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 March 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-18090
CAERE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2250509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Cooper Court, Los Gatos, California, 95030
(Address of principal executive offices)
(408) 395-7000
(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports). and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Outstanding
Class March 31, 1996
Common Stock
$.001 par value 13,322,208
This is page 1 of 13 pages
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<TABLE>
CAERE CORPORATION
<CAPTION>
INDEX
PART I. Financial Information
<S> <C> <C>
Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Earnings -- Three Months
Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
Exhibit 11 Statement Regarding Computation of Net Earnings
Per Share 12
PART II. Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CAERE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 3,728 $ 10,664
Short-term investments 45,610 37,101
Receivables 6,378 6,180
Income tax receivable - 1,109
Inventories (Note B) 1,951 2,077
Other current assets 2,481 2,425
----------- ---------
Total current assets 60,148 59,556
Property and equipment, net 5,457 5,639
Other assets 3,940 4,103
----------- -----------
Total assets $ 69,545 $ 69,298
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other payables $ 5,786 $ 6,340
Accrued merger related costs 217 930
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 13,322,208 and 13,283,224
shares 13 13
Additional paid-in capital 62,289 62,075
Retained earnings (deficit) 1,240 (60)
----------- ------------
Total stockholders' equity 63,542 62,028
----------- -----------
Total liabilities and stockholders' equity $ 69,545 $ 69,298
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1996 1995
Net revenues $ 13,556 $ 12,224
Cost of revenues 4,315 3,694
----- -----
9,241 8,530
----- -----
Operating expenses:
Research and development 1,762 2,172
Selling, general and administrative 6,518 6,231
----- -----
8,280 8,403
----- -----
Operating earnings 961 127
Interest income, net 648 538
---- ----
Earnings before income taxes 1,609 665
Income tax expense 309 166
---- ----
Net earnings $ 1,300 $ 499
===== =========
Net earnings per common and
common equivalent share $ .10 $ .04
==== =========
Shares used in per share calculation 13,459 13,688
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net earnings $ 1,300 $ 499
Adjustments to reconcile net earnings to net cash provided
by (used for) operating activities:
Depreciation and amortization 636 444
Merger related costs (507) (1,138)
Amortization of capitalized software development costs 162 152
Changes in operating assets and liabilities:
Receivables, net (198) 101
Income tax receivable 1,109 -
Inventories 126 246
Other current assets (56) (167)
Accrued expenses and other payables (760) (2,993)
----------- -----------
Net cash provided by (used for) operating activities 1,812 (2,856)
---------- -----------
Cash flows from investing activities:
Short-term investments, net (8,509) 2,637
Capital expenditures (325) (1,074)
Capitalized software development costs (165) (120)
Other assets 37 (304)
---------- -----------
Net cash provided by (used for) investing activities (8,962) 1,139
----------- ----------
Cash flows from financing activities:
Proceeds from issuances of common stock 214 246
---------- ----------
Net increase (decrease) in cash and cash equivalents (6,936) (1,471)
Cash and cash equivalents at beginning of period 10,664 3,995
---------- ----------
Cash and cash equivalents at end of period $ 3,728 $ 2,524
========== ==========
Supplemental disclosures:
Cash paid for income taxes $ 29 $ 1,011
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CAERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A) Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets,
statements of earnings, and statements of cash flows reflect all adjustments
(consisting of only normal recurring adjustments) which are, in the opinion of
management, necessary to present the financial position of the Company as of
March 31, 1996, and its results of operations and cash flows for the periods
indicated.
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q, and, therefore,
certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company filed audited financial statements
with the Securities and Exchange Commission which included all information and
footnotes necessary for a complete presentation of the Company's financial
position, results of operations and cash flows for the years ended December 31,
1995, 1994 and 1993, in its report on Form 10-K for the year ended December 31,
1995 (the "Form 10-K"). These condensed 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 period ended March 31, 1996, are not
necessarily indicative of the results to be expected for the full year.
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<CAPTION>
B) Inventories March 31, 1996 December 31, 1995
----------- -------------- -----------------
(In thousands)
<S> <C> <C>
A summary of inventories follows:
Raw materials $ 1,157 $ 1,212
Work in process 263 287
Finished goods 531 578
---------- - --------
$ 1,951 $ 2,077
========== ========
</TABLE>
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.
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains statements of what may happen in the
future. Actual results may differ materially from those discussed here. Factors
that could cause such a difference include, but are not limited to, those
discussed in the sections entitled "Certain Trends" below and "Risk Factors" in
the Company's report on Form 10-K for its fiscal year ended December 31, 1995.
Results of Operations
The following chart summarizes net revenues, cost of revenues, and
gross margins for the Company's products categorized between hardware and
software. Software products consist of the OmniPage, WordScan, OmniForm, and
PageKeeper lines of products. Hardware products consist of transaction
processing OCR and bar code products, and the M/Series line of production OCR.
