CE SOFTWARE HOLDINGS, INC.
1997 ANNUAL REPORT
<PAGE>
ANNUAL REPORT CONTENTS
FINANCIAL OVERVIEW................................. 1
LETTER TO STOCKHOLDERS............................. 2
PRODUCT OVERVIEW................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 6
INDEPENDENT AUDITORS' REPORT....................... 9
CONSOLIDATED BALANCE SHEETS........................ 10
CONSOLIDATED STATEMENTS OF OPERATIONS.............. 12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.... 13
CONSOLIDATED STATEMENTS OF CASH FLOWS.............. 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........16
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.................... 23
OFFICERS AND DIRECTORS............................. 24
STOCKHOLDER INFORMATION............................ 25
<PAGE>
FINANCIAL OVERVIEW
<TABLE>
<CAPTION>
Year ended September 30, 1997
Statements of Operations - Quarterly Results 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues $2,006 1,668 1,655 1,727
Operating expenses 2,069 1,966 1,624 1,539
Net loss (368) (562) (243) (137)
Loss per share (.33) (.50) (.23) (.13)
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
Statements of Operations Data 1997 1996 1995
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Net revenues $7,056 10,438 12,919
Loss before income taxes (1,310) (1,409) (682)
Net loss (1,310) (1,399) (443)
Loss per share $(1.19) (1.22) (.39)
Shares used to compute primary
per share data 1,105 1,149 1,149
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
Balance Sheet Data 1997 1996 1995
(Amounts in thousands)
<S> <C> <C> <C>
Cash, cash equivalents, and investments 1,945 1,863 1,335
Current assets 4,104 5,381 5,296
Total assets 6,773 8,970 11,015
Long-term debt 878 919 951
Stockholders' equity 4,994 6,451 7,845
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
Company Data 1997 1996 1995
<S> <C> <C> <C>
Total employees 68 94 120
Total full-time equivalent employees 65 92 117
</TABLE>
1
<PAGE>
LETTER TO STOCKHOLDERS
For the third year running, CE Software has been participating in a revolution
in the way the whole world communicates. Not only has this revolution had
far-reaching changes for our company, but for the entire computer software
industry and for business and society as a whole. The revolution is the wiring
of our planet and the delivery of the worldwide data network--the Internet--to
virtually every country and city in the world.
While this revolution is often laced with over-hyped techno-optimism, more
prosaic is the fact that today more people than ever before are communicating
with electronic mail (E-mail). E-mail is, and probably will remain so for some
time, the number one use of the Internet.
What enables this communication revolution is first the network
infrastructure--the Internet itself--and second, the emergence of messaging
standards. Such standards ensure that every E-mail product, no matter who
develops and sells it, speaks the same language. That means the college
student using America Online can easily communicate with her father who uses
QuickMail at his office. Multiply that simplicity and effectiveness tens of
millions of times over and what this revolution really means becomes apparent.
It's the chance for universal, written electronic communication based upon
standards to reach as far as the Internet itself.
Another aspect of this revolution--no less important, but often overlooked-is
the impact that Internet-derived technologies are having in offices, schools,
and homes. Standards drive the Internet and E-mail communications. It's no
surprise that these same standards are being used even where there may be no
Internet connection, like the small office or school. Simply put, products
built for Internet communication are also at work today in businesses that do
not use the Internet. This dual use of technology benefits the customer and
vendor alike. A single product can be used in a variety of settings with
little or no modification.
Standards-based E-mail has several advantages over traditional messaging
systems. Customers can typically enjoy easy communication inside their
organizations as well as outside, reaching customers and partners as if they
were part of the company. Because E-mail systems can now talk to one another,
troublesome linking systems are no longer needed, reducing costs and
administrative maintenance. Perhaps most importantly, E-mail systems are
becoming simpler to install and use, placing the power of E-mail communication
in the hands of people who do not have dedicated technology staff.
So where is CE in the midst of this revolution? Participant or spectator? We
think of ourselves as a very active participant. During the past year, CE has
focused nearly all of its resources, not the least of which are the talents of
its employees, on enhancing our flagship E-mail product, QuickMail, to be a
complete and capable player in the worldwide communications revolution.
Detailed descriptions of our products and milestones for the past year follow
this letter. The capabilities of QuickMail, which will celebrate a decade of
messaging excellence in 1998, have been expanded to add full support for the
Internet's messaging standards. We call this newest addition to the product
family QuickMail Office.
QuickMail Office builds upon the reputation CE earned with QuickMail: solving
real-world communications problems in an elegant, simple, straightforward and
often award-winning manner. These talents and this history serve us well today
as we take an active role in outfitting businesses for the global
communications revolution. With QuickMail Office, CE now offers a rich and
complete set of messaging solutions for the Microsoft Windows environment.
This represents just one way in which CE has reformulated its products and
focus to meet the needs and realities of today's messaging marketplace.
The revolution also has meant some difficult and challenging times for CE. The
E-mail market has changed quite dramatically in the past 18 months, and we have
adapted to meet new market realities. The software industry is subject to near
constant change, and CE responded to meet the challenges presented. Delivery
of our new E-mail products and judicious cost-cutting allowed CE to stabilize
as a somewhat leaner but viable company. The choices we faced were hard, but
we made our way with characteristic speed and intensity. Through it all,
though, we remain a stable and healthy company poised to grow and to resume the
leadership role that we held for so long with QuickMail.
2
<PAGE>
During the past year, CE's course of action was influenced, at least in part, by
numerous changes at Apple Computer. Any vendor that has ever provided software
to the Apple market came under scrutiny as the press and analysts alternately
predicted Apple's doom and then resurrection at the hands of its founder, Steve
Jobs. During this turbulent time for the industry, CE remained focused and
listened carefully to its Macintosh customers. CE has offered Windows E-mail
solutions since 1993, and now offers customers a full range of both Macintosh
and Windows products, as well as tools for an easy transition from the Apple
platform to that of Microsoft. This pragmatic approach reflects the
cross-platform nature of our customers, who generally are more interested in
running their businesses than in debating the merits of one operating system
over another.
In July, after nearly 7 years of service, I was promoted to president and CEO of
the operating company, CE Software, Inc. Richard Skeie, who had temporarily
lead CE Software, returned his leadership focus to CE Software Holdings. This
transition permits us to continue our focus on updating our E-mail product line
while examining new business opportunities.
Also this year, CE settled the lawsuit we brought against Powercore, Inc.,
relating to our 1994 acquisition of Network Scheduler, a group calendar product.
The settlement brought closure to this chapter in our company's history and
allows us to sharpen our focus on our core strengths in messaging.
