1
Results of Operations
On December 20, 1994, the Company acquired Calera Recognition Systems,
Inc. (Calera). Calera began operations in November 1982 and was engaged in the
design, development, and marketing of OCR hardware and software systems for
converting scanned or faxed images into computer usable text. The merger was
effected by issuing approximately 2,500,000 shares of Caere's common stock for
all of the outstanding stock and vested options of Calera. The acquisition was
accounted for using the pooling-of-interests method of accounting. Accordingly,
all annual and interim financial information prior to the acquisition has been
restated to combine the results of the Company and Calera.
Net revenues for the Company increased 23% to $59,130,000 during 1994
from $48,264,000 during 1993. Net revenues during 1992 were $57,093,000.
The following chart summarizes net revenues, cost of revenues, and
gross margins for the Company's various product areas. Desktop Products consist
of the Company's OmniPage family of page recognition software, its PageKeeper
desktop document management products, and its OmniScan(R) handheld scanners.
WordScan Products consist of the Millennium Series of OCR hardware products as
well as the WordScan family of software products. Business Products consist of
transaction processing OCR and bar code products. Business Products have
hardware components that have significantly lower gross margins than the
software-only OmniPage products.
1994 1993 1992
-------------------------------- -------------------------------- --------------------------------
Desktop WordScan Business Desktop WordScan Business Desktop WordScan Business
In thousands Products Products Products Products Products Products Products Products Products
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Revenues....... $34,691 $15,127 $9,312 $25,819 $15,030 $7,415 $34,824 $14,038 $8,231
Cost of Revenues... 9,594 3,903 4,136 8,388 4,155 3,662 9,176 5,499 3,987
------- ------- ------ ------- ------- ------ ------- ------- ------
$25,097 $11,224 $5,176 $17,431 $10,875 $3,753 $25,648 $ 8,539 $4,244
======= ======= ====== ======= ======= ====== ======= ======= ======
Gross Margin % .... 72.3% 74.2% 55.6% 67.5% 72.4% 50.6% 73.7% 60.8% 51.6%
------------------------------ ------------------------------ ------------------------------
Combined ...... 70.2% 66.4% 67.3%
Net revenues for Desktop Products increased 34% during 1994 to
$34,691,000 from $25,819,000 in 1993. The increase was primarily the result of
increased retail unit sales of the OmniPage software products as well as
increased royalty revenues related to those products. The growth was somewhat
offset by lower unit sales of OmniScan, the Company's handheld scanning
solution. During 1993, net revenues for Desktop Products decreased from
$34,824,000 in 1992 primarily due to both lower unit sales and lower average
unit prices for OmniPage, Image Assistant(R) and FaxMaster(TM). In addition,
during 1993 the Company discontinued its FaxMaster product line and expensed
$834,000 of advanced royalties, license fees, and excess inventories as a
result of the discontinuance.
Net revenues for WordScan Products were consistent from 1993 to 1994 at
$15,030,000 and $15,127,000, respectively. The mix of sales shifted during the
year to increased software unit sales of WordScan, partially offset by
decreased average selling prices for software, and a decline in hardware sales.
Net revenues for WordScan Products in 1993 increased 7% from $14,038,000 in
1992 due to increased software unit sales.
Net revenues for Business Products increased 26% during 1994 to
$9,312,000 from $7,415,000 in 1993 due to increased unit sales of its
transaction processing OCR products, primarily in the domestic market. During
1993, net revenues for Business Products decreased from $8,231,000 in 1992 due
to lower international sales and lower average unit prices on bar code products.
Export sales grew 15% during 1994, and represented 31% of net revenues
during the year compared to 33% of net revenues during 1993 and 28% of net
revenues in 1992. Export sales in dollar terms were $18,125,000, $15,725,000,
and $16,189,000 during 1994, 1993 and 1992, respectively.
2
Gross Margins
The increase in gross margin for Desktop Products to 72.3% in 1994 from 67.5%
in 1993 was primarily due to the higher unit sales of the OmniPage family of
software products and higher royalty revenues associated with those products.
In addition, unit sales of OmniScan, which has a much higher cost of sales due
to its hardware components, were lower in 1994 than 1993, resulting in an
improvement in overall margins. During 1993 gross margins were adversely
affected by the significant decrease in revenues compared to 1992 and to
accelerated write-offs of advanced royalties and license fees due to the lower
than anticipated sales levels of certain related products.
The increase in gross margins for WordScan Products from 60.8% to 72.4% to
74.2% in 1992, 1993, and 1994, respectively, was due to the shift in product
mix to a higher proportion of software products, which carry higher gross
margins.
