UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
Commission File Number 0-21138
BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1601 Clint Moore Road
Boca Raton, Florida
(Address of principal 33487
executive offices) (Zip Code)
(561) 997-6227
(Registrant's telephone number, including area code)
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 12, 2000
----- ------------
Common stock, par value 11,601,438
$.01 per share
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BOCA RESEARCH, INC.
Form 10-Q for the Quarter Ended March 31, 2000
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of March 31, 2000 and
December 31, 1999................................ 3
Condensed Consolidated Statements of
Operations (unaudited) for the three months
ended March 31, 2000 and 1999.................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the three
months ended March 31, 2000 and 1999............. 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
Item 1. Legal Proceedings............................ 22
Items 2-3. 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, December 31,
2000 1999
--------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 10,664 $ 11,819
Trade receivables, net................................... 2,644 3,623
Inventory, net........................................... 2,222 3,672
Prepaid expenses and other current assets................ 2,519 789
---------- ----------
Total current assets................................... 18,049 19,903
Property and equipment, net................................ 618 2,039
Goodwill and other intangible assets....................... 3,010 3,369
Other assets............................................... 1,441 1,177
---------- ----------
Total assets......................................... $ 23,118 $ 26,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 4,176 $ 4,444
Deferred revenue......................................... 202 586
Accrued expenses and other current liabilities........... 2,842 3,619
---------- ----------
Total current liabilities 7,220 8,649
---------- ----------
Deferred revenue........................................... -- 16
---------- -----------
Other non-current liabilities.............................. 500 500
---------- -----------
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares
authorized, 11,601,438 issued and outstanding
at March 31, 2000, 11,475,793 issued and
outstanding at December 31, 1999........................ 116 115
Additional paid-in capital............................... 39,985 39,516
Deficit.................................................. (24,703) (22,308)
----------- ------------
Total stockholders' equity............................. 15,398 17,323
---------- -----------
Total liabilities and stockholders' equity........... $ 23,118 $ 26,488
======== ========
</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,
---------------------
2000 1999
-------- ------
<S> <C> <C>
Net sales..................................................... $ 4,655 $ 10,701
Cost of goods sold............................................ 4,259 8,603
---------- ----------
Gross profit............................................. 396 2,098
---------- ----------
Operating expenses:
Research and development................................. 718 1,081
Selling, general and administrative...................... 3,226 4,964
---------- ----------
Total operating expenses................................. 3,944 6,045
---------- ----------
Loss from operations.......................................... (3,548) (3,947)
Non-operating income, net..................................... 1,153 141
---------- ----------
Loss before income tax benefit................................ (2,395) (3,806)
Income tax benefit............................................ -- --
---------- ----------
Net loss...................................................... $ (2,395) $ (3,806)
----------- -----------
Net loss per share (basic and diluted)........................ $ (0.21) $ (0.43)
---------- -----------
Weighted average shares outstanding........................... 11,526 8,778
========== ==========
</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,
---------------
2000 1999
---- ----
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss................................................ $(2,395) $(3,806)
Adjustments for non-cash charges........................ 682 798
Gain on sale of shares received under
marketing agreement.................................. (956) --
Gain on sale of fixed assets............................ (292) --
Changes in assets and liabilities....................... (210) 1,566
---------- -------
Net cash used in operating activities................. (3,171) (1,442)
---------- --------
Investing activities:
Cash paid for acquisition............................... -- (2,800)
Proceeds from sale of shares received under
marketing agreement................................... 1,156 --
Proceeds from sale of fixed assets...................... 715 --
Capital expenditures.................................... (325) (85)
---------- ---------
Net cash provided by (used in)
investing activities................................ 1,546 (2,885)
---------- ---------
Financing activities - Exercise of options.................... 470 71
---------- --------
Net decrease in cash and cash equivalents..................... (1,155) (4,256)
Cash and cash equivalents, beginning of period................ 11,819 6,959
--------- --------
Cash and cash equivalents, end of period...................... $ 10,664 $ 2,703
======== =======
</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, 2000, and the results of its operations and its cash
flows for the three month periods ended March 31, 2000 and 1999. 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 1999 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, 1999. The results of operations for the
three month period ended March 31, 2000 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 $0 and $258,437 in the three
month periods ended March 31, 2000 and 1999, 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, 2000 and 1999, and net loss is the only component of
comprehensive income (loss) for such periods.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, and accounts payable
approximates fair value.
