U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 2000.
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File No. 000-29741
CE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1298712
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1801 Industrial Circle
West Des Moines, Iowa 50265
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 221-1801
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of class)
Indicate by mark (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
(Cover page continued)
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Indicate by mark (X) if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
Issuer's revenues for its most recent fiscal year: $3,055,328
Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price on the OTCBB of the Common Stock on
November 30, 2000: $594,397.
Number of shares outstanding of each of the registrant's classes of common stock
as of November 30, 2000:
Common Stock 1,155,124
DOCUMENTS INCORPORATED BY REFERENCE:
List hereunder the following documents if incorporated by reference and the Part
of the 10-KSB into which the document is incorporated.
Portions of the Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held March 23, 2001 are
incorporated by reference into Part III.
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CE SOFTWARE, INC.
2000 FORM 10-KSB ANNUAL REPORT
Table of Contents
Page
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Trademarks/Definitions 1
PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 9. Directors and Executive Officers of the Registrant 28
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management 28
Item 12. Certain Relationships and Related Transactions 28
PART IV
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K 29
Signatures 30
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TRADEMARKS/DEFINITIONS
BackMatic(TM), CEToolbox(TM), Choosy(TM), DialogKeys(TM), MailManager(TM),
MassCopier(TM), MobileVision(TM), Mounty(TM), Mousies(TM), NameFinder(TM),
NameServer(TM), ProKey(TM), QM Server(TM), QM Administrator(TM), QM-Connect
Gateway(TM), QM Config(TM), QM-Data Collection Bridge(TM), QM-Direct Bridge(TM),
QM Forms(TM), QM-Internet(TM) Gateway, QM-Link Gateway(TM), QM Menu(TM), QM-QM
Bridge(TM), QM Remote(TM), QM-Script Gateway(TM), QM-Serial Gateway(TM), QM
Server(TM), QM TimeOuts(TM), QuicKeys(R), QuickMail(TM), QuickMessenger(TM),
QuickSend(TM), QuickTimer(TM), Scrap Ease(TM), Screen Ease(TM), Speak Ease(TM),
TAA(TM), Technical Assistance Assistant(TM), and Vaccine(TM) are trademarks or
registered trademarks of CE Software, Inc., an Iowa corporation.
IBM(R) is a registered trademark of International Business Machines Corporation
("IBM"). Macintosh(R) and Apple(R) are registered trademarks and Mac(TM) is a
trademark of Apple Computer, Inc. ("Apple"). MS-DOS(R), Windows(R) and
Microsoft(R) are registered trademarks of Microsoft Corporation ("Microsoft").
Intercall(TM) is a trademark of Holmen and Ungman. CalendarMaker(R) is a
registered trademark of Prairie Group, Inc. QuickConference is a trademark of
PrairieSoft, Inc.
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PART I
Item 1: Business
General
CE Software, Inc., an Iowa corporation, develops computer software products that
enhance communications, connectivity and productivity for businesses and
home-based personal computer users. The Company's products include personal
productivity tools such as the QuicKeys product family, which as of November
1998 became available for use in the Microsoft's Windows operating system in
addition to Apple's Macintosh operating system; and business e-mail software,
collectively known as the QuickMail product family and developed for use with
both Microsoft's Windows and Apple's Macintosh operating systems.
The Company
CE Software, Inc. (the Company) was formed in January 1987 as the successor to a
business started in 1981 as the software development arm of a retail computer
store known as Computer Emporium. The three founders of the Company, Richard A.
Skeie, Donald M. Brown and John S. Kirk, still beneficially and collectively own
approximately 25% of the Company's outstanding common stock. All three founders
remain involved in the Company.
In February 1990, all the common stock of the Company was acquired by Anubis
Corporation, which then changed its name to CE Software Holdings, Inc. The
merger was accounted for as a reverse acquisition. CE Software Holdings, Inc.
existed primarily as a stock holding company, and accordingly, the Company was a
subsidiary of CE Software Holdings, Inc.
On March 1, 2000 the Company filed Amended and Restated Articles of
Incorporation to effect a ten for one stock split of the Company's Common Stock.
From and after the amendment, the Company has been authorized to issue
10,000,000 shares of Common Stock, par value $.10.
On April 28, 2000, the Company was spun-off by its parent by means of a dividend
to shareholders of CE Software Holdings, Inc. Shareholders of CE Software
Holdings, Inc. received one (1) share of the Company's common stock for each
share of CE Software Holdings, Inc. stock held as of the close of business on
April 28, 2000.
Early in the 1980's, the original business focused on developing accounting
software, games, and programming products for the Apple II computer. Shortly
after the release of the Macintosh computer in 1984, the Company released its
first Macintosh program. For several years, the bulk of the Company's product
development and sales was for the Macintosh. In 1987 the Company released its
automation software QuicKeys. In 1988 the Company released its e-mail software
QuickMail. Beginning in 1990, the Company focused on re-engineering its existing
Macintosh e-mail product for use with Microsoft's DOS operating system. In 1992,
an upgrade extended the functionality of QuickMail to users of Microsoft's
Windows operating system.
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In 1996 the Company re-engineered QuickMail LAN from a proprietary system to one
based on the Internet's open standards. The new product, called QuickMail Pro
now accommodates a Windows 95/98/00, Windows NT, or Mac OS e-mail server. In
1997 the Company released its QuickMail server for Macintosh. The Macintosh and
Windows client software along with the Macintosh QuickMail server comprise
QuickMail Office, a complete, client-server business e-mail solution for small
to mid-sized companies running Windows or Mac OS clients with a Macintosh
server.
In 1998 the Company re-engineered its second major product group, QuicKeys, to
operate within Microsoft's Windows operating system. Like the Macintosh version,
QuicKeys for Windows automates any repetitive, multi-step function to save the
time of numerous repetitive keystrokes.
Products
The Company's business and personal productivity software products have received
awards from professional groups, user groups, and industry trade publications
both in the United States and internationally.
The Company's products can be divided into two distinct groups, personal
productivity and messaging applications. The personal productivity group
consists of QuicKeys and the messaging group includes QuickMail Office and
QuickMail Pro. The Company's approximate net revenues are as follows:
Years ended September 30,
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2000 1999
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Messaging $1,833,000 2,329,000
Personal productivity 1,222,000 1,459,000
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Total net revenues $3,055,000 3,788,000
The Company believes that the products in the messaging and personal
productivity groups, as updated from time to time, will continue to make a
significant revenue contribution. Of course, these products may be at risk of
reduced sales if the Company is unable to produce competitive products or
respond to changes in customer demands or operating system requirements.
