CE SOFTWARE HOLDINGS, INC.
1998 ANNUAL REPORT
<PAGE>
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............................. 10
CONSOLIDATED BALANCE SHEETS.............................. 11
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, 1998
- ---------------------------------------------------------------------------------------------
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 $1,223 1,288 905 941
Operating expenses 1,344 1,289 962 969
Net earnings (loss) (393) (265) (261) 4,610
Basic earnings (loss) per share (.36) (.24) (.24) 4.21
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
- ---------------------------------------------------------------------------------------------
Statements of Operations Data 1998 1997 1996
- ---------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Net revenues $4,357 7,056 10,438
Earnings (loss) before income taxes 4,422 (1,310) (1,409)
Net earnings (loss) 3,691 (1,310) (1,399)
Basic earnings (loss) per share 3.37 (1.19) (1.22)
Shares used to compute basic
per share data 1,096 1,105 1,149
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
- ---------------------------------------------------------------------------------------------
Balance Sheet Data 1998 1997 1996
- ---------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash, cash equivalents, and investments $6,989 1,945 1,863
Current assets 8,114 4,104 5,381
Total assets 10,462 6,773 8,970
Long-term debt 343 834 878
Stockholders' equity 8,613 4,994 6,451
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
- ---------------------------------------------------------------------------------------------
Company Data 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total employees 45 68 94
Total full-time equivalent employees 40 65 92
</TABLE>
1
<PAGE>
LETTER TO STOCKHOLDERS
The past year proved an interesting one for CE Software. We faced the problem
of E-mail becoming a commodity, felt the effects of financial upheaval in Asia,
derived a substantial benefit from the sale of our interest in a high-tech
startup, and charted a new course for our products and our company.
QuickMail Office continues to provide small to mid-sized businesses with a
strong E-mail solution. However, the entire E-mail marketplace has faced
unrelenting pressure from free or nearly free E-mail products. (For a complete
description of all of CE Software's products, please see the next section.)
Larger competitors like Microsoft as well as developers of free software have
flooded the E-mail market with commodity-priced software products, reducing CE
Software's overall opportunity to grow its QuickMail business.
Recognizing these market trends, we have focused our QuickMail development
efforts on providing the best, most comprehensive business-quality
communication solution for small to medium-sized companies. Further, our plans
for a major upgrade to QuickMail Office in the first half of 1999 hold the
promise of continued solid revenues for the year.
The financial crisis in Japan had a negative impact on countless companies this
year, and CE Software was not spared from its effects. Due to the dismal
financial climate in Japan, purchases of our software products fell dramatically
beginning in the winter of 1997-98. Traditionally a strong market for CE
Software's products, Japan had contributed over $580,000 in sales in fiscal year
97. In fiscal year 98, the total contribution fell to merely $50,000, less
than a tenth of the previous year.
The marked change in sales to Japan placed a significant burden on our other
sales and distribution channels to make up the shortfall. Unfortunately, the
challenge proved too great and overall revenues dropped. Because the situation
in Japan shows no obvious signs of change in the near future, we do not expect
significant revenue from sales in that country for at least a year.
Fortunately, there is also positive financial news from the past year to report.
In July, CE Software benefited from the sale of its ownership in Relevance
Technologies, a company founded in 1996 by CE Software and former president Ford
Goodman. When Pleasanton, Calif.-based Documentum purchased Relevance
Technologies, we received $6.2 million in cash and stock for our stake in the
startup company.
Due in part to this event, our cash, short-term equivalents and investments grew
to $7.0 million, a $5.1 million increase compared with $1.9 million a year ago.
Our earnings per share rose to $3.37 from ($1.19) in 1997. In addition,
long-term debt was reduced during the year and, as a consequence, we enter
1999 with a solid balance sheet and ample resources to support new product
strategies centered around the QuicKeys product line.
QuicKeys is our widely known and highly esteemed automation utility software.
After eleven years of developing and marketing QuicKeys for Apple's Mac OS, we
launched a version of the product for Microsoft Windows 95/98 and NT in
November of 1998. QuicKeys for Windows brings our award-winning system
Automation software to the 160 million-strong and growing Windows market.
2
<PAGE>
Customer feedback about the lack of a QuicKeys equivalent on the Windows
platform prompted our development efforts, and the apparent dearth of strong
competition in this market segment gave further impetus to the project. Early
customer, press, and computer-industry response to QuicKeys for Windows has been
quite promising. We are optimistic that we will be able to grow the customer
base and revenues associated with this product in the coming year.
The recent release of the single-user, "retail" version of QuicKeys for Windows
represents only the first step in our long-term plan to provide a wide range of
automation solutions for a variety of professions and industries that rely on
PCs to get work done. Our engineering team is hard at work on a new version of
QuicKeys that allows a single person to solve company- or industry-specific
problems with QuicKeys automation then share those solutions with the entire
organization or workgroup via the network. "QuicKeys for Workgroups," as we
call this new product, helps customers easily and efficiently deploy and
maintain multiple copies of QuicKeys, making the product's benefits available
to a larger group at a lower cost of ownership.
In addition, QuicKeys for Windows can easily be adapted to meet the needs of
Original Equipment Manufacturers (OEMs) of hardware and software who license
QuicKeys technology to add value to their own products. Such a QuicKeys
technology-licensing program will be an important engine of revenue and growth
for our company in the coming year and beyond.
Finally, 1999 will also see a major upgrade to our QuicKeys for Apple's Mac OS
product. This new version will help generate increased revenue through upgrades
sold to existing customers and the acquisition of new customers.
