SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-18090
CAERE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2250509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Cooper Court, Los Gatos, California, 95030
(Address of principal executive offices)
(408) 395-7000
(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports). and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Outstanding
Class September 30, 1995
Common Stock
$.001 par value 13,232,154
This is page 1 of 13 pages
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CAERE CORPORATION
INDEX
PART I. Financial Information
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Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1995
and December 31, 1994 3
Condensed Consolidated Statements of Operations -- Three
Months and Nine Months Ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
Exhibit 11 Statement Regarding Computation of Net Earnings
Per Share 13
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CAERE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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September 30, December 31,
1995 1994
ASSETS
Cash and cash equivalents ................................................ $ 4,219 $ 3,995
Short-term investments ................................................... 41,195 47,104
Receivables .............................................................. 7,538 6,040
Income tax receivable .................................................... 1,100 --
Inventories (Note B) ..................................................... 2,315 2,555
Other current assets ..................................................... 3,620 3,459
--------- ------
Total current assets ............................................ 59,987 63,153
Property and equipment, net .............................................. 5,590 3,615
Other assets ............................................................. 1,794 1,134
--------- ------
Total assets .................................................... $ 67,371 $ 67,902
========================================================================== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other payables ...................................... $ 5,668 $ 7,882
Accrued merger related costs ............................................. 509 2,267
--------- ------
Total current liabilities ....................................... 6,177 10,149
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 13,232,154 and 13,046,419
shares ................................................................. 13 13
Additional paid-in capital ............................................... 61,648 60,597
Notes receivable from stockholders ....................................... (179) (400)
Accumulated deficit ...................................................... (288) (2,457)
--------- ------
Total stockholders' equity ...................................... 61,194 57,753
--------- ------
Total liabilities and stockholders' equity ...................... $ 67,371 $ 67,902
========================================================================== ========= =========
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Net revenues ........................ $13,057 $17,575 $38,453 $42,868
Cost of revenues .................... 4,228 5,257 11,810 12,582
------- ------- ------- -------
8,829 12,318 26,643 30,286
------- ------- ------- -------
Operating expenses:
Research and development .......... 2,157 2,429 6,643 7,385
Selling, general and administrative 6,135 6,500 18,722 19,434
Merger related costs .............. -- -- 297 --
------- ------- ------- -------
8,292 8,929 25,662 26,819
------- ------- ------- -------
Operating earnings ................ 537 3,389 981 3,467
Interest income, net ................ 538 342 1,571 936
Earnings before income taxes ...... 1,075 3,731 2,552 4,403
Income tax expense .................. 161 1,183 383 1,396
------- ------- ------- -------
Net earnings ...................... $ 914 $ 2,548 $ 2,169 $ 3,007
======= ======= ======= =======
Net earnings per common and
common equivalent share (Note C) $ 0.07 $ 0.20 $ 0.16 $ 0.23
===== ===== ==== =====
Shares used in per share calculation 13,608 12,917 13,477 12,932
====== ====== ====== ======
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
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Cash flows from operating activities:
Net earnings $ 2,169 $ 3,007
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,636 1,501
Merger related costs (1,758) -
Amortization of capitalized software development costs 458 464
Changes in operating assets and liabilities:
Receivables (1,498) 472
Income tax receivable (1,100) 1,002
Inventories 240 (768)
Other current assets (161) 62
Accrued expenses and other payables (2,214) 1,869
------- -----
Net cash provided by (used for) operations (2,228) 7,609
------- -----
Cash flows from investing activities:
Short-term investments, net 5,909 (87)
Capital expenditures (3,425) (832)
Capitalized software development costs (389) (360)
Other assets (915) 220
----- ---
Net cash provided by (used for) investing activities 1,180 (1,059)
----- -------
Cash flows from financing activities:
Proceeds from issuances of common stock, net 1,051 335
Proceeds from repayment of shareholder notes 221 -
--- -
Net cash provided by financing activities 1,272 335
Net increase in cash and cash equivalents 224 6,885
Cash and cash equivalents, beginning of period 3,995 20,671
----- ------
Cash and cash equivalents, end of period $ 4,219 $ 27,556
===== ======
Supplemental disclosures:
Cash paid for income taxes $ 603 $ 1,102
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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CAERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A) Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets,
statements of operations and statements of cash flows reflect all adjustments
(consisting of only normal recurring adjustments) which are, in the opinion of
management, necessary to present the financial position of the Company as of
September 30, 1995, and the results of operations and cash flows for the periods
indicated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and
therefore certain information and footnote disclosure normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company filed audited financial
statements with the Securities and Exchange Commission which included all
information and footnotes necessary for a complete presentation of the Company's
financial position, results of operations and cash flows for the years ended
December 31, 1994, 1993 and 1992 in its report on Form 10-K for the year ended
December 31, 1994 ("the Form 10-K"). These condensed consolidated financial
statements should be read in conjunction with the financial statements contained
in the Company's Form 10-K. The results of operations for the interim periods
ended September 30, 1995, are not necessarily indicative of the results to be
expected for the full year.
