Item 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as anticipate, believe, continue, could, estimate,
expect, future, intend, may, plan, potential, predict, seek, should, target, will or the negative of these terms or
other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under Item 1A Risk Factors.
These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
Founded in 1982, Captaris, Inc., (we, us, our) is a provider of computer products that automate document-centric
business processes. With a comprehensive suite of software, hardware and services, we help organizations gain control over many processes that include the need to integrate documents more securely and efficiently. Our solutions also provide
interoperability between documents and business applications and technology platforms.
We develop products and services for document
capture, intelligent document recognition and classification, routing, workflow, document management and document delivery. Our product lineup includes the brand names RightFax, FaxPress, Captaris Workflow, Alchemy, Single Click Entry, DOKuStar and
RecoStar.
Our products are distributed and supported through a global network of technology partners. This distribution system consists of
business partners from all levels of the information technology (IT) spectrum: value-added resellers, original equipment manufacturers (OEMs), system integrators, distributors, mass market resellers, online retailers, office
equipment dealers, and independent software vendors (ISVs). We believe the use of multiple distribution channels increases the likelihood that our products will be sold to more customers.
We have a large installed base of customers that includes, as of the date of this report, the entire Fortune 100, the majority of the Global 2000
companies, and thousands of mid-sized enterprises. Our customers use our products to reduce costs, comply with regulations, increase the performance and productivity of critical business processes, and leverage their IT system investments.
In July 2007, we bolstered our product portfolio, customer base, and distribution capabilities by acquiring Castelle, a provider of
all-in-one network fax appliance solutions for businesses and enterprises. Castelle FaxPress products are designed to be easily deployed and maintained and are generally intended for lower volume use at lower price points than our
RightFax product offerings. FaxPress provides Captaris with a fax server product that can be positioned in the tier below RightFax for customers looking for basic fax services that are low cost and easily deployable. The FaxPress products are
available through a worldwide network of distributors, resellers, and online retailers.
Included in our single business segment,
Castelles expertise in building all-in-one network appliance solutions facilitates our plan to broaden our offerings in the areas of document capture, routing and management. The network appliance design combines software and
hardware into a plug and play device, and we believe this design is particularly well suited to support our focus on achieving synergies with multi-function product manufacturers and their dealer networks.
We further increased our product portfolio, customer base and distribution capabilities with the acquisition of Ocė Document Technologies GmbH
(ODT) in January 2008. ODT is a provider of software and solutions for document capture, text recognition, and document classification. ODT, a wholly-owned subsidiary of the Ocė Group since 2000, has approximately 178 employees and
maintains its global headquarters in Constance, Germany, and its North American office in Bethesda, Maryland. On an unaudited basis, ODTs revenue was about 22.5 million for the 12 months ended November 30, 2007 and their gross
margin was about 65%. ODTs revenue includes software licenses, maintenance and support, hardware and professional services. In contrast to our business prior to acquisition, ODTs revenue includes a higher percentage of professional
services and a larger portion of their sales are made directly rather than through partners. As a result of these factors, and a smaller revenue and customer base, ODT has a lower gross margin and more revenue variability.
After our acquisition, we re-named ODT to Captaris Document Technologies GmbH (CDT). CDT develops intelligent document and character
recognition technologies that can read and extract the important information from documents needed to drive business processes and decisions. CDT products include RecoStar, DOKuStar, Single Click Entry and ID-Star. CDT customers
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include some large ISVs and OEMs with capture offerings, as well as blue chip end-user accounts in Germany. CDTs expertise in intelligent document
recognition supports our vision of fully enabling document capture, collaboration and workflow. As we continue to merge our products, we anticipate leveraging CDTs technology to enhance capture and routing in both the RightFax and Alchemy
platforms. The ability to classify documents and extract critical meta-data will also enable deeper integrations with line of business applications and business process management.
Executive Summary
We derive net revenue primarily from licensing software as well as follow-on sales
of add-on software modules, incremental capacity and the sale of maintenance, support and service agreements, professional services, appliances and the resale of fax boards.
We work with resellers and distributors located throughout the world. These resellers and distributors sell and install our products and they receive
discounts based on the volume of sales. Within our selling and marketing groups, we dedicate significant resources to monitor our resellers and distributors and to generate demand and provide market positioning and support.
Utilizing an indirect channel approach provides several advantages, including minimizing our investment in office facilities and personnel in field
locations and applying greater resources to sales and implementation efforts. However, with a channel sales model, we have more difficultly tracking the number and location of all end-users utilizing our products. This also limits our ability to
capture information around product usage, system integration characteristics, and deployment satisfaction directly from our customers perspective in order to enhance or build new products, solutions and services.
We have extensive service offerings that are sold in conjunction with our products, including: maintenance, support, professional services and solutions.
All of these offerings are designed to help customers protect and extend their software investment.
Our $2.8 million revenue growth over
the prior year was primarily attributable to the inclusion of Castelle in our results of operations from July 10, 2007 through December 31, 2007, and the continuing growth of our traditional maintenance, support and service revenue. In
comparison to 2007, we expect 2008 revenue increases from software, appliances, and services. This expectation is based on including in our 2008 results of operations revenue from both Castelle for the entire year and, as discussed in the
Acquisitions and Divestitures section below, CDT, as well as increased customer demand from increased investment in our sales organization. In comparison to 2007, we expect 2008 hardware revenue to decrease as a percentage of overall revenue due to
market shifts to software-based fax over Internet protocol, which does not rely on fax hardware in many Internet protocol environments. No single customer represented more than 10% of our net revenue for each of the years ended December 31,
2007, 2006 or 2005.
Our gross profit is the selling price of our products, net of estimated returns, less cost of revenue. Our cost of
revenue includes manufacturing and distribution costs, royalties for licensed products, amortization of acquired technology, product warranty costs, operation costs related to product support and costs associated with the delivery of professional
services.
Our $1.8 million gross profit increase over the prior year was primarily attributable to the inclusion of Castelle in our
results of operations from July 10, 2007 through December 31, 2007, and the continuing growth of our traditional maintenance, support and service revenue. We expect our gross profit will increase in 2008 due to anticipated increases in
revenue mentioned above. We expect gross profit as a percentage of revenue will decline in 2008 for two reasons. First, CDT has traditionally recorded lower gross margins than Captaris primarily because of a higher portion of professional services;
therefore including CDT in our results of operations will have the effect of reducing our overall gross profit as a percentage of revenue. Secondly, we anticipate recording a portion of the amortization expense related to the technology acquired
from CDT in cost of revenue.
Our operating expenses were $69.9 million, $60.4 million and $67.7 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The $9.5 million increase from 2006 to 2007 was due primarily to increases in the overall number of employees and occupancy costs of $3.8 million, Castelle operating expenses of $2.7 million and
research and development spending of $1.9 million for outsourced engineering. The $7.3 million decrease from 2005 to 2006 was due primarily to a $2.3 million reduction in compensation cost due to the minimum incentive plan obligation for certain
Teamplate founders, which was discontinued in late 2005, and a $1.3 million reduction in advertising expenses.
Our income from continuing
operations for the year ended December 31, 2007 was $228,000, compared to income of $4.0 million for the year ended December 31, 2006 and a loss from continuing operations of $4.0 million for the year ended December 31, 2005. The
decrease in income from continuing operations from 2006 to 2007 was primarily attributable to an overall increase in operating expenses in 2007. The increase in income from continuing operations from 2005 to 2006 was primarily attributable to
revenue growth and an overall reduction in operating expenses in 2006. In addition, 2005 operating expenses included corporate reorganizations charges as well as non-cash impairment charges. We did not incur these charges in 2006.
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We recorded an income tax benefit of $1.5 million and $3.3 million, respectively, on losses from
continuing operations for the years ended December 31, 2007 and December 31, 2005. For the year ended December 31, 2006, we recorded an income tax provision of $1.8 million on income from continuing operations. Our income tax benefit
in 2007 included the reversal of tax liabilities of $403,000 which we determined were no longer probable based on updated information surrounding the related tax return, a research and development tax credit of $173,000, and the tax benefit for
tax-exempt interest income of $566,000. Our income tax provision in 2006 included adjustments of $72,000 primarily associated with correcting deferred tax asset balances as of December 31, 2005. The income tax benefits in 2005 included the
reversal of tax liabilities of $523,000 which we determined were no longer probable based on updated information surrounding the related tax return. In 2006, we received income tax refunds of $1.9 million that primarily resulted from the carry-back
of our 2005 net operating loss to 2003.
Prior to December 31, 2007, our principal sources of liquidity were cash and cash
equivalents. In anticipation of our acquisition of CDT in January 2008, we liquidated our investments in cash and cash equivalents ($46.2 million) and entered into a $10.0 million line of credit agreement as described below. As of December 31,
2006, our portfolio consisted primarily of money market funds, adjustable rate mortgage-backed securities, and municipal and United States government agency-backed securities. The balance of cash, cash equivalents and short and long-term investments
at December 31, 2006 totaled $59.4 million.
The decrease in cash, cash equivalents and short and long-term investments from 2006 to
2007 was primarily due to the Castelle acquisition of $12.0 million, repurchase of our common stock of $9.5 million and capital purchases of $5.2 million. These decreases were partially offset by increases from our net cash flow provided by
operations of $10.6 million and proceeds of $2.2 million from the exercise of stock options. Capital expenditures during the year ended December 31, 2007, consisted primarily of an enterprise resource management system to support the growth of
our core business activities. In the first quarter of 2008, we paid $680,000 for management incentive bonuses we accrued in 2007.
On
January 1, 2006, we adopted the provisions of FASB Statement of Financial Accounting Standard (SFAS) Statement No. 123(R),
Share-Based Payment
, (SFAS No. 123R), which, among other things, requires us to
measure and recognize compensation expense for all share-based payment awards made to employees and directors including stock options and stock units. Under the provisions of SFAS No. 123R, we recorded $1.4 million and $677,000, respectively,
in 2007 and 2006 as stock-based compensation expense relating to stock options and stock units. Prior to 2006, we had only disclosed in the footnotes to our consolidated financial statements, as permitted by SFAS No. 123, pro forma financial
results including the effects of share-based compensation expense. For the year ended December 31, 2005, the pro forma stock-based compensation expense was $3.9 million. The decrease in stock-based compensation expense in 2006, compared to
our pro forma stock-based compensation expense in 2005, can be attributed to accelerating the vesting of underwater stock options in 2005, the reduction in number of shares granted in 2006 compared to 2005 and differences between accounting for
stock options and stock units under SFAS No. 123R in 2006 and SFAS No. 123 in 2005.
Acquisitions
2008
On January 4, 2008, our wholly-owned
subsidiary, Captaris Verwaltungs GmbH, a German limited liability company (CV GmbH), acquired Océ Document Technologies GmbH (ODT), pursuant to a Sale and Purchase Agreement (the SPA) by and between CV GmbH
and Océ Deutschland Holding GmbH & Co. KG, a German limited partnership (the Seller), dated December 20, 2007. Under the terms of the SPA, CV GmbH acquired all of the outstanding equity of ODT from the Seller, and
ODT became a wholly-owned subsidiary of CV GmbH and an indirect wholly-owned subsidiary of Captaris.
Under the terms of the acquisition
agreement, CV GmbH acquired ODT for approximately 10.4 million ($15.4 million), net of ODTs cash balance as of the closing of approximately 21.6 million ($31.8 million). CV GmbH also assumed ODTs operating and
financial liabilities, including approximately 12.1 million ($17.9 million) in future retirement obligations. At the closing, €2.0 million ($3.0 million) of the purchase price was deposited in a third-party escrow account for 12
months as security for any post-closing purchase price adjustment and, subject to certain limitations, for indemnification claims against the Seller; however, in connection with the resolution of a post-closing dispute with the Seller, we expect to
release the full amount of the escrow to the Seller during the first quarter of 2008.
After our acquisition, we re-named ODT to Captaris
Document Technologies GmbH (CDT). CDT is a provider of software and solutions for document capture, text recognition and document classification. CDT has approximately 178 employees and maintains its global headquarters in Constance,
Germany, and its North American office in Bethesda, Maryland.
2007
On July 10, 2007, through our wholly-owned subsidiary, Merlot Acquisition Corporation, a California corporation (Merger Sub), we
consummated an acquisition of Castelle, a California corporation (Castelle), pursuant to an Agreement and Plan of Merger (the Merger Agreement) by and among Captaris, Castelle and Merger Sub, dated April 25, 2007. In
accordance with the terms of the Merger Agreement, Merger Sub was merged with and into Castelle, with Castelle being the surviving corporation (the
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Merger), and each issued and outstanding share of Castelle common stock was converted into the right to receive $4.14 in cash, after the closing
adjustments described in the Merger Agreement. In addition, each outstanding option to purchase shares of Castelle common stock was converted into the right to receive an amount of cash equal to the product of (a) the number of shares as to
which such option was vested and exercisable, multiplied by (b) the excess, if any, of the per share merger consideration ($4.14) over the per share exercise price of such option. The aggregate merger consideration described above that we paid
was $10.8 million, net of Castelles cash balance at closing of $1.0 million. Additionally, we assumed $2.3 million of Castelles liabilities and paid $1.2 million in transaction costs. The assumed liabilities include deferred revenue of
$938,000 and accounts payable and other accrued liabilities of $1.4 million. The acquisition of Castelle has been accounted for as a purchase. Our results of operations for the year ended December 31, 2007 include Castelles results of
operations for the period from July 10, 2007 to December 31, 2007 including an in-process research and development charge of $219,000. The primary product offering for Castelle is a server appliance with embedded fax software. The revenue
for this new Captaris product offering is recorded within a new appliance product line category beginning in the third quarter of 2007.
Critical
Accounting Judgments and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience, current conditions and various other assumptions we believe to be reasonable under the circumstances. Our estimates form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual
results may differ significantly from these estimates. To the extent that there are material differences between these estimates and actual results, our presentation of our financial condition or results of operations may be affected.
On an ongoing basis, we evaluate our estimates used, including those related to the valuation of goodwill and other intangible assets, useful lives of
intangible assets and equipment and leasehold improvements, inventory valuation allowances, revenue recognition, the estimated allowances for sales returns and doubtful accounts and income tax accruals. We believe that the following accounting
policies are critical to understanding our historical and future performance, as these policies may involve a higher degree of judgment and complexity than others. For a detailed discussion on the application of these and other accounting policies,
see Note 1 in Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Our most critical accounting
judgments and estimates relate to the following areas:
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Allowances for sales returns and doubtful accounts;
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Valuation of inventory at lower of cost or market value;
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Classification of investments and assessment of related unrealized losses;
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Valuation of acquired businesses, assets and liabilities;
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Impairment of goodwill;
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Impairment of equipment, leasehold improvements, long-lived assets and other intangible assets;
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Useful lives of equipment, leasehold improvements and intangible assets;
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Stock-based compensation plans; and
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Accounting for income taxes.
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Revenue recognition.
Our revenue recognition policies follow the guidelines of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2,
Software
Revenue Recognition
, as amended. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collection is reasonably assured.
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We sell products through resellers, distributors, Original Equipment Manufacturers (OEM)
and other channel partners, as well as directly to end-users. Generally our resellers do not stock product, and except for OEM sales described below, we recognize product revenue upon shipment, net of estimated returns, provided that collection is
determined to be probable and no significant obligations remain. If a reseller does stock product, we defer this revenue until the reseller sells the product through to end-users.
Sales of our appliance products are made through stocking distributors. For sales to distributors we recognize revenues on either the sell-through or
sell-in method of revenue recognition as determined by the contractual arrangement with each distributor. When the distributor is entitled to stock rotation rights we recognize revenue upon delivery of the products to the distributor less a
provision for an estimate of those rights (the sell-in method). Otherwise, revenue is recognized upon delivery of the products to the end-user (the sell-through method).
Revenue from perpetual software licenses is recognized when the software has been shipped, provided that collection for such revenue is deemed probable.
Revenue from term software licenses is recognized over the term of the license, generally twelve months.
All software licenses are bundled
with 30 days of telephone support. We consider revenue associated with this telephone support to be insignificant, and therefore, we recognize this revenue when the software is shipped and concurrently record an estimate for the related cost of the
telephone support.
Whenever a software license, hardware, installation and post-contract customer support (PCS) elements are
sold together, we allocate the total arrangement fee among each element based on its respective fair value, which is the price charged when that element is sold separately. The amount of revenue assigned to each element is impacted by our judgment
as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish VSOE
for those elements could affect the timing of revenue recognition for these elements. Revenue for PCS is recognized on a straight-line basis over the service contract term, ranging from one to five years. PCS includes rights to unspecified upgrades
and updates, when and if available, and bug fixes.
Installation revenue is recognized when the product has been installed at the
customers site and accepted by the customer. Recognition of revenue from software sold with installation services is recognized either when the software is shipped or when the installation services are completed, depending on our agreement
with the customer and whether the installation services are integral to the functionality of the software.
We have entered into agreements
with certain OEMs from which we receive royalty payments periodically. Under the terms of the OEM license agreements, each OEM will qualify our software on their hardware and software configurations. Once the software has been qualified, the OEM
will begin to ship products and report net sales to us. Most OEMs pay a license fee based on the number of copies of licensed software included in the products sold to their customers. These OEMs pay fees on a per-unit basis and we record associated
revenue when we receive notification of the OEMs sales of the licensed software to an end-user. The terms of the license agreements generally require the OEMs to notify us of sales of our products within 30 to 45 days after the end of the
month or quarter in which the sales occur. As a result, we recognize the revenue in the month or quarter following the sales of the product to these OEMs customers.
We provide allowances for estimated returns, and return rights that exist for some customers. In general, customers are not granted return rights at the time of sale. However, we have historically accepted returns and
therefore, reduce revenue recognized for estimated product returns. For those customers to whom we do grant return rights, we reduce revenue by an estimate of these returns. If we cannot reasonably estimate these returns, we defer the revenue until
the return rights lapse. For software sold to resellers for which we have granted exchange rights, we defer the revenue until the reseller sells the software through to end-users. When customer acceptance provisions are present and we cannot
reasonably estimate returns, we recognize revenue upon the earlier of customer acceptance or expiration of the acceptance period.
Professional services are customarily billed at fixed rates, plus out-of-pocket expenses and revenue is recognized when the service has been completed. However, if it is determined that a consulting engagement will be unprofitable, we
recognize the loss at the time of such determination. Training revenue is recognized when the training is completed.
Allowance for
sales return.
We estimate potential future product returns related to current period revenue based on our historical returns, current economic trends, changes in customer demand and acceptance of our products. We periodically review the
adequacy of our sales returns allowance and underlying assumptions. If the assumptions we use to calculate the estimated sales returns do not properly reflect future returns, a change in accruals for sales returns would be made in the period in
which such a determination was made. Historically, our accruals for sales returns have been adequate.
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Allowance for doubtful accounts.
We make ongoing assumptions as to the collectibility
of our accounts receivable in our calculation of the allowance for doubtful accounts. In determining the amount of the allowance, we make estimates based on our historical bad debts, the aging of customer accounts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment patterns. Our reserves historically have been adequate to cover our actual credit losses. However, if actual credit losses were to fluctuate significantly from the
reserves we have established, our general and administrative expenses could be adversely affected.
Valuation of inventory at lower
of cost or market value.
Due to rapid changes in technology, it is possible that older products in inventory may become obsolete or that we may sell these products below cost. When we determine that the carrying value of inventories is not
recoverable, we write-down inventories to market value. If actual market conditions are less favorable than we project, inventory write-downs may be required, which may have a material adverse effect on our financial results.
Classification of investments and assessment of related unrealized losses.
We classify our short-term and long-term investments as
available-for-sale. We invest excess cash primarily in money market funds, adjustable rate mortgage-backed securities and municipal and United States government agency-backed securities. We record our portfolio at fair market value. We
determine the fair value of our investments based on quoted market prices. Investments with legal maturities of one year or less are classified as short-term. We recognize realized gains and losses upon sale of investments using the specific
identification method. We record unrealized gains and losses, net of any income tax effect, as a component of other comprehensive income. We record interest income using an effective interest rate, with the associated premium or discount amortized
to interest income over the term of the investment. We recognize an impairment charge for unrealized losses when an investments decline in fair value is below the cost basis and is judged to be other than temporary. In making this judgment, we
evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost, the financial condition and near-term business outlook for the investee and our intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
Valuation of acquired businesses, assets and
liabilities.
Our business acquisitions typically result in goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. As of December 31, 2007 our goodwill and intangible assets, net
of accumulated amortization, were $49.3 million. The determination of the fair value of such intangible assets and goodwill is a critical and complex consideration that involves significant assumptions and estimates. These assumptions and estimates
are based on our best judgments and could materially affect our financial condition and results of operations.
