<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-21138
March 31, 1998
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BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1377 Clint Moore Road
Boca Raton, Florida
(Address of principal 33847
executive offices) (Zip Code)
Registrant's telephone number, including
area code: (561) 997-6227
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of
Class June 3, 1998
----- ------------
Common stock, par value 8,741,657
$.01 per share
<PAGE> 2
BOCA RESEARCH, INC.
Form 10-Q For The Quarter Ended March 31, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of March 31, 1998 (As Restated) and
December 31, 1997 .................................... 3
Condensed Consolidated Statements of
Income (unaudited) for the three months
ended March 31, 1998 (As Restated) and 1997 .......... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the three
months ended March 31, 1998 (As Restated) and 1997 ... 5
Notes to Condensed Consolidated
Financial Statements (unaudited) ..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 11
PART II. OTHER INFORMATION
Items 1-3. Not applicable ............................................ 22
Item 4. Submission of Matters to a Vote of
Security Holders ....................................... 22
Item 5. Other Information ......................................... 22
Item 6. Exhibits and Reports on Forms 8-K ......................... 22
Signatures ........................................................... 23
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PART I. ITEM 1.
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31,
1998 December 31,
As Restated 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 6,191 $ 8,205
Trade receivables, net ................................... 10,050 11,723
Inventory, net ........................................... 15,335 14,876
Prepaid expenses and other assets ........................ 923 470
Prepaid and deferred income taxes ........................ 9,225 9,214
------- -------
Total current assets ................................... 41,724 44,488
Property and equipment, net .............................. 4,827 5,540
Other assets ............................................. 339 191
------- -------
Total assets ........................................... $46,890 $50,219
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 7,592 $ 6,546
Accrued expenses and other current liabilities ........... 2,147 3,092
------- -------
Total current liabilities .............................. 9,739 9,638
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares authorized,
8,741,657 issued and outstanding at March 31, 1998,
8,725,079 issued and outstanding at December 31, 1997 ... $ 87 $ 87
Additional paid-in capital ............................... 25,989 25,915
Retained earnings ........................................ 11,075 14,579
------- -------
Total stockholders' equity ............................. 37,151 40,581
------- -------
Total liabilities and stockholders' equity ........... $46,890 $50,219
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
As Restated
1998 1997
----------- ---------
<S> <C> <C>
Net sales ...................................... $ 15,616 $ 18,758
Cost of goods sold ............................. 15,766 18,663
-------- --------
Gross profit (loss) ....................... (150) 95
-------- --------
Operating expenses:
Research and development .................. 577 674
Selling, general and administrative ....... 2,980 4,703
-------- --------
Total operating expenses .................. 3,557 5,377
-------- --------
Loss from operations ........................... (3,707) (5,282)
Non-operating income, net ...................... 203 140
-------- --------
Loss before income tax benefit ................. (3,504) (5,142)
Income tax benefit ............................. -- (1,800)
-------- --------
Net loss ....................................... $ (3,504) $ (3,342)
-------- --------
Net loss per share (Basic and Diluted) ......... $ (.40) $ (.38)
-------- --------
Weighted average shares outstanding ............ 8,742 8,709
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------
As Restated
1998 1997
----------- --------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss ............................................. $(3,504) $(3,342)
Adjustments for non-cash charges ..................... 747 732
Changes in assets and liabilities .................... 703 3,195
------- -------
Net cash provided by (used in) operating
activities ......................................... (2.054) 585
------- -------
Investing activities - Capital expenditures ............ (34) (36)
Financing activities - Exercise of options ............. 74 242
------- -------
Net increase (decrease) in cash and cash equivalents ... (2,014) 791
Cash and cash equivalents, beginning of period ......... 8,205 7,826
------- -------
Cash and cash equivalents, end of period ............... $ 6,191 $ 8,617
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
the Company in accordance with the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting and, accordingly, they
do not include all of the information and disclosures required by generally
accepted accounting principles. In the opinion of management, the condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of March 31, 1998, and the results of its operations and its cash
flows for the three month periods ended March 31, 1998 and 1997. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of the
Company's 1997 audited consolidated financial statements.
The accompanying financial statements should be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto for the year ended December 31, 1997. The results of operations for the
three month period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the
current presentation.
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash payments (refunds) for income taxes were $11,350 and $(849,033)
in the three month periods ended March 31, 1998 and 1997, respectively.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes all changes in equity during a period
except those resulting from investment by owners and distributions to owners.