Gross margins for Business Products increased to 55.6% in 1994 from 50.6% in
1993 and 51.6% in 1992. The increase was driven primarily by the economies of
scale associated with higher net revenues in 1994 and, to a lesser extent, by
increased sales of transaction-processing OCR products, which tend to have
higher gross margins than bar code products.
The primary factor affecting gross margins in the future is likely to be 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 rapidly become obsolete necessitating
increased inventory write-offs or reserves and a corresponding decrease in
gross margins.
Operating Expenses
Research and development (R&D) expenses were $9,734,000 compared to $9,389,000
in 1993. As a percentage of sales, R&D decreased to 16% in 1994 from 19% in
1993. The decrease in R&D expense as a percentage of net revenues in 1994 was
primarily the result of higher 1994 revenues while R&D expenditures remained
relatively constant. R&D expense in 1993 increased 25% from 1992 expenses of
$7,521,000 primarily due to expansion of product lines.
The Company is committed to providing continuing enhancements to current
products as well as developing new technologies for the future. This commitment
resulted in the Company continuing to invest heavily in R&D during 1994. In
accordance with Statement of Financial Accounting Standards No. 86, the Company
capitalized $481,000 of software development costs during 1994, compared to
$880,000 during 1993, and $780,000 in 1992. Amortization of capitalized
software costs was $662,000 during 1994, $722,000 during 1993, and $407,000
during 1992.
Selling, general and administrative (S,G&A) expenses increased to $25,897,000
during 1994 from $24,594,000 and $23,126,000 in 1993 and 1992, respectively. As
a percentage of revenue, S,G&A decreased to 44% in 1994 from 51% in 1993 due to
increased revenues in 1994. The increased spending of approximately 5-6% per
year is primarily attributable to increased sales and marketing personnel and
promotional costs associated with Desktop and WordScan products, including the
OmniPage family of software products, PageKeeper, and WordScan. The Company
expects that S,G&A may increase in absolute dollars during 1995 as the Company
continues to expand its sales and marketing efforts in the recognition and
desktop document management areas.
During 1994, the Company incurred $3,254,000 of merger related costs as a
result of the acquisition of Calera. These include approximately $1,236,000 of
direct transaction costs for investment bankers, accountants, attorneys, and
financial printing related to the merger. The balance reflects costs and
expenses related to integrating the two companies such as the elimination of
redundant information systems and equipment, severance and outplacement of
terminated employees, and cancellation of certain contractual arrangements.
3
The Company is unable to determine the effects that the merger and integration
actions will have on future operating results and financial condition.
During 1993, the Company discontinued its FaxMaster product and expensed
$834,000 of advanced royalties, license fees, and excess inventories related to
the product line.
Interest income increased 30% to $1,372,000 during 1994 due to a combination of
higher cash balances and slightly higher returns on the Company's short-term
investments.
The effective income tax rate during 1994 was 40% primarily due to
nondeductible merger related costs. This has been partially offset by the
Company's tax exempt investments and the benefit of its foreign sales
corporation. Additionally, none of the approximately $22,600,000 net operating
loss carryforward of Calera was available to be used by the Company because
the merger was not completed until December 20, 1994. In future years,
depending on profitability, the Company may be able to utilize approximately
$2,700.000 of net operating loss carryforwards per year. The effective income
tax benefit during 1993 was 64% primarily due to Caere's net operating loss
carryback and to the tax exempt nature of its interest income. Effective
January 1, 1993, Calera changed its method of accounting for income taxes by
adopting Statement of Financial Standards No. 109. Accounting for Income Taxes.
The cumulative effect of this change in accounting principle was $960,000.
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 adverse
changes in general economic conditions, rapid or unexpected changes in the
technologies affecting optical character recognition, rising costs, or the
unavailability of needed components. The industry has 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 various scanner manufacturers. These bundled
products began shipping in quantities during the fourth quarter. While the
Company expects to aggressively market upgrade products to these customers, and
believes that these bundles will provide a greater number of scanner purchasers
with experience in the advantages of optical character recognition, there is no
assurance that the Company will be successful in this new business model. In
addition, use of the bundled products may cause deferral of the purchase of the
Company's fully priced retail version of OmniPage and WordScan products for a
period of time or may cause customers to shift purchases to upgrades instead of
fully priced retail products. This could have a materially adverse impact on
the Company's results of operations.
Future operating results of the Company are dependent upon the ability of the
combined company to realize the synergies expected to result from the merger.