In summary, CE Software enters 1999 with new strategic directions, new product
offerings and exceptional financial health. Despite worrisome developments in
the E-mail marketplace and the consequences of international economic turmoil,
I am optimistic that our strategic plans both support the needs of current
customers and chart a path for our company's growth and profitability.
Innovative new products and bold new directions are essential for success in the
computer software industry. With solid financial backing and the dedication of
our talented staff, I am confident we have the right ingredients for product and
financial success in 1999.
I want to thank you for your support of CE Software, and I invite you to join in
the excitement as we once again set industry standards for time- and
labor-saving automation on the Mac OS and Windows platforms.
Cordially,
/s/Christian F. Gurney
Christian F. Gurney
President and Chief Executive Officer
CE Software, Inc.
3
<PAGE>
PRODUCT OVERVIEW
QuicKeys for Windows
- ------------ QuicKeys for Windows, our latest product, is revolutionary new
| | automation software designed to save time and boost
| photo | productivity for anyone who counts on a PC to get work done.
| | QuicKeys takes the "busywork" out of computing by automating
| of | hundreds of time-consuming tasks - like opening programs,
| | typing E-mail addresses, finding files, and much more. Plus,
| box | QuicKeys'handy hot keys and custom toolbars put automation
- ------------ right at the users' fingertips - no matter what program they're
using.
"could be the QuicKeys also makes longer, more complicated tasks - like
biggest compressing and sending a few files via E-mail - a breeze.
Timesaver QuicKeys simply records the keystrokes and mouse-clicks
you ever put involved in the task then plays them back, quickly and
on your PC..." accurately, whenever the user presses the hot key or clicks
the toolbar button designated for that task.
London
Sunday Times Released in November 1998, QuicKeys is already taking the
industry by storm. Computer expert and syndicated columnist
Don Crabb gave QuicKeys 9 1/2 of 10 points in a Chicago
Sun-Times review, Newsweek.com and the London Sunday Times
recommended the product to readers, and the Software Publishers
Association voted it a finalist for the annual Excellence in
Software or (Codie) Awards.
QuicKeys for Mac OS & Instant QuicKeys
- ------------ Leading the industry in desktop productivity for more than
| | twelve years now, QuicKeys for Mac OS will see a major upgrade
| photo | during the first half of 1999. QuicKeys users worldwide can
| | look forward to a dozen new features, enhanced toolbars, an
| in | updated interface and complete interoperability with the
| | next-generation Mac OS, version 8.5.
| box |
- ------------ New in 1998, Instant QuicKeys is a slightly leaner, lower-cost
version of QuicKeys tailored for non-experts who want a
"QuicKeys is fast and easy way to automate their Macs. Instant QuicKeys
still one of creates keyboard shortcuts - or hot keys - that automatically
my favorite launch applications, type text, choose printers, and perform
utilities." many other common computer tasks. Plus, Instant QuicKeys'
simplified interface and extensive setup wizards have
Bob LeVitus, users saving time within minutes.
author of
Mac OS 8 In fact, we've made automation so easy that other software
for Dummies and hardware vendors are looking to Instant QuicKeys to
add value to their own products. Leading computer peripheral
manufacturer Kensington, for example, ships a copy of Instant
QuicKeys with each keyboard, mouse or trackball it sells.
<TABLE>
<CAPTION>
NOVEMBER 1997 DECEMBER 1997 JANUARY 1998 FEBRUARY 1998 MARCH 1998 APRIL 1998 MAY 1998
<C> <C> <C> <C> <C> <C> <C>
QuicKeys for Mac Tools for QuickMail Office QuicKeys Instant
OS 3.5.2r1 ships; combating reviewed PowerPak QuicKeys for
QuicKeys unsolicited E-mail in Macworld 1.0 ships Mac OS ships
now fully added to QuickMail
compatible Office; version QuickConference French
with Mac OS 8 1.0.2 for Mac OS IP 1.0 ships version of
and version 1.5 for later sold QuicKeys Mac
QuickMail Office Windows ship (to Prairie Group) OS 3.5.2 Earns "Very Good" ships
rating in German version Swedish version
NetProfessional of QuicKeys Mac of QuicKeys
review OS 3.5.2 ships Mac OS 3.5.2
ships
QuickMail Office
Reviewed in
Computer Shopper,
ZD Internet
Regis McKenna,
father of
high-tech
marketing,
promotes QuickMail
Pro in BusinessWeek
article
</TABLE>
4
<PAGE>
QuicKeys Office, QuickMail Pro & QuickMail Pro Server.
E-mail remains a vital means of communication for organizations ------------
of all sizes. But while the large corporation can afford | PHOTO |
full-time technical staff to maintain its E-mail system, smaller | |
businesses don't often have that luxury. Instead, they must | IN |
rely on the E-mail software itself to be easy to setup, | |
use and maintain. | BOX |
| |
That's the promise of QuickMail Office, the first and only ------------
all-in-one-box Internet and interoffice E-mail package for
small to mid-sized businesses on the market today. QuickMail "An easy-to-use
Office ships standard with easy-to-use QuickMail Pro client e-mail
software and low-maintenance QuickMail Pro Server software on bundle...
the customer's platform of choice, Mac OS or Windows. This a great
unique, "all-inclusive" approach to E-mail provides QuickMail solution"
customers with a convenient single source - CE Software - for MacWorld
all the information, software, training and technical support
they need to keep E-mail running smoothly.
CE Software's innovation in E-mail continues with upcoming
release of much-anticipated upgrades to QuickMail Office and
QuickMail Pro. Available in the first half of 1999, version
2.0 adds a brand-new look, an expanded address book and
server-side mail-management rules to QuickMail's legendary
ease-of-use and powerful feature set.
