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CAERE CORPORATION 1995 ANNUAL REPORT
In 1995, Caere continued to play a leading role in bringing OCR applications
into mainstream markets. Our strategies for success reflected changing market
conditions and a commitment to help customers increase their productivity.
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Caere Corporation
1995 Annual Report
91 92 93 94 95
------ ------ ------ ------ ---------
Net revenues (mill.) 51,529 57,093 48,264 59,130 51,939
Software unit sales (mill.) 79,074 151,280 152,541 603,973 1,271,386
Net earnings (mill.) 6,980 4,774 352 2,384 2,397
Revenues by business
line (mill.)
Hardware 24,770 18,217 15,281 14,041 10,286
Software 26,759 38,876 32,983 45,089 41,653
EPS .54 .36 .03 .18 .18
No. employees 246 267 270 304 223
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FINANCIAL HIGHLIGHTS In thousands, except per share
YEARS ENDED DECEMBER 31: 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Net revenues $51,939 $59,130 $48,264 $57,093 $51,529
Earnings (loss) before income taxes 2,820 3,984 (1,701) 8,965 10,385
Net earnings 2,397 2,384 352 4,774 6,980
Earnings (loss) per share before cumulative
effect of change in accounting .18 .18 (.05) .36 .54
principle
Net earnings per share $ .18 $ .18 $ .03 $ .36 $ .54
Weighted average shares outstanding 13,538 13,136 12,639 13,318 12,911
AS OF DECEMBER 31:
Cash and short-term investments $47,765 $51,099 $39,325 $40,977 $33,998
Working capital 52,650 53,729 46,552 47,340 2,557
Total assets 69,298 67,902 58,684 63,001 55,134
Total stockholders' equity 62,028 57,753 51,620 54,430 47,310
CORPORATE PROFILE
Caere(R) Corporation is an industry leader in the design, manufacture, and
sale of information management products. As the worldwide leader of optical
character recognition (OCR) software and hardware systems and a leading provider
of forms and document management technologies, Caere offers products that help
people gather, access, and use the exploding number of documents, images, forms,
and faxes that come across their desktops. Caere products include the
OmniPage(R) and WordScan(R) families of OCR software that convert printed and
faxed documents into electronic text, eliminating the need to retype printed
information; the PageKeeper(R) line of document management software that
effortlessly retrieves information from virtually any source; OmniForm(TM)
software, which converts paper forms into electronic formats; Millennium(R)
Series high-speed hardware and software for high-volume text-recognition
applications; and, a broad array of OCR and bar code readers that accelerate
transaction processing.
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TABLE OF CONTENTS
Letter to Shareholders 3
Operations Review 6
Management's Discussion and Analysis 12
Independent Auditors' Report 17
Consolidated Balance Sheets 18
Consolidated Statements of Earnings 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Quarterly Results of Operations 30
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TO OUR SHAREHOLDERS:
Continuing to carry out our mission to simplify the way people gather,
access, and use information, Caere focused on how to best meet the needs of an
ever-changing marketplace in fiscal year 1995. New customer dynamics and market
opportunities required new ways of doing business. By refining our strategies
for ongoing success, Caere was able to maintain its desktop OCR market
leadership and position itself to compete in the larger information management
arena.
Due to the shift in our OCR products business model from a stand-alone
full-priced approach to a product bundling (with scanners) and upgrade approach,
our revenues dipped. The bundling/upgrade model is increasingly the typical
business model of successful, mainstream software companies. Bundling
significantly expands the user base, which is then aggressively targeted for
affordable upgrades that have lower average selling prices than regular retail
products. We expect this approach to be successful for Caere as well. Overall
revenues were $51.9 million in fiscal 1995 as compared to revenues of $59.1
million in 1994. Net earnings were $2.4 million or $.18 per share in 1995, the
same as they were in 1994.
THREE KEY STRATEGIES FOR SUCCESS
To meet market demands for continually improving information management
products while providing sustainable long-term growth and earnings for the
Company, Caere is now focused on implementing three key strategies: 1) driving
OCR into the mainstream; 2) offering additional desktop applications; and 3)
providing products to increase business productivity beyond the desktop.
DRIVING OCR INTO MAINSTREAM MARKETS
By the beginning of fiscal 1995, we had successfully completed our
strategic acquisition of Calera(R) Recognition Systems, fortifying Caere's lead
in the desktop OCR marketplace. Caere's OmniPage and Calera's WordScan product
families have long been the industry's leading OCR software packages, and we are
now in the process of combining them into a single, richly featured product line
under the OmniPage flagship name. With the merger of the two companies
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behind us, our team of OCR technology, sales, and marketing experts is solidly
in place and moving forward synergistically to continue to drive OCR into more
mainstream markets.
In implementing our new bundling/upgrade business model, Caere is working
closely with the industry's leading scanner manufacturers, who bundle
limited-capability versions of our popular OmniPage software along with their
scanners. Soaring scanner sales have resulted in record OCR software shipments
for Caere. The Company shipped more than 1,000,000 bundled units in fiscal 1995
as compared to approximately 400,000 bundled units in 1994, significantly
increasing our base of users and potential upgrade customers.
Along with forming and maintaining strong alliances with original
equipment manufacturers (OEMs), Caere expanded both its retail and direct
distribution channels in fiscal 1995. In the United States, the 450-store
OfficeMax chain joined such other major resellers as Best Buy, CompUSA, Computer
City, and Egghead in carrying Caere's OCR software. And Vobis, the largest
computer retailer in Europe, also became a Caere reseller in 1995. Through our
new direct response program, we also began to actively engage our customers
directly on a continual basis--via telephone, direct mail, and in-box
solicitations.
To better support higher-volume sales, we implemented a major
reorganization of our customer service and support group. We added a new
director and senior service representatives, improved the efficiency of our call
handling and escalation systems, centralized European service and support
through a third party, and initiated fee-for-support services in the United
States.
