SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-18090
CAERE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2250509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Cooper Court, Los Gatos, California, 95030
(Address of principal executive offices)
(408) 395-7000
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Outstanding
Class June 30, 1996
Common Stock
$.001 par value 13,509,106
This is page 1 of 14 pages
CAERE CORPORATION
INDEX
PART I. Financial Information
Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Earnings -- Three Months
and Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CAERE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents $ 4,702 $ 10,664
Short-term investments 46,933 37,101
Receivables 7,017 6,180
Income tax receivable - 1,109
Inventories 2,075 2,077
Other current assets 2,600 2,425
--------- ----------
Total current assets 63,327 59,556
Property and equipment, net 5,302 5,639
Other assets 3,872 4,103
--------- -----------
Total assets $ 72,501 $ 69,298
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other payables $ 6,246 $ 6,340
Accrued merger related costs - 930
--------- -----------
Total current liabilities 6,246 7,270
Preferred stock, $.001 par value: authorized 2,000,000
shares; none issued or outstanding - -
Common stock, $.001 par value: authorized 30,000,000
shares; issued and outstanding 13,509,106 and 13,046,419
shares 14 13
Additional paid-in capital 63,526 62,075
Retained earnings (deficit) 2,715 (60)
--------- -----------
Total stockholders' equity 66,255 62,028
--------- -----------
Total liabilities and stockholders' equity $ 72,501 $ 69,298
========= ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net revenues $ 13,989 $ 13,172 $ 27,545 $ 25,396
Cost of revenues 4,457 4,196 8,772 7,890
------ ------ ------- -------
9,532 8,976 18,773 17,506
------ ------ ------ ------
Operating expenses:
Research and development 1,859 2,003 3,621 4,175
Selling, general and administrative 6,574 6,360 13,002 12,591
Merger related costs - 297 90 297
---- ------ ----- ------
8,433 8,660 16,713 17,063
------ ------ ------ ------
Operating earnings 1,099 316 2,060 443
Interest income 745 495 1,393 1,033
----- ------ ------ ------
Earnings before income taxes 1,844 811 3,453 1,476
Income taxes 369 55 678 221
------ ------ ------ ------
Net earnings $ 1,475 $ 756 $ 2,775 $ 1,255
======= ====== ====== ======
Net earnings per common and
common equivalent share $ 0.11 $ 0.06 $ 0.20 $ 0.09
======== ======== ======== ========
Shares used in per share calculation 13,820 13,385 13,658 13,556
====== ====== ====== ======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 2,775 $ 1,255
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,244 1,038
Merger related costs (860) (1,297)
Amortization of capitalized software development costs 294 309
Changes in operating assets and liabilities:
Receivables, net (837) (1,158)
Income tax receivable 1,109 (1,100)
Inventories 2 251
Other current assets (175) (288)
Accrued expenses and other payables (164) (1,642)
-------- --------
Net cash provided by (used for) operations 3,388 (2,632)
-------- --------
Cash flows from investing activities:
Short-term investments, net (9,832) 4,982
Capital expenditures (743) (2,879)
Capitalized software development costs (297) (240)
Other assets 70 (336)
-------- --------
Net cash provided by (used for) investing activities (10,802) 1,527
-------- --------
Cash flows from financing activities -
proceeds from issuances of common stock 1,452 698
-------- --------
Net change in cash and cash equivalents (5,962) (407)
Cash and cash equivalents, beginning of period 10,664 3,995
-------- --------
Cash and cash equivalents, end of period $ 4,702 $ 3,588
======== ========
Supplemental disclosures:
Cash paid for income taxes $ 46 $ 596
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CAERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A) Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets,
statements of earnings and statements of cash flows reflect all adjustments
(consisting of only normal recurring adjustments) which are, in the opinion of
management, necessary to fairly present the financial position of the Company as
of June 30, 1996, and the results of operations and cash flows for the periods
indicated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and
therefore certain information and footnote disclosure normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company filed audited financial
statements with the Securities and Exchange Commission which included all
information and footnotes necessary for a complete presentation of the Company's
financial position, results of operations and cash flows for the years ended
December 31, 1995, 1994 and 1993, in its report on Form 10-K for the year ended
December 31, 1995 ("the Form 10-K"). These condensed consolidated financial
statements should be read in conjunction with the financial statements contained
in the Company's Form 10-K dated March 25, 1996. The results of operations for
the interim periods ended June 30, 1996, are not necessarily indicative of the
results to be expected for the full year.