Despite all the changes this past year, CE Software's finances remain solid. We
have taken steps to reduce our operating expenses by streamlining our
operations. By year-end, we had reduced expenses by $500,000 per quarter when
compared to the previous year. Our staff was reduced from 92 to 65, a number
more in keeping with our goals and capabilities. These actions helped conserve
our cash. Including investments, we now have more than $1.9 million in the
bank, slightly better than the $1.8 million 12 months earlier. This, coupled
with low debt, provides a stable foundation for future operations.
CE made positive progress during the second half of this year to stabilize
sales, control costs, and chart a course to the future. We continue to focus on
the fundamentals of the software market. While we are pleased that we have
remained a viable competitor during these tumultuous times, our work is not and
cannot be complete until we return this company to profitability and restore
shareholder value.
To help us reach this goal, we will continue to focus on our messaging
expertise, our existing customer base of more than 2.6 million people worldwide
and our network of 13 international distributors. We must ensure that our
programs are executed with determination and speed. In addition, we will look
for new applications of our messaging technology and expertise, both on our own
and in conjunction with partners. Finally, we will seek to expand our product
offerings into new areas.
None of these goals will be easy, and none are likely to lead to overnight
success. We will continue to strive to improve our products, our customer
service, and our financial performance, all the while keeping abreast of new
developments in the communications revolution. Perhaps our greatest asset is
our dedicated team of professionals who have demonstrated that they are willing
and able to continue our work into the years beyond. Our potential for improved
performance remains very strong. I personally want to thank you for your
support and patience over the past years. I can assure you that everyone at CE
Software is working hard to reward your forbearance in the years to come.
|-------------| Cordially,
| |
| PHOTO OF |
| |
| CHRISTIAN | /s/ Christian F. Gurney
| |
| GURNEY | Christian F. Gurney
| | President
| | CE Software, Inc.
|-------------|
3
<PAGE>
PRODUCT OVERVIEW
QUICKMAIL OFFICE
There's no question that E-mail is a key business communication tool. These
days, more and more companies are turning to Internet standards-based E-mail
products--like QuickMail Office--to take better advantage of the power and
flexibility this worldwide network has to offer businesses.
QuickMail Office is an Internet and interoffice E-mail solution for small to
mid-sized businesses that run Microsoft Windows and Apple's Mac OS. It includes
easy-to-use QuickMail Pro client software plus a powerful but low-maintenance
E-mail server. QuickMail Office is everything a business needs to set up and
run its own E-mail system, all in one box.
Better yet, QuickMail Office puts advanced communication tools--like mailing
lists and an E-mail-on-demand service--to work for small businesses. With these
tools, companies can stay in touch with hundreds of customers, partners, and
employees--quickly, easily, and inexpensively.
TRADE PRESS COMMENTS: |-------------|
"This E-mail is for the | |
real world." | PRODUCT |
| |
LAN Times | BOX |
September 29, 1997 | |
| PHOTO |
"... a very reliable | |
Internet-based system | |
at a low cost." |-------------|
InfoWorld TARGET MARKETS:
September 22, 1997 . Small to mid-sized
businesses
. Corporate workgroups
. Creative agencies
. Educational institutions
QUICKMAIL PRO
Because many of the same people who count on an easy-to-use E-mail system at
work also need access to Internet E-mail outside of the office, QuickMail Pro is
available as a stand-alone product too. QuickMail Pro, the client portion of
QuickMail Office, is an ideal E-mail solution for telecommuters, traveling
employees, and people who use Internet E-mail at home for business and fun.
Available for both Microsoft Windows and Apple's Mac OS, QuickMail Pro is
specially designed to work efficiently with the dial-up connections through
which most home users access the Internet.
Since its debut in November 1996, QuickMail Pro has received positive feedback
from the computer trade press, including a four-star rating from PC/Computing.
In the spirit of continuously improving our products, in June we shipped
QuickMail Pro 1.5, an update that improved performance and added several new
convenience features. Plans are already in the works for the next versions of
QuickMail Pro, which will continue our focus on making Internet E-mail a
powerful and easy-to-use communications tool, even for beginners.
TRADE PRESS COMMENTS: |-------------|
"...strikes the best | |
balance between powerful | PRODUCT |
features and ease-of-use | |
| BOX |
Computer Currents | |
July 22, 1997 | PHOTO |
| |
"For quick-and easy | |
Internet E-mail, |-------------|
QuickMail Pro does
the job" TARGET MARKETS:
. Home offices
PC/Computing . Small offices
July 1997 . Home computer users
. Educational institutions
<TABLE>
<CAPTION>
CE SOFTWARE PRODUCT HIGHLIGHTS
OCTOBER 1996 NOVEMBER 1996 DECEMBER 1996 JANUARY 1997 FEBRUARY 1997 MARCH 1997 APRIL 1997
<C> <C> <C> <C> <C> <C> <C>
QuickMail Pro MailTicker, QuickMail Pro QuicKeys 3.5.2 QuickMail Pro
1.0 ships directory 1.0.1 for (Power PC- Server for
services Macintosh ships native version) Windows NT,95
plug-ins and ships ships
QuickMail Pro QuickMail Pro
Client 1.0.1r1 for QuickMail Pro QuickMail Pro
Converter Macintosh ships 1.0.1 Macintosh 1.0 for Windows
are available earns three earns four
"diamonds" in "stars" in
MacWEEK PC/Computing
QuickMail Pro
1.0.1 for
Macintosh earns
three "stars"
in Macworld
</TABLE>
4
<PAGE>
QUICKEYS
Long a favorite application among creative professionals, QuicKeys was updated
twice this year to keep pace with the latest Macintosh technology. In March, we
shipped a version of QuicKeys accelerated for better performance in the Power
Macintosh environment. And in November, we made available a free update that
ensured QuicKeys' compatibility with Apple's newest Macintosh operating system,
Mac OS 8.
QuicKeys extends the functionality of any application by automating repetitive,
multi-step actions performed on a Macintosh. Outfitted with configurable
toolbars and a batch processor, QuicKeys helps creative content developers of
all types--print, multimedia, Internet--meet deadlines.
QuicKeys continues to lead the industry in Macintosh productivity tools. This
year alone, QuicKeys won Macworld magazine's World Class Award, received a Home
Choice Award from the editors of MacHome Journal, and was nominated for an
Editors' Choice Award from MacUser magazine.
TRADE PRESS COMMENTS: |-------------|
"...the hands-down winner | |
if you're looking for an easy | PRODUCT |
way to automate repetitive | |
tasks... " | BOX |
| |
Macworld | PHOTO |
June 1996 | |
| |
"If you want to work more |-------------|
quickly and easily and just
make your Mac behave the TARGET MARKETS:
way you want it to, you're . Graphic designers
talking QuicKeys." . Advertising agencies
. Publishing houses
MacHome Journal . New media content
September 1997 creators
QUICKMAIL LAN
For nearly a decade, QuickMail LAN has been the leading interoffice E-mail
system for Macintosh-centric networks. Though the proliferation of Internet
standards has caused CE Software to expand its product offering with QuickMail
Office this year, we continue to sell and support QuickMail LAN. In fact, today
more than 2.6 million people still count on QuickMail LAN to help them
communicate across the hall and around the world.