Working to meet customer demands for continually improved OCR software
products, Caere shipped OmniPage Pro(R) 6.0 and WordScan Plus 4.0 for Microsoft
Windows in fiscal 1995. OmniPage Pro 6.0 for Apple Macintosh computers shipped
in the beginning of January 1996. In fiscal 1995 the Company also announced
OmniPage Pro for Windows 95, demonstrating a pre-release version at Microsoft's
August 1995 major launch event for Windows 95 in Redmond, Washington.
ADDITIONAL DESKTOP APPLICATIONS
Also previewed at the Microsoft Windows 95 launch was OmniForm 2.0, the
latest version of our new electronic forms conversion software, which began
shipping in the fourth quarter of fiscal 1995. Its predecessor, OmniForm 1.0,
which shipped in March 1995, was the first offering from Caere Affiliate
Publishing (CAP), the Company's recently established internal group whose
purpose is to publish a variety of innovative, market-focused desktop software
applications that leverage and complement existing Caere technology. OmniForm
has met with enthusiastic customer acceptance in its first year in the
marketplace.
In addition, in the first quarter of 1995, we shipped PageKeeper 2.0, the
latest version of our award-winning, desktop document management software. This
version of PageKeeper gives professionals, such as lawyers and consultants, easy
access to an enormous amount of data from a variety of different sources,
including electronic- and paper-based documents, e-mail, faxes, and online
services.
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BOOSTING PRODUCTIVITY BEYOND THE DESKTOP
To help organizations improve productivity beyond the individual desktop,
Caere also shipped PageKeeper 2.1 for Workgroups in 1995. This product earned a
green light, "go buy it" rating in PC Computing magazine's December 1995 issue.
In order to strengthen our ability to compete in the broader productivity
market, Caere made a $2.4 million equity investment in the fourth quarter of
1995 for approximately a 20% ownership stake in privately held ZyLAB
International, Inc., a leading developer of full text indexing and retrieval
software. This investment supports our corporate goal of helping customers be
more productive and competitive by automating their document-based business
activities, whether the documents are paper, fax, or electronic. By optimizing
complementary technologies, Caere and ZyLAB will be able to offer an improved
and wider variety of productivity products to current and new markets.
MOVING FORWARD
Our strategies are in place, and we are moving forward in the tactical
implementation process. We were pleased to welcome Frederick W. Zuckerman, who
recently retired as Vice President/Treasurer of IBM, to our board of directors
in March 1995. His comprehensive knowledge of the financial community, global
awareness, and experience as a senior operations executive will help us grow the
Company to its next stage of development. In closing, we would like to thank the
entire Caere team for their continuing commitment to helping us implement--and
reap the rewards from--our strategies for success.
[PHOTO ROBERT G. TERESI] [PHOTO STEVEN C. HUMPHREYS]
/s/ Robert G. Teresi /s/ Steven C. Humphreys
Robert G. Teresi Steven C. Humphreys
Chief Executive Officer and Chairman of the Board President
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[FULL PAGE GRAPHIC]
MOTION
MOVING OCR INTO THE MAINSTREAM, CAERE FOCUSES ON
MAINTAINING LEADERSHIP IN ALL OCR MARKETS.
SUPERIMPOSED ON ABSTRACT ILLUSTRATION.
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OCR is no longer a "niche" market. What began as a productivity tool to help
people and organizations such as lawyers, insurance companies and government
agencies derive significant benefits from converting stacks of printed documents
into editable electronic documents on a desktop computer, is now finding a much
wider audience. Increased awareness of OCR's capabilities, due in large part to
Caere's relentless education efforts, is helping to drive OCR into the
mainstream. Also contributing to this increased awareness is the availability of
more affordable desktop computer power, new scanner products with lower prices,
attractively priced scanner/OCR bundles, and improved OCR accuracy.
THE LEADER IN DESKTOP OCR
Caere pioneered electronic text recognition with the introduction of
OmniPage software in 1988. Today, the OmniPage family is the desktop OCR market
leader and Caere is ranked as the number one OCR provider (BIS Strategic
Decisions, August 1995). Our 1994 acquisition of Calera Recognition Systems
brought to Caere the industry's second most popular OCR package, WordScan Plus,
further strengthening our market lead. To maintain this lead, Caere continually
strives to improve technology, offering new products to meet customers'
ever-changing needs. This year, we delivered OmniPage Professional(R) 6.0,
featuring Caere's exclusive, new Quadratic Neural Network(TM) and enhanced
Language Analyst(R) technologies which improve accuracy and provide a higher
level of intelligence for identifying regions of a document image. Also, we
shipped WordScan Plus 4.0, which includes our new Predictive Optical Word
Recognition(TM) (POWR(TM)) engine. Another breakthrough in OCR technology, POWR
extends character recognition to full word recognition. We plan to integrate the
most powerful aspects of each of these technologies in future versions of
OmniPage.
BUNDLES AND UPGRADES
Caere began to implement its new bundle and upgrade strategy in fiscal
1995 to meet the needs of a changing marketplace and help the Company sustain
long-term growth. "Light" versions--with limited capabilities--of Caere OCR
software are now bundled with most scanners. This aggressive seeding of the
exploding scanner marketplace has greatly expanded the number of Caere product
users, while our attractive upgrade pricing is turning many of these initially
"trial" users into a broader market of paying customers.
[GRAPHIC]
A STRONG POSITION IN ALL OCR MARKETS
Caere also leverages its advanced OCR capabilities in other
productivity-enhancing products. The Millennium Series, for example, is Caere's
family of hardware and software solutions for high-speed, commercial OCR
applications. This year, we announced our new M/POWR(TM) engine for the
M/Series,(TM) which raises the accuracy bar for high-volume applications by 50%
over the product family's former engine.
In addition, Caere's Business Products include a full array of the
industry's highest-accuracy OCR devices that cost-effectively improve the
productivity of a broad range of transaction processing applications--from
reading bank checks to tracking items on an assembly line. This year we
announced a new passport reader device, which can be used for fast, efficient
processing of international travel documents, and the BilReader,(TM) an OCR
reader for use at bank teller windows.
