<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended December 31, 1998.
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, P.O. Box 65580, West Des Moines, Iowa 50265
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (515) 221-1801
Former name, former address and former fiscal year, if changed since last
report: No changes.
_______________________________________________________________________________
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
January 31, 1999 Common Stock 1,095,900
Class B Common Stock 0
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998 3
Consolidated Statements of Operations
Three Months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Assets December 31 September 30
Current assets:
<S> <C> <C>
Cash and cash equivalents $3,853,755 4,106,493
Investments 2,920,505 2,882,031
Trade accounts receivable, net 582,184 479,953
Inventories 341,141 394,649
Other current assets 357,493 251,102
_________ _________
Total current assets 8,055,078 8,114,228
Property, fixtures, and equipment:
Land 316,796 316,796
Building 1,312,016 1,312,016
Fixtures and equipment 2,690,857 2,633,551
_________ _________
Total property, fixtures, and equipment 4,319,669 4,262,363
Less accumulated depreciation 2,456,124 2,360,475
_________ _________
Net property, fixtures, and equipment 1,863,545 1,901,888
Deferred income taxes 380,000 369,000
Other intangible assets, net of amortization 30,898 33,888
Other assets 35,258 43,256
__________ __________
Total assets $10,364,779 10,462,260
__________ __________
__________ __________
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $89,526 87,480
Trade accounts payable 241,036 238,343
Accrued payroll and benefits 150,812 171,033
Income taxes payable 298,309 275,744
Other accrued payables 91,887 111,991
Deferred revenue 26,295 33,948
Deferred income taxes 443,000 588,000
__________ __________
Total current liabilities 1,340,865 1,506,539
Long-term debt, net of current portion 319,500 342,685
__________ __________
Total liabilities 1,660,365 1,849,224
__________ __________
__________ __________
Stockholders' equity:
Common stock, $.10 par value. Authorized
2,000,000 shares; issued and outstanding
1,095,900 in 1998 and 1997 109,590 109,590
Additional paid-in capital 5,893,710 5,893,710
Accumulated comprehensive income 42,916 (72,138)
Retained earnings 2,658,198 2,681,874
__________ __________
Total stockholders' equity 8,704,414 8,613,036
__________ __________
Total liabilities and stockholders' equity $10,364,779 10,462,260
__________ __________
__________ __________
</TABLE>
3
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net revenues $868,487 1,222,646
Cost of revenues 206,890 275,782
__________ __________
Gross profit 661,597 946,864
Sales and marketing 392,776 575,386
General and administrative 404,153 443,516
Research and development 296,587 325,132
__________ __________
Operating expenses 1,093,516 1,344,034
__________ __________
Operating loss (431,919) (397,170)
Other income (expense):
Gain on sale of investments 1,827 -
Change in market value of trading securities 347,363 -
Interest income 52,879 25,074
Interest expense (9,761) (20,436)
__________ __________
Total other income 392,308 4,638
Loss before income tax benefit (39,611) (392,532)
Income tax benefit (15,935) -
__________ __________
Net loss (23,676) (392,532)
Other comprehensive income, before tax -
Unrealized gains on securities 197,554 -
Income tax expense related to items of other
comprehensive income (82,500) -
__________ __________
Comprehensive income (loss) $ 91,378 $ (392,532)
__________ __________
__________ __________
Basic loss per share $ (.02) (.36)
Shares used in per share calculation - basic 1,095,900 1,095,900
Diluted loss per share $ (.02) (.36)
Shares used in per share calculation - diluted 1,095,900 1,095,900
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net loss $(23,676) (392,532)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization:
Property, fixtures, and equipment 95,649 107,111
Purchased software 2,990 33,333
Other - 37,094
Accretion of discount (6,452) -
Change in market value (trading securities) (347,363) -
Proceeds from sale of trading securities 967,922 -
Gain on sale of trading securities (1,827) -
Decrease deferred income taxes payable (238,500) -
(Increase) decrease in trade accounts receivable (102,231) 471,349
Increase in other current assets (106,391) -
Decrease in inventories 53,508 92,379
Decrease (increase) increase in other assets 7,998 (26,892)
Increase (decrease) in trade accounts payable 2,693 (107,994)
Decrease in accrued expenses (40,325) -
Decrease in deferred revenue (7,653) (15,388)
Increase in income taxes payable 22,565 -
Other - 150
__________ __________
Net cash provided by operating activities 278,907 198,610
Cash flows from investing activities:
Purchase of held-to-maturity investments (540,310) -
Proceeds upon maturity of held-to-maturity investments 87,110 -
Proceeds from sale of property and equipment - 1,350
Purchase of property and equipment (57,306) (31,478)
__________ __________
Net cash used in investing activities (510,506) (30,128)
Cash flows from financing activities:
Payment of long-term debt (21,139) (10,662)
__________ __________
Net cash used in financing activities (21,139) (10,662)
__________ __________
Net (decrease) increase in
cash and cash equivalents (252,738) 157,820
Cash and cash equivalents at beginning of period 4,106,493 1,454,434
__________ __________
Cash and cash equivalents at end of period $3,853,755 $1,612,254
__________ __________
__________ __________
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $52,937 20,297
Income taxes 200,000 -
__________ __________
__________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
5
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(Unaudited)
1) Accounting policies
During interim periods, CE Software Holdings, Inc. follows the accounting
policies set forth in its Annual Report to Stockholders and its Report on Form
10-KSB filed with the Securities and Exchange Commission. Users of financial
information produced for interim periods are encouraged to refer to the
footnotes contained in the Annual Report to Stockholders when reviewing interim
financial results.