Messaging
QuickMail Office is an easy-to-use electronic mail package aimed at small to
mid-sized businesses. It was originally released as an e-mail system for
Macintosh-centric local area networks (LAN) in 1988 (QuickMail LAN). Due to the
new direction of the e-mail industry, QuickMail LAN was upgraded in 1996 and
1997 to QuickMail Office to offer full support for industry messaging standards.
QuickMail Office provides important communications functionality such as sending
and receiving of messages, remote access to e-mail and connectivity to other
office locations and e-mail systems.
The Company also continues to sell, but does not support QuickMail LAN. Gateway
and bridge software that connects QuickMail LAN with the Internet and with other
applications are also still available from the Company.
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In November 1996, the Company released QuickMail Pro, an Internet e-mail client
for Windows and Macintosh. Originally available as a client-only solution,
QuickMail Pro became part of a complete, all-in-one-box business e-mail solution
with the addition of an e-mail server. The result was the debut of QuickMail
Office in 1997.
In 1998 the Company released an upgrade to QuickMail Office, which included
tools that help companies prevent the unauthorized use of server resources by
people who send bulk e-mail, also known as "spam." In addition, the upgrade
featured simplified address book management, improved integration with other
e-mail programs and more efficient directory services plug-ins.
In June 1999, the Company released QuickMail Office 2.0 and QuickMail Pro 2.0
for Macintosh, a major upgrade of its easy-to-use Internet and interoffice
e-mail system for mid-sized businesses. It includes an all-new interface,
advanced contact management features, hierarchical file folders, built-in
directory services, plus numerous other features and improvements.
In October 1999, the Company released QuickMail Pro 2.0 for Windows, a major
upgrade of its easy-to-use Internet and personal e-mail client. This QuickMail
Office 2.0 client, now available for both Windows and Macintosh, features an
all-new interface, home and office e-mail account handling in one window,
advanced contact management features, hierarchical file folders and dozens of
other improvements.
In November 2000, the Company released QuickMail Pro 2.1 for Macintosh and
Windows, a major upgrade of its easy-to-use Internet and personal e-mail client.
This version features all-new HTML previewing, automatic updates, system
multi-user support, advanced contact management features, lock client feature
and dozens of other improvements.
Personal Applications
QuicKeys, the Company's automation utility, was first introduced in 1987 for
Macintosh users and is now available for Microsoft's Windows users as well.
QuicKeys automates any repetitive, multi-step function performed on a Macintosh
or Windows computer. Since its release, QuicKeys has been the leading desktop
automation package for the Macintosh computing environment and has won several
awards from key computer industry publications such as Macworld magazine. The
Windows version of QuicKeys was recently written up in PC World in an article
titled "A Control Freak's Best Friend."
The Company released QuicKeys 3.0 in August 1993. Recognizing the changing
requirements of the software industry, this release built in close support for
two of the leading Apple Computer technology initiatives: Apple Events and
AppleScript. In 1993, QuicKeys 3.0 was named Best Utility of the Year by the
editors of MacUser magazine.
The Company released QuicKeys 3.5 in August 1996. QuicKeys 3.5 allows users to
create customized toolbars and floating palettes for triggering shortcuts.
Version 3.5 also supports batch processing, which performs the same QuicKeys
sequence on multiple files.
The Company released QuicKeys 1.0 for Windows in November 1998. This new
automation software is designed to save time and boost productivity for anyone
who uses Microsoft Windows 95, 98 or NT 4.0. QuicKeys is designed to save a PC
user's time and effort by
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automatically performing hundreds of common but time-consuming computer tasks,
such as opening programs, typing text, choosing from menus, plus many more.
QuicKeys also automates longer tasks that require several consecutive steps,
such as compressing and sending files via e-mail. QuicKeys simply records the
keystrokes and mouse-clicks involved in the task then play the entire sequence
back, quickly and accurately, whenever the user presses the hot key or clicks
the toolbar button designated for that task. In addition to helping PC users
work faster and easier, QuicKeys makes all the elements of the user's computer
system -- programs, documents, operating system and Internet connection -- work
together more efficiently. For instance, a single QuicKeys sequence can easily
perform a task that involves steps in several programs. With a wide range of
features, QuicKeys can automate and control almost any function of any PC
software. QuicKeys has garnered very favorable feedback from the press and
customers.
QuicKeys 4.0 for Macintosh debuted in April 1999. Version 4.0 added Mac OS 8.5
compatibility, ten new plug-ins that increased function of the Web, Internet
e-mail and the Macintosh desktop, enhanced reliability and performance, new
toolbar functionality and 50 new time-saving features. Soon after, in October
1999, QuicKeys 4.1 for Macintosh was released. It included the following
enhancements designed to improve QuicKeys' ease-of-use, speed, and reliability;
owner-compatibility with Mac OS 9, instant e-mail plug-in updated to work with
QuickMail Pro version 2.0, more reliability when creating and executing Apple
Menu, File Launch and timed Shortcuts, and double-click items in Finder windows
that overlap toolbars.
QuicKeys 5.0 for Macintosh was released in June 2000. Version 5.0 added greatly
enhanced tabbed toolbars, pop out toolbars, speech activated triggers,
create/view palette, OS 9 multi-user compatibility, many improvements to
shortcuts, and many other new enhancements. This product has won many top awards
and reviews for its usefulness and quality.
QuicKeys 2.0 for Windows was released in October 2000. This was a greatly
enhanced version of QuicKeys for Windows that added a multitude of enhancements,
actions, and features requested by customers. Some of the new enhancements
include Pop out Toolbars, Check Spelling, Zip Files, QuickType, Screen Capture,
Screen Saver, and Set System Clock as well as many other improvements and
enhancements. This new version has been highly ranked in comparative reviews of
automation software and has received many outstanding reviews from the leading
PC reviewers.
Product Support
The Company believes that customer technical support is an important part of its
overall performance. As of September 30, 2000, the Company had five employees
involved in technical support services, available to all customers by electronic
mail, Worldwide Web site, telephone, or fax. Certain customers are charged an
annual maintenance fee for upgrades and support. Support services include
explaining how the customer's computer works, how their other software works in
relation to CE products, solving problems with software operation, and
suggesting solutions to business and personal computing issues.
Distribution and Marketing
The Company's products are primarily marketed through independent distributors
in the United States, through numerous independent dealers and distributors in
other countries,
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directly to large corporate accounts under site licensing agreements, and
directly to end-users through direct marketing campaigns.
Of the Company's total net revenues for fiscal 2000, approximately 26% are
through independent, domestic, nonexclusive distributors. Sales to one such
distributor, Ingram Micro, accounted for nearly 12% of total net revenues.
Domestic distributors purchase product at a discount from list prices. The
Company also distributes its products electronically from its Web site through
the services of Digital River, which accounted for 12% of total net revenues.
