SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-21138
March 31, 1999
BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1377 Clint Moore Road
Boca Raton, Florida
(Address of principal 33487
executive offices) (Zip Code)
Registrant's telephone number, including
area code: (561) 997-6227
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 May 14, 1999
----- ------------
Common stock, par value 8,783,746
$.01 per share
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<PAGE>
BOCA RESEARCH, INC.
Form 10-Q For The Quarter Ended March 31, 1999
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of March 31, 1999 and
December 31, 1998.............................. 3
Condensed Consolidated Statements of
Operations (unaudited) for the three months
ended March 31, 1999 and 1998 ................. 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the three
months ended March 31, 1999 and 1998........... 5
Notes to Condensed Consolidated
Financial Statements (unaudited)............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 10
Part II. OTHER INFORMATION
Items 1-3.Not applicable.................................... 23
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 23
Item 5. Other Information................................. 23
Item 6. Exhibits and Reports on Forms 8-K................. 23
Signatures.................................................. 24
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<PAGE>
PART I. Item 1.
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,703 $ 6,959
Trade receivables, net 9,546 11,549
Inventory, net........................................... 9,086 9,246
Prepaid expenses and other current assets................ 652 637
Prepaid and deferred income taxes........................ 2,310 2,051
-------- --------
Total current assets.................................. 24,297 30,442
Property and equipment, net................................. 3,546 3,874
Goodwill and other intangible assets........................ 4,445 4,804
Other assets................................................ 672 622
-------- --------
Total assets........................................ $ 32,960 $ 39,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 6,436 $ 6,804
Notes payable............................................ -- 2,800
Deferred revenue......................................... 458 --
Accrued expenses and other current liabilities........... 3,608 4,037
-------- --------
Total current liabilities............................. 10,502 13,641
-------- --------
Deferred revenue............................................ 91 --
-------- --------
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares
authorized, 8,783,746 issued and outstanding
at March 31, 1999, 8,756,487 issued and
outstanding at December 31, 1998........................ 88 87
Additional paid-in capital............................... 26,116 26,045
Retained earnings (deficit).............................. (3,837) (31)
-------- --------
Total stockholders' equity............................ 22,367 26,101
-------- --------
Total liabilities and stockholders' equity......... $ 32,960 $ 39,742
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Net sales..................................................... $ 10,701 $ 15,616
Cost of goods sold............................................ 8,603 15,766
-------- --------
Gross profit (loss)...................................... 2,098 (150)
-------- --------
Operating expenses:
Research and development................................. 1,081 577
Selling, general
and administrative..................................... 4,964 2,980
-------- --------
Total operating expenses................................. 6,045 3,557
-------- --------
Loss from operations.......................................... (3,947) (3,707)
Non-operating income, net..................................... 141 203
-------- --------
Loss before income tax benefit................................ (3,806) (3,504)
Income tax benefit............................................ -- --
-------- --------
Net loss...................................................... $ (3,806) $ (3,504)
-------- --------
Net loss per share (Basic and Diluted)........................ $ (0.43) $ (0.40)
-------- --------
Weighted average
shares outstanding.......................................... 8,778 8,742
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss................................................ $ (3,806) $ (3,504)
Adjustments for non-cash charges........................ 798 747
Changes in assets and liabilities....................... 1,566 703
-------- --------
Net cash used in operating
activities............................................ (1,442) (2,054)
-------- --------
Investing activities:
Cash paid for acquisition............................... (2,800) --
Capital expenditures.................................... (85) (34)
-------- --------
Net cash used in investing activities................. (2,885) (34)
Financing activities - Exercise of options ................ 71 74
-------- --------
Net decrease in cash and cash equivalents..................... (4,256) (2,014)
Cash and cash equivalents, beginning of period................ 6,959 8,205
-------- --------
Cash and cash equivalents, end of period...................... $ 2,703 $ 6,191
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
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, 1999, and the results of its operations and its cash
flows for the three month periods ended March 31, 1999 and 1998. 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 1998 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, 1998. The results of operations for the
three month period ended March 31, 1999 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 for income taxes were $258,437 and $11,350 in the
three month periods ended March 31, 1999 and 1998, 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, 1999 and 1998, and net loss is the only component of
comprehensive income (loss) for such periods.