By continually offering innovative products to boost productivity--from
the desktops of individual users to the loading docks of international
corporations--Caere is focused on maintaining leadership in all OCR markets.
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By leveraging our strong base of technology and resources, Caere extends its
ability to offer customers an increasingly wide variety of products that improve
desktop productivity.
PAGEKEEPER KEEPS DESKTOP USERS PRODUCTIVE
Our Windows-based PageKeeper desktop document management software combines
Caere's proven OCR technology and advanced search-and-retrieval functionality
which is usually found only in high-end text-retrieval systems. This product
enables users to easily manage and retrieve a wide variety of information--from
scanned paper documents to faxed images and electronic files. In fiscal 1995,
Caere shipped PageKeeper 2.0 with integrated e-mail, fax, and online services
support to help users better manage multiple sources of information. While
PageKeeper continues to be technically acclaimed and is a leader in its product
category, the market opportunity has not lived up to our expectations. Going
forward, we are evaluating how to best leverage this advanced technology for
broader market applications.
[GRAPHIC]
CAERE AFFILIATE PUBLISHING
The establishment of Caere Affiliate Publishing (CAP) in fiscal 1994
directly supports the Company's mission to simplify the way people gather,
access, and use information. CAP was created to publish innovative software
products that leverage and complement our current technology, offering more
product choices to existing and new customers in a variety of markets.
The CAP business model provides advantages for software developers,
channel partners, and end users. Through CAP, independent software developers
can more easily bring their cutting-edge applications to market by taking
advantage of Caere's name recognition, large installed base, channel strength,
and sales force. The CAP process entails prospect identification, opportunity
analysis and project and product management. Once a CAP product ships into the
channel, corporate resources are provided in the areas of sales, marketing, and
technical support. For our channel partners and end users, CAP offers an
expanding and diversified product portfolio that is backed by Caere's reputation
for quality, support, and reliability.
OMNIFORM FILLS A WIDESPREAD NEED
For several years, forms-intensive businesses--such as medical services,
insurance, real estate, human resources departments, police departments, and
government agencies--have been asking for an electronic forms application. CAP
published two versions of OmniForm electronic forms conversion software in its
first year of operation to meet these needs. OmniForm 1.0, a Windows 3.1
application, easily turns any paper form into an automated electronic
reproduction that users can then edit and fill out on screen. OmniForm 2.0 for
Windows 95, which takes full advantage of the new Windows 95 environment,
includes OLE (Object Linking and Embedding) and Microsoft Exchange support,
providing users with cutting-edge capabilities.
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[FULL PAGE GRAPHIC]
EXPANSION
WE ARE LEVERAGING OUR RESOURCES & DISTRIBUTION
CHANNELS TO EXPAND OUR DESKTOP APPLICATIONS PORTFOLIO.
SUPERIMPOSED ON ABSTRACT ILLUSTRATION.
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[FULL PAGE GRAPHIC]
MULTIPLICATION
OUR STRONG TECHNOLOGIES PLUS SYNERGISTIC PARTNERING & INVESTMENTS
WILL ENABLE CAERE TO PROVIDE MULTIPLE PRODUCTIVITY SOLUTIONS.
SUPERIMPOSED ON ABSTRACT ILLUSTRATION.
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Caere is already helping people improve productivity at the desktop. Now, we are
broadening our focus--leveraging our own powerful technologies as well as
investing in and working with complementary companies--to offer a wider array of
products that will enable organizations to further boost productivity.
THE TECHNOLOGY FOR BUILDING INFORMATION MANAGEMENT SOLUTIONS
Caere continually invests in developing and advancing technologies--such
as, Natural Language Processing,(TM) developed by Carnegie Mellon researchers,
True Page,(R) and Logical Form Recognition.(TM) These technologies add
"intelligence" to a document, providing increased accuracy and versatility for
users. Our efforts in this area have enabled us to push the boundaries of OCR to
create an even broader and more advanced Document Content Recognition(TM)
foundation on which to build future productivity products.
PAGEKEEPER FOR WORKGROUPS
To help businesses improve productivity beyond the individual desktop,
Caere shipped PageKeeper 2.1 for Workgroups in 1995. Now, multiple users can
scan, import, and index information concurrently to the same database. Read-only
access protects network security. PC Computing magazine gave PageKeeper for
Workgroups its green light, "go buy it" rating in the magazine's December 1995
issue. In its review, the magazine wrote, "PageKeeper is much more than OCR
software; it tracks all your electronic information--and [its] Natural Language
Processing technology automatically indexes everything."
INVESTMENT IN ZYLAB FURTHER EXPANDS OPPORTUNITIES
In fiscal 1995, Caere made an equity investment in ZyLAB International,
Inc., a leading developer of full text indexing and retrieval software products.
ZyLAB's products complement--and, in some cases, incorporate--our own OCR and
document management products. This synergistic combination supports Caere's
corporate mission to improve the way people gather, access, and use information.
ZyLAB provides products that simplify the process of searching large volumes of
information from a variety of sources.
[GRAPHIC]
The investment provides for cooperative software development and
co-marketing. ZyLAB's expertise and presence in electronic publishing--via the
Internet's World Wide Web--and in CD-ROM publishing, provide opportunities for
Caere to expand its reach into these rapidly growing markets where OCR is a key
technology for bridging the gap between paper and electronic worlds.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion contains statements of what may happen in the future.
Actual results may differ materially from those discussed here. Information
concerning factors that could cause such a difference can be found in the
following sections entitled "Gross Margins," "Certain Trends," "Liquidity and
Capital Resources," and other statements set forth below, as well as the section
entitled "Risk Factors" in the Company's report on Form 10-K for its fiscal year
ended December 31, 1995.
RESULTS OF OPERATIONS
Nineteen hundred ninety-five was a year of transition for Caere
Corporation. After the acquisition of Calera Recognition Systems, Inc. in
December 1994, Caere changed its sales strategy to one of seeding the expanding
scanner market with low priced optical character recognition (OCR) products that
were bundled with those of scanner manufacturers. The objective of this "bundle
and upgrade" strategy is to expose more customers to the benefits of the
Company's OCR and then upgrade those customers to fully featured products. The
effect on 1995 results of operations was a decrease in net revenues of 12% to
$51,939,000 from $59,130,000 in 1994, despite an increase in unit shipments of
software products of 111% during the year.