Results of Operations
The results of operations for the interim period reported are not necessarily
indicative of results to be expected for the year. The information reflects
all the adjustments (none of which were other than normal recurring items)
which are, in the opinion of management, necessary to present a fair statement
of the results for the interim period.
2) Investments
Investments consist of trading securities, available-for-sale securities, and
held-to-maturity securities.
Trading securities are unrestricted common stock of Documentum, Inc. The
investment is recorded at market value, with the unrealized loss recognized
in other income (expense).
Available-for-sale securities are restricted stock of Documentum, Inc. The
investment is recorded at market value, with the unrealized loss recorded as
a component of stockholders' equity.
3) Stockholders' Equity
At December 31, 1998, options to purchase an aggregate of 145,946 shares were
held by 47 persons, at exercise prices of from $2.16 to $46.25 per share.
4) Effect of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), is effective for both interim and annual periods ending
after December 15, 1997. Accordingly, the Company has applied the provisions
of SFAS 130 for the period ended December 31, 1998 and has retroactively
restated all Statements of Income to conform with the provisions. The effect
of implementing SFAS 130 was immaterial to the Company's financial position and
results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), is effective
for both interim and annual periods ending after December 15, 1997.
Accordingly, the Company has applied the provisions of SFAS 131 for the period
ended December 31, 1998, however, there was no restatement necessary to
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conform with the provisions. The effect of implementing SFAS 131 was immaterial
to the Company's financial position and results of operations.
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), is
effective for fiscal years beginning after December 31, 1997. This statement
requires revenue recognition for software licensing when certain criteria are
met. The Company's revenue is generated exclusively from the development and
licensing of single element products, as defined in the statement, and from
post-contract customer support (PCS) arrangements. The Company does offer
separate PCS services that are recognized ratable over the terms of the
arrangement. There are insignificant PCS services provided with initial license
arrangement that are not recognized ratably over the license agreement but
rather are recognized with the initial licensing fee as prescribed in the
statement. The adoption of SOP 97-2 was immaterial to the Company's financial
position and results of operations.
7
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ITEM 2. 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 the
quarters ended December 31, 1998 and 1997.
Quarter ended December 31, 1998 1997
Percentage of net revenues:
Net revenues 100% 100%
Cost of revenues 24 22
___ ___
Gross profit 76 78
Sales and marketing 45 47
General and administrative 47 36
Research and development 34 27
___ ___
Total operating expenses 126 110
___ ___
Operating loss (50) (32)
Other income, net 45 -
___ ___
Loss before income tax benefit (5) (32)
Income tax benefit (2) -
___ ___
Net loss (3)% (32)%
___ ___
___ ___
Net Revenues
Net revenues for the first quarter of the current year were $868,000 compared
to $1,223,000 for the first quarter of the prior year. Revenues were down in
both the Messaging and Personal Applications product groups. As a percentage
of net revenues, approximately 34% of the Company's current revenues were from
Personal Application products compared to 25% a year ago. Nearly all of these
revenues are from the sales of QuicKeys, the Company's productivity enhancing
utility program. During fiscal 1998, this product was only available for the
Apple Macintosh market. The Macintosh's smaller market share over the last few
years has negatively impacted these revenues and in the opinion of management,
the new version of QuicKeys for Windows, released in this first quarter of
fiscal year 1999 offers meaningful long-term growth potential. During the
first quarter of the current fiscal year, approximately 19% of the Personal
Application revenue resulted from the release of QuicKeys for Windows.