In January, we made available a beta version of a free update that improved the
speed of the QuickMail LAN client. And in November, we shipped an upgrade to
the QuickMail Internet Gateway (QMIG), software that allows QuickMail LAN users
to exchange E-mail with the Internet via a full-time Internet connection. The
new version improves the overall speed and performance of the gateway, making
Internet E-mail faster and easier than ever before.
TRADE PRESS COMMENTS: |-------------|
"QuickMail remains a | |
solid choice for Mac-based | PRODUCT |
E-mail systems and is the | |
best choice for Mac-centric | BOX |
LANs ..." | |
| PHOTO |
MacWEEK | |
November 13, 1995 | |
|-------------|
TARGET MARKETS:
. Small to mid-sized
businesses
. Corporate workgroups
. Creative agencies
. Educational institutions
<TABLE>
<CAPTION>
MAY 1997 JUNE 1997 JULY 1997 AUGUST 1997 SEPTEMBER 1997 OCTOBER 1997 NOVEMBER 1997
<C> <C> <C> <C> <C> <C> <C>
QuickMail Pro QuickMail Pro QuickMail Pro QuickMail Pro QuickMail QuickMail Pro QuicKeys 3.5.2
for Macintosh 1.5 ships 1.0.1 for Server 1.0 for Office 1.0 for 1.0 for Windows (Mac OS 8
ships in Japan Macintosh earns Macintosh ships Macintosh ships ships in Japan upgrade) ships
QuickMail three "apples"
Office 1.0 for in MacHome QuickMail Pro QuickMail QuickMail
Windows ships Journal 1.0.1 for Office 1.0 Office 1.0
Macintosh earns ships in for Macintosh
three "mice" in Germany, earns four-and-
MacUser France, and a-half "diamonds"
Sweden in MacWEEK
QuickMail Office
1.0 for Windows
earns "Excellent"
rating in LAN
Times
QuickMail Office
1.0 for Windows
reviewed in
InfoWorld
</TABLE>
5
<PAGE>
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 three-year period ended September 30, 1997.
Years ended September 30,
1997 1996 1995
Percentage of net revenues:
Net revenues 100% 100 100
Cost of revenues 17 17 16
Gross profit 83 83 84
Sales and marketing 49 39 39
General and administrative 33 36 29
Research and development 20 19 19
Intangible assets write-off and
restructuring expenses - 8 -
Total operating expenses 102 102 87
Operating loss (19) (19) (3)
Other income (expense), net 1 6 (2)
Loss before income taxes (18) (13) (5)
Income tax benefit - - (2)
Net loss (18)% (13) (3)
NET REVENUES
Sales to domestic and international distributors represent approximately 48% of
the Company's fiscal 1997 revenues, with one domestic distributor accounting for
14% of total revenues and four international distributors accounting for 19% of
total revenues. Net revenues for fiscal 1997 decreased by 32% from the prior
year, and net revenues for fiscal 1996 decreased by 19% from the prior year.
The decrease in fiscal 1997 is due to a $2,426,000 decrease in revenues from
the Company's Messaging products, a $725,000 decrease in revenues from the
Company's Personal Application products, and a $231,000 decrease in revenues
from the Company's Calendaring and Scheduling products.
Revenues from the Company's Messaging products fell 30%, but still accounted
for approximately 79% of total net revenues. Historically these revenues were
primarily derived from QuickMail LAN, the Company's Macintosh server based,
E-mail solution. In management's opinion, these revenues have been negatively
impacted by a continued weak Macintosh market. The Company has recently
developed and begun marketing QuickMail Pro and QuickMail Office. These
cross-platform, open standards, Messaging products are not tied to the success
of the Macintosh market. To date, revenues from these products have totaled
approximately $1.8 million and as of the fourth quarter of fiscal 1997 these
revenues exceeded those generated by QuickMail LAN.
The decrease in revenues in Personal Applications was due primarily to reduced
sales of WebArranger. Sales of QuicKeys were also down somewhat when compared
to the prior year. This decrease was due primarily to increased sales during
the fourth quarter of the prior year following the long-awaited QuicKeys product
upgrade. Revenues from Calendaring and Scheduling products decreased 75% as
marketing efforts were discontinued. In management's opinion the potential
return on this product group does not warrant further marketing efforts.
Approximate net revenues by product group for the three years ended September
30, 1997, 1996, and 1995, are as follows:
6
<PAGE>
Years ended September 30,
1997 1996 1995
Messaging $5,553,000 7,979,000 8,882,000
Personal applications 1,428,000 2,153,000 3,003,000
Calendaring and scheduling 75,000 306,000 1,034,000
Total net revenues $7,056,000 10,438,000 12,919,000
Net revenues from international channels were $2,095,000, $2,606,000, and
$3,146,000 in fiscal 1997, 1996, and 1995, respectively. These revenues
represented approximately 30%, 25%, and 24% of total net revenues for each
of the three years, respectively.
COST OF REVENUES
The Company's cost of revenues is composed primarily of: 1) the costs of
product materials such as manuals, diskettes, 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)
capitalized manufacturing expenses; and 5) amortization of capitalized
translation costs. Amortization of capitalized purchased software includes both
purchased product rights and technology rights.
Gross profit as a percentage of net revenues was 83% in fiscal 1997 and 1996,
and was 84% in fiscal 1995. Although the overall percentage remained unchanged
in fiscal 1997 when compared to the prior year, the Company did record somewhat
lower amortization expense associated with capitalized purchased software. This
decreased expense was offset primarily by an increase in amortization of
capitalized translation costs associated with international versions of the
products. The slight decrease in the gross profit percentage in fiscal 1996
compared to fiscal 1995 was due primarily to somewhat higher royalty payments
made to outside developers. This increase was partially offset by decreased
packaging costs.
SALES AND MARKETING
Sales and marketing expenses decreased by $648,000 or 16% during fiscal 1997
compared to fiscal 1996. The decrease is primarily in salaries and benefits,
$325,000, and marketing/advertising expenses, $307,000. The decrease in salaries
and benefits is due to both lower sales commissions and workforce reductions.
The decrease in marketing/advertising expense is due primarily to fewer direct
mail campaigns and less advertising. These marketing expenses have decreased as
the Company has focused its marketing on a fewer number of products. The
decrease of $914,000 during fiscal 1996 compared to fiscal 1995 was primarily in
marketing/advertising expenses, $570,000; salaries and benefits, $200,000;
facility overhead expenses, $80,000; and travel and entertainment, $40,000. The
decrease in marketing/advertising expense was due to significantly less
advertising in industry publications that was partially offset by more direct
mail campaigns. The decrease in salaries and benefits was due to both lower
sales commissions and some workforce reductions. The decrease in facility
overhead expenses and travel and entertainment expenses was due to workforce
reductions.
