UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-26170
Eagle Point Software Corporation
(Exact name of registrant as specified in its charter)
Delaware 42-1204819
(State or other jurisdiction of (I.R.S.employer
incorporation or organization) identification number)
4131 Westmark Drive, Dubuque, IA 52002-2627
(address of principal executive offices)
(319) 556-8392
(Registrant's telephone number, including area code)
Indicate by check mark 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 applicable date.
Common Stock, par value $.01 per share, outstanding as of February 10, 2000:
4,846,476 shares.
Eagle Point Software Corporation
Form 10-Q
For the quarter ended December 31, 1999
Index
PART I. Financial Information
-----------------------------
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Operations -
for the three and six month periods,
ended December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
for the six months ended December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 12
PART II. Other Information
--------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
------------------------------------------------
1999 1999
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,580,922 $ 5,481,640
Short-term investments 7,016,662 11,040,912
Accounts receivable (net of allowances of $176,416 and $218,309, respectively) 2,711,247 1,654,487
Interest receivable 72,268 83,914
Deferred income taxes 242,927 242,927
Inventories 527,926 120,531
Income taxes receivable 59,869 3,942
Prepaid expenses and other assets 192,196 82,671
-------------------- ------------------
Total current assets 18,404,017 18,711,024
PROPERTY & EQUIPMENT, NET 6,529,009 6,555,782
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$481,484 and $335,941 respectively) 1,152,296 157,967
NON-COMPETE AGREEMENTS (net of accumulated amortization of $323,390
and $276,863 respectively) 101,675 148,202
GOODWILL, NET 700,735 0
DEFERRED INCOME TAXES 570,505 570,505
-------------------- ------------------
TOTAL ASSETS $27,458,237 $26,143,480
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 43,512 $ 71,434
Accounts payable 129,622 112,773
Accrued expenses 1,678,902 1,094,578
Deferred revenues 2,658,566 2,403,456
-------------------- ------------------
Total current liabilities 4,510,602 3,682,241
LONG-TERM DEBT 28,571 64,343
DEFERRED REVENUES 222,716 214,691
-------------------- ------------------
Total liabilities 4,761,889 3,961,275
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
----------------------------------------------
1999 1999
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at December 31, 1999 and June 30, 1999
Common stock, $.01 par value; 20,000,000 shares authorized, 4,941,730
Shares issued and outstanding at December 31, 1999 and June 30, 1999 49,417 49,417
Additional paid-in capital 17,624,290 17,624,290
Retained earnings 5,499,863 5,058,091
----------------- -----------------
23,173,570 22,731,798
Treasury stock, at cost; 95,254 shares at December 31, 1999
and 108,877 shares at June 30, 1999 (477,222) (549,593)
----------------- -----------------
Total stockholders' equity 22,696,348 22,182,205
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,458,237 $26,143,480
=================== =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
===================================================================================================================================
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- ---------------------------------
1999 1998 1999 1998
Net revenues
Product sales $3,108,660 $2,710,927 $5,310,720 $5,381,773
Training and support 1,251,185 978,847 2,520,250 1,949,704
-------------- -------------- -------------- --------------
Total net revenues 4,359,845 3,689,774 7,830,970 7,331,477
-------------- -------------- -------------- --------------
Cost of revenues
Product sales 936,691 546,246 1,535,310 1,084,294
Training and support 89,321 98,178 199,420 193,336
-------------- -------------- -------------- --------------
Total cost of revenues 1,026,012 664,424 1,734,730 1,277,630
-------------- -------------- -------------- --------------
Gross profit 3,333,833 3,045,350 6,096,240 6,053,847
-------------- -------------- -------------- --------------
Operating expenses:
Selling and marketing 1,569,890 1,141,621 2,773,507 2,308,430
Research and development 717,058 721,207 1,483,231 1,431,993
General and administrative 721,719 653,835 1,354,545 1,283,633
Acquisition related charges 261,136 0 261,136 0
-------------- -------------- -------------- --------------
Total operating expenses 3,269,803 2,516,663 5,872,419 5,024,056
-------------- -------------- -------------- --------------
Operating income 64,030 528,687 223,821 1,029,791
Other income; net:
Interest income, net of expense 193,620 191,160 396,315 389,917
Other income, net 21,970 277 43,799 924
-------------- -------------- -------------- --------------
Income before income taxes 279,620 720,124 663,935 1,420,632
Income tax expense 85,175 232,450 222,161 476,198
-------------- -------------- -------------- --------------
Net income $ 194,445 $ 487,674 $ 441,774 $ 944,434
============== ============== ============== ==============
Weighted average common
shares outstanding 4,846,476 4,825,853 4,846,476 4,821,066
============== ============== ============== ==============
Basic income per share $ 0.04 $ 0.10 $ 0.09 $ 0.20
