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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18090
CAERE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2250509
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 COOPER COURT 95032
LOS GATOS, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(408) 395-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock reported on the Nasdaq National Market on March 31, 1997 was
approximately $160,136,000.
The number of shares of Common Stock outstanding as of March 1, 1998
was, 13,006,008.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders to be
held May 13, 1998 (Part III of Form 10-K).
(2) Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1997 (Parts II and IV of Form 10-K).
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The following documents are incorporated in Part II of this Annual
Report by reference to the 1997 Annual Report to Stockholders:
<TABLE>
<CAPTION>
Annual Report to Stockholders
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and 1996 Page 21
Consolidated Statements of Earnings for each of the years in the Page 22
three-year period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the Page 23
years in the three-year period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the years in Page 24
the three-year period ended December 31, 1997
Notes to the Consolidated Financial Statements Pages 25-32
Independent Auditors' Report Page 32
</TABLE>
With the exception of the information expressly incorporated by
reference into Items 5, 6, 7, and 8 of this Annual Report, the 1997 Annual
Report to Stockholders, attached as Exhibit 13.1, is not deemed filed as part of
this report.
2. Financial Statement Schedules
The following financial statement schedule is filed as a part of this
Annual Report and should be read in conjunction with the Financial Statements:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or not
applicable, or because the required information is included in the 1997 Annual
Report to Stockholders, filed as Exhibit 13.1.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of October 14,
1994, between the Company and Calera Recognition Systems, Inc.(5)
3.1 Certificate of Incorporation of the Company.(1) (exhibit 3.4)
3.1(i) Certificate of Amendment filed with the Delaware
Secretary of State October 13, 1994.(6)
3.1(ii) Agreement of Merger between Caere Acquisition Corporation
and Calera Recognition Systems, Inc. as filed with the
California Secretary of State December 20, 1994.(6) (exhibit
3.5)
3.2 Amended Bylaws of the Company.(8) (exhibit 3.4)
4.1 Reference is made to Exhibits 3.1 and 3.2.
*10.1 1981 Incentive Stock Option Plan, as amended, and related form
of incentive stock option agreement.(8)
*10.2 1981 Supplemental Stock Option Plan, as amended, and related
form of supplemental stock option agreement.(8)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
10.3 Lease Agreement for 100 Cooper Court, dated November 27, 1991,
between the Company and Vasona Business Park.(7)
10.4 Lease Agreement for 104 Cooper Court, dated November 27, 1991,
between the Company and Vasona Business Park.(7)
10.5 Form of Indemnity Agreement between the Company and its
officers and directors.(1) (exhibit 10.12)
*10.6 Employee Stock Purchase Plan.(8)
*10.7 1992 Officer Bonus Plan.(4) (exhibit 10.9)
*10.8 1992 Non-Employee Directors' Stock Option Plan.(8)
10.9 Preferred Share Purchase Rights Plan.(3) (exhibit 1)
*10.10 Executive Compensation and Benefits Continuation Agreement,
Robert G. Teresi, dated December 28, 1994.(6)
11.1 Statement regarding computation of net earnings (loss) per
share.(9)
13.1 1997 Annual Report to Stockholders.
21.1 Subsidiaries of the Company.(9)
23.1 Consent of KPMG Peat Marwick LLP.(9)
24.1 Power of Attorney. Reference is made to page 18.(9)
27 Financial Data Schedule.(9)
</TABLE>
*Management contract or compensatory plan or arrangement.
- ---------------------------------
(1) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Registration Statement on Form S-1, as amended (File No.
33-30842).
(2) Incorporated by reference to the corresponding exhibit in the
Company's Form 10-K Annual Report for the fiscal year ended December 31, 1990.
(3) Incorporated by reference to the indicated exhibit in the Company's
Form 8-K Current Report filed on April 18, 1991.
(4) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Form 10-K Annual Report for the fiscal year ended December 31,
1991.
(5) Incorporated by reference to Caere's Registration Statement on Form
S-4 (File No. 33-85840).
(6) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Form 10-K Annual Report for the fiscal year ended December 31,
1994.
(7) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Form 10-K Annual Report for the fiscal year ended December 31,
1995.
(8) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Form 10-K Annual Report for the fiscal year ended December 31,
1996.
(9) Incorporated by reference to the corresponding or indicated exhibit
to the Company's Form 10-K Annual Report for the fiscal year ended December 31,
1997.
(b) Reports on Form 8-K.
None.
<PAGE> 4
SIGNATURE
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CAERE CORPORATION
April 2, 1998
/s/ BLANCHE M. SUTTER
--------------------------------------------
Executive Vice President, Chief Financial
Officer and Secretary
<PAGE> 5
CAERE CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
13.1 1997 Annual Report to Stockholders.