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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,
2000 1999
----------------- ------------
<S> <C> <C>
Accounts receivable................................... $ 6,410 $ 7,711
Allowance for sales returns, allowances and
price protection..................................... (1,516) (2,007)
Allowance for doubtful accounts....................... (2,250) (2,081)
---------- ---------
$ 2,644 $ 3,623
======== ========
</TABLE>
Included in the accounts receivable balance is $13,000 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 2000 and 1999 were $0 and $53,000, respectively. The Company
has agreed to payment terms of 180 days for PowerTel.
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ------------
<S> <C> <C>
Raw materials......................................... $ 2,894 $ 4,378
Work in process....................................... -- 1,053
Finished goods........................................ 3,196 3,351
Inventory allowances.................................. (3,868) (5,110)
---------- ---------
$ 2,222 $ 3,672
========== =========
</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 $1,765,000 at March 31, 2000 and
$11,664,000 at December 31, 1999.
Deferred Revenue
Revenue from engineering services contracts is recognized as the work is
performed using the percentage of completion method. Revenue from product
licensing or software royalties is recognized as earned in accordance with the
terms of the contracts. Amounts received but unearned are recorded as deferred
revenue.
Line of Credit
The Company has a two year collateralized revolving line of credit
agreement expiring November 9, 2000, which permitted borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. During March 2000, the Company's total credit limit under the loan
agreement was reduced from $5,000,000 to $2,500,000. The interest rate during
the second year of the agreement is 1/2% 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 December 31, 1999 or
March 31, 2000.
Commitments and Contingencies
On March 3, 2000, the Company completed the sale of certain of its assets
(the "Purchased Assets") relating to its manufacturing operations at 1377 Clint
Moore Road for the manufacture of products, including modems, to Boundless
Manufacturing Services, Inc. ("Boundless"), a wholly owned subsidiary of
Boundless Corporation, for $1,700,000 in cash and note (the "Boundless
Transaction"). In accordance with the terms of the Asset Purchase Agreement
between the Company and Boundless Technologies, Inc., which was assigned to
Boundless on the closing of the transaction, Boundless paid the Company $700,000
in cash and Boundless issued to the Company a 6% promissory note (the "Note") in
the principal amount of $1,000,000 to be paid in eight equal installments of
$125,000 plus accrued interest commencing
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
on June 1, 2000, and on the first business day of every third month thereafter,
until paid in full. The obligations of Boundless under the Note are guaranteed
by Boundless Technologies, Inc. and Boundless Corporation. Additionally,
concurrent with the closing of the Boundless Transaction, the Company entered
into a Supply Agreement with Boundless pursuant to which the Company agreed to
outsource the manufacture of certain products to Boundless for a period of two
years.
Under the Supply Agreement, the Company guarantees that it will purchase
products resulting in proceeds to Boundless exclusive of costs of materials, of
at least $3,775,000 during the first year of the term of the Supply Agreement.
To the extent the Company falls short of the cumulative prorated amount
guaranteed in any of the four 90 day periods subsequent to March 3, 2000, the
amount of the shortfall would be due within 30 days after the end of the 90 day
period in which the shortfall occurred. In the event of any default under the
Note, the Company is entitled to offset any amounts due to Boundless under the
Supply Agreement.
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.
The Company has been named a co-defendant in an action brought in the
United States District Court for the District of Massachusetts, by NEC
Technologies, Inc. The suit alleges that the Company supplied modem hardware to
NEC, which was combined by NEC with software supplied by another co-defendant,
Ring Zero Systems, Inc. NEC was subsequently sued for patent infringement by
PhoneTel Communications, Inc., allegedly as a result of NEC's combination of
modem hardware and software supplied by the vendors in its personal computer
products. NEC alleges that Boca and Ring Zero are obligated to indemnify NEC for
NEC's costs of defense and settlement of the PhoneTel suit, in the amount of
$327,000. This action was dismissed without prejudice on April 25, 2000;
however, the reason for the dismissal was entirely procedural, and there has
been no resolution of the substantive dispute. The Company anticipates that NEC
will refile this action in an appropriate jurisdiction in the near future. The
Company is evaluating the claim, but does not presently believe the claim will
have a material adverse effect on the Company's operating results and financial
condition.