The Company intends to seek to reduce operating costs over time by eliminating
duplicative facilities, repositioning competitive product lines, and reducing
overall the number of employees that would have otherwise been required by each
of the two companies operating separately. There can be no assurance that these
steps will reduce costs to the extent, or as quickly, as planned. The Company
anticipates that the combined revenues of the two companies after the merger
may be less than the sum of their respective revenues before the merger, at
least in the short term, as a result of potential disruption in the market
place and competitive responses to the merger.
As previously reported, the Company was informed on December 19, 1994 by the
Antitrust Division of the U.S. Department of Justice (DOJ) that it intends to
investigate the merger of the Company with Calera. The Company intends to fully
cooperate with the investigation. To date, the Company has not received any
further notice with respect to the DOJ investigation.
4
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 occur 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
operating results for that quarter to fall significantly short of anticipated
levels. Due to analysts' expectations of continued growth, any such shortfall in
operating results could have a very significant 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 as of December 31, 1994. Working
capital increased 15% to $53,729,000 with no long-term debt. The Company had
cash and short-term investments amounting to $51,099,000. The Company believes
that current cash balances and internally generated funds will be sufficient to
meet its cash requirements through 1995.
The following table presents, for the periods indicated, the percentage
relationship certain items in the Company's statements of earnings bear to net
revenues.
Percentage of net revenues Percentage change
Year ended December 31, -----------------
----------------------- 1993 1992
1994 1993 1992 to 1994 to 1993
---- ---- ---- ------- -------
Net revenues 100.0% 100.0% 100.0% 22.5% (15.5)%
Cost of revenues 29.8 33.6 32.7 8.8 (13.2)
----- ----- ----- ------ ------
Gross margin 70.2 66.4 67.3 29.4 (16.6)
----- ----- ----- ------ ------
Research and development 16.5 19.5 13.2 3.7 24.8
Selling, general and administrative 43.8 51.0 40.5 5.3 6.3
Merger related costs 5.5 0.0 0.0 100.0 0.0
Discontinuance of product line 0.0 1.7 0.0 (100.0) 100.0
----- ----- ----- ------ ------
Operating earnings (loss) 4.4 (5.8) 13.6 194.7 (135.4)
Interest income, net 2.3 2.2 2.1 29.8 (10.5)
----- ----- ----- ------ ------
Earnings (loss) before income taxes
and cumulative effect of change in
accounting principle 6.7 (3.6) 15.7 334.2 (119.0)
Income tax expense (benefit) 2.7 (2.3) 7.3 246.4 (126.1)
----- ----- ----- ------ ------
Earnings (loss) before cumulative
effect of change in accounting
principle 4.0 (1.3) 8.4 492.1 (112.7)
Cumulative effect of change in
accounting for income taxes 0.0 2.0 0.0 (100.0) 100.0
----- ----- ----- ------ ------
Net earnings 4.0% 0.7% 8.4% 577.3% (92.3)%
===== ===== ===== ====== ======
5
CONSOLIDATED BALANCE SHEETS
December 31 1994 1993
In thousands, except share and per share data ---- ----
Assets
Current assets
Cash and cash equivalents $ 3,995 $20,671
Short-term investments 47,104 18,654
Receivables 6,040 7,762
Income tax receivable -- 1,002
Inventories 2,555 1,868
Deferred income taxes 2,711 2,091
Other current assets 748 758
------- -------
Total current assets 63,153 52,806
Property and equipment, net 3,615 4,219
Other assets 1,134 1,659
------- -------
$67,902 $58,684
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 400 $ 400
Accounts payable 3,080 2,565
Accrued expenses 3,677 3,289
Accrued merger related costs 2,267 --
------- -------
Total current liabilities 9,424 6,254
Deferred income taxes 725 810
Commitments and contingencies
Stockholders' equity
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
13,046,419 and 12,543,041 shares 13 13
Additional paid-in capital 60,597 56,448
Notes receivable from stockholders (400) --
Accumulated deficit (2,457) (4,841)
------- -------
Total stockholders' equity 57,753 51,620
------- -------
$67,902 $58,684
======= =======
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31 1994 1993 1992
In thousands, except per share data ---- ---- ----
Net revenues $59,130 $48,264 $57,093
Cost of revenues 17,633 16,205 18,662
------- ------- -------
41,497 32,059 38,431
------- ------- -------
Operating expenses
Research and development 9,734 9,389 7,521
Selling, general and administrative 25,897 24,594 23,126
Merger related costs 3,254 -- --
Discontinuance of product line -- 834 --
------- ------- -------
38,885 34,817 30,647
------- ------- -------
Operating earnings (loss) 2,612 (2,758) 7,784
Interest income 1,372 1,057 1,181