</TABLE>
<PAGE> 1
EXHIBIT 13.1
CAERE CORPORATION
ANNUAL REPORT 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share) 1997 1996 1995 1994 1993
<C> <S> <S> <S> <S> <S>
Years Ended December 31,
Net revenues $55,018 $54,528 $51,939 $59,130 $48,264
Earnings (loss) before income taxes 4,017 496 2,820 3,984 (1,701)
Net earnings 3,140 396 2,397 2,384 352
Earnings (loss) per share before
cumulative effect on change in
accounting principle .24 .03 .18 .18 (.05)
Basic earnings per share .24 .03 .18 .18 .03
Diluted earnings per share $ .24 $ .03 $ .18 $ .18 $ .03
Weighted average share outstanding:
Basic 13,123 13,120 13,172 12,649 12,639
Diluted 13,265 13,319 13,538 13,136 12,639
As of December 31,
Cash and short-term investments $49,573 $44,290 $47,765 $51,099 $39,325
Working capital 54,893 49,793 52,650 53,729 46,552
Total assets 67,300 63,154 69,298 67,902 58,684
Total stockholders' equity 61,209 55,748 62,028 57,753 51,620
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
In addition to historical information, the statements contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations include "forward looking" statements and are subject to risks and
uncertainties. The actual future results of Caere Corporation (the "Company")
could differ materially from those projected in any forward looking information.
Some factors that could cause future actual results to differ materially from
the Company's recent results or those projected in any forward looking
information are those listed below in the sections entitled "Gross Margins,"
"Certain Trends," "Year 2000 Compliance," "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,
1997. The Company assumes no obligation to update the forward looking
information or such factors.
On March 31, 1997, the Company acquired Formonix, Inc. ("Formonix"), a
developer of electronic forms software located in Colorado. Under the terms of
the acquisition, the Company issued 550,000 shares of common stock in exchange
for all of the capital stock of Formonix. The acquisition was accounted for
using the purchase method, and, accordingly, the operating results of Formonix
are included in the consolidated results of the Company since the date of
acquisition. In connection with this transaction, acquired in-process research
and development of $2.9 million was charged to operations during the Company's
first quarter. See Note 8 of Notes to the Consolidated Financial Statements.
The following table presents, for the periods indicated, the percentage
relationship certain items in the Consolidated Statements of Earnings bear to
net revenues:
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
PERCENTAGE CHANGE
PERCENTAGE OF NET REVENUES 1996 1995
YEARS ENDED DECEMBER 31, 1997 1996 1995 TO 1997 TO 1996
<S> <C> <C> <C> <C> <C>
Net revenues 100% 100% 100% 1% 5%
Cost of revenues 26 30 33 (13) (4)
Gross margin 74 70 67 7 9
Research and development 17 13 15 33 (11)
Selling, general and administrative 49 48 48 3 5
Merger related costs -- -- 3 (100) (94)
In-process research and development 5 8 -- (33) 100
Operating earnings 3 1 1 261 (36)
Interest income, net 4 5 4 (7) 25
Writedown of investment in ZyLAB
International -- (5) -- (100) (100)
Earnings before income taxes 7 1 5 710 (82)
Income tax expense 1 -- -- 777 (76)
Net earnings 6% 1% 5% 693% (83)%
</TABLE>
NET REVENUES
In fiscal 1997, the Company completed its third year of the "bundle and
upgrade" strategy, seeding the expanding market for scanners with lightly
featured OCR products by bundling those products with the products of its
scanner manufacturer partners. The objective of the strategy is to expose more
customers to the benefits of the Company's OCR technology and then "upgrade"
those customers to fully-featured products.
The following chart summarizes net revenues, cost of revenues, and gross
margins for the Company's products categorized between software and hardware.
Software products consist of the OmniPage, WordScan, OmniForm, and PageKeeper
lines of products, and in 1997, Recognita's family of software products.
Hardware products consist of transaction processing OCR and barcode products and
the M/Series line of high volume OCR products.
<TABLE>
<CAPTION>
BUSINESS LINE ANALYSIS
(IN THOUSANDS) 1997 1996 1995
-------------------------------- -------------------------------- ---------------------------------
SOFTWARE HARDWARE SOFTWARE HARDWARE SOFTWARE HARDWARE
PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $47,119 $ 7,899 $55,018 $45,797 $ 8,731 $54,528 $41,653 $10,286 $51,939
Cost of revenues 10,260 4,060 14,320 12,798 3,675 16,473 12,989 4,095 17,084
------- ------- ------- ------- ------- ------- ------- ------- -------
$36,859 $ 3,839 $40,698 $32,999 $ 5,056 $38,055 $28,664 $ 6,191 $34,855
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin % 78.2% 48.6% 74.0% 72.1% 57.9% 69.8% 68.8% 60.2% 67.1%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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Net revenues of the Company's Windows-based OmniPage OCR software
increased 12 percent in 1997 versus 1996, primarily due to the introduction of
version 8.0 in September 1997. Also contributing to increased software revenues
in 1997 over 1996 was the inclusion of the revenues of Recognita Rt. since its
acquisition in December 1996. These increases were offset by a 32 percent
decline in revenues of OmniPage for the Macintosh platform during the same
period. Combined software revenues for 1997 increased three percent in 1997 to
$47,119,000, from $45,797,000 in 1996.
Unit shipments in 1997 of bundled OCR products increased 56 percent to
2.8 million, from approximately 1.8 million in 1996, due to higher unit volumes
of scanner shipments. Unit shipments of upgrade products increased 14 percent to
approximately 240,000 units in 1997, from approximately 210,000 units in 1996.
This increase was due to a greater number of customers who received the bundled
product upgrading to a fully featured version and an increasing number of
customers upgrading to the 8.0 version of OmniPage Pro that began shipping in
September 1997. Unit shipments of fully priced non-upgrade versions of OCR
products declined six percent from 1996 to 1997. The Company expects this
decline to continue as more and more of its bundled units are delivered to the
market with its partners' scanner products and more customers qualify to
purchase the Company's fully featured products at upgrade pricing.