Of the Company's total net revenues for fiscal 2000, approximately 34% are
through independent, international distributors. Several of these distributors
are limited by contract to distribution within a specified geographic area. The
Company expects to continue emphasizing its international sales in upcoming
periods. It currently provides translations of certain programs in, German,
French and several other languages. Sales to three such distributors, Computers
Unlimited in the United Kingdom, Prisma in West Germany, and Moreware in Sweden,
accounted for approximately 14%, 3%, and 5% of total net revenues, respectively.
International distributors generally require a somewhat larger discount, in
return for various advertising, customer service, and customer registration
duties performed by them.
The Company gives its distributors industry-standard rights of return for stock
balancing and for defective products and replacement rights when products are
upgraded to new versions. A reserve for returns has been recorded and was
$34,600 and $31,000 at September 30, 2000 and 1999, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on the financial statements because of the Company's low cost to replace
such returns. Returns from end users, for any reason, have not been significant.
Product Development
The personal computer software industry continues to undergo rapid technological
change, requiring a continuous high level of enhancement of existing products
and development of new products. The Company is committed to the creation of new
products and is planning to continue the enhancement of existing products.
The Company's future financial performance will depend, in part, on the
successful development, completion, and introduction of new software products,
and of enhanced versions of existing products, and customer acceptance of those
products. In the future, there is no assurance that the Company will not
encounter difficulties that could delay or prevent the successful development
of, or marketing of, new products and/or enhancements of existing products.
There also can be no assurance that such products will yield positive results or
that such results can be obtained on a timely basis or without the expenditure
of substantial funds.
The Company's software products are primarily developed internally, although the
Company has increased the amount of extended development with several partners
and has purchased and/or licensed software products from independent authors and
other software companies. As of September 30, 2000, 8 employees were engaged
full time in product development. During fiscal years 2000 and 1999, the Company
spent approximately $665,000 and $1,110,000, respectively, on product
development and enhancement activities, representing approximately 22% and 29%,
respectively, of net revenues in each of these periods.
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Competition
The personal computer software market is highly competitive and has been subject
to rapid change, which is expected to continue. The Company's competitors
include many software vendors that have financial, marketing, and technological
resources far in excess of those of the Company. Certain of these include
Microsoft, IBM (Lotus), Qualcomm, Netscape Division of America Online, and
Novell Corporation. Certain computer manufacturers have obtained software,
directly competitive with the Company's products and have included that software
within their computers and computer systems without additional charge to
consumers. This practice negatively impacts the Company's ability to market its
products.
The Company's messaging and personal productivity products are marketed
primarily through the retail channel. All of these products face competing
products offering many similar features. The Company believes that the principal
competitive factors in the market include product features and functions, ease
of understanding and operating the software, product reliability,
price/performance characteristics, name recognition, and availability and
quality of support and training services. Price competition is likely to become
an increasing factor in the personal computer software market, which could, in
turn, be expected to increase pressures on profit margins in the future.
Product Protection
The Company regards its software as proprietary and attempts to protect it with
copyrights, trade secret laws, and internal nondisclosure safeguards, as well as
restrictions on disclosure and transferability that are incorporated into its
software license agreements. The Company licenses its software products to
customers rather than transferring title. Despite these restrictions, it may be
possible for competitors or users to copy aspects of the Company's products or
to obtain information which the Company regards as trade secrets. Computer
software generally can be patented only with difficulty, and existing copyright
laws afford only limited practical protection. Policing unauthorized use of such
a broadly disseminated product as computer software is difficult, and software
piracy can be expected to be a persistent problem for the packaged software
industry. These problems may be particularly acute in international markets.
However, because of the rapid pace of technological change in its industry, such
protections are less significant than factors such as knowledge, ability and
experience of the Company's employees, frequent product enhancement, and the
timeliness and quality of Company support services.
Employees
As of September 30, 2000, the Company employed 27 individuals. As of September
30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000, the Company
employed 45, 32, 31 and 28 individuals, respectively. Over the last few years
the Company has steadily taken steps to reduce its workforce. These steps have
included both normal employee attrition, as well as employee severance.
Historically, such reductions within the areas of development, sales and
marketing have been in response to the Company's focus on a smaller number of
products and the outsourcing of some functions requiring a particular expertise.
Within the administrative areas, reductions have been in response to reduced
workloads caused by a smaller volume of transactions. At November 30, 2000, the
Company employed 27 individuals. Employment may increase in the future as new
product development is undertaken.
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The term full-time equivalent employee (FTE) is defined as one full-time
employee or two or more part-time employees working an aggregate of a 40-hour
workweek. As of September 30, 2000 the Company employed 27 FTEs. As of September
30, 1999, December 31, 1999, March 31, 2000, and June 30, 2000, the Company
employed 45, 30, 31, and 28 FTEs, respectively.
Forward-looking statements
The Company or management may make or may have made certain forward-looking
statements, orally or in writing, such as those within Management's Discussion
and Analysis contained in its various SEC filings. The Company wishes to ensure
that such statements are accompanied by meaningful cautionary statements, so as
to ensure to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995. Such
statements are therefore qualified in their entirety by reference to and are
accompanied by the following discussion of certain important factors that could
cause actual results to differ materially from those described in such
forward-looking statements.
The Company cautions the reader that this list of factors is not intended to be
exhaustive. The Company operates in a continually changing business environment,
and new risk factors emerge from time to time. Management cannot predict such
factors, nor can it assess the impact, if any, of such factors on the Company's
business or the extent to which any factors may cause actual results to differ
materially from those described in any forward-looking statement. None of the
Company's forward-looking statements should be relied upon as prediction of
actual results.
The Company faces risks and uncertainties that could render actual events
materially different than those described in our forward-looking statements.
These risks and uncertainties include, but not limited to, the risk new products
(internally developed or acquired) and product upgrades may not be effected on a
timely basis; the risk such products may not achieve market acceptance within
the Windows or Macintosh markets; the risk the prevalence and functionality of
available free e-mail software will increase and further erode revenues; the
risk of the growth potential of QuicKeys for Windows; the risk that QuicKeys for
Macintosh may not be fully adaptable to Mac OS X; the risk the Company would not
be able to fund its working capital needs from cash flows; and the risk
associated with domestic and international general economic conditions. The
Company's products are sold in markets that change rapidly and the Company must
continually anticipate and adapt its products to emerging computer technologies
and capabilities. The Company may not be able to successfully adapt to these
changing markets.
Risk factors may affect future results
The Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including but not limited to the risks discussed in the paragraph
above.
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Item 2: Properties
The Company's principal facility is a 22,000-square-foot office building that
the Company built in 1990 in West Des Moines, Iowa. In May 1994, the Company
borrowed $1,000,000 secured by a mortgage on this building. In February 1995,
the Company purchased the land adjacent to this building, giving the Company an
additional option for future expansion. The purchase price was $225,000. This
adjacent land was contracted for sale in December of 1998 with a closing in
January of 1999. The sales price was $200,000.