QuickMail Pro Directory System & Mail Directory System for Mac OS
For years, large companies have known about the ------------ "Fast and
benefits of Directory services: quick and easy | PHOTO | powerful...
access to up-to-date contact information for | OF | a truly
customers, employees and partners. Today, CE | LOGO | valuable
Software brings the power of directories to ------------ piece of
smaller organizations with two new products: software"
the QuickMail Pro Directory System and the
Mail Directory System for Mac OS. George Gould
Callaway
Working alongside popular Mac OS E-mail servers, Cars, Inc.
the directories create and maintain a comprehensive database
of information such as phone and fax numbers and E-mail
addresses. Everyone in the organization, plus selected
outside parties, can access the database right from their
favorite Internet E-mail program.
Further, the directory automatically scans messages that pass
through the E-mail server and uses the contact information in
the to update the database, guaranteeing users to get the most
current information possible. With this powerful directory at
their fingertips, users can locate a lost phone number or
forgotten E-mail address in seconds, saving time and increasing
the accuracy of their business communication.
<TABLE>
<CAPTION>
JUNE 1998 JULY 1998 AUGUST 1998 SEPTEMBER 1998 OCTOBER 1998 NOVEMBER 1998 DECEMBER 1998
<C> <C> <C> <C> <C> <C> <C>
Swedish German QuicKeys for QuickMail QuicKeys for QuicKeys for QuicKeys for
version of version of Windows Pro Windows earns Windows 1.0 Windows named
QuickMail QuickMail preview Directory 9 1/2 of 10 ships finalist for
Pro for Mac Pro for Mac edition System ships points in Software
OS 1.5.3 OS 1.5.3 available Chicago German version Publishers
ships ships to public Mail Sun-Times of QuicKeys Association's
Directory review Mac OS 3.5.3 Excellence in
Italian System ships Software (Codie)
versions of for Mac OS QuicKeys for Award
QuickMail ships Windows
Pro for Mac beta edition QuicKeys for
OS 1.5.3 and available Windows reviewed
QuickMail to public in Newsweek.com,
Pro for the London
Windows Kensington Sunday Times
1.5.3 ship bundles
Instant French version
for Mac OS of QuicKeys
with Mac OS 3.5.2
keyboards ships
and input
devices
French
version of
QuickMail
Pro for Mac
OS 1.5.3
ships
</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, 1998.
Years ended September 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Percentage of net revenues:
Net revenues 100% 100 100
Cost of revenues 22 17 17
- -----------------------------------------------------------------------------
Gross profit 78 83 83
- -----------------------------------------------------------------------------
Sales and marketing 39 49 39
General and administrative 39 33 36
Research and development 27 20 19
Intangible assets write-off and
restructuring expenses - - 8
- -----------------------------------------------------------------------------
Total operating expenses 105 102 102
- -----------------------------------------------------------------------------
Operating loss (27) (19) (19)
Other income, net 129 1 6
- -----------------------------------------------------------------------------
Earnings (loss) before
income taxes 102 (18) (13)
Income tax expense (17) - -
- -----------------------------------------------------------------------------
Net earnings (loss) 85% (18) (13)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NET REVENUES
Revenues from the Company's Messaging products fell 40%, but still accounted
for approximately 77% 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 1998, QuickMail LAN accounted for only
19% of the Messaging product revenues compared to 51% in the prior year. The
decline is due to reduced number of businesses using the MAC OS and the Company
promoting its QuickMail Pro/Office. The QuickMail LAN product will be
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.
Approximately 23% of the Company's fiscal 1998 revenues are from Personal
Applications products. Revenues from these products decreased by 29%, compared
to the prior year. The vast majority of these revenues are from sales of
QuicKeys, which is the Company's productivity enhancing utility program.
During fiscal 1998, this product was only available for the Apple Macintosh
market. In management's opinion, the Macintosh's shrinking market share has
negatively impacted these revenues and that a new version, QuicKeys for Windows,
released in the first quarter of fiscal 1999, offers meaningful long-term growth
potential.
Revenues from the Calendaring and Scheduling product accounted for 1% of net
revenues during fiscal 1997. This product was discontinued in 1997.
6
<PAGE>
Approximate net revenues by product group for the three years ended
September 30, 1998, 1997, and 1996, are as follows:
Years ended September 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Messaging $3,345,000 5,553,000 7,979,000
Personal applications 1,012,000 1,428,000 2,153,000
Calendaring and scheduling - 75,000 306,000
- -----------------------------------------------------------------------------
Total net revenues $4,357,000 7,056,000 10,438,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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 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, increased from 17% to 22% in
fiscal 1998, compared to fiscal 1997. The increase, on a percentage basis, was
primarily due to higher amortization expense of capitalized translation costs
associated with the new international versions of QuickMail. Also contributing
to the increase, on a percentage basis, was a somewhat higher amortization
expense associated with both capitalized purchased software and capitalized
manufacturing expense.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1998 were reduced by $1,753,000 or 51%
compared to fiscal 1997. This sizable decrease was primarily within
marketing/advertising expense, $1,073,000; salaries and benefits, $597,000;
and facility overhead expenses, $90,000. The decline in marketing/advertising
expenses was primarily due to less advertising, which is the direct result of
the Company's focus on fewer products. The decrease in salaries, benefits and
facility overhead expenses was primarily due to workforce reductions. The
decrease of $648,000 during fiscal 1997 compared to fiscal 1996 was primarily in
salaries and benefits, $325,000, and marketing/advertising expenses, $307,000.
The decrease in salaries and benefits was due to both lower sales commissions
and workforce reductions. The decrease in marketing/advertising expense was due
primarily to fewer direct mail campaigns and less advertising.
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 27% or $621,000 during fiscal 1998 compared to fiscal 1997.