Impairment of
goodwill
. Our judgments regarding the existence of impairment indicators include our assessment of the impacts of legal factors; market and economic conditions; the results of our operational performance and strategic plans; competition and
market share; and any potential for the sale or disposal of a significant portion of our principal operations. If we conclude that indicators of impairment exist, we then assess the fair value of goodwill. Our valuation process provides an estimate
of a fair value of goodwill using a discounted cash flow model and includes many assumptions and estimates. We test goodwill for impairment on an annual basis in the first quarter of the year, and on an interim basis in certain circumstances. During
the period from December 31, 2007 through the date of this report, our stock price declined significantly. In accordance with SFAS No. 142, we performed an analysis and concluded that the decline in our stock price and related market
capitalization was caused by routine and temporary fluctuations in our stock price and is not an indication that our goodwill is impaired. In the event that, in the future, we conclude that our goodwill or our amortizable intangible assets are
impaired, we would be required to record a charge to earnings in our financial statements and that charge may significantly decrease our results of operations.
Impairment of equipment, leasehold improvements, long-lived assets and other intangible assets.
We periodically review long-lived assets, other intangibles and product lines that we may sell or otherwise
dispose of before the end of the assets previously estimated useful life to determine if there is any impairment of these assets. We assess the impairment of these assets, or the need to accelerate amortization, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our long-lived assets and other
intangibles. Future events could cause us to conclude that impairment indicators exist and that the assets should be reviewed to determine their fair value. We assess the assets for impairment based on the estimated future undiscounted cash flows
expected to result from the use of the assets and their eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the assets carrying amount
over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of a fair value of these assets using a discounted cash flow model, which includes many assumptions and estimates. Once the valuation is
determined, we will write-down these assets to their determined fair value, if necessary. Any write-down could have a material adverse effect on our financial condition and results of operations.
On November 3, 2005, we announced a corporate reorganization that included the layoff of certain Teamplate founders and triggered the acceleration
of the remaining Teamplate management incentive plan obligation. During this time, we also assessed the effect this layoff had on the valuation of the intangibles related to the Teamplate acquisition and determined that the intangibles were not
impaired as a result of the layoff.
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Concurrent with the announcement of the reorganization, we announced that we would record a non-cash
impairment charge of $607,000 in the fourth quarter of 2005. This impairment charge included $559,000 of impairment of application systems software projects that would no longer be completed and $48,000 of assets that would be abandoned with the
office consolidation. We do not anticipate future cash expenditures in connection with this impairment.
Useful lives of equipment,
leasehold improvements and intangible assets.
Equipment and leasehold improvements, identifiable intangible assets and certain other long-lived assets are recorded at cost less accumulated amortization and are amortized over their useful
lives on a straight-line basis. Useful lives for equipment and leasehold improvements are based on our estimates of the period that the equipment or leasehold improvement will be used, which typically range from two to five years. The useful lives
of our leasehold improvements are typically less than the lives of the applicable leases. Useful lives for intangible assets are based on our estimates of the period that the intangible assets will generate cash. Changes in estimated useful lives
could have a material effect on our financial condition and results of operations.
Contingencies.
We are periodically
involved in litigation or claims, including patent infringement claims, in the normal course of our business. We follow the provisions of SFAS No. 5,
Accounting for Contingencies,
to record litigation or claim-related expenses. We
evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We accrue for settlements when the outcome is probable and the amount or range of the settlement
can be reasonably estimated. In addition to our judgments and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in actual settlement amounts that differ materially from estimates. We expense our
legal costs associated with these matters when incurred.
Stock-based compensation plans
.
Our equity option plans are
broad-based, long-term retention programs that are intended to attract and retain talented employees and align shareholder and employee interest. We rely on our share-based compensation plans that provide broad discretion to our Board of Directors
to create appropriate share-based incentives for members of our Board of Directors, executives and select employees.
The 2006
Equity Incentive Plan
(formerly the 1989 Plan)
On June 8, 2006, at the 2006 Annual Meeting of
Shareholders of Captaris, Inc., our shareholders approved the Captaris, Inc. 2006 Equity Incentive Plan (the 2006 Plan), which amended and restated the Captaris, Inc. 1989 Restated Stock Option Plan (the 1989 Plan) to, among
other things, expand the types of awards available for grant to include, in addition to stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units (RSUs) and other stock or cash-based awards.
The 2006 Plan authorizes the issuance of stock options and RSUs to purchase up to 12,900,000 shares of Captaris common stock, the same number authorized under the 1989 Plan. The stock options under the 2006 Plan are generally granted at an
exercise price of the average of the high and low market value of our common stock on the date of grant, and generally vest over four years. They have a term of one to ten years from the date of grant and vest at the rate of 25% after one year and
2.0833% per month thereafter. Pursuant to the 2006 Plan, as of December 31, 2007, there were 1,949,450 stock options and RSUs available to grant, and 3,250,841 stock options and 195,081 RSUs outstanding.
Equity Grant Program for Non-employee Directors
Effective upon shareholder approval of the 2006 Plan and upon recommendation of the Compensation Committee, the Board of Directors implemented the Terms of Equity Grant Program for Non-employee Directors (the
NED Equity Program) under the 2006 Plan. The NED Equity Program provides for: 1) initial and annual stock option grants with a Black-Scholes or binomial (whichever method is then being used by the Company to value its stock options for
financial reporting purposes) value of $20,000 on the date of grant; and 2) initial and annual restricted deferred stock units (DSUs) with a $25,000 value based on the fair market value which we currently calculate using the
average of the high and low stock price, as reported by The Nasdaq Global Market, of our common stock on the date of grant. The stock options will vest in full one year after the date of grant and have a ten-year term, as long as the non-employee
director remains on the Board. The DSUs will be automatically deferred under the Captaris, Inc. Deferred Compensation Plan for Non-employee Directors (the NED Deferred Compensation Plan) and will vest in full one year after the
date of grant. The compensation expense associated with the NED Equity Program is included in our stock-based compensation expense.
Deferred Compensation Program
Effective upon shareholder approval of the 2006 Plan and upon recommendation of the
Compensation Committee, the Board of Directors also implemented the NED Deferred Compensation Plan, the purpose of which is to further long-term growth of the
28
CAPTARIS, INC.
Company by allowing non-employee directors to defer receipt of certain compensation, keeping their financial interests aligned with the Company, and
providing them with a long-term incentive to continue providing services. The NED Deferred Compensation Plan is administered by the Compensation Committee of the Board of Directors.
Directors who are not also employees of our Company or our affiliates are eligible to participate in the NED Deferred Compensation Plan. Non-employee
directors may elect to defer receipt of 25%, 50%, 75% or 100% of any cash compensation paid to the non-employee director for his or her service on the Board of Directors or any committee of the Board of Directors. Deferred cash compensation will be
credited to the non-employee directors account as of the date on which it would have been paid had it not been deferred, and will be deemed to be invested in our common stock at a value equal to the closing price of our common stock on such
date. Deferred cash compensation is fully vested upon receipt. In general, a non-employee directors vested account balance will be distributed in a lump sum as soon as administratively practicable after his or her separation from service on
the Board of Directors. The compensation expense associated with the NED Deferred Compensation Plan is included in our stock-based compensation expense.
The 2000 Plan
Upon the adoption of the 2006 Plan on June 8, 2006, no further awards will
be granted under the Captaris, Inc. 2000 Non-Officer Employee Stock Compensation Plan (the 2000 Plan), which resulted in a reduction in the number of stock options available for grant by 1,050,115 shares. Under the 2000 Plan, stock
options generally were granted at the fair market value of our common stock at the date of grant and generally vest over four years. Stock options under the 2000 Plan have a term of ten years from the date of grant and vest at the rate of 25% after
one year and 2.0833% per month thereafter. As of December 31, 2007, there were 1,355,321 stock options outstanding under the 2000 Plan.
Non-plan Option Grants
As an inducement to employment, on November 15, 2000, we granted our President, Chief
Executive Officer and Director of Captaris, a nonqualified stock option grant outside of any Captaris equity incentive plans. In addition, as an inducement to employment, on October 22, 1997, we granted each of two now former employees of
Captaris a nonqualified stock option outside of any of Captaris equity incentive plans. As of December 31, 2007, there were 766,000 of these stock options outstanding.
Stock-Based Compensation Expense.
We account for stock-based compensation under the provisions of SFAS No. 123(R),
Share-Based
Payment
which requires us to recognize expense related to the fair value of our stock-based compensation. We adopted SFAS No. 123R using the modified prospective transition method. Under this transition method, compensation cost recognized
for the years ended December 31, 2007 and 2006 includes: (a) compensation cost for all stock-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based compensation granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R. We chose the straight-line method for recognizing compensation expense. For all unvested stock options outstanding as of January 1, 2006, we recognize the previously measured but unrecognized compensation expense, based on the
fair value at the original grant date, on an accelerated basis over the remaining vesting period. For stock-based compensation granted subsequent to January 1, 2006, we recognize compensation expense, based on the fair value on the date of
grant, on a straight-line basis over the vesting period.
Our stock-based compensation expense includes expense related to our stock
options and our stock units. The amount of stock-based compensation expense, net of forfeitures, recognized in the year ended December 31, 2007 and 2006 was $1.4 million and $677,000, respectively, of which $42,000 and $191,000, respectively,
related to stock options granted prior to January 1, 2006. Total unamortized compensation expense as of December 31, 2007 and 2006 was $4.3 million and $1.6 million, respectively, net of estimated forfeitures. Total unamortized stock-based
compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of three years.
On September 1, 2005, our Compensation Committee and Board of Directors approved the acceleration of vesting of certain unvested stock options granted to our employees and officers under our stock option plans
that had an exercise price greater than $3.73 per share, the closing price of our common stock on September 1, 2005. There were 241 employees affected by this modification. Stock options held by non-employee directors were not included in the
acceleration. Previously unvested stock options to purchase 2.3 million shares of our common stock became immediately exercisable. The Board also imposed a holding period that requires all executive officers and certain other members of senior
management to refrain from selling shares acquired upon the exercise of these stock options, other than shares needed to cover the exercise price and to satisfy withholding taxes and shares transferred by will or by the applicable laws of descent
and distribution, until the date on which the exercise would have been permitted under the options original vesting terms.
29
CAPTARIS, INC.
The accelerated vesting eliminated future compensation expenses that we would otherwise recognize in
our financial statements with respect to these stock options as a result of adopting SFAS No. 123R. In accordance with APB No. 25 and FASB Interpretation No. 44, no compensation expense was recorded within the financial statements as
a result of this modification in 2005 because the stock options had no intrinsic value on the date of the modification due to the exercise price being in excess of the current market price of the stock. Had the stock options not been accelerated,
the unamortized fair value-based compensation expense for these stock options at January 1, 2006, would have been $1.9 million, net of estimated forfeitures, compared to the post acceleration unamortized expense of $267,000, net of estimated
forfeitures, and would have been expensed under vesting schedules in place prior to the acceleration and recorded in 2006 through 2009. Option expense recorded in the year ended December 31, 2006 would have increased by $1.1 million, net of
estimated forfeitures, and the unamortized compensation expense for these stock options would have been $812,000, net of estimated forfeitures, to be recorded in 2007 through 2009.
Accounting for income taxes.
We follow the asset and liability method of accounting for income taxes as set forth by SFAS No. 109,
Accounting for Income Taxes
, and account for uncertainties related to income taxes under the provisions of FASB Interpretation No. 48,
Accounting for Uncertainties in Income Taxes an interpretation of FASB Statement No. 109
(FIN No. 48). Accordingly, we are required to estimate our potential income tax claims in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. Significant
judgment is required in evaluating our tax positions and in determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As
required by FIN No. 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amounts we recognize in the financial statements are the largest benefit that have a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We will establish
a valuation allowance to reduce deferred tax assets unless it is more likely than not that we will generate sufficient taxable income to allow for the realization of our deferred net tax assets. The provision for income taxes includes the impact of
potential tax claims and changes to accruals and valuation allowances that we consider appropriate, as well as the related penalties and interest expense. In addition to our judgments and use of estimates, there are inherent uncertainties
surrounding income taxes that could result in actual amounts that differ materially from our estimates. Any adjustments in our tax provision related to these contingencies could have a material effect on our financial condition, results of
operations and cash flow.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, the percentage of net revenue represented by certain items in our consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
(1)
|
|
|
2006
|
|
|
2005
(1)
|
|
Net revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
30.3
|
|
|
30.1
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
69.7
|
|
|
69.9
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
17.0
|
|
|
13.3
|
|
|
16.2
|
|
Selling and marketing
|
|
37.0
|
|
|
34.6
|
|
|
39.9
|
|
General and administrative
|
|
19.4
|
|
|
17.5
|
|
|
21.5
|
|
Amortization of intangible assets
|
|
1.1
|
|
|
1.4
|
|
|
2.0
|
|
In-process research and development
|
|
0.2
|
|
|
|
|
|
|
|
Gain on sale of discontinued product line CallXpress
|
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
73.7
|
|
|
65.7
|
|
|
78.3
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
(4.0
|
)
|
|
4.2
|
|
|
(9.5
|
)
|
Other income, net
|
|
2.7
|
|
|
2.1
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense (benefit)
|
|
(1.4
|
)
|
|
6.3
|
|
|
(8.4
|
)
|
Income tax expense (benefit)
|
|
(1.6
|
)
|
|
2.0
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
0.2
|
|
|
4.3
|
|
|
(4.6
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
0.2
|
%
|
|
4.3
|
%
|
|
(4.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the years ended December 31, 2007 and 2005, respectively, percentages from certain line items do not sum to the
total of those line items due to rounding.
|
30
CAPTARIS, INC.
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
Percent
Change
from 2006
|
|
|
2006
|
|
Percent
Change
from 2005
|
|
|
2005
|
|
|
(in thousands)
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue
|
|
$
|
33,164
|
|
(3.7
|
)%
|
|
$
|
34,428
|
|
4.8
|
%
|
|
$
|
32,860
|
Maintenance, support and services revenue
|
|
|
40,355
|
|
11.7
|
%
|
|
|
36,183
|
|
13.1
|
%
|
|
|
31,997
|
Hardware revenue
|
|
|
17,773
|
|
(16.9
|
)%
|
|
|
21,375
|
|
(0.7
|
)%
|
|
|
21,523
|
Appliance revenue
|
|
|
3,537
|
|
(1
|
)
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
94,829
|
|
3.1
|
%
|
|
$
|
91,986
|
|
6.5
|
%
|
|
$
|
86,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Percent change of appliance revenue is not meaningful because we did not have this revenue in 2006 and 2005.
|
We calculate net revenue as the selling price of our products less an estimate for returns. We derive net revenue
primarily from licensing software as well as follow on sales of add-on software modules, incremental capacity and sales of maintenance, support and service agreements, professional services, appliances and resale of fax boards.
Years ended December 31, 2007 and 2006.
Net revenue for the year ended December 31, 2007 increased by $2.8 million compared to
the year ended December 31, 2006. The net revenue increase was due primarily to including Castelle appliance and maintenance, support and services revenue, for the period of July 10, 2007 through December 31, 2007, in our 2007
operating results. Additionally, as a result of an increase in the number of underlying agreements, our traditional maintenance, support and services revenue also increased. These increases were partially offset by decreases in revenue from software
and hardware.
Software revenue decreased $1.3 million primarily due to a non-recurring $1.8 million strategic licensing arrangement with
Xpedite recorded in our 2006 results which we discuss in further detail below.
Hardware revenue decreased in 2007 in comparison to 2006
due to several large sales to large customers in 2006 and fewer comparably large individual software license sales in 2007. Variations in hardware revenue generally trends directly with software revenue as we resell fax boards with a significant
number of our RightFax software products. Also, the volume and associated revenue varies from period to period depending upon the mix of software sold and the requirements of each customer.
We believe our net revenue will increase in 2008 primarily due to the addition of CDT revenue from the date of acquisition, a full year of revenue from
Castelle, product growth from our existing product lines, and revenue from new product releases. A significant portion of CDT revenue is in Europe, is sold direct and includes a relatively higher portion of professional services.
Years ended December 31, 2006 and 2005.
Net revenue for the year ended December 31, 2006 increased by $5.6 million compared to
the year ended December 31, 2005. The increase in net revenue was due primarily to the growth of maintenance, support and service agreements and an increase in the volume of our software licenses sold, which we believe to be the result of
increased customer deployment during 2006 of RightFax throughout their organizations. In addition, $1.8 million of the increase in revenue was due to a strategic licensing arrangement with Xpedite. This strategic license arrangement began in
September 2003. In accordance with this arrangement, Xpedite agreed to pay a minimum of $2.0 million over a three-year period for a license to use and resell our fax-to-mail technology. In September 2004 we recognized $250,000 of revenue
in connection with this arrangement but due to a dispute with Xpedite, did not record any revenue in 2005 relating to this arrangement. In February 2006, we resolved the dispute regarding the revenue for 2005. As a result, we recorded $750,000
of revenue related to the 2005 commitment. During the third quarter of 2006 we received an additional $1.0 million from Xpedite.
Revenue from our RightFax product line in the year ended December 31, 2006 increased compared to the year ended December 31, 2005. This increase was due primarily to $1.8 million from the Xpedite strategic licensing arrangement
and to the growth of professional services sold and an increase in the volume of RightFax licenses sold resulting from what we believe to be increased capacity needs from existing customers as they further deployed during 2006 RightFax throughout
their organizations. RightFax product revenue, which includes revenue from software licenses and hardware sales, was $77.5 million for the year ended December 31, 2006, up 6.7% from the year ended December 31, 2005. Revenue from RightFax
software for the year ended December 31, 2006 was $27.1 million, an increase of $1.4 million or 5.4% from the year ended December 31, 2005. RightFax maintenance, support and services revenue was $29.0 million for the year ended
December 31, 2006, up $3.6 million or 14.4% from the prior year. RightFax hardware sales for the year ended December 31, 2006 was $21.4 million, relatively flat compared to the prior year.
31
CAPTARIS, INC.
Revenue from the Captaris Alchemy and Captaris Workflow product lines increased $711,000 to $14.5
million in the year ended December 31, 2006 compared to $13.8 million the year ended December 31, 2005. This increase was primarily due to increased international Captaris Workflow sales. This increase was partially offset by the decrease
in sales of the Alchemy product line. The decrease in sales of Alchemy was primarily due to customer support issues relating to the consolidation of worldwide technical support that took place in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
65,889
|
|
$
|
66,206
|
|
$
|
64,076
|
Canada
|
|
|
3,492
|
|
|
3,551
|
|
|
3,404
|
Europe
|
|
|
12,163
|
|
|
10,562
|
|
|
9,874
|
Asia Pacific
|
|
|
6,614
|
|
|
5,654
|
|
|
5,190
|
Rest of the world
|
|
|
6,671
|
|
|
6,013
|
|
|
3,836
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
94,829
|
|
$
|
91,986
|
|
$
|
86,380
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, 2007 and 2006
.
International net revenue,
excluding Canada, represented 26.8% of total net revenue for the year ended December 31, 2007 compared to 24.2% for the year ended December 31, 2006, representing an increase of $3.2 million. This increase was attributable to overall
growth in international software, maintenance and services, and hardware sales. International revenue from software, maintenance and services, and hardware sales increased 9.4%, 26.0% and 0.8%, respectively, for the year ended December 31, 2007
compared to the year ended December 31, 2006. The overall increase in revenue from our international regions was due to our continued investment and expansion into international markets and to a higher distribution of sales outside North
America from our Captaris Alchemy product line. Our revenue from markets outside of the U.S. has increased to 31% of total revenue in 2007 from 28% in 2006 and 26% in 2005. We expect the portion of our revenue derived from international markets will
be significantly higher in 2008 due, primarily, to the acquisition of CDT and our continuing expansion of our international operations. We generate a significant portion of CDT revenue in Europe.
We expect our revenue will increase in 2008 due to the acquisitions of Castelle and CDT. In addition we increased our investment in our sales
organization in 2007 and plan to continue our investment in our sales organization in 2008. We expect our revenue will increase as a result of these investments. Historically, excluding the effects of acquisitions, our business experiences
seasonality with a decline in revenue during the first quarter compared to the prior years fourth quarter, building gradually during the second and third quarters, and ending with the fourth quarter as our largest quarter for revenue. We
anticipate a similar pattern in 2008.
Years ended December 31, 2006 and 2005
.