The Company has rented a small amount of office space in its principal facility
from time to time. At December 1, 2000 two tenants are renting about 1,500
square feet.
Item 3: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to the stockholders in the fourth quarter of fiscal
2000.
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PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
As of November 30, 2000, there were approximately 250 stockholders of record.
The Company believes that it has approximately 1,150 beneficial stockholders
(including the stockholders of record). The Company has never paid cash
dividends on its stock and anticipates it will continue to retain earnings for
use in the growth and operation of its business and does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. Under the
Company's loan agreement, the bank requires prior approval before any dividends
can be paid.
The Company's common stock trades on the Over the Counter Bulletin Board tier of
The Nasdaq Stock Market under the symbol: CESW. The following table sets forth
the range of high and low sales prices per share of common stock for last
quarter as provided by Nasdaq. The stock first started trading on July 28, 2000.
Quarter ended: Common stock
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Low High
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September 30, 2000 $0.125 $0.937
Prior to April 28, 2000 the Company was a wholly owned subsidiary of CE Software
Holdings, Inc. On that date, the Company was spun-off by its parent by means of
a dividend to shareholders of CE Software Holdings, Inc. Shareholders of CE
Software Holdings, Inc. received one (1) share of the Company's common stock for
each share of CE Software Holdings, Inc. stock held immediately prior to the
effective time of the merger of Lightning Rod Software, Inc. with and into CE
Software Holdings, Inc. on April 28, 2000.
Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. Historical
results and percentage relationships are not necessarily indicative of the
operating results for any future period. Within this discussion and analysis,
all dollar amounts (except for per share amounts) have been rounded to the
nearest thousand.
The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues for each of
the years in the two-year period ended September 30, 2000.
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Years ended September 30,
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2000 1999
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Percentage of net revenues:
Net revenues 100% 100
Cost of revenues 22 23
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Gross profit 78 77
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Sales and marketing 28 45
General and administrative 44 38
Research and development 22 29
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Total operating expenses 94 112
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Operating loss (16) (35)
Other (expense) income, net (0) (16)
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Earnings (loss) before income taxes (16) (51)
Income tax (benefit) expense (0) (13)
Net earnings (loss) (16)% (38)
================================================================================
NET REVENUES
Revenues decreased 19% from fiscal 1999 to fiscal 2000. Approximately 40% of the
Company's fiscal 2000 revenues were from Personal Productivity products. These
revenues are from sales of QuicKeys, the Company's productivity enhancing
utility program, which is available for the Windows and Apple Macintosh markets.
The release of QuicKeys for Windows, in the first quarter of fiscal 1999,
offered additional revenue potential. Revenues from the QuicKeys product group
decreased by 16% compared to the prior year. The decrease in fiscal 2000
compared to the prior year was due to an over all decrease in sales and a delay
in the release of the QuicKeys 2.0 for Windows, which was released in October
2000.
Revenues from the Company's Messaging products fell 21%, but still accounted for
approximately 60% of the total net revenues. Historically, these revenues were
primarily derived from QuickMail LAN, the Company's Apple Mac OS, E-mail
solution. Over the past few years, revenues from QuickMail LAN have
significantly declined. For fiscal year 2000, QuickMail LAN accounted for only
1% of the Messaging product revenues compared to 5% in the prior year. The
decline is due to the reduced number of businesses using the Mac OS and the
Company promoting its QuickMail Pro/Office. QuickMail LAN product support was
discontinued in fiscal 1999. Presently, the majority of messaging revenues is
generated from the Company's QuickMail Pro and QuickMail Office products. These
products are cross-platform, open standards messaging products available for
both Microsoft Windows and Mac OS environments. In management's opinion, these
revenues have been negatively impacted due to the development of strong
competition within the E-mail market. This competition includes the prevalence
of inexpensive and, in some cases, free E-mail software. In management's
opinion, such competition is expected to continue and may hinder substantial,
long-term growth of this product group.
COST OF REVENUES
The Company's cost of revenues is composed primarily of: 1) the costs of product
materials such as manuals, diskettes, CD-ROMS, and packaging; 2) amortization of
capitalized purchased software; 3) royalties paid to outside developers for the
use of certain software included with some of the Company's products; 4)
amortization of capitalized manufacturing
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expenses; and 5) amortization of capitalized translation costs. Amortization of
capitalized purchased software includes both purchased product rights and
technology rights.
Cost of revenues, as a percentage of net revenues, decreased slightly from 23%
to 22% in fiscal 2000, compared to fiscal 1999. The change, on a percentage
basis, was the net effect of higher royalties associated with the QuickMail
product line and lower amortization expense associated with capitalized
purchased software.
SALES AND MARKETING
Sales and marketing expenses decreased to $862,000 during fiscal year 2000 from
$1,715,000 during fiscal year 1999. The significant decreases included contract
labor and temporary help, $38,000 or 44% from prior year; salaries and benefits,
$71,000 or 15%; travel and entertainment, $14,000 or 48%; marketing/advertising
expenses, $632,000 or 66%; allocated facility overhead expenses, $81,000 or 53%
and miscellaneous, $17,000 or 80%. The decreases are a result of a smaller sales
and marketing workforce, a reallocation of overhead because of the workforce
reduction and restructuring, and a more focused marketing/advertising program,
which is the direct result of the Company concentrating on fewer products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are composed principally of salaries of
administrative and technical support personnel, fees for professional services,
amortization of other intangible assets, and facilities expenses. These expenses
decreased $42,000 or 3% during fiscal 2000 compared to fiscal 1999. The largest
of these changes included decreases in amortization and depreciation, $122,000
or 32%; contract labor and temporary help, $59,000 or 86%; telephone $41,000 or
34%; shipping, $37,000 or 46%; maintenance & repairs, $26,000 or 34%; supplies,
$15,000 or 44%; salaries and benefits, $13,000 or 1%; outside services, $10,000
or 38% and miscellaneous, $2,000 or 1%. The decreases were offset by increases
in overhead allocation, $244,000 or 48%, legal & accounting, $24,000 or 247% and
insurance, $15,000 or 87%. The change in overhead allocation resulted from an
increase, on a percentage basis, of employees in the general and administrative
category compared to sales and marketing and research and development
categories. The decrease in amortization and depreciation was the result of a
portion of the intangible assets and fixed assets becoming fully amortized or
depreciated.
RESEARCH AND DEVELOPMENT
Research and development expenses were $665,000 and $1,110,000 in fiscal 2000
and 1999, respectively. These expenses were 22% and 29% of net revenues in the
two years, respectively. Salaries and benefits, contract labor and temporary
help, overhead allocation and miscellaneous decreased by $210,000, $119,000,
$102,000 and $14,000, respectively, in fiscal 2000 compared to fiscal 1999 due
to the reduced number of employees in research and development. The decreases in
salaries and benefits and contract labor and temporary help were the result of a
more focused development effort, while the decrease in overhead was due to the
reallocation of overhead expenses as discussed previously.