The Company and its Boca Global, Inc. subsidiary have been named
co-defendants in an action brought in the District Court of South Dakota, by
Gateway, Inc. Global Village, Inc. had contracted to supply its FaxWorks
software to be bundled with Gateway PCs. Gateway's complaint against the Company
and Boca Global, Inc. alleges that either or both of these entities
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
assumed the liabilities of Global Village, Inc. with respect to the FaxWorks
product. Gateway reportedly will pay between $5,000,000 and $6,000,000 to settle
litigation brought by PhoneTel, Inc., for which Gateway is seeking
indemnification from the Company, Boca Global, Inc., and an unrelated
co-defendant. While the Company believes it will be able to assert numerous
defenses to liability, the Company is unable to estimate what impact, if any,
this claim will have upon the Company's financial statements, given the
preliminary nature of the claim.
Stockholders' Equity
During the three month period ended March 31, 2000, 125,645 shares were
issued in connection with the exercise of options granted under the Company's
stock option plans and with purchases by employees through the Employee Stock
Purchase Plan. The aggregate proceeds received from these exercises were
$469,668.
Stock Option Plan
During the three month period ended March 31, 2000, the Company granted
options to purchase 81,750 shares at prices ranging from $5.78 to $7.69 to both
new and existing employees. During the three month period ended March 31, 2000,
options to purchase 125,502 shares were canceled.
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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, 2000 and 1999, 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
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Net sales..................................................... 100.0 % 100.0 % (56.5)%
Cost of goods sold............................................ 91.5 80.4 (50.5)
------ -------
Gross profit........................................... 8.5 19.6 (81.1)
------ -------
Operating expenses:
Research and development.................................... 15.4 10.1 (33.6)
Selling, general and administrative......................... 69.3 46.4 (35.0)
------ -------
Total operating expenses.................................... 84.7 56.5 (34.5)
------ -------
Loss from operations.......................................... (76.2) (36.9) (10.1)
Non-operating income, net..................................... 24.8 1.3 717.7
------ -------
Loss before income tax benefit............................... (51.4) (35.6) (37.1)
Income tax benefit............................................ -- -- --
------ -------
Net loss...................................................... (51.4)% (35.6)% (37.1)
======== =========
</TABLE>
Results of Operations
Net Sales. The Company's net sales decreased by 56.5% to $4,655,000 in
the three months ended March 31, 2000 from $10,701,000 in the three months ended
March 31, 1999. Net sales for the three-month period ended March 31, 2000 and
the comparable period in 1999 are shown in the following table by product
category. 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.
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<PAGE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(In Millions)
-------------
Data Communications................ $3.4 $ 8.4
Custom Manufacturing............... 0.1 0.5
Networking......................... -- 0.1
Video Graphics..................... -- --
I/O, IDE, & Multiport.............. 0.7 0.9
Video Conferencing................. -- 0.3
Internet Access Device............. 0.1 0.4
Engineering Services............... 0.4 0.1
------- ------
$ 4.7 $10.7
===== =====
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. Sales of data communication products were
adversely affected by industry-wide pricing pressure.
With respect to the Global Village branded product, net sales decreased
to $2,373,000 in the first quarter of 2000 as compared to net sales of
$4,083,000 in the first quarter of 1999. The inclusion of non-Global Village
brand modems with certain models being sold by Apple Computer, Inc. continue to
negatively impact sales of Global Village modems.
The engineering services revenue consisted of $179,000 for contract
engineering and $196,000 in royalties from licensing the Company's internet
appliance reference design.
International sales were approximately $0.6 million for the three months
ended March 31, 2000 compared to $1.3 million for the three months ended March
31, 1999 due to the foregoing factors.
Gross Profit. Gross profit was $396,000 for the three months ended March
31, 2000 as compared to $2,098,000 for the three months ended March 31, 1999 and
decreased as a percentage of net sales to 8.5% in the three months ended March
31, 2000 from 19.6% in the three months ended March 31, 1999. The Company's
gross profit was negatively impacted by deteriorating profit margins on Global
Village branded product.
On March 3, 2000, the Company completed the sale of certain of its assets
(the "Purchased Assets") relating to its manufacturing operations at 1377 Clint
Moore Road for the manufacture of products, including modems, to Boundless
Manufacturing Services, Inc. ("Boundless"), a wholly owned subsidiary of
Boundless Corporation, for $1,700,000 in cash and notes. The sale is part of the
Company's efforts to improve gross margins and resulted in a gain of $277,000.
