company has hired additional sales personnel in the Pacific Rim, Europe and
Latin America. The Company plans to continue to broaden its international
distribution base to more effectively penetrate emerging markets such as the
Pacific Rim and Latin America/Caribbean.
Original Equipment Manufacturers. The Company markets to OEMs who purchase
the Company's products and typically incorporate them into their finished
products. The OEM channel of distribution is different from wholesale
distributors and retailers in terms of packaging, support, price and terms. The
Company generally targets specific products for the OEM marketplace and offers
specific marketing arrangements that enable private label packaging and sale of
the Company's products. Sales to OEMs accounted for approximately 22%, 46%, and
56% of net sales in 1994, 1995 and 1996, respectively. In 1996, AST Research
accounted for approximately 20% of the Company's net sales.
The Company's OEM customers included in 1996 AST Research, HYUNDAI
Electronics, Digital Equipment Corporation, Fujitsu Corporation, Hucom, IBM and
NEC Technologies, Inc./Packard Bell.
Wholesale Distributors. The Company also sells its products through
regional, national, and international wholesale distributors. Sales to wholesale
distributors accounted for approximately 64%, 42% and 34%, respectively, of the
Company's net sales in 1994, 1995 and 1996. The Company's U.S. distributors
include major microcomputer wholesale distributors such as Ingram Micro Inc.,
Tech Data Corporation, and Merisel, Inc., as well as regional wholesale
distributors. Sales to Ingram Micro accounted for approximately 10% of the
Company's net sales in 1995 and 6% in 1996. Net sales to wholesale distributors
decreased in absolute dollars from 1995 to 1996.
The Company has purchasing and marketing agreements with its principal
wholesale distributors. These agreements generally contain provisions relating
to stock rotation privileges and price protection. Wholesale distributors
typically purchase products from the Company by submitting purchase orders.
Returns of unsold products by wholesale distributors are permitted on a limited
basis in exchange for other Boca products on terms negotiated with the Company.
The Company works with wholesale distributors to monitor inventory
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levels. In addition, in the event the Company reduces its prices, the Company
credits its wholesale distributors 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 Company has established
reserves for product returns, price protection and warranty claims which
management believes are adequate. The Company believes that its return and
pricing policies are consistent with general industry practices. There can be no
assurance that product returns, price protection or warranty claims will not
have a material adverse effect on the Company's future operating results.
Retailers and Catalog Companies. The Company also sells directly to
several retail chains and catalog companies. Similar to its arrangements with
wholesale distributors, the Company offers stock rotation privileges and price
protection to retailers. Sales to retailers and catalog companies accounted for
approximately 14%, 12% and 10%, respectively, of the Company's net sales in
1994, 1995 and 1996. The Company's U.S. retailers and catalog companies include
Micro Warehouse Inc., Best Buy Co., The Wiz and Computer City. The Company
believes that the retail channel is the fastest growing distribution channel in
the PC industry. The Company intends to focus on increasing its presence in the
retail channel.
International. The Company sells its products through dealers and
distributors worldwide and supports marketing programs with local distributors
in certain countries. In 1994, 1995 and 1996, international sales comprised
approximately 16%, 21% and 28%, respectively, of the Company's net sales.
International sales are subject to risks, including various regulatory
requirements, political and economic changes and disruptions, tariffs or other
barriers, difficulties in staffing and managing foreign sales operations, and
potentially adverse tax consequences. In addition, fluctuations in exchange
rates may render the Company's products less competitive to local product
offerings or expose the Company to foreign currency exchange losses. In the
latter part of 1996 and early 1997, the U.S. dollar has been strong against
major currencies such as the German mark and Japanese yen which causes an
increase in price of the Company's products in these markets. This may require
the Company to reduce price and accept lower gross profit margins.
In support of the Company's strategy to expand its international
operations, in September 1995, the Company acquired fifty percent of the Common
Stock of MBf/Boca Asia Pacific Sdn Bhd, a Malaysian joint venture between the
Company and Hitechniaga Sdn Bhd which will primarily distribute the Company's
products in the Pacific Rim. In 1996 the Company formed a distribution
partnership, PowerTel BOCA, in India to facilitate product distribution into
South Asia, India and parts of Africa. The Company owns 20% of PowerTel BOCA. In
January 1997, the Company announced that it had signed a letter of intent to
acquire certain assets of Creatix, a German-based manufacturer of modems, ISDN
equipment and other communications products. Creatix markets and sells its
products primarily in the German market. Creatix has been operating under a
court appointed bankruptcy trustee since November 1996. As a result of the
bankruptcy filing, Creatix' sales have declined since November 1996. If the
acquisition of certain assets of Creatix is completed, the Company will have
manufacturing capacity in Germany which will enable the Company to reduce
delivery time to its European customers. In light of the deterioration in the
operating results of Creatix, the Company is evaluating whether to complete the
acquisition.
SALES AND MARKETING
The Company sells its products primarily through its sales force which at
December 31, 1996 consisted of 26 employees. The Company's domestic sales force
is segregated by geographic regions. The Company's international sales effort is
managed by the Company's Senior Vice President and General Manager,
International, with support from sales managers in the Pacific Rim, Europe,
Canada and Latin America.
The Company generates brand recognition through trade advertising and
participation in international, national, and regional trade shows. The Company
allocates a percentage of the major wholesale distributors' net sales to a
cooperative advertising fund used by those distributors to promote the Company's
products. In connection with new product introductions, the Company may work
with a major wholesale distributor or retailer to tailor specific product
promotions. The Company also participates in the COMDEX and CEBIT trade shows,
as well as numerous other regional and international trade shows. In 1996, the
Company began a
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<PAGE> 11
national television advertising campaign on CNN to enhance its brand name
recognition and to advertise its videoconferencing products. This advertising
campaign will not continue in 1997.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
The Company believes that its technical support and customer service
programs have been a major factor in the Company's success and distinguish the
Company from many other vendors of PC enhancement products. The Company offers
extensive user documentation and a technical support hotline to wholesale
distributors, resellers, and end users. The Company's technical analysts answer
technical support calls directly and generally provide same-day response to
questions that cannot be resolved in the initial phone call. The Company also
provides a seven-day, 24 hour electronic bulletin board that makes available
current software drivers, technical tips and answers to hardware and software
compatibility questions. In addition, the technical support department has
implemented a Quick Fax System providing installation tips and technical
documents to customers via fax. Boca also provides a support forum on CompuServe
and maintains a home page on the Internet's World Wide Web to provide customer
support and information. Although the Company's technical support and customer
service programs are available to its international customers, the Company
typically relies on its foreign distributors to provide these programs. Many of
these distributors are trained by the Company's personnel and have direct access
to the Company's programs.
All products sold by the Company include a five-year limited warranty which
permits customers to return any product for repair or replacement if the product
does not perform as warranted. To date, the Company has not encountered material
warranty claims or liabilities. There can be no assurance, however, that
warranty claims will not have a material adverse effect on future operating
results.
MANUFACTURING
The Company began its own manufacturing operation in April 1992 to provide
the Company with assembly capabilities utilizing SMT. This technology allows
increased functional density and reduction in size of the circuit board. Such
reduction in size permits increasingly complex circuits to be packaged at closer
proximities, enhancing circuit processing speed and thus board and system
performance. SMT has enabled the Company to reduce costs, increase capacity,
increase production yields, and improve the quality of its products. All of the
Company's products are currently designed, manufactured, assembled, tested, and
packaged at the Company's manufacturing facility in Boca Raton, Florida using
seven high-volume SMT lines, which currently run on two shifts. The Company has
the ability to increase its monthly production capacity by updating some of its
manufacturing equipment, by adding additional SMT lines and/or by running a
third shift.
If the acquisition of Creatix is completed, an additional capacity of three
SMT lines will be available in Germany, enabling the Company to reduce delivery
time to its European customers.
Quality and reliability are emphasized in the design and manufacture of the
Company's products. Accordingly, each product undergoes quality inspection
throughout the manufacturing process as well as in-circuit and functional
testing. The Company utilizes automated/computerized test equipment for this
purpose, some of which has been designed by the Company.
PURCHASING
The Company purchases substantially all of its components and subassemblies
from suppliers on a purchase order basis and does not maintain long-term supply
arrangements. The Company selects suppliers based on quality of product and
industry acceptance. 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. Similar to others
in the electronics industry, the Company has, from time to time, experienced
difficulty in obtaining some 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
9
<PAGE> 12
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
component shortages will not occur in the future which could increase the cost
or delay the shipment of the Company's products, which in turn could have a
material adverse effect on the Company's operating results. Government tariffs
on imported components could also impact the Company's ability to compete with
foreign manufacturers. An increase in import tariffs on such components would
likely result in increases in the prices of these components paid by the Company
and other domestic manufacturers. Significant tariffs could result in the
Company seeking alternate sources of supply which may not be as reliable as the
Company's existing sources.
BACKLOG
The Company's backlog at December 31, 1995 and December 31, 1996 was
approximately $29,200,000 and $5,200,000, respectively. Orders included in
backlog generally may be cancelled or rescheduled by customers without
significant penalty.
COMPETITION
The markets for the Company's products are intensely competitive resulting
in constant price pressures. Competitive factors include price, product quality
and reliability, product availability, credit terms, name recognition, delivery
time and post-sale service and support. The Company believes that it currently
competes favorably with respect to these factors, although it may be at a
competitive disadvantage against companies with greater financial, technical,
product development, manufacturing or marketing resources. A variety of
companies currently offer products that compete directly with the Company's
products. The Company's primary U.S.-based competitors are Diamond Multimedia,
Global Village, Hayes Microcomputer Products, Motorola, U.S. Robotics and Zoom
Telephonics. In addition to U.S.-based firms, the Company faces competition from
Pacific Rim suppliers, including CIS and GVC, which generally offer these
products at significantly lower prices. These suppliers typically market their
products through the same distribution channels as the Company. The Company
competes with these suppliers on the basis of product quality, delivery times,
freight costs, technical support and customer service. In addition, as the
Company enters new product markets, such as ISDN, cable modems and
videoconferencing, the Company expects 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.
