________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26170
EAGLE POINT SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-1204819
(State or other jurisdiction of incorporation (I.R.S. employer identification
or organization) number)
4131 WESTMARK DRIVE, DUBUQUE, IOWA 52002-2627, (319) 556-8392
(Address of principal executive offices, including zip code)
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 $.01 PER SHARE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-K or any amendment to this
Form 10-K. [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 19, 1996 was $11,810,280. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
Number of shares of common stock outstanding as of September 19, 1996:
4,941,730.
Documents Incorporated by Reference:
Part III - Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's annual stockholders' meeting to be held on
December 5, 1996 (the "Proxy Statement").
________________________________________________________________________________
PART I
ITEM 1. BUSINESS
Eagle Point Software Corporation (the "Company" or "Eagle Point") is a
leading developer and marketer of application software for use by professionals
in the architecture, engineering, construction and geographic information
systems ("AEC/GIS") industries. The Company's product line includes 90 modules
that can be used by civil engineers, surveyors, architects, building service
engineers, structural engineers, landscape architects, hydrologists and mapping
professionals to automate various design, analysis, drafting, mapping and
engineering functions. Most of the Company's products are designed for use in
conjunction with either AutoCAD or MicroStation, general purpose computer-aided
design ("CAD") drafting software tools developed by Autodesk, Inc. ("Autodesk")
and Bentley Systems, Inc. ("Bentley Systems"), respectively. Accordingly, the
Company's business and financial results are linked to the continued market
acceptance of AutoCAD and MicroStation, however, the Company is actively trying
to reduce its reliance on AutoCAD. There can be no assurance that the Company
will be successful in achieving such reduction of its reliance on AutoCAD. See
"Risk Factors -- Dependence on AutoDesk and Bentley Systems." The Company
focuses on developing and marketing technologically advanced software
application products that are designed to provide AEC/GIS professionals with the
functionality associated with high-end proprietary CAD systems at a price
suitable for more economical desktop systems.
The Company, originally incorporated in Iowa in 1983, reincorporated
in Delaware in May, 1995. In June, 1995 the Company completed an initial public
offering of its Common Stock, $.01 par value ("Common Stock"). In January, 1995
the Company acquired substantially all of the assets and business and assumed
certain of the liabilities of LANDCADD, Inc. ("LANCADD"), a Colorado-based
developer of software applications for landscape architecture, irrigation design
and environmental planning (the "LANCADD Acquisition"). In March, 1995 the
Company acquired certain assets of Facility Mapping Systems, Inc. ("FMS"), a
California-based developer of computer-aided GIS software applications for
managing parcels of land, streets, sewer systems, water systems, lighting,
buildings, electrical systems, natural gas systems, land use planning, telephone
systems, census information or analysts (the "FMS Acquisition"). In November,
1995 the Company merged with ECOM Associates, Inc.("ECOM"), a Wisconsin-based
developer of software applications for the structural engineers (the "ECOM
Merger"). Unless otherwise indicated, all references herein to the "Company"
refer to Eagle Point Software Corporation and its predecessors.
THE AEC/GIS SOFTWARE MARKET
The Company's software products are principally designed for use by
professionals in the AEC/GIS industries. These professionals use AEC/GIS-
related software in a variety of applications, including: automated mapping;
facilities management; plant and power management; civil engineering/surveying
and architecture; hydrology/hydraulics; landscape; structural engineering; and
construction.
Historically, design and drafting tasks were accomplished manually.
In order to reduce the costs and time necessary to complete projects, however,
such tasks have become increasingly automated. This automation was initially
provided by several large companies that marketed expensive integrated
proprietary hardware and software solutions directly to large users. In recent
years, however, the widespread availability of increasingly powerful and
inexpensive desktop personal computers and workstations, together with the
continued development of open-architecture general purpose CAD software, has
resulted in rapid acceptance of desktop based systems. The demand for these
products has come both from large users, who have generally found such systems
to be more cost effective than proprietary systems, as well as from many smaller
and mid-sized firms and governmental agencies that previously had been unable to
justify the cost of a proprietary system. This trend among users to seek lower
cost alternatives to proprietary systems has particularly benefited suppliers of
open-architecture CAD-based graphic engines, such as AutoCAD and MicroStation.
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The market for desktop AEC/GIS application software is highly
fragmented, with over 100 companies estimated to be offering some form of
AEC/GIS software application product. These companies range from a few large
firms offering a wide selection of products and having substantial financial and
marketing resources, to numerous small entities offering only a few specialized
products and having limited financial and marketing capabilities.
MARKET FOR THE COMPANY'S PRODUCTS; CUSTOMERS
The Company has traditionally targeted the segment of the AEC/GIS
market consisting of medium-sized consulting, engineering and architectural
firms of 20 to 50 employees, as well as governmental agencies in cities and
counties with fewer than 100,000 people. The typical selling cycle to this
segment of the market is approximately 90 days. During fiscal 1996, no single
customer accounted for more than 0.5% of the Company's revenues.
The Company has recently begun to focus limited resources on serving
the segments of the AEC/GIS market consisting of large organizations, (such as
FORTUNE 1000 companies, large engineering and consulting firms and larger
city/state/federal government agencies). These large organizations have tended
to rely on expensive proprietary software systems and have only recently begun
to migrate to desktop CAD systems. In addition, the selling cycle to large-
sized organizations is typically longer, ranging from 6 months to 3 years. As
large organizations increasingly focus on lower cost software solutions, the
Company intends to focus more resources and personnel to market products to this
market segment.
Small organizations in the AEC/GIS market, which generally consist of
consulting, engineering and architectural firms with fewer than 20 employees,
colleges and universities, contractors and specific in-house departments of
larger organizations, typically require a limited set of application software
products. Since the majority of the Company's products currently require the
use of AutoCAD or MicroStation, the Company has not devoted significant
marketing efforts to date on serving this category of users. However, the
Company is currently planning the development of additional modules for use in a
stand-alone environment which the Company believes will enhance its ability to
penetrate this market segment.
International. The Company distributes its products internationally
primarily through a network of over 50 resellers located in more than 40
countries. Currently, most of the Company's products distributed internationally
are in English. The Company does have a limited number of products with the
software and/or the documentation translated into various foreign languages. The
Company believes that the international distribution of its products will be
enhanced by the translation of its products into local languages, the
incorporation of local engineering regulations and requirements and the
establishment of a local marketing and support presence. The Company believes
that the design of the Company's products facilitates their translation into
foreign languages and additional products are currently being translated. The
Company anticipates that an increasing number of its products will be translated
into foreign languages in the future to enhance their appeal to international
customers. At this time the Company does not have any international offices,
however the Company may in the future explore opportunities for opening
international offices. The Company's international revenues (excluding Canada)
were $564,000 in fiscal 1996 or approximately 2.9% of the Company's revenues.
The Company believes that the increased use of general purpose drafting software
worldwide creates opportunities for the Company to increase the portion of its
revenues derived from international markets. The international portion of the
Company's business is subject to a number of inherent risks, including
difficulties in opening and managing foreign offices, establishing channels of
distribution, establishing the credit worthiness of foreign customers, the
collection of outstanding accounts, localizing software to meet engineering
regulations and requirements or translating products into foreign languages; the
lack of control over fluctuations in the value of foreign currencies;
import/export duties and quotas; and unexpected regulatory, economic or
political changes in foreign markets. See "Risk Factors -- Foreign Operations."
