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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999.
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File No. 0-18809
CE SOFTWARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1614808
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1801 Industrial Circle, 50265
West Des Moines, Iowa (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (515) 221-1801
________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of class)
Indicate by mark (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
(Cover page continued)
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Indicate by mark (X) if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $3,787,868
Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on
November 30, 1999: $11,117,750.
Number of shares outstanding of each of the registrant's classes of common stock
as of November 30, 1999:
Common Stock 1,111,775
DOCUMENTS INCORPORATED BY REFERENCE:
List hereunder the following documents if incorporated by reference and the
Part of the 10-KSB into which the document is incorporated.
Portions of the Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held February 25, 2000, are
incorporated by reference into Part III.
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CE SOFTWARE HOLDINGS, INC.
1999 FORM 10-KSB ANNUAL REPORT
Table of Contents
Page
Trademarks/Definitions 1
PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7. Financial Statements 17
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
Item 9. Directors and Executive Officers of the Registrant 33
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management 34
Item 12. Certain Relationships and Related Transactions 34
PART IV
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K 35
Signatures 37
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TRADEMARKS/DEFINITIONS
ArrangeTM, BackMaticTM, ButtonActionTM, CEToolboxTM, ChoosyTM, CursorWaitTM,
DayVisionTM, Demo QuicKeys(r), DialogKeysTM, DisMountyTM, Finder EventsTM, Grab
EaseTM, GrabberTM, MailManagerTM, MassCopierTM, Medi:for(r), MenuDecisionTM,
MenuWaitTM, MobileVisionTM, MountyTM, MousieTM, My Time Manager(r),
NameFinderTM,NameServerTM, NetModemChoosyTM, Network Scheduler(r),
ns:AgentTM, NSDDTM, Paste EaseTM, Printer BridgeTM, ProcessSwapTM, ProKeyTM,
QK IconsTM, QK InstallTM, QM ServerTM, QM AdministratorTM, QM-Connect
GatewayTM, QM ConfigTM, QM-Data Collection BridgeTM, QM-Direct BridgeTM,
QM FormsTM, QM-InternetTM Gateway, QM-Link GatewayTM, QM MenuTM, QM-MHS
GatewayTM, QM-QM BridgeTM, QM RecorderTM, QM Recorder IITM, QM RemoteTM, QM
ResourcesTM, QM-Script GatewayTM, QM-Serial GatewayTM, QM ServerTM, QM
TimeOutsTM, QuickAccessTM, QuicKeys(r), QuicKeys
IconsTM, QuickConferenceTM, QuickMailTM, QuickMailTM Pro, QuickMailBarTM,
QuickMessengerTM, QuickSendTM, QuickTimerTM, Schedule/DOS(r), Scrap EaseTM,
Screen EaseTM, SpeakEaseTM, TeamVisionTM, Technical Assistance AssistantTM,
TypeEaseTM, VaccineTM, WindowDecisionTM, and WindowWaitTM are trademarks or
registered trademarks of CE Software, Inc., an Iowa corporation.
IBM(r) is a registered trademark of International Business Machines Corporation
("IBM"). Macintosh(r) and Apple(r) are registered trademarks, and
AppleScriptTM, AppleTalkTM, AppleTalk Remote AccessTM , and MacTM are
trademarks of Apple Computer, Inc. ("Apple"). MS-DOS(r) and Microsoft(r) are
registered trademarks and Windows(r) is a trademark of Microsoft Corporation
("Microsoft"). IntercallTM is a trademark of Holmen and Ungman. QM-LinkTM and
QM PostmanTM are trademarks of Netstrategy Software, Inc. Novell(r) is a
registered trademarks of Novell, Inc.Netscape NavigatorTM is a trademark of
Netscape Communications, Inc., CalendarMakerTM is a trademark of PrairieSoft,
Inc., and WebWhackerTM is a trademark of The Forefront Group, Inc.
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PART I
Item 1: Business
General
CE Software Holdings, Inc., a Delaware corporation (the "Company"), develops
computer software products that enhance communications, connectivity, and
productivity for businesses and home-based personal computer users. The
Company's products include personal productivity tools such as the QuicKeys
product family, which as of November, 1998, became available for use in the
Microsoft's Windows operating system in addition to Apple's Macintosh
operating system; business E-mail software, collectively known as the
QuickMail product family and developed for use with both Microsoft's Windows
and Apple's Macintosh operating systems.
The Company
Formed in 1988 as Anubis Corporation, the Company changed its name to CE
Software Holdings, Inc. in February 1990 after acquiring all the common
stock of CE Software, Inc., an Iowa corporation. The merger was accounted
for as a reverse acquisition. CE Software Holdings, Inc., exists primarily
as a stock holding company, and accordingly, the operations described in
this document, unless otherwise specified, are those of the subsidiary, CE
Software, Inc.
The operating subsidiary, CE Software, Inc. (CE) was formed in January 1987 as
the successor to a business started in 1981 as the software development arm of
a retail computer store known as Computer Emporium. The three founders of CE
Software, Inc., Richard A. Skeie, Donald M. Brown, and John S. Kirk, still
beneficially and collectively own approximately 26% of the Company's outstanding
common stock. Mr. Skeie and Mr. Kirk remain involved in the Company.
Early in the 1980's, the original business focused on developing accounting
software, games, and programming products for the Apple II computer. Shortly
after the release of the Macintosh computer in 1984, CE released its first
Macintosh program. For several years, the bulk of CE's product development
and sales was for the Macintosh. Beginning in 1990, the Company also focused
on re-engineering existing Macintosh E-mail products for use with Microsoft's
Windows operating systems. In 1991, an upgrade extended the functionality of
QuickMail LAN, the Company's flagship proprietary E-mail product, to users of
IBM and IBM-compatible computers. QuickMail LAN was upgraded again in 1993 to
support Microsoft's Windows operating systems.
In fiscal 1997, CE re-engineered QuickMail LAN from a proprietary system to one
based on the Internet's open standards such as POP3 (Post Office Protocol 3).
The new product, called QuickMail Office, accommodates a Windows 95, Windows NT,
or Mac OS E-mail server, whereas QuickMail LAN requires a Macintosh server.
QuickMail Office is a complete, client-server business E-mail solution for small
to mid-sized companies running Windows or Mac OS.
In fiscal 1998, CE re-engineered its second major product group, QuicKeys, to
operate within Microsoft's Windows operating system. Like the Macintosh
version, QuicKeys for
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Windows automates any repetitive, multi-step function to save the time of
numerous repetitive keystrokes. QuicKeys for Windows was released in November
of 1998.
On June 30, 1997 the Company amended its Restated Certificate of Incorporation
to effect a one for five reverse stock split of the Company's Common Stock.
From and after the amendment, the Company has been authorized to issue
2,000,000 shares of Common Stock, par value $.10.
In fiscal 1998, the investment in Relevance Technologies, Inc. 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. Of the
stock received, the agreement required that 14,302 shares be held in escrow
for a period of one year. The Company had classified these restricted shares
as available-for-sale securities, and the unrestricted shares as trading
securities. 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 results in an overall net gain from
the sale of investments of $5,852,746. A realized loss of $282,786 on the
decline of market value of the unsold shares was reflected for the year ended
September 30, 1998.
In fiscal 1999, the Company sold the remaining 46,882 shares of Documentum at
an average price of $30.48 resulting in realized losses of $835,864, of which
$553,078 (net of previously recognized loss of $282,786) was recognized for
the year ended September 30, 1999.
Products
CE's business and personal productivity software products have received awards
from professional groups, user groups, and industry trade publications both in
the United States and internationally.
CE's products can be divided into two distinct groups: personal productivity
and messaging applications. The personal productivity group consists of the
Quickeys product line and the messaging group includes QuickMail Office and
QuickMail Pro. The Company's approximate net revenues are as follows:
Years ended September 30,
1999 1998 1997
Messaging $2,329,000 3,345,000 5,553,000
Personal productivity 1,459,000 1,012,000 1,428,000
Calendaring and scheduling - - 75,000
__________________________________________________________________________
Total net revenues $3,788,000 4,357,000 7,056,000
In fiscal 1999 and 1998, sales of the QuickMail product family and of QuicKeys
were responsible for all of the Company's revenues. CE believes that the
products in the messaging and personal productivity groups, as updated from
time to time, will continue to make a significant revenue contribution. Of
course, these products may be at risk of reduced sales if the Company is unable
to produce competitive products or respond to changes in usage of such products.