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B) Inventories September 30, 1995 December 31, 1994
----------- ------------------ -----------------
(In thousands)
A summary of inventories follows:
Raw materials ................................................. $ 1,710 $ 1,235
Work in process ............................................... 239 520
Finished goods ................................................ 366 800
- ------------------------------------------------------------------- ------- -------
$ 2,315 $ 2,555
======= =======
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(C) Net Earnings Per Share
Net earnings per common and common equivalent share are computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of options to
purchase common stock calculated using the treasury stock method. Fully diluted
earnings per share for all periods presented were not materially different from
primary earnings per share.
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues
Net revenues for the third quarter of 1995 were $13,057,000 compared
to $17,575,000 for the third quarter of 1994. For the nine months ending
September 30, 1995, net revenues were $38,453,000 compared to $42,868,000 in the
comparable 1994 period. The revenue breakdown between Desktop Products and
Business Products was as follows:
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Third Quarter Year to Date
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1995 1994 1995 1994
---- ---- ---- ----
Business Products 2,407 2,676 5,899 5,991
Desktop Products 10,650 14,899 32,554 36,877
------ ------ ------ ------
Total 13,057 17,575 38,453 42,868
====== ====== ====== ======
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The decrease in Desktop Products revenue for both the third quarter of 1995 and
the nine months ending September 30, 1995, was caused by the continuing shift in
the business model brought about by the bundling of OCR software with scanners.
The effect of this shift is to lower the average unit selling price for the
OmniPage and WordScan lines of software. Unit sales of the bundled (OEM) and
upgrade versions of the OmniPage and WordScan lines were up approximately 19%
during the third quarter of 1995 compared to the third quarter of 1994. During
the same period, unit sales for fully priced retail versions of Desktop Products
software, which consist of the OmniPage, WordScan, PageKeeper, and OmniForm
products, decreased approximately 39%. On a year-to-date basis, unit sales of
bundles and upgrades were up approximately 92% in 1995 compared to 1994, while
unit sales of retail versions declined approximately 24% over the same period.
The Company expects that this trend in the business model will continue
throughout 1995.
The decrease in the Company's transaction processing Business Products net
revenues for both the third quarter and year-to-date comparisons was due
primarily to lower average unit selling prices and a decrease in unit sales of
bar code products. The Company has not experienced any uniform seasonality
patterns with these products, and quarterly revenues fluctuate throughout the
year.
Gross Margins
Gross margins were 67.6% for the third quarter, compared to 70.1% for the third
quarter of 1994. For the nine-month period, gross margins were 69.3% in 1995
compared to 70.6% in 1994. The decrease in gross margins is caused by the
reduction in average selling prices of OCR software products related to the
bundling business. The primary factors affecting gross margins in the future are
likely to be continuing shifts in product mix between bundled, upgrade, and
retail software, as well as changes 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) expense for the third quarter of 1995 was
$2,157,000, an 11% decrease compared to the third quarter of 1994 R&D expense of
$2,429,000. Included in the third quarter R&D expense was approximately $150,000
of costs associated with the merger of the Company with Calera Recognition
Systems (Calera). The Company acquired Calera in December 1994. For the nine
months ending September 30, 1995, R&D expense was down 10% to $6,643,000 from
$7,385,000 in 1994. The decrease in both the third quarter and year-to-date R&D
spending on a comparative basis was the result of synergies related to the
Calera acquisition. The Company expects to continue significant investment in
R&D during 1995.
Selling, general and administrative (SG&A) expenses decreased approximately 6%
to $6,135,000 for the third quarter of 1995 compared to $6,500,000 for the
comparable quarter of 1994. Included in SG&A for the third quarter of 1995 was
approximately $28,000 of merger-related costs for transitional employees. For
the nine months ended September 30, 1995, SG&A was down 4% to $18,722,000
compared to $19,434,000 for the same period in 1994. The decrease in 1995 SG&A
for both the third quarter and year-to-date comparisons was also a result of
synergies realized from the Calera acquisition.
The Company incurred an additional integration charge of $297,000 related to the
Calera merger in the second quarter of 1995. These merger related costs are
shown as a separate line item in operating expenses in the accompanying
Statements of Earnings. This charge included severance payments, legal, and
other transactions costs and were somewhat offset by a savings resulting from an
early buyout of the lease for the building that Calera occupied prior to the
acquisition.