There is a trend in original PC system manufacturing to integrate
additional functionality onto the system board or to utilize chipsets which
provide additional functionality. As PC manufacturers integrate more memory on
the system board as well as certain sound and video graphics functions and some
interface functions such as IDE controllers, or utilize chipsets which provide
such capabilities, the Company's strategy is to broaden its product offerings to
offset the decreasing opportunities for PC enhancement products. In this regard,
demand for the Company's SoundExpression multimedia products declined in the
last six months of 1995 and continued throughout 1996, due to the increased use
by OEMs of chipsets incorporating sound and modem features which are integrated
onto the system board of the PC. The Company believes that the size of both the
aftermarket and the OEM market will allow the Company to expand its product
offerings. In addition, OEMs which do not integrate more functionality on the
system board or utilize chipsets which provide such functionality will continue
to require PC enhancement products.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on trade secret and copyright laws to protect
its proprietary rights in its products, rather than upon patent protection. The
Company believes that its success depends primarily upon factors such as its
responsiveness to customer needs and changing markets, the technological
competence and innovative skill of its personnel and its marketing skills.
Although the Company has not historically been the
10
<PAGE> 13
subject of significant claims of infringement by third parties, as is common in
the industry, the Company from time to time receives, and may in the future
receive, communications from third parties asserting intellectual property
rights relating to the Company's products and technologies. There can be no
assurance that the Company will be able to obtain licenses of any intellectual
property rights claimed by third parties in the future 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 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.
The Company uses the Boca and Boca Research names as trademarks in
connection with its products. Each of the Boca and Boca Research names are
registered trademarks with the United States Patent and Trademark Office.
In certain of its products, the Company includes software licensed from
third parties, including VoiceView TalkShop, which is licensed from Radish
Communications Systems, Inc. and incorporated into the Company's multimedia
voice modem; QuickLink(TM), which is licensed from Smith Micro and incorporated
into many of the Company's modems; MediaWorks, which is licensed from Midisoft
Corporation and TEN software, which is licensed from Total Entertainment
Network, Inc., both of which are incorporated into the Company's SoundExpression
multimedia product; VideoLink, which is licensed from Smith Micro, and VDOPhone,
which is licensed from VDO Net Corp., both of which are incorporated into the
Company's videoconferencing products. The Company also licenses the Trio
Information Systems from Trio Software for use in its international modems. All
of these license arrangements are on a non-exclusive basis and require the
Company to pay the licensors a specified royalty based upon the number of units
sold by the Company. The Company's operating results could be adversely affected
by a number of factors relating to third party software, including lack of
market acceptance, failure by the licensors to promote or support the software,
delays in shipments of the Company's products as a result of delays in the
introduction of 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 or claims that such software infringes the
intellectual property rights of third parties could adversely affect the
Company's operating results. The Company also licenses the ISDN technology
utilized in its ISDN terminal adapters from Chase Research, Plc and the
technology utilized in many of its networking products from NetComm Limited.
EMPLOYEES
As of December 31, 1996, the Company had 339 full-time employees, including
215 in manufacturing and operations, 68 in sales, marketing and customer
support, 33 in finance and administration, and 23 in engineering and product
development. The Company's success will depend in part on its ability to attract
and retain highly qualified technical, marketing, engineering and management
personnel. The Company's employees are not covered by any collective bargaining
agreements and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good. The Company uses part time
employees in its manufacturing operation to balance changes in production
levels. The number of part-time employees at December 31, 1996 was approximately
119.
ITEM 2: PROPERTIES
The Company's headquarters are located in a 70,000 square feet facility in
Boca Raton, Florida. This facility accommodates corporate administration,
marketing, sales and manufacturing, including final testing, assembly,
packaging, and shipping of products. The lease expires in September 2000. The
Company leases another 25,000 square feet in a facility adjacent to the
headquarters building which is used for warehousing, testing of returns, and
other rework. The lease expires in July 2002. A third facility consisting of
32,000 square feet in Boca Raton is subject to a lease which expires in July
2002. This facility is adjacent to the Company's headquarters and is used for
engineering and customer support. The Company believes that its existing
11
<PAGE> 14
facilities are adequate for its current needs and that additional facilities in
the area are available to meet future needs.
ITEM 3: LEGAL PROCEEDINGS
From time to time, lawsuits are filed against the Company in the ordinary
course of business. The Company is not a party to any litigation that in the
judgement of management is likely to have a material adverse effect on the
Company or its business. 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 the 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders of the Company during the
fourth quarter of the fiscal year ended December 31, 1996.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. The executive officers of the
Company are elected annually by the Board of Directors and hold office until
their successors are elected and qualified, or until their earlier removal or
resignation.
Anthony F. Zalenski, 53 years old, has served as President, Chief Executive
Officer and a member of the Board of Directors since September 1994. From 1988
to 1994, Mr. Zalenski was employed by Motorola, Inc., most recently as Executive
Vice President and Chief Operating Officer of Motorola UDS (Universal Data
Systems), a modem manufacturing subsidiary of Motorola, Inc. Prior to joining
Motorola UDS, Mr. Zalenski held various management positions with Comsat
Corporation, General Datacomm Industries and AT&T.
James E. Hamilton, 38 years old was hired November 29, 1996 as Senior Vice
President of Domestic Sales and subsequently promoted to President of the
Retail/Distribution division on January 13, 1997. From July 1994 to January
1997, Mr. Hamilton was Vice President-General Merchandising Manager of the Tandy
Corporation. From May 1993 to July 1994, he was Senior Buyer/Divisional
Merchandise Manager with Montgomery Ward & Co. where he also worked an
additional fifteen years of his career.
R. Michael Brewer, 54 years old, has served as Senior Vice President of
Finance and Chief Financial Officer of the Company since February 1996. From
January 1994 to February 1996, Mr. Brewer served as Vice President of Finance of
the Company. From September 1978 to January 1994, Mr. Brewer served as Vice
President of Finance for the United States operations of Mitel Corporation, a
manufacturer of telecommunications equipment. Mr. Brewer is a Certified Public
Accountant.
Charles R. Kenmore, 47 years old, has served as Senior Vice President and
General Manager, International since February 1996. From January 1995 to
February 1996, Mr. Kenmore served as Vice President and General Manager,
International. From October 1989 to January 1995, Mr. Kenmore served as the Vice
President and General Manager International of the Information Services Group of
Motorola, Inc.
Michael A. Reale, 57 years old, has served as Senior Vice President of
Manufacturing since February 1996. From January 1995 to February 1996, Mr. Reale
served as Vice President of Manufacturing. From October 1992 to January 1995,
Mr. Reale served as President and Chief Operation Officer of MGV Manufacturing,
Inc., a provider of memory modules, manufacturer of proprietary PC designs and
contract electronic assembly. From February 1989 to June 1992, Mr. Reale served
as Senior Vice President of SCI Systems, Inc., a contract manufacturer.
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<PAGE> 15
Christopher Buffum, 47 years old, has served as Senior Vice President of
OEM Sales of the Company since January 1997. From February 1996 to December 1996
Mr. Buffum served as Vice President of OEM Sales of the Company. From November
1994 to February 1996, Mr. Buffum served as Director of OEM Sales of the Company
and from August 1991 to November 1994 he served as Manager of OEM Sales. From
July 1989 to August 1991, Mr. Buffum was employed by Dell Computer as a Director
of Field Sales.
Kevin James Lockwood, 37 years old, has served as Vice President of
Domestic Sales since February 1997. From April 1996 to January 1997, Mr.
Lockwood was employed by Fujitsu as Director of Retail Operations. From June
1994 to April 1996, Mr. Lockwood was Director of Retail Sales at Acer America
Corporation.
Larry L. Light, 41 years old, has served as Vice President of Engineering
since February 1995. From July 1981 to January 1995, Mr. Light was employed by
IBM Corporation, where he held a variety of management and engineering
positions, including Product Manager for several PC Systems.
Martha A. Ritchason, 57 years old, has served as Vice President of Human
Resources of the Company since July 1995. From August 1991 to June 1995, Ms.
Ritchason served as Director of Human Resources of the Company. From December
1979 to July 1991, Ms. Ritchason served as Director of Human Resources for the
City of Delray Beach, Florida.
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq Stock Market under
the symbol BOCI. The following table sets forth the high and low last reported
sale prices for the Company's Common Stock for the period indicated as reported
by the Nasdaq National Market.
<TABLE>
<CAPTION>
YEAR FISCAL QUARTER ENDED HIGH LOW
- ----- ------------------------------------------------------------ ---- ---
<S> <C> <C> <C>
1995 March 31, 1995.............................................. 13 1/2 8 1/8
June 30, 1995............................................... 27 10 3/8
September 30, 1995.......................................... 35 1/4 22 1/4
December 31, 1995........................................... 29 5/8 21
1996 March 31, 1996.............................................. 25 15 3/4
June 30, 1996............................................... 25 1/2 16
September 30, 1996.......................................... 17 1/2 9 1/2
December 31, 1996........................................... 13 3/8 10 3/8
1997 March 31, 1996 (through March 28, 1997)..................... 8 3/8 6 7/8
</TABLE>
As of March 28, 1997, the Company had outstanding 8,713,228 shares of
Common Stock held by 343 shareholders of record. This number does not include
beneficial owners of the Common Stock whose shares are held in the names of
various dealers, clearing agencies, banks, brokers and other fiduciaries.