From 1995 to 1996, in the second full year of the bundle and upgrade
model, net revenues for software products increased 10 percent due to increasing
shipments of OCR upgrade products, as well as increasing shipments of OmniForm
products which began shipping in the second quarter of 1995. Net revenues of
OmniPage Professional upgrade products increased over 119 percent in 1996 from
1995, while net revenues of non-upgrade, fully priced OCR products declined 24
percent over the same period.
Net revenues for hardware products decreased 10 percent to $7,899,000 in
1997, compared to $8,731,000 in 1996. The decrease was primarily attributable to
the transition of M/Series hardware products, designed for high-volume OCR
applications, to software-only solutions as the computing power of PCs continues
to increase. This increased power makes the hardware assistance provided in this
product line unnecessary. In 1997, sales of transaction processing OCR and
barcode products were relatively consistent with 1996. Historically, this
automated data entry business has experienced fluctuations in sales patterns.
The periodic award of large sales contracts tends to make shipments difficult to
predict, and such fluctuations in revenues are expected to continue in the
future.
From 1995 to 1996, net revenues for hardware products decreased 15
percent to $8,731,000 from $10,286,000. The decrease was primarily attributable
to the beginning of the M/Series transition and the decline in shipments of such
hardware products, as well as a decrease in shipments of automated data entry
products.
International sales increased 14 percent during 1997 and represented 34
percent of net revenues during the year, compared to 30 percent in 1996 and 29
percent in 1995. International sales totaled $18,659,000 in 1997, $16,391,000 in
1996, and $15,154,000 in 1995. An increase in software upgrade revenues is the
primary reason for the increase in export sales in 1997.
During 1996, international sales increased eight percent from 1995 as
volume increases associated with the bundle and upgrade strategy were initially
realized during that year.
GROSS MARGINS
Overall gross margins increased to 74.0 percent in 1997 from 69.8
percent in 1996, due to a product mix that was more heavily weighted towards
software products carrying higher gross margins than hardware products. Gross
margins for software products increased from 72.1 percent in 1996 to 78.2
percent in 1997, due primarily to a change in certain bundling arrangements
where the Company shifted the cost of manufacturing its limited-featured bundled
products to certain bundling partners. Under such agreements, rather than
selling manufactured products to such partners at very low prices, the Company
allows such bundling customers to produce their own requirements on a reduced
royalty basis. This transition has the effect of reducing the Company's revenues
by amounts nearly equal to the reduction in associated cost of revenues for such
bundled products, resulting in an improvement in overall gross margin percentage
for software products. This type of arrangement with bundling partners is
expected to continue in 1998. Also contributing to the improved margin
percentage in 1997 was increasing production volumes being generated by the
bundle and upgrade model, as well as increased royalty revenue. In addition,
royalty payments to Formonix, related to sales of OmniForm products, were
eliminated following the March 1997 acquisition.
From 1995 to 1996, gross margins for software products increased to 72.1
percent from 68.8 percent in 1995, due primarily to the shift of the cost of
manufacturing bundled products to certain bundling partners as described above.
Gross margins for hardware products decreased to 48.6 percent in 1997
from 57.9 percent in 1996, due primarily to a reduction in absorption of fixed
manufacturing overhead resulting from lower production volumes of M/Series
hardware products. In addition, such M/Series products typically carried higher
gross margins than other hardware products. Also contributing to lower margins
on hardware products was the reduction of selling prices of certain M/Series
products.
From 1995 to 1996, gross margins for hardware products decreased to 57.9
percent from 60.2 percent, also due primarily to a reduction in absorption of
fixed manufacturing overhead as a result of lower unit shipments of both
M/Series and automated data entry products.
The primary factor affecting gross margins in the future is likely to be
shifts in product mix between fully-priced, non-upgrade software, bundled
software, and upgrade products, as well as overall shifts in product mix between
software and hardware products. In addition, the microcomputer software market
has been subject to
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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 increased 33 percent to
$9,370,000 in 1997, from $7,069,000 in 1996. As a percentage of revenue, 1997
R&D expense increased to 17 percent of net revenues from 13 percent in 1996. The
increase in spending from 1996 to 1997 was primarily attributable to increased
staffing of ongoing software development projects and the inclusion of R&D
expenses of the Company's recently acquired subsidiaries: Recognita acquired in
December 1996, and Formonix acquired in March 1997. From 1995 to 1996, R&D
expenses decreased 11 percent to $7,069,000 from $7,915,000, respectively. As a
percentage of revenue, 1996 R&D expense declined to 13 percent of net revenues
from 15 percent in 1995. The decrease in spending from 1995 to 1996 was
primarily the result of synergies created by the merger with Calera Recognition
Systems, Inc. ("Calera") late in 1994.
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 1997. In
accordance with Statement of Financial Accounting Standards No. 86, the Company
capitalized $858,000 of software development costs during 1997, compared to
$561,000 in 1996 and $614,000 in 1995. Amortization of capitalized software
development costs was $508,000 in 1997, compared to $734,000 in 1996 and
$683,000 in 1995.