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PRODUCTS
The Company's products are organized into the following product
families: Civil Engineering/Surveying; Geographic Information Systems; Building
Design and Construction; Hydrology/Hydraulics; Landscape
Architecture/Environmental Planning; and Structural Engineering. Many of the
Company's products are integrated for use with one another across different
platforms. This integration enables users to easily add new modules to their
existing Eagle Point system. In addition, most of the Company's products include
a similar graphical user interface, which makes it easier for users to learn to
use additional Eagle Point products. Suggested list prices for the Company's
products range from approximately $195 to $2,495 per module, although many of
the Company's products are sold, by the Company, at prices less than their
suggested list prices. To facilitate additional sales of its software
application products, the Company also resells AutoCAD and other CAD-software
products manufactured by third parties.
Civil Engineering/Surveying. The Civil Engineering/Surveying product
series consists of 25 modules. Through the integration of the surveying modules
with the civil engineering design modules, users are able to gather surveying
data in the field electronically, download the data to the office, complete the
design and/or analysis, develop detailed construction documents and upload the
final design information to electronic surveying equipment for construction
staking purposes. Typical projects for which the Civil Engineering/Surveying
product series are used include the design/analysis of road, railroads,
airports, sites, subdivisions and landfills.
Geographic Information Systems. The Geographic Information Systems
product series consists of 12 modules which can be used by a wide variety of
customers including city, county and state engineering departments, planning
departments, utility companies, pipeline companies, city and county assessors
and recorders and other organizations which have an interest in managing and
tracking parcels of land, streets, sewer systems, water systems, lighting,
buildings, electrical systems, natural gas systems, land use planning, telephone
systems, census information and addresses. By graphically selecting any type of
feature such as a sewer, road, sign, pipeline, electric line or any other
feature of interest, the user is provided with any or all information stored in
an electronic database that has been associated with such feature. This type of
information will be useful throughout the entire Eagle Point product line to aid
in design/planning decisions. The Geographic Information Systems product line
was acquired by the Company on March 31, 1995 in connection with the FMS
Acquisition.
Building Design and Construction. The Building Design and
Construction product series consists of 10 modules which can be used by
architects and building services professionals to design and manage buildings.
Walls, windows, doors, floors and roofs, along with internal utilities and
fixtures, can be modeled to allow the user to develop several design variations.
Through the use of real time simulation features, the building owner can then
"walk through" the building to help in selecting the favored design. Once
selected, the designer can then complete final construction documents and
automatically estimate the building materials necessary in order to prepare for
the bidding and construction phase of the project.
Hydrology/Hydraulics. The Hydrology/Hydraulics product series
consists of 11 modules which aid users in designing and/or analyzing sewer
systems, stream flow and surface water run-off. Three dimensional ground
terrain models developed through the Civil Engineering/Surveying product series
are used in conjunction with Hydrology/Hydraulics products to develop an
integrated model of the entire hydrology or hydraulic project. This integrated
model is then used to design new storm or sanitary sewer networks including pipe
sizes, flow line elevations and hydraulic grade lines. Additionally, stream
flows can be analyzed to determine the flooding impact upstream from newly-
constructed bridges or culverts.
Landscape Architecture/Environmental Planning. The Landscape
Architecture/Environmental Planning product series consists of 7 modules which
are used by landscape architects and government planners to develop plans for
plantings, park layouts, green zones and irrigation systems, as well as analysis
for site visibility, solar potential, slope stability and other factors to
determine development suitability and environmental constraints. These modules
provide the user with a database of
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over 900 plants from every climactic zone around the world complete with
statistics which allow for complete growth simulation. Once the landscape plan
is modeled, the planner or owner can then "walk around" the newly and/or post-
growth plantings to view the overall esthetics of the site. The Landscape
Architecture/Environmental Planning product line was acquired by the Company on
January 1, 1995 in connection with the LANDCADD Acquisition.
Structural Engineering. The Structural Engineering products series
consists of 25 modules which can be used by structural engineers, architects and
other building professionals. Modules are designed to work independently or in
concert with one another and are classified under standard structural design
disciplines. Both structural analysis and design calculations may be performed
for a variety of materials including structural steel, reinforced concrete,
aluminum, and a variety of timber based products. A comprehensive 3-D finite
element analysis module is also integrated within the system, along with a
series of foundation design and bridge analysis programs. The user inputs the
geometry, material and connectivity data into the system for it to perform the
structural analysis and design calculations. The Structural Engineering product
line was acquired by the Company on November 9, 1995 in conjunction with the
ECOM Merger.
SALES AND MARKETING
The Company markets and sells its products in the United States and
Canada primarily through the use of direct response marketing, sales seminars,
trade shows and advertising designed to generate sales leads that can be pursued
by the Company's in-house telesales force. The Company's telesales force has
increased from 19 professionals at June 30, 1992 to 108 professionals at June
30, 1996.
The Company believes that the use of telesales professionals provides
competitive advantages over those competitors which principally rely upon
resellers. The Company believes that its use of a telesales force allows it to
develop a stronger ongoing relationship with the customer than could be achieved
through the use of resellers and provides the Company a cost-effective channel
of distribution for its products. In addition, the Company's sales
professionals have the ability to offer certain customers trade-in or volume
discounts, extended free trials and other flexible pricing arrangements designed
to introduce the customer to Eagle Point products in the hope of increasing
sales to that customer in the future. The Company believes that it generally
has greater incentive than a reseller to invest in a longer selling cycle by
providing flexible initial pricing. As the Company expands its product
offerings through the addition or acquisition of new modules, the Company's
direct knowledge of its customers' existing software systems and applications
needs provide the Company with valuable information to identify cross-selling
opportunities. The Company believes that such information is not generally
available to software companies which rely on resellers to market their
products. In addition, the Company believes that a significant number of its
product enhancements released in recent years were initially developed as a
result of communications with customers regarding their specific software
requirements.
Initial sales leads are primarily developed through direct mail
marketing, and trade publication advertising, public relations and promotional
campaigns undertaken by the Company, as well as through participation by the
Company in various trade shows and sales and training seminars. In fiscal 1996,
the Company is scheduled to hold over 250 customer sales and training seminars
in the United States and various international markets. The Company has also
been successful in placing its products in various colleges, universities and
secondary schools at reduced cost as a means of increasing familiarity with its
products among young professionals in the AEC/GIS market. The Company, while
maintaining a general database with over 250,000 names, also maintains a
registered user data base which facilitates the Company's ability to communicate
periodically with current customers and to pursue repeat sales and cross-selling
opportunities. In fiscal 1996, the Company made direct mailings to over 175,000
existing and potential customers on a quarterly basis.
Once sales leads are developed, the Company's telesales professionals
track such leads through an automated lead tracking system. A typical sales
cycle for the Company's products involves numerous communications between the
Company's telesales professionals and the potential customer. Frequently, the
potential customer is furnished a demonstration copy of the Company's product
and certain
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product literature, and invited to contact current customers to discuss the
product or observe its use. Potential customers may also be invited to attend
product demonstration seminars.
TRAINING AND SUPPORT
The Company believes that providing its customers with direct and
value-added training and support services helps ensure that customers obtain the
maximum benefits offered by its products. The Company believes that its
training and support programs also enhance the Company's relationships with
customers and help to differentiate the Company from AutoCAD-based application
developers that do not offer direct training and support. Moreover, the Company
believes that the demand by users for various training and support services
provides the Company with incremental revenue opportunities.