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Personal Applications
QuicKeys
QuicKeys, CE's automation utility, was first introduced in 1987 for Macintosh
users and is now available for Microsoft's Windows users as well. QuicKeys
automates any repetitive, multi-step function performed on a Macintosh or
Windows computer . Since its release, QuicKeys has been the leading desktop
automation package for the Macintosh computing environment and has won several
awards from key computer industry publications such as Macworld magazine.
CE released QuicKeys 3.0 in August 1993. Recognizing the changing requirements
of the software industry, this release built in close support for two of the
leading Apple Computer technology initiatives: Apple Events and AppleScript.
In addition, QuicKeys 3.0 was designed from the start to take advantage of the
audio/visual workstations then being offered by Apple Computer. With the
appropriate technology installed, shortcuts could be triggered either by voice
command or by the more traditional keyboard interaction. QuicKeys 3.0 greatly
simplified user interaction by combining many operating components into one
main user interface window. In 1993, QuicKeys 3.0 was named Best Utility of the
Year by the editors of MacUser magazine.
CE released QuicKeys 3.5 in August 1996. QuicKeys 3.5 allows users to create
customized toolbars and floating palettes for triggering shortcuts.
Version 3.5 also supports batch processing, which performs the same QuicKeys
sequence on multiple files, as well as a new, tab-oriented interface with
movable windows. In the spring of 1997, CE released version 3.5.2, with native
support for Power Macintosh computers, and in November 1997, a software patch
was made available to insure complete compatibility between QuicKeys and Apple's
Mac OS 8.
CE released QuicKeys 1.0 for Windows in November 1998. This new automation
software is designed to save time and boost productivity for anyone who uses
Microsoft Windows 95, 98 or NT 4.0. QuicKeys is designed to save a PC users
time and effort by automatically performing hundreds of common but time-
consuming computer tasks, such as opening programs, typing text, choosing from
menus, plus many more. QuicKeys also automates longer tasks that require
several consecutive steps, such as compressing and sending files via E-mail.
QuicKeys simply records the keystrokes and mouse-clicks involved in the task
then plays the entire sequence back, quickly and accurately, whenever the user
presses the hot key or clicks the toolbar button designated for that task. In
addition to helping PC users work faster and easier, QuicKeys makes all the
elements of the user's computer system -- programs, documents, operating system
and Internet connection -- work together more efficiently. For instance, a
single QuicKeys sequence can easily perform a task that involves steps in
several programs. With a wide range of features, QuicKeys can automate and
control almost any function of any PC software. QuicKeys has garnered very
favorable feedback from the press and customers.
QuicKeys 4.0 for Macintosh debuted in April 1999. Version 4.0 added Mac OS 8.5
compatibility, ten new plug-ins that increased function of the Web, Internet
E-mail and the Macintosh desktop, enhanced reliability and performance, new
toolbar functionality and 50 new time-saving features. Soon after, in October
1999, QuicKeys 4.1 for Macintosh
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was released. It included the following enhancements designed to improve
QuicKeys' ease-of-use, speed, and reliability; owner compatibility with
Mac OS 9, instant E-mail plug-in updated to work with QuickMail Pro version
2.0, more reliability when creating and executing Apple Menu, File Launch
and timed Shortcuts, and double-click items in Finder windows that
overlap toolbars.
Messaging
QuickMail Office is an easy-to-use electronic mail package aimed at small to
mid-sized businesses. It was originally released as an E-mail system for
Macintosh-centric local area networks (LAN) in 1988 (QuickMail LAN). Due to the
new direction of the E-mail industry, QuickMail LAN was upgraded in 1996 to
QuickMail Office to offer full support for industry messaging standards.
QuickMail Office provides important communications functionality such as sending
and receiving of messages, remote access to E-mail and connectivity to other
office locations and E-mail systems.
CE also continues to sell, but does not support QuickMail LAN. Gateway and
bridge software that connects QuickMail LAN with the Internet and with other
applications are also still available from CE.
In November 1996, the Company released QuickMail Pro, an Internet E-mail client
for Windows and Macintosh. Originally available as a client-only solution,
QuickMail Pro became part of a complete, all-in-one-box business E-mail solution
with the addition of three E-mail servers to the product family. The result was
the debut of QuickMail Office in the spring of 1997.
In January 1998, the Company released an upgrade to QuickMail Office which
included tools that help companies prevent the unauthorized use of server
resources by people who send bulk E-mail, also known as "spam". In addition,
the upgrades feature simplified address book management, improved integration
with other E-mail programs and more efficient directory services plug-ins.
QuickMail Office includes easy-to-use QuickMail Pro client software plus
powerful E-mail server software for Windows NT, Windows 95, and Mac OS. It was
designed to bring the powerful features and ease-of-use associated with
QuickMail LAN forward to the future.
In June 1999, the Company released QuickMail Office 2.0 and QuickMail Pro 2.0
for Macintosh, a major upgrade of its easy-to-use Internet and interoffice
E-mail system for mid-sized businesses. It includes an all-new interface,
advanced contact management features, hierarchical file folders, built-in
directory services, plus numerous other features and improvements.
In October 1999, the company released QuickMail Pro 2.0 for Windows, a major
upgrade of its easy-to-use Internet and personal E-mail client. This
QuickMail Office 2.0 client, now available for both Windows and Macintosh,
features and all-new interface, home and office E-mail account handling in
one window, advanced contact management features, heirarchical file folders
and dozens of other improvements.
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Product Support
CE believes that customer technical support is an important part of its overall
performance. As of September 30, 1999, the Company had 10 full-time employees
involved in technical support services, available to all customers by electronic
mail, Worldwide Web site, telephone, or fax. Certain customers are charged an
annual maintenance fee for upgrades and support. Support services include
explaining how the customer's computer works, how their other software works
in relation to CE products, solving problems with software operation, and
suggesting solutions to business and personal computing issues.
Distribution and Marketing
The Company's products are primarily marketed through independent distributors
in the United States, through numerous independent dealers and distributors in
other countries, directly to large corporate accounts under site licensing
agreements, and directly to end-users through direct marketing campaigns.
Of the Company's total net revenues for fiscal 1999, approximately 24% are
through independent, domestic, nonexclusive distributors. Sales to one such
distributor, Ingram Micro, accounted for nearly 17% of total net revenues.
Domestic distributors purchase product at a discount from list prices.
Of the Company's total net revenues for fiscal 1999, approximately 27% are
through independent, international distributors. Several of these distributors
are limited by contract to distribution within a specified geographic area.
The Company expects to continue emphasizing its international sales in upcoming
periods by providing additional translations of its products. It currently
provides translations of certain programs in Japanese, German, French and
several other languages. Sales to three such distributors, Computers Unlimited
in the United Kingdom, Prisma in West Germany, and Moreware in Sweden, accounted
for approximately 7%, 3%, and 3% of total net revenues, respectively.
International distributors generally require a somewhat larger discount, in
return for various advertising, customer service, and customer registration
duties performed by them.
The Company gives its distributors industry-standard rights of return for stock
balancing and for defective products, and replacement rights when products are
upgraded to new versions. A reserve for returns has been recorded and was
$31,000 and $50,800 at September 30, 1999 and 1998, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on the financial statements because of the Company's low cost to replace
such returns. Returns from end users, for any reason, have not been
significant.
Product Development
The personal computer software industry continues to undergo rapid technological
change, requiring a continuous high level of enhancement of existing products
and development of new products. The Company is committed to the creation of
new products and intends to continue the enhancement of existing products.
The Company's future financial performance will depend, in part, on the
successful development, completion, and introduction of new software products,
and of enhanced versions of existing products, and customer acceptance of those
products. In the future,
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there is no assurance that the Company will not encounter difficulties
that could delay or prevent the successful development of, or marketing of,
new products and/or enhancements of existing products. There also can be no
assurance that such products will yield positive results or that such results
can be obtained on a timely basis or without the expenditure of substantial
funds.
The Company's software products are primarily developed internally, although
the Company has increased the amount of extended development with several
partners and has purchased and/or licensed software products from independent
authors and other software companies. As of September 30, 1999, 12 employees
were engaged full time in product development. During fiscal years 1999, 1998,
and 1997, the Company spent approximately $1,110,000, $1,169,000, and
$1,429,000, respectively, on product development and enhancement activities,
representing approximately 29%, 27%, and 20%, respectively, of net revenues
in each of these periods.