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<PAGE>
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,
1999 1998
--------- ------------
<S> <C> <C>
Accounts receivable................................... $14,029 $16,241
Allowance for sales returns, allowances and
price protection..................................... (2,311) (2,161)
Allowance for doubtful accounts....................... (2,172) (2,531)
------- -------
$ 9,546 $11,549
======= =======
</TABLE>
Included in the accounts receivable balance is $122,543 in receivables
from PowerTel Boca Pvt., Ltd. ("PowerTel") a joint venture in India in which the
Company has a 20% ownership interest. Sales to this related party in the first
quarters of 1999 and 1998 were approximately $53,000 and $66,000, respectively.
The Company has agreed to payment terms of 180 days for PowerTel.
During the first quarter of 1999, the Company charged off an accounts
receivable balance of approximately $406,000 from LocalNet Communications, Inc.
In addition, the Company wrote off its investment of $150,000 in LocalNet
Communications, Inc.
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials......................................... $ 7,708 $ 8,024
Work in process....................................... 2,751 3,133
Finished goods........................................ 2,002 1,339
Inventory reserves.................................... (3,375) (3,250)
------- -------
$ 9,086 $ 9,246
======= =======
</TABLE>
-7-
<PAGE>
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 $13,400,737 at March 31, 1999 and
$13,161,200 at December 31, 1998.
Deferred Revenue
There are two components comprising deferred revenue as of March 31,
1999. Each component is described below.
Revenue related to the providing of engineering services is recognized
as the work is performed, using the percentage of completion method. During the
first quarter of 1999, revenue of approximately $90,000 was recognized with
respect to such engineering services and has been included in net sales. Related
costs including labor and direct expenses have been included in the cost of
goods sold.
During the first quarter of 1999, the Company entered into an agreement
that provides e.TV Commerce, Inc., a wholly owned subsidiary of Compu-DAWN, with
an exclusive arrangement, subject to certain exceptions, to market Boca
Research's advanced network capable TV set-top box. Boca Research has agreed not
to manufacture the TV set-top box for any other multi-level marketing company
which resells local and/or long distance telephone services or Internet access
services, subject to, among other things, minimum purchase requirements over a
two year period. Related to this agreement, Boca Research has been issued
117,398 unregistered shares of Compu-DAWN's common stock. Compu-DAWN retains a
call on all shares issued at prices ranging from $5.00 to $5.75. The appraised
value of the shares received by the Company is $200,000 and this amount is being
recognized as revenue on a straight-line basis over 24 months.
Line of Credit
The Company entered into a two-year secured revolving line of credit
agreement on November 9, 1998, which permits borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. The interest rate during the first year of the agreement is 1% in
excess of the prime rate. The loan agreement requires the Company to maintain
certain financial ratios, limits the incurrence of additional debt, and
prohibits payment of dividends without the lender's consent. No borrowings were
outstanding as of March 31, 1999 and 1998.
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
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 cannot predict the outcome of any such claim which may
arise in the future, or the effect of any such claim on the Company's operating
results or financial condition.
Stockholders' Equity
During the three month period ended March 31, 1999, 27,259 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 $
71,097.
Stock Option Plan
During the three month period ended March 31, 1999, the Company granted
options to purchase 55,000 shares at prices ranging from $ 3.22 to $ 4.66 to
both new and existing employees.
During the three month period ended March 31, 1999, 88,172 stock options
were canceled.
Proposed Stock Issuance
On April 28, 1999, Boca Research, Inc. entered into a Common Stock
Purchase Agreement (the "Agreement") with Infomatec Integrated Information
Systems AG, an Internet software company located in Augsburg, Germany (the
"Purchaser"), pursuant to which the Purchaser will purchase 1,747,965 newly
issued shares of common stock of the Company at a purchase price of $4.58 per
share, for an aggregate purchase price of approximately $8.0 million in cash. In
addition, subject to terms and conditions set forth in the Agreement, the
Purchaser has agreed to grant stock options to the existing management of the
Company to purchase from the Purchaser up to 270,000 shares of the common stock
of the Company being acquired by the Purchaser at a per share purchase price of
$4.58. Consummation of the transactions contemplated by the Agreement is
conditioned upon, among other things, approval by the Board of Directors of both
the Company and the Purchaser, as well as other customary closing conditions.