In
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<PAGE>
accordance with the terms of the Asset Purchase Agreement between the Company
and Boundless Technologies, Inc., which was assigned to Boundless on the closing
of the transaction, Boundless paid the Company $700,000 in cash and Boundless
issued to the Company a 6% promissory note (the "Note") in the principal amount
of $1,000,000 to be paid in eight equal installments of $125,000 plus accrued
interest commencing on June 1, 2000, and on the first business day of every
third month thereafter, until paid in full. The obligations of Boundless under
the Note are guaranteed by Boundless Technologies, Inc. and Boundless
Corporation. Additionally, concurrent with the closing of the Boundless
Transaction, the Company has entered into a Supply Agreement with Boundless
pursuant to which the Company agreed to outsource the manufacture of certain
products to Boundless for a period of two years. Under the Supply Agreement, the
Company guarantees that it will purchase products resulting in proceeds to
Boundless exclusive of costs of materials, of at least $3,775,000 during the
first year of the term of the Supply Agreement. To the extent the Company falls
short of the cumulative prorated amount guaranteed in any of the four 90 day
periods subsequent to March 3, 2000, the amount of the shortfall would be due
within 30 days after the end of the 90 day period in which the shortfall
occurred. In the event of any default under the Note, the Company is entitled to
offset any amounts due to Boundless under the Supply Agreement.
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.
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 fulfill the specified minimum
level of contract manufacturing services under the Boundless Transaction.
Research and Development Expenses. Research and development expenses
decreased to $718,000 in the three months ended March 31, 2000 from $1,081,000
in the three months ended March 31, 1999. This represents an increase in
research and development expenses as a percentage of net sales to 15.4% for the
three months ended March 31, 2000 from 10.1% for the three months ended March
31, 1999. Research and development expenses decreased in the three months ended
March 31, 2000 versus the comparable period in 1999 primarily as the result of
closing the Sunnyvale, California location and the reclassification to cost of
goods sold of certain costs related to contract engineering revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3,226,000 in the three months ended March
31, 2000 from $4,964,000 in the three months ended March 31, 1999. Selling,
general and administrative expenses as a percentage of net sales increased to
69.3% in the three months ended March 31, 2000 from 46.4% in the three months
ended March 31, 1999. Selling, general and administrative expenses decreased in
the three months ended March 31, 2000 versus the comparable period in 1999
primarily as the result of the Company's efforts to reduce expenses. The
Company's expenses for the three months ended March 31, 2000 compared to the
three months ended March 31,
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<PAGE>
1999 were $387,000 lower for technical support, $380,000 lower for rent,
$307,000 lower for marketing development funds, $197,000 lower for advertising
and creative costs, $201,000 lower for warranty costs, $70,000 lower for trade
shows, and included a $292,000 gain on the sale of fixed assets.
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, 2000, the Company's working capital
decreased by $425,000. This decrease was represented by a decrease in accounts
receivable of $979,000 and inventory of $1,450,000 offset by an increase in
prepaid expenses and other current assets of $1,730,000 and decreases in
accounts payable of $268,000, accrued expenses of $777,000 and deferred revenue
of $400,000. Also in the three months ended March 31, 2000, the Company had a
$956,000 gain associated with the sale of shares previously received in
connection with an exclusive marketing agreement and a $292,000 gain on the sale
of fixed assets. The Company's operations used cash of $3,171,000 for the three
months ended March 31, 2000. The Company does not anticipate that it will be
profitable in the second quarter of 2000 and this would negatively impact the
generation of cash from operations for the second quarter of 2000.
The Company has a two year collateralized revolving line of credit
agreement expiring November 9, 2000, which permitted borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. During March 2000, the Company's total credit limit under the loan
agreement was reduced from $5,000,000 to $2,500,000. The interest rate during
the second year of the agreement is 1/2% 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 December 31, 1999 or
March 31, 2000.
The Company incurred substantial operating losses in 1997, 1998, 1999, and
in the first quarter of 2000 and it is likely that cash flow from operations
will be negative in 2000. However, management has implemented efforts to bring
the Company's expense structure in line with the reduced revenue levels being
achieved. Further, the Company may have additional cash requirements in
connection with the Boundless Transaction. Although there can be no assurances
that the Company will return to profitable operations in 2000, management
believes that existing cash balances, availability of funds under the credit
line and cash generated from operations will be sufficient to meet its liquidity
and capital needs for the next twelve months. However, if certain negative
factors occur as further described below under the heading Certain Factors That
May Affect Our Performance, the Company's liquidity could become strained in the
latter part of the year 2000.