Competition
The personal computer software market is highly competitive and has been
subject to rapid change, which is expected to continue. The Company's
competitors include many independent software vendors that have financial,
marketing, and technological resources far in excess of those of the Company.
Certain of these include Microsoft, IBM (Lotus), QUALCOMM, Netscape Division of
America Online, and Novell Corporation. In addition, certain computer
manufacturers may devote significant resources to creating software, directly
competitive with products of the Company, for inclusion with their computers and
computer systems without additional charge to consumers.
The Company's messaging and personal productivity products are marketed
primarily through the retail channel. All of these products face competing
products offering many similar features. The Company believes that the
principal competitive factors in the market include product features and
functions, ease of understanding and operating the software, product
reliability, price/performance characteristics, name recognition, and
availability and quality of support and training services. Price competition
could become an increasing factor in the personal computer software market,
which could, in turn, be expected to increase pressures on profit margins
in the future.
Product Protection
The Company regards its software as proprietary and attempts to protect it
with copyrights, trade secret laws, and internal nondisclosure safeguards,
as well as restrictions on disclosure and transferability that are incorporated
into its software license agreements. The Company licenses its software
products to customers rather than transferring title. Despite these
restrictions, it may be possible for competitors or users to copy aspects of
the Company's products or to obtain information which the Company regards as
trade secrets. Computer software generally can be patented only with
difficulty, and existing copyright laws afford only limited practical
protection. Policing unauthorized use of such a broadly disseminated
product as computer software is difficult, and software piracy can be
expected to be a persistent problem for the packaged software industry.
These problems may be particularly acute in international markets. However,
because of the rapid pace of technological change in its industry, such
protections are less significant than factors such as knowledge, ability, and
experience of the Company's employees, frequent product enhancement, and the
timeliness and quality of Company support services.
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Employees
As of September 30, 1999, the Company employed 42 full-time equivalent employees
(FTE's) and 45 total employees. Part-time employees in total working an
aggregate of a 40-hour workweek make one FTE. As of September 30, 1998,
December 31, 1998, March 31, 1999, and June 30, 1999, the Company employed 41,
41, 43, and 47 FTE's, and 45, 45, 46, and 48 total employees, respectively.
Over the last few years the Company has steadily taken steps to reduce its
workforce. These steps have included both normal employee attrition, as well
as employee severance. Such reductions within the areas of development, sales
and marketing have been in response to the Company's focus on a smaller number
of products and the outsourcing of some functions requiring a particular
expertise. Within the administrative areas, reductions have been in response
to reduced workloads caused by a smaller volume of transactions. At November
30, 1999, the Company employed 29 FTE's and 31 total employees.
Forward-looking statements
The Company or management may make or may have made certain forward-looking
statements, orally or in writing, such as those within Management's Discussion
and Analysis contained in its various SEC filings. The Company wishes to
ensure that such statements are accompanied by meaningful cautionary statements,
so as to ensure to the fullest extent possible the protections of the safe
harbor established in the Private Securities Litigation Reform Act of 1995.
Such statements are therefore qualified in their entirety by reference to and
are accompanied by the following discussion of certain important factors that
could cause actual results to differ materially from those described in such
forward-looking statements.
The Company cautions the reader that this list of factors is not intended to be
exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such factors, nor can it assess the impact, if any, of such factors on
the Company's business or the extent to which any factors may cause actual
results to differ materially from those described in any forward-looking
statement. None of the Company's forward-looking statements should be relied
upon as prediction of actual results.
The Company faces risks and uncertainties that could render actual events
materially different than those described in our forward-looking statements.
These risks and uncertainties include, but not limited to, the risk new
products and product upgrades may not be effected on a timely basis; the risk
such products may not achieve market acceptance within the Windows or Macintosh
markets; the risk the prevalence and functionality of available free E-mail
software will increase and further erode revenues; the risk of the growth
potential of QuicKeys for Windows; the risk the Company would not be able to
fund its working capital needs from cash flows; the Year 2000 risks discussed
in Part II, Item 6; and the risk that the prevalence and functionality of
available free E-mail software will increase and further erode revenues; and
the risk associated with domestic and international general economic conditions.
The Company's products are sold in markets that change rapidly and the Company
must continually anticipate and adapt its products to emerging computer
technologies and capabilities. The Company may not be able to successfully
adapt to these changing markets.
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Risk factors that may affect future results
The Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including but not limited to the risks discussed in the paragraph
above.
Item 2: Properties
The Company's principal facility is a 22,000-square-foot office building
which the Company built in 1990 in West Des Moines, Iowa. In May 1994, the
Company borrowed $1,000,000 secured by a mortgage on this building. In
February 1995, the Company purchased the land adjacent to this building,
giving the Company an additional option for future expansion. The purchase
price was $225,000. This adjacent land was contracted for sale in December
of 1998 with a closing in January of 1999. The sales price was $200,000.
Since August of 1996, the Company has leased 1,700 square feet of office space
in a facility adjacent to the Company's principal facility. This office space
was subleased to a third party during all of fiscal year 1998 until the lease
expired in August of 1998. The third party tenant continued to rent minimal
office space in the Company's principal facility on a month-to-month basis
until July 31, 1999. There have been no tenants leasing office space
after July 31, 1999.
Item 3: Legal Proceedings
None
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to the stockholders in the
fourth quarter of fiscal 1999.
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PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
As of November 30, 1999, there were 174 stockholders of record. The
Company believes that it has approximately 1,850 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 for
the last two fiscal years as provided by Nasdaq.
Quarter ended: Common stock
Low High
September 30, 1999 $4.188 $8.000
June 30, 1999 3.125 7.000
March 31, 1999 3.250 5.000
December 31, 1998 3.625 5.500
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
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its earnings to finance
future growth and does not anticipate paying any cash dividends on its Common
Stock in the forseeable future.
Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. Historical
results and percentage relationships are not necessarily indicative of the
operating results for any future period. Within this discussion and analysis,
all dollar amounts (except for per share amounts) have been rounded to the
nearest thousand.
The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues for each
of the years in the three-year period ended September 30, 1999.
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Years ended September 30,
1999 1998 1997
Percentage of net revenues:
Net revenues 100% 100 100
Cost of revenues 23 22 17
_______________________
Gross profit 77 78 83
Sales and marketing 45 39 49
General and administrative 43 39 33
Research and development 29 27 20
_______________________
Total operating expenses 117 105 102
_______________________
Operating loss (40) (27) (19)
Other (expense) income, net (10) 129 1
_______________________
Earnings (loss) before income taxes (50) 102 (18)
Income tax (benefit) expense (12) 17 -
_______________________
Net earnings (loss) (38)% 85 (18)
_______________________
_______________________
NET REVENUES
Revenues decreased 13% from fiscal 1998 to fiscal 1999. Approximately 39% of
the Company's fiscal 1999 revenues were from Personal Productivity products.
These revenues are from sales of QuicKeys, the Company's productivity enhancing
utility program, which is available for the Windows and Apple Macintosh markets.
During fiscal 1998, this product was only available for the Apple market, but
the release of QuicKeys for Windows, in the first quarter of fiscal 1999,
offers meaningful long-term growth potential. Revenues from the QuicKeys
product group increased by 44% compared to the prior year. The increase in
fiscal 1999 compared to the prior year was due to the release of the QuicKeys
for Windows product, which accounted for 13% of QuicKeys revenues, and a new
release of a QuicKeys for Macintosh 4.0.
Revenues from the Company's Messaging products fell 30%, but still accounted
for approximately 61% 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 1999, QuickMail LAN accounted for
only 5% of the Messaging product revenues compared to 23% in the prior year.
The decline is due to the reduced number of businesses using the Mac OS and
the Company promoting its QuickMail Pro/Office. QuickMail LAN product support
was discontinued in fiscal 1999. Presently, the majority of messaging
revenues is generated from the Company's QuickMail Pro and QuickMail Office
products. These products are cross-platform, open standards messaging products
available for both Microsoft Windows and Mac OS environments. In management's
opinion, these revenues have been negatively impacted due to the development
of strong competition within the E-mail market. This competition includes the
prevalence of inexpensive and, in some cases, free E-mail software. In
management's opinion, such competition is expected to continue and may hinder
substantial, long-term growth of this product group.