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<PAGE>
Item 2.
BOCA RESEARCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors set forth below and
elsewhere in this Report.
As an aid to reviewing the Company's results of operations for the three
months ended March 31, 1999 and 1998, 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
1999 1998 Change
---- ---- -------
<S> <C> <C>
Net sales..................................................... 100.0 % 100.0 % (31.5)%
Cost of goods sold............................................ 80.4 100.9 (45.4)
----- -----
Gross profit (loss)........................................ 19.6 (0.9) *
----- -----
Operating expenses:
Research and development..................................... 10.1 3.7 87.3
Selling, general and administrative.......................... 46.4 19.1 66.6
----- -----
Total operating expenses..................................... 56.5 22.8 69.9
----- -----
Loss from operations.......................................... (36.9) (23.7) *
Non-operating income, net..................................... 1.3 1.3 (30.5)
----- -----
Loss before income tax benefit................................ (35.6) (22.4) *
Income tax benefit............................................ -- --
----- -----
Net loss...................................................... (35.6) % (22.4) % *
======== ========
</TABLE>
* Not meaningful
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<PAGE>
Results of Operations
Net Sales. The Company's net sales decreased by 31.5% to $10,701,000 in
the three months ended March 31, 1999 from $15,616,000 in the three months ended
March 31, 1998. Net sales for the three month period ended March 31, 1999 and
the comparable period in 1998 is shown below by product category. Included in
the data communications product category below is net sales of $4,083,000 of
Global Village branded product during the first quarter of 1999. The Company
acquired the modem business of Global Village Communication, Inc. as of June 18,
1998. The addition of the Global Village brand extended Boca Research's customer
base in the Macintosh market with the #1-selling modems for Macs.
Three Months
Ended March 31,
----------------
1999 1998
---- ----
(In Millions)
Data Communications............................... $ 8.4 $ 8.0
Custom Manufacturing.............................. 0.5 4.8
Networking........................................ 0.1 0.5
Video Graphics.................................... -- 0.3
I/O, IDE, & Multiport............................. 0.9 1.4
Video Conferencing................................ 0.3 0.2
Internet Access Device............................ 0.4 0.4
Engineering Services.............................. 0.1 --
----- -----
$10.7 $15.6
===== =====
Excluding the net sales associated with the modem business of Global
Village, the sales decrease was primarily attributable to decreases in sales of
data communications products and custom manufacturing. Sales of data
communication products were adversely affected by several factors, including
pricing pressure on all modem products, excess industry-wide channel inventories
of pre-standard 56 Kbps product, and the slow adoption of 56 Kbps technology by
consumers who realize that the 56 Kbps product does not significantly increase
Internet downloading speed capability over the 33.6 Kbps product.
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<PAGE>
With respect to the Global Village branded product, net sales decreased to
$4,083,000 in the first quarter of 1999 as compared to net sales of $8,737,000
in the fourth quarter of 1998. During January 1999, Apple Computer, Inc.
("Apple") introduced its new line of Power Macintosh G3 computers, which
negatively impacted sales of the Company's existing Global Village modems. In
fact, because of the introduction of the Universal Serial Bus interface, no
modems were available for the Power Macintosh G3 computers until Boca Research
began shipping the Global Village TelePort Internal 56K fax/modem in the second
half of February. From April 2 through June 27, 1999, Apple is offering
purchasers of a qualifying Power Macintosh G3 computer the option of choosing
either a 56K internal modem or an internal Zip drive at no additional cost. The
Company currently anticipates that the Apple promotion may have a negative
impact on sales of Global Vilage branded product during the second quarter of
1999.
In 1998, the Company continued to provide custom manufacturing to increase
the utilization of its manufacturing facilities. Because the gross margin for
custom manufacturing has historically been low, the Company plans to decrease
its emphasis on this area. Sales in this category in 1998 represented 18% of net
sales. For the three months ended March 31, 1999 sales in this category
represented 5% of net sales.
International sales were approximately $1.3 million for the three months
ended March 31, 1999 compared to $2.8 million for the three months ended March
31, 1998 due to the foregoing factors.