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<PAGE>
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.
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.
Transition of Company. The Company embarked upon a plan in early 2000
to transition from being primarily a data communication products manufacturer to
its new focus on providing software and systems solutions-based services. The
Company has very limited experience providing software and systems
solutions-based services, and there can be no assurances that the Company will
succeed in implementing its as-yet unproven business plan. The Company
anticipates that it will provide a significant amount of formal engineering and
design services to the infotainment appliance industry, yet has limited
experience to date in doing so. Risks associated with this transition include:
a. the existence of a limited number of network operators and information
appliance manufacturers that have deployed products and services using
the Company's technology;
b. potential delays in deploying high-speed networks and internet-enhanced
services and applications by the Company's customers;
c. an unproven business model, which depends on revenues from engineering
services and royalty fees paid by information appliance manufacturers and
network operators; and
d. a potential inability of the Company to expand its engineering and design
staff, increase its sales or marketing activities, and invest in its
technological infrastructure.
Boca Global, Inc.: Declining Revenue. If sales fail to improve, the
Company may need to evaluate its options with respect to this business unit to
minimize losses and cash outflows.
Inprimis Technologies, Inc.: Uncertainty in Development of an Evolving
Industry. The market for intelligent computing devices is emerging and the
potential size of this market and the timing of its development are not known.
As a result, the profitability of the Inprimis subsidiary is uncertain and its
revenue may not grow as fast as anticipated, if at all. The Company is dependent
upon the broad acceptance by business and consumers of a wide variety of
intelligent computing devices, which depend on many factors, including:
a. the development of content and applications for intelligent computing
devices;
b. the willingness of large numbers of businesses and consumers to use
devices such as handheld and palm-size PCs and handheld industrial data
collectors to perform functions
-15-
<PAGE>
currently carried out manually or by traditional PCs, including inputting
and sharing data, communicating among users and connecting to the
Internet; and
c. the evolution of industry standards that facilitate the distribution of
content over the Internet to these devices via wired and wireless
telecommunications systems, satellite or cable.
The Company cannot guarantee that it will succeed in achieving its
goals, and its failure to do so would have a material adverse effect on its
business, prospects, financial condition and operating results.
Software Development and Services Market; Low Barriers to Entry. The
market for software development and services is becoming increasingly
competitive. Increased competition may result in price reductions, lower gross
margins and loss of market share, which would harm the Company's planned
business through its Inprimis subsidiary. The Company faces competition from:
a. current and potential customers' internal research and development
departments that may seek to develop their own proprietary solutions;
b. large professional engineering services firms that may enter the market;
c. established intelligent computing device software and tools
manufacturers; and
d. small- and medium-sized engineering service companies.
As the Company develops new products, particularly products focused on
specific industries, they may begin competing with companies in sectors that
were not listed. It is also possible that new competitors will enter the market
or that existing competitors will form alliances that may enable them to rapidly
increase their market share. The barriers to entering the market as software
developer or hardware design consultant for intelligent computing devices are
low. New market entrants may have lower overhead than the Company and therefore
be able to offer advantageous pricing. The Company expects that competition will
increase as other established and emerging companies enter the intelligent
computing device market and as new products and technologies are introduced.
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 inventory levels in response to unexpected
shortfalls in sales or, conversely, to increase production or inventory levels
in response to unexpected demand. The Information Technology ("IT") sector in
which the Company offers outsourcing and other services is characterized by
rapidly changing technology with continuous improvements in both computer
hardware and software and rapid obsolescence of current systems. The Company's
success will depend in part on its ability to develop solutions that keep pace
with continuing changes in information technology, evolving industry standards
and changing client preferences.
-16-
<PAGE>
Additionally, there canbe 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.
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 that
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 the 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.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have varied significantly, and 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, VARs 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
-17-
<PAGE>
economic conditions generally. Quarterly sales depend on the volume and timing
of ordersreceived 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
of 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 such
acquisitions, manage one or more acquisitions successfully, or that the Company
will be able to integrate the operations, products, or personnel gained through
such acquisition without a material adverse impact on the Company's business,
financial condition, and results of operations, particularly in the quarters
immediately following such acquisitions.