All purchasers of the Company's software are provided 60 days of
product support without charge. For support after the 60-day period, customers
can elect to obtain ongoing support on either a one-year contract basis or an
as-used fee basis. In addition, all customers have telephone access to the
Company's electronic bulletin board service. Customers also receive a technical
newsletter which is distributed quarterly by the Company and which is designed
primarily to apprise customers of technological enhancements and new products
offered by the Company. The Company also conducts training seminars to educate
customers on the functionality of the Company's products. For a fee, customers
may discuss products with and receive technical assistance directly from the
Company's in-house professionals who participated in the development of such
products. The Company believes that such programs help to foster customer
loyalty and allow the Company to develop product enhancements that can be
marketed to other users.
Approximately 23.9% of the Company's revenues for fiscal 1996 were
attributable to customer training and support services.
PRODUCT DEVELOPMENT
The Company offers a broad range of products which are designed to
keep pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its customers. The number of modules
offered by the Company has increased from 12 at June 30, 1991 to 90 at June 30,
1996. Of the 90 modules offered by the Company at June 30, 1996, 43 of such
modules were developed internally by the Company and the remainder were added to
the Company's product line as a result of acquisitions by the Company of
products, businesses or technologies. All of the Company's products acquired
through acquisitions are integrated into the Company's product line and further
enhanced by the Company's development staff.
The Company releases enhanced versions of its software modules on an
on-going basis, and also typically introduces several new product modules each
year. The Company's software modules share the same technological foundation,
all being written in the computer programming language C or C++. The Company
works closely with its existing and prospective customers to determine their
requirements and to design enhancements and new products to meet their needs.
Each product development project begins with a review of the existing customer
requests, which are derived from a database generated by the Company's various
customer support programs, interviews with certain key customers and competitive
analyses. Product specifications for the development project are then
generated, a development team is assembled, and a detailed development and
release schedule is produced.
COMPETITION
Competition in the AEC/GIS market is intense and increasing. The
Company currently faces competition from two basic types of competitors. The
first category includes companies principally offering integrated proprietary
hardware and software solutions. The primary competitors within this group are
Intergraph Corporation, which owns a 50% equity interest in Bentley Systems,
Environmental Systems Research, Inc. ("ESRI") and a number of mid-sized
companies serving various foreign markets. The Company typically competes with
these companies for larger users. Most of the Company's
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competitors within this group have significantly greater financial and marketing
resources than the Company.
The second category of competitors includes companies which offer
AEC/GIS application software products, many of which are AutoCAD or
MicroStation-based, similar to products offered by the Company. The primary
competitor in this category is Softdesk, which offers a broad line of software
applications for the AEC/GIS market. Intergraph Corporation and ESRI, as well as
a number of smaller companies, also serve certain target markets within the
AEC/GIS market. Although the Company believes that it enjoys a greater market
share and greater resources than many competitors in this category, certain of
these competitors may offer specific solutions which are not available from the
Company.
A potential source of additional competition for the Company is
Autodesk, the developer of AutoCAD, and/or Bentley Systems, the developer of
MicroStation. Approximately 58.3% of the Company's net revenues for fiscal 1996
were related to AutoCAD, including 44.5% from the sale of the Company's software
products designed for use with AutoCAD and 13.8% derived from the resale by the
Company of AutoCAD. In addition, 5.3% of the Company's net revenues during such
period were derived from the sale of the Company's software products designed
for use with MicroStation. Autodesk currently sells application software in
certain segments of the CAD and related software markets not currently served by
the Company. In addition, Autodesk sells certain AEC/GIS software applications
outside the United States. To date, Autodesk has encouraged third party
developers of application software to expand distribution in international
markets. Accordingly, the Company does not anticipate that expansion by the
Company in international markets will have an adverse effect on its current
relationship with Autodesk. Although Autodesk and Bentley Systems currently do
not offer AEC/GIS software application products in the United States, either
company may in the future decide to internally develop and market such
application products, or to acquire one or more independent companies which
currently offer AutoCAD-based or MicroStation-based AEC/GIS software application
products.
The Company believes that the principal bases for competition in the
AEC/GIS market are product functionality, product reliability, price/performance
characteristics, ease of product use, availability of products on popular
computer platforms, the ability to integrate the product with other
applications, user support, documentation and training, distribution networks,
and corporate reputation. No assurance can be given that the Company will be
able to compete successfully against current and future sources of competition
or that the competitive pressures faced by the Company will not adversely affect
its business, operating results or financial condition. See "Risk Factors --
Competition."
PROPRIETARY RIGHTS
The Company relies primarily on a combination of contract, copyright,
trademark and trade secret laws, license and confidentiality agreements and
software security measures to protect its proprietary technology. The Company
distributes its products under "shrink-wrap" software license agreements which
grant users licenses to (rather than ownership of) the Company's products and
which contain various provisions intended to protect the Company's ownership and
confidentiality of the underlying technology. Outside the United States and
Canada, the Company's software is distributed with a third party "hardware lock"
which requires an authorization code generated by the Company's internal systems
to enable the software to function. The Company also requires all of its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. In addition, the Company periodically reviews its
proprietary technology for patentability, although the Company does not have any
current patents. Despite these precautions, the Company believes that existing
laws provide limited protection for the Company's technology and that it may be
possible for a third party to misappropriate the Company's technology or to
independently develop similar technology. In addition, effective copyright and
trade secret protection may not be available in every jurisdiction where the
Company distributes products, particularly in foreign countries where the laws
generally offer no protection or less protection than those of the United
States. Moreover, "shrink-wrap" licenses, which are not signed by the end-user,
may be unenforceable in certain jurisdictions. See "Risk Factors -- Limited
Protection of Intellectual Property; Risk of Infringement."
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Certain technology used in the Company's products is licensed from third
parties. Royalties are calculated and paid monthly on a per copy fee or
percentage of revenues basis. Eleven of the Company's currently offered 90
modules depend on licensed technology. For fiscal 1996, sales of such eleven
modules accounted for approximately 9% of the Company's net revenues for such
period. None of the Company's other 79 modules rely upon such eleven modules.
The Company believes that, due to the rapid pace of technological
innovation and change within the CAD industry, legal protections afforded the
Company's technology are less significant in affecting the Company's business
and results of operations than factors such as the reputation of the Company,
the knowledge, ability and experience of Company personnel, the frequency of
product enhancements and the timeliness and quality of the Company's customer
service and support.
The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. The litigation of such a
claim may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages and may also be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim (which
license may not be available on commercially reasonable terms). As the number of
software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims.
EMPLOYEES
As of June 30, 1996, the Company had 257 employees, including 125 in sales
and marketing, 87 in product development and 45 in general and administrative
functions. None of the Company's employees are represented by a labor union, and
the Company believes that its employee relations are good.
RECENT DEVELOPMENTS
On July 29, 1996, the Company purchased substantially all of the assets of
Computer Integrated Building Corporation ("CIBC"), a California-based developer
of software applications for the home building market. The purchase price was
$550,000 cash. Additionally, the Company is obligated to make a contingent cash
payment equal to (1) 75% of the revenues between $550,000 and $743,400 received
by the Company in connection with the sale of Computer Integrated Building
Corporation's products during the 12 month period ending July 29, 1997, plus (2)
50% of such revenues exceeding $743,400 during the 12 month period ending July
29, 1997. As part of the acquisition, a three year non-compete agreement was
entered into between the Company and the former owners of CIBC.