Gross Profit (Loss). Gross profit (loss) was $2,098,000 for the three
months ended March 31, 1999 as compared to ($150,000) for the three months ended
March 31, 1998 and increased as a percentage of net sales to 19.6% in the three
months ended March 31, 1999 from (0.9%) in the three months ended March 31,
1998. The gross profit (loss) percentage is being affected by low utilization of
the Company's manufacturing facilities and aggressive channel pricing to reduce
channel inventories. In the three months ended March 31, 1999 the Company's
gross profit was impacted favorably by net sales of $4,083,000 of the Global
Village branded product, which have higher gross margins associated with them as
compared to sales of Boca Research branded products.
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 currently 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.
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<PAGE>
Research and Development Expenses. Research and development expenses
increased to $1,081,000 in the three months ended March 31, 1999 from $577,000
in the three months ended March 31, 1998. This represents an increase in
research and development expenses as a percentage of net sales to 10.1% for the
three months ended March 31, 1999 from 3.7% for the three months ended March 31,
1998. Research and development expenses increased in the three months ended
March 31, 1999 versus the comparable period in 1998 primarily as the result of
the acquisition of the modem business of Global Village. In addition, the
Company is placing more emphasis on research and development and currently
anticipates that research and development expenses in 1999 may be greater than
such expenses in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4,964,000 in the three months ended March
31, 1999 from $2,980,000 in the three months ended March 31, 1998. Selling,
general and administrative expenses as a percentage of net sales increased to
46.4% in the three months ended March 31, 1999 from 19.1% in the three months
ended March 31, 1998. Selling, general and administrative expenses increased in
the three months ended March 31, 1999 versus the comparable period in 1998
primarily as the result of the acquisition of the modem business of Global
Village. The Company's expenses for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 were $880,000 higher for
advertising and $150,000 higher for the write-off of the Company's investment in
LocalNet Communications, Inc.
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, 1999, the Company's working capital
decreased by $3,006,000 from December 31, 1998. This decrease was represented by
a decrease in cash of $4,256,000, decreases in inventories of $160,000 and trade
receivables of $2,003,000; offset by a decrease in current liabilities of
$3,139,000 and an increase in other current assets of $274,000. The Company's
operations used cash of $1,442,000 for the three months ended March 31, 1999.
The Company does not anticipate that it will be profitable in the second quarter
of 1999 and this would negatively impact the generation of cash from operations
for the second quarter of 1999. In April 1999, the Company received a federal
income tax refund in the amount of $2,455,816 from the Internal Revenue Service
which has increased the Company's cash balances.
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<PAGE>
The Company entered into a two-year secured revolving line of credit
agreement on November 9, 1998, which permits borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. The interest rate during the first year of the agreement is 1% in
excess of the prime rate. The loan agreement requires the Company to maintain
certain financial ratios, limits the incurrence of additional debt, and
prohibits payment of dividends without the lender's consent. No borrowings were
outstanding as of March 31, 1999 and 1998.
On April 28, 1999, Boca Research, Inc. entered into a Common Stock Purchase
Agreement (the "Agreement") with Infomatec Integrated Information Systems AG, an
Internet software company located in Augsburg, Germany (the "Purchaser"),
pursuant to which the Purchaser will purchase 1,747,965 newly issued shares of
common stock of the Company at a purchase price of $4.58 per share, for an
aggregate purchase price of approximately $8.0 million in cash. In addition,
subject to terms and conditions set forth in the Agreement, the Purchaser has
agreed to grant stock options to the existing management of the Company to
purchase from the Purchaser up to 270,000 shares of the common stock of the
Company being acquired by the Purchaser at a per share purchase price of $4.58.
Consummation of the transactions contemplated by the Agreement is conditioned
upon, among other things, approval by the Board of Directors of both the Company
and the Purchaser, as well as other customary closing conditions.
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 for such acquisitions or to meet working
capital needs. There can be no assurance that additional capital beyond the
amounts 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 Problem" refers to the fact that many currently installed
computer systems and software products are coded to accept only two-digit
entries in the date code field and are unable to distinguish 21st Century dates
from 20th Century dates. These date code fields are required to distinguish 21st
Century dates from 20th Century dates and, as a result, many companies' software
and computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements.