International Operations. The Company's international sales are subject
to the risks inherent in international sales, including various regulatory
requirements (including the need to obtain certifications for the Company's data
communications products), political and economic changes and disruptions,
tariffs or other barriers, difficulties in staffing and managing foreign
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render the Company's products less competitive relative to
local product offerings or expose the Company to foreign currency exchange
losses. One or more of these factors may have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
operating results.
Dependence on Suppliers. The major components of the Company's products
include circuit boards, microprocessors, chipsets and memory components. Most of
the components used in the Company's products are available from multiple
sources. However, certain components used in the Company's products are
currently obtained by Boundless Manufacturing Services, Inc. ("Boundless"), who
manufactures the Company's products, 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
-18-
<PAGE>
to others in the computer industry, the Company has, from time to time,
experienced difficulty inobtaining certain components. Neither the Company nor
Boundless has 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 Boundless' 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 Boundless believes that with respect
to its single source components it could obtain similar components from other
sources, the Company 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 28% of net sales in 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 account for
approximately 18% of the Company's net sales in 1997, 32% of net sales in 1998
and 47% of net sales in 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
-19-
<PAGE>
ability to maintain its existing relationships with its wholesale distributors
or could negatively impact sales to such distributors.
Competition. The markets for the Company's products are intensely
competitive resulting in constant pricing pressures. Some of the Company's
competitors have significantly greater financial, technical, product
development, manufacturing or marketing resources than the Company. The Company
believes that its ability to compete depends on a number of factors, including
price, product quality and reliability, product availability, credit terms, name
recognition, delivery time, and post-sale service and support. There can be no
assurance that the Company will be able to continue to compete successfully with
respect to these factors. A variety of companies currently offer products that
compete directly with the Company's products. These competitors could introduce
additional products or add features to their existing products that are superior
to the Company's products or that achieve greater market acceptance. In addition
to U.S.-based firms, the Company faces competition from Pacific Rim suppliers,
which generally offer products at significantly lower prices. The introduction
of lower priced competitive products or significant price reductions by the
Company's competitors would result in price reductions in the Company's products
that could have a material adverse effect on the Company's operating results. In
addition, as the Company enters into new product markets, such as Internet TV
appliances, 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 Boundless' manufacturing facility in Boca Raton,
Florida. Boundless' manufacturing operations
-20-
<PAGE>
utilize certain equipment which, if damaged or otherwise rendered inoperable,
would result in the disruption of Boundless' manufacturing operations. Although
the Company maintains business interruption insurance which the Company believes
is adequate, any extended interruption of theoperations at Boundless' 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.
Dependence on Key Personnel and Management of Growth. The Company is
highly dependent on its executive officers and other key personnel, many of whom
could be difficult to replace. If certain of these people were to leave the
Company, operating results could be adversely affected. The future growth and
success of the Company also depends in part on its ability to attract and retain
skilled employees and on the ability of its officers and key employees to manage
growth successfully. The Company has no long-term employment contracts with any
of its executive officers.
-21-
<PAGE>
PART II.
BOCA RESEARCH, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is disclosed in the "Commitments
and Contingencies" Note to the Company's Condensed Consolidated Financial
Statements contained in Part I hereof.
Items 2-3.
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, 2000.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Calculation of shares used in determining
earnings per share.
(b) Reports on Form 8-K
None.
-22-
<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 15, 2000 /S/ Robert W. Ferguson
---------------------------------
Robert W. Ferguson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: May 15, 2000 /S/ Robert P. Heinlein
---------------------------------
Robert P. Heinlein
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-23-
<PAGE>
BOCA RESEARCH, INC.
INDEX TO EXHIBITS
Page
----
Exhibit 11 Calculation of shares used in determining earnings per share 25
-24-
<PAGE>
BOCA RESEARCH, INC.
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING NET INCOME PER SHARE
(Unaudited)
March 31, 2000
Three Months Ended
March 31, 2000
--------------
Shares outstanding at January 1, 2000................... 11,475,793
Shares issued January 1, 2000 in
connection with the 1992 Employee
Stock Purchase Plan.................................... 13,813
Shares issued in connection with a
non-qualified stock option plan........................ 36,515
----------
Weighted average shares
outstanding............................................ 11,526,121
==========
March 31, 1999
Three Months Ended
March 31, 1999
--------------
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
=========
-25-
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<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.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 6,410,000
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<COMMON> 116,000
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<SALES> 4,655,000
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<CGS> 4,259,000
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