GAIN (LOSS) ON SALES OF INVESTMENTS / CHANGE IN MARKET VALUE OF SECURITIES
During fiscal 2000, the Company acquired an investment that was listed as an
available for sale security. The corresponding change in market value is
recorded in other comprehensive
12
<PAGE>
income (loss). See note 2 of the Notes to Financial Statements for the complete
details of the transaction.
During fiscal 1999, the Company disposed of the remaining shares of Documentum,
Inc. acquired in the sale of Relevance Technologies, Inc. in 1998. See note 2 of
the Notes to Financial Statements for the complete details of the transaction.
INCOME TAXES
The Company's income tax benefit for fiscal 2000 was none and the income tax
benefit for fiscal year 1999 was $473,000. As of the end of fiscal 1999, all
operating loss carrybacks available to the Company have been utilized. The
Company has recorded a valuation allowance for its excess of deferred tax assets
over deferred tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $508,000 to $735,000 as of the end of
fiscal 2000, compared to $227,000 for the prior year. The increase in cash and
cash equivalents was primarily due to the additional capital contribution of
$406,000 in cash and the contribution of $341,000 from the exercise of stock
options described in note 1 to the financial statements. As discussed in note 1
of the Notes to Financial Statements, as of April 28, 2000 approximately
$716,000 was contributed by Holdings to the Company as additional capital for
all amounts owed by the Company to its former parent.
Other sources include the decrease in trade accounts receivable of $139,000, and
the decrease in inventories of $83,000. The primary use of cash was from
operations with an operating loss of $484,000 and $100,000 payments on the
outstanding principal of the long-term debt. Virtually all of the cash and cash
equivalents balance is held in one of two types of cash equivalents. A total of
$621,000 is invested in a money market fund and $119,000 is invested through a
repurchase agreement arrangement offering overnight liquidity and competitive
returns.
Cash and cash equivalents decreased to $227,000 at the end of fiscal 1999, from
$451,000 at the end of fiscal 1998. Operating losses of $1,449,000 were offset
by the $1,429,000 received from the sale of the remaining shares of Documentum
common stock. See note 2 of Notes to Financial Statements. Other sources include
the proceeds from the sale of land of $200,000, and the decrease in inventories
of $144,000. The primary use of cash was from operations with an operating loss
of $1,449,000 and $89,000 payments on the outstanding principal of the long-term
debt. Virtually all of the cash and cash equivalents balance was held in one
type of cash equivalents. A total of $231,000 was invested through a repurchase
agreement arrangement offering overnight liquidity and competitive returns.
The Company believes it will be able to fund its working capital needs from
operations and available cash and investments through our current new product
development cycle and through calendar year 2001.
RISK AND UNCERTAINTY
The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could render them materially different, including, but
not limited to, the risk that new products and product upgrades may not be
effected on a timely basis, the risk that such products and
13
<PAGE>
upgrades may not achieve market acceptance, the risk that competitors will
develop similar products and reach the market first, the risk that competing
products distributed at no cost will materially decrease the Company's
opportunity to market its products, and the risk that the Company would not be
able to fund its working capital needs from cash flow.
Item 7: Financial Statements
Index to Item 7: Financial Statements
Independent Auditors' Report. 15
Balance Sheets, as of September 30, 2000 and 1999. 16
Statements of Operations, for the years
ended September 30, 2000 and 1999. 17
Statements of Stockholders' Equity, for the years
ended September 30, 2000 and 1999. 18
Statements of Cash Flows, for the years
ended September 30, 2000 and 1999. 19
Notes to Financial Statements. 21
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CE SOFTWARE, INC.:
We have audited the accompanying balance sheets of CE Software, Inc., as of
September 30, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for the years ended September 30, 2000 and
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CE Software, Inc., as of
September 30, 2000 and 1999, and the results of its operations and its cash
flows for the years ended September 30, 2000 and 1999, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Des Moines, Iowa
October 27, 2000
15
<PAGE>
BALANCE SHEETS
CE Software, Inc.
September 30, 2000 and 1999
Assets (note 3) 2000 1999
---------- ----------
Current assets:
Cash and cash equivalents $ 735,280 227,071
Investments 51,729 --
Trade accounts receivable, less allowance for
doubtful accounts of $35,580 in 2000 and
$30,000 in 1999 (note 7) 360,655 500,185
Recoverable income taxes 153,766 176,121
Inventories 167,171 250,208
Other current assets 109,505 287,725
---------- ----------
Total current assets 1,578,106 1,441,310
---------- ----------
Property, fixtures, and equipment:
Land 82,877 91,796
Building 1,312,016 1,312,016
Fixtures and equipment 2,725,017 2,716,807
---------- ----------
Total property, fixtures, and equipment 4,119,910 4,120,619
Less accumulated depreciation 2,952,210 2,710,159
---------- ----------
Net property, fixtures, and equipment 1,167,700 1,410,460
---------- ----------
Other intangible assets, net of amortization 9,967 21,927
Other assets 29,236 19,285
---------- ----------
Total assets $2,785,009 2,892,982
========== ==========
Liabilities and Stockholders' Equity 2000 1999
----------- -----------
Current liabilities:
Current portion of long-term debt (note 3) $ 108,592 100,237
Trade accounts payable 97,199 207,259
Accrued payroll and benefits 112,432 141,144
Other accrued payables 119,981 120,057
Due to affiliates -- 825,701
Deferred revenue 2,033 9,444
----------- -----------
Total current liabilities 440,237 1,403,842
Long-term debt, net of current portion (note 3) 132,267 240,859
----------- -----------
Total liabilities 572,504 1,644,701
----------- -----------
Stockholders' equity (note 4):
Common stock, $.10 par value. Authorized
10,000,000 shares; issued and outstanding
1,155,124 in 2000 and 1,131,124 in 1999 115,512 113,112
Additional paid-in capital 1,504,713 35,910
Accumulated other comprehensive loss (23,433) --
Retained earnings 615,713 1,099,259
----------- -----------
Total stockholders' equity 2,212,505 1,248,281
----------- -----------
Total liabilities and stockholders' equity $ 2,785,009 2,892,982
=========== ===========
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF OPERATIONS
CE Software, Inc.