International net revenue,
excluding Canada, represented 24.2% of total net revenue for the year ended December 31, 2006 compared to 21.9% for the year ended December 31, 2005, representing an increase of $3.3 million. This increase was attributable to overall
growth in software, maintenance and services, and hardware sales. International revenue from software, maintenance and services, and hardware sales increased 11.9%, 24.7% and 22.7%, respectively, for the year ended December 31, 2006 compared to
the year ended December 31, 2005. The overall increase in revenue from our international regions was due to our continued investment and expansion into international markets and to a higher distribution of sales outside North America from our
Captaris Alchemy product line. We believe that our revenue growth for the year ended December 31, 2006 compared to the prior year was largely attributable to the changes we introduced into the sales channels in 2005, and our continued
investments in our sales organizations.
Gross Profit
Gross profit is calculated as the selling price of our products, net of estimated returns, less cost of revenue. Cost of revenue includes manufacturing and distribution costs for products and programs sold, royalties
for licensed products, amortization of acquired technology, product warranty costs, operation costs related to product support and costs associated with the delivery of professional services.
32
CAPTARIS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Percent
Change
from 2006
|
|
|
2006
|
|
|
Percent
Change
from 2005
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Gross profit
|
|
$
|
66,075
|
|
|
2.8
|
%
|
|
$
|
64,266
|
|
|
8.1
|
%
|
|
$
|
59,455
|
|
Percentage of revenue
|
|
|
69.7
|
%
|
|
|
|
|
|
69.9
|
%
|
|
|
|
|
|
68.8
|
%
|
Years ended December 31, 2007 and 2006
.
Gross profit for the year ended
December 31, 2007 increased by $1.8 million compared to the year ended December 31, 2006. The gross profit increase was due primarily to including Castelle appliance and maintenance, support and services revenue, for the period of
July 10, 2007 through December 31, 2007, in our 2007 operating results. Additionally, as a result of an increase in the number of underlying agreements, our traditional maintenance, support and services revenue also increased. These
increases collectively offset the effect of the 2006 non-recurring $1.8 million from Xpedite, which was 100% margin.
We believe our gross
profit will increase in 2008 due to the inclusion of CDT revenue from the date of acquisition, a full year of revenue from Castelle, and continued growth from software, appliance and maintenance, support and services sources. However, we expect
gross profit as a percentage of revenue will decline in 2008 for two reasons. First, CDT has traditionally recorded lower gross margins because a significant portion of their revenue is from professional services, which has a lower margin than
software. Therefore including CDT in our results of operations will have the effect of reducing our overall gross profit as a percentage of revenue. Secondly, we anticipate recording a portion of the amortization expense relating to the technology
acquired from CDT in cost of revenue.
Years ended December 31, 2006 and 2005
.
The increase in gross profit for
the year ended December 31, 2006 compared to the year ended December 31, 2005 was primarily due to increased revenue from maintenance, support and service agreements and software licenses including the $1.8 million from Xpedite which was
100% margin. This increase was partially offset by lower margins contributed by professional services and costs associated with our consolidation of our international product support.
Research and Development
Research and development expenses consist of the salaries and related
benefits for our product development personnel, outside engineering services, prototype materials and expenses related to the development of new and improved products, facilities and depreciation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Percent
Change
from 2006
|
|
|
2006
|
|
|
Percent
Change
from 2005
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
16,167
|
|
|
32.2
|
%
|
|
$
|
12,227
|
|
|
(12.5
|
%)
|
|
$
|
13,976
|
|
Percentage of revenue
|
|
|
17.0
|
%
|
|
|
|
|
|
13.3
|
%
|
|
|
|
|
|
16.2
|
%
|
Years ended December 31, 2007 and 2006.
For the year ended December 31,
2007, research and development expenses increased $3.9 million compared to the year ended December 31, 2006. This was primarily due to an increase in outsourced engineering services of $1.9 million, the inclusion of Castelles research and
development expenses from July 10, 2007 through December 31, 2007 of $1.0 million and organizational transition costs of $353,000 associated with changes in our research and development organization structure relating to sustaining and
maintenance engineering. These increases were partially offset by a decrease in depreciation costs of $289,000 as certain assets became fully depreciated. We expect overall research and development expenses to increase in absolute dollars in 2008
compared to 2007 as we will continue the use of outsourced engineering services and realize a full year of Castelle and CDT research and development expenses.
Years ended December 31, 2006 and 2005.
For the year ended December 31, 2006, research and development expenses decreased $1.7 million compared to the year ended December 31, 2005,
primarily due to a reduction of $852,000 in staffing cost due to a lower headcount, a reduction of $724,000 in compensation cost due to the minimum incentive plan obligation for certain Teamplate founders, which was discontinued in late 2005, a
reduction of $276,000 for outsourced research and development and a reduction of $17,000 in other expenses. These decreases were partially offset by an increase of $120,000 in stock-based compensation expense.
Selling and Marketing
Selling and marketing expenses
consist primarily of salaries and benefits, sales commissions, travel expenses and related facilities costs for our sales, business development, marketing and order management personnel. Selling expenses also include professional fees associated
with partner development, as well as costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.
33
CAPTARIS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Percent
Change
from 2006
|
|
|
2006
|
|
|
Percent
Change
from 2005
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Selling and marketing
|
|
$
|
35,084
|
|
|
(10.2
|
%)
|
|
$
|
31,830
|
|
|
(7.6
|
%)
|
|
$
|
34,448
|
|
Percentage of revenue
|
|
|
37.0
|
%
|
|
|
|
|
|
34.6
|
%
|
|
|
|
|
|
39.9
|
%
|
Years ended December 31, 2007 and 2006.
For the year ended December 31,
2007, selling and marketing expenses increased $3.3 million compared to the year ended December 31, 2006. This was primarily due to increases in staffing and occupancy costs related to hiring additional sales organization personnel of $2.5
million, the inclusion of Castelles selling and marketing expenses from July 10, 2007 through December 31, 2007 of $757,000, travel and entertainment associated with an increased investment in our sales organization of $616,000 and
commissions on higher compensation plans of $394,000. These increases were partially offset by decreases in consulting fees of $494,000, reseller commissions of $301,000, and planned advertising of $243,000. We expect overall sales and marketing
expenses to increase in absolute dollars in 2008 compared to 2007 as a full year of Castelle and CDT sales and marketing expenses will be included in our results of operations.
Years ended December 31, 2006 and 2005.
The decrease of $2.6 million or 7.6% in selling and marketing expenses for the year ended
December 31, 2006, compared to the year ended December 31, 2005, was due primarily to a decrease of $1.6 million in expenses related to the Teamplate minimum incentive plan obligation which was discontinued in late 2005, a $1.3 million
reduction in marketing and advertising programs and a $671,000 reduction in sales commissions resulting from a change in compensation structure. These decreases were partially offset by an increase of $687,000 in staff and occupancy costs relating
to a higher headcount, an increase of $227,000 for stock-based compensation expenses and an increase of $91,000 in other expenses.
General and
Administrative
General and administrative expenses consist of the salaries, benefits and related costs of our executive, finance,
information technology, human resource and legal personnel, third-party professional service fees, bad debt charges, facilities, and depreciation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Percent
Change
from 2006
|
|
|
2006
|
|
|
Percent
Change
from 2005
|
|
|
2005
|
|
|
|
(in thousands)
|
|
General and administrative
|
|
$
|
18,392
|
|
|
14.2
|
%
|
|
$
|
16,103
|
|
|
(13.1
|
%)
|
|
$
|
18,529
|
|
Percentage of revenue
|
|
|
19.4
|
%
|
|
|
|
|
|
17.5
|
%
|
|
|
|
|
|
21.5
|
%
|
Years ended December 31, 2007 and 2006.
For the year ended December 31,
2007 general and administrative expenses increased $2.3 million compared to the year ended December 31, 2006. This was primarily due to the inclusion of Castelles general and administrative expenses from July 10, 2007 through
December 31, 2007 of $990,000, staffing and occupancy cost increases, including salaries related to organizational changes that in turn include severance costs of $462,000 relating to the departure of our Chief Operating Officer, stock-based
compensation expense of $459,000 associated with additional grants of stock options and stock units, software and hardware purchases and associated maintenance of $383,000 and legal expenses of $233,000. These increases were partially offset by a
reduction in depreciation of $343,000 as certain assets became fully depreciated and a decrease in state sales tax expense of $173,000. We expect overall general and administrative expenses to increase in absolute dollars in 2008 compared to 2007 as
a full year of Castelle and CDT general and administrative expenses will be included in our results of operations.
Years ended
December 31, 2006 and 2005.
The $2.4 million decrease in general and administrative expenses in the year ended December 31, 2006 compared to the year ended December 31, 2005 was due primarily to a decrease of $679,000 in
staffing and occupancy cost primarily due to decreased headcount, a reduction of $629,000 for costs incurred for consulting services, a decrease in bad debt expense of $544,000, a decrease of $553,000 in costs associated with internal control costs,
a decrease of $538,000 in audit and tax fees and an additional decrease of $9,000 in other expenses. These decreases where partially offset by $542,000 in stock-based compensation cost related to the implementation of SFAS No. 123R.
34
CAPTARIS, INC.
Amortization of Intangible Assets
We amortize acquired intangible assets with definite lives. Amortization expense for acquired core technology and license agreements is recorded in cost
of revenue and was $2.0 million, $1.9 million and $1.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Amortization expense recorded in operating expenses related to acquired intangible assets was $1.0 million, $1.3
million and $1.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in amortization expense in 2007 compared to 2006 was due primarily to certain intangible assets becoming fully amortized. The decrease in
amortization expense in 2006 compared to 2005 was due primarily to certain intangible assets becoming fully amortized. We expect amortization expense for 2008 to increase from 2007 due to the additional amortization of the combined Castelle and CDT
intangibles.
In-process research and development
Described above under Acquisitions, we acquired Castelle on July 10, 2007. We recognized an in-process research and development charge of $219,000 as a separate line item on our consolidated
statements of operations for the fair value of research and development in-process on the date we acquired Castelle.
Stock-Based Compensation Expense
(Benefit)
On January 1, 2006, we adopted SFAS No. 123R, which requires us to measure and recognize compensation expense for
all share-based payment awards made to employees and directors including employee stock options and stock units. Prior to 2006, we had only shown, as permitted by SFAS No. 123, pro forma financial results including the effects of share-based
compensation expense in the footnotes to the financial statements. For the years ended December 31, 2007, 2006 and 2005, we recognized the following in share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of revenue
|
|
$
|
29
|
|
$
|
12
|
|
$
|
(12
|
)
|
Research and development
|
|
|
138
|
|
|
46
|
|
|
(74
|
)
|
Selling and marketing
|
|
|
238
|
|
|
116
|
|
|
(119
|
)
|
General and administrative
|
|
|
962
|
|
|
503
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (benefit)
|
|
$
|
1,367
|
|
$
|
677
|
|
$
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, the pro forma stock-based compensation expense was $3.9
million. The decrease in stock-based compensation expense in 2006, compared to our pro forma stock-based compensation expense in 2005, can be attributed to accelerating the vesting of underwater stock options in 2005, the reduction in number of
shares granted in 2006 compared to 2005 and differences between accounting for stock options and stock units under SFAS No. 123R in 2006 and SFAS No. 123 in 2005.
On September 1, 2005, our Compensation Committee and Board of Directors approved the acceleration of vesting of certain unvested stock options
granted to our employees and officers under our stock option plans that had an exercise price greater than $3.73 per share, the closing price of our common stock on September 1, 2005. Stock options held by non-employee directors were not
included in the acceleration. Previously, unvested stock options to purchase approximately 2.3 million shares of our common stock became immediately exercisable. The Board also imposed a holding period that will require all executive officers
and certain other members of senior management to refrain from selling shares acquired upon the exercise of these stock options, other than shares needed to cover the exercise price and to satisfy withholding taxes and shares transferred by will or
by the applicable laws of descent and distribution, until the date on which the exercise would have been permitted under the options original vesting terms.
The accelerated vesting eliminated future compensation expenses that we would otherwise recognize in our financial statements with respect to these stock options as a result of adopting SFAS No. 123R. In
accordance with APB No. 25 and FASB Interpretation No. 44, no compensation expense was recorded within the financial statements as a result of this modification because the stock options had an intrinsic value of $0.00 on the date of the
modification due to the exercise price being in excess of the current market price of the stock. In accordance with SFAS No. 123, we included the unamortized compensation expense of $1.1 million (net of income taxes) related to the accelerated
stock options in our pro forma net loss and net loss per common share for the year ended December 31, 2005. Had the stock options not been accelerated, the unamortized fair value-based compensation expense for the stock options would
have been recorded in 2006 through 2009, under vesting schedules in place prior to the acceleration, which generally would have resulted in fair value-based compensation expenses, net of forfeitures and income taxes, of $748,000 in 2006 and $568,000
in 2007 to 2009.
35
CAPTARIS, INC.
Gain on Sale of the CallXpress Product Line
In September of 2003, we sold our CallXpress product line. Concurrent with the transaction, we entered into an earn-out agreement with the buyer which
entitles us to receive additional payments of up to $1.0 million per year for each of the three years following the sale, depending on the buyers success in achieving certain revenue targets. In March 2005, we received a report from the buyer
and payment of $1.0 million, confirming achievement of the revenue target for 2004. We recognized this payment as an additional gain on the sale of the CallXpress product line and we classified it on our income statement within operating expenses in
the first quarter of 2005. In February of 2007 and 2006, respectively, we received notification confirming that the buyer had achieved their revenue target for the applicable year. We received two payments of $1.0 million each in March of 2007 and
2006, respectively. Accordingly, in the first quarters of 2007 and 2006, respectively, we recorded an additional gain on the sale of the CallXpress product line within operating expenses. This agreement expired in 2007 and, therefore, we will no
longer receive any payments.
Other Income, Net
Other income, net, consists primarily of interest income and foreign currency transaction gains and losses. For the years ended December 31, 2007, 2006 and 2005, other income was $2.5 million, $1.9 million and $911,000, respectively.
The increase in other income for the year ended December 31, 2007 compared to 2006 was primarily due to an increase in foreign currency transaction gains. The increase in other income for the year ended December 31, 2006 compared to 2005
was due primarily to an increase in interest income resulting from an increase in our invested cash balances. During 2007, we liquidated substantially all of our invested cash balances enabling us to use the proceeds in connection with the separate
purchases of Castelle and CDT. In comparison to 2007, interest income for 2008 will be substantially lower as a result of reduced invested cash balances, and interest expense will be substantially higher due to interest incurred for borrowing on our
new credit facility from Wells Fargo Foothill, LLC (see below under Subsequent Events). Foreign currency transaction gains were $524,000 in 2007, transaction losses were $163,000 in 2006 and transaction gains were $124,000 in 2005.
Income Tax Expense (Benefit)
We are
subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are
transactions and calculations for which the ultimate tax determination is uncertain. As required by FIN No. 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amounts we recognize in the financial statements are the largest benefit that have a greater than 50 percent likelihood of
being realized upon ultimate settlement with the relevant tax authority. We adjust these accruals in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of statutes of limitations. The provision for income
taxes includes the impact of potential tax claims and changes to accruals that we consider appropriate, as well as the related penalties and interest.
Our effective tax rates differ from the statutory rate primarily due to tax exempt interest income, state income taxes, foreign income taxes and accruals for certain tax exposures discussed above. The effective income
tax rates on income and losses from continuing operations in 2007, 2006 and 2005 were 117.6%, 31.4% and 45.2%, respectively. We recorded an income tax benefit of $1.5 million and $3.3 million, respectively, on losses from continuing operations for
the years ended December 31, 2007 and December 31, 2005. For the year ended December 31, 2006, we recorded an income tax provision of $1.8 million on income from continuing operations. The income tax benefits in 2007 included the
reversal of tax liabilities of $403,000 which we determined were no longer probable based on updated information surrounding the related tax return, a research and development tax credit of $173,000, and the tax benefit for tax-exempt interest in
taxable income of $566,000. The income tax provision in 2006 included adjustments of $72,000 primarily associated with correcting deferred tax asset balances at December 31, 2005. The income tax benefits in 2005 included the reversal of tax
liabilities of $523,000 which we determined were no longer probable based on updated information surrounding the related tax return.
At
December 31, 2007, we have available unused net operating losses that may be applied against future taxable income. These net operating losses consist of international losses of $2.6 million that do not expire, federal losses of $7.4 million
that expire from 2019 to 2027, and state losses of $13.1 million that expire from 2009 to 2027. Additionally, we have $3.1 million of tax attributes from our Canadian subsidiary which are primarily investment tax credits and deferred research and
development expenditures which begin to expire in 2013.
Our policy is to evaluate our deferred tax assets on a jurisdiction by
jurisdiction basis and record a valuation allowance for our deferred tax assets if we do not have sufficient positive evidence indicating that we will have future taxable income available to utilize our deferred tax assets. In assessing the need for
a valuation allowance, we first examine our historical cumulative three year pre-tax book income (loss). If we have historical cumulative three year pre-tax book income, we consider this to be strong positive evidence
36
CAPTARIS, INC.
indicating we will be able to realize our deferred tax assets in the future. Absence the existence of any negative evidence outweighing the positive evidence
of cumulative three year pre-tax book income, we do not record a valuation allowance for our deferred tax assets.
If we have historical
cumulative three year pre-tax book losses, we then examine our historical cumulative three year pre-tax book losses to determine whether any unusual or abnormal events occurred in this time period which would cause the results not to be an indicator
of future performance. As such, we normalize our historical cumulative three year pre-tax results by excluding abnormal items that are not expected to occur in the future. This analysis of normalized historical book income includes
material management assumptions that relate to the appropriateness of excluding non-recurring items. If, after excluding non-recurring items, we have normalized historical cumulative three year pre-tax book income, we consider this
strong positive evidence indicating we will be able to realize our deferred tax assets in the future. We then assess any additional positive and negative evidence such as the existence or absence of historical cumulative three year taxable income,
future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards and taxable income in prior carry back years. After reviewing and weighing all of the positive and
negative evidence, if the positive evidence outweighs the negative evidence then we do not record a valuation allowance for our deferred tax assets. If the negative evidence outweighs the positive evidence, then we record a valuation allowance for
our deferred tax assets.
For our U.S. federal jurisdictions, we have incurred U.S. cumulative pre-tax book losses of $2.5 million for the
three years ended December 31, 2007. As of December 31, 2007, we continue to believe, based on the weight of available evidence, that no valuation allowance is required at December 31, 2007 for our deferred tax assets related to U.S.
federal net operating losses and other U.S. deferred tax assets because the preponderance of objectively verifiable, positive evidence outweighs available negative evidence.
Objectively verifiable positive evidence considered for purposes of this determination includes our normalized cumulative pre-tax book income
of $1.0 million for the three years ended December 31, 2007 exclusive of certain expenses in 2005 that we believe were an aberration, including: (1) $2.1 million for incentive compensation paid pursuant to an earn-out agreement with the
former founders of Teamplate which we acquired in 2003 and (2) $1.4 million of increased accounting and consulting fees incurred to comply with the Sarbanes Oxley Act of 2002 which we consider to be in excess of our normal and recurring fees
for annual compliance. We believe these are unusual items that are not indicative of a continuing condition and should be considered an aberration for purposes of determining our earnings history for assessing the realizability of our deferred tax
assets in accordance with the recognition criteria of SFAS No. 109. In addition to the objective positive evidence, we also have positive evidence that is more subjective in nature including projected cumulative 3 year earnings for the period
2006 through 2008, projected cumulative 3 year taxable income for the period 2008 through 2010 and projected future earnings from Castelle which we acquired in 2007. These positive evidences are less certain than the objective positive evidences and
therefore carry less weight when evaluating whether a valuation allowance is not needed. Negative evidence we considered was our history of cumulative book losses for the three years ended December 31, 2007, which we believe was an aberration
(as discussed above). Based on the weight of all available evidence, we believe it is more likely than not that we will generate sufficient future U.S. taxable income to realize our U.S. deferred tax assets at December 31, 2007. In addition, we
believe it is more likely than not that we will utilize our net operating loss carry forwards and they will not be limited by Internal Revenue Code Section 382 before they expire. We also believe that because of our assumptions and judgment
involved with this analysis, there is an element of uncertainty that these U.S. federal net operating losses and U.S. deferred tax assets will be utilized in the future. Therefore, in the future we will continue to closely monitor evidence on a
quarterly basis. If we believe that our negative evidence outweighs our positive evidence, we will record a valuation allowance against the U.S. net operating losses and the U.S. deferred tax assets at that time.