The Company currently anticipates that it will retain all of its earnings
for use in the development of its business and does not anticipate paying any
cash dividends on the Common Stock in the foreseeable future. The covenants
contained in the Company's line of credit prohibit the Company from paying
dividends on the Common Stock without the prior approval of the bank.
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<PAGE> 16
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for the years
ended December 31, 1992 through December 31, 1996 is derived from the Company's
consolidated financial statements, which have been audited by the Company's
independent auditors. The information set forth below is qualified by reference
to and should be read in conjunction with the Financial Statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales.................................... $44,554 $64,717 $83,594 $143,038 153,524
Cost of goods sold........................... 28,546 45,142 61,284 107,486 122,855
------- ------- ------- -------- --------
Gross profit....................... 16,008 19,575 22,310 35,552 30,669
------- ------- ------- -------- --------
Operating expenses:
Research and development................ 854 1,493 1,438 2,679 3,073
Selling, general and administrative..... 7,144 12,526 12,391 18,469 18,551
Impairment of goodwill.................. 0 1,938 0 0
------- ------- ------- -------- --------
Total operating expenses........... 7,998 15,957 13,829 21,148 21,624
------- ------- ------- -------- --------
Income from operations....................... 8,010 3,618 8,481 14,404 9,045
Non-operating income, net.................... 26 320 472 540 596
------- ------- ------- -------- --------
Income before income taxes................... 8,036 3,938 8,953 14,944 9,641
Provision for income taxes (1)............... 2,193 1,205 3,217 5,402 3,191
------- ------- ------- -------- --------
Net income................................... $ 5,843 $ 2,733 $ 5,736 9,542 6,450
======= ======= ======= ======== ========
PRO FORMA (UNAUDITED) DATA (1):
Historical income before income taxes........ $ 8,036 -- -- -- --
Income taxes................................. 2,966 -- -- -- --
======= ======= ======= ======== ========
Net income................................... $ 5,070 -- -- -- --
=======
Primary earnings per share (pro forma for
1992)...................................... $ 0.73 $ 0.33 $ 0.68 $ 1.07 $ 0.72
======= ======= ======= ======== ========
Weighted average primary shares
outstanding................................ 6,904 8,316 8,460 8,921 8,941
======= ======= ======= ======== ========
Fully diluted earnings per share (pro forma
for 1992).................................. $ 0.73 $ 0.33 $ 0.68 $ 1.06 $ 0.72
======= ======= ======= ======== ========
Weighted average fully diluted shares
outstanding................................ 6,904 8,316 8,460 9,040 8,941
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $11,100 $24,087 $27,801 $ 37,854 $ 47,248
Total assets................................. 17,420 36,410 41,340 57,678 $ 66,066
Long-term obligations, net of current
portion.................................... -- -- -- -- --
Total stockholders' equity................... $13,672 $30,004 $36,017 $ 46,607 $ 55,162
</TABLE>
- ---------------
(1) Through March 3, 1992, the Company (excluding Boca Research International,
Inc.) was an S corporation for Federal and state income tax purposes and,
accordingly, was not subject to corporate income tax. The pro forma data
has been computed as if the Company were subject to corporate income taxes
for 1992, based on the statutory tax rates and the tax laws in effect
during the respective periods.
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<PAGE> 17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this Report contain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Certain
Factors That May Affect Future Performance" as well as those discussed in this
section and elsewhere in this Report.
RESULTS OF OPERATIONS
The following discussion of the Company's consolidated results of
operations for the years ended December 31, 1994, 1995 and 1996 is based upon
the consolidated statements of income data contained in the Company's selected
consolidated financial data appearing elsewhere in this Report. The following
discussion and analysis should be read in conjunction with the financial
information set forth under "Selected Consolidated Financial Data" and the
consolidated financial statements, including the notes thereto, included
elsewhere herein.
The following table sets forth for the periods indicated the percentage of
net sales represented by each line item in the Company's consolidated statements
of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................................. 73.3 75.1 80.0
----- ----- -----
Gross profit...................................................... 26.7 24.9 20.0
----- ----- -----
Operating expenses:
Research and development.......................................... 1.7 1.9 2.0
Selling, general and administrative............................... 14.8 12.9 12.1
----- ----- -----
Total operating expenses.......................................... 16.5 14.8 14.1
----- ----- -----
Income from operations.............................................. 10.2 10.1 5.9
Non-operating income................................................ 0.6 0.4 .4
----- ----- -----
Income before income taxes.......................................... 10.8 10.5 6.3
Income taxes........................................................ 3.9 3.8 2.1
----- ----- -----
Net income.......................................................... 6.9% 6.7% 4.2%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Net Sales. The Company's net sales increased by 7.3% from $143,038,000 in
1995 to $153,524,000 in 1996. The increase was attributable to increased sales
of the Company's data communications products, increased sales to OEMs and
increase penetration of international markets. The Company's net sales declined
in the last six months of 1996 to $61,927,000 from $91,596,000 in the first six
months of 1996. This trend is expected to continue for at least the first six
months of 1997 in light of weakened industry conditions due in part to the
anticipation of availability of 56Kbps analog modem technology which has caused
consumers to delay their purchasing decisions, resulting in excess channel
inventories. Also, several of the Company's OEM customers entered the fourth
quarter of 1996 with high inventories in anticipation of the normally strong
fourth quarter. Sales of PCs were weak in the fourth quarter which affected the
Company's sales to OEM customers as new orders were delayed and backlog was
cancelled or rescheduled to a later date.
The Company's net sales increased by 71.1% from $83,594,000 in 1994 to
$143,038,000 in 1995. The increase was attributable to increased sales of the
Company's data communications and multimedia products, increased sales to OEMs
and increased penetration of international markets. Sales of the Company's data
communications products increased by 78.1% from $47,045,000 in 1994 to
$83,771,000 in 1995 and sales of the Company's SoundExpression multimedia
products increased from $808,000 in 1994 to $25,189,000 in 1995. The increased
sales of the Company's data communications and multimedia products in 1995 was
primarily due to increased demand for the Company's 28.8Kbps modem products and
SoundExpression
15
<PAGE> 18
products, which were introduced in late 1994. Sales of the Company's
SoundExpression multimedia products declined in the last six months of 1995 due
to the increased use by OEMs of chipsets incorporating sound and modem features
which are integrated onto the system board of the PC.
International sales increased by approximately 130% and 44% in 1995 and
1996, respectively. In 1994, 1995 and 1996, international sales comprised
approximately 16%, 21%, and 29% respectively, of the Company's net sales. In
1996, Hucom was the Company's largest international customer and represented 9%
of the Company's net sales. Sales to Hucom were minimal in the last six months
of 1996. The Company believes that Hucom over estimated demand in the first six
months of 1996, which resulted in over ordering of product and excess inventory.
The Company does not know when or if Hucom will resume purchasing product.
Sales to OEMs increased by approximately 255% and 32% in 1995 and 1996,
respectively. The increase in 1996 was due in part to $30,133,000 in OEM sales
to AST Research which was the Company's largest customer and represented 20% of
net sales. Sales to N.E.C. Technologies whose U.S. operations were acquired in
the latter part of 1996 by Packard Bell, were $20,880,000. Sales to
N.E.C./Packard Bell represented 14% of net sales in 1996 and N.E.C./Packard Bell
was the Company's second largest customer. As of December 31, 1996, the Company
had an accounts receivable balance of $8,621,000 due from N.E.C./Packard Bell
and N.E.C./Packard Bell had excess inventory of the Company's modem products. In
February 1997, N.E.C./Packard Bell agreed to pay $5,263,000 of the outstanding
account receivable, which amount was paid in March 1997, and agreed to pay the
remaining balance as it sells the underlying inventory. The Company agreed to
accept, under certain conditions and with a restocking charge, returns of
certain products previously sold to N.E.C./Packard Bell. While the Company has
recorded an allowance for these possible returns, there can be no assurance that
such allowance will be sufficient to cover product returns. The increase in 1995
was due in part to $24,582,000 in OEM sales to NEC Technologies, Inc. Sales to
OEMs comprised approximately 22%, 46% and 56%, respectively, of the Company's
net sales in 1994, 1995 and 1996.
The following table presents the net sales for the Company's product
categories for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRODUCT CATEGORIES 1994 % 1995 % 1996 %
- ------------------------------------------------------------------ ------- --- -------- --- -------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Data communications............................................... $47,045 56% $ 83,771 58% $130,931 85%
Multimedia........................................................ 808 1 25,189 18 1,016 1
Video graphics.................................................... 15,424 19 13,965 10 6,225 4
Video conferencing................................................ -- -- -- -- 1,000 1%
I/O, IDE and Multiport............................................ 12,002 14 11,642 8 8,027 5
Networking........................................................ 7,168 9 8,222 6 6,314 4
Other............................................................. 1,147 1 249 -- 11 --
------- --- -------- --- -------- ---
Total net sales............................................... $83,594 100% $143,038 100% $153,524 100%
======= === ======== === ======== ===
</TABLE>
Gross Profit. Gross profit decreased from $35,552,000 in 1995 to
$30,669,000 in 1996, and decreased as a percentage of net sales from 24.9% in
1995 to 20.0% in 1996. The Company's gross profit percentage has decreased in
each of the last four years, however in previous years, the percentage increase
in sales offset the effect of the gross profit percentage erosion. The sales
increase in 1996 of 7.3% compares with a 1995 increase of 71.1%, and a 1994
increase of 29.2%. Entering 1996, the industry was experiencing a shortage of a
critical component for the 28.8Kbps modem which created a shortage mentality
resulting in customers and manufacturers over ordering and over producing
product. The component shortage problem was over by the end of the second
quarter of 1996 and, coupled with slower sales, industry pricing pressure became
severe as manufacturers attempted to increase sales by reducing prices. The
Company anticipates that gross profit percentages will continue to be under
significant pressure in the first six months of 1997. As a result of declining
sales and reduced margins, the Company will report a net loss for the first
quarter of 1997. The gross profit percentage will also be affected by the
underutilization of the Company's manufacturing operations and the
implementation of the Company's policy to upgrade 33.6Kbps modems to 56Kbps
modems. The gross
16
<PAGE> 19
profit percentage on upgrading previously shipped 33.6Kbps to 56Kbps modems may
be lower than the gross profit percentages on new sales of 56Kpbs modems.
