<PAGE> 1
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 June 30, 1998 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, 95032
----------------------------------------------
(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.
<TABLE>
<CAPTION>
Outstanding
Class June 30, 1998
----- -------------
<S> <C>
Common Stock
$.001 par value 12,681,929
</TABLE>
This is page 1 of 18 pages
<PAGE> 2
CAERE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations -- Three Months
and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAERE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,423 $16,417
Short-term investments 43,720 33,156
Receivables, net 5,568 5,263
Inventories (Note B) 1,883 1,917
Deferred income taxes 3,241 3,241
Other current assets 826 990
------- -------
Total current assets 57,661 60,984
Property and equipment, net 4,191 4,781
Other assets 2,081 1,535
------- -------
Total assets $63,933 $67,300
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other payables $ 6,913 $ 6,091
Preferred stock, $.001 par value: authorized 2,000,000
shares; none issued or outstanding -- --
Common stock, $.001 par value: authorized 30,000,000
shares; issued and outstanding 12,681,929 and 13,107,235
shares 13 13
Additional paid-in capital 48,893 57,720
Retained earnings 8,114 3,476
------- -------
Total stockholders' equity 57,020 61,209
------- -------
Total liabilities and stockholders' equity $63,933 $67,300
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 16,168 $ 12,751 $ 31,827 $ 25,323
Cost of revenues 3,883 3,353 7,310 7,069
-------- -------- -------- --------
12,285 9,398 24,517 18,254
-------- -------- -------- --------
Operating expenses:
Research and development 2,986 2,204 5,933 4,206
Selling, general and administrative 6,855 6,683 13,913 12,995
In-process research and development -- -- -- 2,935
-------- -------- -------- --------
9,841 8,887 19,846 20,136
-------- -------- -------- --------
Operating earnings (loss) 2,444 511 4,671 (1,882)
Interest income 743 613 1,330 1,175
-------- -------- -------- --------
Earnings (loss) before income taxes 3,187 1,124 6,001 (707)
Income tax expense 794 112 1,363 222
-------- -------- -------- --------
Net earnings (loss) $ 2,393 $ 1,012 $ 4,638 $ (929)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.19 $ 0.08 $ 0.36 $ (0.07)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.18 $ 0.08 $ 0.34 $ (0.07)
======== ======== ======== ========
Weighted average shares used in basic earnings (loss) per
share calculation 12,817 13,280 12,940 12,983
======== ======== ======== ========
Weighted average shares used in diluted earnings (loss) per
share calculation 13,531 13,320 13,670 12,983
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
CAERE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,638 $ (929)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,439 1,488
In-process research and development -- 2,935
Amortization of capitalized software development costs 318 243
Tax benefit associated with exercise of stock options 30 --
Changes in operating assets and liabilities:
Receivables, net (305) (36)
Inventories 34 414
Other current assets 164 (303)
Accrued expenses and other payables 822 (2,077)
-------- --------
Net cash provided by operating activities 7,140 1,735
-------- --------
Cash flows from investing activities:
Short-term investments, net (10,564) (6,463)
Capital expenditures (697) (1,184)
Capitalized software development costs (150) (558)
Other assets (866) 127
-------- --------
Net cash used for investing activities (12,277) (8,078)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,545 701
Repurchase of stock (10,402) --
-------- --------
Net cash provided by (used for) financing activities (8,857) 701
-------- --------
Net change in cash and cash equivalents (13,994) (5,642)
Cash and cash equivalents at beginning of period 16,417 11,663
-------- --------
Cash and cash equivalents at end of period $ 2,423 $ 6,021
======== ========
Supplemental disclosures:
Cash paid for income taxes $ 2,091 $ 991
======== ========
Common stock issued for business acquisition $ -- $ 3,105
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
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
June 30, 1998, 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,
1997, 1996 and 1995, in its report on Form 10-K, as amended, for the year ended
December 31, 1997 (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 June 30, 1998,
are not necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
B) Inventories June 30, 1998 December 31, 1997
----------- ------------- -----------------
(In thousands)
<S> <C> <C>
A summary of inventories follows:
Raw materials $ 596 $ 738
Work in process 459 226
Finished goods 828 953
--------- ---------
$ 1,883 $ 1,917
========= =========
</TABLE>
6
<PAGE> 7
C) Earnings (Loss) Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. SFAS No. 128 changes the
standards for computing earnings per share ("EPS") by replacing the presentation
of primary EPS with basic EPS for all periods presented. Basic EPS excludes