Interest Income
Interest income was $538,000 for the third quarter of 1995 compared to $342,000
for the third quarter of 1994. For the nine months ending September 30, 1995,
interest income was $1,571,000 compared to $936,000 for the comparable period of
1994. The increases were the result of higher average cash balances and higher
interest rates earned on the Company's short-term investments.
Income Taxes
The effective income tax rate for the year is expected to approximate 15%, based
on utilization of net operating loss carryforwards assumed with the acquisition
of Calera, the Company's Foreign Sales Corporation, and the tax-free nature of
most interest earned on the Company's short-term investments.
Net Earnings and Earnings Per Share
Net earnings decreased 64% to $914,000 for the third quarter of 1995 compared to
$2,548,000 for the third quarter of 1994. For the nine months ending September
30, 1995, net earnings decreased 28% to $2,169,000 from $3,007,000 for the
comparable period of 1994. The primary reason for the decreases was the
declining revenues associated with the shift in the business model to a bundle
and upgrade strategy. Earnings per share were $.07 for the third quarter of 1995
compared to $.20 for the third quarter of 1994. For the first nine months of
1995, earnings per share were $.16 compared to $.23 for the same period of 1994.
The effect of the merger related costs commingled in R&D and SG&A in operating
expenses, along with the additional integration charge incurred in the second
quarter of 1995, was to reduce earnings per share by $.01 and $.08, during the
third quarter of 1995 and the nine months ending September 30, 1995,
respectively.
Certain Trends
The Company's future operating results may be affected by various uncertain
trends and factors 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 of 1994. 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 adversely impact 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
with Calera Recognition Systems, Inc., consummated in the fourth quarter of
1994. 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.
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 arising 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
The Company's financial position remains strong, with working capital of
$53,810,000 and no long-term debt. Cash and short-term investments aggregated
approximately $45,414,000 at September 30, 1995. The Company believes that
existing cash balances will be sufficient to meet its cash requirements for the
foreseeable future.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. With respect to credit sales,
the Company attempts to control its bad debt exposure through monitoring of
customers' creditworthiness and, where practicable, through participation in
credit associations that provide credit rating information about its customers.
The Company has also purchased credit insurance for certain key accounts to
eliminate the potential for catastrophic losses.
Recent Developments
On October 8, 1995, the Board of Directors approved, subject to stockholder
approval, the Agreement and Plan of Reorganization between the Company and
ViewStar Corporation ("ViewStar"), and a related Agreement of Merger between the
Company and ViewStar. In the proposed merger, the Company will issue 3,437,000
shares of Common Stock for all the outstanding capital stock and vested options
to purchase common stock of ViewStar. The proposed merger will be effected such
that ViewStar will become a wholly owned subsidiary of the Company and the
combination will be accounted for as a pooling of interests. ViewStar develops,
markets, and sells software for workflow and document and image management.
On November 1, 1995, the Company announced that it is investing $2.4 million for
approximately 20% ownership in ZyLAB International, Inc., a developer of full
text indexing and retrieval software.
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Item 6
Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Regarding Computation of Net Earnings
(Loss) Per Share - page 13
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
covered by this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAERE CORPORATION
Date: November 13, 1995
/S/ Blanche M. Sutter
Blanche M. Sutter, Vice President
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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EXHIBIT 11
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CAERE CORPORATION
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS (LOSS) PER SHARE
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Net earnings $914,000 $2,548,000 $2,169,000 $3,007,000
======== ========== ========== ==========
Weighted average shares outstanding during
the period 13,215,958 10,610,707 13,140,976 10,590,369
Common equivalent shares using the
treasury stock method 392,012 2,306,730 336,397 2,341,552
-------- --------- -------- ---------
Common and common equivalent shares
outstanding for purposes of calculating
net earnings per share 13,607,970 12,917,437 13,477,373 12,931,921
========== ========== ========== ==========
Net earnings per common and common
equivalent share $0.07 $0.20 $0.16 $0.23
========= ========= ============== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,219
<SECURITIES> 41,195
<RECEIVABLES> 8,752
<ALLOWANCES> 1,214
<INVENTORY> 2,315
<CURRENT-ASSETS> 59,987
<PP&E> 16,331
<DEPRECIATION> 10,741
<TOTAL-ASSETS> 67,371
<CURRENT-LIABILITIES> 6,177
<BONDS> 0
<COMMON> 61,661
0
0
<OTHER-SE> 179
<TOTAL-LIABILITY-AND-EQUITY> 67,371
<SALES> 38,453
<TOTAL-REVENUES> 38,453
<CGS> 11,810
<TOTAL-COSTS> 25,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,571
<INCOME-PRETAX> 2,552
<INCOME-TAX> 383
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,169
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