Revenues from the Company's Messaging products fell 38% compared to the prior
year, but still accounted for approximately 66% of total net revenues.
Historically, these revenues were primarily derived from QuickMail LAN, the
Company's Macintosh server based, E-mail solution. Over the past few years,
revenues from QuickMail LAN have significantly declined. For the first fiscal
quarter of fiscal year 1999, QuickMail LAN accounted for 14% of Messaging
product revenues compared to 25% for the first fiscal quarter of the prior
year. Management believes that the decline is due, in part, to the
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reduced number of businesses using the Mac OS, and in part to Company efforts to
promote its QuickMail Pro/Office over the QuickMail LAN. The QuickMail LAN
product will be discontinued in fiscal 1999. Presently, the majority of
messaging revenues is generated from the Company's QuickMail Pro and QuickMail
Office products. These sales consisted of 83% and 70% of messaging product
revenues for the first quarter of fiscal 1999 and the first quarter last year,
respectively. 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.
Net revenues from international channels decreased to approximately $276,000 in
the first quarter of the current year, from $347,000 in the first quarter of the
prior year, representing 32% and 28% of net revenues, respectively. The
decrease was primarily within the Japanese and Australian markets. In
management's opinion, these decreases were primarily due to the continued
financial crisis in Asia.
Cost of Revenues
The Company's cost of revenues is composed primarily of: 1) the costs of
product materials such as manuals, CD-ROMs, diskettes, and packaging; 2)
amortization of capitalized purchased software; 3) royalties paid to outside
developers for the use of certain software included with some of the Company's
products; 4) manufacturing expenses; and 5) amortization of capitalized
translation costs.
Cost of revenues decreased $69,000 in the first quarter of fiscal 1999 compared
to the same period a year ago. As a percentage of net revenues, cost of
revenues increased to 24% from 22%. In management's opinion, the increase is
due to lower revenues which resulted in fixed charges, such as amortization,
being higher on a percentage basis.
Sales and Marketing
Sales and marketing expenses decreased $183,000 or 32%, during the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998. The
decreases are primarily in salaries and benefits which decreased $90,000 and
contract labor and temporary help, $76,000. A smaller workforce and less
dependence on contract labor associated with the outsourcing of various
marketing functions account for the decreases.
General and Administrative
General and administrative expenses are composed principally of salaries of
general, administrative, and technical support personnel, fees for professional
services, amortization of other intangible assets, and facilities expenses.
These expenses for the first quarter decreased 9% or $39,000 from the first
quarter of the prior year, representing 47% and 36% of net revenues for first
fiscal quarter of the current year and prior year, respectively. The reduction
in expenses is mainly due to lower depreciation and amortization expense,
$31,000, resulting from the full amortization of purchased software technology.
9
Research and Development
Research and development expenses decreased to $297,000 in the first quarter of
fiscal 1999, compared to $325,000 in the first quarter of the prior year,
representing 34% and 27% of net revenues, respectively. The primary area that
decreased in the first quarter of fiscal 1999 was salaries and benefits,
$65,000 associated with some workforce reductions, while contract labor and
temporary help increased $44,000 due to outsourcing of research and development.
Income Tax Benefit
The Company recorded an income tax benefit of $15,935 for the first quarter of
fiscal 1999.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $253,000 to $3,584,000 at the end of the
first quarter of fiscal 1999 from $4,106,000 at the end of fiscal 1998. The
decrease in cash and cash equivalents was primarily a result of the proceeds on
the sale of trading securities of $968,000 less the purchase of $570,000 of
held-to-maturity investments, the tax payment of $200,000 and the operating
loss for the quarter of $432,000. The Company believes it can fund its working
capital needs from operations, available cash, and available investments.
Recent Developments
The Documentum, Inc. stock has decreased in value since December 31, 1998.