In Canada, we recorded a full valuation allowance against our investment tax credits because we do not believe it is more likely than not that we will
utilize the credits prior to the expiration of the statutory carryforward period. Our Canadian subsidiary has a history of losses, and with projected Canadian income insufficient to support utilization of the investment tax credit carryovers prior
to expiration provides substantial negative evidence supporting our conclusion regarding realizability of the tax credit carryovers.
In
our other foreign jurisdictions, we believe that our net operating losses are more likely than not to be realized. Our history of income and net operating loss utilization, coupled with an indefinite carryforward period for net operating losses
provide sufficient objectively verifiable positive evidence to support our conclusion regarding realizability of these carryforwards.
We
anticipate the effective tax rate for 2008 to be in the range of 31% to 34%.
37
CAPTARIS, INC.
Discontinued Operations
In September of 2003, we completed the sale of the assets of MediaTel. As such, MediaTels results of operations have been classified as discontinued operations. For the year ended December 31, 2006 we
recorded additional net gain of $16,000, net of income taxes of $11,000, related to legal fees and settlement of legal proceedings. In 2005, we recognized a net gain of $38,000, net of income taxes of $25,000, related to insurance reimbursements of
legal fees incurred in defense of various legal proceedings.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents. Traditionally our principal sources of liquidity have also included short and long-term
investments. During 2007, in anticipation of our acquisition of CDT, we liquidated all of our investments. As a result we did not own any short and long-term investments as of December 31, 2007. Therefore, our cash and cash equivalent balance
as of December 31, 2007 was $46.2 million. Additionally, subsequent to December 31, 2007, as described below in Subsequent Events, we entered into a $10.0 million line of credit agreement. As of December 31, 2006, when our
portfolio consisted primarily of money market funds, adjustable rate mortgage-backed securities, and municipal and United States government agency-backed securities, the balance of cash, cash equivalents and short and long-term investments totaled
$59.4 million.
Cash provided by operating activities for 2007 was $10.6 million resulting from changes in working capital components and
adjustments to net income for non-cash expenses. Working capital sources of cash were primarily from a decrease in accounts receivable and increases in deferred revenue and accounts payable. Accounts receivable decreased due to better revenue
linearity within the fourth quarter of 2007 in comparison to the same period for the prior year. Accounts payable increased primarily due to inventory purchases. Deferred revenue increased primarily due to increased maintenance and support
obligations. Working capital uses of cash included increases in prepaid expenses and deferred income taxes. Prepaid expenses increased due to expenditures relating to the CDT acquisition that were recorded as deferred costs of the acquisition.
Deferred income taxes increased due to taxes provided for temporary differences between book income and taxable income.
Cash provided by
operating activities in 2007 was $10.6 million which was $3.3 million lower compared to 2006 due, primarily, to income of $4.0 million in 2006 compared to income of $224,000 in 2007, as well as increases in prepaid expenses and deferred tax assets.
Cash provided by operating activities for 2006 was $13.9 million, primarily from our net income for the year, adjusted by non-cash expenses and changes in working capital components. Working capital sources of cash were primarily from a decrease in
taxes receivable and deferred tax assets and an increase in deferred revenue. Deferred revenue increased primarily due to increased maintenance and support obligations. Working capital uses of cash included increases in trade receivables and prepaid
expenses.
Cash provided by investing activities was $31.5 million for the year ended 2007 compared to cash used in investing activities of
$4.7 million during 2006. Cash provided by investing activities in 2007 consisted primarily of $48.7 million of proceeds from sales and maturities of investments, net of purchases. This was reduced by $12.0 million used for the purchase of Castelle
and $5.2 million for purchases of capital equipment. Cash used in investing activities in 2006 was due primarily to $3.5 million of investment purchases, net of proceeds from sales and maturities of investments and $1.3 million of capital asset
purchases.
Cash used in financing activities during the year ended December 31, 2007 was $7.0 million compared to cash used of $4.9
million in the year ended December 31, 2006. In 2007, cash used in financing activities included $9.5 million to repurchase 1,663,839 shares of our common stock pursuant to our repurchase program, partially offset by cash provided by the
exercise of stock options of $2.2 million through our employee stock option plans, as well as $308,000 of excess tax benefits from stock-based compensation. In 2006, cash used in financing activities included $11.3 million to repurchase 2,099,506
shares of our common stock pursuant to our repurchase program partially offset by cash provided from the exercise of stock options from our employee stock option plans of $5.3 million.
Subsequent to year end, on January 4, 2008, our wholly-owned subsidiary, Captaris Verwaltungs GmbH (CV GmbH), a German limited liability
company, acquired Océ Document Technologies GmbH (ODT). Under the terms of the acquisition agreement, CV GmbH acquired all of the outstanding stock of ODT for approximately 10.4 million ($15.4 million), net of
ODTs cash balance as of the closing of approximately 21.6 million ($31.8 million). To finance this transaction, we loaned CV GmbH 31.6 million ($46.2 million), representing the aggregate amount of cash paid to the seller
in the acquisition. Since the acquisition, and through the date of this report, the majority of our consolidated cash is held by ODT in Germany. We intend to have ODT remit its excess cash to Captaris in repayment of the intercompany loan. However,
in accordance with capital maintenance rules under German law, ODT can only remit to its shareholders cash equal to the amount that its net assets exceeds its registered share capital. As of the date of this report, ODTs net assets do not
exceed its registered share capital and therefore no cash can be remitted to Captaris to repay the intercompany loan. We are in the process of merging ODT into CV GmbH, with CV GmbH being the surviving company. CV GmbHs registered share
capital is significantly less than ODTs and, as a result of the merger, we expect CV GmbHs net assets to exceed its registered share capital immediately after the merger, therefore freeing up approximately 5.0 million ($7.4
million) of
38
CAPTARIS, INC.
cash to be remitted to Captaris in repayment of the intercompany loan. We expect the merger and remittance of the 5.0 million ($7.4 million) to
occur late in the second quarter of 2008. We expect CV GmbH to repay the remainder of the intercompany loan over the next 5 years.
The
outstanding intercompany loan of 31.6 million ($46.2 million) exposes us to significant gains and losses from fluctuations in the exchange rate of Euros to U.S. dollars. To mitigate this risk, we have entered into a foreign currency
exchange forward contract with Wells Fargo Bank N.A., agreeing to sell approximately 31.6 million at a future date. This contract is unsecured and matures on April 4, 2008. Under the provisions of SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
, our foreign currency forward contract is an effective hedge of our foreign currency risk exposure on the intercompany loan. However, until ODT can remit cash in repayment of the intercompany loan,
which we would then use to settle the foreign currency forward contract, we are exposed to potentially significant U.S. dollar cash flow risks. To the extent that the foreign currency forward contract is in a loss position on the date of maturity,
we will have to settle the contract in U.S. dollars equal to the amount of the loss. Additionally, we intend to continue to hedge our foreign currency exposure on the intercompany loan until it is repaid in full. This will require us to enter into a
new foreign currency contract when our existing foreign currency contract expires on April 4, 2008. There can be no assurances that we will be able to obtain a new foreign currency contract at the same rate or similar unsecured terms.
We believe existing cash, cash equivalents and amounts available under our line of credit agreement together with funds generated from
operations will be sufficient to meet our anticipated working capital needs and capital expenditure needs for the next twelve months and the foreseeable future.
Stock Repurchase Plan
On June 8, 2006, our Board of Directors authorized us to enter into a Rule 10b5-1
repurchase plan to facilitate the repurchase of our common stock at times when we ordinarily would not be in the market because of self-imposed trading blackout periods. Transactions under the Rule 10b5-1 repurchase plan began on September 18,
2006, the first trading day after the trading window closed in the third quarter of 2006.
Under our Rule 10b5-1 repurchase plan as well as
stock repurchases we made prior to or outside of the plan during open trading window periods, we repurchased 1,663,839 shares of our common stock for $9.5 million, 2,099,506 shares for $11.3 million, and 1,285,778 shares for $4.9 million in 2007,
2006 and 2005, respectively.
In 2006, the Board of Directors approved two separate increases to our previously announced stock repurchase
program, each time bringing the total cash available for repurchase to approximately $15.0 million. As of December 31, 2007, $9.6 million was available under our repurchase program. As of March 1, 2008 we have purchased an additional
33,000 shares under our repurchase plan for $126,000. We may repurchase shares in the future subject to the rules of our Rule 10b5-1 repurchase plan and, in the case of any discretionary purchases made outside of the plan, subject to overall market
conditions, stock prices, and our cash position and requirements going forward. The repurchase program will continue until the earlier of (a) such time when the maximum dollar amount authorized has been utilized or (b) our Board of
Directors elects to discontinue our repurchase program.
Contractual Obligations and Commercial Commitments
We have operating leases for all of our offices and certain equipment. Rental expense for operating leases was $3.1 million, $3.0 million and $3.1 million
in 2007, 2006 and 2005, respectively. Certain of our lease agreements provide for scheduled rent increases over the lease term. We recognize minimum rental expenses on a straight-line basis over the term of the lease. As of December 31, 2007,
we occupied 38,165 square feet of office space, net of sub-leased office space, in Bellevue, Washington under a lease that ended on February 29, 2008. In February 2008, we relocated our United States headquarters to a new location also in
Bellevue, Washington. As of the date of this report, we lease 52,810 square feet of office space under a lease that expires in February 2015. In March 2007, we renewed our lease for the Englewood, Colorado office for another twelve months and
reduced the leased space to approximately 15,000 square feet.
39
CAPTARIS, INC.
The following table summarizes our contractual obligations and estimated commercial commitments as of
December 31, 2007 and the effect such obligations are expected to have on liquidity in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
(in thousands)
|
Contractual Obligations
|
|
Total
|
|
Less than 1
year
|
|
1-3
years
|
|
4-5
years
|
|
More than 5
years
|
Operating leases, net of sublease income
|
|
$
|
14,881
|
|
$
|
2,813
|
|
$
|
4,758
|
|
$
|
3,818
|
|
$
|
3,492
|
Purchase obligations
1
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term commitments
2
|
|
|
1,245
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations and estimated commercial commitments
|
|
$
|
16,126
|
|
$
|
4,058
|
|
$
|
4,758
|
|
$
|
3,818
|
|
$
|
3,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
1.
|
These purchase obligations exclude our commitment to purchase CDT pursuant to an agreement signed on December 20,
2007 see Subsequent Events below. Our acquisition of CDT was consummated in January 2008.
|
2.
|
We have certain obligations to purchase telecommunication services and general purchases for our operating activities.
|
Subsequent to year end (see Subsequent Events below), we assumed the following CDT commitments for leased
spaces and personal property under existing non-cancelable operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
(in thousands)
|
Contractual Obligations
|
|
Total
|
|
Less than 1
year
|
|
1-3
years
|
|
4-5
years
|
|
More than 5
years
|
Operating leases
|
|
$3,324
|
|
$873
|
|
$1,570
|
|
$881
|
|
$
|
We have a $1.0 million standby letter of credit. We have collateralized the letter of credit with
a $1.0 million restricted certificate of deposit, which secures our corporate headquarters and is included in restricted cash as of December 31, 2007.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS
No. 141R),
Business Combinations
, which replaces SFAS No. 141 and amends several others. The statement retains the purchase method of accounting for acquisitions but changes the way we will recognize assets and liabilities. It
also changes the way we will recognize assets acquired and liabilities assumed arising from contingencies, requires us to capitalize in-process research and development at fair value, and requires us to expense acquisition-related costs as incurred.
SFAS No. 141R is effective for us on, but not before, January 1, 2009, the beginning of our fiscal 2009 reporting periods. SFAS No. 141R will apply prospectively to our business combinations completed on or after January 1, 2009
and will not require us to adjust or modify how we recorded any acquisition prior to that date.
In February 2007, the FASB issued
SFAS No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
. Under SFAS No. 159, we may elect to measure many financial instruments and certain other
items at fair value on an instrument by instrument basis subject to certain restrictions. We adopted SFAS No. 159 on January 1, 2008. Adopting SFAS No. 159 did not have a material impact on our consolidated financial position, results
of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which defines fair
value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. We adopted SFAS No. 157 on January 1, 2008. Adopting SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.
40
CAPTARIS, INC.
Subsequent Events
Stock Option and Stock Unit Grants
Subsequent to year end, on February 22, 2008, we granted 223,000 stock options and
194,950 stock units to certain employees. We expect to record stock-based compensation expense of $348,000 and $699,000 for the stock options and stock units, respectively, ratably over a four year period.
Acquisition of Océ Document Technologies GmbH
On January 4, 2008, our wholly-owned subsidiary, Captaris Verwaltungs GmbH, a German limited liability company (CV GmbH), acquired Océ Document Technologies GmbH (ODT), pursuant to a Sale and Purchase
Agreement (the SPA) by and between CV GmbH and Océ Deutschland Holding GmbH & Co. KG, a German limited partnership (the Seller), dated December 20, 2007. Under the terms of the SPA, CV GmbH acquired all
of the outstanding equity of ODT from the Seller, and ODT became a wholly-owned subsidiary of CV GmbH and an indirect wholly-owned subsidiary of Captaris. After our acquisition, we re-named ODT to Captaris Document Technologies GmbH
(CDT).
Under the terms of the acquisition agreement, CV GmbH acquired CDT for approximately 10.4 million ($15.4
million), net of CDTs cash balance as of the closing of approximately 21.6 million ($31.8 million). CV GmbH also assumed CDTs operating and financial liabilities, including approximately 12.1 million ($17.9 million)
in future retirement obligations. At the closing, €2.0 million ($3.0 million) of the purchase price was deposited in a third-party escrow account for 12 months as security for any post-closing purchase price adjustment and, subject to certain
limitations, for indemnification claims against the Seller; however, in connection with the resolution of a post-closing dispute with the Seller, we expect to release the full amount of the escrow to the Seller during the first quarter of 2008.
CDT is a provider of software and solutions for document capture, text recognition and document classification. CDT has approximately 178
employees and maintains its global headquarters in Constance, Germany, and its North American office in Bethesda, Maryland.
Credit Facility
On January 2, 2008, we entered into a credit agreement providing for a senior secured revolving credit facility with Wells Fargo
Foothill, LLC, as arranger, administrative agent, swing lender, and letter of credit issuer, and the other lenders party thereto (the Credit Facility).
The Credit Facility provides for a $10.0 million revolving line of credit commitment, which may be used (i) for revolving loans, (ii) for swing line advances, subject to a sublimit of $2.0 million and
(iii) to request the issuance of letters of credit on our behalf, subject to a sublimit of $5.0 million. On or before January 2, 2009, we may, subject to applicable conditions, request an increase in the commitment under the Credit
Facility of up to $10.0 million. The credit available under the Credit Facility may be used to, among other purposes, pay a portion of the purchase price for the acquisition of Océ Document Technologies GmbH as described above and to finance
our ongoing working capital, capital expenditure, and general corporate needs. Upon the closing of the Credit Facility on January 2, we obtained an initial cash advance of approximately $9.8 million.
We may, subject to applicable conditions, elect interest rates on our revolving borrowings calculated by reference to (i) the LIBOR rate (the
LIBOR Rate) fixed for given interest periods, plus a margin determined by our average daily balance of the revolving loan usage during the preceding month or (ii) Wells Fargo Bank, National Associations prime rate (or, if
greater, the average rate on overnight federal funds plus one half of one percent) (the Base Rate), plus a margin determined by our average daily balance of the revolving loan usage during the preceding month. For swing line borrowings,
we will pay interest at the Base Rate, plus a margin determined by our average daily balance of the revolving loan usage during the preceding month. For borrowings made with the LIBOR Rate, the margin ranges from 250 to 275 basis points, while for
borrowings made with the Base Rate, the margin ranges from 100 to 125 basis points.
The Credit Facility matures on January 2, 2013,
at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been cash collateralized.
The
Credit Facility provides for the payment of specified fees and expenses, including commitment and unused line fees, and contains certain loan covenants, including, among others, financial covenants providing for a minimum EBITDA and maximum amount
of capital expenditures, and limitations on our ability with regard to the incurrence of debt, the existence of liens, stock repurchases and dividends, investments, and mergers, dispositions and acquisitions, and events constituting a change in
control. Our obligations under the Credit Facility are guaranteed by certain of our direct and indirect domestic subsidiaries (collectively, the Guarantors).
The Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency
events, material judgments, and cross defaults to certain other indebtedness. The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the Credit Facility and
the obligations of any or all of the Guarantors to pay the full amount of our obligations under the Credit Facility.
41
CAPTARIS, INC.
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Captaris, Inc.
We have audited the accompanying consolidated
balance sheets of Captaris, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders equity and cash flows for each of the years in the three
year period ended December 31, 2007. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Captaris Inc. and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 14 to the financial statements,
effective January 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes. As discussed in Notes 1 and 10 to the consolidated
financial statements, effective January 1, 2006, the Company changed its method of accounting for share-based payment arrangements to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13,
2008 expressed an unqualified opinion thereon.
|
/s/ Moss Adams LLP
|
Seattle, Washington
|
March 13, 2008
|
44
CAPTARIS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,182
|
|
$
|
10,695
|
Restricted cash
|
|
|
1,000
|
|
|
|
Short-term investments, available-for-sale
|
|
|
|
|
|
7,084
|
Accounts receivable, net
|
|
|
19,348
|
|
|
21,347
|
Inventories
|
|
|
1,681
|
|
|
961
|
Prepaid expenses and other assets
|
|
|
4,564
|
|
|
2,971
|
Income tax receivable and deferred tax assets, net
|
|
|
3,527
|
|
|
3,052
|
|
|
|
|
|
|
|
Total current assets
|
|
|
76,302
|
|
|
46,110
|
Long-term investments, available-for-sale
|
|
|
|
|
|
41,584
|
Restricted cash
|
|
|
|
|
|
1,000
|
Other long-term assets
|
|
|
847
|
|
|
303
|
Equipment and leasehold improvements, net
|
|
|
7,735
|
|
|
4,340
|
Intangible assets, net
|
|
|
11,748
|
|
|
6,570
|
Goodwill
|
|
|
37,522
|
|
|
32,199
|
Deferred tax assets, net
|
|
|
5,344
|
|
|
3,842
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
139,498
|
|
$
|
135,948
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,621
|
|
$
|
5,308
|
Accrued compensation and benefits
|
|
|
5,528
|
|
|
4,522
|
Other accrued liabilities
|
|
|
1,706
|
|
|
1,920
|
Income taxes payable
|
|
|
327
|
|
|
192
|
Deferred revenue
|
|
|
22,747
|
|
|
20,328
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
38,929
|
|
|
32,270
|
|
|
|
|
|
|
|
Accrued liabilities noncurrent
|
|
|
696
|
|
|
307
|
Deferred revenue noncurrent
|
|
|
5,962
|
|
|
5,544
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
45,587
|
|
|
38,121
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 4,000 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 120,000 shares authorized; 26,378 and 27,556 outstanding, respectively
|
|
|
264
|
|
|
275
|
Additional paid-in capital
|
|
|
40,971
|
|
|
46,614
|
Retained earnings
|
|
|
49,961
|
|
|
49,790
|
Accumulated other comprehensive income
|
|
|
2,715
|
|
|
1,148
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
93,911
|
|
|
97,827
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
139,498
|
|
$
|
135,948
|
|
|
|
|
|
|
|
See the accompanying notes to these consolidated financial statements.
45
CAPTARIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net revenue
|
|
$
|
94,829
|
|
|
$
|
91,986
|
|
|
$
|
86,380
|
|
Cost of revenue
|
|
|
28,754
|
|
|
|
27,720
|
|
|
|
26,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
66,075
|
|
|
|
64,266
|
|
|
|
59,455
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,167
|
|
|
|
12,227
|
|
|
|
13,976
|
|
Selling and marketing
|
|
|
35,084
|
|
|
|
31,830
|
|
|
|
34,448
|
|
General and administrative
|
|
|
18,392
|
|
|
|
16,103
|
|
|
|
18,529
|
|
Amortization of intangible assets
|
|
|
1,029
|
|
|
|
1,274
|
|
|
|
1,749
|
|
In-process research and development
|
|
|
219
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued CallXpress product line
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69,891
|
|
|
|
60,434
|
|
|
|
67,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,816
|
)
|
|
|
3,832
|
|
|
|
(8,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,052
|
|
|
|
1,894
|
|
|
|
1,121
|
|
Interest expense and other income (expense), net
|
|
|
467
|
|
|
|
55
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,519
|
|
|
|
1,949
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense (benefit)
|
|
|
(1,297
|
)
|
|
|
5,781
|
|
|
|
(7,336
|
)
|
Income tax expense (benefit)
|
|
|
(1,525
|
)
|
|
|
1,816
|
|
|
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
228
|
|
|
|
3,965
|
|
|
|
(4,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of MediaTel assets, net of income tax expense (benefit) of $(2), $11 and $25, respectively
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
224
|
|
|
$
|
3,981
|
|
|
$
|
(3,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
|
$
|
(0.14
|
)
|
Income from discontinued operations
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
|
$
|
(0.14
|
)
|
Income from discontinued operations
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
27,019
|
|
|
|
27,899
|
|
|
|
28,907
|
|
Diluted net income (loss) per share
|
|
|
27,623
|
|
|
|
28,514
|
|
|
|
28,907
|
|
See the accompanying notes to these consolidated financial statements.