------- ------- -------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 3,984 (1,701) 8,965
Income tax expense (benefit) 1,600 (1,093) 4,191
------- ------- -------
Earnings (loss) before cumulative effect of change
in accounting principle 2,384 (608) 4,774
Cumulative effect of change in accounting for income
taxes -- 960 --
------- ------- -------
Net earnings $ 2,384 $ 352 $ 4,774
======= ======= =======
Earnings (loss) per share
Earnings (loss) before cumulative effect of change in
accounting principle $ .18 $ (.05) $ .36
Cumulative effect of change in accounting
principle $ -- $ .08 $ --
------- ------- -------
Net earnings $ .18 $ .03 $ .36
======= ======= =======
Shares used in per share calculation 13,136 12,639 13,318
======= ======= =======
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Notes
Common stock Additional receivable Total
------------ paid-in from Accumulated stockholders'
In thousands, except share data Shares Amount capital stockholders deficit equity
------ ------ ------- ------------ ------- ------
Balances as of December 31, 1991 12,615,987 $12 $57,265 $ -- $(9,967) 47,310
Exercise of stock options 267,687 1 1,251 -- -- 1,252
Issued pursuant to stock purchase plan 50,558 -- 320 -- -- 320
Repurchase of stock (7,350) -- (93) -- -- (93)
Tax benefit associated with
exercise of stock options -- -- 867 -- -- 867
Net earnings -- -- -- -- 4,774 4,774
---------- --- ------- ----- ------- ------
Balances as of December 31, 1992 12,926,882 13 59,610 -- (5,193) 54,430
Exercise of stock options 38,467 -- 155 -- -- 155
Issued pursuant to stock purchase plan 61,592 -- 446 -- -- 446
Repurchase of stock (483,900) -- (3,863) -- -- (3,863)
Tax benefit associated with
exercise of stock options -- -- 100 -- -- 100
Net earnings -- -- -- -- 352 352
---------- --- ------- ----- ------- ------
Balances as of December 31, 1993 12,543,041 13 56,448 -- (4,841) 51,620
Repurchase of stock (19,916) -- (311) -- -- (311)
Exercise of stock options 265,993 -- 1,956 -- -- 1,956
Issued in exchange for notes receivable 125,109 -- 400 (400) -- --
Issued pursuant to stock purchase plan 57,192 -- 395 -- -- 395
Reissuance of treasury stock to public 75,000 -- 1,104 -- -- 1,104
Tax benefit associated with
exercise of stock options -- -- 605 -- -- 605
Net earnings -- -- -- -- 2,384 2,384
---------- --- ------- ----- ------- ------
Balances as of December 31, 1994 13,046,419 $13 $60,597 $(400) $(2,457) $57,753
========== === ======= ===== ======= ======
See accompanying notes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 1994 1993 1992
In thousands ---- ---- ----
Cash flows from operating activities
Net earnings $ 2,384 $ 352 $ 4,774
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 1,939 2,739 2,274
Merger related costs 2,467 -- --
Amortization of capitalized software
development costs 662 722 407
Deferred income taxes (705) (1,102) (94)
Discontinuance of product line -- 834 --
Changes in operating assets and liabilities:
Receivables 1,722 707 1,447
Income tax receivable 1,002 (902) --
Inventories (687) 1,630 1,103
Other current assets 10 (161) 41
Accounts payable 515 (133) (294)
Accrued expenses 993 (1,284) 1,558
-------- ------- -------
Net cash provided by operations 10,302 3,402 11,216
-------- ------- -------
Cash flows from investing activities
Short-term investments, net (28,450) 14,650 (2,692)
Capital expenditures (1,362) (1,370) (2,741)
Capitalized software development costs (481) (880) (780)
Other assets 171 458 (2,195)
-------- ------- -------
Net cash provided by (used for) investing activities (30,122) 12,858 (8,408)
-------- ------- -------
Cash flows from financing activities
Proceeds from issuances of common stock 3,144 601 1,479
Repurchase of stock -- (3,863) --
-------- ------- -------
Net cash provided by (used for) financing activities 3,144 (3,262) 1,479
-------- ------- -------
Net change in cash and cash equivalents (16,676) 12,998 4,287
Cash and cash equivalents at beginning of year 20,671 7,673 3,386
-------- ------- -------
Cash and cash equivalents at end of year $ 3,995 $20,671 $ 7,673
-------- ------- -------
Supplemental disclosures:
Cash paid for income taxes $ 2,112 $ 1,457 $ 3,793
-------- ------- -------
Noncash investing and financing activities:
Tax benefit associated with
exercise of stock options $ 605 $ 100 $ 867
-------- ------- -------
Options exercised in exchange for notes receivable or stock $ 711 $-- $ 93
-------- ------- -------
See accompanying notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company. Caere Corporation (the Company) designs, develops, manufactures and
markets information recognition software and products. The Company distributes a
range of information recognition software and equipment through a channel of
original equipment manufacturers, value added resellers, distributors and retail
distributors.