The combined value of the trading and available-for-sale shares of Documentum
was $1,436,520 and $ 626,701 at December 31, 1998 and January 31, 1999. The
market price was $53.44 and $23.31 per share December 31, 1998 and January 31,
1999, respectively. There were no shares sold during January. Recent market
prices indicate the stock is volatile despite favorable earnings reports from
Documentum. The Company continues to monitor this investment and make
decisions about its stock holdings considering this volatility.
Risk and Uncertainty
The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-QSB 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 may not achieve market acceptance within the Windows or Macintosh
markets; the risk that the prevalence and functionality of available free E-mail
software will increase and further erode revenues; and the risk that the Company
would not be able to fund its working capital needs from cash flows.
YEAR 2000 Software Exposure
The Company is cognizant of the issues associated with the two digit programming
code in existing computer systems as the Year 2000 nears. The Year 2000 problem
is complex and can be quite extensive, as many computer systems will be affected
in some way by the rollover of the two-digit year value to a four-digit year
value. Systems that do not properly recognize such
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information could generate erroneous data or cause a system to fail. The Year
2000 issue creates risk for the Company from unforeseen problems in its
products, its own computer systems and from third parties with whom the Company
deals. Failures of the Company's and/or third parties' computer systems could
have a material impact on the Company's ability to conduct its business. The
Company has programs which it continues to evaluate and modify to ensure
products will operate properly in the Year 2000 and in the years immediately
following 2000, for both future shipments of its products and for its products
already in the current customer installed base. Many products will operate
properly in the Year 2000 and in the years immediately following 2000, while
others still may require further modification in order to operate properly in
the Year 2000 and in the years immediately following 2000. While the Company
believes that most of its currently developed and actively marketed products
will operate properly in the Year 2000 and in the years immediately following
2000 for significantly all functionality, these software products could contain
errors or defects related to the Year 2000. Versions of the Company's products,
which are not the most currently released or which are not currently being
developed, may not operate properly in the Year 2000 and in the years
immediately following 2000. The Company sells some of its older product lines,
which are not being actively developed and updated, as such these products may
not necessarily operate properly in the Year 2000 and in the years immediately
following 2000. The Company has provided information on its Web site for the
purpose of assisting customers in planning for the transition to Year 2000.
Such information is informational only and is provided without warranty of any
kind. The Company recognizes that whether its products will be viewed to
operate properly in the Year 2000 and in the years immediately following 2000
will depend upon many factors, many of which are completely out of the
Company's control. This uncertainty may result in lawsuits against the
Company. Management cannot estimate the impact of any such suits on the
Company. The Company is not involved in any legal matters relating to Year 2000
issues. The Company continues to address the potential impact to the Company
of Year 2000 operability by any of its key suppliers or customers. It is
believed the corporate systems will operate properly in the Year 2000 and in
the years immediately following 2000. The Year 2000 project cost is not
expected to be material. The Company believes that its exposure on Year 2000
issues is not material to its business as a whole.
11
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CE SOFTWARE HOLDINGS, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule - for SEC filing only
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1998.
12
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SIGNATURES
Pursuant to the requirements 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)
Signature Title Date
/s/ Richard A. Skeie February 12, 1999
_________________________ President, Chief Executive _________________
(Richard A. Skeie) Officer, and Director
/s/ John S. Kirk February 12, 1999
_________________________ Secretary, Treasurer, and _________________
(John S. Kirk) Director
/s/ John L. Mason February 12, 1999
_________________________ Chief Financial Officer _________________
(John L. Mason)
13
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EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule - for SEC filing only
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,853,755
<SECURITIES> 2,920,505
<RECEIVABLES> 582,184
<ALLOWANCES> 0
<INVENTORY> 341,141
<CURRENT-ASSETS> 8,055,078
<PP&E> 4,319,669
<DEPRECIATION> 2,456,124
<TOTAL-ASSETS> 10,364,779
<CURRENT-LIABILITIES> 1,340,865
<BONDS> 409,026
0
0
<COMMON> 109,590
<OTHER-SE> 8,594,824
<TOTAL-LIABILITY-AND-EQUITY> 10,364,779
<SALES> 868,487
<TOTAL-REVENUES> 868,487
<CGS> 206,890
<TOTAL-COSTS> 206,890
<OTHER-EXPENSES> 1,093,516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (9,761)
<INCOME-PRETAX> (39,611)
<INCOME-TAX> (15,935)
<INCOME-CONTINUING> (23,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,676)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