46
CAPTARIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
224
|
|
|
$
|
3,981
|
|
|
$
|
(3,979
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,700
|
|
|
|
3,104
|
|
|
|
3,474
|
|
Amortization
|
|
|
2,980
|
|
|
|
3,198
|
|
|
|
3,675
|
|
Stock-based compensation expense (benefit)
|
|
|
1,367
|
|
|
|
677
|
|
|
|
(246
|
)
|
In-process research and development
|
|
|
219
|
|
|
|
|
|
|
|
|
|
(Gain) loss on disposition of equipment
|
|
|
(7
|
)
|
|
|
74
|
|
|
|
10
|
|
Impairment of long-lived assets and intangibles
|
|
|
83
|
|
|
|
|
|
|
|
607
|
|
Provision for doubtful accounts
|
|
|
114
|
|
|
|
29
|
|
|
|
572
|
|
Unrealized gain in foreign currency exchange
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(1,349
|
)
|
|
|
3,477
|
|
|
|
(1,054
|
)
|
Changes in assets and liabilities, net of acquired assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,658
|
|
|
|
(2,563
|
)
|
|
|
(1,108
|
)
|
Inventories
|
|
|
411
|
|
|
|
(411
|
)
|
|
|
411
|
|
Prepaid expenses and other assets
|
|
|
(1,990
|
)
|
|
|
(1,159
|
)
|
|
|
(448
|
)
|
Income taxes receivable and deferred income taxes, net
|
|
|
(628
|
)
|
|
|
(1,185
|
)
|
|
|
(1,905
|
)
|
Accounts payable
|
|
|
2,603
|
|
|
|
622
|
|
|
|
(2,222
|
)
|
Accrued compensation and benefits
|
|
|
183
|
|
|
|
765
|
|
|
|
(623
|
)
|
Other accrued liabilities
|
|
|
(469
|
)
|
|
|
(489
|
)
|
|
|
813
|
|
Income taxes payable
|
|
|
(109
|
)
|
|
|
111
|
|
|
|
(343
|
)
|
Deferred revenue
|
|
|
2,088
|
|
|
|
3,692
|
|
|
|
3,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,645
|
|
|
|
13,923
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment and leasehold improvements
|
|
|
(5,244
|
)
|
|
|
(1,284
|
)
|
|
|
(3,045
|
)
|
Purchases of investments
|
|
|
(38,945
|
)
|
|
|
(71,242
|
)
|
|
|
(50,951
|
)
|
Purchases of businesses, net of cash acquired
|
|
|
(11,974
|
)
|
|
|
|
|
|
|
|
|
Proceeds from disposals of fixed assets
|
|
|
55
|
|
|
|
14
|
|
|
|
26
|
|
Proceeds from sale of and maturities of investments
|
|
|
87,618
|
|
|
|
67,790
|
|
|
|
55,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
31,510
|
|
|
|
(4,722
|
)
|
|
|
1,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
2,165
|
|
|
|
5,278
|
|
|
|
574
|
|
Repurchase of common stock
|
|
|
(9,494
|
)
|
|
|
(11,301
|
)
|
|
|
(4,942
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
308
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,021
|
)
|
|
|
(4,907
|
)
|
|
|
(4,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
35,134
|
|
|
|
4,294
|
|
|
|
(1,181
|
)
|
Effect of exchange rate changes on cash
|
|
|
353
|
|
|
|
(19
|
)
|
|
|
38
|
|
Cash and cash equivalents at beginning of period
|
|
|
10,695
|
|
|
|
6,420
|
|
|
|
7,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
46,182
|
|
|
$
|
10,695
|
|
|
$
|
6,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
|
$
|
458
|
|
|
$
|
141
|
|
|
$
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software acquired with three year payment terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of software acquired
|
|
$
|
935
|
|
|
$
|
|
|
|
$
|
|
|
Cash paid for the software
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
634
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castelle acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
14,281
|
|
|
$
|
|
|
|
$
|
|
|
Cash paid
|
|
|
(11,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these consolidated financial statements.
47
CAPTARIS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Retained
Earnings
|
|
|
Total
Shareholders
Equity
|
|
|
Total
Comprehensive
Income (Loss)
|
|
Balance at January 1, 2005
|
|
29,451,973
|
|
|
$
|
295
|
|
|
$
|
55,410
|
|
|
$
|
748
|
|
$
|
49,788
|
|
|
$
|
106,241
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
200,793
|
|
|
|
2
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
|
|
Repurchase of common stock
|
|
(1,285,778
|
)
|
|
|
(13
|
)
|
|
|
(4,929
|
)
|
|
|
|
|
|
|
|
|
|
(4,942
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
|
|
Income tax benefit related to stock-based compensation
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
Unrealized gain on investments, net of income tax expense of $38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
63
|
|
|
|
63
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,979
|
)
|
|
|
(3,979
|
)
|
|
|
(3,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
28,366,988
|
|
|
$
|
284
|
|
|
$
|
50,835
|
|
|
$
|
851
|
|
$
|
45,809
|
|
|
$
|
97,779
|
|
|
$
|
(3,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
1,288,365
|
|
|
|
12
|
|
|
|
5,266
|
|
|
|
|
|
|
|
|
|
|
5,278
|
|
|
|
|
|
Repurchase of common stock
|
|
(2,099,506
|
)
|
|
|
(21
|
)
|
|
|
(11,280
|
)
|
|
|
|
|
|
|
|
|
|
(11,301
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
|
|
Income tax benefit related to stock-based compensation
|
|
|
|
|
|
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
1,116
|
|
|
|
|
|
Unrealized gain on investments, net of income tax expense of $68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
108
|
|
|
|
108
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
189
|
|
|
|
189
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,981
|
|
|
|
3,981
|
|
|
|
3,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
27,555,847
|
|
|
$
|
275
|
|
|
$
|
46,614
|
|
|
$
|
1,148
|
|
$
|
49,790
|
|
|
$
|
97,827
|
|
|
$
|
4,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
486,036
|
|
|
|
5
|
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
2,165
|
|
|
|
|
|
Repurchase of common stock
|
|
(1,663,839
|
)
|
|
|
(16
|
)
|
|
|
(9,478
|
)
|
|
|
|
|
|
|
|
|
|
(9,494
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
1,367
|
|
|
|
|
|
Income tax benefit related to stock-based compensation
|
|
|
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
308
|
|
|
|
|
|
Unrealized gain on investments, net of income tax expense of $4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
Cumulative effect of adoption of FASB Interpretation No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,557
|
|
|
|
|
|
|
1,557
|
|
|
|
1,557
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
|
|
224
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
26,378,044
|
|
|
$
|
264
|
|
|
$
|
40,971
|
|
|
$
|
2,715
|
|
$
|
49,961
|
|
|
$
|
93,911
|
|
|
$
|
1,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these consolidated financial statements.
48
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Summary of Significant Accounting Policies
The Business
Captaris, Inc.,
(we, us, our) is a corporation formed in the State of Washington in 1982. Our principal executive offices are located in Bellevue, Washington. We are a provider of computer products that automate document-centric
business processes. With a comprehensive suite of software, hardware and services, we help organizations gain control over many processes that include the need to integrate documents more securely and efficiently. Our solutions also provide
interoperability between documents and business applications and technology platforms.
We operate under one business unit segment to
deliver our product and software solutions. We develop products and services for document capture, intelligent document recognition and classification, routing, workflow, document management and document delivery. Our product lineup includes the
brand names RightFax, FaxPress, Captaris Workflow, Alchemy, Single Click Entry, DOKuStar and RecoStar.
Our products are distributed and
supported through a global network of technology partners. This distribution system consists of business partners from all levels of the information technology (IT) spectrum: value-added resellers, original equipment manufacturers
(OEMs), system integrators, distributors, mass market resellers, online retailers, office equipment dealers, and independent software vendors (ISVs). We believe the use of multiple distribution channels increases the
likelihood that our products will be sold to more customers.
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States
of America.
Principles of Consolidation
Our consolidated financial statements include the accounts of Captaris, Inc. and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Generally accepted accounting
principles in the U.S. require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of our consolidated financial statements and the reported
amounts of revenue and expenses during the reporting periods presented. We base our estimates on historical experience, current conditions and various other assumptions we believe to be reasonable under the circumstances. Our estimates form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as identifying and assessing appropriate accrual and disclosure treatment with respect to commitments and
contingencies. Actual results may differ significantly from these estimates. To the extent that there are material differences between these estimates and actual results, our presentation of our financial condition or results of operations may be
affected.
Reclassifications
In 2006,
in an effort to provide investors more detail on our expenses, we began separating Selling, general and administrative expenses into two separate categories: Selling and marketing expenses and General and administrative expenses. In addition, in
2006 we reclassified stock-based compensation expense (benefit) from one separate line item on the income statement to the expense categories as disclosed in Note 10. All relative prior period balances have been reclassified to conform to the
current period presentation. These reclassifications had no material impact on revenue, gross margin, net income (loss), assets or liabilities in the periods presented.
Business Combinations
We include the results of operations of acquired businesses from the date of
acquisition. We record net assets acquired at their fair value at the date of acquisition. We include the excess of the purchase price over the fair value of net assets acquired as goodwill in the accompanying consolidated balance sheets. In certain
circumstances, we have pushed down the goodwill to the acquiring foreign subsidiary resulting in foreign currency translation differences upon consolidation.
49
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Our cash balances periodically exceed FDIC limits on insurable amounts.
Investments
We classify our short-term and long-term
investments as available-for-sale. We record our portfolio at fair market value. We determine the fair value of our investments based on quoted market prices. We classify investments with legal maturities of one year or less as
short-term. We recognize realized gains and losses upon the sale of investments using the specific identification method. We record unrealized gains and losses, net of any income tax effect, as a component of other comprehensive income. We record
interest income using an effective interest rate, with the associated premium or discount amortized to interest income over the term of each investment.
We recognize an impairment charge for unrealized losses when an investments decline in fair value is below the cost basis and we judge the decline to be other than temporary. In making this judgment, we
evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost, the financial condition and near-term business outlook for the investee and our intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
Concentration of Credit Risk
We extend credit to customers and are, therefore, subject to credit risk. We perform initial and ongoing credit evaluations of our customers
financial condition and do not require collateral on accounts receivable. To determine our allowance for doubtful accounts, we use estimates based on our historical bad debt experience, the aging of customer accounts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer payment patterns. Historically, actual credit losses have been within our expectations.
A significant portion of our revenue is derived from sales in the United States. For the years ended December 31, 2007, 2006 and 2005, sales in the United States accounted for 69.5%, 72.0% and 74.2%,
respectively, of net revenue. No single customer represented more than 10% of our net revenue in 2007, 2006, or 2005.
Inventories
Inventories consist primarily of fax boards, which we either resell or forward integrate into finished goods. We value these inventories on our
consolidated balance sheets at the lower of cost or market (as determined by the first-in, first out method). Due to rapid changes in technology, it is possible that older products in inventory may become obsolete or that we may sell these products
below cost. If actual market conditions are less favorable than we project, inventory write-downs may be required. When we determine that the carrying value of inventories is not recoverable, we write-down inventories to market value.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Finished goods
|
|
$
|
1,131
|
|
$
|
961
|
Components
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,681
|
|
$
|
961
|
|
|
|
|
|
|
|
Restricted Cash
As of December 31, 2007, we had a $1.0 million irrevocable standby letter of credit as collateral pursuant to a lease agreement for our corporate headquarters. Through January 31, 2008, we were required to
collateralize this letter of credit with a $1.0 million restricted certificate of deposit. We have included this certificate of deposit in restricted cash on our consolidated balance sheets as of December 31, 2007 in current assets and 2006 in
long-term assets.
50
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equipment and Leasehold Improvements
We record equipment and leasehold improvements and certain other long-lived assets at cost less accumulated depreciation. We calculate depreciation on a
straight-line basis over the estimated useful lives. We base the useful lives of equipment and leasehold improvements on our estimates of the time period that the equipment or leasehold improvement will be utilized, typically from two to five years.
The useful lives of our leasehold improvements are typically less than the lives of the applicable leases. We periodically evaluate the recoverability of equipment and leasehold improvements and take into account events or circumstances that
indicate that impairment exists or that the useful lives should be revised. If we conclude that there is a change in the recoverability of equipment or leasehold improvements, we make adjustments accordingly.
Intangible Assets
All of our intangible assets,
other than goodwill, are subject to amortization. We amortize our intangible assets using the straight-line method over their estimated useful life. We base the useful lives of intangible assets on our estimates of the time period that the
intangible assets will generate cash, typically from one to nine years. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that impairment exists or that the useful lives should be revised.
If we conclude that there is a change in the recoverability of our intangible assets, we make adjustments accordingly.
Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. In accordance with
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,
we perform tests for goodwill impairment on an annual basis and on an
interim basis in certain circumstances. If we conclude impairment exists, we adjust goodwill to its fair value. In addition, certain financial statements of our wholly-owned subsidiaries have been translated to U.S. dollars. Accordingly, we have
translated the value of goodwill recorded on our subsidiaries financial statements at year end exchange rates and included the adjusted amounts on our consolidated balance sheets as of December 31, 2007 and 2006.
Fair Value of Financial Instruments
For certain
financial instruments, including accounts receivable, accounts payable and accrued liabilities, recorded amounts presented on our consolidated balance sheets approximate fair value due to the short maturities of these instruments. We record
short-term and long-term investments at fair value as the underlying securities are classified as available-for-sale and marked to market at each reporting period. We record any unrealized changes in market value as components of other comprehensive
income (loss), net of income taxes.
Foreign Currency
The financial statements of our wholly-owned foreign subsidiaries have been translated to U.S. dollars in accordance with SFAS No. 52,
Foreign Currency Translation
. Accordingly, all assets and liabilities
of the subsidiaries have been translated at year-end exchange rates and all revenue and expenses have been translated at the average exchange rates for the periods presented. We report any translation gains and losses as components of other
comprehensive income (loss).
Foreign currency transaction gains and losses result from foreign exchange rate changes on transactions
denominated in currencies other than U.S. dollars. Gains and losses on those foreign currency transactions are included in other income (expense) on our consolidated income statements. Foreign currency transaction gains were $524,000 in 2007,
transaction losses were $163,000 in 2006 and transaction gains were $124,000 in 2005.
Stock-Based Compensation
We account for stock-based compensation under the provisions of SFAS No. 123(R),
Share-Based Payment
(SFAS No. 123R), which
requires us to recognize expense related to the fair value of our stock-based compensation. We adopted SFAS No. 123R using the modified prospective transition method. Under this transition method, compensation cost recognized for the years
ended December 31, 2007 and 2006 includes: (a) compensation cost for all stock-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all stock-based compensation granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. We
chose the straight-line method for recognizing compensation expense. For all unvested stock options outstanding as of January 1, 2006, we recognize the previously measured but unrecognized compensation expense, based on the fair value at the
original grant date, on an accelerated basis over the remaining vesting period. For stock-based compensation granted subsequent to January 1, 2006, we recognize compensation expense, based on the fair value on the date of grant, on a
straight-line basis over the vesting period.
51
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Our revenue recognition policies follow the guidelines of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2,
Software Revenue
Recognition
, as amended. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collection is reasonably assured.
We sell products through resellers, Original Equipment Manufacturers (OEM) and other channel partners, as well as directly to end-users.
Generally our resellers do not stock product, and except for OEM sales described below, we recognize product revenue upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations
remain. If a reseller does stock product, we defer this revenue until the reseller sells the product through to end-users.
Sales of our
appliance products are made through stocking distributors. For sales to distributors we recognize revenues on either the sell-through or sell-in method of revenue recognition as determined by the contractual arrangement with each distributor. When
the distributor is entitled to stock rotation rights we recognize revenue upon delivery of the appliances to the distributor less a provision for an estimate of those rights (the sell-in method). Otherwise, revenue is recognized upon
delivery of the appliances to the end-user (the sell-through method).
Revenue from perpetual software licenses is recognized
when the software has been shipped, provided that collection for such revenue is deemed probable. Revenue from term software licenses is recognized over the term of the license, generally twelve months.
Whenever a software license, hardware, installation and post-contract customer support (PCS) elements are sold together, we allocate the
total arrangement fee among each element based on its respective fair value, which is the price charged when that element is sold separately. The amount of revenue assigned to each element is impacted by our judgment as to whether an arrangement
includes multiple elements and, if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish VSOE for those elements could affect
the timing of revenue recognition for these elements. Revenue for PCS is recognized on a straight-line basis over the service contract term, ranging from one to five years. PCS includes rights to unspecified upgrades and updates, when and if
available, and bug fixes.
Installation revenue is recognized when the product has been installed at the customers site and accepted
by the customer. Recognition of revenue from software sold with installation services is recognized either when the software is shipped or when the installation services are completed, depending on our agreement with the customer and whether the
installation services are integral to the functionality of the software.
We have entered into agreements with certain OEMs from which we
receive royalty payments periodically. Under the terms of the OEM license agreements, each OEM will qualify our software on their hardware and software configurations. Once the software has been qualified, the OEM will begin to ship products and
report net sales to us. Most OEMs pay a license fee based on the number of copies of licensed software included in the products sold to their customers. These OEMs pay fees on a per-unit basis and we record associated revenue when we receive
notification of the OEMs sales of the licensed software to an end-user. The terms of the license agreements generally require the OEMs to notify us of sales of our products within 30 to 45 days after the end of the month or quarter in which
the sales occur. As a result, we recognize the revenue in the month or quarter following the sales of the product to these OEMs customers.
We provide allowances for estimated returns, and return rights that exist for some customers. In general, customers are not granted return rights at the time of sale. However, we have historically accepted returns and therefore, reduce
revenue recognized for estimated product returns. For those customers to whom we do grant return rights, we reduce revenue by an estimate of these returns. If we cannot reasonably estimate these returns, we defer the revenue until the return rights
lapse. For software sold to resellers for which we have granted exchange rights, we defer the revenue until the reseller sells the software through to end-users. When customer acceptance provisions are present and we cannot reasonably estimate
returns, we recognize revenue upon the earlier of customer acceptance or expiration of the acceptance period.
Professional services are
customarily billed at fixed rates, plus out-of-pocket expenses and revenue is recognized when the service has been completed. However, if it is determined that a consulting engagement will be unprofitable, we recognize the loss at the time of such
determination. Training revenue is recognized when the training is completed.
52
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warranty Expense
We establish a warranty reserve based on our historical experience and an estimate of the amounts necessary to settle future and existing claims on products sold as of our financial statement reporting date.
Historically, warranty expenses have not been material.
Research and Development Costs
We expense research and development costs as they are incurred. We have not capitalized any software development costs, as technological feasibility is
not generally established until substantially all development has been completed.
Advertising Costs
We expense advertising costs to selling and marketing expense as they are incurred. Advertising expenses were $4.0 million, $4.1 million and $4.5 million
for the years ended December 31, 2007, 2006 and 2005, respectively.
Income Taxes
We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
. SFAS No. 109 requires an asset and liability
approach, under which we record deferred income taxes for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. We measure these deferred taxes using tax rates expected
to be in effect when the temporary differences reverse. We establish valuation allowances to reduce deferred tax assets unless it is more likely than not that we will generate sufficient taxable income to allow for the realization of our deferred
net tax assets.
We also account for income taxes in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109
(FIN No. 48). Under the provisions of FIN No. 48, we may recognize the tax benefits from uncertain tax positions only if it is more likely than not that
the tax positions will be sustained, on examination by the applicable taxing authorities, based on the technical merits of the positions. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transition. Upon adoption, we recognized a $53,000 charge to our beginning retained earnings as a cumulative effect of a change in accounting principle. In accordance with FIN No. 48, we recognize interest
accrued and penalties related to unrecognized tax benefits as a component of our income tax expense.