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Annual Report on Form 10-K.
Dependence on Autodesk and Bentley Systems. In fiscal 1996, approximately
58.3% of the Company's net revenues were related to AutoCAD, including 44.5%
from the sale of Eagle Point software products designed for use with AutoCAD and
13.7% derived from the resale by the Company of AutoCAD. In addition, 5.3% of
the Company's net revenues in this period were derived from the sale of Eagle
Point software products designed for use with MicroStation. Accordingly, the
Company's business and financial results are linked to the continued market
acceptance of AutoCAD and MicroStation. In the Company's 3rd and 4th Quarter of
fiscal year 1996, the financial results of the Company were adversely impacted
by a soft market for AutoCAD and AutoCAD related products. The timing of major
AutoCAD or MicroStation releases may affect the timing of purchases of the
Company's products. The Company's product development efforts, insofar as they
relate to the compatibility of its products with those of Autodesk, the
developer of AutoCAD, or Bentley Systems, the developer of MicroStation, have
thus far been facilitated by cooperation from Autodesk's and Bentley Systems'
development personnel. However,
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there exists no material contractual or other formal relationship obligating
Autodesk or Bentley Systems to provide such cooperation. The Company is
currently authorized by Autodesk to resell AutoCAD. Any adverse change in the
business results of, or the Company's relationship with, Autodesk, or Bentley
Systems, including any limitation by Autodesk on the Company's ability to resell
AutoCAD, could have a material adverse effect on the Company's business,
operating results or financial condition.
Management of Growth. The Company's business has grown significantly over
the past several years. The Company is currently expanding its principal
facility and if growth continues the Company may need to expand further its
facilities and enhance its management information and telecommunications systems
and other operations. In addition, the Company's management team has limited
experience in operating and managing a public company. There can be no assurance
that the Company will continue to grow or be effective in managing its future
growth, expanding its facilities and operations or attracting and retaining
additional qualified personnel. Any failure to effectively manage growth, expand
its operations or attract and retain personnel could have a material adverse
effect on the Company's business operating results or financial condition.
Acquisitions. A principal business strategy of the Company is to pursue
acquisitions of businesses, products and technologies that are complementary to
those of the Company. To date, the Company's management has had limited
experience in making acquisitions. The Company recently completed the
acquisitions of ECOM and CIBC and the Company will likely make additional
acquisitions in the future. Integrating acquired products and businesses
requires a significant amount of management time and skill and may place
significant demands on the Company's operations and financial resources. There
can be no assurance that the Company will be effective in making acquisitions.
Any failure to effectively integrate its recent acquisitions or any future
acquisitions could have a material adverse effect on the Company's business,
operating results or financial condition. Acquisitions may also give rise to
contingent payment obligations by the Company. In connection with the CIBC
Acquisition, the Company has agreed to make a contingent payment to CIBC equal
to (1) 75% of the revenues between $550,000 and $743,000 received by the Company
in connection with the sale of CIBC's products during the 12 month period ending
July 29, 1997, plus (2) 50% of such revenues exceeding $743,400 during the 12
month period ending July 29, 1997. Such contingent payments, if any, would be
made directly to the acquired company, would be accounted for as goodwill by the
Company and would be amortized over a period not to exceed five years. The
Company believes that such contingent payments, if any, would not have a
material adverse effect on the Company's results of operations.
Competition. Competition in the AEC/GIS software industry is intense and
increasing. The Company faces competition from companies offering stand-alone
CAD systems as well as from companies offering AutoCAD-based or MicroStation-
based software applications. Autodesk markets application software for certain
segments of the United States CAD industry not currently served by the Company
and markets certain architectural software, which competes directly with
products offered by the Company, in international markets. In the future, the
Company may face additional competition from Autodesk or Bentley Systems if such
entities decide either to internally develop and market or to acquire software
applications in the AEC/GIS markets served by the Company. Intergraph
Corporation, one of the Company's primary competitors, owns a 50% equity
interest in Bentley Systems. Many of the Company's competitors have and
potential competitors may have significantly greater financial, technological
and marketing resources than the Company. Barriers to entry in the AEC/GIS
software industry are relatively low and the risk of new competitors entering
the market is high. In addition, the AEC/GIS software industry is experiencing
consolidation which could result in existing competitors increasing their market
position or breadth of product offerings through acquisitions. Competitive
pressures could force the Company to reduce its prices, resulting in reduced
margins. There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that
competition will not have a material adverse effect on the Company's business,
operating results or financial condition. See "Business--Competition."
Variability of Quarterly Operating Results and Seasonality. The Company
has experienced in the past, and may experience in the future, significant
quarter-to-quarter fluctuations in its operating results. Factors such as the
timing of new product introductions and upgrades by the Company; the Company's
-9-
competitors or AutoDesk (See "Dependence on AutoDesk and Bentley Systems"),
customer acceptance of software applications, product development expenses,
announcements or changes in pricing policies by competitors, the timing of
significant orders, the mix of products sold, the mix of domestic versus
international revenues, the existence of product errors or bugs, and the hiring
and training of additional staff could contribute to this variability of
quarterly results. In addition, the Company's operating results may be adversely
impacted by the markets acceptance of new, or changes in existing hardware or
software technology, including without limitation, Windows95/NT, the Internet,
CD ROM Technology, etc. Economic and other factors affecting the building,
construction, architecture, mapping and engineering industries could also affect
demand for the Company's products in one or more particular quarters. The
Company historically has operated with little or no backlog. A significant
portion of the Company's net revenues in a quarter are derived from orders
received late in that quarter, which makes the Company's financial performance
more susceptible to an unexpected downturn in business and quarterly results
difficult to forecast. In addition, the Company's expense levels are based in
part on expectations of future revenue levels, and a shortfall in revenues could
result in a disproportionate decrease in the Company's net income. As the
markets in which the Company competes mature and new and existing companies
compete for customers, price competition is likely to intensify and such
competition could affect quarterly operating results. In addition, operating
results historically have been seasonally lower during the first and fourth
quarters than during the other quarters of the fiscal year.
Technological Demands of the Marketplace. The software industry is
characterized by rapid technological changes and advances which can result in
relatively short product lifecycles. The Company's future success will depend
upon its ability to enhance its current products and introduce new products that
keep pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its customers. To meet this goal the Company
periodically upgrades certain of its products. There can be no assurance that
the Company will be successful in introducing and marketing product enhancements
or new products, or that such products will be accepted by the market. The
Company's software products, like software products generally, may contain
undetected errors or bugs when introduced, or as new versions are released.
While the Company's current products have not experienced significant post-
release software error bugs to date, there can be no assurance that such
problems will not occur in the future, particularly as the Company expands its
product offerings and its products become more complex and sophisticated. Any
such defective software may result in a loss of or delay in market acceptance of
the Company's products or an increased warranty expenses or product recalls. See
"Business--Products" and "--Product Development."
Limited Protection of Intellectual Property; Risk of Infringement. The
Company's success is heavily dependent upon its proprietary technology. The
Company does not have any patents on its technology and relies upon copyright,
trademark and trade secret laws, license and confidentiality agreements and
software security measures to establish and protect its proprietary technology.