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, the M/Series line of production OCR that was acquired in the
Calera acquisition, and in 1994 and 1993, the OmniScan(R) handheld scanner
product.
BUSINESS LINE ANALYSIS 1995 1994 1993
---- ---- ----
Software Hardware Software Hardware Software Hardware
In thousands Products Products Combined Products Products Combined Products Products Combined
- -------------------------------------------------------------------------------------------------------------------------
Net revenues $41,653 $10,286 $51,939 $45,089 $14,041 $59,130 $32,983 $15,281 $48,264
Cost of revenues 12,989 4,095 17,084 11,716 6,579 18,295 9,804 7,123 16,927
- -------------------------------------------------------------------------------------------------------------------------
$28,664 $ 6,191 $34,855 $33,373 $ 7,462 $40,835 $23,179 $ 8,158 $31,337
Gross margin % 68.8% 60.2% 67.1% 74.0% 53.1% 69.1% 70.3% 53.4% 64.9%
Net revenues for software products decreased 8% during 1995 to $41,653,000
from $45,089,000 in 1994, due to the change in the business model to the "bundle
and upgrade" strategy described above. During 1994, net revenues for software
products increased 37% from $32,983,000 in 1993, primarily as a result of
increased retail unit sales of the OmniPage products.
Net revenues for hardware products decreased 27% to $10,286,000 in 1995
compared to $14,041,000 in 1994. The decrease was caused by the elimination of
the OmniScan handheld scanner from the product line, lower net revenues
associated with the transaction processing OCR/bar code products, and lower unit
sales of M/Series products. From 1993 to 1994, net revenues for hardware
products decreased 8% from $15,281,000 in 1993, due to lower unit sales of
M/Series products and lower unit volumes and pricing for OmniScan in 1994. These
decreases were partially offset by increased unit sales of transaction
processing OCR/bar code products. Caere has historically experienced
fluctuations in the transaction processing OCR/bar code portion of its business
and expects those fluctuations to continue.
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Export sales decreased 16% during 1995, and represented 29% of net
revenues during the year compared to 31% in 1994 and 33% in 1993. Export sales
totaled $15,154,000 in 1995, $18,125,000 in 1994, and $15,725,000 in 1993. The
"bundle and upgrade" model described above is the primary reason for the decline
in export sales in 1995. In addition, the availability of foreign versions of
certain software products lagged their introduction domestically due to
additional product development requirements.
GROSS MARGINS
Gross margins for software products declined from 74.0% in 1994 to 68.8%
in 1995 due to product mix changes related to the increased unit volumes of
bundle and upgrade products. These products have lower gross margins than fully
priced retail products. During 1994, gross margins for software products
increased to 74.0% from 70.3% in 1993 due to accelerated write-offs in 1993
related to the discontinuance of certain product lines. In addition, the Company
has retroactively reclassified the amortization of capitalized software
development costs to cost of revenues from research and development expense in
the accompanying Consolidated Statements of Earnings. The effect of this
reclassification was to decrease gross margins by 1.3%, 1.1%, and 1.5% during
1995, 1994, and 1993, respectively.
Gross margins for hardware products increased to 60.2% in 1995 from 53.1%
in 1994 due to the discontinuance of sales of the OmniScan product, which had
significantly lower gross margins than the Company's other hardware based
products. From 1993 to 1994, gross margins for hardware products remained
consistent at 53.4% and 53.1%, respectively.
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 13% to $7,915,000 in
1995 from $9,072,000 in 1994. As a percentage of revenue, 1995 R&D expense
remained consistent with 1994 at 15% in each year. The decrease in spending from
1994 to 1995 was a result of synergies created by the merger with Calera. R&D
expense increased in 1994 by 5% from 1993's total of $8,667,000. However, as a
percentage of revenue, R&D declined from 18% in 1993 to only 15% in 1994. The
increase in R&D spending in 1994 was attributable to product development by both
Caere and Calera prior to the merger of the two companies.
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's continuing to invest heavily in R&D during 1995. In
accordance with Statement of Financial Accounting Standards No. 86, the Company
capitalized $614,000 of software development costs during 1995, compared to
$481,000 in 1994 and $880,000 during 1993. Amortization of capitalized software
development costs was $683,000 in 1995, compared to $662,000 in 1994 and
$722,000 during 1993. In 1995, the Company began including amortization of
capitalized software development costs in cost of revenues in the accompanying
Consolidated Statements of Earnings. Previously, such amortization was included
in R&D expense. Cost of revenues and R&D expense have been adjusted for this
reclassification for all periods presented.
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Selling, general and administrative (S,G&A) expenses decreased 4% in
1995 to $24,892,000 from $25,897,000 in 1994. The decrease in S,G&A spending was
a result of the elimination of duplicative facilities and reduction in personnel
due to synergies from the Calera acquisition. As a percentage of revenue, S,G&A
increased to 48% of revenue in 1995 from 44% in 1994. This increase is primarily
attributable to a decline in overall net revenues. During 1994, S,G&A expense
increased 5% from 1993's total of $24,594,000. This increase is attributable to
the hiring of additional sales and marketing personnel and expanding promotional
costs associated with the OmniPage and WordScan product lines. As a percentage
of revenue, however, S,G&A expense actually declined from 51% in 1993 to only
44% in 1994 as the revenue base increased. 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 1995, the Company recorded merger related costs totaling
$1,387,000. Of this amount, $297,000 was related to the Calera acquisition and
was recorded in the second quarter of 1995. This charge included additional
severance payments, legal, and other transaction costs offset partially by
savings resulting from an early buyout of a duplicative facilities lease. In the
fourth quarter of 1995, an additional $1,090,000 charge was recorded related to
the terminated merger with ViewStar Corporation. This charge included direct
costs for investment bankers, accountants, attorneys, and financial printing
related to the transaction prior to its termination. During 1994, the Company
incurred $3,254,000 of merger related costs as a result of the acquisition of
Calera. At that time, the charge included approximately $1,236,000 of direct
transactions costs with the balance reflecting costs to integrate the two
companies such as elimination of redundant information systems, severance and
outplacement of terminated employees, and cancellation of certain contractual
arrangements.
