-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQIkEctqQ5ff3QEIosYFiYETfVOcSzJrDrU5KD4v2uvMRjvFEMIwf17c1WZytObb LbmiTNKIsU2VhpJPukgouQ== 0000891618-98-001531.txt : 19980403 0000891618-98-001531.hdr.sgml : 19980403 ACCESSION NUMBER: 0000891618-98-001531 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAERE CORP CENTRAL INDEX KEY: 0000854916 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942250509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-18090 FILM NUMBER: 98586428 BUSINESS ADDRESS: STREET 1: 100 C00PER CT CITY: LOS GATOS STATE: CA ZIP: 95030 BUSINESS PHONE: 4083957000 MAIL ADDRESS: STREET 1: 100 COOPER COURT CITY: LOS GATOS STATE: CA ZIP: 95030 10-K405/A 1 AMENDMENT #1 TO FORM 10-K405 1 ================================================================================ 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). ================================================================================ 2 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:
Annual Report to Stockholders 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
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
Exhibit Number Description 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)
3
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)
*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. 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 5 CAERE CORPORATION INDEX OF EXHIBITS
Exhibit Number Description 13.1 1997 Annual Report to Stockholders.
EX-13.1 2 1997 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 CAERE CORPORATION ANNUAL REPORT 1997 FINANCIAL HIGHLIGHTS
(In thousands, except per share) 1997 1996 1995 1994 1993 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
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:
RESULTS OF OPERATIONS PERCENTAGE CHANGE PERCENTAGE OF NET REVENUES 1996 1995 YEARS ENDED DECEMBER 31, 1997 1996 1995 TO 1997 TO 1996 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)%
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.
BUSINESS LINE ANALYSIS (IN THOUSANDS) 1997 1996 1995 -------------------------------- -------------------------------- --------------------------------- SOFTWARE HARDWARE SOFTWARE HARDWARE SOFTWARE HARDWARE PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED PRODUCTS PRODUCTS COMBINED 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% ======= ======= ======= ======= ======= ======= ======= ======= =======
16 2 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 3 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 18 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 19 5 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 6 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 ======= =======
See accompanying Notes to the Consolidated Financial Statements. 21 7 CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 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
See accompanying Notes to the Consolidated Financial Statements. 22 8 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES COMMON STOCK ADDITIONAL RECEIVABLE RETAINED TOTAL PAID-IN FROM EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) 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 =========== =========== =========== =========== =========== ===========
See accompanying Notes to the Consolidated Financial Statements. 23 9 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 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 $ -- $ -- ======== ======== ========
See accompanying Notes to the Consolidated Financial Statements. 24 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 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:
DECEMBER 31, (IN THOUSANDS) 1997 1996 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 ======= =======
The Company's investments are classified as follows:
DECEMBER 31, (IN THOUSANDS) 1997 1996 Cash equivalents $15,185 $ 8,337 Short-term investments 33,156 32,627 ------- ------- $48,341 $40,964 ======= =======
The estimated fair value of available-for-sale securities as of December 31, 1997, by contractual maturity, consisted of the following:
(IN THOUSANDS) Due in one year or less $19,866 Due in more than one year 1,790 Auction-rate securities 11,500 ------- $33,156 =======
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 12 NOTE 3. RECEIVABLES A summary of receivables follows:
DECEMBER 31, (IN THOUSANDS) 1997 1996 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 ====== ======
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:
DECEMBER 31, (IN THOUSANDS) 1997 1996 Raw materials $ 738 $1,540 Work in process 226 348 Finished goods 953 891 ------ ------ $1,917 $2,779 ====== ======
NOTE 5. PROPERTY AND EQUIPMENT A summary of property and equipment follows:
DECEMBER 31, (IN THOUSANDS) 1997 1996 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 ======= =======
NOTE 6. ACCRUED EXPENSES A summary of accrued expenses follows:
DECEMBER 31, (IN THOUSANDS) 1997 1996 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 ====== ======
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 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.
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 Net revenues $ 56,683 $ 54,039 Net earnings $ 4,446 $ 1,852 Basic earnings per share $ .33 $ .14 Diluted earnings per share $ .33 $ .14
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.
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 Net revenues $ 55,018 $ 54,534 Net earnings $ 5,325 $ 506 Basic earnings per share $ .40 $ .04 Diluted earnings per share $ .40 $ .04
28 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:
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 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
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):
1997 1996 1995 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE 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 ===== ======== ===== ======= ===== ========
29 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about fixed stock options outstanding at December 31, 1997 (shares in thousands):
RANGE OF NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG. EXERCISE PRICES OUTSTANDING REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE CONTRACTUAL LIFE (IN YEARS) $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 =============== ===== ==== ===== === =====
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:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 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 ======= ======= =======
30 16 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below.
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 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 ======= ======= =======
The difference between the effective income tax rate and the U. S. federal statutory income tax rate is as follows:
YEARS ENDED DECEMBER 31, 1997 1996 1995 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% ====== ====== ======
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 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)
1997, QUARTER ENDED YEAR ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31 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
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 -----END PRIVACY-ENHANCED MESSAGE-----