B) Inventories June 30, 1996 December 31, 1995
------------ ------------- -----------------
(In thousands)
A summary of inventories follows:
Raw materials $ 1,067 $ 1,212
Work in process 420 287
Finished goods 588 578
--------- ---------
$ 2,075 $ 2,077
========= =========
C) Net Earnings Per Share
Net earnings per common and common equivalent share are computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of options to
purchase common stock calculated using the treasury stock method. Fully diluted
earnings per share for all periods presented were not materially different from
primary earnings per share.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company notes that, except for the historical information contained
herein, the matters discussed below are forward-looking statements subject to
risks and uncertainties that may cause the Company's actual results to differ
materially from what may be contained herein. Such risks and uncertainties
include, but are not limited to: technological and competitive factors such as
rival products, acceptance of new products, and pricing pressures; success of
the "bundle and upgrade" business model including the Company's maintaining its
relationships with scanner manufacturers as well as customers opting to upgrade
to newer or more fully featured products; changes in customer order patterns,
including the maintenance of relationships with retail distributors and dealers;
manufacturing considerations, including the maintenance of margins in a
declining-price environment as well as risk of inventory obsolescence due to
shifts in market demand and new product introductions; and other risk factors
listed from time to time in the Company's SEC reports, including but not limited
to this report on Form 10-Q and the report on Form 10-K for the year ended
December 31, 1995 (Certain Trends and Risk Factors sections).
Results of Operations
The following chart summarizes net revenues, cost of revenues, and
gross margins for the Company's products categorized between hardware and
software. Software products consist of the OmniPage, WordScan, OmniForm, and
PageKeeper lines of products. Hardware products consist of transaction
processing OCR and bar code products, and the M/Series line of production OCR
products.
Business Line Analysis
------------- --------------- ---------------- ------------- ---------------- ---------------
Three Months Ending: June 30, 1996 June 30, 1995
Software Hardware Software Hardware
Products Products Combined Products Products Combined
Net revenues $11,462 $2,527 $13,989 $10,827 $2,345 $13,172
Cost of revenues 3,376 1,081 4,457 3,249 947 4,196
---------- ----------- ----------- ----------- ----------- -----------
$8,086 $1,446 $9,532 $7,578 $1,398 $8,976
Gross margin % 70.5% 57.2% 68.1% 70.0% 59.6% 68.1%
------------- --------------- ---------------- ------------- ---------------- ---------------
------------- --------------- ---------------- ------------- ---------------- ---------------
Six Months Ending: June 30, 1996 June 30, 1995
Software Hardware Software Hardware
Products Products Combined Products Products Combined
Net revenues $22,877 $4,668 $27,545 $21,031 $4,365 $25,396
Cost of revenues 6,798 1,974 8,772 6,131 1,759 7,890
---------- ----------- ----------- ---------- ----------- -----------
$16,079 $2,694 $18,773 $14,900 $2,606 $17,506
Gross margin % 70.3% 57.7% 68.2% 70.8% 59.7% 68.9%
------------- --------------- ---------------- ------------- ---------------- ---------------
Net revenues for software products increased 6% during the second
quarter of 1996 to $11,462,000 from $10,827,000 in 1995, due to increased unit
sales of upgrade products resulting from the change in the business model to a
"bundle and upgrade" strategy. Software unit sales increased 82% in the second
quarter of 1996 compared to the same period in 1995 due to increases in both
upgrade and bundled unit shipments. For the six month period ending June 30,
1996, net revenues for software products increased 9% to $22,877,000 compared to
$21,031,000 during the same period of 1995. During this comparative period,
software unit sales increased 130% in 1996 versus 1995.
Net revenues for hardware products increased 8% to $2,527,000 in the
second quarter of 1996 compared to $2,345,000 during the same period in 1995.
The increase was primarily the result of higher unit sales of transaction
processing OCR and bar code products. For the six months ending June 30, 1996,
net revenues for hardware products increased 7% to $4,668,000 from $4,365,000
during the same period of 1995. This increase was primarily due to higher sales
of transaction processing OCR products.