dilution and is computed by dividing net earnings available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board ("APB") Opinion No. 15. All prior period share and
per share amounts have been restated to comply with SFAS No. 128.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------------
1998 1997 1998 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 2,393,000 $ 1,012,000 $ 4,638,000 $ (929,000)
=========== =========== ============= =============
Shares used to compute basic earnings
(loss) per share (weighted average common
shares outstanding)
12,816,982 13,280,285 12,940,261 12,982,694
Dilutive common equivalent shares - stock
options
713,609 40,125 729,258 --
----------- ----------- ------------- -------------
Shares used to compute diluted earnings
(loss) per share
13,530,591 13,320,410 13,669,519 12,982,694
=========== =========== ============= =============
Basic earnings (loss) per share $ .19 $ .08 $ .36 $ (.07)
=========== =========== ============= =============
Diluted earnings (loss) per share $ .18 $ .08 $ .34 $ (.07)
=========== =========== ============= =============
</TABLE>
There were no reconciling items in the numerators between the basic
and diluted earnings per share computations. Options excluded from the
computation of earnings per share because their effect on earnings per share was
antidilutive, but which could dilute basic earnings per share in future periods,
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Options excluded 29,692 1,312,004 15,923 491,659
Weighted average exercise price $ 14.25 $ 8.59 $ 14.25 $ 9.78
</TABLE>
7
<PAGE> 8
D) Business Acquisition
On March 31, 1997, the Company acquired Formonix, Inc.
("Formonix"), a software developer located in Colorado. The total value of the
acquisition was approximately $3,188,000. The Company issued 550,000 shares of
Common Stock in exchange for all of the capital stock of Formonix. Using the
closing price of the Company's Common Stock on the closing date of the
acquisition, the valuation of the shares issued was approximately $3,105,000.
Acquisition costs associated with the transaction totaled approximately $83,000
and consisted mainly of professional fees. The business combination was
accounted for under the purchase method of accounting. Accordingly, the
consolidated financial statements of the Company do not include Formonix until
after the date of the acquisition.
Acquired technology was valued using a risk-adjusted cash flow
model, under which future expected cash flows were discounted taking into
account risks related to existing markets, the technology's life expectancy,
future target markets and potential changes thereto, and the competitive outlook
for the technology. The analysis resulted in an allocation of approximately
$253,000 to purchased software and the balance of approximately $2,935,000 to
in-process technology, which had not yet reached technological feasibility and
had no alternative future use, and accordingly, was charged to expense.
The following summarized, pro forma results of operations assume
the acquisition took place at the beginning of the period and excludes the
$2,935,000 charge for acquired in-process technology.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
<S> <C>
(In thousands, except per share amounts)
Net revenues $25,323
Net earnings 1,863
Diluted earnings per share $ .14
</TABLE>
E) Revenue Recognition
The Company recognizes revenue in accordance with Statement of
Position ("SOP") No. 97-2, Software Revenue Recognition, which supersedes SOP
No. 91-1. SOP No. 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products, upgrades,
enhancements, post-contract customer support, installation, and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence that is specific to the
vendor. If a vendor does not have evidence of the fair value for all elements in
a multiple-element arrangement, all revenue from the arrangement is deferred
until such evidence exists or until all elements are delivered.
8
<PAGE> 9
F) Comprehensive Income
In June 1997, SFAS No. 130, Reporting Comprehensive Income ("SFAS No.
130"), was issued and established standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the disclosure but requires the
Company to display an amount representing total comprehensive income for the
period in its financial statements. The Company has not determined the manner in
which it will present the information required by SFAS No. 130 in its annual
financial statements for the year ending December 31, 1998. The Company's total
comprehensive income (loss) for all periods presented herein would not have
differed significantly from those amounts reported as net earnings (loss) in the
condensed consolidated statements of operations.
G) Segment Reporting
In June 1997, SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("SFAS No. 131"), was issued and established
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements issued to
shareholders. The Company has not yet determined the manner in which it will
present the information required by SFAS No. 131.
H) Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under SFAS No. 133, entities
are required to carry all derivative instruments in the balance sheet at fair
value. The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, the reason for holding it. The
Company must adopt SFAS No. 133 by October 1, 1999. The Company has not
determined the impact that SFAS No. 133 will have on its financial statements.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company notes that, except for the historical information
contained herein, the matters discussed below contain forward-looking statements
subject to risks and uncertainties that may cause the Company's actual results
to differ materially. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Form 10-Q.
The Company expressly disclaims any obligation to update this information or
publicly release any revisions or reflect events or circumstances after the date
of this report. Such risks and uncertainties include, but are not limited to,
various important competitive and technological factors, such as pricing
pressures; success of the "bundle and upgrade" business model, including the
maintenance of the Company's relationships with scanner manufacturers, as well
as customers opting to upgrade to newer or more fully featured products; the
timely completion of additional product capabilities and software updates;
changes in customer order patterns, the maintenance of relationships with retail
distributors and dealers; manufacturing considerations, including the
maintenance of margins in a declining-price environment, as well as risk of
inventory obsolescence due to shifts in market demand and new product
introductions; and other risk factors listed from time to time in the Company's
reports filed with the Securities and Exchange Commission, including, but not
limited to, the report on Form 10-K, as amended, for the year ended December 31,
1997.
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,
PageKeeper, and Recognita lines of products. Hardware products consist of
transaction processing optical character recognition ("OCR") and bar code
products, and the M/Series line of production OCR products.
BUSINESS LINE ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDING: JUNE 30, 1998 JUNE 30, 1997
SOFTWARE HARDWARE SOFTWARE HARDWARE
PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED
-------- ------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $13,618 $ 2,550 $16,168 $11,351 $ 1,400 $12,751
Cost of revenues 2,616 1,267 3,883 2,485 868 3,353
------- ------- ------- ------- ------- -------
$11,002 $ 1,283 $12,285 $ 8,866 $ 532 $ 9,398
Gross margin % 80.8% 50.3% 76.0% 78.1% 38.0% 73.7%
------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDING: JUNE 30, 1998 JUNE 30, 1997
SOFTWARE HARDWARE SOFTWARE HARDWARE
PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED
-------- ------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $27,361 $ 4,466 $31,827 $22,216 $ 3,107 $25,323
Cost of revenues 5,046 2,264 7,310 5,262 1,807 7,069
------- ------- ------- ------- ------- -------
$22,315 $ 2,202 $24,517 $16,954 $ 1,300 $18,254
Gross margin % 81.6% 49.3% 77.0% 76.3% 41.8% 72.1%
------- ------- ------- ------- ------- -------
</TABLE>
10
<PAGE> 11
Net revenues for software products increased 20 percent during the
second quarter of 1998 to $13,618,000 from $11,351,000 in 1997, due primarily to
increased shipments of OmniPage Pro 8.0 as well as OmniForm 3.0, which began
shipping late in the first quarter of 1998. Also contributing to the increase in
revenues for software products was the initial shipment of PageKeeper Standard,
the first of the Company's new generation of document management products.
Revenues from Windows 95/NT versions of OmniPage Pro increased 18 percent over
the second quarter of 1997. On a sequential basis, software product revenues
were down one percent in the second quarter of 1998, from $13,743,000 during the
first quarter of 1998. The primary reason for the decline was the Company's
price reduction of its OmniPage Pro upgrade product from $129 to $99, which was
announced in the second quarter of 1998. For the six months ended June 30, 1998,
net revenues for software products increased 23 percent to $27,361,000 from
$22,216,000 during the same period of 1997, due primarily to increased shipments
of OmniPage Pro, the introduction of OmniForm 3.0 and PageKeeper Standard and
increased royalties related to bundled OCR and document management products.
The marketplace for OCR software has been changing rapidly as a
result of significant declines in scanner prices. To gain greater leverage in
this expanding market the Company reduced the price of its OmniPage Pro upgrade
product to $99 from $129 in April 1998. The Company expects that the reduced
price will generate sufficient increases in consumer demand to provide for
continuing increases in quarterly software revenues. However, there can be no
assurance that volume increases will result or will be adequate to increase
revenues or that more consumers will purchase the software at the lower price
point.