The largest of these changes were decreases in salaries and benefits, $522,000;
legal and accounting, $87,000; telephone, $44,000; and travel and entertainment,
$30,000, and an increase in amortization, $59,000. The decreases are due
primarily to workforce reductions and fewer legal expenses. The higher
amortization expense was due to increasing the rate the intangible assets
were being amortized. In fiscal 1997 compared to fiscal 1996, these expenses
decreased by 39% or $1,478,000. 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 and cost saving measures.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,169,000, $1,429,000, and $2,000,000,
in fiscal 1998, 1997, and 1996, respectively. These expenses were 27%, 20%,
and 19% of net revenues in the three years, respectively. Salaries and benefits
decreased by $268,000 in fiscal year 1998 compared to fiscal 1997 due to staff
reductions resulting from a more focused development effort. The primary area
that decreased in fiscal 1997 compared to fiscal 1996 were salaries and
benefits, $446,000; contract labor, $49,000; travel and entertainment, $25,000;
and office supplies, $16,000. The decreases were primarily associated with
workforce reductions.
7
<PAGE>
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 SALES OF INVESTMENTS / CHANGE IN MARKET VALUE OF SECURITIES
The Company has recorded a net gain of $5,853,000 on the sale of investments.
This net gain consisted of a gain on the sale of Relevance Technologies, Inc.
stock of $6,206,000 and a loss on the sale of Documentum, Inc. stock of
$353,000. A loss of $283,000 was the recognized mark to market for trading
securities. See note 2 of Notes to Consolidated Financial Statements.
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 for fiscal 1998 was 17% and the
income tax benefit for fiscal year 1997 and 1996 was 0% and 1%, respectively.
The benefit in 1996 results from tax operating loss carrybacks against prior
year earnings. As of the end of fiscal 1996, all operating loss carrybacks
available to the Company have been utilized. The Company had recorded a
valuation allowance for its operating loss carryforwards which were utilized
in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $4,106,000 at the end of fiscal 1998,
from $1,454,000 at the end of fiscal 1997. The increase of $2,652,000 can
be attributed to the cash received of $2,897,000 from the sale of Documentum
common stock and the $691,000 received from Documentum upon the sale of
Relevance stock. See note 2 of Notes to Consolidated Financial Statements.
Other sources include the decrease in trade accounts receivable of $628,000,
and the decrease in inventories of $348,000. The primary use of cash was from
operations with an operating loss of $1,185,000 and the $400,000 prepayment on
the outstanding principal of the long-term debt. Virtually all of the cash and
cash equivalents balance is invested in one of two types of cash equivalents.
A total of $3,581,000 is invested in a money market fund and $488,000 is
invested through a repurchase agreement arrangement offering overnight
liquidity and competitive returns.
In fiscal 1997, 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 consisted
of a U.S. Treasury bill and a federal agency guaranteed mortgage-backed
security. Both of these investments matured in fiscal 1998 and the Company
held 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.
The Company believes it will be able to fund its working capital needs from
operations, available cash, and available investments. The bank loan agreement
providing a $2,000,000 credit line was intentionally not renewed and therefore
expired on April 30, 1998. There was no outstanding balance on the credit line
during 1998 and 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.
8
<PAGE>
The Company is cognizant of the issues associated with the two digit
programming code in existing computer systems as the Year 2000 nears. The Year
2000 problem is complex and can be quite extensive, as many computer systems
will be affected in some way by the rollover of the two-digit year value to a
four-digit year value. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Year 2000 issue
creates risk for the Company from unforeseen problems in its products, its own
computer systems and from third parties with whom the Company deals. Failures
of the Company's and/or third parties' computer systems could have a material
impact on the Company's ability to conduct its business. The Company has
programs which it continues to evaluate and modify to ensure products will
operate properly in the Year 2000 and in the years immediately following 2000,
for both future shipments of its products and for its products already in the
current customer installed base. Many products will operate properly in the
Year 2000 and in the years immediately following 2000, while others still may
require further modification in order to operate properly in the Year 2000 and
in the years immediately following 2000. While the Company believes that most
of its currently developed and actively marketed products will operate properly
in the Year 2000 and in the years immediately following 2000 for significantly
all functionality, these software products could contain errors or defects
related to the Year 2000. Versions of the Company's products, which are not
the most currently released or which are not currently being developed, may not
operate properly in the Year 2000 and in the years immediately following 2000.
The Company sells some of its older product lines, which are not being actively
developed and updated, as such these products may not necessarily operate
properly in the Year 2000 and in the years immediately following 2000. The
Company has provided information on its Web site for the purpose of assisting
customers in planning for the transition to Year 2000. Such information is
informational only and is provided without warranty of any kind. The Company
recognizes that whether its products will be viewed to operate properly in the
Year 2000 and in the years immediately following 2000 will depend upon many
factors, many of which are completely out of the Company's control. This
uncertainty may result in lawsuits against the Company. Management cannot
estimate the impact of any such suits on the Company. The Company is not
involved in any legal matters relating to Year 2000 issues. The Company is
addressing the potential impact to the Company of Year 2000 operability by any
of its key suppliers or customers. It is believed the corporate systems will
operate properly in the Year 2000 and in the years immediately following 2000.
The Year 2000 project cost is not expected to be material. The Company believes
that its exposure on Year 2000 issues is not material to its business as a
whole.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." These statements are effective for fiscal
years beginning after December 15, 1997, therefore, the Company will adopt these
statements for its fiscal year ended September 30, 1999. The financial
statements will require information to be revised at the time of their adoption.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition" which
provides guidance on when revenue should be recognized on software transactions,
and SOP 98-4, "Deferral of the Effective Date of SOP 97-2, Software Revenue
Recognition" which delays the adoption of SOP 97-2. The Company believes the
adoption of SOP 97-2 and SOP 98-4 will not have a material impact on its
accounting practices for revenue recognition or licensing.