Export sales decreased 9% to $3,408,000, or 24% of net revenues, during
the second quarter of 1996, compared to $3,743,000, or 28% of net revenues, in
the same period of 1995. Delayed availability of new foreign versions of certain
software products was the primary reason for the decrease during the period. On
a year-to-date basis, export sales decreased 3% to $7,668,000, or 28% of net
revenues, compared to $7,908,000, or 31% of net revenues, in the same period of
1995.
Gross Margins
Gross margins for software products improved from 70.0% in the second
quarter of 1995 to 70.5% in the second quarter of 1996 primarily due to
manufacturing efficiencies and economies of scale earned through the increase in
unit sales volume of the "bundle and upgrade" model. On a year-to-date basis,
gross margins for software products in 1996 declined slightly to 70.3% from
70.8% during the same period of 1995. The primary factor for this change being
product mix changes, including lower retail software unit sales, resulting from
the change in the Company's business model.
Gross margins for hardware products decreased to 57.2% in the second
quarter of 1996 from 59.6% in the same period of 1995 due to lower unit sales of
M/Series products which typically carry higher gross margins than other hardware
products. For the six months ended June 30, 1996, gross margins for hardware
products declined to 57.7% from 59.7% during the same period of 1995. Lower unit
sales of M/Series products were the primary factor contributing to this decline.
The primary factor affecting gross margins in the future is likely to
be shifts in product mix between fully priced retail software, bundled software,
and upgrade products as well as overall shifts in product mix between software
and hardware products. The personal computer software market has been subject to
rapid changes, including significant price competition, which can be expected to
continue. Future technology or market changes may cause certain products to
become obsolete rapidly, necessitating increased inventory write-offs or
reserves and a corresponding decrease in gross margins.
Operating Expenses
Research and development (R&D) expenses decreased 7% to $1,859,000 in
the second quarter of 1996 from $2,003,000 during the same period of 1995. The
decrease in spending from 1995 to 1996 was a result of synergies created by the
merger with Calera. As a percentage of revenue, R&D expense decreased to 13% in
the second quarter of 1996 from 15% during the same period in 1995. This
decrease was the result of both higher net revenues and decreased expenses. For
the six months ended June 30, 1996, R&D expense decreased 13% to $3,621,000 from
$4,175,000 during the same period of 1995. As a percentage of revenue, R&D
expense decreased to 13% in 1996 from 16% of revenue in 1995. On a year-to-date
basis, merger synergies were the primary factors for the decrease.
The Company is committed to providing continuing enhancements to
current products as well as developing new technologies for the future. This
commitment will result in the Company's continuing to invest heavily in R&D
during 1996. In accordance with Statement of Financial Accounting Standards No.
86, the Company capitalized $132,000 of software development costs during the
second quarter of 1996, compared to $120,000 in the same period of 1995.
Amortization of capitalized software development costs was $132,000 in the
second quarter of 1996, compared to $157,000 in 1995.
Selling, general and administrative (S,G&A) expenses increased 3% in
the second quarter of 1996 to $6,574,000 from $6,360,000 during the same period
of 1995. The increase in S,G&A spending was primarily a result of higher service
and support costs along with increased legal related fees and expenses. As a
percentage of revenue, S,G&A expense decreased to 47% of revenue in the second
quarter of 1996 from 48% during the same period in 1995. This decrease is
primarily attributable to the increase in overall net revenues. For the six
months ended June 30, 1996, S,G&A expense increased 3% to $13,002,000 from
$12,591,000 during the same period of 1995. As a percentage of revenue, S,G&A
expense decreased to 47% in 1996 from 50% of revenue in 1995. On a year-to-date
basis, overall spending on advertising and promotion increased at a rate less
than the increase in revenues. The Company expects that S,G&A expense may
increase in dollar terms in 1996 as efforts to expand sales and marketing
activities continue in both the recognition and desktop document management
areas.
During the second quarter of 1995, a $297,000 merger related charge was
recorded related to the Company's December 1994 acquisition of Calera
Recognition Systems, Inc. This charge represented additional integration costs
including severance payments, legal fees, and other costs connected with the
transaction.