Gross profit increased from $22,310,000 in 1994 to $35,552,000 in 1995, but
decreased as a percentage of net sales from 26.7% in 1994 to 24.9% in 1995. The
decrease in gross profit as a percentage of net sales was primarily due to
increased sales to OEM customers. As discussed below, gross profit margins are
typically lower on sales to OEMs, but are generally offset by lower operating
expenses associated with sales to OEMs.
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, depending upon the product and channel mix. Management believes that the
lower operating expenses typically associated with OEM sales generally offset
their corresponding lower gross profit margins. There could be circumstances,
which the Company anticipates will occur during the first six months of 1996, in
which the Company accepts lower gross profit margin sales for purposes such as
to phase-out inventory, to utilize manufacturing capacity or to respond to
competitive pricing pressures.
Research and Development Expenses. Research and development expenses were
$1,438,000 in 1994, $2,679,000 in 1995 and $3,073,000 in 1996, and represented
1.7%, 1.9% and 2.0%, respectively, of net sales for each of those years. The
increase in research and development expenses in 1995 and 1996 as a percentage
of net sales was primarily attributable to the increase in expenses associated
with the Company's efforts to obtain international certification on the
Company's data communications products and an increase in expenses associated
with prototyping the Company's current product designs for OEM applications. As
product life cycles shorten there is an increased need to recertify more
products. Each increase in speed from 28.8Kbps to 33.6Kbps to 56Kbps requires
recertification. Research and development expenses are expected to increase as a
percentage of sales in the first six months of 1997 because of lower sales and
the fixed nature of many research and development expenses together with
increased expenses associated with the planned diversification of the Company's
product line.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12,391,000 in 1994, $18,469,000 in 1995 and
$18,552,000 in 1996, and represented 14.8%, 12.9% and 12.1%, respectively, of
net sales for each of those years. Selling, general and administrative expenses
in 1996 include $256,000 for consulting fees and expenses recorded for the
October 4, 1996 Consulting Agreement entered into by the Company with ArgoQuest,
Inc. See Note 7 to the Consolidated Financial Statements for further information
regarding this Agreement. Also, the terms and conditions of this Agreement are
detailed in the Company's Current Report on form 8-K filed with the Commission
on October 15, 1996. Expenses for employee bonuses in 1996 were approximately
$1,100,000 less than 1995 because net income performance targets were not met.
Selling, general and administrative expenses for 1995 include $383,000 of
due diligence costs associated with the potential acquisition of Hayes
Microcomputer Products, Inc. The acquisition discussions were subsequently
terminated. The decrease in selling, general, and administrative expense as a
percentage of net sales is primarily the result of increased sales to OEM
customers during 1995, as well as the fixed nature of certain selling, general
and administrative expenses allocated over a larger sales base. 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 distribution channels, and the particular sales and marketing
requirements of each of the channels. Certain selling, general, and
administrative expenses have a fixed nature, thus a reduction in net sales could
increase selling, general and administrative expenses as a percentage of net
sales. It is expected that for at least the first six months of 1997 net sales
will be lower than the comparable period in 1996 and selling, general and
administrative expenses as a percentage of net sales will increase.
17
<PAGE> 20
Provision for Income Taxes. Federal and state income taxes have been
provided for at an effective rate of 35.9% in 1994, 36.1% in 1995 and 33.1% in
1996. The differences in the Company's effective tax rate from the statutory
rate are primarily due to the operations of the Company's foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's working capital increased by
$9,394,000 from December 31, 1995. This increase was represented by increases in
cash and cash equivalents of $7,348,000, trade receivables of $4,296,000, other
current assets of $1,658,000, a decrease in current liabilities of $168,000,
consisting of an increase in trade payables offset by a decrease in accrued
expenses, income taxes payable and other liabilities as detailed in Note 5 to
the Consolidated Financial Statements and a decrease in inventories of
$4,976,000. The increase in cash and cash equivalents in 1996 primarily resulted
from cash provided by operations of $8,072,000 offset by capital expenditures of
$2,222,000. The Company's capital expenditures in 1996 consisted primarily of
the purchase of production and manufacturing equipment.
Accounts receivable increased significantly in 1996 as a result of
customers delaying payment due to their slow sales, weakened industry conditions
which required many customers to improve their cash flow by delaying payment and
extended terms given by the Company. The allowances for product returns, price
protection and doubtful accounts are an estimation by management of receivables
that will not be collected because of product returns, price protection credits,
customer disputes for short shipments, disputed claims, and bad debts. These
allowances totaled 13.6% and 12.7% of gross receivables as of December 31, 1995
and December 31, 1996, respectively. In making its estimation, the Company's
management considers the level of sales, the type of customer (international or
domestic), the channel mix (OEM, wholesale distributor or retailer and catalog
companies), product price changes and competitive price protection measures.
Should the actual amounts of product returns, price protection and uncollectible
accounts exceed the estimated amounts used in recording the allowances,
additional charges to operations would be required.
The Company has taken actions to reduce its exposure in connection with
doubtful accounts receivable, including requiring certain customers to maintain
letters of credit and entering into an insurance arrangement with the
Export-Import Bank of the United States to make available insurance on
receivables from certain qualified customers.
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
revolving line of credit with a commercial bank which expires on May 30, 1998.
As of December 31, 1996, no borrowings were outstanding under this line of
credit. The line of credit 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, limit the incurrence of additional debt, and prohibit payment of
dividends without the bank's consent.
The Company's collection period for its trade receivables may increase
during 1997 as a result of higher sales to the retail market in which extended
credit terms are common. The Company currently believes that the combination of
cash generated from operations, the Company's existing cash balances and
availability under its line of credit will be sufficient to meet its liquidity
and capital requirements for at least the next twelve months. However, the
significant decrease in sales being experienced in the first quarter of 1997 may
put pressure on the cash resources of the company until inventories are reduced
and receivables are collected. The introduction of the higher speed 56Kbps
analog modem may significantly decrease the demand for lower speed analog
modems. This may require the Company to sell current inventory at lower margins.
However, the Company believes that since an industry standard has not been
established for the 56Kbps modem and the 56Kbps modem is priced higher than
28.8Kbps and 33.6Kbps modems that the lower speed modems will have a market for
all of 1997 but will experience severe pricing pressure.
The Company regularly evaluates potential acquisitions of businesses,
technologies or products complementary to the Company's business. In the event
that the Company effects one or more acquisitions, the
18
<PAGE> 21
Company's cash balances may be utilized to finance such acquisitions and
additional sources of liquidity such as debt or equity financings may be
required to finance such acquisitions or to meet working capital needs. There
can be no assurance that additional capital beyond the amounts currently
forecasted by the Company will not be required nor that any such required
additional capital will be available on terms acceptable to the Company, if at
all, at such time or times as required by the Company.
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. 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. 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 could occur 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 and throughout 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. 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. This could
impact modem sales to the Company's OEM customers in the future. 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.
19
<PAGE> 22
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 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. As a result of
declining sales and reduced margins, the Company will report a net loss for the
first quarter of 1997.
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. 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
20
<PAGE> 23
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 56% of net sales in 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
1996, the Company's three largest OEM customers accounted for approximately 41%
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 of operations or financial condition.
The Company's three largest wholesale distributors accounted for
approximately 14% of the Company's net sales in 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.
The Company's sales to wholesale distributors declined in absolute dollars from
1995 to 1996.
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 enters into new product markets, such as ISDN, cable
modems and videoconferencing, the Company anticipates that it will encounter
competition
21
<PAGE> 24
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 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.
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<PAGE> 25
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.
23
<PAGE> 26
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(1) Financial Statements
Independent Auditors' Report of Deloitte & Touche LLP.................... 25
Consolidated Balance Sheets.............................................. 26
Consolidated Statements of Income........................................ 27
Consolidated Statements of Stockholders' Equity.......................... 28
Consolidated Statements of Cash Flows.................................... 29
Notes to Consolidated Financial Statements............................... 30
(2) Financial Statement Schedules............................................ 41
Schedule II -- Consolidated Valuation and Qualifying Accounts............ 41
</TABLE>
Schedules other than those listed above have been omitted since they are
either not applicable, not required or the information is included elsewhere
herein.
24
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Boca Research, Inc.
We have audited the accompanying consolidated balance sheets of Boca
Research, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule listed in the Index at Item 8.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Boca Research, Inc. and
subsidiaries at December 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepting accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 3, 1997
25
<PAGE> 28
BOCA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1)........................... $ 477,494 $ 7,825,801
Trade receivables, net (Notes 1,10).......................... 22,871,369 27,167,474
Inventory, net (Notes 1,2)................................... 22,456,765 18,380,520
Prepaid expenses and other assets (Note 11).................. 889,719 890,297
Prepaid and deferred income taxes (Notes 1,4)................ 2,229,966 3,887,608
----------- -----------
Total current assets.................................... 48,925,313 58,151,700
Property and equipment, net (Notes 1,3)........................... 7,721,790 7,052,240
Non-current portion of deferred income taxes (Notes 1,4).......... 242,441 274,792
Goodwill, net..................................................... 166,400 0
Other assets (Note 11)............................................ 622,419 587,122
----------- -----------
TOTAL............................................................. $57,678,363 $66,065,854
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 5,837,329 $ 7,314,472
Accrued expenses and other liabilities (Note 5).............. 4,627,484 3,589,382
Income taxes payable......................................... 606,873 0
----------- -----------
Total current liabilities............................... 11,071,686 10,903,854
----------- -----------
Commitments and contingencies (Notes 7,9,12)
Stockholders' equity (Note 8):
Preferred stock, 5,000,000 $.01 par value shares authorized,
none issued and outstanding at December 31, 1995 and 1996...