53
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income (Loss) Per Common Share
We compute basic net income (loss) per common share by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. We compute diluted net income (loss) per common
share by dividing net income (loss) by the sum of the weighted average number of shares of common stock outstanding during the year and the net additional shares that would have been issued had all dilutive stock options been exercised less shares
that would be repurchased with the proceeds from such exercises. Dilutive stock options are those that have an exercise price less than the average stock price during the period. The following table sets forth the computation of basic and diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
|
(in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
228
|
|
|
$
|
3,965
|
|
$
|
(4,017
|
)
|
Income from discontinued operations
|
|
|
(4
|
)
|
|
|
16
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
224
|
|
|
$
|
3,981
|
|
$
|
(3,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
27,019
|
|
|
|
27,899
|
|
|
28,907
|
|
Dilutive effect of common shares from stock options
|
|
|
604
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
27,623
|
|
|
|
28,514
|
|
|
28,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
$
|
(0.14
|
)
|
Income from discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
$
|
(0.14
|
)
|
Income from discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, we excluded 206,725 common stock equivalents from the
calculation of diluted net income (loss) per share because such securities were antidilutive due to the net loss from continuing operations. Additionally, employee stock options to purchase 2,834,282, 3,474,446 and 4,320,126 shares in the years
ended December 31, 2007, 2006 and 2005, respectively, were outstanding, but were not included in the computation of diluted net income (loss) per share because the exercise price of the stock options was greater than the average share price of
the common shares.
Comprehensive Income
Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income includes revenue, expenses, gains and losses that, under generally accepted accounting principles, we record as an
element of shareholders equity but are excluded from net income. Our other comprehensive income is comprised of foreign currency translation adjustments from our subsidiaries not using the U.S. dollar as their functional currency and
unrealized gains and losses, net of income taxes, on marketable securities categorized as available-for-sale.
The components of
accumulated other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Accumulated net unrealized loss on available-for-sale investments, net of income tax benefit of $0 and $5
|
|
$
|
|
|
$
|
(10
|
)
|
Accumulated foreign currency translation
|
|
|
2,715
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
2,715
|
|
$
|
1,148
|
|
|
|
|
|
|
|
|
|
54
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R),
Business Combinations
, which replaces SFAS No. 141 and amends several others. The statement retains the
purchase method of accounting for acquisitions but changes the way we will recognize assets and liabilities. It also changes the way we will recognize assets acquired and liabilities assumed arising from contingencies, requires us to capitalize
in-process research and development at fair value, and requires us to expense acquisition-related costs as incurred. SFAS No. 141R is effective for us on, but not before, January 1, 2009, the beginning of our fiscal 2009 reporting periods.
SFAS No. 141R will apply prospectively to our business combinations completed on or after January 1, 2009 and will not require us to adjust or modify how we recorded any acquisition prior to that date.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115
. Under SFAS No. 159, we may elect to measure many financial instruments and certain other items at fair value on an instrument by instrument basis subject to certain restrictions. We adopted SFAS
No. 159 on January 1, 2008. Adopting SFAS No. 159 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. We adopted
SFAS No. 157 on January 1, 2008. Adopting SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.
3. Business Acquired
On July 10, 2007, we acquired Castelle, a Morgan Hill, California company.
Castelle is in the business of developing, manufacturing, marketing and supporting office automation systems that allow organizations to implement faxing over local area networks and the Internet. Under the terms of the stock purchase agreement, we
acquired Castelle for a total of $14.3 million, net of cash acquired. We paid $12.0 million in cash net of Castelles cash balance at closing of $1.0 million, including transaction costs of approximately $1.2 million and assumed liabilities of
$2.3 million. The assumed liabilities include deferred revenue of $938,000 and accounts payable and other accrued liabilities of $1.4 million. The acquisition of Castelle has been accounted for as a purchase.
In accordance with SFAS No. 141,
Business Combinations,
we assigned all identifiable assets and liabilities a portion of the cost of the
acquisition based on their respective fair values. We engaged a valuation firm to provide an estimated fair value for all identifiable intangible assets including technology, trade name, customer relationships and non-compete agreements, using an
income and a cost approach. The determination of fair value is a critical and complex consideration that involves significant assumptions and estimates. These assumptions and estimates were based on our best judgments and resulted in the allocation
of purchase price for this acquisition as detailed below. We allocated the excess of the purchase price over the fair value of the net assets acquired to goodwill. Goodwill in the amount of $4.0 million is deductible for tax purposes.
Castelle was combined in our single business segment, and our results of operations include Castelles results of operations for the
period from July 10, 2007 to December 31, 2007, including an in-process research and development charge of $219,000.
|
|
|
|
Castelle Purchase Price Allocation:
|
|
|
|
|
|
|
|
(in thousands)
|
Acquired technology
|
|
$
|
8,159
|
Goodwill
|
|
|
3,945
|
Other acquired assets
|
|
|
1,959
|
Acquired in-process research and development
|
|
|
219
|
|
|
|
|
Total purchase price
|
|
$
|
14,282
|
|
|
|
|
We amortize all identified amortizable intangible assets on a straight-line basis over their
estimated useful lives, ranging from two to eight years, with no residual value. The weighted-average useful life of these assets is approximately 6.9 years. We will recognize amortization expense for these intangible assets of approximately $1.3
million in 2008, $1.2 million in 2009, $1.1 million in 2010, $1.1 million in 2011, $1.0 million in 2012, $1.0 million in 2013, $664,000 in 2014 and $142,000 in 2015.
55
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Discontinued Operations
On September 15, 2003, Captaris and our wholly-owned subsidiary, MediaTel Corporation (Delaware) (MediaTel), entered into an asset purchase agreement, effective as of September 1, 2003, to sell
the assets of MediaTel to PTEK Holdings, Inc. (PTEK) and its wholly-owned subsidiary, Xpedite Systems, Inc. (Xpedite). As such, MediaTels results of operations have been classified as discontinued operations. MediaTel
provided outsourced e-document delivery services. Concurrent with the sale transaction, we also entered into license and reseller agreements with Xpedite pursuant to which we licensed our fax-to-mail technology to Xpedite in return for minimum
compensation of $2.0 million over a three year period, and both parties agreed to cooperate in providing mutual resale opportunities for each others products and services. In 2004, we recognized $250,000 of revenue in connection with these
agreements. We did not record any revenue in 2005 relating to the license agreement due to a dispute with Xpedite relating to the outstanding minimum licenses fee. In February 2006, we resolved the dispute regarding the revenue relating to 2005. As
a result, in the first quarter of 2006, we recorded an additional $750,000 of revenue related to the 2005 commitment and in the third quarter of 2006, we recorded another $1.0 million of revenue in accordance with the license agreement. This
agreement concluded in 2006, therefore, we recognized no related revenue in 2007.
5. Sale of Discontinued CallXpress Product Line
In September of 2003, we sold our CallXpress product line. Concurrent with the transaction, we entered into an earn-out agreement with the buyer which
entitled us to receive additional payments of up to $1.0 million per year for each of the three years following the sale, depending on the buyers success in achieving certain revenue targets. In all three subsequent years, the buyer achieved
those revenue targets and sent us payments of $1.0 million in March of 2005, 2006 and 2007, respectively. With receipt of each payment, we recognized an additional gain on the sale of the CallXpress product line. We recorded the gains as a component
of operating expenses on our consolidated statement of operations.
6. Investments
As of December 31, 2006, our available-for-sale investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
Classified as current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
4,560
|
|
$
|
1
|
|
$
|
|
|
|
$
|
4,561
|
U.S. Agency adjustable rate mortgages
|
|
|
786
|
|
|
1
|
|
|
(10
|
)
|
|
|
777
|
Small Business Administration Pools
|
|
|
49
|
|
|
|
|
|
|
|
|
|
49
|
Other government agency issues
|
|
|
1,698
|
|
|
|
|
|
(1
|
)
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,093
|
|
$
|
2
|
|
$
|
(11
|
)
|
|
$
|
7,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as long-term assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
40,693
|
|
$
|
7
|
|
$
|
(2
|
)
|
|
$
|
40,698
|
U.S. Agency adjustable rate mortgages
|
|
|
844
|
|
|
|
|
|
(11
|
)
|
|
|
833
|
Small Business Administration Pools
|
|
|
53
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,590
|
|
$
|
7
|
|
$
|
(13
|
)
|
|
$
|
41,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
48,683
|
|
$
|
9
|
|
$
|
(24
|
)
|
|
$
|
48,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have estimated the portion of the mortgages likely to be prepaid within one year based on
historical prepayment data, current interest rates and other economic factors, and we have classified this portion of these investments as short-term.
During 2007, we liquidated our investments in order to pursue acquisition opportunities see Note 20. Subsequent Events.
We recognize realized gains and losses upon sale of investments using the specific identification method. Realized gains (losses) were not significant in 2007, 2006 and 2005.
56
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Computers, software and other equipment
|
|
$
|
18,462
|
|
|
$
|
14,061
|
|
Leasehold improvements
|
|
|
1,715
|
|
|
|
1,721
|
|
Furniture and fixtures
|
|
|
2,369
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
Total equipment and leasehold improvements
|
|
|
22,546
|
|
|
|
18,160
|
|
Less accumulated depreciation
|
|
|
(14,811
|
)
|
|
|
(13,820
|
)
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
7,735
|
|
|
$
|
4,340
|
|
|
|
|
|
|
|
|
|
|
8. Goodwill
In accordance with SFAS No. 142, we do not amortize goodwill. The following table provides information about goodwill activity for the period from January 1, 2006 to December 31, 2007 (in thousands):
|
|
|
|
|
Goodwill at January 1, 2006
|
|
$
|
32,313
|
|
IMR acquisition purchase price adjustments
|
|
|
(214
|
)
|
Foreign currency translation adjustment
|
|
|
100
|
|
|
|
|
|
|
Goodwill as of December 31, 2006
|
|
$
|
32,199
|
|
Castelle acquisition purchase price allocation (see Note 3)
|
|
|
3,945
|
|
Foreign currency translation adjustment
|
|
|
1,378
|
|
|
|
|
|
|
Goodwill as of December 31, 2007
|
|
$
|
37,522
|
|
|
|
|
|
|
9. Intangible Assets
The following table presents details of our intangible assets (in thousands, except number of years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Weighted-
average
amortization
period
(in years)
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
|
Intangible
assets,
net
|
|
Weighted-
average
amortization
period
(in years)
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
|
Intangible
assets,
net
|
Technology
|
|
5.8
|
|
$
|
11,039
|
|
$
|
(6,390
|
)
|
|
$
|
4,649
|
|
5.8
|
|
$
|
9,914
|
|
$
|
(4,541
|
)
|
|
$
|
5,373
|
Trade names/domain name
|
|
5.3
|
|
|
1,540
|
|
|
(336
|
)
|
|
|
1,204
|
|
2.4
|
|
|
240
|
|
|
(240
|
)
|
|
|
|
Customer relationships and marketing channels
|
|
5.8
|
|
|
8,867
|
|
|
(3,443
|
)
|
|
|
5,424
|
|
3.1
|
|
|
3,269
|
|
|
(2,685
|
)
|
|
|
584
|
Reseller agreements
|
|
8.0
|
|
|
311
|
|
|
(189
|
)
|
|
|
122
|
|
7.0
|
|
|
311
|
|
|
(144
|
)
|
|
|
167
|
License agreements
|
|
2.8
|
|
|
2,611
|
|
|
(2,263
|
)
|
|
|
348
|
|
11.0
|
|
|
2,525
|
|
|
(2,080
|
)
|
|
|
445
|
Covenants not to compete
|
|
1.0
|
|
|
400
|
|
|
(400
|
)
|
|
|
|
|
1.0
|
|
|
400
|
|
|
(400
|
)
|
|
|
|
Investment in AVST
|
|
|
|
|
1
|
|
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
24,769
|
|
$
|
(13,021
|
)
|
|
$
|
11,748
|
|
|
|
$
|
16,660
|
|
$
|
(10,090
|
)
|
|
$
|
6,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We amortize intangible assets using the straight-line method over their estimated useful life
ranging from one to nine years. Amortization expense for certain technology and license agreements recorded in cost of revenue was $2.0 million, $1.9 million and $1.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Amortization expense for intangible assets recorded in operating expenses for trade names, customer relationships and reseller agreements, was $1.0 million, $1.3 million and $1.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for 2008 through 2011 is as follows: $3.2 million in 2008, $2.9 million in 2009, $1.7 million in 2010 and $1.1 million in
2011. In addition, we will incur amortization expense related to intangible assets acquired subsequent to December 31, 2007 see Note 20. Subsequent Events.
In April 2002, we entered into a non-exclusive license agreement with AudioFax IP LLC, settling a patent infringement suit filed by AudioFax on November 30, 2001. We capitalized the license fee and we are
amortizing it over the remaining life of the licensors patents. Included in total amortization expense recorded in cost of revenue discussed above is amortization expense related to this license in the amount of $90,000 for each of the years
ended December 31, 2007, 2006 and 2005.
57
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation
Stock-Based Compensation Plans
Our plans are long-term retention programs that are intended to
enhance our long-term shareholder value by offering opportunities to both directors and officers, as well as selected persons to participate in our growth and success and to provide incentives and encourage retention.
The 2006 Equity Incentive Plan
(formerly the 1989 Plan)
On June 8, 2006, at the 2006 Annual Meeting of Shareholders of Captaris, Inc., our shareholders approved the Captaris, Inc. 2006 Equity Incentive
Plan (the 2006 Plan), which amended and restated the Captaris, Inc. 1989 Restated Stock Option Plan (the 1989 Plan) to, among other things, expand the types of awards available for grant to include, in addition to stock
options, stock appreciation rights, stock awards, restricted stock, restricted stock units (RSUs) and other stock or cash-based awards. The 2006 Plan authorizes the issuance of stock options and RSUs to purchase up to
12,900,000 shares of Captaris common stock, the same number authorized under the 1989 Plan. The 2006 Plan did not authorize any new additional shares. We generally grant stock options under the 2006 Plan at an exercise price of the average of the
high and low market value of our common stock on the date of grant, and the stock options generally vest over four years. They have a term of one to ten years from the date of grant and vest at the rate of 25% after one year and 2.0833% per
month thereafter. Pursuant to the 2006 Plan, as of December 31, 2007, there were 1,949,450 stock options and RSUs available to grant, and 3,250,841 stock options and 195,081 RSUs outstanding.
Equity Grant Program for Non-employee Directors
Effective upon shareholder approval of the 2006 Plan, the Board of Directors, upon recommendation of the Compensation Committee, implemented the Terms of Equity Grant Program for Non-employee Directors (the NED
Equity Program) under the 2006 Plan. The NED Equity Program provides for: 1) initial and annual stock option grants with a Black-Scholes or binomial (whichever method is then being used by the Company to value its stock options for financial
reporting purposes) value of $20,000 on the date of grant; and 2) initial and annual restricted deferred stock units (DSUs) with a $25,000 value based on the fair market value which we currently calculate using the average of the
high and low stock price, as reported by The Nasdaq Global Market, of our common stock on the date of grant. The stock options will vest in full one year after the date of grant and have a ten-year term, as long as the non-employee director remains
on the Board. The DSUs will be automatically deferred under the Captaris, Inc. Deferred Compensation Plan for Non-employee Directors (the NED Deferred Compensation Plan) and will vest in full one year after the date of grant. The
compensation expense associated with the NED Equity Program is included in our stock-based compensation expense.
Deferred
Compensation Program
Effective upon shareholder approval of the 2006 Plan, the Board of Directors, upon recommendation of the
Compensation Committee, also implemented the NED Deferred Compensation Plan, the purpose of which is to further long-term growth of our Company by allowing non-employee directors to defer receipt of certain compensation, keeping their financial
interests aligned with our Company, and providing them with a long-term incentive to continue providing services. The NED Deferred Compensation Plan is administered by the Compensation Committee of the Board of Directors.
Directors who are not also employees of the Company or its affiliates are eligible to participate in the NED Deferred Compensation Plan. Non-employee
directors may elect to defer receipt of 25%, 50%, 75% or 100% of any cash compensation paid to the non-employee director for his or her service on the Board of Directors or any committee of the Board of Directors. Cash compensation deferred will be
credited to the non-employee directors account as of the date on which it would have been paid had it not been deferred, and will be deemed to be invested in our common stock at a value equal to the closing price of our common stock on such
date. A non-employee director will be fully vested in that portion of his or her account attributable to deferred cash compensation at all times. In general, a non-employee directors vested account balance will be distributed in a lump sum as
soon as administratively practicable after his or her separation from service on the Board of Directors. The compensation expense associated with the NED Deferred Compensation Plan is included in our stock-based compensation expense.
The 2000 Plan
Upon the
adoption of the 2006 Plan on June 8, 2006, no further awards will be granted under the Captaris, Inc. 2000 Non-Officer Employee Stock Compensation Plan (the 2000 Plan), which resulted in a reduction in the number of stock options
available for grant by 1,050,115 shares. Under the 2000 Plan, we generally granted stock options at the fair market value of our common stock at the date of grant and those stock options generally vested over four years. Stock options under the 2000
Plan have a term of ten years from the date of grant and vest at the rate of 25% after one year and 2.0833% per month thereafter. As of December 31, 2007, there were 1,355,321 stock options outstanding under the 2000 Plan.
58
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-plan Option Grants
As an inducement to employment, on November 15, 2000, we granted our President, Chief Executive Officer and Director of Captaris, a nonqualified
stock option outside of any Captaris Equity incentive plans. In addition, as an inducement to employment, on October 22, 1997, we granted each of two now former employees of Captaris a nonqualified stock option outside of any of
Captaris equity incentive plans. As of December 31, 2007, there were 766,000 of these stock options outstanding.
Stock-based compensation
expense
Our stock-based compensation expense includes expense related to our stock options and stock units. The amount of stock-based
compensation expense, net of forfeitures, recognized in the year ended December 31, 2007 and 2006 was $1.4 million and $677,000, respectively, of which $42,000 and $191,000, respectively, related to stock options granted prior to
January 1, 2006. Total unamortized compensation expense as of December 31, 2007 and 2006 was $4.3 million and $1.6 million, net of estimated forfeitures, respectively. Total unamortized stock-based compensation cost will be adjusted for
future changes in estimated forfeitures and is expected to be recognized over a weighted average period of three years.
The following
table summarizes the allocation of stock-based compensation for our stock options and stock units to our expense categories for the years ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of revenue
|
|
$
|
29
|
|
$
|
12
|
|
$
|
(12
|
)
|
Research and development
|
|
|
138
|
|
|
46
|
|
|
(74
|
)
|
Selling and marketing
|
|
|
238
|
|
|
116
|
|
|
(119
|
)
|
General and administrative
|
|
|
962
|
|
|
503
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (benefit)
|
|
$
|
1,367
|
|
$
|
677
|
|
$
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
In determining the fair value of stock options granted during the years ended December 31,
2007, 2006 and 2005, the following weighted average key assumptions were used in the Black-Scholes option pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Risk-free interest rate
|
|
4.50
|
%
|
|
4.87
|
%
|
|
3.71
|
%
|
Expected volatility
|
|
42.4
|
%
|
|
53.6
|
%
|
|
49.7
|
%
|
Expected term
|
|
5.3
|
|
|
5.3
|
|
|
3.1
|
|
Historically, we have neither declared nor paid any dividends, and we do not expect to do so in
the future. The risk-free interest rate we have used in the Black-Scholes valuation method is based on the implied yield currently available from United States Treasury securities with maturities with equivalent terms. Expected volatility is based
on the annualized daily historical volatility plus implied volatility of our stock price, including consideration of the implied volatility and market prices of traded stock options for comparable entities within our industry. The expected term of
stock options represents the period that our stock-based awards are expected to be outstanding based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. In projecting holding periods, we
considered the contractual terms of our stock-based awards, vesting schedules and expectations of future employee behavior.
Our stock
price volatility and option lives involve our best estimates, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense recognized over the life of the option. SFAS No. 123R
also requires that we recognize compensation expense for only the portion of stock options expected to vest; therefore, we applied an estimated forfeiture rate that we derived from historical employee termination behavior. If the actual number of
forfeitures differs from our estimates, additional adjustments to compensation expense may be required in future periods.
The following
table shows the pro forma effect on our net income (loss) and net income (loss) per share had stock-based compensation expense been determined based on the fair value at the award grant date, in accordance with SFAS No. 123, for the year ended
December 31, 2005 (in thousands except per share data).