9
<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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick
KPMG Peat Marwick LLP
Des Moines, Iowa
October 28, 1998
10
<PAGE>
CONSOLIDATED BALANCE SHEETS
CE Software Holdings, Inc., and Subsidiaries September 30, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Assets ( note 3) 1998 1997
- -----------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $4,106,493 1,454,434
Investments 2,882,031 490,957
Trade accounts receivable, less allowance for doubtful
accounts of $23,000 in 1998 and $56,000 in 1997 (note 7) 479,953 1,108,062
Recoverable income taxes - 24,153
Inventories 394,649 743,111
Deferred income taxes (note 5) - 117,200
Other current assets 251,102 165,624
- -----------------------------------------------------------------------------------------------
Total current assets 8,114,228 4,103,541
- -----------------------------------------------------------------------------------------------
Property, fixtures, and equipment:
Land 316,796 316,796
Building 1,312,016 1,312,016
Fixtures and equipment 2,633,551 2,998,885
- -----------------------------------------------------------------------------------------------
Total property, fixtures, and equipment 4,262,363 4,627,697
Less accumulated depreciation 2,360,475 2,410,190
- -----------------------------------------------------------------------------------------------
Net property, fixtures, and equipment 1,901,888 2,217,507
- -----------------------------------------------------------------------------------------------
Deferred income taxes (note 5) 369,000 65,800
Purchased computer software technology, net of amortization - 144,447
Other intangible assets, net of amortization 33,888 182,265
Other assets 43,256 58,959
- -----------------------------------------------------------------------------------------------
Total assets $10,462,260 6,772,519
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1998 1997
- -----------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt (note 3) $ 87,480 43,953
Trade accounts payable 238,343 316,845
Accrued payroll and benefits 171,033 317,852
Income taxes payable 275,744 -
Other accrued payables 111,991 164,894
Deferred revenue 33,948 100,691
Deferred income taxes 588,000 -
- -----------------------------------------------------------------------------------------------
Total current liabilities 1,506,539 944,235
- -----------------------------------------------------------------------------------------------
Long-term debt, net of current portion (note 3) 342,685 834,253
- -----------------------------------------------------------------------------------------------
Total liabilities 1,849,224 1,778,488
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Stockholders' equity (note 4):
Common stock, $.10 par value. Authorized 2,000,000 shares;
issued and outstanding 1,095,900 in 1998 and 1997 109,590 109,590
Additional paid-in capital 5,893,710 5,893,710
Unrealized loss on available-for-sale investment securities, net (72,138) -
Retained earnings (accumulated deficit) 2,681,874 (1,009,269)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 8,613,036 4,994,031
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,462,260 6,772,519
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues (note 7) $4,356,926 7,056,072 10,437,520
Cost of revenues 977,671 1,212,496 1,722,261
- --------------------------------------------------------------------------------------------------------
Gross profit 3,379,255 5,843,576 8,715,259
- --------------------------------------------------------------------------------------------------------
Sales and marketing 1,711,262 3,464,570 4,112,293
General and administrative 1,683,550 2,304,048 3,782,374
Research and development 1,169,230 1,429,126 2,000,472
Write-off of intangible assets and
restructuring expenses (note 1) - - 800,746
- --------------------------------------------------------------------------------------------------------
Operating expenses 4,564,042 7,197,744 10,695,885
- --------------------------------------------------------------------------------------------------------
Operating loss (1,184,787) (1,354,168) (1,980,626)
Other income (expense):
Gain on sale of investments, net 5,852,746 - -
Change in market value of trading securities (282,786) - -
Gain on sale of joint venture - - 504,926
Loss from joint ventures - - (21,349)
Interest income 109,336 128,071 175,968
Interest expense (72,366) (83,472) (87,486)
Earnings (loss) before income taxes 4,422,143 (1,309,569) (1,408,567)
Income tax expense (benefit) (note 5) 731,000 - (10,000)
- --------------------------------------------------------------------------------------------------------
Net earnings (loss) $3,691,143 (1,309,569) (1,398,567)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share (note 1) $3.37 (1.19) (1.22)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Shares used in per share calculation - basic 1,095,900 1,104,736 1,148,216
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share (note 1) $3.32 (1.19) (1.22)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Shares used in per share calculation - diluted 1,113,201 1,104,736 1,148,216
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Unrealized Retained
Additional loss on avail- Earnings
Common Paid-in able for sale (Accumulated
Stock Capital securities, net Deficit) Total
<S> <C> <C> <C> <C> <C>
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 4) (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 4) 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
Unrealized holding loss, net of - - (72,138) - (72,138)
deferred income taxes of $52,000
Net earnings - - - 3,691,143 3,691,143
- --------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 $109,590 5,893,710 (72,138) 2,681,874 8,613,036
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $3,691,143 (1,309,569) (1,398,567)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Property, fixtures, and equipment 416,701 501,673 542,615
Purchased software 144,447 239,651 351,989
Other 148,377 89,120 154,481
Write-off of Powercore, Inc., intangible assets - - 509,551
Change in market value (trading securities) 282,786 - -
Proceeds from sale of trading securities 2,897,294 - -
Loss on sale of trading securities 353,616 - -
Write-off of prepaid developer royalties - - 184,442
Undistributed loss in joint ventures - - 21,349
Gain on sale of joint venture (6,206,362) - (504,926)
Increase (decrease) deferred income taxes 454,000 - (10,000)
Decrease in trade accounts receivable 628,109 346,825 914,246
Decrease in recoverable income taxes 24,153 184,032 344,199
Decrease (increase) in inventories 348,462 (271,514) 21,973
(Increase) decrease in other assets (69,776) 166,034 188,690
(Decrease) increase in trade accounts payable (78,502) (209,185) 14,035
Increase (decrease) in accrued income taxes 275,744 - -