Common stock, 25,000,000 $.01 par value shares authorized,
8,522,759 and 8,678,883 issued and outstanding at December
31, 1995 and 1996, respectively............................. 85,228 86,789
Additional paid-in capital................................... 23,469,975 25,573,639
Retained earnings............................................ 23,051,474 29,501,572
----------- -----------
Total stockholders' equity.............................. 46,606,677 55,162,000
----------- -----------
TOTAL............................................................. $57,678,363 $66,065,854
========== ==========
</TABLE>
See notes to consolidated financial statements
26
<PAGE> 29
BOCA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net sales (Note 10)............................... $83,593,920 $143,038,331 $153,523,545
Cost of goods sold................................ 61,283,736 107,486,109 122,854,506
----------- ------------ ------------
Gross profit............................ 22,310,184 35,552,222 30,669,039
----------- ------------ ------------
Operating expenses:
Research and development..................... 1,438,299 2,679,114 3,072,755
Selling, general and administrative.......... 12,391,095 18,469,308 18,551,511
----------- ------------ ------------
Total operating expenses................ 13,829,394 21,148,422 21,624,266
----------- ------------ ------------
Income from operations............................ 8,480,790 14,403,800 9,044,773
----------- ------------ ------------
Non-operating income (expense):
Interest income.............................. 145,907 167,820 163,034
Other income................................. 326,207 394,370 468,602
Interest expense............................. 0 (21,536) (35,749)
----------- ------------ ------------
Total non-operating income, net......... 472,114 540,654 595,887
----------- ------------ ------------
Income before income taxes........................ 8,952,904 14,944,454 9,640,660
Income taxes (Notes 1,4).......................... 3,216,881 5,402,011 3,190,562
----------- ------------ ------------
Net income........................................ $ 5,736,023 $ 9,542,443 $ 6,450,098
========== =========== ===========
Primary earnings per share........................ $ 0.68 $ 1.07 $ 0.72
========== =========== ===========
Weighted average primary shares outstanding....... 8,459,642 8,920,552 8,940,622
========== =========== ===========
Fully diluted earnings per share.................. $ 0.68 $ 1.06 $ 0.72
========== =========== ===========
Weighted average fully diluted shares
outstanding..................................... 8,459,642 9,040,184 8,940,622
========== =========== ===========
</TABLE>
See notes to consolidated financial statements
27
<PAGE> 30
BOCA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.......... 8,374,043 $83,741 $22,146,761 $ 7,773,008 $30,003,510
Stock options exercised............... 50,642 506 277,357 277,863
Net income............................ 5,736,023 5,736,023
--------- ------- ----------- ----------- -----------
Balance at December 31, 1994.......... 8,424,685 84,247 22,424,118 13,509,031 36,017,396
--------- ------- ----------- ----------- -----------
Stock options exercised............... 98,074 981 609,216 610,197
Tax benefit of options exercised...... 436,641 436,641
Net income............................ 9,542,443 9,542,443
--------- ------- ----------- ----------- -----------
Balance at December 31, 1995.......... 8,522,759 85,228 23,469,975 23,051,474 46,606,677
--------- ------- ----------- ----------- -----------
Stock options exercised............... 156,124 1,561 1,496,919 1,498,480
Tax benefit of options exercised...... 606,745 606,745
Net income............................ 6,450,098 6,450,098
--------- ------- ----------- ----------- -----------
Balance at December 31, 1996.......... 8,678,883 $86,789 $25,573,639 $29,501,572 $55,162,000
======== ======= ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
28
<PAGE> 31
BOCA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 5,736,023 $ 9,542,443 $ 6,450,098
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 1,520,285 2,615,591 3,057,983
Change in assets and liabilities:
(Increase) decrease in:
Receivables...................................... (1,488,451) (9,880,326) (4,296,105)
Inventory........................................ (2,074,511) (10,983,704) 4,076,245
Prepaid expenses and other assets................ 36,781 (635,359) 34,719
Deferred income taxes............................ 817,877 (1,314,259) (649,855)
Increase (decrease) in:
Accounts payable................................. (1,143,753) 2,772,264 1,477,143
Accrued expenses and other liabilities........... (17,946) 2,448,147 (1,038,102)
Income taxes payable............................. 662,733 965,570 (1,040,266)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................... 4,049,038 (4,469,633) 8,071,860
----------- ----------- -----------
INVESTING ACTIVITIES
Capital expenditures.................................. (4,151,213) (2,623,476) (2,222,033)
Loan to related party (Note 12)....................... (294,711) (205,289)
Loan repayment from related party (Note 12)........... 500,000
----------- ----------- -----------
Net cash used in investing activities............ (4,445,924) (2,328,765) (2,222,033)
----------- ----------- -----------
FINANCING ACTIVITIES
Exercise of stock options............................. 277,863 610,197 1,498,480
----------- ----------- -----------
Net cash provided by financing activities........ 277,863 610,197 1,498,480
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... (119,023) (6,188,201) 7,348,307
Cash and cash equivalents at beginning of year.......... 6,784,718 6,665,695 477,494
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 6,665,695 $ 477,494 $ 7,825,801
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes (net of refunds).................... $ 1,713,124 $ 5,750,700 $ 4,880,683
========== ========== ==========
Interest......................................... $ 0 $ 21,536 $ 35,749
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
29
<PAGE> 32
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. Boca Research, Inc. (the "Company") designs,
manufactures, markets and supports data communications, videoconferencing,
multimedia and networking products to facilitate the transmission of information
on personal computers and computer networks. The Company sells its products
primarily to original equipment manufacturers, wholesale distributors and
retailers and catalog companies principally in the United States, Europe and the
Far East. The majority of the Company's operations are located in Boca Raton,
Florida.
Principles of Consolidation. The accompanying financial statements include
the Company and its wholly owned subsidiaries, Boca Research of Delaware, Inc.,
Boca Research International, Inc., Boca Research Holland B.V., Boca Research
(UK) Limited, Boca Research International Holdings Ltd. and Complete Acquisition
Corp. All material intercompany accounts and transactions have been eliminated
in consolidation. The Company accounts for its investments in MBf/Boca Asia
Pacific Sdn Bhd and Power Tel BOCA Private Ltd. using the equity method.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist primarily of
cash, certificates of deposit, Treasury Bills, commercial paper and money market
funds purchased with maturities of 90 days or less.
Inventory. Inventory is stated at the lower of average cost or market.
Reserves are recorded to reduce excess, obsolete and slow moving inventory to
estimated net realizable value. The markets for the Company's products are
characterized by rapidly changing technology, evolving industry standards and
short product life cycles. The Company may experience rapid declines in sales,
selling prices and margins toward the end of the life cycle of a product or
product category. These declines, which may be difficult to predict, could
result in additional charges for excess, obsolete or slow moving inventory,
returns of older generation products from distributors or substantial price
protection charges, which would have an adverse effect on results of operations.
The Company currently buys certain components used in its products from
single sources. In addition, certain modem chipsets used in the Company's data
communications products have been in short supply and are frequently on
allocation by suppliers. Although there are a limited number of manufacturers of
these chipsets, management believes that other suppliers could provide similar
chipsets on comparable terms. However, a change in suppliers or shortages in the
availability of the chipsets, could cause a delay in manufacturing and a
possible loss of sales, which would affect operating results adversely.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the lesser of the
estimated useful lives of five years or the lease term for leasehold
improvements.
Long-Lived Assets. 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" in 1996. Under SFAS No. 121,
long-lived assets and certain identifiable intangibles to be held and used by a
company are required to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for such long-lived assets and
identifiable intangibles should be based on the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed of are
required to be reported generally at the lower of the carrying amount or fair
value less cost to sell. The adoption of SFAS No. 121 did not have a significant
effect on the Company's financial position or results of operations.
30
<PAGE> 33
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill. Goodwill represents the excess of the cost of the acquired
business over the fair value of net assets acquired in the acquisition of The
Complete PC, Inc. Management reviews goodwill periodically to determine if the
goodwill has been impaired. Management gives consideration in this process to
its best estimate of future operating results of the acquired business and
evaluates the appropriateness of the remaining amortization period. As of
December 31, 1996, goodwill was fully amortized.
Research and Development Costs. Research and development costs are
expensed as incurred.
Income Taxes. The Company provides for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes." Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities and carryforwards that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Earnings Per Share. Earnings per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding.
Common equivalent shares consist of stock options (using the treasury stock
method).
Revenue Recognition. The Company recognizes revenue from product sales
upon shipment, when title passes. Under specified conditions, certain customers
are allowed to return products for credit. Also, under the terms of some of the
agreements, in the event the Company reduces its selling prices, the customers
receive credit for the difference between the original purchase price of product
remaining in specified levels of their inventories and the Company's reduced
price for such products. The Company records allowances for estimated returns
and price adjustments. The allowance for sales returns, allowances and price
protection was $2,613,148 and $2,625,000 at December 31, 1995 and 1996,
respectively, and is netted against accounts receivable. Reductions in selling
prices and product returns may result from events, such as actions by
competitors, technological changes and others, which may be difficult to predict
and may be beyond the Company's control. Accordingly, actual returns, allowances
and price protection may vary significantly in the near term from the estimates
used in recording the allowances.
Trade receivables are presented net of an allowance for doubtful accounts
of $1,000,000 and $1,326,008 as of December 31, 1995 and 1996, respectively.
Product Warranties. Under the Company's five year limited warranty
program, it has agreed to repair or replace products during the designated
warranty period. Costs associated with the warranty program are determined on
the basis of estimated net future costs related to products sold.