Years ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net revenues (note 7) $ 3,055,328 3,787,868
Cost of revenues 661,071 880,682
----------- -----------
Gross profit 2,394,257 2,907,186
----------- -----------
Sales and marketing 861,738 1,714,621
General and administrative 1,354,717 1,396,939
Research and development 664,638 1,109,856
----------- -----------
Operating expenses 2,881,093 4,221,416
----------- -----------
Operating loss (486,836) (1,314,230)
Other income (expense):
Loss on sale of investments, net (note 2) (938) (553,078)
Loss on sale of property, fixtures, and equipment -- (25,000)
Interest income 17,212 3,851
Interest expense (22,942) (33,706)
Miscellaneous 9,958 --
----------- -----------
Loss before income taxes (483,546) (1,922,163)
Income tax benefit (note 5) -- (472,935)
----------- -----------
Net loss $ (483,546) (1,449,228)
=========== ===========
Basic loss per share (note 1) $ (0.43) (1.28)
=========== ===========
Shares used in per share calculation - basic 1,132,439 1,131,124
=========== ===========
Diluted loss per share (note 1) $ (0.43) (1.28)
=========== ===========
Shares used in per share calculation - diluted 1,132,439 1,131,124
=========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
CE Software, Inc.
Years ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other Com-
Common Paid-in prehensive Retained
Stock Capital Income (Loss) Earnings Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1998 $ 113,112 35,910 (72,138) 2,548,487 2,625,371
Comprehensive loss:
Net loss -- -- -- (1,449,228) (1,449,228)
Other comprehensive income -- -- 72,138 -- 72,138
-------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- 72,138 (1,449,228) (1,377,090)
-------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 113,112 35,910 -- 1,099,259 1,248,281
Comprehensive loss:
Net loss -- -- -- (483,546) (483,546)
Other comprehensive loss -- -- (23,433) -- (23,433)
-------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- (23,433) (483,546) (506,979)
Holdings contribution prior to
spin-off (note 1) -- 1,122,595 -- -- 1,122,595
Holdings contribution subsequent
to spin-off (note 1) -- 341,120 -- -- 341,120
Common stock issued 2,400 5,088 -- -- 7,488
-------------------------------------------------------------------------------------------------------------
Balances at September 30, 2000 $ 115,512 1,504,713 (23,433) 615,713 2,212,505
=============================================================================================================
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
STATEMENTS OF CASH FLOWS
CE Software Inc.
Years ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(483,546) (1,449,228)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization:
Property, fixtures, and equipment 242,052 349,684
Other 11,960 11,960
Non-cash issuance of common stock 7,488 --
Proceeds from sale of trading securities -- 1,428,759
Loss on sale of investments 938 553,078
Loss on sale of land -- 25,000
Decrease in deferred income taxes -- (274,000)
Decrease (increase) in trade accounts receivable 139,530 (20,232)
Decrease (increase) in recoverable income taxes 22,355 (176,121)
Decrease in inventories 83,037 144,441
Decrease (increase) in other assets 168,269 (23,613)
Decrease in trade accounts payable (110,060) (31,084)
Decrease in income taxes payable -- (275,744)
Decrease in accrued expenses (28,788) (16,891)
Decrease in deferred revenue (7,411) (24,504)
--------------------------
Net cash provided by
operating activities 45,824 212,505
--------------------------
Cash flows from investing activities:
Proceeds from sale of land 8,919 200,000
Purchase of property, fixtures, and equipment (8,211) (83,256)
Purchase of investments (83,662) --
Proceeds from sale of investments 7,562 --
--------------------------
Net cash (used in) provided by
investing activities (75,392) 116,744
--------------------------
Cash flows from financing activities:
Cash contributed by Holdings prior to
Spin-off (note 1) 406,327 --
Cash contributed by Holdings subsequent to
Spin-off (note 1) 341,120 --
Decrease in due to affiliates (109,433) (473,261)
Payments on long-term debt (100,237) (89,069)
--------------------------
Net cash provided by (used in)
financing activities 537,777 (562,330)
--------------------------
Net increase (decrease) in cash
and cash equivalents 508,209 (224,081)
Cash and cash equivalents at beginning of year 227,071 451,152
--------------------------
Cash and cash equivalents at end of year $ 735,280 227,071
==========================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 23,597 34,764
Income taxes 1,000 268,619
==========================
19
<PAGE>
Supplemental schedule of non-cash investing and
financing activities:
Amounts due to affiliates contributed as
additional paid-in capital (note 1) $ 716,268 --
==========================
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CE Software, Inc.
September 30, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
CE Software, Inc. (the Company) was a wholly-owned subsidiary of CE Software
Holdings, Inc. (Holdings) through April 28, 2000. Immediately prior to the
merger of Holdings with Lightning Rod Software, Inc. (Lightning Rod), Holdings
declared and paid a dividend to all of its shareholders of one share of the
Company for each outstanding share of Holdings (the spin-off). This dividend of
1,131,124 shares represented all the outstanding shares of the Company following
the Company's stock dividend to Holdings on April 27, 2000. All common shares
and per share amounts of the Company have been retroactively restated to give
effect to the April 27, 2000 stock dividend. In conjunction with the spin-off,
Holdings contributed as additional paid-in capital cash of approximately
$406,000 and all amounts the Company owed Holdings of approximately $716,000. In
addition, subsequent to the merger, the Company received approximately $341,000
as additional paid-in capital contribution from Holdings based upon certain
Holdings' stock options exercised within three months of the spin-off.
OPERATIONS
The Company manufactures and sells computer system enhancing and network
productivity software for Apple Macintosh and IBM PC and compatible personal
computers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers money market
funds and overnight repurchase agreements to be the equivalent of cash. At
September 30, 2000 and 1999, cash equivalents totaled approximately $740,000 and
$231,000, respectively.
INVESTMENTS
Available-for-sale securities consisted of stock of Lightning Rod Software, Inc.
at September 30, 2000. The investment was recorded at market value, with the
unrealized loss recorded as a component of comprehensive loss at September 30,
2000. There were no available-for-sale securities held at September 30, 1999.
Trading securities consisted of unrestricted common stock of Documentum, Inc.
held during the year ended September 30, 1999. The investment was recorded at
market value, with the unrealized loss recognized in other income (expense).
There were no trading securities held at September 30, 2000.
21
<PAGE>
INVENTORIES
Inventories are composed primarily of software translation costs, product
materials, and capitalized production costs. Product materials, such as
instruction manuals, CD-ROMS, diskettes, and packaging boxes, are stated at the
lower of cost or market with cost determined using the first-in, first-out
method. Translation costs are amortized over the estimated period between
upgrades of the associated international versions of the products. No
amortization period has exceeded 18 months during the two-year period ended
September 30, 2000.
PROPERTY, FIXTURES, AND EQUIPMENT
Property, fixtures, and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets as
follows: 31 1/2 years for building and five to seven years for fixtures and
equipment.