The Company enters into confidentiality and/or license agreements with its
resellers and potential customers and limits access to and distribution of its
software, documentation and other proprietary information. The Company's
products are, however, generally distributed under "shrink-wrap" licenses that
are not signed by the customer and therefore may be unenforceable in certain
jurisdictions. In addition, effective copyright and trade secret protection may
not be available to the Company, particularly in foreign countries where the
laws generally provide either no protection or less protection than the laws of
the United States. There can be no assurance that the steps taken by the Company
to protect its proprietary technology will be adequate to prevent
misappropriation. The Company has a policy of requiring all of its employees to
sign an agreement which prohibits disclosure of confidential information and a
covenant not to compete with the Company or be employed by competitors of the
Company. There can be no assurance, however, that such restrictive provisions
contained in such agreements would be enforceable by the Company. In addition,
as the number of software applications in the industry increase and
functionality of these applications further overlap, the Company believes that
software developers may become increasingly subject to infringement claims. The
Company is not engaged in any material disputes with other parties with respect
to the ownership or use of the Company's proprietary technology. However, there
can be no assurance that other parties will not assert technology infringement
claims against the Company in the future. Any such claims so asserted, with or
without merit, may be time consuming and expensive to defend. See "Business--
Proprietary Rights".
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Dependence on Management. The continued success of the Company's
operations will depend largely upon the continued services of its executive
officers, in particular Rodney L. Blum, its Chairman, President and Chief
Executive Officer, John F. Biver, its Vice President, Civil Division, and Dennis
J. George, its Chief Financial Officer. The loss of service of one or more of
these executive officers could adversely affect the Company's business. The
company's future success will also be dependent, in part, upon the Company's
ability to attract and retain additional qualified managers and other personnel.
Competition for qualified personnel in the AEC/GIS software industry is intense
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel.
Foreign Operations. Approximately 2.9% of the Company's revenues in fiscal
1996 were derived from sales to customers located outside of the United States
and Canada. The international portion of the Company's business is subject to a
number of inherent risks, including difficulties in opening and managing foreign
offices, establishing channels of distribution, establishing the credit
worthiness of foreign customers, the collection of outstanding accounts,
localizing software to meet engineering regulations and requirements, or in
translating products into foreign languages; the lack of control over
fluctuations in the value of foreign currencies; import/export duties and
quotas; and unexpected regulatory, economic or political changes in foreign
markets. There can be no assurance that these factors will not adversely affect
the Company's international revenues or its overall financial performance.
Reliance on Headquarters. Substantially all of the Company's
administrative, sales, marketing, training, customer service, product
development and product ordering and shipping activities are conducted from a
single facility located in Dubuque, Iowa (the "Dubuque Facility"). A loss with
respect to all or part of this facility or a disruption in the Company's
telecommunications and management information systems would have a material
adverse effect on the Company's results of operations.
Potential Volatility of Stock Price. The stock market has historically
experienced volatility which has particularly affected the market prices of
securities of many technology-based companies and which sometimes has been
unrelated to the operating performances of such companies. Factors such as
announcements of technological developments or new products by the Company or
its competitors, variations in the Company's quarterly operating results or
general economic or stock market conditions may significantly impact the market
price of the Common Stock. Furthermore, any adverse changes in the market price
of the common stock of other related software companies may adversely affect the
market prices of the Company's Common Stock, irrespective of whether there has
been any deterioration of the Company's business or financial results.
Control by Management and Principal Stockholders. The Company's officers
and directors and their affiliates own approximately 52% of the Company's
outstanding Common Stock. As a result, these stockholders, acting together, will
be able to control the outcome of actions requiring stockholder approval, such
as the election of directors, amendments to the Company's charter and mergers.
Anti-Takeover Provisions: Possible Issuance of Preferred Stock. The
Company's Certificate of Incorporation and By-Laws contain various provisions,
including, without limitation, certain notice provisions and provisions
authorizing the Company to issue Preferred Stock, that may make it more
difficult for a third party to acquire, or may discourage acquisition bids for,
the Company and could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock. The ownership by the
Company's officers, directors and their affiliates of substantial shares of
Common Stock could also discourage such bids. In addition, the rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of any holders of Preferred Stock that may be issued in the future
and that may be senior to the rights of the holders of Common Stock.
ITEM 2. PROPERTIES
The following table sets forth a brief description of the properties of the
Company:
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Location General Description
- -------- ------------------------------------
Eagle Point Software Corporation: Corporate headquarters and principal
Dubuque, Iowa operating facility of 32,000 square
feet (the "Dubuque Facility") (1)
Former LANDCADD operations: Development facility consisting of
Denver, Colorado 6,000 square feet (leased)
Former FMS operations: Development facility consisting of
Mill Valley, California 220 square feet (leased)
Former ECOM operations: Development facility consisting of
Milwaukee, Wisconsin 500 square feet (leased)
Former CIBC operations: Development facility consisting of
Sebastopol, California 1,300 square feet (leased)
(1) A 45,000 square foot expansion to the Dubuque facility is currently under
construction. The expansion project, which is estimated at between $3.0
million and $4.0 million was funded by a portion of the proceeds from the
Company's initial public offering, The Company expects this expansion
project to be completed by the end of calendar year 1996.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 16, 1995, the Common Stock has been traded on The Nasdaq
National Market ("Nasdaq") under the symbol EGPT. The approximate number of
stockholders of record of common stock at September 19, 1996 was 164, some of
which are street name holders and depository trusts representing beneficial
shareholders. The Company has more than 1,200 beneficial holders of common
stock.
The Company has never paid cash dividends on the Common Stock. The Company
currently intends to retain any earnings for future growth and therefore does
not anticipate paying any cash dividends on the Common Stock in the foreseeable
future.
On September 19, 1996 the closing sales price of the Company's Common Stock
was $5.00. The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock as reported by Nasdaq.
Quarter Ended HIGH LOW
- ------------- ------ ------
June 30, 1995 (from June 16, 1995) ...................... $18.25 $13.00
September 30, 1995 ...................................... $24.25 $16.25
December 31, 1995 ....................................... $22.25 $15.25
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March 31, 1996 .......................................... $21.00 $ 8.00
June 30, 1996 ........................................... $10.75 $ 6.50
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data presented below for each of the fiscal years
ended June 30, 1996, 1995, 1994, 1993 and 1992 and the balance sheet data at
June 30, 1996, 1995, 1994 and 1993 have been derived from the Company's
financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors, whose report thereon is included elsewhere in this Report
on Form 10-K. The statement of income data for the fiscal year ended June 30,
1991 and the balance sheet data at June 30, 1992 and 1991 are unaudited but have
been derived from the Company's combined financial statements, which in the
opinion of management of the Company, have been prepared on the same basis as
the audited financial statements. The selected combined financial data presented
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the financial
statements and the notes thereto appearing elsewhere in this Report on Form
10-K.