Advertising. The Company participates in cooperative advertising programs
with certain customers. These programs are used by the Company to reimburse
customers for certain forms of advertising. In general, the programs allow
customers credits up to a specified percentage of net purchases. When the
products are sold to such customers, the Company accrues a liability for the
estimated amount to be reimbursed.
Costs of advertising by the Company are expensed as incurred. Total
advertising expense for 1994, 1995 and 1996 was $3,042,020, $4,132,602 and
$3,735,187, respectively.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the fiscal 1996 presentation.
31
<PAGE> 34
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Raw materials................................. $16,500,985 $13,540,462
Work-in-progress.............................. 5,346,162 5,779,063
Finished goods................................ 1,689,618 1,460,995
Inventory reserve............................. (1,080,000) (2,400,000)
----------- -----------
$22,456,765 $18,380,520
========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Machinery and equipment..................... $11,513,621 $13,328,709
Furniture and fixtures...................... 590,419 597,702
Leasehold improvements...................... 935,647 1,121,586
Vehicles.................................... 29,133 74,641
----------- -----------
Total cost............................. 13,068,820 15,122,638
Less accumulated depreciation............... (5,347,030) (8,070,398)
----------- -----------
$ 7,721,790 $ 7,052,240
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was $1,353,485, $2,398,557 and $2,872,990.
4. INCOME TAXES
The net deferred tax asset in the accompanying balance sheets includes
deferred tax assets (liabilities) attributable to the following items:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
Accounts receivable allowances................ $1,163,567 $1,285,197
Accrued expenses.............................. 654,007 648,174
Inventory reserve............................. 388,800 864,000
Goodwill...................................... 623,454 628,365
Depreciation.................................. (442,381) (410,034)
Allowance for product warranties.............. 84,960 106,560
---------- ----------
Net deferred tax asset................... 2,472,407 3,122,262
Valuation allowance for deferred tax assets... 0 0
---------- ----------
Net deferred tax asset after valuation
allowance.............................. $2,472,407 $3,122,262
========= =========
</TABLE>
32
<PAGE> 35
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income taxes in the accompanying statements of income are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current........................................... $2,199,087 $6,156,581 $3,527,431
Deferred.......................................... 749,721 (1,204,737) (595,700)
---------- ---------- ----------
Total........................................ 2,948,808 4,951,844 2,931,731
---------- ---------- ----------
State:
Current........................................... 199,917 559,689 312,986
Deferred.......................................... 68,156 (109,522) (54,155)
---------- ---------- ----------
268,073 450,167 258,831
---------- ---------- ----------
Total........................................ $3,216,881 $5,402,011 $3,190,562
========= ========= =========
</TABLE>
The Company's effective income tax rate differed from the statutory federal
rate of 35% as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before income taxes........ 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Rate differential...................................... -- -- (1.0)
State income taxes..................................... 2.0 2.0 1.8
Exempt foreign trade income............................ (1.3) (2.7) (3.3)
Other, net............................................. 0.2 1.8 0.6
---- ---- ----
Income tax provision................................... 35.9% 36.1% 33.1%
==== ==== ====
</TABLE>
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Cooperative advertising................................. $1,161,799 $ 733,157
Salaries, wages, benefits and bonuses................... 1,602,714 1,158,684
Commissions............................................. 316,103 70,848
Allowance for product warranties........................ 236,000 296,000
Other................................................... 1,310,868 1,333,693
---------- ----------
$4,627,484 $3,589,382
========= =========
</TABLE>
6. LINE OF CREDIT
The Company has an unsecured revolving line of credit agreement 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. No borrowings were outstanding as of December 31, 1995 and
1996.
33
<PAGE> 36
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$716,196, $1,171,872 and $818,223, respectively. During 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 2002 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, 1997, 1998, 1999, 2000, 2001 and thereafter are
$638,669, $622,347, $638,758, $581,128, $389,725 and $198,684, 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.
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 (the
"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 ("OEMs"). The principal terms of the
Consulting Agreement are as follows:
The Consulting Agreement has a term of 54 months (the "Term"). In
consideration of entering into the Consulting Agreement, ArgoQuest will receive
a monthly fee of $83,333 in cash, plus expense, for the Term, except that no
fees will be paid for the period April 1997 through March 1998 (the "Deferred
Period"), unless the Board of Directors of the Company shall determine
otherwise. If the Company achieves at least $50 million in certain Net Sales,
defined in the Consulting Agreement effectively as sales from new customers and
incremental additional sales from existing customers resulting from ArgoQuest's
services, ("Net Sales"), during the first eighteen months of the Consulting
Agreement (the "First Period"), then ArgoQuest will be entitled to receive an
additional consulting fee of $1,000,000 less any consulting fees paid to
ArgoQuest during the Deferred Period. If the Company does not achieve at least
$50 million in Net Sales during the First Period, the Company may terminate the
Consulting Agreement.
ArgoQuest will have the right to be granted options to purchase shares of
Common Stock of the Company, subject to the Company achieving specified Net
Sales during certain periods (the "Initial Options"). In the event that during
the First Period, the Company achieves Net Sales of at least $100 million, then
ArgoQuest will be granted options to purchase 500,000 shares of Common Stock of
the Company (the "Boca Common Stock"), at an exercise price of $2.95 per share.
In the event that during the period April 1998 through March 1999 (the "Second
Period"), the Company achieves Net Sales of at least $125 million, then
ArgoQuest will be granted options to purchase 1,000,000 shares of Boca Common
Stock, at an exercise price of $2.95 per share. In the event that the Company
achieves at least $50 million in Net Sales for the First Period, the Initial
Options to be granted with respect to the First Period will be pro rated on a
linear
34
<PAGE> 37
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis between $0 and $100 million of the targeted Net Sales for such period. In
the event that the Company achieves at least $70 million in Net Sales for the
Second Period, the Initial Options to be granted with respect to the Second
Period will be pro rated on a linear basis between $0 and $125 million of the
targeted Net Sales for such period. In addition, in the event that Net Sales for
the First Period are less than $100 million, ArgoQuest will be entitled to be
granted those Initial Options attributable to the First Period which were not
granted in the First Period if the Company achieves Net Sales for the Second
Period of at least $125 million plus an amount equal to the difference between
actual Net Sales for the First Period and $100 million.
ArgoQuest will have the right to receive additional options to purchase
shares of Boca Common Stock, the grant of such options to be subject to the
Company achieving the Net Sales Target set forth below during the periods set
forth below (the "Performance Options"):
<TABLE>
<CAPTION>
PRO RATA NUMBER OF
NET SALES TARGET THRESHOLD PERFORMANCE EXERCISE PRICE
PERIOD (MILLIONS) (MILLIONS) OPTIONS PER SHARE
- ----------------------- ---------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Date of Agreement $150 $100 225,000 $14.16
through 3/31/98 200 150 225,000 14.16
4/1/98 through 175 150 300,000 17.70
3/31/99 225 175 300,000 17.70
4/1/99 through 250 175 300,000 20.65
3/31/00 350 250 300,000 20.65
4/1/00 through 325 250 300,000 23.60
3/31/01 400 325 300,000 23.60
</TABLE>
In the event that the Company achieves Net Sales equal to at least the Pro
Rata Threshold set forth in the table above but less than the Net Sales Target
for such period, then ArgoQuest will be entitled to be granted a portion of the
Performance Options designated for such period determined on a linear basis from
the Pro Rata Threshold through the Net Sales Target for such period.
All earned Initial Options will vest in full on the date of grant. All
earned Performance Options will vest over a three-year period from the date of
grant, commencing on the first anniversary of the date of grant. The vesting of
all earned Options will accelerate upon a change of control (as defined). In the
event of a change of control, the Company may elect to terminate the Consulting
Agreement and will be discharged from any further obligations to grant Options
or pay consulting fees under the Agreement, except that a portion of the
remaining Options will be granted subject to the Company achieving certain Net
Sale targets during the period in which the change of control occurs. The shares
of Common Stock issuable upon exercise of any Options granted pursuant to the
Consulting Agreement will not be registered under the Securities Act of 1933, as
amended, and will be subject to the restrictions on resale imposed by the
Securities Act. The Consultant has been granted certain rights to require the
Company to register (at the expense of the Consultant) the shares issuable upon
exercise of the Options. The Consultant may not assign or otherwise transfer any
Options, except that the Consultant may transfer Options aggregating not more
than 25% of the Options, determined on a cumulative basis. The Consultant is not
permitted to sell or otherwise dispose of any shares of Common Stock issuable
upon exercise of the Options until the first anniversary of the date of issuance
thereof and, after such date, not to sell or otherwise dispose of greater than
33% of such shares, in the aggregate, on an annual basis.
For the year ended December 31, 1996, the Company recorded $256,000 of
expense representing the monthly amounts and expenses due under the Consulting
Agreement. The Company will recognize expense based on the fair value of the
options at the date of the Consulting Agreement based on the Company's best
estimate of the level of Net Sales likely to be achieved. As of December 31,
1996, the Company has achieved approximately $900,000 in Net Sales, and the
Company's best estimate is that Net Sales will not be achieved
35
<PAGE> 38
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at a level which will require the issuance of any options. The Company has
provided notice to ArgoQuest that monthly payments will not be made subsequent
to March 31, 1997, as provided in the Consulting Agreement.
8. STOCK OPTION AND PURCHASE PLANS
On June 9, 1992, the Board of Directors with the approval of the Company's
shareholders adopted a Non-Qualified Stock Option Plan (the "Plan") pursuant to
which a maximum of 200,000 shares of common stock were reserved for grant to key
employees. The options granted under the Plan expire six years from the date of
grant and, except as otherwise determined from time to time by the Board of
Directors, are not exercisable during the first 12 months after the date of
grant. The options become exercisable as to 20% of the shares covered thereby
upon the expiration of 12 months after the date of grant and as to an additional
20% upon the expiration of each of the next four succeeding twelve month
periods.