OTHER INTANGIBLE ASSETS
Amortization expense was $11,960, and $11,960, for the years ended September 30,
2000 and 1999, respectively. Accumulated amortization at September 30, 2000 and
1999 was $73,756 and $61,796, respectively. The Company assesses the
recoverability of intangible assets through analysis of undiscounted cash flows.
STOCK OPTION PLAN
The Company has adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-based Compensation," as required for
disclosure purposes only. The Company applies the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." In accordance with APB 25, compensation expense is recorded only on
the date of grant if the current market price of the underlying stock exceeded
the exercise price. Pro forma disclosures required by SFAS 123 have been
provided (see note 4).
REVENUE RECOGNITION
Revenue from software licenses is recognized upon shipment of the product, net
of an allowance for estimated product returns. The Company provides an allowance
for product returns based upon historical experience and anticipated returns
from its major distributors. The allowance for estimated product returns at
September 30, 2000 and 1999, was $34,600 and $31,000, respectively, and is
netted against trade accounts receivable in the consolidated balance sheets.
Revenues associated with obligations to provide customers with future product
enhancements are deferred and recognized either pro rata over the term of the
respective agreements or, in the case of revenues associated with specific
upgrades, upon shipment of the upgraded products.
Post-contract customer support (PCS) is provided with other software licenses,
and is also available on a per call basis separate from the license fee. Revenue
equal to the estimated costs of providing the PCS is deferred and recognized
over the estimated performance period. Other accrued payables at September 30,
2000 and 1999 include $57,277 and $91,051, respectively, of such deferrals.
22
<PAGE>
ADVERTISING AND MARKETING
Advertising costs are expensed in the period the advertising takes place. For
the years ended September 30, 2000 and 1999, advertising and marketing costs
were $323,940 and $981,596 respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure About
Fair Value of Financial Instruments," requires the Company to disclose the
estimated fair values for it financial instruments. Fair value estimates,
methods, and assumptions are set forth below:
Cash and cash equivalents, trade accounts receivable, trade accounts payable,
and accrued expenses - The carrying amount approximates the estimated fair value
due to the short-term nature of those instruments.
Investments - Available-for-sale securities were recorded at market value using
published stock prices. Other short-term investments are recorded at cost, which
approximates market value.
Long-term debt - The carrying amount approximates the estimated fair value since
the debt bears interest at a variable interest rate.
Limitations - Fair value estimates are made as of a specific point in time,
based upon the relevant market information about the financial instruments.
Because no market exists for a majority of the Company's financial instruments,
fair value estimates are based on judgments regarding current economic
conditions and other factors. These estimates are subjective in nature and
involve uncertainties and matters of judgments and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
EARNINGS (LOSS) PER COMMON SHARE
SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings (loss) per share. Basic earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding during the year. Diluted earnings (loss) per common
share reflect the potential dilution that would occur from the exercise of
common stock options outstanding. Antidilutive options excluded from the diluted
per share calculation totaled 87,100 at September 30, 2000.
23
<PAGE>
OTHER
SFAS No. 130,"Reporting Comprehensive Income," requires revised and additional
disclosures that did not have a material effect on the results of operations or
financial position of the Company. Other comprehensive income (loss) consisted
of unrealized gains and losses on equity securities.
(2) SALE OF STOCK HELD AS AN INVESTMENT
In fiscal 1999, 46,882 shares of Documentum Inc. trading securities were sold at
an average price below September 30, 1998 market value, resulting in a realized
loss on the sale of $835,864, of which $282,786 was reported in fiscal 1998,
reflecting the mark to market value of the trading securities at September 30,
1998.
In fiscal 2000, 1,700 shares of Lightning Rod available-for-sale securities were
sold, resulting in a realized loss on the sale of $938.
(3) LONG-TERM DEBT
In 1994, CE Software, Inc. borrowed $1,000,000 under a bank loan agreement. The
agreement contains certain financial compliance covenants and restricts certain
transactions, such as issuing dividends without prior written consent of the
bank. The interest rate on the loan is adjustable as defined in the agreement,
and at September 30, 2000 the rate was 7.85%. The loan is secured by a mortgage
on the real estate, a security interest in all business assets owned. Maturities
during the next three fiscal years are as follows: 2001, $108,592; 2002,
$117,534; and 2003, $14,733.
(4) COMMON STOCK
STOCK OPTION PLAN
The Company adopted the 2000 stock option plan on April 27, 2000. The Plan is
available to all employees, non-employee Directors and consultants and options
are generally granted at the discretion of the stock option committee of the
board of directors. Total shares of common stock that may be subject to options
under the Plan are 300,000 shares. Under the plan, the purchase price per share
under options granted is generally the market value at the date of the grant.
Options granted under the plan shall expire 10 years from the date such option
is granted. One-third of the options are exercisable one year after the grant
date with the remaining two-thirds exercisable pro rata during the succeeding 24
months, unless other vesting provisions are provided for in the grant.
The Company applies APB 25 in accounting for its stock option plans and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net earnings (loss) and net earnings (loss) per share would
have been as indicated below:
24
<PAGE>
--------------------------------------------------------------------------------
2000
--------------------------------------------------------------------------------
Net (loss) earnings - as reported $(483,546)
Net (loss) earnings - pro forma $(483,926)
Basic (loss) earnings per share - as reported $(0.43)
Basic (loss) earnings per share - pro forma $(0.43)
Diluted (loss) earnings per share - as reported $(0.43)
Diluted (loss) earnings per share - pro forma $(0.43)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions used for grants during fiscal 2000: risk-free interest rates of
6.0%; dividend yield of 0.0%; expected volatility of 82%, and expected lives of
five years. The fair values of the option grants in 2000 were $0.189 per share.
The effects of applying SFAS 123 may not be representative of the effects on
reported net earnings (loss) for future years.
At September 30, 2000, total options outstanding were 87,100, of which none were
exercisable, at exercise prices ranging from $0.187 to $0.312 and a
weighted-average remaining contractual life of 9.92 and 10.00 years,
respectively. The number of options and the weighted-average exercise price of
options outstanding, granted, exercised, and cancelled during the year ended
September 30, 2000, are as follows:
--------------------------------------------------------------------------------
Number Weighted
of Average
Number of options: Shares Prices
--------------------------------------------------------------------------------
Outstanding at beginning of year 0 $0.000
Granted 89,100 0.189
------------------------------------------------------------------------------
89,100 0.189
Exercised -- --
Cancelled 2,000 0.187
------------------------------------------------------------------------------
Outstanding at end of year 87,100 0.189
==============================================================================
The options outstanding as of September 30, 2000, have the following attributes:
--------------------------------------------------------------------------------
Option statistics
by price ranges: $ 0.187 $0.312
--------------------------------------------------------------------------------
Options outstanding 85,400 1,700
Weighted-average
remaining life (in years) 9.92 10.00
25
<PAGE>
(5) INCOME TAXES
Income tax (benefit) expense for the years ended September 30, 2000 and 1999,
consisted of the following:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Current $ -- (201,935)
Deferred -- (271,000)
--------------------------------------------------------------------------------
Income tax (benefit) expense $ -- (472,935)
Current income tax benefit for 1999 includes $(25,000) of state income tax
expense.