In 1993, the Company discontinued its FaxMaster(TM) product and
expensed $834,000 of advanced royalties, license fees, and excess inventories
related to the product line.
Interest income increased by 57% in 1995 to $2,159,000 from $1,372,000
in 1994. This increase is attributable to generally higher interest rates on the
Company's short-term investments along with a shift from tax-free investments to
taxable securities carrying higher rates of interest. In 1994, interest income
increased 30% from $1,057,000 in 1993, due to a combination of higher cash
balances and slightly higher interest rates on the Company's investments.
The effective income tax rate during 1995 was 15%, primarily due to the
tax exempt nature of a majority of the Company's interest income and the use of
its foreign sales corporation. In 1994, the effective income tax rate was 40%,
primarily due to nondeductible acquisition costs. Additionally, none of Calera's
$22,600,000 net operating loss carryforward was utilized in 1995 due to taxable
income limitations. During 1994, none of the carryforward was utilized as the
merger with Calera 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. In 1993, the effective
income tax benefit was 64%, primarily due to the utilization of a net operating
loss carryforward and to tax exempt 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 but are not limited to adverse changes in general economic conditions,
rising costs, or the
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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 resulted in decreased revenues
from software recognition products during 1995, despite an increase of 111% in
unit sales for the year. 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.
15
18
LIQUIDITY AND CAPITAL RESOURCES
Caere's financial position remains strong at December 31,1995. Working
capital decreased slightly to $52,650,000 from $53,729,000 at December 31, 1994.
The Company has no long-term debt. The Company's cash and short-term investments
totaled $47,765,000 at December 31, 1995. 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 $3,181,000, $9,697,000, and
$3,302,000 during the years ended December 31, 1995, 1994, and 1993,
respectively. Uses of cash include modest expenditures for capital outlays and
other investments, including the Company's 1995 investment in ZyLAB
International. In 1995, growth of cash balances and short-term investments was
reduced by increased corporate merger and acquisition activity.
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.
The following table presents, for the periods indicated, the percentage
relationship certain items in the Consolidated Statements of Earnings bear to
net revenues:
PERCENTAGE OF NET REVENUES PERCENTAGE CHANGE
--------------------------------------------------------
1994 1993
YEARS ENDED DECEMBER 31: 1995 1994 1993 TO 1995 TO 1994
--------------------------------------------------------
Net revenues 100.0% 100.0% 100.0% (12.2)% 22.5%
Cost of revenues 32.9 30.9 35.1 (6.6) 8.1
- ---------------------------------------------------------------------------------------------------------------
Gross margin 67.1 69.1 64.9 (14.6) 30.3
-----------------------------------------------------------------------------------------------------------
Research and development 15.2 15.4 18.0 (12.7) 4.7
Selling, general and administrative 47.9 43.8 51.0 (3.9) 5.3
Merger related costs 2.7 5.5 0.0 (57.4) 100.0
Discontinuance of product line -- -- 1.7 -- (100.0)
- ---------------------------------------------------------------------------------------------------------------
Operating earnings (loss) 1.3 4.4 (5.8) (74.7) 194.7
Interest income, net 4.1 2.3 2.2 57.4 29.8
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 5.4 6.7 (3.6) (29.2) 334.2
Income tax expense (benefit) 0.8 2.7 (2.3) (73.6) 246.4
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect
of change in accounting principle 4.6 4.0 (1.3) (0.1) 492.1
Cumulative effect of change in
accounting for income taxes -- -- 2.0 -- (100.0)
- ---------------------------------------------------------------------------------------------------------------
Net earnings 4.6% 4.0% 0.7% (0.1)% 577.3%
=======================================================
16
19
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, 1995 and 1994, 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, 1995. 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 percent as of December 31, 1993,
and net revenues constituting 31 percent in 1993, of the related consolidated
totals. Those statements 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, 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, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Jose, California
January 26, 1996
17
20
Consolidated Balance Sheets
DECEMBER 31, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 1995 1994
- ---------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 10,664 $ 3,995
Short-term investments 37,101 47,104
Receivables, net 6,180 6,040
Income taxes receivable 1,109 --
Inventories 2,077 2,555
Deferred income taxes 1,659 2,711
Other current assets 766 748
Total current assets 59,556 63,153
Property and equipment, net 5,639 3,615
Other assets 4,103 1,134
- ---------------------------------------------------------------------------------
$ 69,298 $ 67,902
====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings $ -- $ 400
Accounts payable 2,944 3,080
Accrued expenses 3,032 3,677
Accrued merger related costs 930 2,267
Total current liabilities 6,906 9,424
Deferred income taxes 364 725
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
13,283,224 and 13,046,419 shares 13 13
Additional paid-in capital 62,075 60,597
Notes receivable from stockholders -- (400)
Accumulated deficit (60) (2,457)
- ---------------------------------------------------------------------------------
Total stockholders' equity 62,028 57,753
------------------------------------------------------------------------
$ 69,298 $ 67,902
====================
See accompanying notes to consolidated financial statements.