The Company's comprehensive income (loss) equals its net loss for the three
months ended March 31, 1998 and 1997, and net loss is the only component of
comprehensive income (loss) for such periods.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
CURRENT ASSETS
Accounts receivable are included in the condensed consolidated balance
sheets net of allowances and consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Accounts receivable ........................... $13,000 $14,423
Allowance for sales returns, allowances and
price protection ............................ (1,400) (1,300)
Allowance for doubtful accounts ............... (1,550) (1,400)
------- -------
$10,050 $11,723
======= =======
</TABLE>
Included in the accounts receivable balance are: (a) $613,244 from
MBf/Boca Asia Pacific Sdn Bhd, a joint venture in Malaysia in which the Company
has a 50% ownership interest; and (b) $121,280 from PowerTel of India, a joint
venture in India in which the Company has a 20% ownership interest. Sales to
these related parties in the first quarters of 1998 and 1997 were approximately
$45,000 and $481,000, respectively. The Company has agreed to payment terms of
90 days for MBf/Boca Asia Pacific and 180 day payment terms for PowerTel of
India. The $613,244 receivable from MBf/Boca Asia Pacific Sdn Bhd, has been
fully reserved.
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials ................................. $13,366 $11,075
Work in process ............................... 4,034 4,925
Finished goods ................................ 1,435 2,376
Inventory reserves ............................ (3,500) (3,500)
------- -------
$15,335 $14,876
======= =======
</TABLE>
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<PAGE> 8
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment is included in the condensed consolidated balance
sheets net of accumulated depreciation of $11,450,841 at March 31, 1998 and
$10,709,231 at December 31, 1997.
LINE OF CREDIT
The Company has a secured $12,000,000 revolving line of credit with a
commercial bank which expires on May 31, 1998. The commercial bank has committed
in writing to extend this revolving line of credit through July 31, 1998. The
commercial bank has indicated that the line of credit will not be renewed
subsequent to July 31, 1998. The Company is negotiating an asset based line of
credit with a financial institution to replace the current facility. There can
be no assurance that the Company will be able to obtain a replacement facility.
COMMITMENTS AND CONTINGENCIES
The Company receives communications from time to time alleging that
certain of the Company's products infringe the patent rights of other third
parties. The Company has recently received communications from IBM Corporation
("IBM") alleging that certain of the Company's products infringe the patent
rights of IBM. The Company is presently investigating this claim and is not yet
in a position to fully evaluate the merits of such claim. The Company cannot
predict the outcome of this claim or any similar claim which may arise in the
future, or the effect of any such claim on the Company's operating results or
financial condition. No provision has been recorded for any loss that may result
from the ultimate resolution of this uncertainty.
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. The Company
cannot predict the outcome of this claim or the effect, if any, of such claim on
the Company's operating results or financial condition.
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<PAGE> 9
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
On October 4, 1996, the Company entered into a Consulting Agreement with
ARGOQUEST, Inc., a California corporation ("ArgoQuest") pursuant to which
ArgoQuest was retained to serve as a consultant to the Company with respect to
sales to retail accounts, wholesale distributors and original equipment
manufacturers. The Consulting Agreement provided ArgoQuest with the right to be
granted options to purchase shares of Common Stock of the Company, subject to
the Company achieving specified net sales, as defined in the Consulting
Agreement, during certain periods, in addition to receiving monthly consulting
fees. For the three months ended March 31, 1998 and 1997, the Company recorded
$0 and $260,000 of expense, respectively, representing the monthly consulting
fees and expenses due under the Consulting Agreement. Since none of the
specified net sales targets were achieved by ArgoQuest, no options were granted
pursuant to the Consulting Agreement. In accordance with the terms of the
Consulting Agreement, the Company elected to terminate the Agreement, effective
March 31, 1998.
STOCKHOLDERS' EQUITY
During the three month period ended March 31, 1998, 16,578 shares were
issued in connection with the exercise of options granted under the Company's
stock option plans. The aggregate proceeds received from these exercises were
$73,979.
STOCK OPTION PLAN
During the three month period ended March 31, 1998, the Company granted
options to purchase 154,133 shares at prices ranging from $3.97 to $5.38 to both
new and existing employees.
During the three month period ended March 31, 1998, 202,845 stock
options were canceled.
PROPOSED ACQUISITION
The Company has announced the signing of a definitive agreement whereby
the Company will purchase all of the assets relating to the Global Village modem
business for $10,000,000 in cash and notes, plus the assumption of certain
liabilities. The transaction, which is subject to approval by shareholders of
Global Village and other usual closing conditions, is expected to close in June
1998. This transaction, if closed, will require a cash payment of $4,000,000 at
the time of closing, $3,000,000 on September 30, 1998 and $3,000,000 on
December 31, 1998.