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 39% or $1,478,000 during fiscal 1997 compared to fiscal 1996
as virtually all expense categories were reduced. The largest of these
reductions were in salaries and benefits, $741,000; contract labor and other
outside services, $252,000; facility overhead expenses, $86,000; rent, $80,000;
amortization expense, $65,000; shipping, $60,000; travel and entertainment,
$51,000; legal and accounting, $39,000; and office supplies, $36,000. These
decreases are due primarily to workforce reductions, fewer consulting
engagements, and fewer executive salaries. In fiscal 1996 compared to fiscal
1995, these expenses increased by less than 1% or $27,000. The increase was due
primarily to increased use of contract labor.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,429,000, $2,000,000, and $2,498,000
in fiscal 1997, 1996, and 1995, respectively. These expenses were 20%, 19%,
and 19% of net revenues in the three years, respectively. The primary areas
that decreased in fiscal 1997 were salaries and benefits, $446,000; contract
labor, $49,000; travel and entertainment, $25,000; and office supplies, $16,000.
These decreases were predominantly associated with some workforce reductions.
Staff reductions were the result of a more focused development effort and the
departure of two engineers, who left the Company to be part of a new joint
venture.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The primary areas that decreased in fiscal 1996 compared to fiscal
1995 were salaries and benefits, $253,000; employee relocation expenses,
$109,000; facility overhead expenses, $70,000; travel and entertainment,
$30,000; and contract fees paid to external product developers, $28,000.
These decreases were predominantly associated with a department realignment
based on development teams and fewer management staff.
WRITE-OFF OF INTANGIBLE ASSETS AND RESTRUCTURING EXPENSES
In fiscal 1996 the Company reported a one-time charge of $801,000. Of this
charge, $510,000 was related to the write-off of intangible assets. These
intangible assets were acquired in fiscal 1994 from Powercore, Inc., and were
determined to be impaired due to poor revenue performance and an assessment
of their recoverability through an analysis of undiscounted estimated future
cash flows. An additional expense of $184,000 was recorded, related to the
write-off of prepaid developer royalties that were expensed due to current and
estimated future decreasing revenues associated with the products. The
remaining charge of $107,000 was related to restructuring expenses associated
with workforce reductions and the consolidation of offices.
GAIN ON SALE OF JOINT VENTURE
In fiscal 1996 the Company sold its ownership interest in a joint venture,
4-Sight, L.C., and recorded a gain on the sale of $505,000.
INCOME TAX EXPENSE
The Company's effective rate of income tax benefit for fiscal 1997, 1996, and
1995 was 0%, 1%, and 35%, respectively. These benefits result from tax
operating loss carrybacks against earnings in fiscal 1993, 1992, and 1991. As
of the end of fiscal 1996, all operating loss carrybacks available to the
Company have been utilized. The Company has recorded a valuation allowance for
its operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $1,454,000 at the end of fiscal 1997,
from $1,863,000 at the end of fiscal 1996. Virtually all of this balance is
invested in one of two types of cash equivalents. A total of $761,000 is
invested in a money market fund, and $693,000 is invested through a repurchase
agreement arrangement which offers overnight liquidity and competitive returns.
The primary source of cash was $934,000 provided from the repayment of a note
receivable from 4-Sight, L.C. Of the available cash, $482,000 was placed in
short-term investments. These investments consist of a U.S. Treasury bill and
a federal agency guaranteed mortgage-backed security. Both of these investments
mature in fiscal 1998 and the Company intends to hold them to maturity. The net
loss for the year and the decrease in deferred revenues were the primary reasons
for the $741,000 of cash being used in operating activities.
Cash and cash equivalents increased to $1,863,000 at the end of fiscal 1996,
from $1,335,000 at the end of fiscal 1995. Cash provided from operating
activities was $616,000. Two primary sources of cash from operating activities
were non-cash expenses of depreciation and amortization (including write-offs)
of $1,559,000, and reductions in the level of recoverable income taxes and
trade accounts receivable of $1,258,000. Cash of $250,000 also was provided
from the sale of a joint venture, 4-Sight, L.C., and $467,000 was provided from
the repayment of a note receivable from 4-Sight, L.C. Of the available cash,
$467,000 was invested in the purchase of property, fixtures, and equipment, and
$400,000 was paid to Common Knowledge, Inc., for the purchase of software
technology.
The Company believes it will be able to fund its working capital needs from
operations, available cash, available investments, and from its $2,000,000 line
of credit facility, against which the Company has no borrowings as of
September 30, 1997.
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 upgrades may
not achieve market acceptance, the risk that competitors will develop similar
products and reach the market first, and the risk that the Company would not
be able to fund its working capital needs from cash flow, or be able to borrow
under its line of credit.