18
21
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE DATA 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Net revenues $ 51,939 $ 59,130 $ 48,264
Cost of revenues 17,084 18,295 16,927
- ---------------------------------------------------------------------------------------------
34,855 40,835 31,337
============================
OPERATING EXPENSES:
Research and development 7,915 9,072 8,667
Selling, general and administrative 24,892 25,897 24,594
Merger related costs 1,387 3,254 --
Discontinuance of product line -- -- 834
-------------------------------------------------------------------------------------------
34,194 38,223 34,095
----------------------------
Operating earnings (loss) 661 2,612 (2,758)
Interest income 2,159 1,372 1,057
- ---------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 2,820 3,984 (1,701)
Income tax expense (benefit) 423 1,600 (1,093)
- ---------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of change
in accounting principle 2,397 2,384 (608)
Cumulative effect of change in accounting for income taxes -- -- 960
- ---------------------------------------------------------------------------------------------
Net earnings $ 2,397 $ 2,384 $ 352
===========================================================================================
EARNINGS (LOSS) PER SHARE:
Earnings (loss) before cumulative effect of change in
accounting principle $ .18 $ .18 $ (.05)
Cumulative effect of change in accounting principle -- -- .08
-------------------------------------------------------------------------------------------
Net earnings $ .18 $ .18 $ .03
===========================================================================================
Shares used in per share calculation 13,538 13,136 12,639
=============================================================================================
See accompanying notes to consolidated financial statements.
19
22
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 at 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 at 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 at December 31, 1994 13,046,419 13 60,597 (400) (2,457) 57,753
Exercise of stock options 182,823 -- 914 -- -- 914
Collection of notes receivable -- -- -- 400 -- 400
Issued pursuant to stock purchase plan 69,778 -- 569 -- -- 569
Calera dissenting shareholder payments (15,796) -- (64) -- -- (64)
Tax benefit associated with
exercise of stock options -- -- 110 -- -- 110
Other -- -- (51) -- -- (51)
Net earnings -- -- -- -- 2,397 2,397
--------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 13,283,224 $13 $62,075 $ -- $ (60) $62,028
============================================================================================================================
See accompanying notes to consolidated financial statements.
20
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, IN THOUSANDS 1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,397 $ 2,384 $ 352
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 2,317 1,939 2,739
Merger related costs (1,337) 2,467 --
Amortization of capitalized software development costs 683 662 722
Deferred income taxes 691 (705) (1,102)
Discontinuance of product line -- -- 834
Changes in operating assets and liabilities:
Receivables, net (140) 1,722 707
Income taxes receivable (1,109) 1,002 (902)
Inventories 478 (687) 1,630
Other current assets (18) 10 (161)
Accounts payable (136) 515 (133)
Accrued expenses (645) 388 (1,384)
------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 3,181 9,697 3,302
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments, net 9,952 (28,450) 14,650
Capital expenditures (3,925) (1,362) (1,370)
Capitalized software development costs (614) (481) (880)
Investment in ZyLAB International (2,616) -- --
Other assets (838) 171 458
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,959 (30,122) 12,858
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 1,529 3,749 701
Repayment of short-term borrowings (400) -- --
Collection of notes receivable from stockholders 400 -- --
Repurchase of stock -- -- (3,863)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 1,529 3,749 (3,162)
----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 6,669 (16,676) 12,998
Cash and cash equivalents at beginning of year 3,995 20,671 7,673
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,664 $ 3,995 $ 20,671
========================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes $ 1,636 $ 2,112 $ 1,457
======================================================================================================================
Non-cash investing and financing activities:
Options exercised in exchange for notes receivable or stock $ -- $ 711 $ --
====================================================================================================================
Unrealized loss on short-term investments $ (51) $ -- $ --
====================================================================================================================
21
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 , 1994, AND 1993
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 channels 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.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation. The accompanying 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. Certain cash
equivalents and all investments have been classified as available-for-sale, and
are stated at fair value at December 31, 1995.
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 financial position and results of operations. SFAS 115
has been adopted on a prospective basis, and the financial statements of prior
years have not been restated.
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 at December 31, 1995 and 1994, are capitalized software development
costs aggregating $4,209,000 and $3,595,000, respectively, and related
accumulated amortization of $3,413,000 and $2,730,000, respectively. Effective
in 1995, the Company now classifies amortization expense in cost of revenues in
the accompanying consolidated statements of earnings, which is the current
industry standard. Prior year's consolidated statements of earnings have been
adjusted for comparability purposes.
Other Assets. The Company owns a minority interest in ZyLAB
International, Inc. (ZyLAB), a leading developer of full text indexing and
retrieval software, and accounts for such investment under the cost method. At
December 31, 1995, the balance of the ZyLAB investment totaled $2,616,000.
22
25
Revenue Recognition. Revenue is recognized when (i) delivery has
occurred, (ii) collectibility is probable, and (iii) remaining vendor
obligations are insignificant. In addition, provisions are 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 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.
On January 1, 1993, Calera changed its method of accounting for income
taxes to the asset and liability method used by Caere. The 1993 consolidated
statement of earnings includes the cumulative effect of this change of
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 anti-dilutive.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Certain cash equivalents and all short-term investments have been
classified as available-for-sale securities, and consisted of the following:
As of December 31, 1995 As of December 31, 1994
----------------------- -----------------------
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
In thousands Cost gains losses fair value Cost gains losses fair value
- --------------------------------------------------------------------------------------------------------------------------------
Corporate bonds and notes $15,878 $-- $82 $15,796 $ -- $-- $-- $ --
Commercial paper 6,518 31 -- 6,549 -- -- -- --
Asset-backed securities -- -- -- -- 1,000 -- -- 1,000
U.S. government treasury bills -- -- -- -- 1,948 21 -- 1,969
State and municipal bonds 1,600 -- -- 1,600 11,706 -- -- 11,706
Corporate auction-rate
preferred securities 18,700 -- -- 18,700 33,450 -- -- 33,450
------------------------------------------------------------------------------------------------------------------------------
$42,696 $31 $82 $42,645 $48,104 $21 $-- $48,125
========================================================================================
The Company's short-term investments are classified as follows:
As of December 31, 1995 As of December 31, 1994
----------------------- -----------------------
Estimated Estimated
In thousands Cost fair value Cost fair value
- --------------------------------------------------------------------------------
Cash equivalents $ 5,513 $ 5,544 $ 1,000 $ 1,000
Short-term investments 37,183 37,101 47,104 47,125
- --------------------------------------------------------------------------------
$42,696 $42,645 $48,104 $48,125
=================================================
23
26
The cost and estimated fair value of available-for-sale securities as
of December 31, 1995, by contractual maturity, consisted of the following:
ESTIMATED
IN THOUSANDS COST FAIR VALUE
------- ----------
Due in one year or less $23,996 $23,945
Auction-rate preferred securities 18,700 18,700
- --------------------------------------------------------------------------------
$42,696 $42,645
===================
Auction-rate preferred securities are taxable 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 28 days.