Decrease in accrued expenses (199,722) (87,979) (260,222)
Decrease in deferred revenue (66,743) (426,101) (372,502)
Other (1,020) 35,798 (85,156)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,042,707 (741,215) 616,197
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of held-to-maturity investments (1,028,750) (482,383) -
Proceeds upon maturity of
held-to-maturity investments 495,375 - -
Proceeds from sale of equipment 5,350 13,078 21,222
Purchase of property, fixtures, and equipment (105,411) (76,811) (466,732)
Purchase of other intangible assets - - (400,000)
Purchase of other assets - (30,000) (30,000)
Proceeds from sale of joint venture 690,829 - 250,000
Distributions from joint ventures, net - - 97,415
Proceeds from note receivable - 934,000 467,000
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities 57,393 357,884 (61,095)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<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 (448,041) (41,219) (31,648)
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (448,041) (24,938) (27,138)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 2,652,059 (408,269) 527,964
Cash and cash equivalents at beginning of year 1,454,434 1,862,703 1,334,739
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $4,106,493 1,454,434 1,862,703
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $75,794 82,615 81,868
Income taxes - 1,554 4,976
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activities:
Documentum, Inc. common stock
received from the sale of joint venture $5,515,533 - -
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 4) - - 419,375
Issuance of common stock to officer in exchange
for note receivable (note 4) - 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, 1998, 1997, and 1996
(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
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, 1998
and 1997, cash equivalents totaled $4,069,083 and $1,454,215, respectively.
INVESTMENTS
Investments consist of trading securities, available-for-sale securities, and
held-to-maturity securities.
Trading securities are unrestricted common stock of Documentum, Inc. (see
note 2). The investment is recorded at market value, with the unrealized loss
recognized in other income (expense).
Available-for-sale securities are restricted stock of Documentum, Inc. (see
note 2). The investment is recorded at market value, with the unrealized loss
recorded as a component of stockholders' equity.
Held-to-maturity securities consist of certificates of deposit totaling $540,237
and a treasury security in the amount of $487,095. These investments are
recorded at cost as cost approximates market value.
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 three-year period
ended September 30, 1998.
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 $144,447, $239,651, and
$351,989, for the years ended September 30, 1998, 1997, and 1996, respectively.
Accumulated amortization at September 30, 1998 and 1997, was $400,000 and
$255,553, respectively. The cost of internally developed software is expensed
as research and development, as incurred.
OTHER INTANGIBLE ASSETS
Amortization expense, excluding the write-offs discussed below, was $148,377,
$89,120, and $154,481, for the years ended September 30, 1998, 1997, and 1996,
respectively. Accumulated amortization at September 30, 1998 and 1997, was
$589,936 and $441,558, respectively. The Company assesses the recoverability of
intangible assets
16
<PAGE>
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. In fiscal 1997
this additional amortization expense was netted against the gain realized on
settlement of 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. All three of these assets are
related to the acquisition of Powercore, Inc., and all are fully amortized as
of September 30, 1998.
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, 1998.
STOCK OPTION PLANS
On October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," as
required for disclosure purposes only. The Company continues to apply 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. 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, 1998 and 1997, was $50,800 and $35,800, 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 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, 1998 and
1997, include $71,262 and $100,003, respectively, of such deferrals.
ADVERTISING AND MARKETING
Advertising costs are expensed in the period the advertising takes place. For
the years ended September 30, 1998, 1997, and 1996, advertising and marketing
costs were $721,765, $1,801,120, and $2,127,770, 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 of $53,651 for the year ended September 30, 1996, 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 full on March 31, 1997. Interest earned on the advances and the note
in fiscal 1997 and 1996, was $39,749 and $115,495, 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. ("CE"), acquired a 49% ownership interest in
a start-up joint venture, Net Target, Inc., which changed its name to Relevance
Technologies, Inc. (Relevance). The acquisition cost $75,000 in cash plus
certain technology rights. The joint venture subsequently obtained additional
capital, decreasing CE's ownership. The investment was accounted for under
the equity method of accounting. The Company's basis in
17
<PAGE>
the investment as of September 30, 1997, 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 (See note 2).
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 (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 - Trading securities and available-for-sale securities are 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
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share," which
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 reflects the potential dilution
that would occur from the exercise of common stock options outstanding. The
weighted average shares outstanding used for computing basic and diluted
earnings (loss) per common share for each of the years ended September 30,
1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Weighted average shares
outstanding during year 1,095,900 1,104,736 1,148,216
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Diluted:
Weighted average shares
outstanding during year 1,095,900 1,104,736 1,148,216
Additional shares due to stock options 17,301 - -
- ----------------------------------------------------------------------------------------
Shares used to compute diluted per share data 1,113,201 1,104,736 1,148,216
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
Antidilutive options excluded from the above calculations totaled 82,960,
159,822, and 79,752 at September 30, 1998, 1997, and 1996, respectively.
All previously reported earnings (loss) per common share have been restated to
conform to the new presentation.