Selling, general, and administrative ("SG&A") expenses increased three
percent in 1997 to $26,878,000 from $26,103,000 in 1996. As a percentage of
revenue, 1997 SG&A expense increased to 49 percent from 48 percent in 1996. The
increase in SG&A spending was primarily attributable to higher service and
support costs resulting from the Company's high volume business and growing
customer base being generated by the bundle and upgrade model. However, these
increasing SG&A costs were mitigated by the elimination of duplicative efforts
and the streamlining of management and promotional costs between the Company's
OmniPage and OmniForm product line marketing areas during 1997. From 1995 to
1996, SG&A expenses increased five percent to $26,103,000 from $24,892,000. As a
percentage of revenue, 1996 SG&A expense remained consistent with 1995 at 48
percent of revenue in each year. The increase in SG&A spending from 1995 to 1996
was also primarily the result of higher service and support costs associated
with the Company's bundle and upgrade strategy. The Company expects that SG&A
expense may increase in dollar terms in 1998 as efforts to expand sales and
marketing activities continue in the OCR, forms, and desktop document management
areas.
In fiscal 1996, the Company recorded a $90,000 charge for additional
merger related costs associated with its 1995 proposed merger with ViewStar
Corporation. In 1995, merger related costs totaled $1,387,000. Of this amount,
$297,000 was related to the 1994 Calera acquisition. 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. The remaining $1,090,000 in merger related costs in 1995 were associated
with the proposed ViewStar merger. This amount included direct costs for
investment bankers, accountants, attorneys, and financial printing related to
the transaction prior to its termination.
During 1997, in connection with the acquisition of Formonix in March
1997, as discussed in Note 8 of Notes to the Consolidated Financial Statements,
acquired in-process research and development of $2,935,000 was charged to
operations during the Company's first fiscal quarter. In-process research and
development represents the present value of the estimated cash flow 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. During 1996, in connection with the acquisition of
Recognita in December 1996, as discussed in Note 8 of Notes to the Consolidated
Financial Statements, acquired in-process research and development of $4,373,000
was charged to operations during the Company's fourth fiscal quarter.
Interest income decreased seven percent in 1997 to $2,502,000 from
$2,692,000 in 1996. This decrease was primarily attributable to lower average
cash and short-term investment balances in 1997 following the Company's share
repurchase program, completed during the third quarter of 1996, which used
$9,233,000; and the Company's acquisition of Recognita, which used over $4
million. From 1995 to 1996, interest income increased 25 percent to $2,692,000,
from $2,159,000. This increase was primarily attributable to higher average cash
and short-term investment balances in 1996, as well as generally higher interest
rates on the Company's investment securities, in addition to a shift from
tax-free investments to taxable securities carrying higher rates of interest.
In the fourth quarter of 1996, the Company recorded a one-time charge of
$2,616,000 to write-down its investment in ZyLAB International, Inc. ("ZyLAB")
due to a change in the business of ZyLAB.
The effective income tax rate of 22 percent during 1997 was less than
the expected rate of 35 percent, primarily due to benefits derived from federal
net operating loss carryforwards and the Company's foreign sales corporation.
The tax benefits were partially offset by charges related to the Formonix
acquisition that were non-deductible for tax purposes. Based on the Company's
earnings history, the valuation allowance fully attributed to federal net
operating loss and credit carryforwards was adjusted to its net realizable
value. The
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<PAGE> 4
effective income tax rate during 1996 was 20 percent, primarily due to benefits
derived from federal net operating loss carryforwards and the Company's foreign
sales corporation. The tax benefits were partially offset by charges related to
the Recognita acquisition and write-down of the ZyLAB investment, both
non-deductible for tax purposes. The effective income tax rate during 1995 was
15 percent. This was primarily due to tax exempt investments, utilization of
federal and state net operating loss carryforwards, and the Company's foreign
sales corporation. In future years, depending on profitability, the Company may
be able to utilize approximately $2,700,000 of federal net operating loss
carryforwards per year.
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
computer software and hardware industries are characterized by rapid changes in
the technologies affecting optical character recognition, forms, and desktop
document management. These industries have 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.
Late in 1994, the Company began to bundle "lite"or limited edition
versions of its OmniPage and WordScan OCR software with products from various
scanner 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. There can be no assurance that the
Company will be able to maintain these existing relationships or that customers
will continue to upgrade. In addition, such upgrades are typically sold at a
substantially lower price than fully priced products.
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 priced version
of the software, the "bundle and upgrade" program resulted in decreased revenues
from software recognition products during 1995, despite an increase of 111
percent in unit sales for the year. After another full year of operation under
this selling strategy in 1996, net revenues of software products showed an
increase over 1995 of 10 percent, primarily resulting from the 119 percent
increase in revenues of OmniPage Professional upgrade products during the year.
Unit sales volume of upgrade products increased 137 percent from 1995 to 1996.
In fiscal 1997, the bundle and upgrade strategy resulted in an increase in net
revenues of OmniPage Pro upgrade products of 20 percent from 1996 to 1997, while
unit shipments increased 29 percent during the same period. There can be no
assurance that the Company's transition to the "bundle and upgrade" business
model will be successful and continue to provide sufficient increases in unit
volume in the future to offset reduced per-unit revenue, which could have a
material adverse effect on the Company. In addition, customers using bundled
products 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 such distributors. There can be no assurance that the Company
will be able to do so.
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.
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong at December 31, 1997.
Working capital increased to $54,893,000, from $49,793,000 at December 31, 1996.