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BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
RESTATEMENT OF THE THREE MONTHS ENDED MARCH 31, 1998
Subsequent to the issuance of the Company's financial statements for the
three month period ended March 31, 1998, the Company determined that inventory
currently recorded as returned to a vendor during the quarter had not actually
been delivered to the vendor until the subsequent quarter which resulted in an
understatement of inventory and accounts payable at March 31, 1998.
Additionally, management determined that an error was made in recording this
inventory return that resulted in an understatement of cost of goods sold and
accounts payable. Accordingly, the accompanying financial statements have been
restated. Following is a summary of the effects of such restatement:
<TABLE>
<CAPTION>
As Previously As
Reported Restated
------------- --------
<S> <C> <C>
AT MARCH 31, 1998
Inventory................................ $12,547 $15,335
Accounts payable......................... 3,948 7,592
Retained earnings........................ $11,931 $11,075
FOR THE THREE MONTHS
ENDED MARCH 31, 1998
Cost of goods sold....................... $14,910 $15,766
Net loss................................. (2,648) (3,504)
Net loss per share....................... $($0.30) $($0.40)
</TABLE>
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<PAGE> 11
ITEM 2.
BOCA RESEARCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors set forth below and
elsewhere in this Report. The information in the Management's Discussion and
Analysis has been modified to reflect the restatement discussed in the notes to
the condensed financial statements.
As an aid to reviewing the Company's results of operations for the three
months ended March 31, 1998 and 1997, the following table sets forth the
quarterly financial information as a percent of net sales and as a percent of
change when compared to the earlier period:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------ Percent
1998 1997 Change
------ ------ -------
<S> <C> <C> <C>
Net sales ............................. 100.0% 100.0% (16.8)%
Cost of goods sold .................... 100.9 99.5 (15.5)
----- -----
Gross profit ................... (0.9) 0.5 *
----- -----
Operating expenses:
Research and development ............ 3.7 3.6 (14.4)
Selling, general and administrative . 19.1 25.1 (36.6)
----- -----
Total operating expenses ............ 22.8 28.7 (33.8)
----- -----
Loss from operations .................. (23.7) (28.2) *
Non-operating income, net ............. 1.3 0.8 45.0
----- -----
Loss before income tax benefit ........ (22.4) (27.4) *
Income tax benefit .................... -- (9.6) *
----- -----
Net loss .............................. (22.4)% (17.8)% *
===== =====
</TABLE>
* Not meaningful
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<PAGE> 12
RESULTS OF OPERATIONS
NET SALES. The Company's net sales decreased by 16.8% to $15,616,000 in
the three months ended March 31, 1998 from $18,758,000 in the three months ended
March 31, 1997. Net sales for the three month period ended March 31, 1998 and
the comparable period in 1997 is shown below by product category.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
----------------------
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
Data Communications............................... $8.0 $14.3
Custom Manufacturing.............................. 4.8 --
Multimedia........................................ -- 0.9
Networking........................................ 0.5 0.9
Video Graphics.................................... 0.3 0.5
I/O, IDE, & Multiport............................. 1.4 1.8
Video Conferencing................................ 0.2 0.4
Internet Access Device............................ 0.4 --
----- -----
$15.6 $18.8
===== =====
</TABLE>
The sales decrease was primarily attributable to decrease in sales of
data communications products, however the product categories of networking,
video graphics, I/O, IDE, and multiport and videoconferencing also experienced a
decline in sales. The decrease in sales in these categories was partially offset
by an increase in sales in the categories of custom manufacturing and internet
access devices. The Company manufactures several categories of Internet access
devices which allow for Internet access via a TV, including a product
manufactured for a major electronic manufacturing customer. The first quarter
revenue of $2,700,000 for sales of this particular Internet access device to
such customer is included in custom manufacturing. This customer is currently
reviewing its commitment to this product category and, accordingly, the Company
does not anticipate deriving any sales from this customer in the quarter ended
June 30, 1998. Furthermore, in light of the uncertainty surrounding the
customer's ongoing commitment to this product category, there can be no
assurance that the Company will derive any sales from this customer for the
remainder of 1998.
Included in the category of Internet access devices are sales of a model
of this product which was developed by the Company and sold under the Boca
Research name or co-branded. The Company is placing emphasis on this category
and expects sales to increase.