18
<PAGE>
(2) SALE OF STOCK HELD AS AN INVESTMENT
In July 1998, the investment in Relevance was sold as part of a merger between
Relevance and Documentum, Inc. ("Documentum"). The Company received $690,829
in cash and 114,182 shares of Documentum, common stock, Nasdaq National Market
symbol, DCTM. Of the stock received, the agreement requires that 14,302 shares
be held in escrow for a period of one year. The Company has classified these
restricted shares as available-for-sale securities, and the unrestricted shares
as trading securities. The stock was valued at approximately $48.30 per share
upon receipt resulting in the Company recognizing a $6,206,362 gain as follows:
- --------------------------------------------------------------------------------
Cash received from Documentum $690,829
Documentum common stock held in escrow 690,855 (14,302 shares at $48.30)
Documentum common stock unrestricted 4,824,678 (99,880 shares at $48.30)
- --------------------------------------------------------------------------------
Total consideration from Relevance sale $6,206,362
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During fiscal 1998, the Company sold 67,300 shares of Documentum stock on the
open market, resulting in losses of $353,616. These losses are netted with the
original $6,206,362 gain for presentation in the statement of operations for the
year ended September 30, 1998 as a gain on sale of investments of $5,852,746.
At September 30, 1998, the closing market price of Documentum's common stock was
$39.625 per share compared to the $48.30 value placed on the shares at the
purchase date. A decrease in market value of trading securities and an
unrealized loss on available-for-sale investment securities were recorded at
September 30, 1998 as follows:
- --------------------------------------------------------------------------------
Unrestricted Restricted
- --------------------------------------------------------------------------------
Shares held 32,580 14,302
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cost basis of shares $1,573,769 690,855
Market price of shares 1,290,983 566,717
- --------------------------------------------------------------------------------
Mark to market loss $ 282,786 124,138
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) LONG-TERM DEBT AND LINE OF CREDIT
In 1994, CE Software, Inc., received $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, 1998 the rate was 9.18%. 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. The Company reduced the
outstanding principal with a prepayment of $400,000 in July 1998. Maturities
during the next five fiscal years are as follows: 1999, $87,480; 2000, $95,898;
2001, $105,296; 2002, $115,525, and 2003, $25,966.
The bank loan agreement also provided a $2,000,000 credit line which expired
April 30, 1998 and was not renewed by the Company. There was no outstanding
balance on the line during 1998 and 1997.
(4) 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
19
<PAGE>
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 is exercisable
one year after the grant date with the remaining two-thirds exercisable pro rata
during the succeeding 24 months.
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) - as reported $3,691,143 $(1,309,569) $(1,398,567)
Net earnings (loss) - pro forma $3,665,805 $(1,342,227) $(1,399,258)
Basic earnings (loss) per share - as reported $3.37 $(1.19) $(1.22)
Basic earnings (loss) per share - pro forma $3.35 $(1.21) $(1.22)
Diluted earnings (loss) per share - as reported $3.32 $(1.19) $(1.22)
Diluted earnings (loss) per share - pro forma $3.29 $(1.21) $(1.22)
</TABLE>
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 1998, 1997 and 1996: risk-free
interest rates of 5.1%, 6.2% and 6.0%, respectively; dividend yield of 0.0%
in each year; expected volatility of 82% in fiscal 1998 and 63% in fiscal years
1997 and 1996; and expected lives of four years in each year. The fair values
of the option grants in 1998, 1997 and 1996 were $3.58, $1.29 and $0.87 per
share, respectively. The effects of applying SFAS 123 may not be representative
of the effects on reported net earnings (loss) for future years.
At September 30, 1998, total options outstanding were 139,340, of which 57,324
were exercisable, at exercise prices ranging from $2.38 to $46.25 and a
weighted-average remaining contractual life of 8.5 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, 1998, are
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Number of options: 1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Outstanding at beginning of year 159,822 79,752 147,720
Granted 30,380 181,367 36,376
- ------------------------------------------------------------------------------------------
Subtotal 190,202 261,119 184,096
Exercised - - 522
Cancelled 50,862 101,297 103,822
- ------------------------------------------------------------------------------------------
Outstanding at end of year 139,340 159,822 79,752
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Weighted-average exercise price of options: 1998 1997 1996
- ------------------------------------------------------------------------------------------
Outstanding at beginning of year $5.37 16.33 21.86
Granted 2.32 4.89 13.57
Exercised - - 13.42
Cancelled 4.99 13.15 23.25
Outstanding at end of year 4.85 5.37 16.33
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The options outstanding as of September 30, 1998, have the following attributes:
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Option statistics Under $5.00 $10.00 $20.00
by price ranges: $5.00 to $9.99 to $19.99 & over
- ------------------------------------------------------------------------------------------
Options outstanding 54,520 76,340 7,880 600
Weighted-average price $2.20 $5.10 $16.36 $42.20
Weighted-average remaining life 9.2 yrs 8.4 yrs 4.6 yrs 3.2 yrs
Number exercisable 10,249 38,734 7,741 600
Weighted-average
price of exercisable options $2.54 $5.13 $16.38 $42.20
</TABLE>
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.
Under an employment agreement and separation agreement, dated September 30,
1996, with the former president, the 25,000 shares were repurchased and
cancelled through the payment of $2,500 for the par value and cancellation
of a note receivable.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 1998, 1997,
and 1996, consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 277,000 - -
Deferred 454,000 - (10,000)
- ------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 731,000 - (10,000)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
Current income tax benefit for 1998, 1997, and 1996, includes $102,000, $0, and
$800, of state income tax expense, respectively.