The Board of Directors and shareholders adopted the 1992 Stock Option Plan
(the "1992 Plan") pursuant to which, as subsequently amended, a maximum of
1,300,000 shares of common stock are reserved for grant. The 1992 Plan also
provides that no more than 250,000 shares of Common Stock may be issued to any
employee in any one calendar year. Under the 1992 Plan, incentive stock options
may be granted to employees and officers of the Company and non-qualified stock
options may be granted to consultants, employees and officers of the Company.
The exercise price of the options (which in the case of an incentive stock
option cannot be less than the fair market value of the common stock on the date
of grant or less than 110% of fair market value in the case of employees or
officers holding 10% or more of the voting stock of the Company) shall be as
determined by the Compensation Committee of the Board of Directors. In 1996, the
Board of Directors and shareholders approved an amendment to the 1992 Plan to
increase the number of shares of Common Stock that may be issued pursuant to the
1992 Plan to 1,700,000 shares.
The Board of Directors and shareholders adopted the 1992 Non-Employee
Director Stock Option Plan (the "Director Stock Option Plan") pursuant to which,
as subsequently amended, a maximum of 60,000 shares of common stock are reserved
for grant. Under this plan, each non-employee director first elected to the
Board of Directors after January 1, 1993 will receive an option for 10,000
shares on the date of his or her election. The exercise price per share for all
options granted under the plan will be equal to the fair market value of the
common stock at the date of grant. All options vest in three equal installments
beginning on the first anniversary of the date of grant. The term of each option
will be for a period of ten years from the date of grant.
In 1996, the Board of Directors and shareholders approved the 1996
Non-Employee Director Stock Option Plan (the "1996 Director Plan"). The 1996
Director Plan provides that on the date the Plan is approved by the Company's
shareholders each non-employee director received an option to purchase 15,000
shares of common stock. The exercise price per share for all options granted
under the plan is equal to the fair market value of the common stock on the date
of grant. All options vest in three equal annual installments beginning on the
first anniversary of the date of grant. A maximum of 200,000 shares of common
stock have been reserved for grant under the plan.
36
<PAGE> 39
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 274,500 $ 7.17 600,000 $ 6.18 876,000 $ 9.44
Granted................................ 555,000 5.90 403,000 13.31 543,408 18.17
Exercised.............................. 37,000 4.80 79,332 6.15 135,379 8.17
Cancelled.............................. 192,500 7.07 47,668 6.55 130,864 12.35
------- ------- ---------
Outstanding at end of year............. 600,000 6.18 876,000 9.44 1,153,165 13.37
======= ======= =========
Exercisable at end of year............. 110,334 6.51 195,332 6.43 331,167 8.58
======= ======= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.80 - 7.20 317,665 7.4 $ 5.59 205,500 $ 5.60
7.21 - 10.80 114,333 8.0 9.57 39,000 9.52
10.21 - 16.20 275,000 8.8 11.81 60,000 11.58
16.21 - 24.30 351,167 9.1 19.43 10,000 17.38
24.31 - 27.50 95,000 9.0 26.13 16,667 27.14
--------- -------
1,153,165 8.4 13.37 331,167 8.58
========= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's pro forma net income for 1995 and 1996 would have been $9,285,804 and
$4,563,456, respectively. Pro forma earnings per share for 1995 would have been
$1.04 for primary shares outstanding and $1.03 for fully diluted shares
outstanding and pro forma earnings per share for 1996 would have been $0.51. The
weighted average fair value of the options granted during 1995 and 1996 was
estimated at $8.37 and $11.12, respectively, based upon the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield, expected volatility of 60%, risk-free interest
rate of 6.34%, and expected lives of six years.
Subsequent to December 31, 1996, the Company granted options to purchase
317,800 shares at a price range of $8.38 to $10.00 to both new and existing
employees.
The Board of Directors and shareholders adopted a 1992 Employee Stock
Purchase Plan (the "1992 Purchase Plan"). The 1992 Purchase Plan authorizes the
issuance of a maximum of 250,000 shares of common stock pursuant to the exercise
of nontransferable options granted to participating employees. The exercise
price of the options is the lesser of 85% of the fair market value of the common
stock on the first and last day of the purchase period which commences on
January 1 and July 1 of each year. During 1995 and
37
<PAGE> 40
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, there were 18,742 and 20,745 shares issued in connection with this plan,
respectively. At December 31, 1996, there were options to purchase 12,178 shares
at a price of $8.82 granted and exercisable under this plan.
9. SAVINGS PLAN
In January 1992, the Board of Directors adopted a Savings Incentive Plan
(the "Savings Plan") pursuant to Section 401(k) of the Internal Revenue Code.
All employees are eligible to participate in the Savings Plan upon completion of
six months of employment. Each employee may elect to contribute to the Savings
Plan through payroll deductions in an amount not to exceed the amount permitted
under the Internal Revenue Code. The Company has the discretion to make matching
contributions on behalf of the participants. Employees are fully vested in their
contributions. Company contributions vest at a rate of 33% on each anniversary
date of employment. Amounts credited to an employee's account may be distributed
to the employee at the earliest of (a) the termination of the employee's
employment with the Company; (b) the termination of the Plan, or (c) a
withdrawal due to financial hardship. Under the Internal Revenue Code, neither
the employee nor Company contributions to the Savings Plan are taxable to the
employee until such amounts are distributed to the employee. However,
contributions made by the Company are tax deductible. During the years ended
December 31, 1994, 1995 and 1996 the Company's contribution expense to the
Savings Plan aggregated $67,851, $127,306 and $155,944, respectively.
10. MAJOR CUSTOMERS AND GEOGRAPHIC DATA
The Company sells its products primarily to national, regional and
international wholesale distributors and OEM customers. Sales to distributors
accounted for 64%, 42% and 34% of the Company's net sales in 1994, 1995 and
1996, respectively. Sales to OEM customers accounted for 22%, 46% and 56% of the
Company's net sales in 1994, 1995 and 1996, respectively.
Sales to customers who contributed 10% or more of net sales during the
years ended December 31, 1994, 1995 and 1996 and the related receivable balance
at the end of each period were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net sales
Customer A................................. $11,758,611 $ 14,682,577 $ 9,394,212
Customer B................................. 8,271,387 6,685,332 3,225,686
Customer C................................. 8,828,171 10,955,818 8,511,577
Customer D................................. 0 24,582,391 20,879,575
Customer E................................. 0 39,741 30,133,475
Customer F................................. 0 5,581,633 13,893,362
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Accounts receivable
Customer A................................. $ 2,818,388 $ 1,826,643 $ 3,504,586
Customer B................................. 1,382,401 1,565,644 498,899
Customer C................................. 975,353 2,059,405 1,983,285
Customer D................................. 0 4,030,380 8,621,035
Customer E................................. 0 39,741 2,527,423
Customer F................................. 0 2,867,133 2,477,051
</TABLE>
Customers A, B and C are wholesale distributors; customers D, E and F are
OEM.
In February 1997, the Company and Customer D reached an agreement to settle
the December 31, 1996 accounts receivable balance, in which Customer D has paid
$5,263,000 and will pay the balance for products used. The Company agreed to
accept, under certain conditions and with a restocking charge, returns of some
38
<PAGE> 41
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products previously sold, and has recorded an additional allowance for the
estimated amount of such returns. There is no assurance that the effects of the
actual returns will not exceed such additional allowance.
The Company sells its products in the United States and in foreign
countries primarily through its own sales force and independent manufacturer
representative organizations. Net sales by geographic region for the years ended
December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
United States................................... $70,422,842 $112,733,264 $109,934,462
Asia/Pacific Rim................................ 1,546,678 7,380,104 25,409,366
Canada.......................................... 2,409,689 2,248,742 1,291,998
Europe.......................................... 5,774,104 13,135,457 11,989,946
Other........................................... 3,440,607 7,540,764 4,897,773
----------- ------------ ------------
$83,593,920 $143,038,331 $153,523,545
=========== ============ ============
</TABLE>
The Company's identifiable assets located in foreign countries are not
significant.
11. RELATED PARTY TRANSACTIONS
On December 29, 1994, the Company loaned $294,711 to the current President
and CEO in connection with his relocation to Boca Raton, Florida. During the
first quarter of 1995, an additional $205,289 was loaned to him. In April 1995,
the loans were repaid in full.
In September 1995, the Company acquired 50% of the Common Stock of MBf/Boca
Asia Pacific Sdn Bhd, a joint venture in Malaysia which distributes primarily
the Company's products in the Pacific Rim. The investment of $375,000 in this
joint venture as of December 31, 1995 and 1996 is included in other assets in
the consolidated balance sheet. In 1996, sales to the joint venture were
approximately $4,423,000 and the accounts receivable balance due from the joint
venture at December 31, 1996 was $410,578. In 1996, the Company acquired in
India a 20% equity interest in PowerTel Boca PVT, Ltd. ("PowerTel"). PowerTel
distributes Boca Research products and services in India, South Asia, and
certain markets in Africa. PowerTel is headquartered in Bangalore and has
offices in Bombay and Delhi. The investment of $84,000 in this joint venture as
of December 31, 1996 is included in other assets in the consolidated balance
sheet. In 1996, sales to PowerTel were approximately $602,000 and the accounts
receivable balance due from PowerTel at December 31, 1996 was $454,859. The
financial position and results of operations of these joint ventures in 1995 and
1996 were insignificant in relation to the Company's consolidated financial
statements.
