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 September 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 September 30, 1996
Common Stock
$.001 par value 12,552,430
This is page 1 of 14 pages
CAERE CORPORATION
INDEX
PART I. Financial Information
Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Operations -- Three
Months and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 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 7-12
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
Exhibit 11 Statement Regarding Computation of Net Earnings
Per Share 14
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CAERE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents $ 4,245 $ 10,664
Short-term investments 40,500 37,101
Receivables 6,574 6,180
Income tax receivable 496 1,109
Inventories 2,026 2,077
Other current assets 2,826 2,425
----------- --------
Total current assets 56,667 59,556
Property and equipment, net 5,251 5,639
Other assets 3,854 4,103
----------- -----------
Total assets $ 65,772 $ 69,298
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other payables $ 6,950 $ 6,340
Accrued merger related costs - 930
----------- -----------
Total current liabilities 6,950 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 12,552,430 and 13,283,224
shares 13 13
Additional paid-in capital 54,572 62,075
Retained earnings (deficit ) 4,237 (60)
----------- ------------
Total stockholders' equity 58,822 62,028
----------- -----------
Total liabilities and stockholders' equity $ 65,772 $ 69,298
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ----- ------
Net revenues $ 13,403 $ 13,057 $ 40,948 $ 38,453
Cost of revenues 4,273 4,377 13,045 12,267
----- ----- ------ ------
9,130 8,680 27,903 26,186
----- ----- ------ ------
Operating expenses:
Research and development 1,655 2,008 5,276 6,186
Selling, general and administrative 6,495 6,135 19,497 18,722
Merger related costs - - 90 297
------ ------ ------ -----
8,150 8,143 24,863 25,205
----- ----- ------ ------
Operating earnings 980 537 3,040 981
Interest income, net 711 538 2,104 1,571
------ ------ ------ ------
Earnings before income taxes 1,691 1,075 5,144 2,552
Income tax expense 169 161 847 383
------ ------ ----- -----
Net earnings $ 1,522 $ 914 $ 4,297 $ 2,169
====== ====== ===== =====
Net earnings per common and
common equivalent share $ 0.11 $ 0.07 $ 0.32 $ 0.16
======== ======== ========= =========
Shares used in per share calculation 13,342 13,608 13,507 13,477
====== ====== ====== ======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
Cash flows from operating activities:
Net earnings $ 4,297 $ 2,169
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,962 1,636
Merger related costs (930) (1,758)
Amortization of capitalized software development costs 431 458
Changes in operating assets and liabilities:
Receivables (394) (1,498)
Income tax receivable 613 (1,100)
Inventories 51 240
Other current assets (401) (161)
Accrued expenses and other payables 610 (2,214)
--------- ----------
Net cash provided by (used for) operations 6,239 (2,228)
--------- ----------
Cash flows from investing activities:
Short-term investments, net (3,399) 5,909
Capital expenditures (1,306) (3,425)
Capitalized software development costs (429) (389)
Other assets (21) (915)
---------- ----------
Net cash provided by (used for) investing activities (5,155) 1,180
---------- ---------
Cash flows from financing activities:
Proceeds from issuances of common stock, net 1,730 1,051
Repurchase of stock (9,233) -
Repayment of shareholder notes - 221
--------- ---------
Net cash provided by financing activities (7,503) 1,272
---------- ---------
Net increase in cash and cash equivalents (6,419) 224
Cash and cash equivalents, beginning of period 10,664 3,995
--------- ---------
Cash and cash equivalents, end of period $ 4,245 $ 4,219
========= =========
Supplemental disclosures:
Cash paid for income taxes $ 66 $ 603
========= =========
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 operations 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 Caere
Corporation (the "Company") as of September 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 annual 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. The results of operations for the interim
periods ended September 30, 1996, are not necessarily indicative of the results
to be expected for the full year.