The income tax expense for 1998, 1997, and 1996, differs from the "expected" tax
expense computed by applying the United States federal income tax rate of 34%
to the loss before income taxes, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $1,503,529 (445,253) (478,912)
Increase (decrease) in "expected"
tax expense resulting from:
State income tax, net of federal income
tax effect 175,781 - -
Operating loss carryforward (recognized)
not recognized (900,651) 441,229 459,422
Other, net (47,659) 4,024 9,490
- ------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 731,000 - (10,000)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at September 30, 1998 and
1997, are as follows:
21
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for product returns $17,900 12,200
Allowance for doubtful accounts 11,900 19,000
Accrued expenses 50,100 80,500
Equity investments - 25,500
Intangible assets 440,500 490,700
Net operating loss carryforwards - 557,200
Other 4,800 5,500
- ------------------------------------------------------------------------------------------
Gross deferred tax assets 525,200 1,190,600
Valuation allowance - (905,400)
- ------------------------------------------------------------------------------------------
Total deferred tax assets 525,200 285,200
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Deferred tax liabilities:
Equity investments (673,000) -
Accelerated depreciation for tax purposes (71,200) (102,200)
------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $(219,000) 183,000
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The net deferred tax liabilities at September 30, 1998, were composed of net
current deferred tax liabilities of $588,000 and net non-current deferred tax
assets of $369,000. The change in the total valuation allowance for the years
ended September 30, 1998, 1997, and 1996, was a decrease of $905,400, and an
increase of $518,400 and $387,000, respectively.
The Company has the ability to sell investments to generate future taxable
income. Accordingly, management believes it is more likely than not that
results of future operations will generate sufficient taxable income to realize
the deferred tax assets recorded at September 30, 1998.
(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, 1998, 1997, or
1996.
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,
1998, 1997, and 1996, were $39,441, $56,979, and $79,188, 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 77%, 79%, and 76%, of total revenues for the years ended September
30, 1998, 1997, and 1996, respectively.
The Company's major customers are distributors. Of its domestic revenues,
sales to one distributor customer in 1998, 1997, and 1996, were approximately
$828,000, $958,000, and $2,024,000, respectively. Accounts receivable from
this distributor customer at September 30, 1998 and 1997, were approximately
$301,000 and $378,000, respectively.
Virtually all export sales are to distributors. Export sales were approximately
$1,287,000, $2,095,000, and $2,606,000, for the years ended September 30, 1998,
1997, and 1996, respectively. Sales to the Company's top three export
distributor customers represented approximately $259,000, $191,000, and
$182,000, or 6%, 4%, and 4%, of net revenues in fiscal 1998. Sales to the top
three export distributors customers represented approximately $1,148,000 or 16%
of net revenues in fiscal 1997. Percentage components of export sales by
geographic area for 1998, 1997, and 1996, respectively, were Europe (86, 63,
and 64 percent); Japan (4, 28, and 27, percent); Australia (7, 8, and 8
percent); and all others (3, 1, and 1 percent).
22
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of November 30, 1998, there were 180 stockholders of record. The Company
believes that it has approximately 1,800 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 The Nasdaq SmallCap 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 4 to the consolidated
financial statements) for the last two fiscal years as provided by Nasdaq.
Quarter ended: Common stock
- --------------------------------------------------------------------------------
Low High
- --------------------------------------------------------------------------------
September 30, 1998 $ 2.250 $5.250
June 30, 1998 2.000 4.000
March 31, 1998 1.625 3.250
December 31, 1997 1.625 3.969
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
23
<PAGE>
OFFICERS AND DIRECTORS
CE SOFTWARE HOLDINGS, INC. CE SOFTWARE, INC., AND
CE DISTRIBUTING, INC.
Richard A. Skeie Christian F. Gurney
President President,
and Director Chief Executive Officer,
and Director
John S. Kirk John L. Mason
Secretary, Treasurer, Chief Financial Officer
and Director
Christian F. Gurney Richard A. Skeie
Vice President Director
and Director
John L. Mason John S. Kirk
Chief Financial Officer Secretary, Treasurer,
and Director
Sheldon T. Fleck Sheldon T. Fleck
Director; Director
Private Investor
Minneapolis, MN
David J. Lundquist David J. Lundquist
Director; Director
Managing Partner,
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 TRANSFER AGENT AND REGISTRAR
INVESTOR INFORMATION Norwest Bank Minnesota, N.A.
Stock Transfer
Please visit the Company's Web site at: 161 North Concord Exchange
P.O. Box 738
http://www.cesoft.com South St. Paul, MN 55075
(612) 450-4064
or direct inquiries to:
INDEPENDENT AUDITORS
Investor Relations KPMG Peat Marwick LLP
CE Software Holdings, Inc. 2500 Ruan Center
P.O. Box 65580 Des Moines, IA 50309
West Des Moines, IA 50265
(515) 221-1801 LEGAL COUNSEL
Davis, Brown, Koehn,
STOCK TRADING Shors, & Roberts, P.C.
2500 Financial Center
CE Software Holdings, Inc.'s common stock Des Moines, IA 50309
is traded on the Nasdaq Small Capital
Market tier of The Nasdaq Stock Market ANNUAL MEETING
under the symbol: CESH. The Annual Meeting of Stockholders
will be held at 1:30 p.m. on
Thursday, February 25, 1999,
SEC FORM 10-KSB at the Glen Oaks Country Club,
A copy of the Company's Annual Report on West Des Moines, Iowa.
Form 10-KSB for the fiscal year ended
September 30, 1998, is available free of CE Software, Inc., headquarters,
charge on the Securities and Exchange West Des Moines, IA
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
CE Software Holdings, Inc. is committed to equal employment opportunity and
affirmative action.
Copyright 1999 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.
25
<PAGE>
- --------------- CE SOFTWARE HOLDINGS, INC.
| | 1801 Industrial Circle
| CE SOFTWARE | P.O. Box 65580
| | West Des Moines, IA 50265
| | (515) 221-1801
| LOGO | http://www.cesoft.com
| |
- ---------------
<PAGE>