COST OF REVENUES
The Company's cost of revenues is composed primarily of: 1) the costs of
product materials such as manuals, diskettes, CD-ROMS, and
packaging; 2) amortization of capitalized purchased software; 3) royalties
paid to outside developers for the use of certain software included with some
of the Company's products; 4) amortization of capitalized manufacturing
expenses; and 5) amortization of
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<PAGE>
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 slightly from
22% to 23% in fiscal 1999, compared to fiscal 1998. The change, on a
percentage basis, was the net effect of higher royalties associated with the
QuickMail product line and lower amortization expense associated with
capitalized purchased software. Cost of 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 essentially remained unchanged at $1,715,000
and $1,711,000 during fiscal years 1999 and 1998, respectively. Despite the
consistency between periods, certain specific expense categories varied during
fiscal year 1999 compared to the previous fiscal year. The significant
decreases included contract labor and temporary help, $109,000 or 55% from
prior year; salaries and benefits, $109,000 or 19%; travel and entertainment,
$17,000 or 37%; and allocated facility overhead expenses, $24,000 or 14%,
while marketing/advertising expenses increased by $257,000 or 37%. The
decrease in contract labor and temporary help was a result of less reliance
on outside sources and a more focused marketing strategy. The decrease in
salaries and benefits, travel and entertainment, and overhead were primarily
due to lower sales commissions and workforce reductions. The increase in
marketing/advertising expenses was primarily due to the launching of new
products, namely QuicKeys for Windows. The decrease in fiscal 1998 of
$1,753,000 or 51% compared to fiscal 1997 was primarily within
marketing/advertising expense, $1,073,000 or 61%; salaries and benefits,
$597,000 or 51%; and facility overhead expenses, $90,000 or 34%. 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. Decreases in salaries, benefits and facility overhead expenses
were primarily 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 $69,000 or 4% during fiscal 1999 compared to
fiscal 1998. The largest of these changes included increases in overhead
allocation, $70,000 or 17%; salaries and benefits, $27,000 or 3%; and shipping,
$18,000 or 37%, while amortization and depreciation expense decreased $189,000
or 34%. The change in overhead allocation resulted from an increase, on a
percentage basis, of employees in the general and administrative category
compared to sales and marketing and research and development categories.
An increase in vacation accrual expense and the amount allocated for employee
benefits were responsible for the increase in salaries and benefits for
fiscal 1999. Shipping increased due to launch and promotion of QuicKeys for
Windows. The decrease in amortization and depreciation expense of $189,000
was a result of purchased software in fiscal 1998
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and a portion of fixed assets becoming fully depreciated. In fiscal 1998
compared to fiscal 1997 these expenses decreased 27% or $621,000. The largest
of these changes were decreases in salaries and benefits, $522,000 or 34%;
legal and accounting, $87,000 or 59%; telephone, $44,000 or 26%; and travel
and entertainment, $30,000 or 69%, and an increase in amortization, $59,000
or 66%. The decreases are due primarily to workforce reductions and fewer
legal expenses. The higher amortization expense was due to increasing the
rate at which the intangible assets were being amortized.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,110,000, $1,169,000, and $1,429,000
in fiscal 1999, 1998, and 1997, respectively. These expenses were 29%, 27%,
and 20% of net revenues in the three years, respectively. Salaries and benefits
and overhead allocation decreased by $101,000 and $59,000, respectively, in
fiscal 1999 compared to fiscal 1998 due to the reduced number of employees in
research and development. As a result of fewer employees, contract labor and
temporary help increased by $87,000 for the outsourcing of various needs.
Salaries and benefits decreased by $268,000 in fiscal 1998 compared to fiscal
1997 due to staff reductions resulting from a more focused development effort.
GAIN (LOSS) ON SALES OF INVESTMENTS / CHANGE IN MARKET VALUE OF SECURITIES
During fiscal 1999 and 1998, the Company disposed of all shares of Documentum,
Inc. acquired in the sale of Relevance Technologies, Inc. in 1998. See note 2
of the Notes to the Consolidated Financial Statements for the complete details
of the transaction.
INCOME TAXES
The Company's effective income tax benefit for fiscal 1999 was 25% and the
income tax expense for fiscal year 1998 and 1997 was 17% and 0%, respectively.
As of the end of fiscal 1999, all operating loss carrybacks available to the
Company have been utilized. The Company has recorded a valuation allowance
for its excess of deferred tax assets over deferred tax liabilites.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents virtually remained unchanged at $4,127,000 for the
end of fiscal 1999, compared to $4,106,000 for the prior year. Operating
losses of $1,532,000 were offset by the $1,429,000 received from the sale
of the remaining shares of Documentum common stock. See note 2 of Notes to
Consolidated Financial Statements. Virtually all of the cash and cash
equivalents balance is held in one of two types of cash equivalents. A total
of $3,791,000 is invested in a money market fund and $231,000 is invested
through a repurchase agreement arrangement offering overnight liquidity and
competitive returns.
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
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<PAGE>
$400,000 prepayment on the outstanding principal of the long-term debt.
Virtually all of the cash and cash equivalents balance was invested in one
of two types of cash equivalents. A total of $3,581,000 was invested in a
money market fund and $488,000 was invested through a repurchase agreement
arrangement offering overnight liquidity and competitive returns.
The Company believes it will be able to fund its working capital needs from
operations and available cash and investments. 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.
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.
YEAR 2000
The Company has worked, and continues to work, toward the identification,
prioritization, and remediation of potential problems arising from the year
2000. The Company has concentrated on reducing the risk that our customers
2001. may experience problems with CE products. The Company has also worked
2002. to reduce potential disruptions to business operations and to develop
2003. a contingency plan.
The Company's State Of Readiness
The Company has conducted assessments of its currently available, developing,
and installed base of products to determine if each of the products will
function in the year 2000 without significant operational problems, i.e.,
are "year 2000-compliant."
The Company has communicated with its significant vendors and service
providers about their progress in identifying and addressing problems that
their computer systems may face in correctly processing date information
relating to the year 2000. As of this date, most, but not all such third
parties have responded to the Company's requests. The Company will continue
to seek reassurances regarding the year 2000 compliance of vendors, including
key parties from which the Company obtains services, computer software, and
equipment.
With respect to its main business systems, including financial, order processing
and technical support, the Company invested in three primary areas to ensure
year 2000 readiness. First, the financial system was transferred from an older
system to a newer system, both to achieve year 2000 compliance and to provide a
more streamlined system. Secondly, customer database systems relating to
technical support, order processing,
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and sales information, were transferred to a new year 2000-compliant system.
Thirdly, a year 2000-compliant phone system upgrade was purchased and installed.
The Risks Of The Company's Year 2000 Issues
The Company believes that products being currently marketed are largely
year 2000-compliant. However, certain previous releases of our products that
are no longer under support may not prove to be year 2000-compliant with
customers' systems or within an existing network. The Company has provided
information on the year 2000 section of its Web site for the purpose of
assisting customers in planning for the transition to year 2000. While such
information offers assistance to the users of the Company's products, it 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 customer satisfaction issues,
potential lawsuits, and other material costs and liabilities. Management
cannot estimate the impact of any such potential consequences on the Company.
In the event any material vendor, supplier, customer or other third party
cannot timely provide services, products, or systems that meet the year 2000
requirements, the Company's ability to offer products and services, the ability
to process sales, and the ability to generally conduct business could be
materially adversely affected.
The Company believes that it has taken reasonable steps to avoid circumstances
that could lead to year 2000 related liability and is not aware of any
circumstance that could result in liability having a material adverse effect
on the Company's ability to continue its operations. However, the Company
could be faced with severe consequences if year 2000 issues are not identified
and resolved in a timely manner by the Company and material third parties.
In a worst-case scenario if a material vendor, supplier, or other third party
cannot timely provide services, products, or systems that meet the year 2000
requirements, the Company's ability to offer products and services, to process
sales, and to generally conduct business could be materially adversely affected.
This would result in lost revenues. In addition, while the Company is not
aware of any unforeseen severe circumstances, if a customer suffered a business
shutdown as a result of malfunction of a Company product, the Company could be
exposed to significant liability. The amount of lost revenues or liabilities,
however, would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated.
Costs To Address The Company's Year 2000 Issues
The Company estimates that it has invested approximately $75,000 in purchasing
and installing the new financial, data base and phone systems discussed above.