Net revenues for hardware products increased 82 percent to $2,550,000
in the second quarter of 1998, compared to $1,400,000 during the same period in
1997. The primary reason for this improvement was increased shipments of
transaction processing OCR products. It is common in this line of business for
the Company to receive large, one-time orders for products periodically. This
ordering pattern has historically resulted in significant fluctuations in
quarterly hardware revenues. This trend is expected to continue. On a sequential
basis, revenues from hardware products increased 33 percent from $1,916,000 in
the first quarter of 1998, due primarily to the increase in shipments of
transaction processing OCR products. For the six months ended June 30, 1998, net
revenues for hardware products increased 44 percent to $4,466,000 from
$3,107,000 during the same period of 1997, due primarily to the same reason.
International sales increased 52 percent in the second quarter of
1998, compared to the second quarter of 1997 and accounted for approximately 35
percent of total sales in the second quarter of 1998, compared to 29 percent in
the second quarter of 1997. The increase in international sales was primarily
attributable to increased shipments of OmniPage Pro 8.0 as well as OmniForm 3.0
in Europe. For the six months ended June 30, 1998, international sales increased
26 percent compared to the first half of 1997 and accounted for approximately 34
percent of total sales in each period. This increase was primarily attributable
to increased shipments of OmniPage Pro 8.0 as well as the introduction of
OmniForm 3.0.
11
<PAGE> 12
GROSS MARGINS
Gross margins for software products improved from 78.1 percent in the
second quarter of 1997 to 80.8 percent in the second quarter of 1998. The
primary reason for the improvement in margins was the increase in overall
software and hardware volume during the quarter, allowing fixed manufacturing
costs to be spread over a higher level of production. For the six months ended
June 30, 1998, gross margins for software products improved to 81.6 percent,
from 76.3 percent during the first half of 1997. This improvement was primarily
attributable to the same factors, as well as an increase in royalty revenues
between the two periods.
There will be downward pressure on gross margins for software
products in the future as a result of the Company's decision to reduce the price
of its OmniPage Pro upgrade products. This decrease is expected to be somewhat
offset by volume increases that shall lead to improved economies of scale.
However, there can be no assurance that production volumes will rise
sufficiently or that the Company will be successful in securing more favorable
pricing from key suppliers.
Gross margins for hardware products increased to 50.3 percent in the
second quarter of 1998 from 38.0 percent in the same period of 1997, due
primarily to higher unit sales and revenues of transaction processing OCR
products, which typically carry higher gross margins than other hardware
products. Also contributing to the improved margin on hardware products was the
fixed nature of a majority of the Company's hardware manufacturing overhead. As
hardware product volumes increase, the level of manufacturing overhead does not
increase in the same proportion. For the six months ended June 30, 1998, gross
margins for hardware products improved to 49.3 percent from 41.8 percent during
the first half of 1997. This improvement was due to the same factors noted
above.
The primary factor affecting gross margins in the future is likely to
be shifts in product mix between fully priced retail software, bundled software,
and upgrade products, as well as overall shifts in product mix between software
and hardware products. The microcomputer software market has been subject to
rapid changes, including significant price competition, which can be expected to
continue. Future technology or market changes may cause certain products to
become obsolete rapidly, necessitating increased inventory write-offs or
reserves and a corresponding decrease in gross margins.
OPERATING EXPENSES
Research and development (R&D) expense increased 35 percent to
$2,986,000 in the second quarter of 1998, from $2,204,000 during the same period
of 1997. The increase in spending related primarily to additional staffing
associated with ongoing software development projects. As a percentage of
revenue, R&D expense increased to 18 percent of revenue in the second quarter of
1998, compared to 17 percent in the second quarter of 1997. This increase was
attributable to the Company's commitment to developing new and improved products
on a more timely and frequent basis. For the six months ended June 30, 1998, R&D
expense increased 41 percent to $5,933,000, from $4,206,000 in the same period
of 1997. As a
12
<PAGE> 13
percentage of revenue, R&D expense increased to 19 percent of revenue in 1998,
from 17 percent in 1997. These increases were primarily attributable to the
factors noted above.
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 1998. In accordance with Statement of Financial Accounting Standards No.
86, the Company capitalized $75,000 of software development costs during the
second quarter of 1998, compared to $150,000 in the same period of 1997.
Amortization of capitalized software development costs was $180,000 in the
second quarter of 1998, versus $126,000 for the comparable period in 1997. For
the six months ended June 30, 1998, capitalized software development costs
totaled $150,000, compared to $305,000 during the first half of 1997. In
addition to the capitalization of internal R&D expenses in 1997, in connection
with the acquisition of Formonix in March 1997, the Company also capitalized
approximately $253,000 of the acquisition cost. The costs capitalized related to
the portion of the Formonix acquisition valuation which was allocated to
existing products acquired. For the six-month period, amortization of
capitalized software development costs was $318,000 in 1998, versus $243,000 in
the comparable period of 1997.