The Company has no long-term debt. The Company's cash and short-term investments
totaled $49,573,000 at December 31, 1997. The Company believes that current cash
balances and internally generated funds will be sufficient to meet its cash
requirements through 1998.
The Company generated cash from operations of $9,840,000, $5,627,000,
and $3,181,000, during the years ended December 31, 1997, 1996, and 1995,
respectively. In each year, uses of cash included modest expenditures for
capital outlays and other investments. During 1997, a share repurchase program
used cash totaling $2,000,000. In 1996, a share repurchase program used
$9,233,000 and the acquisition of Recognita used over $4,000,000, while in 1995
the Company invested $2,616,000 in ZyLAB. Over the past four years, growth of
cash and short-term investment balances 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.
20
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,417 $11,663
Short-term investments 33,156 32,627
Receivables 5,263 6,888
Inventories 1,917 2,779
Deferred income taxes 3,241 2,474
Other current assets 990 768
------- -------
Total current assets 60,984 57,199
Property and equipment, net 4,781 4,742
Other assets 1,535 1,213
------- -------
$67,300 $63,154
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,145 $ 3,481
Accrued expenses 3,946 3,925
------- -------
Total current liabilities 6,091 7,406
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
13,107,235 and 12,630,584 shares 13 13
Additional paid in capital 57,720 55,399
Retained earnings 3,476 336
------- -------
Total stockholders' equity 61,209 55,748
------- -------
$67,300 $63,154
======= =======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
21
<PAGE> 7
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
<S> <C> <C> <C>
Net revenues $ 55,018 $ 54,528 $ 51,939
Cost of revenues 14,320 16,473 17,084
-------- -------- --------
40,698 38,055 34,855
-------- -------- --------
OPERATING EXPENSES:
Research and development 9,370 7,069 7,915
Selling, general, and administrative 26,878 26,103 24,892
Merger related costs -- 90 1,387
In-process research and development 2,935 4,373 --
-------- -------- --------
39,183 37,635 34,194
-------- -------- --------
Operating earnings 1,515 420 661
Interest income 2,502 2,692 2,159
Writedown of investment in ZyLAB International -- (2,616) --
-------- -------- --------
Earnings before income taxes 4,017 496 2,820
Income tax expense 877 100 423
-------- -------- --------
Net earnings $ 3,140 $ 396 $ 2,397
======== ======== ========
Basic earnings per share $ .24 $ .03 $ .18
======== ======== ========
Diluted earnings per share $ .24 $ .03 $ .18
======== ======== ========
Weighted average number of shares used in per share computations:
Basic 13,123 13,120 13,172
Diluted 13,265 13,319 13,538
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
22
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE RETAINED TOTAL
PAID-IN FROM EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
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
Repurchase of stock (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
Repurchase of stock (1,000,000) -- (9,233) -- -- (9,233)
Exercise of stock options 240,438 -- 1,560 -- -- 1,560
Issued pursuant to stock
purchase plan 106,922 -- 650 -- -- 650
Tax benefit associated with
exercise of stock options -- -- 296 -- -- 296
Other -- -- 51 -- -- 51
Net earnings -- -- -- -- 396 396
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 12,630,584 13 55,399 -- 336 55,748
Repurchase of stock (237,444) -- (2,000) -- -- (2,000)
Exercise of stock options 61,980 -- 410 -- -- 410
Issued pursuant to stock purchase plan 102,115 -- 658 -- -- 658
Issued for acquisition of Formonix, Inc. 550,000 -- 3,105 -- -- 3,105
Tax benefit associated with
exercise of stock options -- -- 57 -- -- 57
Other -- -- 91 -- -- 91
Net earnings -- -- -- -- 3,140 3,140
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 13,107,235 $ 13 $ 57,720 $ -- $ 3,476 $ 61,209
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
23
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,140 $ 396 $ 2,397
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 3,130 2,689 2,317
In-process research and development 2,935 -- --
Merger related costs -- (930) (1,337)
Write-down of investment in ZyLAB International -- 2,616 --
Amortization of capitalized software
development costs 508 734 683
Deferred income taxes (991) (1,301) 691
Loss on disposition of assets 111 -- --
Changes in operating assets and liabilities:
Receivables 1,625 (708) (140)
Income tax receivable -- 1,109 (1,109)
Inventories 862 (702) 478
Other current assets (222) (2) (18)
Accounts payable (1,336) 537 (136)
Accrued expenses 21 893 (755)
-------- -------- --------
Net cash provided by operating activities 9,783 5,331 3,071
-------- -------- --------
Cash flows from investing activities:
Short-term investments, net (529) 4,474 9,952
Capital expenditures (2,786) (1,460) (3,925)
Capitalized software development costs (858) (561) (614)
Investment in ZyLAB International -- -- (2,616)
Other assets (72) (109) (838)
-------- -------- --------
Net cash provided by (used for) investing activities (4,245) 2,344 1,959
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuances of common stock 1,068 2,261 1,529
Repayment of short-term borrowings -- -- (400)
Collection of notes receivable from stockholders -- -- 400
Tax benefit associated with exercise of stock options 57 296 110
Repurchase of stock (2,000) (9,233) --
-------- -------- --------
Net cash provided by (used for) financing activities (875) (6,676) 1,639
-------- -------- --------
Effect of foreign exchange rates on cash 91 -- --
-------- -------- --------
Net change in cash and cash equivalents 4,754 999 6,669
Cash and cash equivalents at beginning of year 11,663 10,664 3,995
-------- -------- --------
Cash and cash equivalents at end of year $ 16,417 $ 11,663 $ 10,664
======== ======== ========
Supplemental disclosures:
Cash paid for income taxes $ 1,202 $ 162 $ 1,636
======== ======== ========
Non-cash investing and financing activities:
Acquisition of Formonix using common stock $ 3,105 $ -- $ --
======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
24
<PAGE> 10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, 1995
NOTE 1. COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY.