59
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
Year Ended
December 31,2005
|
|
Net income (loss), as reported in the prior period
(1)
|
|
$
|
(3,979
|
)
|
Add back: Stock-based compensation benefit, as reported, net of tax of $96
|
|
|
(150
|
)
|
Deduct: Stock-based compensation expense determined under the fair value based method for all awards, net of tax of $1.4 million
(2)
|
|
|
(2,456
|
)
|
|
|
|
|
|
Pro forma net loss, including the effect of stock-based compensation expense
|
|
$
|
(6,585
|
)
|
|
|
|
|
|
Basic and diluted net loss per share, as reported in the prior period
(1)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
Basic and diluted net loss per share, including the effect of stock-based compensation expense
(3)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
(1)
|
With the exception of recognized benefits in 2005 for fully vested variable stock options in accordance with APB
No. 25, net loss and net income (loss) per share prior to fiscal 2006 did not include stock-based compensation expense for employee stock options under SFAS No. 123 because we did not adopt the optional recognition provisions of SFAS
No. 123.
|
(2)
|
Stock-based compensation expense prior to 2006 is calculated based on the pro forma application of SFAS No. 123.
|
(3)
|
Net loss and net loss per share prior to 2006 represents pro forma information based on SFAS No. 123.
|
On September 1, 2005, our Compensation Committee and Board of Directors approved the acceleration of vesting of
certain unvested stock options granted to our employees and officers under our stock option plans that had an exercise price greater than $3.73 per share, the closing price of our common stock on September 1, 2005. There were 241 employees
affected by this modification. Stock options held by non-employee directors were not included in the acceleration. Previously unvested stock options to purchase 2.3 million shares of our common stock became immediately exercisable. The Board
also imposed a holding period that requires all executive officers and certain other members of senior management to refrain from selling shares acquired upon the exercise of these stock options, other than shares needed to cover the exercise price
and to satisfy withholding taxes and shares transferred by will or by the applicable laws of descent and distribution, until the date on which the exercise would have been permitted under the options original vesting terms.
The accelerated vesting eliminated future compensation expenses that we would otherwise recognize in our financial statements with respect to these stock
options as a result of adopting SFAS No. 123R. In accordance with APB No. 25 and FASB Interpretation No. 44, no compensation expense was recorded within the financial statements as a result of this modification in 2005 because the
stock options had no intrinsic value on the date of the modification due to the exercise price being in excess of the current market price of the stock. Had the stock options not been accelerated, the unamortized fair value-based compensation
expense for these stock options at January 1, 2006, would have been $1.9 million, net of estimated forfeitures, compared to the post acceleration unamortized expense of $267,000, net of estimated forfeitures, and would have been expensed under
vesting schedules in place prior to the acceleration and recorded in 2006 through 2009. Option expense recorded in the year ended December 31, 2006 would have increased by $1.1 million, net of estimated forfeitures, and the unamortized
compensation expense for these stock options would have been $812,000, net of estimated forfeitures, to be recorded in 2007 through 2009.
Stock Options
In accordance with SFAS No. 123R, stock-based compensation expense related to stock options was $1.1 million and $547,000 in the
years ended December 31, 2007 and 2006, respectively. In the year ended December 31, 2005, we recognized a stock-based compensation benefit of $246,000 for fully vested variable stock options in accordance with APB No. 25. As of
December 31, 2007 and 2006, total unamortized stock-based compensation costs related to stock options and stock units was $3.7 million and $1.5 million, respectively, net of estimated forfeitures. Total unamortized, stock-based compensation
costs at December 31, 2007 will be adjusted for future changes in estimated forfeitures and we expect will be recognized over a weighted average period of 3.1 years.
60
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the status of our stock option plans and the changes during the years ended
December 31, 2007, 2006 and 2005, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
Available
for Grant
|
|
|
Number of
Stock options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
January 1, 2005
|
|
5,721,576
|
|
|
5,293,055
|
|
|
5.17
|
|
7.61
|
Granted
|
|
(1,315,091
|
)
|
|
1,315,091
|
|
|
3.97
|
|
|
Exercised
|
|
|
|
|
(200,793
|
)
|
|
2.86
|
|
|
Cancelled
|
|
522,585
|
|
|
|
|
|
4.97
|
|
|
Forfeited
|
|
|
|
|
(413,528
|
)
|
|
4.65
|
|
|
Expired
|
|
(4,000
|
)
|
|
(109,057
|
)
|
|
6.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
4,925,070
|
|
|
5,884,768
|
|
|
5.00
|
|
7.13
|
Granted
(1)
|
|
(1,153,059
|
)
|
|
1,059,811
|
|
|
4.54
|
|
|
Exercised
|
|
|
|
|
(1,288,365
|
)
|
|
4.10
|
|
|
Cancelled
|
|
621,518
|
|
|
|
|
|
5.87
|
|
|
Forfeited
|
|
|
|
|
(77,884
|
)
|
|
4.45
|
|
|
Expired
|
|
(1,050,115
|
)
|
|
(543,634
|
)
|
|
6.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
3,343,414
|
|
|
5,034,696
|
|
|
5.03
|
|
6.64
|
|
|
|
|
|
|
|
|
|
|
|
Granted
(1)
|
|
(1,533,109
|
)
|
|
1,236,195
|
|
|
5.48
|
|
|
Exercised
|
|
|
|
|
(486,036
|
)
|
|
4.45
|
|
|
Cancelled
|
|
412,693
|
|
|
|
|
|
6.04
|
|
|
Forfeited
|
|
|
|
|
(189,391
|
)
|
|
4.72
|
|
|
Expired
|
|
(273,548
|
)
|
|
(223,302
|
)
|
|
7.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
1,949,450
|
|
|
5,372,162
|
|
|
5.11
|
|
6.28
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2007
|
|
|
|
|
4,963,494
|
|
|
5.11
|
|
6.07
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2007
|
|
|
|
|
3,538,698
|
|
|
5.14
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The difference in shares granted under stock options available for grant and number of stock options outstanding is due
to grants of stock units. In accordance with the 2006 Plan, each stock unit granted counts as two shares against the number of shares available for issuance.
|
During the year ended December 31, 2007, we granted 1,236,195 stock options, with a weighted average Black-Scholes value of $2.45 per share. During
the year ended December 31, 2006, we granted 1,059,811 stock options, with a weighted average Black-Scholes value of $2.40 per share. In the year ended December 31, 2005, we granted 1,315,091 stock options with a weighted average
Black-Scholes value of $1.50 per share.
Information relating to stock options outstanding and stock options exercisable as of
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
Range of Exercise Prices
|
|
Shares
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
Weighted Average
Exercise Price
|
|
Shares
|
|
Weighted Average
Exercise Price
|
$1.86$3.65
|
|
561,507
|
|
5.61
|
|
$
|
3.16
|
|
452,652
|
|
$
|
3.15
|
$3.73$4.10
|
|
737,177
|
|
6.19
|
|
|
4.01
|
|
626,600
|
|
|
4.04
|
$4.24$4.46
|
|
145,678
|
|
8.19
|
|
|
4.42
|
|
65,553
|
|
|
4.39
|
$4.54$4.54
|
|
690,622
|
|
7.97
|
|
|
4.54
|
|
301,294
|
|
|
4.54
|
$4.86$5.12
|
|
662,870
|
|
6.06
|
|
|
5.02
|
|
400,850
|
|
|
4.97
|
$5.13$5.52
|
|
586,748
|
|
6.75
|
|
|
5.41
|
|
402,748
|
|
|
5.51
|
$5.53$5.75
|
|
174,500
|
|
6.26
|
|
|
5.54
|
|
174,500
|
|
|
5.54
|
$5.78$5.78
|
|
668,225
|
|
9.22
|
|
|
5.78
|
|
|
|
|
|
$5.91$5.92
|
|
247,838
|
|
6.15
|
|
|
5.92
|
|
240,754
|
|
|
5.92
|
$5.94$28.13
|
|
896,997
|
|
2.85
|
|
|
6.85
|
|
873,747
|
|
|
6.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,372,162
|
|
6.28
|
|
$
|
5.11
|
|
3,538,698
|
|
$
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The intrinsic value of stock options exercised during the years ended December 31, 2007, 2006
and 2005 was $879,000, $2.9 million and $218,000, respectively. The aggregate intrinsic value of stock options outstanding, stock options vested and expected to vest and stock options exercisable as of December 31, 2007, was $757,000, $713,000
and $600,000, respectively. The aggregate intrinsic value of stock options outstanding, stock options vested and expected to vest and stock options exercisable as of December 31, 2006, was $14.9 million, $13.8 million and $10.3 million,
respectively. The intrinsic value is calculated as the difference between the market value and the exercise price of the shares as of the reporting date. The market value as of December 31, 2007 was $4.23, the average of the high and low stock
price as reported by Nasdaq Global Market.
Stock Units
Information related to non-vested stock units as of December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Fair Value
|
|
Weighted Average
Remaining
Contractual Term (years)
|
Non-vested at beginning of period
|
|
46,624
|
|
$
|
4.43
|
|
0.44
|
Granted
|
|
148,457
|
|
|
5.60
|
|
|
Exercised
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
195,081
|
|
$
|
5.31
|
|
3.14
|
|
|
|
|
|
|
|
|
Ending expected to vest
|
|
195,081
|
|
|
5.31
|
|
3.14
|
|
|
|
|
|
|
|
|
Ending exercisable
|
|
50,081
|
|
|
4.52
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, we granted 148,457 stock units with a weighted
average Black-Scholes value of $5.60 per share. Compensation expense related to stock units was $295,000 for the year ended December 31, 2007. The aggregate intrinsic value of stock units outstanding, vested or expected to vest and exercisable
as of December 31, 2007, was $824,000, $613,000 and $212,000, respectively.
During the year ended December 31, 2006, we granted
46,624 stock units with a weighted average Black-Scholes value of $4.43 per share. Compensation expense related to stock units was $130,000 for the year ended December 31, 2006. The aggregate intrinsic value of stock units outstanding, vested
or expected to vest and exercisable as of December 31, 2006, was $366,000, $318,000 and $48,000, respectively.
Total unamortized
compensation expense related to stock units as of December 31, 2007 and 2006 was $612,000 and $76,000, respectively. We will recognize unamortized compensation expense for stock units at December 31, 2007 over a weighted average period of
3.2 years.
11. Shareholders Equity
Share
Repurchase Plan
On June 8, 2006, our Board of Directors authorized us to enter into a Rule 10b5-1 repurchase plan to facilitate
the repurchase of our common stock in accordance with our previously announced stock repurchase program. A Rule 10b5-1 repurchase plan allows the purchase of our common shares at times when we ordinarily would not be in the market because of
self-imposed trading blackout periods. Transactions under the Rule 10b5-1 repurchase plan began, subject to the parameters of the plan, on September 18, 2006, the first trading day after our trading window closed in the third quarter of 2006.
Under our Rule 10b5-1 repurchase plan as well as stock repurchases we made prior to or outside of the plan during open trading window
periods, we repurchased 1,663,839 shares of our common stock for $9.5 million, 2,099,506 shares for $11.3 million, and 1,285,778 shares for $4.9 million in 2007, 2006 and 2005, respectively.
As of December 31, 2007, $9.6 million was available under our repurchase program. As of March 1, 2008 we had acquired an additional 33,000
shares under our repurchase plan for $126,000. We may repurchase shares in the future subject to the rules of our Rule 10b5-1 repurchase plan and, in the case of any discretionary purchases made outside of the plan, subject to overall market
conditions, stock prices, and our cash position and requirements going forward. The repurchase program will continue until the earlier of (a) such time when the maximum dollar amount authorized has been utilized or (b) our Board of
Directors elects to discontinue the repurchase program.
62
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingencies
Leases
We lease our office space and certain equipment under non-cancelable operating leases which
expire on various dates between February 2008 and February 2015. Through February 2008, we subleased a portion of our office space to third parties. Rent expense under non-cancelable leases was $3.1 million, $3.0 million and $3.1 million in 2007,
2006 and 2005, respectively. Certain of our lease agreements provide for scheduled rent increases over the lease term. We recognize minimum rental expense on a straight-line basis over the term of our lease. As of December 31, 2007, we have
entered into lease agreements for certain leases beginning in 2008 (2008 leases). Future minimum lease payments under non-cancelable operating leases, including 2008 leases, and future rental income under non-cancelable subleases having
initial or remaining lease terms in excess of one year as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Lease
Payments
|
|
Future Rental
Income
|
|
|
Net
|
2008
|
|
$
|
2,873
|
|
$
|
(60
|
)
|
|
$
|
2,813
|
2009
|
|
|
2,609
|
|
|
|
|
|
|
2,609
|
2010
|
|
|
2,149
|
|
|
|
|
|
|
2,149
|
2011
|
|
|
2,008
|
|
|
|
|
|
|
2,008
|
2012
|
|
|
1,810
|
|
|
|
|
|
|
1,810
|
2013 and thereafter
|
|
|
3,492
|
|
|
|
|
|
|
3,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,941
|
|
$
|
(60
|
)
|
|
$
|
14,881
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to a stock purchase agreement dated December 2, 2007, on January 4, 2008, our
wholly-owned subsidiary, Captaris Verwaltungs GmbH, a German limited liability company (CV GmbH), acquired Océ Document Technologies GmbH (ODT) see Note 20. Subsequent Events. After our acquisition, we re-named
ODT to Captaris Document Technologies GmbH (CDT). We assumed the following CDT commitments for leased spaces and personal property under existing non-cancelable operating leases:
|
|
|
|
|
|
Future Lease
Payments
|
2008
|
|
$
|
873
|
2009
|
|
|
820
|
2010
|
|
|
750
|
2011
|
|
|
715
|
2012
|
|
|
166
|
2013 and thereafter
|
|
|
|
|
|
|
|
|
|
$
|
3,324
|
|
|
|
|
Purchase Commitments
We have certain obligations to purchase telecommunication services and general purchases for our operating activities of $1,245,000 in 2008. We do not anticipate any losses resulting from these purchase commitments.
These purchase obligations exclude our commitment to purchase CDT pursuant to an agreement signed on December 20, 2007 see Note 20. Subsequent Events below.
Intellectual Property
We are periodically involved in litigation or claims, including patent
infringement claims, in the normal course of our business. We follow the provisions of SFAS No. 5,
Accounting for Contingencies,
to record litigation or claim-related expenses. We evaluate, among other factors, the degree of probability
of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We accrue for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated. In addition to our judgments
and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in actual settlement amounts that differ materially from estimates. We expense our legal costs associated with these matters when incurred.
We periodically receive letters and other communications from third parties asserting patent rights and requesting royalty payments, among
other remedies, and will probably receive additional claims in the future. Some of these claims are unresolved and
63
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
continue to be outstanding, even after several years of intermittent communications. The ultimate outcome of any of these matters that continue to be
outstanding or that may arise in the future cannot be determined, and there can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on our results of operations, cash flows and financial condition.
Indemnifications
In the normal course
of business to facilitate sales of our products, we indemnify customers, resellers, distributors, OEMs and other parties to other transactions with the Company, with respect to certain matters. We have agreed to hold the other party harmless against
losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made by certain parties. We evaluate estimated losses for such indemnifications under SFAS No. 5,
Accounting for
Contingencies
, as interpreted by FIN No. 45. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. To date, we have not encountered material
costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial statements.
13.
Restructuring Charges
On November 5, 2007, we announced changes in our research and development organizations structure.
These changes included the elimination of certain positions in our Calgary and Denver offices and the transfer of certain positions to our Bellevue offices. In connection with this structure change, we recorded a charge of $379,000 for severance and
transition costs in the fourth quarter of 2007. We recognized $353,000 of this charge in research and development, $16,000 in cost of revenue and $10,000 in general and administrative expenses. We estimate that we will record an additional charge of
approximately $66,000 in the first quarter of 2008 to complete this structure change.
On July 15, 2006, in an effort to improve the
cost effectiveness and efficiency of our support operations, we centralized our international Technical Support Group. These changes primarily included a reduction in our workforce and, as a result, we recorded a charge of $243,000 for severance
payments made in the third quarter of 2006. We recognized $232,000 of this charge in cost of revenue and $11,000 in selling and marketing expenses.
On November 3, 2005, we announced a corporate reorganization that included the layoff of certain Teamplate founders and triggered the acceleration of the remaining Teamplate management incentive plan obligation. We recorded a charge of
approximately $2.1 million for the year ended December 31, 2005 related to this incentive plan. During this time, we also assessed the effect this layoff had on the valuation of the intangibles related to the Teamplate acquisition and
determined that the intangibles were not impaired as a result of the layoff. Concurrent with the announcement of the November 2005 reorganization, we announced that we would record a non-cash impairment charge of $607,000 in the fourth quarter of
2005. This impairment charge included $559,000 of impairment of application systems software projects that would not be completed and $48,000 of assets abandoned with the office consolidation.
14. Income Taxes
Income (loss) from continuing
operations before income tax expense (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
United States
|
|
$
|
(1,877
|
)
|
|
$
|
5,377
|
|
$
|
(6,027
|
)
|
Foreign
|
|
|
580
|
|
|
|
404
|
|
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense (benefit)
|
|
$
|
(1,297
|
)
|
|
$
|
5,781
|
|
$
|
(7,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The items accounting for the difference between income taxes computed at the United States
statutory rate and the effective tax rate consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Tax Rate
(1)
|
|
|
Amount
|
|
|
Tax Rate
|
|
|
Amount
|
|
|
Tax Rate
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
(454
|
)
|
|
35.0
|
%
|
|
$
|
2,023
|
|
|
35.0
|
%
|
|
$
|
(2,568
|
)
|
|
35.0
|
%
|
Nontaxable interest income
|
|
|
(566
|
)
|
|
43.6
|
|
|
|
(497
|
)
|
|
(8.6
|
)
|
|
|
(301
|
)
|
|
4.1
|
|
State income taxes and other
|
|
|
(61
|
)
|
|
4.7
|
|
|
|
89
|
|
|
1.5
|
|
|
|
(173
|
)
|
|
2.4
|
|
Research and development credit
|
|
|
(173
|
)
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax contingency
|
|
|
(374
|
)
|
|
28.8
|
|
|
|
52
|
|
|
0.9
|
|
|
|
(405
|
)
|
|
5.5
|
|
Other items
|
|
|
103
|
|
|
(7.8
|
)
|
|
|
149
|
|
|
2.6
|
|
|
|
128
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(1,525
|
)
|
|
117.6
|
%
|
|
$
|
1,816
|
|
|
31.4
|
%
|
|
$
|
(3,319
|
)
|
|
45.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax expense (benefit) and cash paid for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Federal
|
|
$
|
(348
|
)
|
|
$
|
(1,748
|
)
|
|
$
|
(2,454
|
)
|
State and local
|
|
|
92
|
|
|
|
54
|
|
|
|
166
|
|
Foreign
|
|
|
80
|
|
|
|
33
|
|
|
|
23
|
|
Total current income tax expense (benefit)
|
|
|
(176
|
)
|
|
|
(1,661
|
)
|
|
|
(2,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal
|
|
|
(1,270
|
)
|
|
|
3,137
|
|
|
|
(264
|
)
|
Deferred state and local
|
|
|
(174
|
)
|
|
|
223
|
|
|
|
(335
|
)
|
Deferred foreign
|
|
|
95
|
|
|
|
117
|
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense (benefit)
|
|
|
(1,349
|
)
|
|
|
3,477
|
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,525
|
)
|
|
$
|
1,816
|
|
|
$
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
458
|
|
|
$
|
141
|
|
|
$
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes refunded
|
|
$
|
66
|
|
|
$
|
1,860
|
|
|
$
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current federal and state provisions do not reflect the tax benefits resulting from deductions
associated with our stock option plans. These savings were $308,000, $1.1 million and $28,000 in 2007, 2006 and 2005, respectively, and were credited to additional paid-in capital. The income tax benefit in 2007 and 2005 includes the reversal of
previous income tax contingency reserves of $403,000 and $523,000, respectively, which we determined were no longer probable based on new information surrounding the related tax returns.