============== ============== ============== ==============
Weighted average common
and common equivalent shares outstanding 4,940,645 5,016,556 4,944,067 5,005,235
============== ============== ============== ==============
Diluted income per share $ 0.04 $ 0.10 $ 0.09 $ 0.19
============== ============== ============== ==============
SEE NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (Unaudited)
========================================================================================================================
Six Months Ended
December 31,
--------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 441,774 $ 944,434
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 640,654 579,230
Amortization of software development costs 145,543 120,784
Charge for purchased research and development 78,600 0
Changes in assets and liabilities:
Accounts receivable (1,056,760) 277,471
Interest receivable 11,646 (13,456)
Income taxes receivable (55,927) 41,786
Inventories (407,383) (17,486)
Prepaid expenses (109,525) (28,868)
Accounts payable 16,849 (57,092)
Deferred revenues 263,133 (583,663)
Accrued expenses 584,324 89,262
Other 0 (35,522)
----------- ------------
Net cash provided by operating activities 832,927 1,316,880
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (508,889) (323,426)
Software development costs:
Capitalized software costs (167,873) (25,014)
Payments to acquire companies (2,089,812)
Purchases of investments (2,012,575) (10,075,643)
Proceeds from maturities of investments 6,036,825 8,028,311
----------- ------------
Net cash, provided by (used in) investing activities 1,257,676 (2,395,772)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (63,692) (176,912)
Purchases of treasury stock (242,603)
Proceeds from issuance of treasury stock 72,371 279,545
----------- ------------
Net cash, provided by (used in) financing activities 8,679 (139,970)
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,099,282 (1,218,862)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,481,640 4,662,570
----------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,580,922 $ 3,443,708
=========== ============
6
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
STATEMENT OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31,
------------------------------------------------------
1999 1998
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest $ 146 $ 425
================= =======================
Income taxes $ 320,897 $ 342,808
================= =======================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payments to acquire companies:
Inventories $ 280,012
Property and equipment 49,369
Purchased research and development 78,600
Developed product technology 972,000
Goodwill 709,831
----------------- -----------------------
$ 2,089,812 $ 0
================= =======================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Interim Financial Statements
The accompanying consolidated financial statements of Eagle Point Software
Corporation and its subsidiary (collectively the "Company" or "Eagle Point") are
unaudited. In the opinion of the Company's management, the financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial position of the Company as of December
31, 1999 and June 30, 1999, and the results of operations and cash flows for the
three-month and six month period ended December 31, 1999.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this quarterly report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 30, 1999.
2. Deferred Revenues and Revenue Recognition
The Company derives substantially all of its product revenues from the license
of its software products. Revenue is recognized upon shipment of the product,
provided that no significant vendor, post-contract support, or product upgrade
obligations remain outstanding and collection of the resulting receivable is
deemed probable. The Company has no significant vendor and post-contract support
obligations associated with its product sales. Dependent upon the timing of
future product upgrade releases and market conditions, the Company may extend
promotions where product upgrade obligations are associated with the shipment of
software products. Based upon the terms of the promotions extended, a portion or
all of the product revenues may be deferred until the promotional product
upgrade is released and subsequently shipped. The Company recognizes its service
revenues from maintenance and support contracts ratably over the period of the
arrangements. These contracts generally have terms of one year or less. The
Company recognizes its service revenues from training arrangements in the period
in which the training occurs.
3. Business Combination
On December 1, 1999, the Company purchased substantially all of the assets of
Surveyors Module International, LLC, a Tennessee limited liability company
("SMI"). The purchase price was approximately $2,000,000 in cash. Additionally,
the Company is obligated to make contingent cash payments during each of the
next two years equal to (1) 70% of the gross profits attributable to the
acquired business, after making specific adjustments, for adjusted annual gross
profits of between $1,650,000 and $2,500,000, plus (2) 85% of the adjusted gross
profits above $2,500,000. SMI, located in Church Hill, Tennessee, is a software
developer for the surveying hand-held data collection marketplace.