State of Readiness. The Company's Year 2000 Readiness Plan addresses year 2000
issues relating to the products made by the Company and the Company's internal
and external IT and non-IT operating systems, including financial and accounting
software and the Company's MRP system. The Company's Year 2000 Readiness Team is
responsible for implementing and executing the Plan which has been developed to
provide a centralized control and monitoring system for the strategic planning,
date critical scheduling and execution of the Company's year 2000 readiness
efforts. The Plan has been structured into the following Phases: Awareness,
Inventory, Assessment, Remediation, Testing/Validation, Cost Analysis,
Dissemination/Implementation and Contingency Planning.
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<PAGE>
Each Phase addresses the products made by the Company and the Company's
own operating systems and the systems of its material customers, vendors,
suppliers and third party providers as well as the products, components and
services which they provide to the Company. Plan status: Phase I - Awareness,
100% complete, Phase II - Inventory, approximately 98% complete, Phase III -
Assessment, approximately 90% complete, the remaining Phases; Remediation,
Testing/Validation, Dissemination/Implementation and Contingency Planning have
reached varying levels of completion.
The Company has completed its evaluation of its current financial and
accounting software. The supplier has informed the Company that it has undergone
an independent year 2000 compliance audit and the Company has received a copy of
their year 2000 compliant certification. The Company's employees have also
successfully tested this software and agree that it is year 2000 compliant. The
supplier of the Company's MRP system has also provided a copy of their year 2000
compliant certification.
In relationship to the Company's other operating systems, the Company
may rely, both domestically and internationally, upon various vendors,
governmental agencies, utility companies, telecommunications service companies,
delivery service companies and other service providers who are outside of the
Company's control. The Company has circulated questionnaires to vendors, third
party providers and customers with whom the Company has material relationships
to obtain information relating to their operating systems' year 2000 compliance.
Until the Company receives responses to these questionnaires, it will not be
able to effectively evaluate the total remediation efforts which will be
required with respect to its IT Systems or non-IT Systems. There is no assurance
that such parties will not suffer a year 2000 business disruption, which could
have a material adverse effect on the Company's financial condition and results
of operations.
The Company continues the assessment, remediation and
testing/validation process of products sold since 1995 and introduced on an
on-going basis to determine which products may have operational concerns
associated with year 2000 compliance. The assessment of whether a complete
system or device in which a Product is embedded will operate correctly for an
end-user depends in part on the year 2000 compliance of the system's other
components, most of which are supplied by parties, other than the Company, over
which the Company has no control. Vendors and suppliers have been requested to
provide the Company with information regarding the year 2000 compliance of the
products and components which they provide to the Company. The Company, to date,
has identified certain products which present a year 2000 issue and is currently
in the process of developing software which will remediate the year 2000 issues
associated with the products. The Company will make the software available for
its customers to download from its year 2000 Web page. As we proceed through the
Assessment Phase, it is possible that the Company will identify other products
which present a year 2000 issue, these products will be reviewed during the
Remediation Phase to determine the appropriate remediation or other appropriate
action. To date, the cost of labor associated with the software development,
which cannot yet be quantified, is the only known cost. We are unable to
determine the full financial impact on the Company at this time for the
remediation of its products.
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<PAGE>
Costs. To date, the Company has identified approximately $200,000 in necessary
expenditures to bring its operating systems into year 2000 compliance, including
the accelerated installation, to afford a solution to year 2000 capability
issues of new software and hardware which had been scheduled in the normal
course of business. The Company has also identified the cost of labor for
software development to remediate certain products, while that cost is not yet
quantifiable, it is not believed that it will be material as the applications
are being developed by the Company's employees. At this time the Company does
not possess all the information necessary to estimate the full potential
financial impact of year 2000 compliance issues relating to its products, its
IT-Systems, non-IT Systems, its vendors, its customers, and other parties. There
can be no assurance that product year 2000 performance issues, of products or
operating systems, including the effect of a year 2000 business disruption, will
not have a material adverse effect on the Company's financial condition and
results of operations.
Contingency Plan. The Company has not yet developed a year 2000-specific
contingency plan. The Company expects to prepare a contingency plan with respect
to "Mission Critical" operating systems by the end of the third quarter 1999. In
addition, if further year 2000 compliance issues are discovered, the Company
then will evaluate the need for one or more contingency plans relating to such
issues.