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<PAGE> 13
First quarter sales were also adversely affected by several factors,
including continued pricing pressure, especially in the OEM channel and with
33.6Kbps modems, excess industry-wide channel inventories of pre-standard 56Kbps
product, and the slow adoption of 56Kbps technology by consumers.
International sales were approximately $2.8 million for the three months
ended March 31, 1998 compared to $4.3 million for the three months ended
March 31, 1997. The decline is due to lower sales to the Company's joint venture
in Southeast Asia and India and lower sales in Europe.
GROSS PROFIT (LOSS). Gross profit (loss) was ($150,000) for the three
months ended March 31, 1998 as compared to $95,000 for the three months ended
March 31, 1997 and decreased as a percentage of net sales to (0.9%) in the three
months ended March 31, 1998 from 0.5% in the three months ended March 31, 1997.
The gross profit (loss) percentage is being affected by several factors
including low utilization of the Company's manufacturing facilities, aggressive
channel pricing to reduce channel inventories, competitive pressures in the OEM
channel and the custom manufacturing product category requiring the Company to
compete with offshore manufacturers which the Company believes have a cost
advantage because of currency devaluations and better purchasing power because
of their larger volumes. Therefore, the Company anticipates that its gross
profit margins for the second quarter of 1998 will not be adequate to enable the
Company to attain profitability.
The gross profit margins for the Company's products depend on 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 and capacity utilization. In
addition, gross profit margins on product categories differ. In particular,
custom manufacturing is typically a low profit margin business. Accordingly, the
Company's gross profit has varied substantially from quarter to quarter in the
past, and can be expected to continue to do so in the future. There will be
circumstances, which management anticipates will occur in the second quarter, in
which the Company accepts lower margin sales for purposes such as to reduce
inventories, and to utilize manufacturing capacity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $577,000 in the three months ended March 31, 1998 from $674,000 in
the three months ended March 31, 1997. This represents an increase in research
and development expenses as a percentage of net sales to 3.7% for the three
months ended March 31, 1998 from 3.6% for the three months ended March 31, 1997.
The small increase in research and development expenses as a percentage of net
sales was primarily attributable to the fixed nature of certain research and
development expenses allocated over a lower sales base.
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<PAGE> 14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $2,980,000 in the three months ended
March 31, 1998 from $4,703,000 in the three months ended March 31, 1997.
Selling, general and administrative expenses as a percentage of net sales
decreased to 19.1% in the three months ended March 31, 1998 from 25.1% in the
three months ended March 31, 1997. The decrease in selling, general and
administrative expenses as a percentage of net sales is primarily the result of
reduced spending and a reduction by $391,000 in uncollectible accounts expense.
The Company's spending for the three months ending March 31, 1998 compared to
the three months ended March 31, 1997 was $473,000 lower for advertising,
$260,000 lower for consulting fees and expenses with ArgoQUEST, Inc., trade
shows and travel were lower by $326,000, and reduced spending on salaries
because of a reduced number of employees. Some of the reduced spending is a
reflection that the Company is placing less emphasis on the retail channel.
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 may
result in an increase in selling, general and administrative expenses as a
percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 1998, the Company's working capital
decreased by $2,865,000 from December 31, 1997. This decrease was represented by
a decrease in cash of $2,014,000, decreases in trade receivables of $1,673,000
and current liabilities of $101,000; offset by an increase in inventories of
$459,000 and an increase in other current assets of $464,000. The Company's
operations used cash of $2,054,000 for the three months ended March 31, 1998.
The Company will not be profitable in the second quarter of 1998 and this will
negatively impact the generation of cash from operations for the second quarter
of 1998. In May 1998, the Company received a federal income tax refund in the
amount of $7,125,000 from the Internal Revenue Service which has increased the
Company's cash balances.
The Company has a secured $12,000,000 revolving line of credit with a
commercial bank which expires on May 31, 1998. The commercial bank has committed
in writing to extend this revolving line of credit through July 31, 1998. The
commercial bank has indicated that the line of credit will not be renewed
subsequent to July 31, 1998. The Company is negotiating an asset based line of
credit with a financial institution to replace the current facility. There can
be no assurance that the Company will be able to obtain a replacement facility.
If a replacement facility is not obtained, the Company may need to seek
alternative sources of funds through equity or debt financing and there can be
no assurance that such equity or debt financing will be available on terms
acceptable to the Company, if at all.