These costs were not anticipated in the Company's 10-K filed for the year ended
September 30, 1998. The Company believes that costs of evaluating its products,
contacting third parties and other actions it has taken internally have not
been material. The Company has not attempted to estimate the costs of any
liability that may arise because of customer dissatisfaction; year 2000
problems arising with vendors, suppliers or customers; potential
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<PAGE>
lawsuits; or similar potential costs and liabilities as such costs cannot be
predicted or estimated.
The Company's Contingency Plans
Contingency considerations were directed to certain key areas, in particular
third party suppliers, to ensure that any potential business interruptions
caused by the year 2000 issue are mitigated. In doing so, determinations of
the degree to which the benefits of alternative sources of supply justify
the costs of providing such alternatives have been made. For example, it was
determined that the costs of providing a backup power generation system could
not be justified.
In anticipation of an increased number of technical support calls, the Company
plans to deploy additional resources and expand its technical service
availability during the time period either side of the end of the year.
Summary
The foregoing statements are based upon our best estimates at the present
time, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans, and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated.
Our evaluation is ongoing and we expect that new and different information
will become available to us as that evaluation continues. Consequently,
there is no guarantee that all material elements will be year 2000-ready
in time.
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Item 7: Financial Statements
Index to Item 7: Financial Statements page
Independent Auditors' Report. 18
Consolidated Balance Sheets, as of September 30, 1999 and 1998. 19
Consolidated Statements of Operations, for each of the years in the
three-year period ended September 30, 1999. 20
Consolidated Statements of Stockholders' Equity, for each of the years
in the three-year period ended September 30, 1999. 21
Consolidated Statements of Cash Flows, for each of the years in the
three-year period ended September 30, 1999. 22
Notes to Consolidated Financial Statements. 24
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<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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Des Moines, Iowa
October 29, 1999
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
CE Software Holdings, Inc., and Subsidiaries
September 30, 1999 and 1998
<S> <C> <C>
Assets (note 3) 1999 1998
Current assets:
Cash and cash equivalents $4,126,637 4,106,493
Investments 1,278,601 2,882,031
Trade accounts receivable, less allowance for doubtful
accounts of $30,000 in 1999 and $23,000 in 1998 (note 7) 500,185 479,953
Recoverable income taxes 176,121 -
Inventories 250,208 394,649
Other current assets 313,579 251,102
__________ __________
Total current assets 6,645,331 8,114,228
Property, fixtures, and equipment:
Land 91,796 316,796
Building 1,312,016 1,312,016
Fixtures and equipment 2,716,807 2,633,551
__________ __________
Total property, fixtures, and equipment 4,120,619 4,262,363
__________ __________
Less accumulated depreciation 2,710,159 2,360,475
__________ __________
Net property, fixtures, and equipment 1,410,460 1,901,888
Deferred income taxes (note 5) - 369,000
Other intangible assets, net of amortization 21,927 33,888
Other assets 19,285 43,256
__________ __________
Total assets $8,097,003 10,462,260
__________ __________
__________ __________
Liabilities and Stockholders' Equity 1999 1998
Current liabilities:
Current portion of long-term debt (note 3) $ 100,237 87,480
Trade accounts payable 207,259 238,343
Accrued payroll and benefits 146,143 171,033
Income taxes payable - 275,744
Other accrued payables 120,057 111,991
Deferred revenue 9,444 33,948
Deferred income taxes - 588,000
__________ __________
Total current liabilities 583,140 1,506,539
Long-term debt, net of current portion (note 3) 240,859 342,685
__________ __________
Total liabilities 823,999 1,849,224
Stockholders' equity (note 4):
Common stock, $.10 par value. Authorized
2,000,000 shares; issued and outstanding
1,105,668 in 1999 and 1,095,900 in 1998 110,567 109,590
Additional paid-in capital 5,927,619 5,893,710
Accumulated other comprehensive loss - (72,138)
Retained earnings 1,234,818 2,681,874
__________ __________
Total stockholders' equity 7,273,004 8,613,036
__________ __________
Total liabilities and stockholders' equity $8,097,003 10,462,260
__________ __________
__________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Net revenues (note 7) $3,787,868 4,356,926 7,056,072
Cost of revenues 880,682 977,671 1,212,496
__________ __________ __________
Gross profit 2,907,186 3,379,255 5,843,576
Sales and marketing 1,714,621 1,711,262 3,464,570
General and administrative 1,614,282 1,683,550 2,304,048
Research and development 1,109,856 1,169,230 1,429,126
__________ __________ __________
Operating expenses 4,438,759 4,564,042 7,197,744
__________ __________ __________
Operating loss (1,531,573) (1,184,787) (1,354,168)
Other income (expense):
(Loss) gain on sale of investments, net (553,078) 5,852,746 -
(Loss) on sale of property, fixtures, and equipment (25,000) - -
Change in market value of trading securities - (282,786) -
Interest income 223,366 109,336 128,071
Interest expense (33,706) (72,366) (83,472)
__________ __________ __________
(Loss) earnings before income taxes (1,919,991) 4,422,143 (1,309,569)
__________ __________ __________
Income tax (benefit) expense (note 5) (472,935) 731,000 -
__________ __________ __________
Net (loss) earnings $(1,447,056) 3,691,143 (1,309,569)
__________ __________ __________
__________ __________ __________
Basic (loss) earnings per share (note 1) $(1.32) 3.37 (1.19)
__________ __________ __________
__________ __________ __________
Shares used in per share calculation - basic 1,098,395 1,095,900 1,104,736
__________ __________ __________
__________ __________ __________
Diluted (loss) earnings per share (note 1) $(1.32) 3.32 (1.19)
__________ __________ __________
__________ __________ __________
Shares used in per share calculation - diluted 1,098,395 1,113,201 1,104,736
__________ __________ __________
__________ __________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Accumulated Retained
Additional Other Com- Earnings
Common Paid-in prehensive (Accumulated
Stock Capital Income (Loss) Deficit) Total
______________________________________________________________________________________________________________
Balances at September 30, 1996 $112,343 6,038,758 - 300,300 6,451,401
Comprehensive loss:
Net loss - - - (1,309,569) (1,309,569)
Other comprehensive income - - - - -
______________________________________________________________________________________________________________
Total comprehensive loss - - - (1,309,569) (1,309,569)
______________________________________________________________________________________________________________
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
______________________________________________________________________________________________________________
Balances at September 30, 1997 109,590 5,893,710 - (1,009,269) 4,994,031
Comprehensive income:
Net earnings - - - 3,691,143 3,691,143
Other comprehensive loss - - (72,138) - (72,138)
______________________________________________________________________________________________________________
Total comprehensive income - - (72,138) 3,691,143 3,619,005
______________________________________________________________________________________________________________
Balances at September 30, 1998 109,590 5,893,710 (72,138) 2,681,874 8,613,036
Comprehensive loss:
Net loss - - - (1,447,056) (1,447,056)
Other comprehensive income - - 72,138 - 72,138
______________________________________________________________________________________________________________
Total comprehensive loss - - 72,138 (1,447,056) (1,374,918)
______________________________________________________________________________________________________________
Stock options exercised 977 33,909 - - 34,886
______________________________________________________________________________________________________________
Balances at September 30, 1999 $110,567 5,927,619 - 1,234,818 7,273,004
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
CE Software Holdings, Inc., and Subsidiaries
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Cash flows from operating activities:
Net (loss) earnings $(1,447,056) 3,691,143 (1,309,569)
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Property, fixtures, and equipment 349,684 416,701 501,673
Purchased software - 144,447 239,651
Other 26,065 148,377 89,120
Amortization of premium 14,073 - -
Accretion of discount (12,962) - -
Change in market value (trading securities) - 282,786 -
Proceeds from sale of trading securities 1,428,759 2,897,294 -
Loss on sale of trading securities 553,078 353,616 -
Loss on sale of land 25,000 - -
Gain on sale of joint venture - (6,206,362) -
(Decrease) increase deferred income taxes (271,000) 454,000 -
(Increase ) decrease in trade accounts receivable (20,232) 628,109 346,825
(Increase) decrease in recoverable income taxes (176,121) 24,153 184,032
Decrease (increase) in inventories 144,441 348,462 (271,514)
(Increase) decrease in other assets (52,610) (69,776) 166,034
(Decrease) increase in trade accounts payable (31,084) (78,502) (209,185)
(Decrease) increase in income taxes payable (275,744) 275,744 -
Decrease in accrued expenses (16,824) (199,722) (87,979)
Decrease in deferred revenue (24,504) (66,743) (426,101)
Other - (1,020) 35,798
__________ __________ __________
Net cash provided by (used in)
operating activities 212,963 3,042,707 (741,215)
__________ __________ __________
Cash flows from investing activities:
Purchase of held-to-maturity investments (1,562,490) (1,028,750) (482,383)
Proceeds upon maturity of
held-to-maturity investments 1,307,110 495,375 -
Proceeds from sale of land 200,000 5,350 13,078
Purchase of property, fixtures, and equipment (83,256) (105,411) (76,811)
Purchase of other assets - - (30,000)
Proceeds from sale of joint venture - 690,829 -
Proceeds from note receivable - - 934,000
__________ __________ __________
Net cash (used in) provided by
investing activities (138,636) 57,393 357,884
__________ __________ __________
__________ __________ __________
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<PAGE>
1999 1998 1997
Cash flows from financing activities:
Proceeds from stock options exercised 34,886 - -
Proceeds from issuance of common stock - - 16,281
Payments on long-term debt (89,069) (448,041) (41,219)
__________ __________ __________
Net cash used in financing activities (54,183) (448,041) (24,938)
__________ __________ __________
Net increase (decrease) in cash
and cash equivalents 20,144 2,652,059 (408,269)
Cash and cash equivalents at beginning of year 4,106,493 1,454,434 1,862,703
__________ __________ __________
Cash and cash equivalents at end of year $4,126,637 4,106,493 1,454,434
__________ __________ __________
__________ __________ __________
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $34,764 75,794 82,615
Income taxes 268,619 - 1,554
__________ __________ __________
__________ __________ __________
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
Issuance of common stock to officer in exchange
for note receivable (note 4) - - 49,969
__________ __________ __________
__________ __________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CE Software Holdings, Inc., and Subsidiaries
September 30, 1999, 1998, and 1997
(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 at
purchase of three months or less at date of purchase to be the equivalent of
cash. At September 30, 1999 and 1998, cash equivalents totaled $4,021,729
and $4,069,083, respectively.