Interest Income
Interest income increased by 51% in the second quarter of 1996 to
$745,000 from $495,000 during the same period of 1995. This increase is
attributable to relatively higher cash and short-term investment balances,
generally higher interest rates on the Company's investment securities along
with a shift from tax-free investments to taxable securities carrying higher
rates of interest. On a year-to-date basis, interest income increased 35% to
$1,393,000 in 1996 from $1,033,000 during 1995 for the same reasons indicated
for the second quarter above.
Income Taxes
The Company's effective income tax rate is 20% in 1996 compared to 15%
in 1995. The primary reasons for the higher tax rate are the shift into taxable
investments along with limitations on both tax benefits derived from the
Company's foreign sales corporation as well as its utilization of net operating
loss carryforwards acquired in the Calera merger.
Net Earnings and Earnings Per Share
Net earnings increased 95% to $1,475,000 in the second quarter of 1996
compared to $756,000 during the same period in 1995. This increase was the
result of higher net revenues and interest income and reduced operating
expenses. Earnings per share increased 83% to $.11 per share in the second
quarter of 1996 compared to $.06 per share in the second quarter of 1995. For
the six months ended June 30, 1996, net earnings increased 121% to $2,775,000
compared to $1,255,000 during the same period in 1995. This increase was the
result of higher net revenues and interest income and reduced operating
expenses.
Certain Trends
The Company's future operating results may be affected by various
uncertain trends and factors which are beyond the Company's control. These
include but are not limited to adverse changes in general economic conditions,
rising costs, or the occasional unavailability of needed components. The
industry is characterized by rapid changes in the technologies affecting optical
character recognition. The industry has also become increasingly competitive,
and, accordingly, the Company's results may also be adversely affected by the
actions of existing or future competitors, including the development of new
technologies, the introduction of new products, and the reduction of prices by
such competitors to gain or retain market share.
During 1994, the Company began to bundle versions of its OmniPage and
WordScan software recognition products with scanners from various manufacturers.
The Company's objective in bundling its software products with scanners was to
expand the overall market for OCR software by providing a larger number of
scanner purchasers with experience in the advantages of optical character
recognition. The success of this model, compared to Caere's former model of
selling its software primarily through retail distribution, depends upon the
Company's maintaining or expanding its existing relationships with scanner
manufacturers and a significant proportion of customers who first receive OCR
software in a bundled product deciding to upgrade to a newer or more fully
featured version of the software. Such an upgrade is typically at a
substantially lower price than the retail price of the newer or fully featured
product.
Bundled products incorporating OmniPage and WordScan began shipping in
significant quantities in the fourth quarter of 1994. Because of the lower
per-unit revenue to the Company that results from the combined sale of a bundled
product plus an upgrade, compared to the retail sale of a fully featured version
of the software, the "bundle and upgrade" program relies on increasing unit
sales of upgrades for its success. There can be no assurance that Caere's
transition to the "bundle and upgrade" business model will be successful and
provide sufficient increase in unit volume in the future to offset reduced
per-unit revenue. In addition, customers using the bundled product may defer or
forego purchase of the Company's more fully featured versions of OmniPage and
WordScan products if they find that the bundled products satisfy their
recognition needs.
A significant portion of the Company's net revenues is attributable to
sales through the distribution channel. The Company's future operating results
are dependent to a certain extent on its ability to maintain its existing
relationships with distributors.
The Company's future earnings and stock price could be subject to
significant volatility, particularly on a quarterly basis. The Company's
revenues and earnings are unpredictable due to the Company's shipment patterns.
As is common in the software industry, the Company's experience has been that a
disproportionately large percentage of shipments has occurred in the third month
of each fiscal quarter, and shipments tend to be concentrated in the latter half
of that month. Because the Company's backlog early in a quarter is not generally
large enough to assure that it will meet its revenue targets for any particular
quarter, quarterly results are difficult to predict until the end of the
quarter. A shortfall in shipments at the end of any particular quarter may cause
the results for that quarter to fall significantly short of anticipated levels.
Due to analysts' expectations of continued growth, any such shortfall in
earnings could have a very significant adverse effect on the trading price of
the Company's common stock in any given period.