The income tax benefit or expense for 2000 and 1999, differs from the "expected"
tax benefit or expense computed by applying the United States federal income tax
rate of 34% to the earnings or loss before income taxes, as follows:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Computed "expected" tax (benefit) expense $(164,405) (652,797)
Increase (decrease) in "expected"
tax expense resulting from:
State income tax, net of federal income
tax effect -- (25,000)
Change in valuation allowance 154,000 302,000
Other, net 10,405 (97,138)
--------------------------------------------------------------------------------
Income tax (benefit) expense $ -- (472,935)
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at September 30, 2000 and 1999
are as follows:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Deferred tax assets:
Allowance for product returns $ 12,100 10,850
Allowance for doubtful accounts 12,500 10,100
Accrued expenses 70,100 71,050
Intangible assets 108,200 121,000
Net operating loss carryforward 187,500 43,000
Alternative minimum tax credit 85,000 85,000
--------------------------------------------------------------------------------
Gross deferred tax assets 475,400 341,000
Valuation allowance 456,000 302,000
--------------------------------------------------------------------------------
Total deferred tax assets 19,400 39,000
Deferred tax liabilities:
Accelerated depreciation for tax purposes (19,400) (39,000)
--------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ -- --
================================================================================
The change in the total valuation allowance for the years ended September 30,
2000 and 1999 was an increase of $154,000 and $302,000, respectively.
26
<PAGE>
(6) 401(k) PROFIT-SHARING PLAN
The Company has a 401(k) profit-sharing plan covering substantially all of its
employees. The profit-sharing component of the plan is funded by employer
contributions at the discretion of the board of directors. There was no
profit-sharing contribution for the years ended September 30, 2000 or 1999.
The plan includes a 401(k) component that allows qualified employees to
contribute between 1% and 12% of their compensation. The Company, at the
discretion of the board of directors, can make matching contributions to the
accounts of qualified employees who have met the one year of service
requirement. Net employer contributions for the years ended September 30, 2000
and 1999, were $29,124 and $30,975, respectively.
(7) MAJOR CUSTOMERS AND EXPORT SALES
The Company's revenues (which are primarily from software sales for personal
computers) are primarily related to its messaging product group, which
represented 60% and 61%, of total revenues for the years ended September 30,
2000 and 1999, respectively.
The Company's major customers are distributors. Of its domestic revenues, sales
to the top two distributor customers in 2000 and 1999 were approximately
$736,000 and $783,000, respectively. Accounts receivable from these two
distributor customers at September 30, 2000 and 1999 were approximately $224,000
and $310,000, respectively.
Virtually all export sales are to distributors. Export sales were approximately
$1,031,000 and $991,000, for the years ended September 30, 2000 and 1999,
respectively. Sales to the Company's top three export distributor customers
represented approximately $416,000, $161,000, and $86,000, or 14%, 5%, and 3%,
of net revenues in fiscal 2000. Sales to the top three export distributors
customers in total represented approximately $537,000 or 13% of net revenues in
fiscal 1999. Percentage components of export sales by geographic area for 2000
and 1999, respectively, were Europe (92 and 89 percent); Japan (3 and 1
percent); Australia (5 and 9 percent) and all others (0 and 1 percent).
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
27
<PAGE>
PART III
Item 9: Directors and Executive Officers of the Registrant
Information with respect to this Item may be found in the section captioned
"Nominees for Elections as Directors" appearing in the Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held March 23, 2001. Such information is incorporated herein by reference.
Information with respect to delinquent Form 4 filings may be found in the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held March 23, 2001.
Such information is incorporated herein by reference.
Item 10: Executive Compensation
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held
March 23, 2001. Such information is incorporated herein by reference.
Item 11: Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held March 23, 2001. Such information is
incorporated herein by reference.
Item 12: Certain Relationships and Related Transactions
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held
March 23, 2001. Such information is incorporated herein by reference.
28
<PAGE>
PART IV
Item 13: Exhibits, Financial Statements, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements
The following financial statements of CE Software, Inc., and the Independent
Auditors' Report issued thereon, are incorporated by reference in Part II, Item
7:
Independent Auditors' Report.
Balance Sheets, as of September 30, 2000 and 1999.
Statements of Operations, for the years
ended September 30, 2000 and 1999.
Statements of Stockholders' Equity, for the years
ended September 30, 2000 and 1999.
Consolidated Statements of Cash Flows, for the years
ended September 30, 2000 and 1999.
Notes to Consolidated Financial Statements.
2. Exhibits Page 31
The following exhibits are filed as part of, or incorporated by reference into,
this Report:
3.1 Amended and Restated Articles of Incorporation of the company as
corrected by Articles of Correction filed with the Iowa Secretary of
State on April 27, 2000.
3.2 Bylaws, incorporated by reference to Exhibit 2.1 to Form 10-SB filed
with the Commission on March 10, 2000.
4.1 Form of Certificate for Common Stock
10.1 CE Software, Inc., 2000 Stock Option Plan
10.2 CE Software, Inc. 401(k) Profit Sharing Plan
10.3 Business Loan Agreement
10.4 Executive Employment Agreement with Christian F. Gurney, including
Stock Purchase Agreement and Non-Recourse Promissory Note.
27 Financial Data Schedule - for SEC filing only
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CE SOFTWARE, INC.
(Registrant)
By /s/ John S. Kirk
------------------------------------
(John S. Kirk, President, and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below.
Signature Title Date
/s/ John S. Kirk
------------------------------- President, Secretary, 01/16/01
(John S. Kirk) Treasurer and Director
30
<PAGE>
EXHIBIT INDEX
Exhibit Reference (*)
Number or Page #
3.1 Amended and Restated Articles of Incorporation
of the Company as corrected by Articles of
Correction filed with the Iowa Secretary of
State on April 27, 2000. Page 32
3.2 Bylaws, incorporated by reference to Exhibit 2.1
to Form 10-SB filed with the Commission on March
10, 2000 *
4.1 Form of Certificate for Common Stock Page 35
10.1 CE Software, Inc., 2000 Stock Option Plan Page 36
10.2 CE Software, Inc. 401(k) Profit Sharing Plan Page 54
10.3 Business Loan Agreement Page 86
10.4 Executive Employment Agreement with Christian
Gurney, including Stock Purchase Agreement and
Non-Recouse Promissory Note Page 113
27 Financial Data Schedule - for SEC filing only
31