Caere Corporation (the "Company") designs, develops, manufactures, and
markets information recognition software and products. The Company distributes a
range of information recognition software and equipment through channels of
original equipment manufacturers, value added resellers, distributors, and
retail distributors.
In December 1996, the Company acquired Recognita Rt. ("Recognita"), a
developer of recognition and forms software and products. This acquisition was
accounted for using the purchase method of accounting. Accordingly, the
consolidated results of the Company only include Recognita's results of
operations since the date of acquisition.
In March 1997, the Company acquired Formonix, Inc. ("Formonix"), a
developer of forms software and products. This acquisition was accounted for
using the purchase method of accounting. Accordingly, the consolidated results
of the Company only include Formonix's results of operations since the date of
acquisition.
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.
FOREIGN CURRENCY TRANSLATION.
The financial statements of the Company's foreign subsidiaries, where the
local currency is the functional currency, are translated using the exchange
rate in effect at the end of the year for assets and liabilities and average
exchange rates during the year for results of operations. The resulting currency
translation adjustments are included in stockholders' equity and have not been
material. The Company enters into transactions denominated in foreign currencies
and includes the exchange gain or loss arising from such transactions in current
operations. Such gains and losses have not been material.
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 (approximates cost) at December
31, 1997 and 1996.
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. Recoverability of
property and equipment is measured by comparison of its carrying amount to
future net cash flows the property and equipment are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the property and
equipment exceeds its fair market value. To date, the Company has made no
adjustments to the carrying values of its long-lived 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, 1997 and 1996, are
capitalized software development costs aggregating $5,628,000 and $4,770,000,
respectively, and related accumulated amortization of $4,655,000 and $4,147,000,
respectively.
OTHER ASSETS.
The Company owns a minority interest in ZyLAB International, Inc.
("ZyLAB"), a 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. At December 31, 1996, the
balance of the ZyLAB investment was written off.
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.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition,"
which supersedes SOP No. 91-1. The Company will be required to adopt SOP No.
97-2 prospectively for software trans-
25
<PAGE> 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
actions entered into beginning January 1, 1998. 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. The Company's management anticipates that the adoption
of SOP No. 97-2 will not have a material effect on the Company's operating
results.
STOCK-BASED COMPENSATION.
The Company uses the intrinsic value method to account for stock-based
compensation.
INCOME TAXES.
The Company 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 the Company's financial statements or tax returns. In
estimating future tax consequences, the Company 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.
EARNINGS 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. The adoption of SFAS No. 128 had no effect on the
Company's earnings per share amounts.
NOTE 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, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Corporate bonds and notes $ 8,868 $17,556
Commercial paper 20,053 6,712
Certificates of deposit 600 3,600
State and municipal bonds 6,181 3,101
Corporate auction-rate preferred securities 11,500 9,995
Money market funds 1,139 --
------- -------
$48,341 $40,964
======= =======
</TABLE>
The Company's investments are classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Cash equivalents $15,185 $ 8,337
Short-term investments 33,156 32,627
------- -------
$48,341 $40,964
======= =======
</TABLE>
The estimated fair value of available-for-sale securities as of December
31, 1997, by contractual maturity, consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Due in one year or less $19,866
Due in more than one year 1,790
Auction-rate securities 11,500
-------
$33,156
=======
</TABLE>
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 seven to 28 days.
26
<PAGE> 12
NOTE 3. RECEIVABLES
A summary of receivables follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Trade accounts receivable $6,767 $8,139
Interest receivable 583 264
------ ------
7,350 8,403
Less allowances for returns and doubtful accounts 2,087 1,515
------ ------
$5,263 $6,888
====== ======
</TABLE>
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 11). Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups of
customers in any particular industry.
NOTE 4. INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Raw materials $ 738 $1,540
Work in process 226 348
Finished goods 953 891
------ ------
$1,917 $2,779
====== ======
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Equipment $12,466 $11,116
Furniture and fixtures 1,896 1,954
Leasehold improvements 1,617 1,489
------- -------
15,979 14,559
Less accumulated depreciation and amortization 11,198 9,817
------- -------
$ 4,781 $ 4,742
======= =======
</TABLE>
NOTE 6. ACCRUED EXPENSES
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996
<S> <C> <C>
Accrued payroll costs $1,125 $1,108
Accrued royalties 250 651
Accrued professional fees 243 329
Income taxes payable 1,247 700
Other accrued expenses 1,081 1,137
------ ------
$3,946 $3,925
====== ======
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating leases
that expire in 2002. As of December 31, 1997, future minimum lease payments
under noncancelable operating leases were $764,000, $798,000, $832,000, $868,000
and $73,000 for each of the years through the period ending December 31, 2002.
Rent expense was approximately $784,000 in 1997, $692,000 in 1996, and
$611,000 in 1995. 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.