As a result of the foregoing factors and other factors which may arise
in the future, the market price of the Company's common stock may be subject to
significant fluctuations over a short period of time. These fluctuations may be
due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer industry or the securities
markets in general.
Liquidity and Capital Resources
Caere's financial position remains strong at June 30,1996. Working
capital increased 9% to $57,081,000 from $52,286,000 at December 31, 1995. The
Company has no long-term debt. The Company's cash and short-term investments
totaled $51,635,000 at June 30, 1996, an all-time high. The Company believes
that current cash balances and internally generated funds will be sufficient to
meet its cash requirements through 1996.
Caere generated cash from operations of $3,388,000 during the six
months ended June 30, 1996. Uses of cash included modest expenditures for
capital equipment and investments in short-term interest bearing securities.
The Company offers credit terms to qualifying customers and also sells
on a prepaid, credit card and cash-on-delivery basis. With respect to credit
sales, the Company attempts to control its bad debt exposure through monitoring
of customers' creditworthiness and, where practicable, through participation in
credit associations that provide credit rating information about its customers.
The Company has also purchased credit insurance for certain key accounts to
eliminate the potential for catastrophic losses.
Recent Developments
The Company and ViewStar Corporation ("ViewStar") entered into an
agreement in June 1996 under the terms of which the Company and ViewStar agreed
to settle outstanding disputes that had arisen in connection with the proposed
merger between the companies which was terminated in the first quarter of 1996.
Terms of the settlement are confidential, but included the unconditional release
of all parties.
Item 4
Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on
May 14, 1996
(b) Management's nominee to the Board of Directors of Class I Directors
(for a three-year term expiring at the 1999 Annual Meeting) was elected by
the following votes:
For Withhold
James K. Dutton (Class I) 11,305,512 301,374
The following are persons whose term of office as Directors of the
Company continued after the meeting:
Director Class Term Expires
Frederick W. Zuckerman II 1997
Robert G. Teresi III 1998
Wayne E. Rosing III 1998
(c) The other matters presented and the voting of stockholders with respect
thereto are as follows:
(i) Approval of the 1992 Non-Employee Directors Stock Option Plan,
as amended, to (i) increase the number of shares which may be
issued from 130,000 to 230,000, an increase of 100,000 shares;
(ii) increase the size of automatic grants made under the
Plan; (iii) provide for full vesting of options under certain
circumstances; and (iv) make the change of control definition
in the Plan similar to that used in the Company's Executive
Officers' Change-of-Control Severance Plan.:
For: 10,555,499 Against: 898,341 Abstain: 132,504 No Vote: 20,542
(ii) Approval of the 1981 Incentive and Supplemental Stock Option
Plans as amended, to (I) increase the number of shares that
may be issued under the Plans from 3,520,000 to 3,595,000, an
increase of 75,000 shares; and (ii) add provisions with
respect to Section 162(m) of the Internal Revenue Code of
1986, as amended.
For: 8,830,120 Against: 1,622,703 Abstain: 133,521 No Vote: 20,542
(iii) Ratification of selection of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1996:
For: 11,482,622 Against: 71,249 Abstain: 53,015 No Vote: 0
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Regarding Computation of Net Earnings
Per Share - page 14
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
period covered by this Report.
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 by the
undersigned, thereunto duly authorized.
CAERE CORPORATION
Date: August 7, 1996
/S/ Blanche M. Sutter
Blanche M. Sutter, Vice President
Finance and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
EXHIBIT 11
CAERE CORPORATION
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS PER SHARE
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ----- ---- ----
Net earnings $ 1,475,000 $ 756,000 $ 2,775,000 $ 1,255,000
========= ======= ========= =========
Weighted average shares outstanding during
the period 13,434,976 13,145,069 13,417,216 13,118,498
Common equivalent shares using the treasur
stock method 385,145 239,628 240,889 437,745
------- ------- ------- -------
Common and common equivalent shares
outstanding for purposes of calculating net
earnings per share 13,820,121 13,384,697 13,658,105 13,556,243
========== ========== ========== ==========
Net earnings per common and common
equivalent share $ 0.11 $ 0.06 $ 0.20 $ 0.09
========== ========== ========== ==========