The results of operations for SMI are included in the Company's consolidated
operating results from December 1, 1999. Pro forma results of operations for the
six month periods ended
8
December 31, 1999 and 1998 as if the acquisition had occurred at the beginning
of each period are as follows:
Six months ended
December 31,
Consolidated 1999 1998
------------ ---------- ----------
Total Revenues $9,618,992 $8,560,068
Net income $ 680,274 $1,104,374
Earnings per share:
Basic $ 0.14 $ 0.23
Diluted $ 0.14 $ 0.22
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Information
This quarterly report on Form 10-Q contains forward looking statements.
These forward looking statements involve risks and uncertainties, which could
cause actual results to differ from those projected. These as well as other
risks and uncertainties are detailed from time to time in reports filed by the
Company with the Securities and Exchange Commission, including this report on
Form 10-Q for the quarter ended December 31, 1999 and the Company's report on
Form 10-K for the year ended June 30, 1999.
Results of Operations
Net revenues increased $500,000 or 6.8% to $7.8 million for the six months
ended December 31, 1999 (the "1999 Period"), from $7.3 million for the six
months ended December 31, 1998 (the "1998 Period"). The Company experienced a
slight decrease in product revenues in the 1999 period and an increase in
training and support revenues. The decrease in product revenues was primarily
attributable to the fact that in the 1998 Period the Company recognized a net
$864,000 of revenues previously deferred as part of a continuing upgrade
promotion. However, the decrease in product revenues was partially offset by an
increase in product revenues from the SMI acquisition. Training and support
revenues were favorably affected in the 1999 Period by the release of new
products and product upgrades in the previous and current fiscal years, as well
as an increased emphasis by the Company on support and maintenance programs. In
addition, $42,000 of the 1999 Period's software revenues, that were part of a
continuing upgrade promotion, was deferred. The revenues deferred under this
promotion will be recognized upon the future release and subsequent shipment of
product upgrades. $292,000 of previously deferred software revenues was
recognized during the 1999 Period as the product upgrades, for which the revenue
was initially deferred, were shipped.
Gross profit remained at $6.1 million for both the 1999 Period and the 1998
Period. Gross profit as percentage of net revenues decreased to 77.8% in the
1999 Period from 82.6% in the 1998 Period. Gross profit as a percentage of
corresponding net revenues relating to product sales decreased to 71.1% in the
1999 Period from 79.9% in the 1998 Period. This decrease is attributable to a
shift in the mix of product sales. Eagle Point products, which have higher gross
profit margins than resales of third party products, decreased to 90.7% of
product sales in the 1999 Period from 96.7% in the 1998 Period. Resales of third
party products, which have a much lower gross profit margin, increased to 9.3%
of product sales in the 1999 period from 3.3% in the 1998 Period. This increase
is primarily attributable to the SMI acquisition. Gross profit as a percentage
of corresponding net revenues relating to training and support increased to
92.1% in the 1999 Period from 90.1% in the 1998 Period primarily due to an
improvement in the sales mix toward support and maintenance revenues, which have
higher gross profit margins than training revenues.
Selling and marketing expense increased $465,000 or 20.1% to $2.7 million
in the 1999 Period from $2.3 million in the 1998 Period. As a percentage of net
revenues, selling and marketing expenses increased to 35.4% in the 1999 Period
from 31.5% in the 1998 Period. The
10
increase is primarily attributable to higher personnel costs associated with an
increase in the sales and marketing staff.
Research and development expense increased $51,000 or 3.6% to $1.483
million in the 1999 Period from $1.432 million in the 1998 Period. As a
percentage of net revenues, research and development expenses decreased to 18.9%
in the 1999 Period from 19.5% in the 1998 Period. The increase is primarily
attributable to higher personnel costs associated with an increase in the
research and development staff. The decrease in research and development as a
percentage of revenues is attributable to the increase in sales volume.
General and administrative expense increased $71,000, or 5.5% to $1.355
million in the 1999 Period from $1.284 million in the 1998 Period. As a
percentage of net revenues, general and administrative expenses decreased
slightly to 17.3% in the 1999 Period from 17.5% in the 1998 Period. The increase
is primarily attributable to higher general and administrative personnel costs.