27
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. MERGERS AND ACQUISITIONS
On January 22, 1996, the Company exercised its right to terminate its
agreement to acquire ViewStar Corporation ("ViewStar"). Direct transaction 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. All such
costs were paid as of December 31, 1996. In addition to these costs, additional
ViewStar transaction expenses totaling $90,000 were recorded and paid in the
first quarter of 1996.
On December 18, 1996, the Company acquired Recognita. Total costs of the
acquisition were $4,868,000. The purchase price of $3,000,000 was paid in cash
prior to the end of fiscal 1996. Acquisition costs associated with the
transaction totaled $1,090,000 and consisted mainly of professional fees. The
Company also assumed $778,000 of debt in conjunction with the acquisition. This
business combination was accounted for under the purchase method of accounting.
Accordingly, Recognita's results of operations have been included in the
Company's consolidated results of operations since the date of acquisition.
The purchase price was allocated among the identifiable assets of
Recognita. After allocating the purchase price to the net tangible assets,
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. This analysis resulted in an allocation of $4,373,000 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 respective periods and exclude
the $4,373,000 charge for acquired in-process technology.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
<S> <C> <C>
Net revenues $ 56,683 $ 54,039
Net earnings $ 4,446 $ 1,852
Basic earnings per share $ .33 $ .14
Diluted earnings per share $ .33 $ .14
</TABLE>
On March 31, 1997, the Company acquired Formonix. 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 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. This business combination was accounted for under
the purchase method of accounting. Accordingly, Formonix's results of operations
have been included in the Company's consolidated results of operations since the
date of acquisition.
The purchase price was allocated among the identifiable assets of Formonix.
After allocating the purchase price to the net tangible assets, 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. This
analysis resulted in an allocation of $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. This analysis also resulted in an
allocation of $253,000 to capitalized software development costs for technology
in development that had reached technological feasibility, and accordingly, will
be amortized to expense over the estimated useful lives of the technology's
related products.
The following summarized, pro forma results of operations assume the
acquisition took place at the beginning of the respective periods and exclude
the $2,935,000 charge for acquired in-process technology.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
<S> <C> <C>
Net revenues $ 55,018 $ 54,534
Net earnings $ 5,325 $ 506
Basic earnings per share $ .40 $ .04
Diluted earnings per share $ .40 $ .04
</TABLE>
28
<PAGE> 14
NOTE 9. STOCK COMPENSATION PLANS
At December 31, 1997, the Company had several stock-based compensation
plans, which are described below. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for such plans been determined
consistent with SFAS Statement No. 123, the Company's net earnings (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
<S> <C> <C> <C>
Net earnings (loss):
As reported $ 3,140 $ 396 $ 2,397
Pro forma $ 1,516 $ (627) $ 1,288
Basic earnings (loss) per share:
As reported $ .24 $ .03 $ .18
Pro forma $ .12 $ (.05) $ .10
Diluted earnings (loss) per share:
As reported $ .24 $ .03 $ .18
Pro forma $ .11 $ (.05) $ .10
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants under each of the option plans in 1997, 1996, and
1995, respectively: dividend yield of zero percent for each year; expected
volatility of 66 percent, 66 percent, and 67 percent; risk-free interest rates
of 5.70 percent, 5.85 percent, and 5.75 percent; and an expected life of 2.8
years, 3.1 years, and 3.2 years.
Under SFAS Statement No. 123, compensation cost related to the 1990
Employee Stock Purchase Plan is recognized for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with the
following assumptions for 1997, 1996, and 1995, respectively: dividend yield of
zero percent for each year; expected volatility of 66 percent, 66 percent, and
67 percent; risk-free interest rates of 5.70 percent, 5.85 percent, and 5.75
percent; and an expected life of 0.6 years in each year. The weighted-average
fair value of those purchase rights granted in 1997, 1996, and 1995 was $2.69,
$2.50, and $3.06, respectively.
FIXED STOCK OPTION PLANS
The Company has three fixed option plans. Under the 1981 Incentive and
Supplemental Stock Option Plans, the Company may grant options to its employees,
directors, and consultants for up to 3,595,000 shares of common stock. Under the
1992 Non-Employee Directors' Stock Option Plan, the Company may grant options to
its non-employee directors for up to 230,000 shares of common stock. Under the
1997 Non-Officer Stock Option Plan, the Company may grant options to its
non-officer employees for up to 250,000 shares of common stock. Under each plan,
the exercise price of each option equals the market price of the Company's stock
on the date of grant, and an option's maximum term is ten years. Options are
generally exercisable in equal installments over four years.