8
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CE SOFTWARE HOLDINGS, INC.:
We have audited the accompanying consolidated balance sheets of CE Software
Holdings, Inc., and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CE Software
Holdings, Inc., and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
November 6, 1997
9
<PAGE>
CONSOLIDATED BALANCE SHEETS
CE Software Holdings, Inc., and Subsidiaries
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets (note 2) 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,454,434 1,862,703
Short-term investments 490,957 -
Trade accounts receivable, less allowance for doubtful
accounts of $56,000 in 1997 and $47,000 in 1996 (note 6) 1,108,062 1,454,887
Recoverable income taxes 24,153 208,185
Note receivable (note 1) - 942,444
Inventories 743,111 471,597
Deferred income taxes (note 4) 117,200 119,000
Other current assets 165,624 321,971
Total current assets 4,103,541 5,380,787
Property, fixtures, and equipment:
Land 316,796 316,796
Building 1,312,016 1,311,104
Fixtures and equipment 2,998,885 3,025,500
4,627,697 4,653,400
Less accumulated depreciation 2,410,190 1,970,580
Net property, fixtures, and equipment 2,217,507 2,682,820
Deferred income taxes (note 4) 65,800 64,000
Purchased computer software technology, net of amortization 144,447 384,098
Other intangible assets, net of amortization 182,265 411,439
Other assets 58,959 47,220
Total assets $6,772,519 8,970,364
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1997 1996
<S> <C> <C>
Current liabilities:
Current portion of long-term debt (note 2) $ 43,953 41,133
Trade accounts payable 316,845 526,030
Accrued payroll and benefits 317,852 329,091
Other accrued payables 164,894 217,625
Deferred revenue 100,691 526,792
Total current liabilities 944,235 1,640,671
Long-term debt, net of current (note 2) 834,253 878,292
Total liabilities 1,778,488 2,518,963
Stockholders' equity (note 3):
Common stock, $.10 par value. Authorized
2,000,000 shares; issued and outstanding
1,095,900 in 1997 and 1,123,426 in 1996 109,590 112,343
Additional paid-in capital 5,893,710 6,038,758
(Accumulated deficit) retained earnings (1,009,269) 300,300
Total stockholders' equity 4,994,031 6,451,401
Total liabilities and stockholders' equity $6,772,519 8,970,364
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net revenues $7,056,072 10,437,520 12,919,124
Cost of revenues 1,212,496 1,722,261 2,015,269
Gross profit 5,843,576 8,715,259 10,903,855
Sales and marketing 3,464,570 4,112,293 5,026,791
General and administrative 2,304,048 3,782,374 3,755,702
Research and development 1,429,126 2,000,472 2,497,595
Write-off of intangible assets and
restructuring expenses (note 1) - 800,746 -
Operating expenses 7,197,744 10,695,885 11,280,088
Operating loss (1,354,168) (1,980,626) (376,233)
Other income (expense):
Interest income 128,071 175,968 112,185
Gain on sale of joint venture - 504,926 -
Loss from joint ventures - (21,349) (325,504)
Interest expense (83,472) (87,486) (92,766)
Loss before income taxes (1,309,569) (1,408,567) (682,318)
Income tax benefit (note 4) - (10,000) (239,759)
Net loss $(1,309,569) (1,398,567) (442,559)
Loss per common share, primary and fully diluted $(1.19) (1.22) (.39)
Weighted average number of common and
common equivalent shares outstanding (note 3) 1,104,736 1,148,505 1,149,156
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Retained
Earnings
Common Additional (Accumulated
Stock Paid-in Capital Deficit) Total
<S> <C> <C> <C> <C>
Balances at September 30, 1994 $114,790 6,031,801 2,141,426 8,288,017
Net loss - - (442,559) (442,559)
Balances at September 30, 1995 114,790 6,031,801 1,698,867 7,845,458
Common stock issued upon
exercise of stock options 53 6,957 - 7,010
Common stock repurchased from
officer (note 3) (2,500) - - (2,500)
Net loss - - (1,398,567) (1,398,567)
Balances at September 30, 1996 112,343 6,038,758 300,300 6,451,401
Common stock issued to employees 198 14,033 - 14,231
Common stock recovered in lawsuit (5,000) (159,063) - (164,063)
Cash paid for common stock in lieu of
issuing fractional shares (1) (18) - (19)
Common stock issued to officer (note 3) 2,050 - - 2,050
Net loss - - (1,309,569) (1,309,569)
Balances at September 30, 1997 $109,590 5,893,710 (1,009,269) 4,994,031
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,309,569) (1,398,567) (442,559)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization:
Property, fixtures, and equipment 501,673 542,615 522,331
Purchased software 239,651 351,989 397,268
Other 89,120 154,481 175,809
Write-off of Powercore, Inc., intangible assets - 509,551 -
Write-off of prepaid developer royalties - 184,442 -
Undistributed loss in joint ventures - 21,349 325,504
Gain on sale of joint venture - (504,926) -
Deferred income taxes - (10,000) (73,109)
Decrease in trade accounts receivable 346,825 914,246 167,899
Decrease in recoverable income taxes 184,032 344,199 445,049
(Increase) decrease in inventories (271,514) 21,973 23,305
Decrease in other assets 166,034 188,690 221,473
(Decrease) increase in trade accounts payable (209,185) 14,035 (179,115)
Decrease in accrued expenses (87,979) (260,222) (36,905)
(Decrease) increase in deferred revenue (426,101) (372,502) 574,328
Other 35,798 (85,156) (85,931)
Net cash (used in) provided by
operating activities (741,215) 616,197 2,035,347
Cash flows from investing activities
Proceeds from sale of equipment 13,078 21,222 3,795
Purchase of property, fixtures, and equipment (76,811) (466,732) (794,518)
Purchase of short-term investments (482,383) - -
Maturities of short-term investments - - 629,331
Purchase of other intangible assets - (400,000) (828)
Purchase of other assets (30,000) (30,000) -
Proceeds from sale of joint venture - 250,000 -
Distributions from (investment in and advances to)
joint ventures, net - 97,415 (845,000)
Proceeds from note receivable 934,000 467,000 -
Net cash provided by (used in)
investing activities 357,884 (61,095) (1,007,220)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from stock options exercised - 7,010 -
Proceeds from issuance of common stock 16,281 - -
Payment for repurchase of common stock - (2,500) -
Payments on long-term debt (41,219) (31,648) (36,547)
Net cash used in financing activities (24,938) (27,138) (36,547)
Net (decrease) increase in cash
and cash equivalents (408,269) 527,964 991,580
Cash and cash equivalents at beginning of year 1,862,703 1,334,739 343,159
Cash and cash equivalents at end of year $1,454,434 1,862,703 1,334,739
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $82,615 81,868 100,330
Income taxes 1,554 4,976 360,947
Supplemental schedule of non-cash investing and
financing activities:
Recovery of common stock in settlement of lawsuit $164,063 - -
Conversion of an advance to a joint venture to
a note receivable - 1,401,000 -
Repurchase of common stock from officer in
exchange for cancellation of note receivable
(note 3) - 419,375 -
Issuance of common stock to officer in exchange
for note receivable (note 3) 49,969 - -
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CE Software Holdings, Inc., and Subsidiaries
September 30, 1997, 1996, and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CE Software
Holdings, Inc., and its wholly owned subsidiaries, CE Software, Inc., and CE
Distributing, Inc. (the Company). CE Software Holdings, Inc., exists primarily
as the stock holding company. CE Distributing, Inc., has been inactive since
its note receivable was repaid in March 1997. All remaining operations are
accounted for by CE Software, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
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 AND SHORT-TERM INVESTMENTS
For purposes of the consolidated statements of cash flows, the Company considers
money market funds and repurchase agreements with a maturity of three months
or less at date of purchase to be the equivalent of cash. At September 30, 1997
and 1996, cash equivalents totaled $1,454,215 and $1,862,703, respectively.
Short-term investments consist of a U.S. Treasury bill and a federal agency
guaranteed mortgage-backed security that both mature in fiscal 1998. Cash
equivalents and the Company's short-term investments are classified as
"held-to-maturity" under the Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and are
stated at amortized cost, which approximates fair value.
INVENTORIES
Inventories are composed primarily of software translation costs, product
materials, and capitalized production costs. Product materials, such as
instruction manuals, 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 three-year period ended September 30, 1997.
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.
PURCHASED COMPUTER SOFTWARE TECHNOLOGY
Purchased computer software technology is amortized over a period of three to
five years based on the expected life of the related products. Amortization
of the cost is included in cost of revenues and was $239,651, $351,989, and
$397,268 for the years ended September 30, 1997, 1996, and 1995, respectively.
Accumulated amortization at September 30, 1997 and 1996, was $255,553 and
$562,702, respectively. The cost of internally developed software is expensed
as research and development, as incurred.