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 any such
new products or enhancements did not gain market acceptance. In addition, there
can be no assurance that products or
-16-
<PAGE>
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete. The introduction of competing
technologies for the 56 Kbps modem and the marketing activities to promote the
advantages of such technology 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 56 Kbps technology is
resulting in more extensive upgrade policies which has resulted in lower gross
margins. Moreover, price decreases have occurred earlier in the 56 Kbps product
cycle than occurred with 14.4 Kbps and 28.8 Kbps 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 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.
Technological Change and Development of Thin Client Products Market. The
market for thin client products is characterized by rapidly developing
technology, evolving industry standards and customer demands, and frequent
product introductions. These market characteristics are exacerbated by the
emerging nature of this market and the fact that many companies are expected to
introduce thin client products into the market. A key element of the Company's
business strategy is to introduce products that capitalize on the growth in the
thin client products market. The Company's success in exploiting the growth in
this market will depend in significant part upon the ability of the Company to
continually improve the performance and features of its thin client products.
There can be no assurance that the Company will be successful in developing or
marketing products that will meet with market acceptance. Failure by the Company
to successfully market thin client products could result in a material adverse
effect on the Company's business, results of operations and financial condition.
-17-
<PAGE>
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 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.
Acquisitions. The Company may from time to time pursue the acquisition of
other companies, assets, technologies or product lines that would complement or
expand its existing business. Certain of these acquisitions may involve
businesses in which the Company lacks experience. Acquisitions involve a number
of risks that could adversely affect the Company's operating results, including
the diversion of management's attention, the assimilation of the operations,
products and personnel of the acquired companies, the amortization of acquired
intangible assets and the potential loss of key employees of the acquired
companies. There can be no assurance that the Company will be able to identify
businesses that would complement or expand its existing business or complete
such acquisitions, manage one or more acquisitions successfully, or that the
Company will be able to integrate the operations, products or personnel gained
through such acquisition without a material adverse impact on the Company's
business, financial condition and results of operations, particularly in the
quarters immediately following such acquisitions.
-18-
<PAGE>
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 had a negative impact for 1998 which is
expected to continue in 1999. 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 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. Shortages of
components not only limit the Company's production capacity but also could
result in higher costs due to the higher costs of components in short supply or
the need to utilize higher cost substitute components. An extended interruption
in the supply of any of these components or a reduction in their quality or
reliability would have a material adverse effect on the Company's operating
results. While the Company believes that with respect to its single source
components it could obtain similar components from other sources, it could be
required to alter product designs to use alternative components. There can be no
assurance that severe shortages of components will not occur in the future which
could increase the cost or delay the shipment of the Company's products and have
a material adverse effect on the Company's operating results. Significant
increases in the prices of these components could also have a material adverse
effect on the Company's operating results since the Company may not be able to
adjust product pricing to reflect the increases in component costs. Moreover, a
number of components for the Company's products are obtained from foreign
suppliers. Increases in tariffs on such components or fluctuations in exchange
rates could result in increases in the prices paid by the Company for these
components, which could impact the Company's ability to compete with foreign
manufacturers and have a material adverse effect on the Company's operating
results.
-19-
<PAGE>
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 49% of net sales in 1998
and 32% of net sales for the three months ended March 31, 1999. 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
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. 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 32% of the Company's net sales in 1998 and 31% of net sales for
the three months ended March 31, 1999. 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.
During the third quarter of 1998, the Company improved the distribution of
Boca Research branded products by leveraging the strong retail position of its
Global Village line of modems. Direct sales to the retail channel were 7% of net
sales in 1998 and 13% of net sales for the three months ended March 31, 1999.
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
-20-
<PAGE>
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 Internet TV appliances and thin client
devices, 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. 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.
-21-
<PAGE>
Dependence on Custom Manufacturing Sales. Custom manufacturing sales
accounted for approximately 18% and 5% of the Company's net sales for the year
ended December 31, 1998 and the three months ended March 31, 1999, respectively.
The contract manufacturing industry is intensely competitive and the level and
timing of orders placed by the Company's contract manufacturing customers is
highly variable. As a result, there can be no assurance that the Company will
continue to successfully provide custom manufacturing services. The inability of
the Company to successfully maintain its custom manufacturing services could
adversely affect the Company's business, results of operations or financial
condition.
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.