In December 1994 the Company acquired Calera Recognition Systems, Inc.
(Calera), a developer of software and hardware for converting scanned or faxed
images into usable text and graphics.
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries after
elimination of intercompany transactions.
Cash, Cash Equivalents and Short-Term Investments. Cash and cash equivalents
consist of cash on deposit with banks and highly liquid money market instruments
with original maturities of 90 days or less. Short-term investments are stated
at cost, which approximates market.
In 1994 the Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115").
The cumulative effect of adopting SFAS 115 was not material to the Company's
consolidated financial position and results of operations. Certain cash
equivalents and all of the Company's short-term investments, consisting
principally of municipal bonds and auction-rate preferred securities, are
classified as available-for-sale under the provisions of SFAS 115.
Inventories. Inventories are stated at the lower of first-in, first-out cost or
market.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is provided over the
estimated useful lives of the respective assets, generally three to five years,
on a straight-line basis. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease terms or the lives of the
respective assets.
Software Development Costs. The Company capitalizes software development costs
incurred subsequent to determining a product's technological feasibility. Such
costs are amortized on a straight-line basis over the estimated useful life of
the product, generally two to three years. Included in other assets as of
December 31, 1994 and 1993, are capitalized software development costs
aggregating $3,638,000 and $3,157,000, respectively, and related accumulated
amortization of $2,772,000 and $2,110,000, respectively. Amortization expense is
included in research and development in the accompanying consolidated statements
of earnings.
Revenue Recognition. Revenue is recognized upon product shipment, and a
provision is recorded for the limited rights to exchange products and price
protection on unsold merchandise granted to certain distributors.
Income Taxes. Caere recorded income tax expense during all periods using the
asset and liability approach that results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in Caere's consolidated financial statements or tax
returns. In estimating future tax consequences, Caere generally considers all
expected future events other than enactment of changes in tax laws or rates. A
valuation allowance is recognized for the portion of deferred tax assets whose
realizability is not considered more likely than not.
During 1992 Calera recorded income taxes using the deferred method. On January
1, 1993, Calera changed its method of accounting for income taxes to the asset
and liability method used by Caere. The accompanying 1993 consolidated statement
of earnings includes the cumulative effect of this change in accounting
principle.
Earnings Per Share. Earnings per share is 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. Common equivalent shares are
excluded from the computation when their effect is antidilutive.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. MERGER WITH CALERA RECOGNITION SYSTEMS, INC.
On December 20, 1994, the Company issued approximately 2.5 million common shares
in exchange for all of the capital stock and vested stock options of Calera.
This business combination has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the results of operations, financial
position and cash flows of Calera. The results of operations for the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
Years Ended December 31
Nine Months Ended -----------------------
In thousands September 30, 1994 1993 1992
------------------ ---- ----
(Unaudited)
Net Revenues
Caere $ 31,362 $ 33,234 $ 43,055
Calera 11,496 15,030 14,038
-------- -------- --------
Combined $ 42,858 $ 48,264 $ 57,093
-------- -------- --------
Net Earnings (Loss)
Caere $ 2,728 $ (1,012) $ 7,395
Calera 368 554 (2,621)
Cumulative effect of change in accounting
for income taxes by Calera -- 810 --
-------- -------- --------
Combined $ 3,096 $ 352 $ 4,774
-------- -------- --------
There were no significant transactions between the Company and Calera prior to
the combination which required elimination, and no adjustments were required to
conform accounting policies, except to record an additional cumulative effect of
changing Calera's method of accounting for income taxes. Certain
reclassifications were made to the accompanying 1993 and 1992 consolidated
financial statements to conform to the 1994 presentation.
NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Certain cash equivalents and all investments have been classified as
available-for-sale securities, and as of December 31, 1994, consisted of the
following:
Unrealized Unrealized Estimated
In thousands Cost gains losses fair value
---- ----- ------ ----------
Asset-backed securities $ 1,000 $ -- $-- $ 1,000
U. S. government treasury bills 1,948 21 -- 1,969
State and municipal bonds 11,706 -- -- 11,706
Corporate auction-rate preferred securities 33,450 -- -- 33,450
------- ------- --- -------
$48,104 $ 21 $-- $48,125
======= ======= === =======
The Company's investments are classified as follows:
December 31 1994
In thousands ----
Cash equivalents $1,000
Short-term investments 47,104
-------
$48,104
=======
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost and estimated fair value of available-for-sale securities as of
December 31, 1994, by contractual maturity, consisted of the following:
Estimated
In thousands Cost fair value
---- ----------
Due in one year or less $14,654 $14,675
Auction-rate securities 33,450 33,450
------- -------
$48,104 $48,125
======= =======
Auction-rate securities are investments without a stated expiration date. The
Company has the option of adjusting the respective interest rates or liquidating
these investments at auction on stated auction dates which range from 7 to 49
days.
NOTE 4. RECEIVABLES
A summary of receivables follows:
December 31 1994 1993
In thousands ---- ----
Trade accounts receivable $8,158 $9,358
Interest receivable 155 167
------ ------
8,313 9,525
Less allowance for returns and doubtful accounts 2,273 1,763
----- -----
$6,040 $7,762
====== ======
The Company's credit risk is concentrated primarily in trade receivables from
dealers and distributors of hardware and software products who sell into the
retail market (Note 14). Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups of
customers in any particular industry.
NOTE 5. INVENTORIES
A summary of inventories follows:
December 31 1994 1993
In thousands ---- ----
Raw materials $1,235 $1,065
Work in process 520 391
Finished goods 800 412
------ ------
$2,555 $1,868
====== ======
NOTE 6. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31 1994 1993
In thousands ---- ----
Equipment $10,217 $11,115
Furniture and fixtures 1,541 1,725
Leasehold improvements 1,364 1,386
------- -------
13,122 14,226
Less accumulated depreciation
and amortization 9,507 10,007
------- -------
$ 3,615 $ 4,219
======= =======
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHORT-TERM BORROWINGS
The Company has a $1,000,000 line of credit facility which expires
January 31, 1995. Interest accrues at the bank's prime rate plus 1.5% (10% as
of December 31, 1994). Borrowings are limited to 70% of eligible accounts
receivable, as defined in the agreements, and are collateralized by
substantially all of the Company's assets. Borrowings under this line of credit
were repaid by the Company on January 11, 1995.
NOTE 8. ACCRUED EXPENSES
A summary of accrued expenses follows:
December 31 1994 1993
In thousands ---- ----
Accrued payroll costs $1,424 $1,562
Accrued royalties 969 689
Accrued warranty costs 225 175
Accrued professional fees 507 300
Other accrued expenses 552 563
------ ------
$3,677 $3,289
====== ======
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating leases that
expire in 1997. As of December 31, 1994, future minimum lease payments under
noncancelable operating leases were $891,000, $790,000 and $51,000 for each of
the three years through the period ending December 31, 1997.
Rent expense was approximately $913,000 in 1994, $847,000 in 1993, and $830,000
in 1992. The Company is responsible for taxes and insurance in connection with
its facilities leases.
There are certain claims against the Company arising in the normal course of
business. The extent to which these matters will be pursued by the claimants or
the eventual outcome is not presently determinable; however, the Company
believes that the ultimate resolution of these matters will not have a material
adverse effect on its consolidated financial position or results of operations.
On December 19, 1994, the Company was informed by the Antitrust Division of the
United States Department of Justice that it had commenced an investigation into
possible violations of federal antitrust laws arising from the acquisition of
Calera. The Company has not had any further communications with the Antitrust
Division, but believes it has complied with federal antitrust laws in connection
with the merger.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. MERGER RELATED COSTS
On December 20, 1994, the Company merged with Calera, as described in Note 2,
and initiated a plan to combine the operations of the two companies. On this
date, the Company recorded a $3.3 million charge related to the merger
transaction and integration costs. Transaction costs consist principally of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges. Other merger related costs include the
elimination of redundant information systems and equipment, severance and
outplacement of terminated employees, and cancellation of certain contractual
agreements.