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------
1996(1) 1995(2) 1994 1993 1992
------- ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA(3)(4):
Net revenues:
Product sales $14,580 $13,344 $7,695 $6,051 $2,687
Training and support 4,582 2,487 1,232 801 253
------- ------- ------ ------ ------
Total net revenues 19,162 15,831 8,927 6,852 2,940
------- ------- ------ ------ ------
Cost of revenues 5,073 4,834 3,151 2,374 593
------- ------- ------ ------ ------
Gross profit 14,089 10,997 5,776 4,478 2,347
------- ------- ------ ------ ------
Operating expenses:
Selling and marketing 6,421 4,324 2,377 1,814 1,107
Research and product development 3,511 2,129 1,698 1,158 484
General and administrative 1,680 1,493 820 588 292
Charge for purchased research and development -- 1,039(5) -- -- --
Acquisition related charges 43 -- -- -- --
------- ------- ------ ------ ------
Total operating expenses 11,655 8,985 4,895 3,560 1,883
------- ------- ------ ------ ------
Operating income from continuing operations 2,434 2,012 881 918 464
------- ------- ------ ------ ------
Interest income (expense), net 711 (166) (156) (77) (18)
Other income (expense), net 31 30 (9) (7) 14
------- ------- ------ ------ ------
Income from continuing operations before income taxes 3,176 1,876 716 834 460
Income taxes 1,100 559 177 239 143
------- ------- ------ ------ ------
Income from continuing operations 2,076 1,317 539 595 317
Income (Loss) from discontinued operations -- -- (125) (9) 96
------- ------- ------ ------ ------
Net income $ 2,076 $ 1,317 $ 414 $ 586 $ 413
======= ======= ====== ====== ======
Per Share:
Income from continuing operations $ .42 $ .34(5) $ .11 $ .12 $ .06
Net income $ .42 $ .34 $ .08 $ .12 $ .08
Weighted average number of common shares outstanding(6) 4,958 3,873 5,010 5,010 5,010
BALANCE SHEET DATA(3)(AT PERIOD END):
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Working capital $12,215 $15,282 $ 76 $ 577 $ 539
Total assets 24,596 23,579 5,605 5,014 2,729
Total debt 901 857 2,197 1,955 1,045
Stockholders' equity 20,929 18,985 1,836 1,422 837
(1) On November 9, 1995, the Company merged with ECOM Associates, Inc. The
Company has accounted for the merger as a pooling of interests. The pooling
did not have a material effect on the financial statements previously
presented and therefore such statements have not been restated.
Accordingly, the statement of income data for the fiscal year ended June
30, 1996 includes the results of operations of ECOM from the merger date.
(2) On January 1, 1995, the Company acquired substantially all of the assets
and business and assumed certain of the liabilities of LANDCADD. On March
31, 1995, the Company acquired certain assets of FMS. The Company has
accounted for each acquisition using the purchase method and, accordingly,
the statement of income data for the fiscal year ended June 30, 1995
includes the results of operations of LANDCADD and FMS from each respective
acquisition date.
(3) The data presented has been derived from the Company's financial
statements, which include the accounts of the Company and VisionOne
Partners (the "Partnership"), an entity under common ownership and common
management with the Company. The Partnership was formed solely to build and
own the Dubuque facility for lease to the Company. On June 30, 1995 the
Company purchased the Dubuque facility from the Partnership. See Note 1 and
Note 16 of Notes to Financial Statements.
(4) The Company's computer hardware manufacturing business was discontinued in
October 1993. Data relating to income from continuing operations does not
include the results from such discontinued operations. Net income data does
include the results from such discontinued operations. See Note 15 of Notes
to Financial Statements.
(5) In connection with the LANDCADD and FMS acquisitions, the portion of the
aggregate purchase prices related to research and development that had not
yet reached technological feasibility and had no alternative use as of the
date of acquisition was recorded as a charge for purchased research and
development. See Note 3 of Notes to Financial Statements. Exclusive of this
charge for purchased research and development, operating income from
continuing operations, income from continuing operations and income from
continuing operations per share would have been $3,051,000, $1,992,000 and
$.51, respectively, for the fiscal year ended June 30, 1995.
(6) On August 5, 1994, the Company repurchased, and subsequently retired,
1,625,000 shares of Common Stock. See Note 10 of Notes to Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1983 and during the remainder of the 1980s
focused on developing and marketing a software application product for use by
roadway design professionals. In 1990, the Company, under new management, began
to expand significantly its product line to include complementary software
application products for use by a variety of AEC/GIS professionals. Of the 90
modules comprising the Company's current product line, 43 modules were
internally developed and 47 modules were added through acquisitions.
On January 1, 1995, the Company added 6 modules of landscape architecture/
environmental planning application software as a result of the LANDCADD
Acquisition. On March 31, 1995, the Company added 12 modules of geographic
information systems software to its product line as a result of the FMS
Acquisition. On November 9, 1995, the Company added 25 modules of structural
engineering
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software as a result of the ECOM Merger. The LANDCADD Acquisition and the FMS
Acquisition were each accounted for under the purchase method, and accordingly,
the results of operations of such businesses are included in the Company's
results from their respective dates of acquisition. For each acquisition, the
aggregate cost over the fair value of acquired net assets has been assigned
principally to purchased research and development and software development costs
based on their estimated fair market values. The portion of the aggregate
purchase prices allocated to research and development that had not yet reached
technological feasibility and had no alternative future use was charged to
expense on the date of purchase. Accordingly, the Company's results of
operations for fiscal 1995 reflect a nonrecurring charge for purchased research
and development of approximately $1.0 million dollars. The ECOM Merger was
accounted for as a pooling of interest, however, it did not have a material
effect on financial statement and therefore such statements have not been
restated.
Prior to October 1993, the Company operated a computer hardware
manufacturing division that acted as a value added reseller, or dealer, selling
hardware products to the CAD marketplace. From fiscal 1990 to fiscal 1994, this
division operated at a loss, with the exception of fiscal 1992. In the second
quarter of fiscal 1994, the Company discontinued this division. The results of
operations of this division prior to this discontinuance are reflected in the
Company's financial statements as income (loss) from discontinued operations.
Because this division ceased operations with insignificant amount of assets of
such division being reassigned to other divisions, there was no gain or loss
resulting from the decision to cease such operations.
The Company resells AutoCAD in order to facilitate the additional sale of
the Company's software application products. Resales of AutoCAD represented
approximately 13.8% of net revenues in fiscal 1996. The resales of AutoCAD carry
a substantially lower gross-margin than sales of Eagle Point software products
and represented approximately 3.7% of gross profit in the same period.
The Company has experienced in the past, and may experience in the future,
significant quarter-to-quarter fluctuations in its operating results. Factors
such as the timing of new product introductions and upgrades by the Company; the
Company's competitors or Autodesk, customer acceptance of software applications,
product development expenses, announcements or changes in pricing policies by
competitors, the timing of significant orders, the mix of products sold, the mix
of domestic versus international revenues, the existence of product errors or
bugs, and the hiring and training of additional staff could contribute to this
variability of quarterly results. Economic and other factors affecting the
building, construction, architecture, mapping and engineering industries could
also affect demand for the Company's products in one or more particular
quarters. The Company historically has operated with little or no backlog. A
significant portion of the Company's net revenues in a quarter are derived from
orders received later in that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and quarterly
results difficult to forecast. In addition, the Company's expense levels are
based in part on expectations of future revenue levels, and a shortfall in
revenues could result in a disproportionate decrease in the Company's net
income. As the markets in which the Company competes mature and new and existing
companies compete for customers, price competition is likely to intensify and
such competition could affect quarterly operating results. See "Risk Factors--
Variability of Quarterly Operating Results."
FORWARD LOOKING INFORMATION.