INVESTMENTS
Investments consist of trading securities, available-for-sale securities,
and held-to-maturity securities.
Trading securities consisted of unrestricted common stock of Documentum,
Inc. at September 30, 1998 (see note 2). The investment was recorded at
market value, with the unrealized loss recognized in other income (expense)
for the year ended September 30, 1998. There were no trading securities
held at September 30, 1999.
Available-for-sale securities consisted of restricted stock of Documentum,
Inc. at September 30, 1998 (see note 2). The investment was recorded at market
value, with the unrealized loss recorded as a component of comprehensive income
at September 30, 1998. There were no available-for-sale securities held at
September 30, 1999.
At September 30, 1999, held-to-maturity securities consist of certificates of
deposit totaling $270,000 and two bond securities totaling $1,008,601. These
investments are recorded at cost as cost approximates market value.
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<PAGE>
INVENTORIES
Inventories are composed primarily of software translation costs, product
materials, and capitalized production costs. Product materials, such as
instruction manuals, CD-ROMS, diskettes, and packaging boxes, are stated at
the lower of cost or market with cost determined using the first-in, first-out
method. Translation costs are amortized over the estimated period between
upgrades of the associated international versions of the products. No
amortization period has exceeded 18 months during the three-year period ended
September 30, 1999.
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 was amortized over a period of three to
five years based on the expected life of the related products. The
amortization expense included in cost of revenues for the years ended September
30, 1998, and 1997 was $144,447, and $239,651, respectively. The purchased
computer software technology was fully amortized in fiscal 1998. The cost of
internally developed software is expensed as research and development, as
incurred.
OTHER INTANGIBLE ASSETS
Amortization expense, excluding the write-off discussed below, was $11,961,
$148,377, and $89,120, for the years ended September 30, 1999, 1998, and 1997,
respectively. During fiscal 1999, a fully amortized intangible asset with an
original cost of $540,100 was written-off. Accumulated amortization at
September 30, 1999 and 1998, was $61,796 and $589,936, 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. 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.
CLASS B COMMON AND PREFERRED STOCK
The Company cancelled the previously 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 had ever
been issued.
STOCK OPTION PLANS
The Company has adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-based Compensation," as required for
disclosure purposes only. The Company 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).
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<PAGE>
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, 1999 and 1998, was $31,000 and $50,800, 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, 1999 and
1998, include $91,051 and $71,262, respectively, of such deferrals.
ADVERTISING AND MARKETING
Advertising costs are expensed in the period the advertising takes place.
For the years ended September 30, 1999, 1998, and 1997, advertising and
marketing costs were $981,596, $721,765, and $1,801,120, respectively.
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 were
recorded at market value using published stock prices. Other short-term
investments are recorded at cost, which approximates market value.
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<PAGE>
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, 1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Basic:
Weighted average shares
outstanding during year 1,098,395 1,095,900 1,104,736
_________ _________ _________
_________ _________ _________
Diluted:
Weighted average shares
outstanding during year 1,098,395 1,095,900 1,104,736
Additional shares due to stock options - 17,301 -
_________ _________ _________
Shares used to compute diluted per share data 1,098,395 1,113,201 1,104,736
_________ _________ _________
_________ _________ _________
</TABLE>
Antidilutive options excluded from the above calculations totaled 138,855,
82,960, and 159,822, at September 30, 1999, 1998, and 1997, respectively. All
previously reported earnings (loss) per common share have been restated to
conform to the new presentation.
OTHER
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
October 1, 1998. This statement required revised and additional disclosures
but did not have a material effect on the results of operations or financial
position of the Company. Other comprehensive income consisted of unrealized
gains and losses on an equity security for fiscal years 1999 and 1998. The
tax expense (benefit) related to other comprehensive income (loss) for fiscal
years 1999 and 1998 amounted to $(25,250) and $25,250, respectively.
(2) SALE OF STOCK HELD AS AN INVESTMENT
In fiscal 1998, the investment in Relevance was sold as part of a merger
between Relevance and Documentum, Inc. ("Documentum"). The Company
received $690,829 in
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<PAGE>
cash and 114,182 shares of Documentum, common stock, Nasdaq National Market
symbol, DCTM. Of the stock received, the agreement
required that 14,302 shares be held in escrow for a period of one year,
ending in July 1999. The Company had 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:
<TABLE>
<CAPTION>
<S> <C> <C>
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
_________
_________
</TABLE>
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
_________ ________
_________ ________
In fiscal 1999, the remaining 46,882 shares of Documentum Inc.
(Documentum) were sold at an average price of $30.48, resulting in a
realized loss on the sale of $835,864, of which $282,786 was reported in fiscal
1998, reflecting the mark to market value of the trading securities.
(3) LONG-TERM DEBT
In 1994, CE Software, Inc. borrowed $1,000,000 under a bank loan agreement.
The agreement contains certain financial compliance covenants and restricts
certain transactions, such as issuing dividends without prior written consent
of the bank. The interest rate on the loan is adjustable as defined in the
agreement, and at September 30, 1999 the rate was 7.85%. 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 four fiscal years are as follows: 2000, $100,237;
2000, $108,581; 2001, $117,545; and 2002, $14,733.
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<PAGE>
(4) COMMON STOCK
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.