3. RECEIVABLES
DECEMBER 31, IN THOUSANDS 1995 1994
------ ------
Trade accounts receivable $7,743 $8,158
Interest receivable 139 155
- --------------------------------------------------------------------------------
7,882 8,313
Less allowance for returns and doubtful accounts 1,702 2,273
- --------------------------------------------------------------------------------
$6,180 $6,040
=================
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 (see Note 13). Historically, the Company has not
experienced significant losses related to receivables from individual customers
or groups of customers in any particular industry.
4. INVENTORIES
DECEMBER 31, IN THOUSANDS 1995 1994
------ ------
Raw materials $1,212 $1,235
Work in process 287 520
Finished goods 578 800
- --------------------------------------------------------------------------------
$2,077 $2,555
=======================
5. PROPERTY AND EQUIPMENT
DECEMBER 31, IN THOUSANDS 1995 1994
------- -------
Equipment $13,012 $10,217
Furniture and fixtures 2,247 1,541
Leasehold improvements 1,580 1,364
- --------------------------------------------------------------------------------
16,839 13,122
Less accumulated depreciation and amortization 11,200 9,507
- --------------------------------------------------------------------------------
$ 5,639 $ 3,615
===================
24
27
6. SHORT-TERM BORROWINGS
The Company had a $1,000,000 line of credit facility which expired on
January 31, 1995. Interest accrued at the bank's prime rate plus 1.5% (10% as of
December 31, 1994). Borrowings were limited to 70% of eligible accounts
receivable, as defined in the agreements, and were collateralized by
substantially all of the Company's assets. Borrowings under this line of credit
were repaid by the Company on January 11, 1995. The Company has not renewed this
credit facility or secured other borrowings.
7. ACCRUED EXPENSES
A summary of accrued expenses follows:
DECEMBER 31, IN THOUSANDS 1995 1994
------ ------
Accrued payroll costs $1,478 $1,424
Accrued royalties 829 969
Accrued professional fees 344 507
Other accrued expenses 381 777
- --------------------------------------------------------------------------------
$3,032 $3,677
=======================
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating leases
that expire in 1997. As of December 31, 1995, future minimum lease payments
under noncancelable operating leases were $603,000 and $51,000 for each of the
two years through the period ending December 31, 1997.
Rent expense was approximately $611,000 in 1995, $913,000 in 1994, and
$847,000 in 1993. 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.
9. MERGER RELATED COSTS
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, and initiated a plan to combine the operations of the two companies.
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. On the date of the merger, 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.
25
28
The Calera merger transaction and integration costs are summarized
below:
PERIOD FROM ACQUISITION TO DECEMBER 31, 1994 PROVISION RECORDED CASH ACCRUED AS OF
IN THOUSANDS AT ACQUISITION DATE WRITE-OFFS PAYMENTS DEC. 31, 1994
Transaction costs $1,236 $ -- $ 770 $ 466
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
===============================================
YEAR ENDED DECEMBER 31, 1995 ACCRUED AS OF CASH CHANGE IN ACCRUED AS OF
IN THOUSANDS DEC. 31, 1994 WRITE-OFFS PAYMENTS ESTIMATE DEC. 31, 1995
Transaction costs $ 466 $-- $ 494 $ 51 $ 23
Severance and outplacement 1,359 -- 1,321 366 404
Redundant information systems and equipment 22 -- 17 -- 5
Cancellation of facility leases 420 -- 300 (120) --
$2,267 $-- $2,132 $ 297 $432
==============================================================
The nature, timing and extent of other merger related costs follow:
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. The balance at December 31,
1995, relates to payments due to certain former officers. The payments are
expected to be completed by the end of 1996.
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. The remaining balance is expected
to be paid by the end of 1996.
Cancellation of facility leases. The Company consolidated duplicate
offices. An early termination was negotiated by the Company and was paid during
fiscal year 1995.
On January 22, 1996, the Company exercised its right to terminate its
agreement to acquire ViewStar. Direct transactions costs totaling $1,090,000
were expensed in fiscal year 1995. These costs included fees for investment
bankers, attorneys, accountants, financial printing and other transaction costs
which were incurred through the date of termination. Of this total, $592,000 had
been paid by year end while $498,000 was accrued as of December 31, 1995.
26
29
10. CAPITAL STOCK
As of December 31, 1995, the Company had reserved 3,650,000 common
shares 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 for grant Shares Price per share
------------------------------------------------------------
BALANCES AT 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) -- --
Terminated (168,242) -- --
Exercised -- (391,102) 1.50-11.50
-------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 878,605 1,513,992 2.73-20.00
Increase in share reserve 50,000 -- --
Granted (437,500) 437,500 8.00-18.13
Canceled 227,947 (227,947) 6.13-11.50
Terminated (48,165) -- --
Exercised -- (182,823) 2.73-8.25
-------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 670,887 1,540,722 $2.73-20.00
===================================================
There were 593,726 options exercisable at December 31, 1995, at an
average exercise price of $7.83.
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 shareholder rights plan. The
plan is intended to protect shareholders 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,
1995, 100,000 shares of the Company's Preferred Stock have been reserved for
this plan.
11. 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 consolidated statement of earnings.