The Company has announced the signing of a definitive agreement whereby
the Company will purchase all of the assets relating to the Global Village modem
business for $10,000,000 in cash and notes, plus the assumption of certain
liabilities. The transaction, which is subject to
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<PAGE> 15
approval by shareholders of Global Village and other usual closing conditions,
is expected to close in June 1998. This transaction, if closed, will require a
cash payment of $4,000,000 at the time of closing, $3,000,000 on September 30,
1998 and $3,000,000 on December 31, 1998.
In order for the Company to be able to make all of the payments that
would be required for the proposed acquisition, a replacement loan facility must
be secured or the Company's operations must improve or inventories reduced to an
extent that the cash necessary to make such payments would be provided. The
Company's inventory levels remain at more than three months of sales which is
higher than the desired level.
The Company regularly evaluates acquisitions of businesses, technologies
or products complementary to the Company's business. In the event that the
Company effects one or more acquisitions, the Company's cash balances may be
utilized to finance such acquisitions and additional sources of liquidity such
as debt or equity financing 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 capital will be available on terms acceptable to the
Company, if at all, at such time or times as required by the Company.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or other equipment or systems that have or rely on
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system or equipment failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company is in the process of identifying and assessing the systems
that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Company expects to complete the
assessment, formalize its plan for corrective action, and estimate the potential
incremental costs required to address this issue by December 1998. The Company
presently believes that the Year 2000 issue will not pose significant
operational problems for the Company's computer systems and the software or
equipment incorporated into the Company's products. The Company also believes
that the Year 2000 issue will not have a significant impact on its financial
position or results of operations, although there can be no assurance, at least
until the Company completes the assessment process.
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.
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<PAGE> 16
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 any 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 introduction of competing technologies for the
56Kbps modem and the marketing activities to promote the advantages of such
technology heightened the competitive pressures in the industry. Each increase
in speed in modern 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. Moreover, price
decreases have occurred earlier in the 56Kbps product cycle than occurred with
14.4Kbps and 28.8Kbps products.
Sales of individual products and product lines are typically
characterized by rapid declines in sales, pricing and margins toward the end of
the respective product's life cycle, the precise timing of which may be
difficult to predict. As new products are planned and introduced, the Company
attempts to monitor closely the inventory of older products and to phase out
their manufacture in a controlled manner. Nevertheless, the Company could
experience unexpected reductions in sales of older generation products as
customers anticipate the availability of new products. These reductions could
give rise to additional charges for obsolete or excess inventory, returns of
older generation products by distributors or substantial price protection
charges. To the extent that the Company is unsuccessful in managing product
transitions, its business and operating results could be materially adversely
affected.
Because the majority 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. Moreover, it is a concern in the PC industry that the
penetration of PCs into the home has flattened at 40% and that PC sales growth
will slow as PCs become more of a replacement
- 16 -
<PAGE> 17
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.
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 the level of demand for the Company's
products, 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 return to its growth in sales or to 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
second quarter of 1998.
Dependence on Custom Manufacturing Sales. In the third quarter of 1997,
the Company began manufacturing products on a contract basis for other
companies. Custom manufacturing sales accounted for approximately 12% of the
Company's net sales for the year ended December 31, 1997 and increased to 31% of
sales for the three months ended March 31, 1998. The Company has only recently
begun custom manufacturing and, accordingly, the Company has limited experience
in the management and operation of custom manufacturing services. Moreover, the
contract manufacturing industry is highly fragmented and intensely competitive.
In addition, the level and timing of orders placed by the Company's contract
manufacturing customers vary due to customer attempts to manage inventory,
changes in the customer's manufacturing strategy and variation in demand for the
customer's product. For all of these reasons, there can be no assurance that the
Company will be successful in developing its custom
- 17 -
<PAGE> 18
manufacturing services. The inability of the Company to expand its custom
manufacturing services could adversely affect the Company's business, results of
operations or financial condition.
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, such as the pending acquisition of the Global
Village modem 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 certification 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 did have a negative impact
for 1997 which continued for the three months ended March 31, 1998. 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 chipsets used in the Company's
data communications products in the past 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. Shortgages of
components not only limit the Company's production capacity but also could
result in higher costs due to the higher costs of components in short supply or
the need to utilize higher cost substitute components. An extended interruption
in the supply of any of these components or a reduction in their quality or
reliability would have a
- 18 -
<PAGE> 19
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 45% of net sales in the
year 1997 and 64% of net sales for the three months ended March 31, 1998. 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 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
product pricing, which could have a material adverse effect on the Company's
operating results. In 1996, the Company's three largest OEM customers accounted
for approximately 42% of the Company's net sales; and in 1997, sales to these
customers were approximately 4%. The Company did not recognize any sales to
these OEM customers in the three months ending March 31, 1998. A decline in
sales to large customers or a delay or default in payment by one or more of such
customers could have a material adverse effect on the Company's results of
operations or financial condition.