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>
<S> <C> <C> <C>
1999 1998 1997
Net (loss) earnings - as reported $(1,447,056) 3,691,143 (1,309,569)
Net (loss) earnings - pro forma $(1,479,711) 3,669,878 (1,342,227)
Basic (loss) earnings per share - as reported $(1.32) 3.37 (1.19)
Basic (loss) earnings per share - pro forma $(1.35) 3.35 (1.21)
Diluted (loss) earnings per share - as reported $(1.32) 3.32 (1.19)
Diluted (loss) earnings per share - pro forma $(1.35) 3.30 (1.21)
</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 1999, 1998 and 1997: risk-free
interest rates of 5.0%, 5.1%, and 6.2%, respectively; dividend yield of 0.0% in
each year; expected volatility of 72%, 82% and 63% in fiscal 1999, 1998 and
1997, respectively, and expected lives of four years in each year. The fair
values of the option grants in 1999, 1998 and 1997 were $4.43, $3.58, and $1.29
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, 1999, total options outstanding were 138,855, of which
83,422 were exercisable, at exercise prices ranging from $2.38 to $46.25
and a weighted-average remaining contractual life of 7.9 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,
1999, are as follows:
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<PAGE>
Number of options: 1999 1998 1997
___________________________________________________________________________
Outstanding at beginning of year 139,340 159,822 79,752
Granted 26,160 30,380 181,367
___________________________________________________________________________
165,500 190,202 261,119
Exercised 9,768 - -
Cancelled 16,877 50,862 101,297
___________________________________________________________________________
Outstanding at end of year 138,855 139,340 159,822
___________________________________________________________________________
___________________________________________________________________________
Weighted-average exercise price of options: 1999 1998 1997
___________________________________________________________________________
Outstanding at beginning of year $4.82 5.37 16.33
Granted 4.55 2.19 4.89
Exercised 3.57 - -
Cancelled 4.57 4.99 13.15
Outstanding at end of year 4.88 4.82 5.37
The options outstanding as of September 30, 1999, have the following attributes:
Option statistics Under $5.00 $10.00 $20.00
by price ranges: $5.00 to $9.99 to $19.99 & over
___________________________________________________________________________
Options outstanding 72,550 57,825 7,880 600
Weighted-average price $3.13 $5.13 $16.36 $42.20
Weighted-average
remaining life (in years) 8.70 7.43 3.60 2.20
Number exercisable 26,227 48,715 7,880 600
Weighted-average
price of exercisable options $2.44 $5.15 $16.36 $42.20
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 then
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.
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<PAGE>
(5) INCOME TAXES
Income tax (benefit) expense for the years ended September 30, 1999, 1998, and
1997, consisted of the following:
1999 1998 1997
Current $(201,935) 277,000 -
Deferred (271,000) 454,000 -
_______________________________________________________________________________
Income tax (benefit) expense $(472,935) 731,000 -
Current income tax (benefit) expense for 1999, 1998, and 1997, includes
$(25,000), $102,000, and $0 of state income tax expense, respectively.
The income tax benefit or expense for 1999, 1998, and 1997, differs from
the "expected" tax benefit or expense computed by applying the United
States federal income tax rate of 34% to the earnings or loss before
income taxes, as follows:
1999 1998 1997
_______________________________________________________________________________
Computed "expected"
tax (benefit) expense $(652,797) 1,503,529 (445,253)
Increase (decrease) in "expected"
tax expense resulting from:
State income tax, net of federal income
tax effect (25,000) 175,781 -
Change in valuation allowance 302,000 (905,400) 518,400
Other, net (97,138) (42,910) (73,147)
_______________________________________________________________________________
Income tax (benefit) expense $(472,935) 731,000 -
_______________________________________________________________________________
_______________________________________________________________________________
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at September 30, 1999 and
1998, are as follows:
1999 1998
Deferred tax assets:
Allowance for product returns $10,850 17,900
Allowance for doubtful accounts 10,100 11,900
Accrued expenses 71,050 50,100
Intangible assets 121,000 440,500
Net operating loss carryforward 43,000 -
Alternative minimum tax credit 85,000 -
Other - 4,800
__________________________________________________________________
Gross deferred tax assets 341,000 525,200
Valuation allowance 302,000 -
__________________________________________________________________
Total deferred tax assets 39,000 525,200
Deferred tax liabilities
Equity investments - (673,000)
Accelerated depreciation for tax purposes (39,000) (71,200)
__________________________________________________________________
Net deferred tax (liabilities) $ - (219,000)
__________________________________________________________________
__________________________________________________________________
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, 1999,
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<PAGE>
1998, and 1997 was an increase of $302,000, decrease of $905,400, and an
increase of $518,400, respectively.
(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, 1999, 1998, or
1997.
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,
1999, 1998, and 1997, were $31,695, $39,441, and $56,979, 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 61%, 77%, and 79%, of total revenues for the years ended September
30, 1999, 1998, and 1997, respectively.
The Company's major customers are distributors. Of its domestic revenues,
sales to one distributor customer in 1999, 1998, and 1997, were approximately
$617,000, $828,000, and $958,000, respectively. Accounts receivable from this
distributor customer at September 30, 1999 and 1998 were approximately $234,000
and $301,000, respectively.
Virtually all export sales are to distributors. Export sales were approximately
$991,000, $1,287,000, and $2,095,000, for the years ended September 30, 1999,
1998, and 1997, respectively. Sales to the Company's top three export
distributor customers represented approximately $276,000, $131,000, and
$130,000, or 7%, 3%, and 3%, of net revenues in fiscal 1999. Sales to the
top three export distributors customers represented approximately $632,000
or 15% of net revenues in fiscal 1998. Percentage components of export sales
by geographic area for 1999, 1998, and 1997, respectively, were Europe (89, 86,
and 63 percent); Japan (1, 4, and 28 percent); Australia (9, 7, and 8 percent);
and all others (1, 3, and 1 percent).
(8) SUBSEQUENT EVENT (UNAUDITED)
On December 28, 1999, the Company signed a definitive agreement to merge with
Minneapolis, Minnesota-based ATIO Corporation USA, Inc., developer of CyberCall,
a fully integrated E-business customer care solution. Subject to conditions
described in the merger agreement, the transaction is expected to close in the
first quarter of 2000. Current ATIO shareholders will receive one CESH share
per 15.5 ATIO shares. The merger is structured to be treated as a tax-free
reorganization under the Internal Revenue Code. The post-merger company will
initially trade on the NASDAQ Small Cap market under the symbol CESH.
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<PAGE>
The definitive agreement is subject to the following funding requirements,
all of which must occur by closing: (a) approximately $5 million from the
Company, (b) $964,000 from Minneapolis-based Venturian Corp. (NASDAQ: VENT)
and (c) a minimum of $1.5 million pursuant to a private offering by CESH
prior to closing, the terms and conditions of which are to be determined.
The private offering by CESH will not be registered with the SEC and the
securities acquired through the private offering could not be sold or offered
in the United States absent registration or an applicable exemption from
registration.
Immediately following the closing, but prior to considering the effect of the
private offering, current CESH shareholders will own approximately 54% and
Venturian will hold approximately 15% of the shares of the post-merger company.
The agreement contemplates that in the first half of 2000, ATIO International,
a current ATIO shareholder, will purchase 314,062 shares of the post-merger
company, priced at $6.48 per share, for a total of approximately $2.1 million
in cash.
Additional conditions to the completion of the merger include the restructuring
of certain ATIO agreements, the restructuring of ATIO debt or conversion of
ATIO debt into equity and the ongoing commitment and availability of key ATIO
managers and staff. Additionally, CESH shareholders must approve the agreement.
As a further condition of the merger, CESH's subsidiary company CE Software,
Inc., will be distributed to CESH shareholders simultaneous with the merger
with ATIO.
Item 8: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9: Directors and Executive Officers of the Registrant
Information with respect to this Item may be found in the section
captioned "Nominees for Elections as Directors" appearing in the Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held February 25, 2000. Such information is incorporated
herein by reference.
Information with respect to delinquent Form 4 filings may be found in the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Proxy Statement to be delivered to stockholders
in connection with
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<PAGE>
the Annual Meeting of Stockholders to be held February 25, 2000. Such
information is incorporated herein by reference.
Item 10: Executive Compensation
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held February 25, 2000. Such information is incorporated herein by
reference.
Item 11: Security Ownership of Certain Beneficial Owners and
Management
Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing
in the Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held February 25, 2000. Such information
is incorporated herein by reference.
Item 12: Certain Relationships and Related Transactions
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held
February 25, 2000. Such information is incorporated herein by reference.
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<PAGE>
PART IV
Item 13: Exhibits, Financial Statements, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements
The following consolidated financial statements of CE Software Holdings, Inc.,
and subsidiaries, and the Independent Auditors' Report issued thereon, are
incorporated by reference in Part II, Item 7:
Independent Auditors' Report.
Consolidated Balance Sheets, as of September 30, 1999 and 1998.
Consolidated Statements of Operations, for each of the years in the
three-year period ended September 30, 1999.
Consolidated Statements of Stockholders' Equity, for each of the years
in the three-year period ended September 30, 1999.
Consolidated Statements of Cash Flows, for each of the years in the
three-year period ended September 30, 1999.
Notes to Consolidated Financial Statements.