Selling, general and administrative (S,G&A) expenses increased three
percent in the second quarter of 1998 to $6,855,000, from $6,683,000 during the
same period of 1997. The primary factor for the increase was sales and support
expenses associated with the Company's growing customer base resulting from the
high-volume business generated by the "bundle and upgrade" model. As a
percentage of revenue, S,G&A expense decreased to 42 percent of total revenue in
the second quarter of 1998, from 52 percent during the same period in 1997. This
decrease was primarily attributable to higher net revenues between the
comparable periods. For the six months ended June 30, 1998, S,G&A expense
increased seven percent to $13,913,000, or 44 percent of revenue, from
$12,995,000, or 51 percent of revenue, during the first half of 1997. These
changes were due to the same factors noted above. The Company is attempting to
control the level of S,G&A expenditures while it invests heavily in vital R&D
projects. Nonetheless, the Company believes that S,G&A expense may increase in
dollar terms in 1998 as necessary efforts to expand sales and marketing
activities continue in the OCR, forms, and desktop document management areas.
During the first half of 1997, a $2,935,000 one-time charge for
in-process research and development was taken related to the Company's
acquisition of Formonix in March 1997. This charge related to the portion of the
Formonix acquisition valuation represented by the present value of estimated
cash flows expected to be generated by Formonix-related technology which, at the
acquisition date, had not yet reached the point of technological feasibility and
did not have an alternative future use.
INTEREST INCOME
Interest income was $743,000 in the second quarter of 1998, compared
to $613,000 in the same period of 1997. The increase in interest income was
attributable to higher average cash and short-term investment balances between
the comparable periods. For the six months ended June 30, 1998, interest income
increased to $1,330,000, compared to $1,175,000 in the first half of 1997, due
primarily to the same reason.
13
<PAGE> 14
INCOME TAXES
The Company's effective income tax rate in 1998 is expected to be
between 23 percent and 28 percent, which is less than statutory rates, primarily
due to the use of the Company's foreign sales corporation and increased
utilization of net operating loss carryforwards assumed in its 1994 acquisition
of Calera Recognition Systems, Inc. ("Calera"). In the first half of 1997, the
effective income tax rate was 10 percent, due primarily to the use of the
Company's foreign sales corporation and to the utilization of Calera net
operating loss carryforwards in the 1997 fiscal year.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings for the second quarter of 1998 were $2,393,000, compared
to $1,012,000 during the same period in 1997. Diluted earnings per share were
$.18 in the second quarter of 1998, versus $.08 in the comparable period of
1997. For the six months ended June 30, 1998, net earnings were $4,638,000, or
$.34 per share, compared to a net loss of $929,000, or $.07 per share, in the
first half of 1997. The 1997 loss resulted from the $2,935,000 one-time
in-process research and development charge related to the Formonix acquisition.
Excluding this one-time charge, diluted earnings for the first half of 1997
would have been $2,006,000, or $.15 per share, using 13,125,000 weighted average
shares outstanding for this pro forma diluted earnings per share calculation.
CERTAIN TRENDS AND RISKS
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. In
addition, the industry is characterized by rapid changes in the technologies
affecting optical character recognition, forms technology, and document
management technology. 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.
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 success of the "bundle and upgrade" program depends on
increasing unit sales of upgrades. There can be no assurance that the Company'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.
14
<PAGE> 15
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 such distributors. There can be no assurance that
the Company will be able to maintain such relationships.
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 until the end of each quarter 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 June 30, 1998. Working
capital decreased eight percent to $50,748,000, from $54,893,000 at December 31,
1997. The Company has no long-term debt. The Company's cash and short-term
investments totaled $46,143,000 at June 30, 1998. The Company believes that
current cash balances and internally generated funds will be sufficient to meet
its cash requirements through 1998.
Caere generated cash from operating activities of $7,140,000 during
the six months ended June 30, 1998. Uses of cash included $10,564,000 to
purchase additional short-term investments, net of maturities, and $10,402,000
to repurchase 761,000 shares of the Company's common stock, in addition to
$697,000 for investments in capital equipment. During the first half of 1997,
the Company generated cash from operating activities of $1,735,000. Uses of cash
during that period included $6,463,000 to purchase short-term investments, net
of maturities, and $1,184,000 for capital equipment acquisitions.