Income (loss) from discontinued operations before income tax expense was $(6,000), $27,000 and $63,000 for the years ended December 31, 2007, 2006
and 2005, respectively, and was all derived in the United States. The following table is a reconciliation from the United States statutory rate to the effective tax rate for discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Tax Rate
|
|
|
Amount
|
|
Tax Rate
|
|
|
Amount
|
|
Tax Rate
|
|
Income tax expense (benefit) at the statutory rate
|
|
$
|
(2
|
)
|
|
35.0
|
%
|
|
$
|
9
|
|
35.0
|
%
|
|
$
|
22
|
|
35.0
|
%
|
State income taxes and other
|
|
|
|
|
|
4.6
|
|
|
|
2
|
|
4.6
|
|
|
|
3
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2
|
)
|
|
39.6
|
%
|
|
$
|
11
|
|
39.6
|
%
|
|
$
|
25
|
|
39.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes result from temporary differences relating to items that are expensed for financial
reporting but are not currently deductible for income tax purposes. Significant components of our deferred tax assets and deferred tax liabilities as of December 31, 2007 and 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable allowances
|
|
$
|
455
|
|
|
$
|
392
|
|
Inventories
|
|
|
257
|
|
|
|
789
|
|
Equipment and leasehold improvements
|
|
|
410
|
|
|
|
305
|
|
Accrued compensation, benefits and stock-based compensation
|
|
|
1,292
|
|
|
|
751
|
|
Amortization of intangibles
|
|
|
1,154
|
|
|
|
1,185
|
|
Deferred revenue
|
|
|
1,796
|
|
|
|
1,308
|
|
Other
|
|
|
392
|
|
|
|
160
|
|
Net operating losses
|
|
|
3,826
|
|
|
|
3,678
|
|
Credit carryovers
|
|
|
3,477
|
|
|
|
1,902
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
13,059
|
|
|
$
|
10,470
|
|
Income taxes receivable
|
|
|
124
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets and income taxes receivable
|
|
$
|
13,183
|
|
|
$
|
10,480
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
(286
|
)
|
|
$
|
(496
|
)
|
Intangible assets not deductible for tax
|
|
|
(719
|
)
|
|
|
(1,246
|
)
|
Foreign translation adjustment
|
|
|
(222
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,227
|
)
|
|
|
(1,910
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and income taxes receivable before valuation allowance
|
|
$
|
11,956
|
|
|
$
|
8,570
|
|
Valuation allowance
|
|
|
(3,085
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and income taxes receivable after valuation allowance
|
|
$
|
8,871
|
|
|
$
|
6,894
|
|
|
|
|
|
|
|
|
|
|
65
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2007, we have available unused net operating losses that may be applied against
future taxable income. These net operating losses consist of international losses of $2.6 million that do not expire, federal losses of $7.4 million that expire from 2019 to 2027, and state losses of $13.1 million that expire from 2009 to 2027.
Additionally, we have $3.1 million of tax attributes from our Canadian subsidiary which are primarily investment tax credits and deferred research and development expenditures which begin to expire in 2013.
Our policy is to evaluate our deferred tax assets on a jurisdiction by jurisdiction basis and record a valuation allowance for our deferred tax assets if
we do not have sufficient positive evidence indicating that we will have future taxable income available to utilize our deferred tax assets. In assessing the need for a valuation allowance, we first examine our historical cumulative three year
pre-tax book income (loss). If we have historical cumulative three year pre-tax book income, we consider this to be strong positive evidence indicating we will be able to realize our deferred tax assets in the future. Absence the existence of any
negative evidence outweighing the positive evidence of cumulative three year pre-tax book income, we do not record a valuation allowance for our deferred tax assets.
If we have historical cumulative three year pre-tax book losses, we then examine our historical cumulative three year pre-tax book losses to determine whether any unusual or abnormal events occurred in this time
period which would cause the results not to be an indicator of future performance. As such, we normalize our historical cumulative three year pre-tax results by excluding abnormal items that are not expected to occur in the future. This analysis of
normalized historical book income includes material management assumptions that relate to the appropriateness of excluding non-recurring items. If, after excluding non-recurring items, we have normalized historical cumulative
three year pre-tax book income, we consider this strong positive evidence indicating we will be able to realize our deferred tax assets in the future. We then assess any additional positive and negative evidence such as the existence or absence of
historical cumulative three year taxable income, future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards and taxable income in prior carry back years. After
reviewing and weighing all of the positive and negative evidence, if the positive evidence outweighs the negative evidence then we do not record a valuation allowance for our deferred tax assets. If the negative evidence outweighs the positive
evidence, then we record a valuation allowance for our deferred tax assets.
For our U.S. federal jurisdiction, we incurred U.S. cumulative
pre-tax book losses of $2.5 million for the three years ended December 31, 2007. As of December 31, 2007, we continue to believe, based on the weight of available evidence, that no valuation allowance is required at December 31, 2007
for our deferred tax assets related to U.S. federal net operating losses and other U.S. deferred tax assets because the preponderance of objectively verifiable positive evidence outweighs available negative evidence.
Objectively verifiable positive evidence considered for purposes of this determination includes our normalized cumulative pre-tax book income
of $1.0 million for the three years ended December 31, 2007 exclusive of certain expenses in 2005 that we believe were aberrations including: (1) $2.1 million for incentive compensation paid pursuant to an earn-out agreement with the
former founders of Teamplate which we acquired in 2003 and (2) $1.4 million of increased accounting and consulting fees incurred to comply with the Sarbanes Oxley Act of 2002 which we consider to be in excess of our normal and recurring fees
for annual compliance. We believe these are unusual items that are not indicative of a continuing condition and should be considered an aberration for purposes of determining our earnings history for assessing the realizability of our deferred tax
assets in accordance with the recognition criteria of SFAS No. 109. In addition to the objective positive evidence, we also have positive evidence that is more subjective in nature including projected cumulative 3 year earnings for the period
2006 through 2008, projected cumulative 3 year taxable income for the period 2008 through 2010 and projected future earnings from Castelle which we acquired in July 2007. These positive evidences are less certain than the objective positive
evidences and therefore carry less weight when evaluating whether a valuation allowance is not needed. Negative evidence we considered was our history of cumulative book losses for the three years ended December 31, 2007, which we believe was
an aberration, as discussed above. Based on the weight of all available evidence, we believe it is more likely than not that we will generate sufficient future U.S. taxable income to realize our U.S. deferred tax assets at December 31, 2007. In
addition, we believe it is more likely than not that we will utilize our net operating loss carry forwards and they will not be limited by Internal Revenue Code Section 382 before they expire. We also believe that because of our assumptions and
66
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
judgment involved with this analysis, there is an element of uncertainty that these U.S. federal net operating losses and U.S. deferred tax assets will be
utilized in the future. Therefore, in the future we will continue to closely monitor evidence on a quarterly basis. If we believe that our negative evidence outweighs our positive evidence, we will record a valuation allowance against the U.S. net
operating losses and the U.S. deferred tax assets at that time.
In Canada, we recorded a full valuation allowance against our investment
tax credits because we do not believe it is more likely than not that we will utilize the credits prior to the expiration of the statutory carryforward period. Our Canadian subsidiary has a history of losses, and with projected Canadian income
insufficient to support utilization of the investment tax credit carryovers prior to expiration provides substantial negative evidence supporting our conclusion regarding realizability of the tax credit carryovers.
In our other foreign jurisdictions, we believe that our net operating losses are more likely than not to be realized. Our history of income and net
operating loss utilization, coupled with an indefinite carryforward period for net operating losses provide sufficient objectively verifiable positive evidence to support our conclusion regarding realizability of these carryforwards.
On January 1, 2007, we adopted the provisions of FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109
(FIN No. 48). Previously, we had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for Contingencies
. As required by FIN No. 48, we
recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount we recognize in the financial statements are the largest benefit that have a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Beginning on January 1, 2007, we applied FIN
No. 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN No. 48, we recognized a $53,000 increase in the liability for unrecognized tax benefits, which we accounted for as a
reduction to the January 1, 2007 beginning balance of retained earnings. The amount of unrecognized tax benefits as of January 1, 2007 was $518,000.
A reconciliation of our beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
518,000
|
|
Additions based on tax positions related to the current year
|
|
|
116,000
|
|
Reductions as result of lapse of applicable statute of limitations
|
|
|
(403,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
231,000
|
|
|
|
|
|
|
During the third quarter of 2007, we reduced our liability for unrecognized tax benefits by
$403,000 because of the expiration of a federal statute. The amount of unrecognized tax benefits as of December 31, 2007 includes $87,000 of unrecognized tax benefits which, if ultimately recognized, will reduce goodwill related to the
acquisition of Castelle in 2007. Additionally, the amount of unrecognized tax benefits as of December 31, 2007 includes $144,000 which, if ultimately recognized, will impact our effective tax rate.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to United States federal income tax examinations by the Internal Revenue Service for the years before
2004 and for state and local, or non-United States income tax examinations by tax authorities for the years before 2003.
We recognize
interest accrued and penalties related to unrecognized tax benefits as a component of our income tax expense. We accrued approximately $108,000, $202,000, and $150,000 for interest and penalties as of December 31, 2007, 2006, and 2005
respectively.
67
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Geographic Revenue, Long-Lived Assets and Significant Customers
We achieve broad United States market coverage for our products primarily through a nationwide network of computer-oriented value-added resellers.
Information regarding our operations in different geographic areas is set forth below (in thousands). Revenue and long-lived assets are reported based on the location of our customers.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
65,889
|
|
$
|
66,206
|
|
$
|
64,076
|
Canada
|
|
|
3,492
|
|
|
3,551
|
|
|
3,404
|
Europe
|
|
|
12,163
|
|
|
10,562
|
|
|
9,874
|
Asia Pacific
|
|
|
6,614
|
|
|
5,654
|
|
|
5,190
|
Rest of the world
|
|
|
6,671
|
|
|
6,013
|
|
|
3,836
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
94,829
|
|
$
|
91,986
|
|
$
|
86,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
47,021
|
|
$
|
34,385
|
|
Canada
|
|
|
8,501
|
|
|
7,335
|
|
Rest of the world
|
|
|
1,483
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
57,005
|
|
$
|
43,109
|
|
|
|
|
|
|
|
|
|
No single customer represented more than 10.0% of our net revenue for the years ended
December 31, 2007, 2006 or 2005.
16. Legal Proceedings
As reported in our Annual Report on Form 10-K for the year ended December 31, 2006, Captaris has been involved in an ongoing lawsuit in Circuit Court in Cook County, Illinois. The lawsuit was filed by Travel 100
Group, Inc. (Travel 100), against Mediterranean Shipping Company (Mediterranean). The complaint alleges violations of the Telephone Consumer Protection Act in connection with the receipt of facsimile advertisements that were
transmitted by MediaTel Corporation, a wholly-owned subsidiary of Captaris, on behalf of travel service providers, including Mediterranean. All of the assets of MediaTel were sold to a subsidiary of PTEK Holdings, Inc. on
September 1, 2003.
The Travel 100 complaint sought injunctive relief and unspecified damages and certification as a class action
on behalf of Travel 100 and others similarly situated throughout the United States that received the facsimile advertisements. Mediterranean named Captaris as a third-party defendant and asserted that, to the extent that it is liable, Captaris
should be liable under theories of indemnification, contribution or breach of contract for any damages suffered by Mediterranean. Both Captaris and MediaTel have denied any liability in the case because, among other facts and defenses, MediaTel
understood that the database and lists of travel agent recipients to whom faxes were sent had authorized that information could be sent to them by fax.
On September 29, 2006, the court in the Mediterranean case granted summary judgment in favor of Mediterranean and Captaris and dismissed the case. In granting summary judgment, the court ruled that Travel 100 had
invited the facsimile advertisements and there was no violation of the Telephone Consumer Protection Act. Travel 100 filed a motion for reconsideration, which the court denied. Travel 100 then filed a notice of appeal on December 29, 2006. All
briefing on the appeal is complete, however no date has been set for oral argument.
Our insurance carrier has agreed to pay defense
costs in the Mediterranean case, but has reserved its rights to contest their duty to indemnify Captaris with respect to this matter. We intend to vigorously defend the appeal of the Mediterranean summary judgment ruling; however, litigation is
subject to numerous uncertainties and we are unable to predict the ultimate outcome of the Mediterranean case. There is no guarantee that we will not be required to pay damages in respect of this case in the future, which could materially and
adversely affect our results of operations, cash flows and financial condition for the quarter or year in which any accrual is recorded or any damages are paid.
68
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Allowances for Doubtful Accounts and Sales Returns (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning
of year
|
|
Castelle on
July 10, 2007
(date of
acquisition)
(see Note 3)
|
|
Charged to
costs and
expenses
|
|
Writeoffs
|
|
|
Balance
at end
of year
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,178
|
|
$
|
|
|
$
|
114
|
|
$
|
(389
|
)
|
|
$
|
903
|
Allowance for sales returns
|
|
|
138
|
|
|
220
|
|
|
1,954
|
|
|
(1,620
|
)
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,316
|
|
$
|
220
|
|
$
|
2,068
|
|
$
|
(2,009
|
)
|
|
$
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,194
|
|
$
|
|
|
$
|
29
|
|
$
|
(45
|
)
|
|
$
|
1,178
|
Allowance for sales returns
|
|
|
175
|
|
|
|
|
|
1,151
|
|
|
(1,188
|
)
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,369
|
|
$
|
|
|
$
|
1,180
|
|
$
|
(1,233
|
)
|
|
$
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,110
|
|
$
|
|
|
$
|
572
|
|
$
|
(488
|
)
|
|
$
|
1,194
|
Allowance for sales returns
|
|
|
277
|
|
|
|
|
|
1,189
|
|
|
(1,291
|
)
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,387
|
|
$
|
|
|
$
|
1,761
|
|
$
|
(1,779
|
)
|
|
$
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Employee Savings Plan
We offer a 401(k) plan to substantially all of our employees. Company matching contributions are determined annually and are at the discretion of the Board of Directors. During the years ended December 31, 2007,
2006 and 2005, employer-matching cash contributions totaled $667,000, $450,000 and $266,000, respectively.
69
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Condensed Consolidated Quarterly Financial Data (unaudited) (in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
2007
|
|
|
June 30,
2007
|
|
|
Sept. 30,
2007
|
|
|
Dec. 31,
2007
|
|
|
March 31,
2006
|
|
|
June 30,
2006
|
|
|
Sept. 30,
2006
|
|
|
Dec. 31,
2006
|
|
Net revenue
|
|
$
|
20,513
|
|
|
$
|
22,966
|
|
|
$
|
23,265
|
|
|
$
|
28,085
|
|
|
$
|
19,573
|
|
|
$
|
22,630
|
|
|
$
|
24,560
|
|
|
$
|
25,223
|
|
Gross profit
|
|
|
14,255
|
|
|
|
16,073
|
|
|
|
16,318
|
|
|
|
19,429
|
|
|
|
13,920
|
|
|
|
15,869
|
|
|
|
17,119
|
|
|
|
17,358
|
|
Operating income (loss)
|
|
|
(1,066
|
)
|
|
|
(704
|
)
|
|
|
(1,540
|
)
|
|
|
(506
|
)
|
|
|
(208
|
)
|
|
|
(252
|
)
|
|
|
2,001
|
|
|
|
2,291
|
|
Other income, net
|
|
|
719
|
|
|
|
630
|
|
|
|
420
|
|
|
|
750
|
|
|
|
450
|
|
|
|
372
|
|
|
|
335
|
|
|
|
792
|
|
Income (loss) from continuing operations
|
|
|
(263
|
)
|
|
|
(164
|
)
|
|
|
486
|
|
|
|
169
|
|
|
|
33
|
|
|
|
33
|
|
|
|
1,643
|
|
|
|
2,256
|
|
Income (loss) from discontinued operations
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
48
|
|
|
|
(5
|
)
|
|
|
(16
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(265
|
)
|
|
$
|
(165
|
)
|
|
$
|
486
|
|
|
$
|
168
|
|
|
$
|
81
|
|
|
$
|
28
|
|
|
$
|
1,627
|
|
|
$
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Income (loss) from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Income (loss) from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in the calculation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
27,476
|
|
|
|
27,223
|
|
|
|
26,968
|
|
|
|
26,446
|
|
|
|
28,347
|
|
|
|
28,191
|
|
|
|
27,859
|
|
|
|
27,206
|
|
Diluted net income (loss) per share
|
|
|
27,476
|
|
|
|
27,223
|
|
|
|
27,504
|
|
|
|
26,733
|
|
|
|
28,580
|
|
|
|
28,526
|
|
|
|
28,472
|
|
|
|
28,506
|
|
20. Subsequent Events
Stock Option and Stock Unit Grants
Subsequent to year end, on February 22, 2008, we granted 223,000 stock options and
194,950 stock units to certain employees. We expect to record stock-based compensation expense of $348,000 and $699,000 for the stock options and stock units, respectively, ratably over a four year period.
Acquisition of Océ Document Technologies GmbH
On January 4, 2008, our wholly-owned subsidiary, Captaris Verwaltungs GmbH, a German limited liability company (CV GmbH ), acquired Océ Document Technologies GmbH (ODT), pursuant to a Sale and Purchase
Agreement (the SPA) by and between CV GmbH and Océ Deutschland Holding GmbH & Co. KG, a German limited partnership (the Seller), dated December 20, 2007. Under the terms of the SPA, CV GmbH acquired all
of the outstanding equity of ODT from the Seller, and ODT became a wholly-owned subsidiary of CV GmbH and an indirect wholly-owned subsidiary of Captaris. After our acquisition, we re-named ODT to Captaris Document Technologies GmbH
(CDT).
Under the terms of the acquisition agreement, CV GmbH acquired CDT for approximately 10.4 million ($15.4
million), net of CDTs cash balance as of the closing of approximately 21.6 million ($31.8 million). CV GmbH also assumed CDTs operating and financial liabilities, including approximately 12.1 million ($17.9 million)
in future retirement obligations. At the closing, €2.0 million ($3.0 million) of the purchase price was deposited in a third-party escrow account for 12 months as security for any post-closing purchase price adjustment and, subject to certain
limitations, for indemnification claims against the Seller; however, in connection with the resolution of a post-closing dispute with the Seller, we expect to release the full amount of the escrow to the Seller during the first quarter of 2008.
Subsequent to year end, we loaned our wholly-owned subsidiary CV GmbH, 31.6 million. Until the intercompany loan is repaid, this
loan exposes us to significant gains and losses from fluctuations in the exchange rate of Euros to U.S. dollars. To mitigate this risk, we have entered into a foreign currency exchange forward contract, agreeing to sell approximately 31.6
million in the future. This contract is unsecured and matures on April 4, 2008. Under the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
, our foreign currency forward contract is an
effective hedge of our foreign currency risk exposure on the intercompany loan.
CDT is a provider of software and solutions for document
capture, text recognition and document classification. CDT has approximately 178 employees and maintains its global headquarters in Constance, Germany, and its North American office in Bethesda, Maryland.
Credit Facility
On January 2, 2008, we entered
into a credit agreement providing for a senior secured revolving credit facility with Wells Fargo Foothill, LLC, as arranger, administrative agent, swing lender, and letter of credit issuer, and the other lenders party thereto (the Credit
Facility).
The Credit Facility provides for a $10.0 million revolving line of credit commitment, which may be used (i) for
revolving loans, (ii) for swing line advances, subject to a sublimit of $2.0 million and (iii) to request the issuance of letters of credit on our behalf, subject to a sublimit of $5.0 million. On or before January 2, 2009, we may,
subject to applicable conditions, request an increase in the commitment under the Credit Facility of up to $10.0 million. The credit available under the Credit Facility may be used to, among other purposes, pay a portion of the purchase price for
the acquisition of Océ Document Technologies GmbH as described above and to finance our ongoing working capital, capital expenditure, and general corporate needs. Upon the closing of the Credit Facility on January 2, we obtained an
initial cash advance of approximately $9.8 million.
70
CAPTARIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We may, subject to applicable conditions, elect interest rates on our revolving borrowings calculated
by reference to (i) the LIBOR rate (the LIBOR Rate) fixed for given interest periods, plus a margin determined by our average daily balance of the revolving loan usage during the preceding month or (ii) Wells Fargo Bank,
National Associations prime rate (or, if greater, the average rate on overnight federal funds plus one half of one percent) (the Base Rate), plus a margin determined by our average daily balance of the revolving loan usage during
the preceding month. For swing line borrowings, we will pay interest at the Base Rate, plus a margin determined by our average daily balance of the revolving loan usage during the preceding month. For borrowings made with the LIBOR Rate, the margin
ranges from 250 to 275 basis points, while for borrowings made with the Base Rate, the margin ranges from 100 to 125 basis points.
The
Credit Facility matures on January 2, 2013, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been cash collateralized.
The Credit Facility provides for the payment of specified fees and expenses, including commitment and unused line fees, and contains certain loan
covenants, including, among others, financial covenants providing for a minimum EBITDA and maximum amount of capital expenditures, and limitations on our ability with regard to the incurrence of debt, the existence of liens, stock repurchases and
dividends, investments, and mergers, dispositions and acquisitions, and events constituting a change in control. Our obligations under the Credit Facility are guaranteed by certain of our direct and indirect domestic subsidiaries (collectively, the
Guarantors).
The Credit Facility contains events of default that include, among others, non-payment of principal, interest or
fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, and cross defaults to certain other indebtedness. The occurrence of an event of default will increase the applicable
rate of interest and could result in the acceleration of our obligations under the Credit Facility and the obligations of any or all of the Guarantors to pay the full amount of our obligations under the Credit Facility.
71