-22-
<PAGE>
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, 1999.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.21 Extension to Employment agreement, dated as of
March 31, 1999, between Robert W. Ferguson and
the Company.
11 Calculation of shares used in determining
earnings per share.
(b) Reports on Form 8-K
On May 5, 1999, 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 purchase of 1,747,965 newly issued shares by Infomatec
Integrated Information Systems AG, at a purchase price of $4.58 per
share, for an aggregate purchase price of approximately $8.0 million in
cash.
-23-
<PAGE>
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: May 14, 1999 /S/ Anthony F. Zalenski
-----------------------
Anthony F. Zalenski
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 14, 1999 /S/ Navrose S. Mehta
--------------------
Navrose S. Mehta
Executive Vice President
and General Manager
(Principal Financial and
Accounting Officer)
-24-
<PAGE>
BOCA RESEARCH, INC.
INDEX TO EXHIBITS
Page
----
Exhibit 10.21 Extension to Employment agreement, dated as of
March 31, 1999, between Robert W. Ferguson and
the Company. 26
Exhibit 11 Calculation of shares used in determining earnings
per share. 28
-25-
<PAGE>
Exhibit 10.21
EXTENSION TO EMPLOYMENT AGREEMENT
THIS EXTENSION TO EMPLOYMENT AGREEMENT is made and entered into this
31st day of March, 1999, by and between ROBERT W. FERGUSON, hereinafter referred
to as "Employee," and BOCA RESEARCH, INC., hereinafter referred to as "Boca."
W I T N E S S E T H :
WHEREAS, Employee and Boca have previously entered into an Employment
Agreement dated October 16, 1998, which contract expires on March 31, 1999; and
WHEREAS, Employee and Boca desire to extend the terms of such
Employment Agreement through June 30, 1999;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained and other good and valuable consideration from one party to the
other, the receipt and adequacy of which are hereby acknowledged, the parties
agree as follows:
1. Boca and Employee hereby agree to extend the terms of the Employment
Agreement through June 30, 1999.
2. Employee shall continue to be available on a reasonable basis to
provide onsite consultation and advice and shall attend the Operations
Committee meetings chaired by the CEO during the second quarter of
1999.
3. All other terms and conditions of the Employment Agreement, except as
modified herein, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Extension to
Employment Agreement the day and year first above written.
-26-
<PAGE>
Witnesses: BOCA RESEARCH, INC.
____________________________________ By: /S/ Anthony F. Zalenski
------------------------
____________________________________
____________________________________ /S/ Robert W. Ferguson
-------------------
____________________________________ Robert W. Ferguson
-27-
<PAGE>
BOCA RESEARCH, INC.
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING NET INCOME PER SHARE
(Unaudited)
March 31, 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
--------------
<S> <C>
Shares outstanding at January 1, 1999........................ 8,756,487
Shares issued January 1, 1999 in
connection with the 1992 Employee
Stock Purchase Plan......................................... 20,643
Shares issued in connection with a
non-qualified stock option plan............................. 1,071
---------
Weighted average shares
outstanding................................................. 8,778,201
=========
March 31, 1998
Three Months Ended
March 31, 1998
--------------
Shares outstanding at January 1, 1998........................ 8,725,079
Shares issued January 1, 1998 in
connection with the 1992 Employee
Stock Purchase Plan......................................... 16,578
---------
Weighted average shares
outstanding................................................. 8,741,657
=========
</TABLE>
-28-
<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-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,703,000
<SECURITIES> 0
<RECEIVABLES> 14,029,000
<ALLOWANCES> 4,483,000
<INVENTORY> 9,086,000
<CURRENT-ASSETS> 24,297,000
<PP&E> 16,946,000
<DEPRECIATION> 13,400,000
<TOTAL-ASSETS> 32,960,000
<CURRENT-LIABILITIES> 10,502,000
<BONDS> 0
0
0
<COMMON> 88,000
<OTHER-SE> 22,279,000
<TOTAL-LIABILITY-AND-EQUITY> 32,960,000
<SALES> 10,701,000
<TOTAL-REVENUES> 10,701,000
<CGS> 8,603,000
<TOTAL-COSTS> 8,603,000
<OTHER-EXPENSES> 6,045,000
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 13,000
<INCOME-PRETAX> (3,806,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,806,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,806,000)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