12. SUBSEQUENT EVENT
The Company has entered into a letter of intent to purchase the fixed and
certain current assets of Creatix, a German based company 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 is with the court appointed trustee and is subject
to the Company receiving (a) bank financing for the purchase price, (b) a firm
commitment from the Government of Sasland 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 provides for the execution of a
definitive Transfer Agreement which will incorporate the terms of the letter of
intent and contains 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 Sasland. In light of the
deterioration in the operating results of Creatix, the Company is evaluating
whether to complete the acquisition.
39
<PAGE> 42
BOCA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1995 and 1996 is as
follows (in thousands except for per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1995
Net sales.......................... $27,269 $33,196 $37,350 $ 45,223
Gross profit....................... 7,470 8,427 9,521 10,134
Income from operations............. 2,947 3,237 3,731 4,489
Net income......................... 2,003 2,183 2,422 2,934
Primary earnings per share......... 0.23 0.25 0.27 0.32
Fully diluted earnings per share... 0.23 0.24 0.27 0.32
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1996
Net sales.......................... $44,935 $46,661 $32,966 $ 28,961
Gross profit....................... 9,367 9,859 6,168 5,276
Income (loss) from operations...... 3,920 4,197 1,419 (492)
Net income......................... 2,602 2,761 1,022 65
Primary earnings per share......... 0.29 0.31 0.12 0.01
Fully diluted earnings per share... 0.29 0.31 0.12 0.01
</TABLE>
40
<PAGE> 43
BOCA RESEARCH, INC. AND SUBSIDIARIES
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
- ---------------------------------------------------------------------------------------------------
Allowance for Sales Returns,
Allowances and Price Protection $ 752,530 $ 67,954 -- -- $ 820,484
Allowance for Doubtful Accounts 1,006,021 45,789 -- $ 738,275 313,535
Allowance for Inventory Reserve 1,153,040 500,028 -- 1,103,068 550,000
Allowance for Product Warranties 135,572 60,000 -- 19,572 176,000
1995
- ---------------------------------------------------------------------------------------------------
Allowance for Sales Returns,
Allowances and Price Protection $ 820,484 $1,792,664 -- -- $2,613,148
Allowance for Doubtful Accounts 313,535 951,593 -- 265,128 1,000,000
Allowance for Inventory Reserve 550,000 1,248,103 -- 718,103 1,080,000
Allowance for Product Warranties 176,000 60,000 -- -- 236,000
1996
- ---------------------------------------------------------------------------------------------------
Allowance for Sales Returns,
Allowances and Price Protection $ 2,613,148 $ 11,852 -- -- $2,625,000
Allowance for Doubtful Accounts 1,000,000 602,584 -- 276,576 1,326,008
Allowance for Inventory Reserve 1,080,000 2,657,267 -- 1,337,267 2,400,000
Allowance for Product Warranties 236,000 60,000 -- -- 296,000
</TABLE>
- --------------------------------------------------------------------------------
41
<PAGE> 44
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
In accordance with General Instruction G(3) to Form 10-K, except as
indicated in the following sentence, the information called for by Items 10, 11,
12 and 13 is incorporated by reference from the registrant's definitive proxy
statement pursuant to Regulation 14A for the Annual Meeting of Shareholders to
be held on May 13, 1997. As permitted by General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, the information on executive
officers called for by Item 10 is included in Part I of this Annual Report on
Form 10-K.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The Financial Statements and Schedules filed as part of this Annual
Report on Form 10-K are listed in the index under Item 8.
(b) Reports on Form 8-K
On October 15, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K to report under Item 5 (Other
Events) the execution of the Consulting Agreement among the Company,
ArgoQuest, Inc. and Jason Barzilay.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ------------ ---------------------------------------------------------------------------
<C> <S> <C>
(1)2.1 -- Agreement of Merger dated March 2, 1992 between the Company and Boca
Research Holding, Inc.
(1)2.2 -- Agreement of Merger dated December 22, 1992 between the Company and Boca
Research Incorporated Manufacturing, Inc.
(2)2.3 -- Asset Purchase Agreement dated July 2, 1993 between Complete Acquisition
Corp. and The Complete PC, Inc.
(1)3.1 -- Amended and Restated Articles of Incorporation of the Company.
(1)3.2 -- By-Laws of the Company.
(1)10.1 -- Non-Qualified Stock Option Plan.
(1)10.2 -- 1992 Stock Option Plan.
(1)10.3 -- 1992 Employee Stock Purchase Plan.
(1)10.4 -- 1992 Non-Employee Director Stock Option Plan.
(1)10.5 -- Lease Agreement between the Company and Catexor Limited Partnership I dated
October 4, 1990, as amended and supplemented pursuant to the First Addendum
to Lease dated October 4, 1990, Second Addendum to Lease dated October 4,
1990, Third Addendum to Lease dated December 1, 1991 and Fourth Addendum to
Lease dated January 9, 1992.
(1)10.6 -- Sublease Agreement between the Company and Seagate Technology, Inc.
("Seagate") dated February 2, 1992 together with the Master Lease Agreement
between Seagate and Banyan Lakes Village, A Joint Venture dated April 1,
1987.
(1)10.7 -- License Agreement dated August 14, 1992 between the Company and Cadtrack
Corporation.
(1)10.8 -- Distribution Agreement dated as of October 29, 1991 between Ingram Micro
Inc. and the Company.
(1)10.9 -- Distribution Agreement dated May 1, 1990 between Softsel Computer Products,
Inc. and the Company, as amended.
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ------------ ---------------------------------------------------------------------------
<C> <S> <C>
(1)10.10 -- Distributor Contract dated August 16, 1991 between Tech Data Corporation
and the Company.
(1)10.11 -- Form of Indemnification Agreement between the Company and its directors and
officers.
(3)10.12 -- Standard Commercial Lease between Equitable Pacific Partners Limited
Partnership and the Company.
(3)10.13 -- Employment Agreement, dated as of April 24, 1995, between Anthony F.
Zalenski and the Company.
(4)10.14 -- Agreement dated as of May 3, 1995 between the Company and Chase Research
Plc.
(5)10.15 -- Joint Venture Agreement dated September 25, 1995 between Hitechniaga Sdn
Bhd and the Company.
(6)10.16 -- Amended Revolving Credit Agreement between the Company, Boca Research
International, Inc., Boca Research Holland B.V., Inc., Complete Acquisition
Corp., Boca Research of Delaware, Inc. and First Union National Bank of
Florida dated as of June 26, 1995.
(6)10.17 -- 1996 Non-Employee Director Stock Option Plan.
(7)10.18 -- Consulting Agreement dated October 4, 1996 by and among the Company,
ArgoQuest, Inc. and Jason Barzilay.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits to the Registration Statement
No. 33-56530 filed with the Securities and Exchange Commission.
(2) Incorporated by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
July 22, 1993.
(3) Incorporated by reference to exhibits to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995.
(4) Incorporated by reference to Exhibit 10.2 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(5) Incorporated by reference to Exhibit 10 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995.
(6) Incorporated by reference to the exhibits to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to Exhibit 10 to the registant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 15, 1996.
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BOCA RESEARCH, INC.
/S/ ANTHONY F. ZALENSKI
By:
......................................
NAME: ANTHONY F. ZALENSKI
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/S/ ANTHONY F. ZALENSKI President, Chief Executive March 28, 1997
........................................ Officer and a Director (Principal
ANTHONY F. ZALENSKI Executive Officer)
/S/ R. MICHAEL BREWER Senior Vice President of Finance March 28, 1997
........................................ and Chief Financial Officer
R. MICHAEL BREWER (Principal
Financial Officer and Principal
Accounting Officer)
/S/ ROBERT W. FERGUSON Director March 28, 1997
........................................
ROBERT W. FERGUSON
/S/ GEORGE GAN CHEE WAI Director March 28, 1996
........................................
GEORGE GAN CHEE WAI
/S/ PATRICK J. KEENAN Director March 28, 1997
........................................
PATRICK J. KEENAN
/S/ JOSEPH M. O'DONNELL Director March 28, 1997
........................................
JOSEPH M. O'DONNELL
/S/ W. JAMES PRICE Director March 28, 1997
........................................
W. JAMES PRICE
/S/ E. ROE STAMPS, IV Director March 28, 1997
........................................
E. ROE STAMPS, IV
</TABLE>
44
<PAGE> 1
EXHIBIT 21.1
BOCA RESEARCH, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---------------------------------- ----------------------------------
<S> <C>
Complete Acquisition Corp. Florida
Boca Research International, Inc. United States Virgin Islands
Boca Research Holland B.V. Holland
Boca Research of Delaware, Inc. Delaware
Boca Research (UK) Limited United Kingdom
Boca Research International
Holdings Ltd. Mauritius
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-65330 of Boca Research, Inc. on Form S-8 and in Registration Statement No.
33-80043 of Boca Research, Inc. on Form S-8 of our report dated March 3, 1997,
appearing in this Annual Report on Form 10-K of Boca Research, Inc. for the year
ended December 31, 1996.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 28, 1997
<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 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,825,801
<SECURITIES> 0
<RECEIVABLES> 31,118,482
<ALLOWANCES> 3,951,008
<INVENTORY> 18,380,520
<CURRENT-ASSETS> 58,151,700
<PP&E> 15,122,638
<DEPRECIATION> 8,070,398
<TOTAL-ASSETS> 66,065,854
<CURRENT-LIABILITIES> 10,903,854
<BONDS> 0
0
0
<COMMON> 86,789
<OTHER-SE> 55,075,211
<TOTAL-LIABILITY-AND-EQUITY> 66,065,854
<SALES> 153,523,545
<TOTAL-REVENUES> 153,523,545
<CGS> 122,854,506
<TOTAL-COSTS> 122,854,506
<OTHER-EXPENSES> 21,624,266
<LOSS-PROVISION> 602,584
<INTEREST-EXPENSE> 35,749
<INCOME-PRETAX> 9,640,660
<INCOME-TAX> 3,190,562
<INCOME-CONTINUING> 6,450,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,450,098
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