In October 1995, the Company purchased computer software technology from Common
Knowledge, Inc., for cash of $400,000, and a two percent royalty fee on revenues
generated from the acquired technology over the next three years.
OTHER INTANGIBLE ASSETS
Amortization expense, excluding the write-offs discussed below, was $89,120,
$154,481, and $175,809 for the years ended September 30, 1997, 1996, and 1995,
respectively. Accumulated amortization at September 30, 1997 and 1996, was
$441,558 and $212,384, respectively. The Company assesses the recoverability
of intangible assets through analysis of undiscounted cash flows. Based on this
analysis, an additional expense of $140,054 was taken against the customer list
in fiscal 1997 and an additional expense of $362,059 and $147,492 was taken
against goodwill and a trade name, respectively, in fiscal 1996. All three of
these assets are related to the acquisition of Powercore, Inc., and all but the
customer list are fully amortized as of September 30, 1997. In fiscal 1997 this
additional amortization expense was netted against the gain realized on
settlement of
16
<PAGE>
the Powercore lawsuit. The combined effect had no impact on the results of
operations. In fiscal 1996 this additional amortization expense was included
in the statement of operations within the $800,746 write-off of intangible
assets and restructuring expenses. The balance of other intangibles as of
September 30, 1997, consists of the following:
Accumulated
Cost amortization Net
Customer list $540,100 403,684 136,416
Other 83,723 37,874 45,849
$623,823 441,558 182,265
The customer list is being amortized over seven years, however the write-down
referred to above accelerated this amortization period by approximately
22 months.
CLASS B COMMON AND PREFERRED STOCK
The Company has authorized 3,000,000 shares of $.01 par value Class B common
stock and 2,000,000 shares of $.01 par value preferred stock. No shares of
either class of stock have been issued as of September 30, 1997.
STOCK OPTION PLANS
Prior to October 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees." In accordance with APB
25, compensation expense was recorded only on the date of grant if the current
market price of the underlying stock exceeded the exercise price. On October 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-based Compensation, "which (a) permits
entities to estimate the fair value of all stock-based awards on the date of
grant and expense this value over the vesting period, or (b) alternatively,
allows entities to continue to apply the provisions of APB 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in years ending after December 15, 1995, and future years as
if the fair-value-based method has been applied. The Company has elected to
continue to apply the provisions of APB 25 and provide the pro forma disclosure
provisions of SFAS 123 (See note 3).
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, 1997 and 1996, was $35,800 and $31,100, 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,
but is not available 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, 1997
and 1996, include $100,003 and $153,028, respectively, of such deferrals.
ADVERTISING AND MARKETING
Advertising costs are expensed in the period the advertising takes place. For
the years ended September 30, 1997, 1996, and 1995, advertising and marketing
costs were $1,801,120, $2,127,770, and $2,683,401, respectively.
INVESTMENT IN JOINT VENTURES
CE Distributing, Inc., had a 50% interest in a joint venture, 4-Sight L.C. The
investment was accounted for under the equity method of accounting. Earnings
(losses) of $53,651 and $(325,504) for the years ended September 30, 1996, and
1995, respectively, are classified under other income (expense) in the
consolidated statements of operations. Effective July 1, 1996, CE Distributing,
Inc., sold its interest in 4-Sight, L.C., for cash of $250,000. As of the
closing date, August 31, 1996, the joint venture had a payable to CE
Distributing, Inc., in the amount of $1,401,000 that accrued interest at the
prime rate. This payable was assumed by the buyer, and converted to an
installment note that accrued interest at 11%. This note was paid in
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CE Software Holdings, Inc. and Subsidiaries
September 30, 1997, 1996, and 1995 (continued)
full on March 31, 1997. Interest earned on the advances and the note in fiscal
1997, 1996, and 1995, was $39,749, $115,495, and $90,241, respectively.
The Company continued to provide certain accounting, shipping, and
administrative services to the joint venture under a separate service agreement
which expired September 30, 1997.
In fiscal 1996, CE Software, Inc., acquired a 49% ownership interest in a
start-up joint venture, Net Target, Inc., which changed its name to Relevance
Technologies, Inc. The acquisition cost $75,000 in cash plus certain technology
rights. The joint venture subsequently obtained additional capital, decreasing
CE Software's ownership to approximately 33%. The investment is accounted for
under the equity method of accounting. The Company's basis of the investment as
of September 30, 1997 and 1996, was zero and an equity loss of the full
investment amount of $75,000 is classified under other income (expense) in the
consolidated statements of operations for the year ended September 30, 1996.
This investment has no effect on the Company's results of operations for the
year ended September 30, 1997, and will not effect future results until such
time as the joint venture generates a profit or the Company makes an additional
capital investment. No such investment is contemplated at this time.
INCOME TAXES
The Company files a consolidated federal income tax return. 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 No. 107, "Disclosure About Fair
Value of Financial Instruments," requires the Company to disclose the estimated
fair values for it financials instruments. Fair value estimates, methods, and
assumptions are set forth below:
Cash and cash equivalents, short-term investments, trade accounts receivable,
note receivable, trade accounts payable, and accrued expenses - The carrying
amount approximates the estimated fair value due to the short-term nature of
those instruments.
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.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during the
year for both primary and fully diluted computations. The weighted average
shares outstanding used for computing primary and fully diluted loss per common
share for each of the years ended September 30, 1997, 1996, and 1995, are as
follows:
18
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Primary:
Weighted average shares
outstanding during year 1,104,736 1,148,216 1,147,903
Additional shares due to stock options - 289 1,253
Shares used to compute primary per share data 1,104,736 1,148,505 1,149,156
Fully diluted:
Weighted average shares
outstanding during year 1,104,736 1,148,216 1,147,903
Additional shares due to stock options - 603 1,631
Shares used to compute fully diluted per share data 1,104,736 1,148,819 1,149,534
</TABLE>
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS
128, which is effective for fiscal years beginning after December 15, 1997,
establishes new standards for computing earnings per share. The effect of
implementing SFAS 128 is expected to be immaterial to the Company's financial
position and results of operations.
(2) LONG-TERM DEBT AND LINE OF CREDIT
On May 6, 1994, CE Software, Inc., received $1,000,000 under a bank loan
agreement. The interest rate on the loan is adjustable on each five-year
anniversary and bears a rate of 2.75% over the five-year U.S. Treasury note
rate. As of September 30, 1997, the rate was 9.18% per annum. The loan is
secured by a mortgage on the real estate, a security interest in all business
assets owned, and is guaranteed by CE Software Holdings, Inc. Terms provide
for monthly principal and interest payments of $10,320 on a 15-year amortization
schedule. Maturities during the next five fiscal years are as follows: 1998,
$43,953; 1999, $48,223; 2000, $52,704; 2001, $58,029; and 2002, $63,666.