B) Inventories
September 30, 1996 December 31, 1995
(In thousands)
A summary of inventories follows:
Raw materials $ 1,142 $ 1,212
Work in process 365 287
Finished goods 519 578
-------- - ---------
$ 2,026 $ 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
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. These risks and uncertainties include, but are not limited to
various technological and competitive factors, including the 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 along with 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 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 Sept. 30, 1996 Sept. 30, 1995
Ending:
----------------------------------------------- ----------------------------------------------
Software Hardware Software Hardware
Products Products Combined Products Products Combined
Net revenues $11,407 $1,996 $13,403 $10,133 $2,924 $13,057
Cost of revenues 3,336 937 4,273 3,278 1,099 4,377
----- --- ----- ----- ----- -----
$8,071 $1,059 $9,130 $6,855 $1,825 $8,680
Gross margin % 70.8% 53.1% 68.1% 67.7% 62.4% 66.5%
-------------- --------------- ---------------- ------------- --------------- ----------------
----------------------------------------------- ----------------------------------------------
Nine Months Ending: Sept. 30, 1996 Sept. 30, 1995
----------------------------------------------- ----------------------------------------------
Software Hardware Software Hardware
Products Products Combined Products Products Combined
Net revenues $34,284 $6,664 $40,948 $31,164 $7,289 $38,453
Cost of revenues 10,134 2,911 13,045 9,409 2,858 12,267
------ ----- ------ ----- ----- ------
$24,150 $3,753 $27,903 $21,755 $4,431 $26,186
Gross margin % 70.4% 56.3% 68.1% 69.8% 60.8% 68.1%
-------------- --------------- ---------------- ------------- --------------- ----------------
Net revenues for software products increased 13% during the third
quarter of 1996 to $11,407,000 from $10,133,000 in 1995, due to increased unit
sales of upgrade products. Software unit sales increased 50% in the third
quarter of 1996 compared to the same period in 1995 due to increases in both
upgrade and bundled unit shipments. For the nine month period ending September
30, 1996, net revenues for software products increased 10% to $34,284,000
compared to $31,164,000 during the same period of 1995. During this comparison
period, software unit sales increased approximately 100% in 1996 versus 1995.
Revenue growth from increased unit volumes for both the third quarter and the
nine months ending September 30, 1996, was somewhat offset by continuing
declines in the average selling prices of the OmniPage OCR software due to
shifts in the business model to the "bundle and upgrade" strategy.
During the fourth quarter of 1996, the Company will begin providing a
golden master of the light version of the bundled OmniPage product to certain
scanner partners who will then produce the "bundled product" at their cost. The
effect of this will be to reduce revenues and cost of sales to the Company by a
similar amount. This change will have a negative effect on the sequential and
year to year comparison of revenues, a positive effect on gross margins, and
very little impact on earnings to the Company.
Net revenues for hardware products decreased 32% to $1,996,000 in the
third quarter of 1996 compared to $2,924,000 during the same period in 1995. The
decrease was primarily the result of lower unit sales of transaction processing
OCR and bar code products. Approximately $500,000 of this decrease was due to a
drop in business with one European customer in 1995. It is common in this line
of business for the Company to receive large one time orders for product. This
ordering pattern has resulted historically in significant fluctuations in
quarterly hardware revenues. This trend is expected to continue. For the nine
months ending September 30, 1996, net revenues for hardware products decreased
9% to $6,664,000 from $7,289,000 during the same period of 1995 due primarily to
the reasons noted above.
Export sales increased 34% to $4,090,000, or 31% of net revenues,
during the third quarter of 1996, compared to $3,057,000, or 23% of net
revenues, in the same period of 1995. The availability of new foreign versions
of certain software products was the primary reason for the increase during the
period. On a year-to-date basis, export sales increased 7% to $11,757,000, or
29% of net revenues, compared to $10,965,000, or 29% of net revenues, in the
same period of 1995.
Gross Margins
Gross margins for software products improved from 67.7% in the third
quarter of 1995 to 70.8% in the third quarter of 1996 primarily due to increased
volumes and a decrease in software media costs. On a year-to-date basis, gross
margins for software products in 1996 improved to 70.4% from 69.8% during the
same period of 1995. The primary factor for this change was manufacturing
efficiencies and economies of scale earned from increasing production volumes
resulting from the change in the Company's business model.
Gross margins for hardware products decreased to 53.1% in the third
quarter of 1996 from 62.4% in the same period of 1995 due to fixed manufacturing
costs' being spread over lower unit volumes and to product mix changes from year
to year. For the nine months ended September 30, 1996, gross margins for
hardware products declined to 56.3% from 60.8% during the same period of 1995
also due to the reasons noted above.