27
30
12. INCOME TAXES
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31, In thousands 1995 1994 1993
------------------------------
CURRENT:
Federal $ (424) $ 1,277 $(1,051)
State 45 423 --
-----------------------------------------------------------------------------
Total current (379) 1,700 (1,051)
---------------------------------------------------------------------------
DEFERRED:
Federal 574 (535) (21)
State 118 (170) (121)
-----------------------------------------------------------------------------
Total deferred 692 (705) (142)
---------------------------------------------------------------------------
Charges in lieu of income taxes associated
with the exercise of stock options 110 605 100
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$ 423 $ 1,600 $(1,093)
=============================
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, In thousands 1995 1994
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DEFERRED TAX ASSETS:
Federal and state net operating loss and research and
experimental credit carryforwards $ 7,969 $ 8,288
Allowance for doubtful accounts and sales returns and allowances 500 693
Inventories, nondeductible lower of cost or market adjustments 260 584
Compensated absences, principally due to accrual for financial reporting purposes 225 253
State tax expense on temporary differences -- 274
Accruals for financial statement purposes not taken for tax purposes 670 929
Other 4 6
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Total gross deferred tax assets 9,628 11,027
Less valuation allowance (7,969) (8,316)
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Net deferred tax assets 1,659 2,711
DEFERRED TAX LIABILITIES:
Property and equipment, principally due to differences in depreciation (25) (313)
Software development costs, principally due to capitalization and amortization (319) (350)
Other (20) (62)
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Total gross deferred tax liabilities (364) (725)
-----------------------------------------------------------------------------------------------------
Net deferred tax benefit $ 1,295 $ 1,986
=====================================================================================================
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The difference between the effective income tax rate and the U. S. federal
statutory income tax rate is as follows:
YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% (34.0)%
Tax exempt income (16.0) (9.0) (15.1)
State tax, net of federal benefit 4.0 5.7 (4.7)
Utilization of net operating loss -- -- (9.5)
carryforward
Benefit of foreign sales corporation (4.0) (3.4) (1.9)
Nondeductible acquisition expenditures -- 10.5 --
Other (3.0) 2.4 .9
- --------------------------------------------------------------------------------
15.0% 40.2% (64.3)%
============================
Calera has a net operating loss carryforward for federal and California
purposes at December 31, 1995, of $22.6 million and $1.4 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.
13. MAJOR CUSTOMERS AND EXPORT SALES
One distributor accounted for 22%, 23%, and 12% of net revenues in 1995,
1994, and 1993, respectively. At December 31, 1995, this distributor accounted
for 20% of trade accounts receivable. A second distributor accounted for 6%, 7%,
and 11% of net revenues in 1995, 1994, and 1993, respectively. At December 31,
1995, this distributor accounted for 9% of trade accounts receivable. Export
sales, principally to Europe, were 29%, 31%, and 33% of net revenues in 1995,
1994, and 1993, respectively.
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Quarterly Results of Operations (Unaudited)
1995, QUARTER ENDED YEAR ENDED
In thousands, except per share data MAR 31 JUN 30 SEP 30 DEC 31 DEC 31
-----------------------------------------------------------
Net revenues $12,224 $13,172 $13,057 $13,486 $51,939
Earnings before income taxes 665 811 1,075 269 2,820
Net earnings 499 756 914 228 2,397
Net earnings per share $ .04 $ .06 $ .07 $ .02 $ .18
Shares used in per share calculations 13,688 13,385 13,608 13,456 13,538
COMMON STOCK PRICE PER SHARE:
High $ 18.13 $ 10.06 $ 12.75 $ 10.50 $ 18.13
Low 9.25 8.00 8.50 7.13 7.13
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, 1995, there were 566 holders of record of the Company's
common stock.
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BOARD OF DIRECTORS Dan Duke Borozan INDEPENDENT AUDITORS
Vice President Operations
Robert G. Teresi KPMG Peat Marwick LLP
Chairman and Dean A. Hovey San Jose, California
Chief Executive Officer, Vice President
Caere Corporation Business Development FORM 10-K
James K. Dutton Chad B. Kinzelberg A copy of the Company's Annual
Director, Caere Corporation Vice President Marketing Report to the Securities and Exchange
Commission on Form 10-K is available
Sidney S. Kahn Lawrence F. Lunetta free of charge by writing or calling
Director, Caere Corporation, Orion Vice President the Investor Relations Department,
Network Systems, Inc., Sales and Service Caere Corporation, 100 Cooper Court,
Telogy Networks, Inc., Los Gatos, California, 95030,
Phoenix Networks Cary Masatsugu (408) 395-7000.
Vice President Engineering
Wayne E. Rosing ANNUAL MEETING
Director, Caere Corporation CORPORATE INFORMATION
The Company's Annual Meeting of
Frederick W. Zuckerman CORPORATE HEADQUARTERS Stockholders will be held at 9:00 a.m.
Director, Caere Corporation, on Tuesday, May 14, 1996, at the Toll
Anacomp Inc., Meditrust, Caere Corporation House Hotel in Los Gatos, California.
Japan Equity Fund, 100 Cooper Court
Singapore Fund, Los Gatos, California 95030 Caere, Calera, OmniPage, OmniPage Professional,
Olympic Financial, Ltd., Telephone (408) 395 7000 OmniPage Pro, WordScan, PageKeeper,
Turner Corporation, Facsimile (408) 354 2743 Millennium, OmniScan, Language Analyst, and
NVR Corporation, True Page are registered trademarks of the
Pantone, Inc. EUROPEAN OPERATIONS Company. Other Caere Corporation product
names and features referred to herein are
EXECUTIVE OFFICERS Caere GmbH trademarks of the Company. Tradenames, product
Innere Wiener Strasse 5 names, and marks other than those identified
Robert G. Teresi 81667 Munich, Germany as trademarks of Caere are trademarks of their
Chief Executive Officer Telephone 49 89 4587 35 0 respective holder(s) and are hereby recognized.
Facsimile 49 89 4587 3520
Steven C. Humphreys Design: IDEAS For Advertising & Design
President LEGAL COUNSEL Photo-illustration: Paul Garbett/Worxs
Blanche M. Sutter Cooley Godward Castro Recyclable
Vice President Finance, Huddleson & Tatum
Chief Financial Officer, Secretary Palo Alto, California
Serge L. Blanc TRANSFER AGENT
Vice President & General Manager
Business Products Boston EquiServe
Boston, Massachusetts
COMMON STOCK
NASDAQ National Market System,
Ticker Symbol CAER
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CAERE Caere Corporation 100 Cooper Court Los Gatos, CA 95030 (408) 395-7000