The merger transaction and integration costs are summarized below:
Period from acquision
to December 31, 1994
Provision ---------------------
recorded at Cash Accrued as of
In thousands acquisition date Write-offs payments December 31, 1994
---------------- ---------- -------- -----------------
Transaction costs $1,236 $ -- $770 $ 466
Other merger related costs:
Severance and outplacement 1,368 -- 9 1,359
Redundant information systems and
equipment 230 200 8 22
Cancellation of facility leases 420 -- -- 420
------ ---- ---- ------
$3,254 $200 $787 $2,267
====== ==== ==== ======
The nature, timing and extent of other merger related costs follows:
Severance And Outplacment. As a result of the merger, certain manufacturing,
distribution, customer service and administrative functions were combined and
reduced. These costs included severance and outplacement charges related to
approximately 40 terminated employees. Affected employees had received
notification of their termination by December 9, 1994, and final assignments are
expected to be completed during the first quarter of 1995.
Redundant Information Systems And Equipment. To facilitate the operations of
the Company, the combined organization migrated to a common management
information system, which resulted in the write-off of the book value of
abandoned systems as of December 31, 1994.
Cancellation Of Facility Leases. The Company plans to consolidate duplicate
offices. Lease payments, resulting from the planned closure of these
facilities, are expected to continue through the lease term or negotiated early
termination date, if applicable.
The Company expects to incur an additional $400,000 of charges related to
transition bonuses and other integration costs as a result of the merger, which
will be included in 1995 operations.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. CAPITAL STOCK
As of December 31, 1994, the Company had reserved 3,450,000 shares of common
stock for issuance under its stock option plans. Options are generally granted
to officers, directors and employees to purchase shares of the Company's common
stock at prices equal to market values at the grant dates and are exercisable in
equal installments over four years. Terms of the options are generally five or
ten years. A summary of stock option transactions follows:
Options outstanding
Options -------------------
available Price
for grant Shares per share
--------- ------ ---------
Balances as of December 31, 1992 322,352 1,190,949 $1.05-17.75
Increase in share reserve 720,176 -- --
Granted (497,788) 497,788 4.09-22.50
Canceled 128,556 (128,556) 1.05-22.50
Expired (23,631) -- --
Exercised -- (38,467) 1.50-7.50
--------- --------- -----------
Balances as of December 31, 1993 649,665 1,521,714 1.50-20.00
Increase in share reserve 800,000 -- --
Granted (1,156,561) 1,156,561 4.09-20.00
Canceled 773,181 (773,181) 1.50-20.00
Expired (19,438) -- --
Exercised -- (391,102) 1.50-11.50
--------- --------- -----------
Balances as of December 31, 1994 1,046,847 1,513,992 $2.73-20.00
========= ========= ===========
There were 443,532 options exercisable as of December 31, 1994, at an average
exercise price of $6.70.
The Company has adopted an Employee Stock Purchase Plan whereby eligible
employees can purchase shares of Common Stock quarterly at the lower of 85% of
the market price on either the purchase date or the offering date.
On April 17, 1991, the Company adopted a stockholder rights plan. The plan is
intended to protect stockholders from unfair or coercive takeover practices. In
accordance with this plan, the Board of Directors declared a dividend
distribution of one common stock purchase right on each outstanding share of its
common stock held as of May 3, 1991. Each right entitles the registered holder
to purchase from the Company a share of common stock at $90. The rights will
not be exercisable until certain events occur. The rights are redeemable at
$.01 by the Company and expire May 3, 2001. As of December 31, 1994, 100,000
shares of the Company's preferred stock have been reserved for this plan.
During 1994, certain officers exercised stock options for notes. The notes are
full recourse promissory notes bearing interest at 5.91% and are collateralized
by the stock issued upon the exercise of stock options. Principal and interest
are due at the earlier of the sale of any such secured stock or December 20,
1995.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. DISCONTINUANCE OF PRODUCT LINE
During 1993, the Company discontinued its FaxMaster product line. Advanced
royalties, license fees and excess inventories related to this product line were
expensed in 1993 and are classified as a discontinuance of product line in the
statement of earnings.
NOTE 13. INCOME TAXES
The components of income tax expense (benefit) are as follows:
Years Ended December 31 1994 1993 1992
In thousands ---- ---- ----
Current
Federal $1,277 $(1,051) $2,571
State 423 -- 847
------ ------- ------
Total current 1,700 (1051) 3,418
------ ------- ------
Deferred
Federal (535) (21) (89)
State (170) (121) (5)
------ ------- ------
Total deferred (705) (142) (94)
------ ------- ------
Charges in lieu of income taxes associated
with the exercise of stock options 605 100 867
------ ------- ------
$1,600 $(1,093) $4,191
====== ======= ======
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below.