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 reduce the potential for catastrophic losses.
15
<PAGE> 16
"YEAR 2000" COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. In
the Company's standard license agreements, the Company warrants to licensees
that its software routines and programs are Year 2000 compliant (i.e. that they
accurately process date-related data within any century and between two or more
centuries). Although the Company believes its software products are Year 2000
compliant, there can be no assurance that the Company's software products
contain all necessary software routines and programs necessary for the accurate
calculation, display, storage and manipulation of data involving dates. If any
of the Company's licensees experience Year 2000 problems, such licensee could
assert claims for damages against the Company. Any such litigation could result
in substantial costs and diversion of the Company's resources even if ultimately
decided in favor of the Company. In addition, many companies are expending
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, operating results or financial condition.
In addition, certain of the Company's internal computer systems are
not "Year 2000" compliant. These systems will be upgraded within the next year
to become compliant. Management has not yet determined the cost related to
achieving "Year 2000" compliance for its internal computer systems.
There also can be no assurance that the Company's suppliers, vendors
or other enterprises with which the Company interacts are or will be "Year 2000"
compliant. Failure of third-party enterprises with which the Company interacts
to achieve "Year 2000" compliance could have a material adverse effect on the
Company's business, financial condition and results of operations.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 13, 1998.
(b) Management's nominee to the Board of Directors of Class III Directors
(for a three-year term expiring at the Annual Meeting in the year
2001) was elected by the following votes:
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Robert G. Teresi (Class III) 10,477,083 1,180,846
</TABLE>
The following are persons whose term of office as Directors of the
Company continued after the Annual Meeting:
<TABLE>
<CAPTION>
Director Class Term Expires
-------- ----- ------------
<S> <C> <C>
James K. Dutton II 2000
Robert J. Frankenberg I 1999
</TABLE>
At the end of May 1998, the total number of directors was increased
to five and Betsy Atkins and Joseph Francesconi were elected to the
Board, as Class I and II directors, respectively.
(a) The other matters presented and the voting of stockholders
with respect thereto are as follows:
(i) Approval of the 1992 Non-Employee Directors'
Stock Option Plan, as amended, to increase the
number of shares that may be issued under the
Plan from 230,000 to 330,000, an increase of
100,000 shares.
<TABLE>
<CAPTION>
For: Against: Abstain: Broker Non Votes:
--------- -------- -------- -----------------
<S> <C> <C> <C> <C>
9,397,898 2,197,447 62,584 0
</TABLE>
(i) Approval of the 1981 Incentive and Supplemental
Stock Option Plans, as amended, to increase the
number of shares that may be issued under the
Plans from 3,595,000 to 4,095,000, an increase
of 500,000 shares.
<TABLE>
<CAPTION>
For: Against: Abstain: Broker Non Votes:
---- -------- -------- -----------------
<S> <C> <C> <C> <C>
7,356,191 4,254,540 45,778 1,420
</TABLE>
17
<PAGE> 18
(i) Ratification of the selection of KPMG Peat
Marwick LLP as the Company's independent auditors
for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
For: Against: Abstain: Broker Non Votes:
--------- -------- -------- -----------------
<S> <C> <C> <C> <C>
11,111,024 500,313 45,172 1,420
</TABLE>
ITEM 5.
OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company by March 15, 1999
(unless such matters are included in the Company's proxy statement pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended).
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: August 12, 1998
/s/ BLANCHE M. SUTTER
-------------------------------------------
Blanche M. Sutter, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,423
<SECURITIES> 43,720
<RECEIVABLES> 5,568
<ALLOWANCES> 1,791
<INVENTORY> 1,883
<CURRENT-ASSETS> 57,661
<PP&E> 16,676
<DEPRECIATION> 12,485
<TOTAL-ASSETS> 63,933
<CURRENT-LIABILITIES> 6,913
<BONDS> 0
0
0
<COMMON> 48,906
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 63,933
<SALES> 31,827
<TOTAL-REVENUES> 31,827
<CGS> 7,310
<TOTAL-COSTS> 9,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 743
<INCOME-PRETAX> 6,001
<INCOME-TAX> 1,363
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,638
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