This Annual Report on Form 10-K contains forward looking statements,
including, without limitation, statements concerning the Company's future
product research and development and expenditures relating to sales and
marketing. These forward looking statements involve risks and uncertainties,
which could cause actual results to differ from those projected. These risks and
uncertainties include technological risks involved in the development and
testing of new products, the impact of competitive products and pricing, and the
uncertainties of which operating systems and hardware platforms will be of
preferred use, and which emerging technologies could impact the demand for the
Company's products.
FISCAL 1996 COMPARED TO FISCAL 1995.
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Net revenues increased by $3.3 million, or 21.0% to $19.2 million for the
fiscal year ended June 30, 1996 from $15.8 million for the fiscal year ended
June 30, 1995. The Company experienced growth in both product sales and training
and support revenues. The increase in products sales was attributable primarily
to increased sales volume and marketing efforts and to an expansion of the
number of modules included in the product line. Training and support revenues
during fiscal 1996 were favorably affected by the Company's larger installed
base of customers and an increased emphasis by the Company on customer training.
Gross profit increased $3.1 million, or 28.1% to $14.1 million for fiscal
1996 from $11.0 million for fiscal 1995 as a result of the increase in net
revenues. Gross profit as a percentage of net revenues increased to 73.5% in
fiscal 1996 from 69.5% in fiscal 1995. Gross profit as a percentage of
corresponding net revenues relating to product sales increased to 70.0% in
fiscal 1996 from 67.1% in fiscal 1995 primarily due to an increased percentage
of sales of Eagle Point's software products and a reduced percentage of resales
of AutoCAD in the sales mix. Gross profit as a percentage of corresponding net
revenues relating to training and support increased to 84.7% in fiscal 1996 from
82.0% in fiscal 1995.
Selling and marketing expense increased $2.1 million, or 48.5%, to $6.4
million in fiscal 1996 from $4.3 million in fiscal 1995. As a percentage of net
revenues, selling and marketing expenses increased to 33.5% in fiscal 1996 from
27.3% in fiscal 1995. The increase was primarily attributable to expanded direct
marketing, advertising and other promotional activities and higher personnel
costs associated with the growth in sales volume.
Research and development expense increased $1.4 million or 64.9% to $3.5
million in fiscal 1996, from $2.1 million in fiscal 1995. As a percentage of net
revenues, research and development expenses increased to 18.3% in fiscal 1996
from 13.4% in fiscal 1995. The increased research and development expenses
related primarily to the increased personnel costs associated with expanding the
company's development staff.
General and administrative expense increased $187,000, or 12.5%, to $1.7
million in fiscal 1996 from $1.5 million in fiscal 1995. As a percentage of net
revenues general and administrative expense decreased to 8.8% in fiscal 1996
from 9.4% in fiscal 1995. The increase was attributable primarily to higher
overhead expenses related to the growth in revenues and employment. The decrease
in expenses as a percentage of revenues was primarily due to the Company's
ability to leverage these expenditures over a larger revenue base.
Operating income from continuing operations increased $422,000, or 21.0%,
to $2.4 million in fiscal 1996 from $2.0 million in fiscal 1995 and, as a
percentage of net revenues, maintained at 12.7% in fiscal 1996 from 12.7% in
fiscal 1995. Excluding the $1.0 million charge for purchased research and
development incurred in fiscal 1995 in connection with the LANDCADD Acquisition
and FMS Acquisition and the $43,000 charge for acquisition related expenses
incurred in fiscal 1996 in connection with the ECOM Merger, operating income
from continuing operations decreased $574,000 to $2.5 million in fiscal 1996
from $3.1 million in fiscal 1995, and as a percentage of revenues decreased to
12.9% in fiscal 1996 from 19.3% in fiscal 1995, as a result of the factors
described above.
Interest expense decreased $174,000 to $24,000 in fiscal 1996 from $198,000
in fiscal 1995. The decrease in interest expense was due to a reduction of debt
from the proceeds generated from the Company's initial public offering. Interest
income increased $703,000 to $735,000 in fiscal 1996 from $32,000 in fiscal
1995. The increase in interest income was due to interest earned primarily from
the proceeds generated from the Company's initial public offering.
The Company's effective tax rate on income from continuing operations was
34.6% for fiscal 1996 compared to 29.8% in fiscal 1995. The primary reason for
the increase was the discontinuance of the research and development tax credit
previously allowed by the federal government for the period July 1, 1995 to June
30, 1996. Effective July 1, 1996 through June 30, 1997 the federal government
has
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reinstated the research and development tax credit. No assurance can be given
that this tax credit will continue beyond June 30, 1997.
FISCAL 1995 COMPARED TO FISCAL 1994.
Net revenues increased by $6.9 million, or 77.3%, to $15.8 million for the
fiscal year ended June 30, 1995, from $8.9 million for the fiscal year ended
June 30, 1994. The Company experienced growth in both product sales and training
and support revenues. The increase in product sales was attributable primarily
to increased sales and marketing efforts and to an expansion of the number of
modules included in the product line. Training and support revenues during
fiscal 1995 Period were favorably affected by the Company's larger installed
base of customers and an increased emphasis by the Company on customer training.
Gross profit increased $5.2 million, or 90.4%, to $11.0 million for fiscal
1995 from $5.8 million for fiscal 1994 as a result of the increase in net
revenues. Gross profit as a percentage of net revenues increased to 69.5% in
fiscal 1995 from 64.7% in fiscal 1994. Gross profit as a percentage of
corresponding net revenues relating to product sales increased to 67.1% in
fiscal 1995 from 63.0% in fiscal 1994 primarily due to an increased percentage
of sales of Eagle Point's software products and a reduced percentage of resales
of AutoCAD in the sales mix. Gross profit as a percentage of corresponding net
revenues relating to training and support increased to 82.0% in fiscal 1995 from
75.3% in fiscal 1994.
Selling and marketing expense increased $1.9 million, or 81.9%, to $4.3
million in fiscal 1995 from $2.4 million in fiscal 1994. As a percentage of net
revenues, selling and marketing expenses increased to 27.3% in fiscal 1995 from
26.6% in fiscal 1994. The increase was primarily attributable to expanded direct
marketing, advertising and other promotional activities and higher personnel
costs associated with the growth in sales volume.
Research and development expense increased $431,000, or 25.4%, to $2.1
million in fiscal 1995, from $1.7 million in fiscal 1994. As a percentage of net
revenues, research and development expenses decreased to 13.4% in fiscal 1995
from 19.0% in fiscal 1994. In the 1994, research and development expense as a
percentage of net revenues exceeded the level required to support the Company's
ongoing development efforts. In fiscal 1995, the Company was able to leverage
these expenditures over a larger revenue base. In addition, the Company was able
to expand its product line significantly through acquisitions.
General and administrative expense increased $673,000, or 82.1%, to $1.5
million in fiscal 1995 from $820,000 in fiscal 1994. As a percentage of net
revenues general and administrative expense increased slightly to 9.4% in fiscal
1995 from 9.2% in fiscal 1994. These increases were attributable primarily to
higher overhead expenses related to the growth in revenues and employment. The
Company's allowance for accounts receivable as a percent of accounts receivables
increased to 7.3% at June 30, 1995 from 3.0% at June 30, 1994. This increase was
primarily the result of the increase in international sales to 10.8% of total
sales for fiscal 1995 from 5.6% for fiscal 1994 and the Company's unfamiliarity
with the LANDCADD and FMS customer base to which the Company began cross selling
its products during the last six months of fiscal 1995.