Operating income decreased $806,000 to $224,000 in the 1999 Period from
$1.030 million in the 1998 Period, and as percentage of net revenues, decreased
to 2.9% in the 1999 Period from 14.0% in the 1998 Period. The Company incurred
$261,000 of non-recurring charges in the 1999 period which included a $79,000
charge for purchased research and development in connection with the SMI
acquisition and $182,000 of other acquisition related charges. Excluding these
non-recurring charges, operating income decreased $545,000 to $485,000 in the
1999 Period from $1.030 million in the 1998 Period and as a percentage of net
revenues decreased to 6.2% in the 1999 Period from 14.0% in the 1998 Period as a
result of factors described above.
Interest income increased $5,000 to $397,000 in the 1999 Period from
$392,000 in the 1998 Period. Other income increased $42,900 to $43,800 in the
1999 Period from $900 in the 1998 Period. The increase in interest income was
primarily attributable to higher cash balances. The increase in other income was
as a result of a refund of use taxes paid in a prior period.
Liquidity and Capital Resources
The Company's financial position remains strong with working capital of
$13.9 million and long-term debt of only $29,000. Cash and short-term
investments aggregated approximately $14.6 million at December 31, 1999. The
Company also has available a $2.0 million unsecured line of credit from it's
principal bank. At December 31, 1999 the Company had no borrowings outstanding
under this line of credit.
Impact of the Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using a two-
digit format, as opposed to four digits, to indicate the year. A significant
concern was that computer systems based on a two-digit format would be unable to
interpret dates beyond the year 1999 which could cause a system failure or other
computer errors, leading to disruptions in operations.
The Company developed a plan to address four general areas of potential
exposure with respect to the Y2K problem: (1) its own software products; (2)
internal informational systems;
11
(3) computer hardware and other equipment related systems; and (4) external. In
accordance with this plan, the Company identified any area of potential exposure
and performed remediation procedures to correct these situations. All
remediation activities were completed and preliminary testing in a simulated Y2K
environment was performed.
The fourth aspect of the Company's Y2K analysis involved evaluating major
vendors' Y2K exposure and their efforts to address such exposure. The Company
obtained documentation and certification from most vendors regarding their Y2K
compliance. Based upon the vendors who responded, which included substantially
all material vendors, there did not appear to be a material Y2K exposure to the
Company.
As of February 8, 2000, the Company has not experienced any material Y2K
issues. The Company will continue to monitor these areas as there may remain
certain Y2K issues which could impact the Company in fiscal year 2000. However,
with the continued the passage of time beyond January 1, 2000 the potential for
problems continually diminishes.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have a significant impact in
fiscal year 2000. The Company has experienced insignificant gains or losses on
foreign currency transactions since substantially all of its international sales
to date have been billed in U.S. dollars. As the Company continues to expand its
international operations, it may begin billing in foreign currencies, which
would increase the Company's exposure to gains and losses on foreign currency
transactions. The Company may choose to limit such exposure by the purchase of
forward foreign exchange contracts if deemed appropriate at that time. To date,
the Company has not entered into any interest rate, currency or other market
risk hedging instruments.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on December 16, 1999.
The following matters were voted upon at the Annual Meeting of Stockholders:
1. The stockholders elected as directors to serve until the 2002 Annual
Meeting of Stockholders:
John F. Biver (4,703,959 votes FOR; 26,291 votes WITHHELD)
James P. Hickey (4,706,459 votes FOR; 23,791 votes WITHHELD)
2. The stockholders approved the Eagle Point Software Corporation 1999
Stock Option Plan.
(3,464,180 votes FOR; 208,483 votes AGAINST; 20,584 votes ABSTAINED)
3. The stockholders approved amendments to the Eagle Point Software
Corporation 1995 Employee Stock Purchase Plan.
(3,462,886 votes FOR; 208,718 votes AGAINST; 21,643 votes ABSTAINED)
4. The stockholders ratified the appointment of Deloitte & Touche, LLP,
the Company's independent public accountants for the fiscal year ending
June 30, 2000.
(4,700,712 votes FOR; 13,700 votes AGAINST; 15,838 votes ABSTAINED)
Item 5. Other Information
None
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement Regarding Computation of Net Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed on December 13, 1999 relating to the Company's
purchased of substantially all of the assets of Surveyors Module
International, LLC.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
--------------------------------
(Registrant)
Date: February 11, 1999 BY: /s/ Rodney L. Blum
- ------------------------ -------------------------
Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: February 11, 1999 BY: /s/ Dennis J. George
- ------------------------ ---------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
15
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of net earnings per share
27 Financial Data Schedule
16