<TABLE>
Business Line Analysis
<CAPTION>
-------------- --------------- ---------------- ------------- --------------- ----------------
Q1'96 Q1'95
Software Hardware Software Hardware
Products Products Combined Products Products Combined
<S> <C> <C> <C> <C> <C> <C>
Net revenues $11,415 $2,141 $13,556 $10,204 $2,020 $12,224
Cost of revenues 3,422 893 4,315 2,882 812 3,694
----- --- ----- ----- --- -----
$7,993 $1,248 $9,241 $7,322 $1,208 $8,530
Gross margin % 70.0% 58.3% 68.2% 71.8% 59.8% 69.8%
-------------- --------------- ---------------- ------------- --------------- ----------------
</TABLE>
Net revenues for software products increased 12% in the first quarter
of 1996 to $11,415,000 from $10,204,000 in 1995, due to increased unit sales of
upgrade products. Software unit sales increased 190% from the first quarter of
1996 compared to the same period in 1995, due to increases in both upgrade and
bundled unit shipments.
Net revenues for hardware products increased 6% to $2,141,000 in the
first quarter of 1996 compared to $2,020,000 during the same period in 1995. The
increase was primarily the result of higher sales of transaction processing OCR
products.
Export sales increased 2% to $4,260,000, or 32% of net revenues, in the
first quarter of 1996, compared to $4,165,000, or 34% of net revenues, in the
same period of 1995. The availability of new foreign versions of certain
software products was the primary reason for the increase during the period.
Gross Margins
Gross margins for software products declined from 71.8% in the first
quarter of 1995 to 70.0% in the first quarter of 1996, due to product mix
changes related to the increased unit volumes of bundled products. These bundled
products have lower gross margins than fully priced retail products due to lower
average unit selling prices.
Gross margins for hardware products decreased to 58.3% in the first
quarter of 1996 from 59.8% in the same period of 1995, due to lower unit sales
of M/Series products, which typically carry higher gross margins than other
hardware products.
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 19% to $1,762,000 in
the first quarter of 1996 from $2,172,000 during the same period in 1995. The
decrease in spending from 1995 to 1996 was a result of synergies created by the
merger with Calera Recognition Systems, Inc. ("Calera"). As a percentage of
revenue, R&D expenses decreased to 13% in the first quarter of 1996 from 18%
during the same period in 1995. This decrease was the result of both higher net
revenues and decreased expenses.
The Company is committed to providing continuing enhancements to
current products as well as developing new technologies for the future. This
commitment will result in the Company's continuing to invest heavily in R&D
during 1996. In accordance with Statement of Financial Accounting Standards No.
86, the Company capitalized $165,000 of software development costs during the
first quarter of 1996, compared to $120,000 in the same period in 1995.
Amortization of capitalized software development costs was $162,000 in the first
quarter of 1996, compared to $152,000 in 1995. In 1995, the Company began
including amortization of capitalized software development costs in cost of
revenues in the accompanying Condensed 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 prior periods
presented.
Selling, general and administrative (S,G&A) expenses increased 5% in
the first quarter of 1996 to $6,518,000 from $6,231,000 during the same period
in 1995. The increase in S,G&A spending was primarily a result of higher
advertising and promotional costs of both software and hardware products. As a
percentage of revenue, S,G&A decreased to 48% of revenue in the first quarter of
1996 from 51% during the same period in 1995. This decrease was primarily
attributable to the increase in overall net revenues. The Company expects that
S,G&A expenses 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.
Interest Income
Interest income increased by 20% in the first quarter of 1996 to
$648,000 from $538,000 during the same period in 1995. This increase was
attributable to generally higher interest rates on the Company's short-term
investments, together with a shift from tax-free investments to taxable
securities carrying higher rates of interest.
Income Taxes
The Company's effective income tax rate in the first quarter of 1996
was 19%, primarily due to the use of its foreign sales corporation and, to a
lesser extent, the tax exempt nature of a portion of the Company's interest
income. In the first quarter of 1995, the effective income tax rate was 25%,
also due primarily to the use of the Company's foreign sales corporation.
Additionally, none of Calera's $22,600,000 net operating loss carryforward was
utilized in the first quarter of 1996 due to taxable income limitations.
Net Earnings and Earnings Per Share
Net earnings increased 161% to $1,300,000 in the first quarter of 1996
compared to $499,000 during the same period in 1995. This increase was the
result of higher net revenues and interest income, reduced operating expenses,
and a lower effective income tax rate. Earnings per share increased 150% to $.10
per share in the first quarter of 1996 compared to $.04 per share in the first
quarter of 1995.