December 31 1994 1993
In thousands ---- ----
Deferred tax assets
Accounts receivable, principally due to allowance for
doubtful accounts and sales returns and allowances $ 693 $ 657
Inventories, nondeductible lower of cost or market
adjustments 584 609
Compensated absences, principally due to accrual for
financial reporting purposes 253 213
State tax expense on temporary differences 274 (52)
Accruals for financial statement purposes not taken for
tax purposes 929 578
Federal and state net operating loss and research and
experimental credit carryforwards 8,288 8,204
Other 6 198
------- -------
Total gross deferred tax assets $11,027 $10,407
Less valuation allowance (8,316) (8,316)
------- -------
Net deferred tax assets $ 2,711 $ 2,091
Deferred tax liabilities
Property and equipment, principally due to differences in
depreciation $ (313) $ (307)
Software development costs, principally due to
capitalization and amortization (350) (419)
Other (62) (21)
------- -------
Total gross deferred tax liabilities $ (725) $ (810)
------- -------
Net deferred tax benefit $ 1,986 $ 1,281
======= =======
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between the effective income tax rate and the U. S. federal
statutory income tax rate is as follows:
Years Ended December 31 1994 1993 1992
---- ---- ----
Statutory federal income tax rate 34.0 % (34.0)% 34.0 %
State tax, net of federal benefit 5.7 (4.7) 7.7
Utilization of net operating loss
carryforward -- (9.5) --
Net operating loss carryforward
not benefited -- -- 9.9
Benefit of foreign sales corporation (3.4) (1.9) (2.8)
Tax exempt income (9.0) (15.1) (2.3)
Non-deductible acquisition expenditures (10.5) -- --
Other (2.4) .9 .2
---- ----- ----
40.2 % (64.3)% 46.7 %
==== ===== ====
Calera has a net operating loss carryforward for federal and California purposes
as of December 31, 1994, of $22.6 million and $1.6 million, respectively. Calera
also has federal research and experimentation credit carryforwards of $479,000.
The carryforwards can only be used to offset earnings of Calera as a result of
separate return limitations. Federal and California tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the event
of a shift in the ownership of the Company, which constitutes an "ownership
change" as defined by Internal Revenue Code Section 382. The acquisition of
Calera in December 1994 resulted in such a change. As a result, Calera's federal
and California net operating loss carryforwards are subject to an annual
limitation approximating $2.7 million. Any unused annual limitations may be
carried forward to increase the limitations in subsequent years.
NOTE 14. MAJOR CUSTOMERS AND EXPORT SALES
One distributor accounted for 23%, 12%, and 20% of net revenues in 1994, 1993
and 1992, respectively. As of December 31, 1994, this distributor accounted for
25% of trade accounts receivable. A second distributor accounted for 7%, 11% and
12% of net revenues in 1994, 1993 and 1992, respectively. As of December 31,
1994, this distributor accounted for 5% of trade accounts receivable. Export
sales, principally in Europe, were 31%, 33%, and 28% of net revenues in 1994,
1993 and 1992, respectively.
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Caere Corporation:
We have audited the accompanying consolidated balance sheets of Caere
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Calera Recognition Systems, Inc. (Calera), a company acquired by
the Company in a business combination accounted for as a pooling of interests,
as described in Note 2 to the consolidated financial statements, which
statements reflect total assets constituting 11% as of December 31, 1993, and
net revenues constituting 31% and 25% in 1993 and 1992, respectively, of the
related consolidated totals. Those statements, before the adjustments
described in Note 2 to record an additional cumulative effect of changing
Calera's method of accounting for income taxes, were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Calera and except for the adjustments described in
Note 2 to record an additional cumulative effect of changing Calera's method
of accounting for income taxes, is based solely upon the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Caere Corporation and subsidiaries
as of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
----------------------------------
KPMG PEAT MARWICK LLP
Palo Alto, California
January 27, 1995
18
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
1994, Quarter Ended Year
In thousands, except per share data -------------------------------------- Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------ ------ ------ ------ ------
Net revenues $11,753 $13,540 $17,575 $16,262 $59,130
Earnings (loss) before income taxes (233) 905 3,731 (419) 3,984
Net earnings (loss) (159) 618 2,548 (623) 2,384
Net earnings (loss) per share $ (.01) $ .05 $ .20 $ (.05) $ .18
Shares used in per share calculations 12,552 12,851 12,917 12,878 13,136
Common stock price per share:
High $ 10.87 $ 9.00 $ 9.50 $ 18.75 $ 18.75
Low 7.75 6.62 6.62 9.12 6.62
The Company has not paid cash dividends on its common stock since its inception.
The Company presently intends to retain earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. The Company's stock trades on the NASDAQ National Market System. On
December 31, 1994, there were 427 holders of record of the Company's common
stock.