2. Exhibits Page 38
The following exhibits are filed as part of, or incorporated by
reference into, this Report:
3(a) I Certificate of Incorporation
3(b) I Amendment dated April 10, 1990, to Certificate of Incorporation
3(c) I Amendment dated April 19, 1990, to Certificate of Incorporation
3(d) I Bylaws
3(e) I Amendment dated June 27, 1997, to the Restated Certificate of
Incorporation
4(a) I Form of Stock Certificate
4(b) I CE Software Holdings, Inc., 1990 Stock Option Plan
4(c) I Representative Form of Incentive Stock Option
4(d) II 1992 Stock Option Plan
4(e) II Nonemployee Directors Stock Option Plan
10(a) I Agreement and Plan of Reorganization dated February 15, 1990,
between Anubis Corp., CE Software, Inc., Richard Skeie, Donald
Brown, and John Kirk on his own behalf and as custodian on
behalf of his minor children
10(b) I Profit Sharing Plan of CE Software, Inc.
10(c) I Form of CE Software, Inc., Noncompete-Nondisclosure
Agreement for Significant Employees
10(d) III Amended and restated Executive Employment Agreement with
Stanford H. Goodman, including Stock Purchase Agreement and
Non-Recourse Promissory Note
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<PAGE>
10(e) IV Asset Purchase Agreement
10(f) IV Registration Rights Agreement
10(g) IV Indemnity Agreement
10(h) IV Business Loan Agreement
10(i) V Amended Non-Recourse Promissory Note with Stanford H.
Goodman
10(j) VI First Amendment to Amended and Restated Executive
Employment Agreement with Stanford H. Goodman
10(k) VII Powercore, Inc., Lawsuit
10(l) VIII Settlement Agreement and General Release with Stanford H.
Goodman
10(m) VIII Unit Purchase and Debt Payment Agreement with 4-Sight plc
10(n) VIII Agreement to establish Net Target
10(o) VIII Executive Employment Agreement with Christian F. Gurney,
including Stock Purchase Agreement and Non-Recourse
Promissory Note.
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule - for SEC filing only
Legend
I Incorporated into this Report by reference to the Registrant's
Registration Statement on Form S-18 which became effective
August 31, 1990, (Registration No. 33-36008C).
II Incorporated into this Report by reference to the Registrant's
Registration Statement on Form S-8 which became effective
November 6, 1992, (Registration # 33-54210).
III Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1993.
IV Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 8-K filed on May 24, 1994.
V Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1994.
VI Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995.
VII Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-QSB for the quarter ended March 31, 1996.
VIII Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1997.
IX Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1998.
X Incorporated into this Report by reference to the exhibits filed as part of
the Registrant's Form 10-KSB for the fiscal year ended September 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CE SOFTWARE HOLDINGS, INC.
(Registrant)
/s/ Christian F. Gurney
By___________________________
(Christian F. Gurney, President, and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below.
Signature Title Date
/s/ Christian F. Gurney 12/28/99
_________________________ President and Director ___________
(Christian F. Gurney)
/s/ Curtis W. Lack 12/28/99
_________________________ Chief Financial Officer ___________
(Curtis W. Lack)
/s/ John S. Kirk 12/28/99
_________________________ Secretary, Treasurer, ___________
(John S. Kirk) and Director
/s/ Richard A. Skeie 12/28/99
_________________________ Vice President ___________
(Richard A. Skeie) and Director
Page 37
<PAGE>
EXHIBIT INDEX
Exhibit Reference (*)
Number or Page #
3(a) Certificate of Incorporation I
3(b) Amendment dated April 10, 1990, to Certificate of Incorporation I
3(c) Amendment dated April 19, 1990, to Certificate of Incorporation I
3(d) Bylaws I
3(e) Amendment dated June 27, 1997, to the Restated Certificate of
Incorporation Page 34
4(a) Form of Stock Certificate I
4(b) CE Software Holdings, Inc., 1990 Stock Option Plan I
4(c) Representative Form of Incentive Stock Option I
4(d) 1992 Stock Option Plan II
4(e) Nonemployee Director Stock Option Plan II
10(a) Agreement and Plan of Reorganization dated February 15, 1990,
between Anubis Corp., CE Software, Inc., Richard Skeie, Donald
Brown, and John Kirk on his own behalf and as custodian on
behalf of his minor children I
10(b) Profit Sharing Plan of CE Software, Inc. I
10(c) Form of CE Software, Inc., Noncompete-Nondisclosure
Agreement for Significant Employees I
10(d) Amended and restated Executive Employment Agreement with
Stanford H. Goodman, including Stock Purchase Agreement and
Non-Recourse Promissory Note III
10(e) Asset Purchase Agreement with Powercore, Inc., dated May 9,
1994 IV
10(f) Registration Rights Agreement with Powercore, Inc.,
dated May 9, 1994 IV
10(g) Indemnity Agreement with Powercore, Inc., dated May 9, 1994 IV
10(h) Business Loan Agreement with Brenton Bank dated May 6, 1994 IV
10(i) Amended Non-Recourse Promissory Note with Stanford H.
Goodman dated July 20, 1994 V
10(j) First Amendment to Amended and Restated Executive Employee
Agreement with Stanford H. Goodman dated February 24,1995 VI
10(k) Powercore, Inc., Lawsuit VII
10(l) Settlement Agreement and General Release with Stanford H.
Goodman dated September 30, 1996 VIII
10(m) Unit Purchase and Debt Payment Agreement with 4-Sight Inc. dated
August 31, 1996 VIII
10(n) Agreement to establish Net Target dated September 30, 1996 VIII
* See legend on following page
Page 38
<PAGE>
EXHIBIT INDEX
(continued)
Exhibit Reference
Number Description or Page #
10(o) Executive Employment Agreement with Christian F.
Gurney including Stock Purchase Agreement and
Non-Recourse Promissory Note. IX
21 Subsidiaries of the Registrant Page 40
23 Consent of KPMG LLP Page 41
27 Financial Data Schedule - for SEC filing only
Legend
I Incorporated into this Report by reference to the Registrant's
Registration Statement on Form S-18 which became effective
August 31, 1990, (Registration No. 33-36008C).
II Incorporated into this Report by reference to the Registrant's
Registration Statement on Form S-8 which became effective
November 6, 1992, (Registration # 33-54210).
III Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1993.
IV Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 8-K filed on May 24, 1994.
V Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1994.
VI Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1995.
VII Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-QSB for the quarter ended
March 31, 1996.
VIII Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1996.
IX Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1997.
X Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1998.
XI Incorporated into this Report by reference to the exhibits filed as
part of the Registrant's Form 10-KSB for the fiscal year ended
September 30, 1999.
Page 39
<PAGE>
EXHIBIT 21
CE SOFTWARE HOLDINGS, INC.
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
CE Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .Iowa
CE Distributing, Inc.. . . . . . . . . . . . . . . . . . . . . . . . .Iowa
Page 40
<PAGE>
EXHIBIT 23
The Board of Directors
CE Software Holdings, Inc.:
We consent to incorporation by reference in the registration statements
(No's 33-54210 and 33-41037) on Form S-8 of CE Software Holdings, Inc. of
our report dated October 29, 1999, relating to the consolidated balance
sheets of CE Software Holdings, Inc. and subsidiaries as of September 30, 1999
and 1998, 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, 1999, which report appears in the September 30, 1999 Form 10-KSB
of CE Software Holdings, Inc.
/s/ KPMG LLP
KPMG LLP
Des Moines, Iowa
December 28, 1999
Page 41
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,126,637
<SECURITIES> 1,278,601
<RECEIVABLES> 530,185
<ALLOWANCES> 30,000
<INVENTORY> 250,208
<CURRENT-ASSETS> 6,645,331
<PP&E> 4,120,619
<DEPRECIATION> 2,710,159
<TOTAL-ASSETS> 8,097,003
<CURRENT-LIABILITIES> 583,140
<BONDS> 240,859
0
0
<COMMON> 110,567
<OTHER-SE> 7,273,004
<TOTAL-LIABILITY-AND-EQUITY> 8,097,003
<SALES> 3,787,868
<TOTAL-REVENUES> 3,787,868
<CGS> 880,682
<TOTAL-COSTS> 4,438,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,706
<INCOME-PRETAX> (1,919,991)
<INCOME-TAX> (472,935)
<INCOME-CONTINUING> (1,447,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447,056)
<EPS-BASIC> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