The Company's three largest wholesale distributors accounted for
approximately 18% of the Company's net sales in 1997 and 20% of net sales for
the three months ended March 31, 1998. The PC distribution industry has been
characterized by rapid change, including consolidations and financial
difficulties of wholesale distributors and the emergence of alternative
distribution channels. The Company is dependent upon the continued viability and
financial stability of its wholesale distributors. The loss or ineffectiveness
of any of the Company's three largest wholesale distributors or a number of its
smaller wholesale distributors could have a material adverse effect on the
Company's operating results. In addition, an increasing number of vendors are
competing for access to wholesale distributors which could adversely affect the
Company's ability to maintain its existing relationships with its wholesale
distributors or could negatively impact sales to such distributors. The
Company's sales to wholesale distributors declined in absolute dollars from 1995
to 1996 and from 1996 to 1997.
- 19 -
<PAGE> 20
During the second half of 1996 and the first half of 1997, the Company
focused on entering the retail channel. However due to the high cost of channel
entry as well as the sales promotions, advertising, and marketing expenses
required to maintain a direct relationship, the Company is limiting its number
of retail customers and may address this channel through wholesale distribution.
Sales to the retail channel in the three months ended March 31, 1998 were 7% of
net sales.
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 take
pricing action that could 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 Internet TV
appliances, cable modems and video conferencing, the Company anticipates that it
will encounter competition from a number of well-established companies, many of
which have greater financial, technical, product development, manufacturing or
marketing resources and experience.
Proprietary Rights; Dependence on Software Licenses. 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.
- 20 -
<PAGE> 21
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.
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.
- 21 -
<PAGE> 22
PART II.
BOCA RESEARCH, INC.
OTHER INFORMATION
Items 1-3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1998.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Calculation of shares used in determining earnings per share.
(b) Reports on Form 8-K
On April 9, 1998, the Company filed a Current Report on Form 8-K
to report that the Company had entered into a definitive agreement with
respect to the acquisition of the Global Village modem business.
- 22 -
<PAGE> 23
BOCA RESEARCH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Dated: June 3, 1998 /s/ Anthony F. Zalenski
-------------------------------------
Anthony F. Zalenski
President and Chief Executive Officer
(Principal Executive Officer)
Dated: June 3, 1998 /s/ R. Michael Brewer
-------------------------------------
R. Michael Brewer
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- 23 -
<PAGE> 24
BOCA RESEARCH, INC.
INDEX TO EXHIBITS
Exhibit 11 Calculation of shares used in determining earnings per share
<PAGE> 1
BOCA RESEARCH, INC.
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING NET INCOME PER SHARE
(UNAUDITED)
MARCH 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------
<S> <C>
Shares outstanding at January 1, 1998 .................. 8,725,079
Shares issued January 1, 1997 in
connection with the 1992 Employee
Stock Purchase Plan .................................. 16,578
---------
Weighted average shares outstanding .................... 8,741,657
=========
</TABLE>
MARCH 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
<S> <C>
Shares outstanding at January 1, 1997 .................. 8,678,883
Shares issued January 1, 1997 in
connection with the 1992 Employee
Stock Purchase Plan .................................. 12,178
Shares issued in connection with a
non-qualified stock option plan ...................... 17,908
---------
Weighted average shares outstanding .................... 8,708,969
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,191,000
<SECURITIES> 0
<RECEIVABLES> 13,000,000
<ALLOWANCES> 2,950,000
<INVENTORY> 15,335,000
<CURRENT-ASSETS> 41,724,000
<PP&E> 16,278,000
<DEPRECIATION> 11,451,000
<TOTAL-ASSETS> 46,890,000
<CURRENT-LIABILITIES> 9,739,000
<BONDS> 0
0
0
<COMMON> 87,000
<OTHER-SE> 37,064,000
<TOTAL-LIABILITY-AND-EQUITY> 46,890,000
<SALES> 15,616,000
<TOTAL-REVENUES> 15,616,000
<CGS> 15,766,000
<TOTAL-COSTS> 15,766,000
<OTHER-EXPENSES> 3,557,000
<LOSS-PROVISION> 250,000
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> (3,504,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,504,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,504,000)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