The bank loan agreement also provides a $2,000,000 credit line which expires
April 30, 1998. There was no outstanding balance on this line as of September
30, 1997 and 1996. Under the bank loan agreement, the Company is required to
satisfy certain financial covenants and is restricted from certain transactions
(such as issuing dividends) without prior written consent of the bank.
(3) COMMON STOCK
REVERSE STOCK SPLIT
On June 30, 1997, the Company executed a one for five, reverse stock split, the
effect of which was the conversion of 5,377,028 shares of par $.02 common stock
into 1,075,400 shares of par $.10 common stock. Shareholders owning fractional
shares, as a result of the reverse split, were paid cash in lieu of issuing any
fractional shares. All common share, stock option, and per share amounts have
been retroactively restated to give effect to the reverse stock split.
STOCK OPTION PLANS
The Company has three stock option plans: the 1990 Plan, the 1992 Plan and the
Non-employee Directors Stock Option Plan. The 1990 Plan granted options to
certain employees to purchase shares of common stock. Total shares of common
stock that may be subject to options under the 1990 Plan are 80,000 shares.
The 1992 Plan is available to all employees and options are 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 1992 Plan are
100,000 shares. The Non-employee Directors Stock Option Plan is available to
directors who are not also employees of the Company. Total shares of common
stock that may be subject to options under the Non-employee Directors Stock
Option Plan are 20,000 shares. Under all plans, the purchase price per share
under any option granted cannot be less than the market value at the date of the
grant. Options granted under the plans 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.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CE Software Holdings, Inc. and Subsidiaries
September 30, 1997, 1996, and 1995 (continued)
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 loss and net loss per share would have
been as indicated below:
1997 1996
Net loss - as reported $(1,309,569) $(1,398,567)
Net loss - pro forma $(1,342,227) $(1,399,258)
Loss per share - as reported $(1.19) $(1.22)
Loss per share - pro forma $(1.21) $(1.22)
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 1997 and 1996: risk-free interest
rates of 6.2% and 6.0%, respectively; dividend yield of 0.0% in both years;
expected volatility of 63% in both years; and expected lives of four years in
both years. The fair values of the option grants in 1997 and 1996 were $1.29
and $0.87 per share, respectively. The effects of applying SFAS 123 may not be
representative of the effects on reported net income for future years.
At September 30, 1997, total options outstanding were 159,822, of which 8,910
were exercisable, at exercise prices ranging from $2.44 to $46.25 and a
weighted-average remaining contractual life of 9.3 years. The number of
options and the weighted-average exercise price of options outstanding,
granted, exercised, and cancelled during the three years ended
September 30, 1997, are as follows:
<TABLE>
<CAPTION>
Number of options: 1997 1996 1995
<S> <C> <C> <C>
Outstanding at beginning of year 79,752 147,720 138,196
Granted 181,367 36,376 18,700
261,119 184,096 156,896
Exercised - 522 -
Cancelled 101,297 103,822 9,176
Outstanding at end of year 159,822 79,752 147,720
</TABLE>
<TABLE>
<CAPTION>
Weighted-average exercise price of options: 1997 1996 1995
<S> <C> <C> <C>
Outstanding at beginning of year 16.33 21.86 22.70
Granted 4.89 13.57 13.69
Exercised - 13.42 -
Cancelled 13.15 23.25 17.75
Outstanding at end of year 5.37 16.33 21.86
</TABLE>
The options outstanding as of September 30, 1997, have the following attributes:
<TABLE>
<CAPTION>
Option statistics Under $5.00 $10.00 $20.00
by price ranges: $5.00 to $9.99 to $19.99 & over
<S> <C> <C> <C> <C>
Options outstanding 26,000 125,187 7,975 660
Weighted-average price $2.51 $5.08 $16.34 $40.35
Weighted-average remaining life 9.8 yrs 9.4 yrs 5.6 yrs 5.2 yrs
Number exercisable - 931 7,319 660
Weighted-average price of exercisable options - $6.25 $16.41 $40.35
</TABLE>
20
<PAGE>
NOTE RECEIVABLE FROM OFFICER
Under an employment agreement and related stock purchase agreement entered into
in fiscal 1997, the Company has a $49,969 note receivable from the president of
CE Software, Inc., for 20,500 shares of common stock. Cash was paid for the par
value of the shares purchased. The note receivable equals the increase in
additional paid-in capital and, for presentation purposes, the note receivable
and the increase in additional paid-in capital are combined and net to zero.
Additional paid-in capital will increase as the note is paid down. The note is
interest-bearing with interest payments due quarterly. The principal amount is
due and payable on demand, but no later than the earlier of 10 years or one
year following the termination of employment. Under the employment agreement,
60% of any cash dividends or other cash distributions paid on the common stock
will be applied to the note receivable balance. The shares of common stock are
being held by the Company as collateral security for the payment in full of the
note.
The Company had a similar agreement with the former president of CE Software,
Inc. In this agreement the Company had a $419,375 non-interest-bearing note
receivable, in exchange for 25,000 shares of common stock. Cash was paid for
the par value of the shares when purchased, and the shares were held by the
Company as collateral security for the note. For presentation purposes in 1995,
the note receivable and the increase in additional paid-in capital were combined
and net to zero. Under the former president's separation agreement, dated
September 30, 1996, the 25,000 shares were repurchased and cancelled through
the payment of $2,500 for the par value and cancellation of the note receivable.
(4) INCOME TAX BENEFIT
Income tax benefit for the years ended September 30, 1997, 1996, and 1995,
consisted of the following:
1997 1996 1995
Current $ - - (166,650)
Deferred - (10,000) (73,109)
$ - (10,000) (239,759)
Current income tax benefit for 1997, 1996, and 1995, includes $0, $800, and
$(9,759), of state income tax expense (benefit), respectively.
The income tax benefit for 1997, 1996, and 1995, differs from the "expected"
tax benefit computed by applying the United States federal income tax rate of
34% to the loss before income taxes, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax benefit $(445,253) (478,912) (231,988)
(Increase) decrease in "expected"
tax benefit resulting from:
State income tax, net of federal income tax effect - - (6,400)
Operating loss carryforward not recognized 441,229 459,422 -
Other, net 4,024 9,490 (1,371)
$ - (10,000) (239,759)
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at September 30, 1997 and
1996, are as follows:
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CE Software Holdings, Inc. and Subsidiaries
September 30, 1997, 1996, and 1995 (continued)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for product returns $ 12,200 10,600
Allowance for doubtful accounts 19,000 16,000
Accrued expenses 80,500 89,000
Equity investments 25,500 -
Intangible assets 490,700 384,000
Net operating loss carryforwards (expiring in 2011 and 2012) 303,200 194,000
Other 5,500 3,400
Gross deferred tax assets 936,600 697,000
Valuation allowance (651,400) (387,000)
285,200 310,000
Deferred tax liabilities-
Accelerated depreciation for tax purposes (102,200) (127,000)
Net deferred tax assets $183,000 183,000
</TABLE>
The net deferred tax assets at September 30, 1997, were composed of net current
deferred tax assets of $117,200 and net non-current deferred tax assets of
$65,800. The increase in the total valuation allowance for the years ended
September 30, 1997, 1996, and 1995, was $264,400, $387,000, and $0,
respectively.