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1997, 1996, and 1995, and changes during the years ended on
those dates is presented below (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,452 $ 8.18 1,541 $ 7.91 1,514 $ 7.03
Granted 840 7.67 486 8.65 438 9.27
Exercised (62) 6.61 (240) 6.49 (183) 5.00
Forfeited (305) 9.21 (335) 8.84 (228) 7.02
----- ------- ----- ------- ----- --------
Outstanding at end of year 1,925 $ 8.09 1,452 $ 8.18 1,541 $ 7.91
===== ======== ===== ======= ===== ========
Options exercisable at year-end 916 705 594
===== ======== ===== ======= ===== ========
Weighted-average fair value of options
granted during the year $ 3.42 $ 4.13 $ 6.30
===== ======== ===== ======= ===== ========
</TABLE>
29
<PAGE> 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
EXERCISE PRICES OUTSTANDING REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
CONTRACTUAL LIFE
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$2.73 to 7.38 513 7.59 $6.83 170 $6.63
$7.44 to 8.00 545 6.86 7.76 315 7.68
$8.06 to 9.19 482 8.63 8.47 151 8.45
$9.25 to 20.00 385 6.30 9.77 280 9.72
- --------------- ----- ---- ----- --- -----
$2.73 to 20.00 1,925 7.38 $8.09 916 $8.24
=============== ===== ==== ===== === =====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1990 Employee Stock Purchase Plan, the Company is authorized to
issue up to 1,000,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan, employees
can choose to have up to 15 percent of their respective annual earnings withheld
to purchase the Company's common stock. The purchase price of the stock is the
lower of 85 percent of the market price on either the purchase date or the
offering date. Under the Plan, the Company sold 102,115 shares, 106,922 shares,
and 69,778 shares to employees in 1997, 1996, and 1995, respectively.
SHAREHOLDER RIGHTS PLAN
The Company's shareholder rights 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, 1997, 100,000 shares of the Company's preferred stock had
been reserved for this plan.
NOTE 10. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 1,109 $ 855 $ (423)
State 702 250 45
------- ------- -------
Total current 1,811 1,105 (378)
------- ------- -------
Deferred:
Federal (856) (1,071) 573
State (135) (230) 118
------- ------- -------
Total deferred (991) (1,301) 691
------- ------- -------
Charges in lieu of income taxes
associated with the exercise of stock options 57 296 110
------- ------- -------
$ 877 $ 100 $ 423
======= ======= =======
</TABLE>
30
<PAGE> 16
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below.
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Deferred tax assets:
Federal and state net operating loss and research
and experimental credit carryforwards $ 5,165 $ 6,671 $ 7,969
Accounts receivable, principally due to allowance
for doubtful accounts and sales returns and allowances 653 411 500
Inventories, non-deductible lower of cost or market adjustments 465 327 260
Compensated absences, principally due to accrual for financial
reporting purposes 321 285 225
State tax expense on temporary differences 24 39 --
Accruals for financial statement purposes not taken for tax purposes 333 310 670
Property and equipment, principally due to differences in depreciation 743 373 --
Other 39 7 4
------- ------- -------
Total gross deferred tax assets 7,743 8,423 9,628
Less valuation allowance (3,900) (5,523) (7,969)
------- ------- -------
Net deferred tax assets 3,843 2,900 1,659
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation -- -- (25)
Software development costs, principally due to capitalization
and amortization (254) (302) (319)
Other (2) (2) (20)
------- ------- -------
Total gross deferred tax liabilities (256) (304) (364)
------- ------- -------
Net deferred tax benefit $ 3,587 $ 2,596 $ 1,295
======= ======= =======
</TABLE>
The difference between the effective income tax rate and the U. S. federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 9.5 2.0 4.0
Tax exempt income -- -- (16.0)
Utilization of net operating loss carryforward (34.2) (239.0) --
Change in beginning valuation allowance (9.5) (206.0) --
Benefit of foreign sales corporation (3.9) (35.0) (4.0)
In-process research and development non-
deductible for tax purposes 25.4 283.0 --
ZyLAB investment writedown non-deductible
for tax purposes -- 180.5 --
Other 0.5 0.7 (3.0)
------ ------ ------
21.8% 20.2% 15.0%
====== ====== ======
</TABLE>
The Company had a net operating loss carryforward for federal purposes at
December 31, 1997, of $13.9 million and federal research and experimentation
credit carryforwards of $441,000. Federal 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, the Company'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.
31
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. MAJOR CUSTOMERS AND EXPORT SALES
One distributor accounted for 23 percent, 28 percent, and 22 percent of net
revenues in 1997, 1996, and 1995, respectively. At December 31, 1997, this
distributor accounted for 13 percent of trade accounts receivable. International
sales, principally to Europe, were 34 percent, 30 percent, and 29 percent of net
revenues in 1997, 1996, and 1995, respectively.
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
1997, QUARTER ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
<S> <C> <C> <C> <C> <C>
Net revenues $ 12,572 $ 12,751 $ 14,069 $ 15,626 $ 55,018
Gross margin 8,856 9,398 10,621 11,823 40,698
In-process research and development 2,935 -- -- -- 2,935
Earnings (loss) before income taxes (1,831) 1,124 2,116 2,608 4,017
Net earnings (loss) (1,941) 1,012 1,852 2,217 3,140
Basic earnings (loss) per share $ (.15) $ .08 $ .14 $ .17 $ .24
Diluted earnings (loss) per share $ (.15) $ .08 $ .14 $ .17 $ .24
Weighted average shares used in
per share calculations:
Basic 12,682 13,280 13,310 13,212 13,123
Diluted 12,682 13,320 13,402 13,387 13,265
Common stock price per share:
High $ 12.88 $ 8.75 $ 9.38 $ 9.19 $ 12.88
Low 7.13 6.00 7.02 8.00 6.00
</TABLE>
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, 1997, there were 452 holders of record of the Company's
common stock.
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, 1997 and 1996, 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, 1997. 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 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, 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
SAN JOSE, CALIFORNIA
JANUARY 26, 1998
32