Certain Trends
The Company's future operating results may be affected by various
uncertain trends and factors which are beyond the Company's control. These
include but are not limited to adverse changes in general economic conditions,
rising costs, or the occasional unavailability of needed components. The
industry is characterized by rapid changes in the technologies affecting optical
character recognition. The industry also 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 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 upon a significant proportion of customers who first receive
OCR software in a bundled product deciding to upgrade to a newer or more fully
featured version of the software. Such an upgrade is typically at a
substantially lower price than the retail price of the newer or fully featured
product.
Bundled products incorporating OmniPage and WordScan began shipping in
significant quantities in the fourth quarter of 1994. Because of the lower
per-unit revenue to the Company that results from the combined sale of a bundled
product plus an upgrade, compared to the retail sale of a fully featured version
of the software, the "bundle and upgrade" program relies on increasing unit
sales of upgrades for its success. There can be no assurance that Caere's
transition to the "bundle and upgrade" business model will be successful and
provide sufficient increase in unit volume in the future to offset reduced
per-unit revenue. In addition, customers using the bundled product may defer or
forego the purchase of the Company's more fully featured versions of OmniPage
and WordScan products if they find that the bundled products satisfy their
recognition needs.
A significant portion of the Company's net revenues is attributable to
sales through the distribution channel. The Company's future operating results
are dependent to a certain extent on its ability to maintain its existing
relationships with distributors.
The Company's future earnings and stock price could be subject to
significant volatility, particularly on a quarterly basis. The Company's
revenues and earnings are unpredictable due to the Company's shipment patterns.
As is common in the software industry, the Company's experience has been that a
disproportionately large percentage of shipments has occurred in the third month
of each fiscal quarter, and shipments tend to be concentrated in the latter half
of that month. Because the Company's backlog early in a quarter is not generally
large enough to assure that it will meet its revenue targets for any particular
quarter, quarterly results are difficult to predict until the end of the
quarter. A shortfall in shipments at the end of any particular quarter may cause
the results for that quarter to fall significantly short of anticipated levels.
Due to analysts' expectations of continued growth, any such shortfall in
earnings could have a very significant adverse effect on the trading price of
the Company's common stock in any given period.
As a result of the foregoing factors and other factors which may arise
in the future, the market price of the Company's common stock may be subject to
significant fluctuations over a short period of time. These fluctuations may be
due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer industry or the securities
markets in general.
Liquidity and Capital Resources
Caere's financial position remains strong at March 31,1996. Working
capital increased 4% to $54,145,000 from $52,286,000 at December 31, 1995. The
Company has no long-term debt. The Company's cash and short-term investments
totaled $49,338,000 at March 31, 1996. The Company believes that current cash
balances and cash flows from operations will be sufficient to meet its cash
requirements through 1996.
Caere generated cash from operations of $1,812,000 during the quarter
ended March 31, 1996. Uses of cash include modest expenditures for capital
equipment and other investments.
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 also has purchased credit insurance for certain key accounts to
eliminate the potential for catastrophic losses.
<PAGE>
EXHIBIT 11
<TABLE>
CAERE CORPORATION
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS PER SHARE
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C> <C> <C>
Net earnings (loss) $ 1,300,000 $ 499,000
============= ============
Weighted average shares outstanding during the period 13,349,703 13,091,631
Common equivalent shares using the treasury
stock method 109,373 596,365
-------------- -----------
Common and common equivalent shares outstanding
for purposes of calculating net earnings per share 13,459,076 13,687,996
=============== ===============
Net earnings per common and common
equivalent share $ .10 $ .04
============== ==============
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 4
Submission of Matters to a Vote of Security Holders
On January 23, 1996, the Company held a Special Meeting of
Stockholders, at which meeting the stockholders approved an amendment to the
Company's 1990 Employee Stock Purchase Plan to increase the number of shares
which may be issued under the plan from 350,000 to 500,000, an increase of
150,000 shares.
Votes cast for: 9,358,485
Votes cast against: 1,739,189
Abstentions: 76,090
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Regarding Computation of Net Earnings
Per Share - page 12.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAERE CORPORATION
Date: May 13, 1996
/s/ Blanche M. Sutter
-----------------------------------
Blanche M. Sutter, Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,728
<SECURITIES> 45,610
<RECEIVABLES> 6,378
<ALLOWANCES> 1,628
<INVENTORY> 1,951
<CURRENT-ASSETS> 60,148
<PP&E> 17,163
<DEPRECIATION> 11,706
<TOTAL-ASSETS> 69,545
<CURRENT-LIABILITIES> 6,003
<BONDS> 0
0
0
<COMMON> 62,302
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 69,545
<SALES> 13,556
<TOTAL-REVENUES> 13,556
<CGS> 4,315
<TOTAL-COSTS> 8,280
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 648
<INCOME-PRETAX> 1,609
<INCOME-TAX> 309
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,300
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