The Company has previously been profitable. In addition, during the year ended
September 30, 1997, the Company streamlined and refocused its operations which
significantly reduced its losses over the last two quarters of fiscal 1997.
Accordingly, management believes it is more likely than not that results of
future operations will generate sufficient taxable income to realize the net
deferred tax asset recorded at September 30, 1997.
(5) 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, 1997, 1996, or
1995.
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, 1997,
1996, and 1995, were $56,979, $79,188, and $71,524, respectively.
(6) 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 79%, 76%, and 69% of total revenues for the years ended September
30, 1997, 1996, and 1995, respectively.
The Company's major customers are distributors. Of its domestic revenues,
sales to one distributor customer in 1997, 1996, and 1995, were approximately
$958,000, $2,024,000, and $2,418,000, respectively. Accounts receivable from
this distributor customer at September 30, 1997 and 1996, were approximately
$378,000 and $667,000, respectively.
Virtually all export sales are to distributors. Export sales were approximately
$2,095,000, $2,606,000, and $3,146,000 for the years ended September 30, 1997,
1996, and 1995, respectively. Sales to the Company's top four export
distributor customers represented approximately $585,000, $307,000, $256,000,
and $223,000 or 8%, 4%, 4%, and 3% of net revenues in fiscal 1997. Sales to two
export distributor customers represented approximately $926,000 or 9% of net
revenues in fiscal 1996. Percentage components of export sales by geographic
area for 1997, 1996, and 1995, respectively, were Europe (63, 64, and 44
percent); Japan (28, 27, and 49 percent); Australia (8, 8, and 6 percent); and
all others (1, 1, and 1 percent).
22
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of November 30, 1997, there were 333 stockholders of record. The Company
believes that it has approximately 2,400 beneficial stockholders. 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. 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 Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol: CESH. The following table sets forth the
range of high and low sales prices per share of common stock (as adjusted for
the June 30, 1997, reverse stock split described in note 3 to the consolidated
financial statements) for the last two fiscal years as provided by Nasdaq.
Quarter ended: Common stock
Low High
September 30, 1997 $ 1.719 $ 3.625
June 30, 1997 2.188 5.625
March 31, 1997 2.813 6.875
December 31, 1996 4.219 8.438
September 30, 1996 4.922 10.000
June 30, 1996 8.750 14.375
March 31, 1996 10.625 16.875
December 31, 1995 6.875 19.688
23
<PAGE>
OFFICERS AND DIRECTORS
CE SOFTWARE HOLDINGS, INC. CE SOFTWARE, INC., AND
CE DISTRIBUTING, INC.
|---------| |---------|
| | | |
| PHOTO | Richard A. Skeie | PHOTO | Christian F. Gurney
| IN | President | IN | President,
| BOX | and Director | BOX | Chief Executive Officer,
| | | | and Director
|---------| |---------|
|---------| |---------|
| | | |
| PHOTO | John S. Kirk | PHOTO | Daniel E. McCann
| IN | Secretary, Treasurer, | IN | Secretary, Treasurer, and
| BOX | and Director | BOX | Chief Financial Officer
| | | |
|---------| |---------|
|---------| |---------|
| | | |
| PHOTO | Christian F. Gurney | PHOTO | Richard A. Skeie
| IN | Vice President | IN | Director
| BOX | and Director | BOX |
| | | |
|---------| |---------|
|---------| |---------|
| | | |
| PHOTO | Daniel E. McCann | PHOTO | John S. Kirk
| IN | Chief Financial Office | IN | Director
| BOX | | BOX |
| | | |
|---------| |---------|
|---------| |---------|
| | | |
| PHOTO | Sheldon T. Fleck | PHOTO | Sheldon T. Fleck
| IN | Director; | IN | Director
| BOX | Private Investor | BOX |
| | Minneapolis, MN | |
|---------| |---------|
|---------| |---------|
| | | |
| PHOTO | David J. Lundquist | PHOTO | David J. Lundquist
| IN | Director; | IN | Director
| BOX | Managing Partner | BOX |
| | Lundquist, Schiltz and | |
|---------| Associates |---------|
Des Moines, IA
24
<PAGE>
STOCKHOLDER INFORMATION
COMPANY PROFILE
CE Software Holdings, Inc., and subsidiaries, headquartered in West Des Moines,
Iowa, design, develop, publish, market, and support a product line of commercial
software for personal computers to enhance office communications, connectivity,
and productivity of business and home users.
CORPORATE INFORMATION AND
INVESTOR INFORMATION
Please visit the Company's Web site at:
http://www.cesoft.com
or direct inquiries to:
Investor Relations
CE Software Holdings, Inc.
P.O. Box 65580
West Des Moines, IA 50265
(515) 221-1801
STOCK TRADING
CE Software Holdings, Inc.'s common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol: CESH.
SEC FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1997, is available free of charge on the Securities and
Exchange Commission's Web site at:
http://www.sec.gov/cgi-bin/srch-edgar
or by writing to:
Investor Relations
CE Software Holdings, Inc.
P.O. Box 65580
West Des Moines, IA 50265
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Stock Transfer
161 North Concord Exchange
P.O. Box 738
South St. Paul, MN 55075
(612) 450-4064
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
2500 Ruan Center
Des Moines, IA 50309
LEGAL COUNSEL
Davis, Brown, Koehn, Shors, & Roberts, P.C.
2500 Financial Center
Des Moines, IA 50309
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:30 p.m. on Friday,
February 27, 1998, at the Des Moines Golf and Country Club, West
Des Moines, Iowa.
- ---------------------------------------------
| |
| |
| PHOTO |
| OF COMPANY |
| HEADQUARTERS |
| IN BOX |
| |
| |
| |
| |
- ---------------------------------------------
CE Software, Inc., headquarters, West Des Moines, IA
CE Software Holdings, Inc. is committed to equal employment opportunity and
affirmative action.
(c) Copyright 1997 CE Software Holdings, Inc. All rights reserved.
QuickMail and TimeVision NS are trademarks and QuicKeys, WebArranger, and
Network Scheduler are registered trademarks of CE Software, Inc. All other
brand or product names are trademarks or registered trademarks of their
respective holders.
Printed in the United States of America
<PAGE>
CE SOFTWARE HOLDINGS, INC.
1801 Industrial Circle
P.O. Box 65580
West Des Moines, IA 50265
(515) 221-1801
http://www.cesoft.com
<PAGE>