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 microcomputer 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 18% to $1,655,000 in
the third quarter of 1996 from $2,008,000 during the same period of 1995. The
decrease in spending from 1995 to 1996 was a result of reduced headcount brought
about primarily by synergies created by the merger with Calera. As a percentage
of revenue, R&D expense decreased to 12% in the third 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 nine months ended September 30, 1996,
R&D expense decreased 15% to $5,276,000 from $6,186,000 during the same period
of 1995. As a percentage of revenue on a nine month basis, 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 and beyond. The Company expects research and development expense to
increase in dollar terms both during the fourth quarter of 1996 and in 1997. In
accordance with Statement of Financial Accounting Standards No. 86, the Company
capitalized $132,000 of software development costs during the third quarter of
1996, compared to $149,000 in the same period of 1995. Amortization of
capitalized software development costs was $137,000 in the third quarter of
1996, compared to $149,000 in 1995.
Selling, general and administrative (S,G&A) expenses increased 6% in
the third quarter of 1996 to $6,495,000 from $6,135,000 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 promotional costs related to the OmniForm
product line. As a percentage of revenue, S,G&A expense increased to 48% of
revenue in the third quarter of 1996 from 47% during the same period in 1995.
For the nine months ended September 30, 1996, S,G&A expense increased 4% to
$19,497,000 from $18,722,000 during the same period of 1995. As a percentage of
revenue, S,G&A expense decreased to 48% in 1996 from 49% 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 the OCR, forms, and desktop document management
areas.
During 1995, a $297,000 merger related charge was taken in the second
quarter 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.
In 1996, a $90,000 merger related charge was taken in the first quarter related
to the Company's terminated acquisition of ViewStar Corporation in the fourth
quarter of 1995. This charge represented additional direct costs including legal
and accounting fees and financial printing costs incurred in connection with the
transaction.
Interest Income
Interest income increased by 32% in the third quarter of 1996 to
$711,000 from $538,000 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 34% to
$2,104,000 in 1996 from $1,571,000 during 1995 for the same reasons indicated
for the third quarter above.
Income Taxes
The Company's effective income tax rate in 1996 is expected to be
10-15%, less than statutory rates primarily due to the use of its foreign sales
corporation and increased utilization of net operating loss carryforwards
acquired in the merger with Calera Recognition Systems, Inc. In 1995, the
effective income tax rate was 15%, due primarily to the use of the Company's
foreign sales corporation and tax-exempt interest income.
Net Earnings and Earnings Per Share
Net earnings increased 67% to $1,522,000 in the third quarter of 1996
compared to $914,000 during the same period in 1995. This increase was the
result of higher net revenues and interest income and relatively flat operating
expenses during the period. Earnings per share increased 57% to $.11 per share
in the third quarter of 1996 compared to $.07 per share in the third quarter of
1995. For the nine months ended September 30, 1996, net earnings increased 98%
to $4,297,000 compared to $2,169,000 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 September 30,1996. Working
capital decreased 5% to $49,717,000 from $52,286,000 at December 31, 1995. This
decrease is related to the Company's repurchase of common stock during the third
quarter. In accordance with its approved share repurchase program, the Company
used $9,233,000 to repurchase 1,000,000 shares during the quarter. The Company
has no long-term debt. The Company's cash and short-term investments totaled
$44,745,000 at September 30, 1996. 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 $6,239,000 during the nine
months ended September 30, 1996. Uses of cash included the $9,233,000 share
repurchase and 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.
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Regarding Computation of Net
Earnings (Loss) Per Share - page 14
(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: November 12, 1996
/S/ Blanche M. Sutter
Blanche M. Sutter, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
EXHIBIT 11
CAERE CORPORATION
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS (LOSS) PER SHARE
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Net earnings $1,522,000 $914,000 $4,297,000 $2,169,000
============== =============== ============== ===============
Weighted average shares outstanding during
the period 13,146,906 13,215,958 13,295,704 13,140,976
Common equivalent shares using the
treasury stock method 195,108 392,012 211,564 336,397
-------------- --------------- -------------- ---------------
Common and common equivalent shares
outstanding for purposes of calculating
net earnings per share 13,342,014 13,607,970 13,507,268 13,477,373
============== =============== ============== ===============
Net earnings per common and common
equivalent share $0.11 $0.07 $0.32 $0.16
============== =============== ============== ===============