Operating income from continuing operations increased $1.1 million, or
128.3%, to $2.0 million in fiscal 1995 from $881,000 in fiscal 1994 and, as a
percentage of net revenues, increased to 12.7% in fiscal 1995 from 9.9% in
fiscal 1994. Excluding the $1.0 million charge for purchased research and
development incurred in connection with the LANDCADD Acquisition and FMS
Acquisition, operating income from continuing operations increased $2.2 million
to $3.1 million in fiscal 1995 from $881,000 in fiscal 1994, and as a percentage
of revenues increased to 19.3% in fiscal 1995 from 9.9% in fiscal 1994, as a
result of the factors described above.
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Interest expense increased $42,000, or 26.9%, to $198,000 in fiscal 1995
from $156,000 in fiscal 1994. The increase in interest expense was due to
borrowings related to the expansion of the Dubuque facility being included in
all of fiscal 1995 as compared to being included in only a portion of fiscal
1994.
The Company's effective tax rate on income from continuing operations was
29.8% for fiscal 1995 compared to 24.8% in fiscal 1994. The Company's effective
income tax rates for the periods were below the federal statutory rate,
primarily due to research and development tax credits. Exclusive of the charge
for purchased research and development, the effective tax rate on income from
continuing operations would have been 31.6% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
generated from operations, borrowings and equity capital financings. At June 30,
1996, the Company had cash, cash equivalents and short-term investments of $10.6
million and working capital of $12.2 million as compared with cash, cash
equivalents and short-term investments of $15.7 million and working capital of
$15.3 million as of June 30, 1995. This decrease is primarily attributable to
investments in long-term marketable securities of $2.5 million and payments made
for the expansion of the Company's facilities. The Company also has a $2.0
million unsecured line of credit with a commercial bank, which borrowings would
be at an interest rate of prime. At June 30, 1996, the Company had no borrowings
outstanding under this line of credit.
The Company's principal capital expenditures in recent years have consisted
of investments in electronic data systems, furniture and equipment needs and the
construction and expansion of the Dubuque facility. Investments in electronic
data systems, furniture and equipment have been funded principally from cash
generated from operations and an aggregate $625,000 principal amount of economic
development loans. At June 30, 1996, these loans carried a weighted average
interest rate of approximately 2.5% per annum. These loans mature at various
dates through the year 2002. The Company anticipates that its capital
expenditures in fiscal 1997 will relate primarily to the expansion of the
Dubuque Facility, including related data systems, furniture and equipment.
Since November, 1995, the Company has been in the process of expanding the
Dubuque Facility. The Company estimates the cost of the expansion project
including related data systems, furniture and equipment to be between $3.0
million and $4.0 million. As of June 30, 1996, the Company had expended $1.7
million toward this expansion project.
A principal business strategy of the Company is to pursue acquisitions of
businesses, products and technologies that are complementary to those of the
Company. On January 1, 1995 the Company completed the LANDCADD Acquisition. The
purchase price consisted of $350,000 paid in cash at the closing, the issuance
of a $200,000 non-interest bearing promissory note, payable quarterly over three
years and the issuance of an aggregate of 37,000 shares of Common Stock (valued
by the Company's Board of Directors at $8 per share). The Company was obligated
to make a contingent payment to LANDCADD equal to 25% of any revenues in excess
of $1.1 million derived by the Company from the sale of LANDCADD products during
the twelve months ending December 31, 1995. Accordingly, as of December 31,
1995, the Company recorded a payable of $186,175 with interest payable of
$19,333 to be paid quarterly through December 31, 1997. In conjunction with the
acquisition, the Company entered into a non-competition agreement with four
former employees of LANDCADD.
On March 31, 1995, the Company completed the FMS acquisition. The purchase
price for the FMS assets consisted of $410,000 paid in cash at the closing, plus
a contingent payment equal to (i) 100% of the revenues derived by the Company
from the sale of FMS products during the twelve months ending March 31, 1996 for
revenues between $410,000 and $670,000 and (ii) 50% of any such revenues
exceeding $670,000. At FMS's election, the contingent payment was to be made in
(a) cash payable in equal quarterly installments over three years period or (b)
shares of Common Stock based on the market price per share on March 31, 1996. As
of March 31, 1996, the revenues derived by the Company from the sale of FMS
-18-
products for the twelve months ended March 31, 1996, were less than $410,000 and
as such no contingent payment was due.
On November 9, 1995, the Company completed the ECOM Merger exchanging all
the capital stock of ECOM for 29,730 shares of the Company's Common Stock. There
were no cash payments in connection with such merger.
On July 29, 1996, the Company completed the CIBC Acquisition. The purchase
price was $550,000 cash. Additionally, the Company is obligated to make a
contingent cash payment equal to (1) 75% of the revenues between $550,000 and
$743,400 received by the Company in connection with the sale of CIBC's products
during the 12 month period ending July 29, 1997, plus (2) 50% of such revenues
exceeding $743,400 during the 12 month period ending July 29, 1997.
The Company believes that it's current cash position, together with funds
generated from operations and borrowings available under its line of credit,
will be sufficient to fund its operations through fiscal 1997.
INFLATION AND FOREIGN CURRENCY EXCHANGE
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 1997. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Report on
Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
- ---------------------------
The information contained under the headings "Nominees for Directors,"
"Members of Board of Directors Continuing in Office" and "Compliance With
Section 16 of the Exchange Act" in the Proxy Statement (which Proxy Statement
will be filed with the Securities and Exchange Commission on or before October
28, 1996) is incorporated herein by reference.
Executive Officers of the Registrant
- ------------------------------------
Information with respect to executive officers of the Company.
-19-
Name Age Position
- ---- --- --------
Rodney L. Blum 41 Chairman of the Board, President and Chief Executive Officer
Dennis J. George 33 Vice President, Chief Financial Officer, Treasurer and
Secretary; Director
John F. Biver 41 Vice President - Civil Division; Director
Edward T. Graham 33 Vice President - Architectural/Structural Division
Brent A. Straka 28 Vice President - Marketing and Business Development Division
William P. LeMay 42 Chief Technology Officer
Rodney L. Blum has served as Chairman of the Board, President and Chief
Executive Officer of the Company since January 1990. From May 1988 until he
joined the Company in 1990, Mr. Blum was Director of Sales and Marketing of
D.D.S., a provider of turn-key computer systems to the auto, large truck and
implement dealer markets. From 1980 until May 1988 he served in various
marketing and management positions at CyCare Systems, Incorporated, a provider
of computerized information processing systems to the healthcare industry.
Dennis J. George has served as Vice President, Chief Financial Officer,
Treasurer, Secretary and a director of the Company since April 1989. During 1988
he was the Financial Budget Analyst for the Ertl Company, a manufacturer of
agricultural model toys. During 1987 he served as Finance Manager for D.D.S.
John F. Biver co-founded the Company in 1983 and has served as Vice
President - Civil Division since January 1990. Mr. Biver has served as a
director of the Company since its inception. Prior to founding the Company, Mr.
Biver was a registered Professional Engineer with the civil engineering firm of
Wright, Kilby, Sejkoara and Associates.
Edward T. Graham has been employed by the Company in various sales
capacities since January 1990. Mr. Graham currently serves as Vice President -
Architectural/Structural Division. From May 1989 until he joined the Company,
Mr. Graham was a principal of Prism Marketing, a provider of marketing systems
and services.
Brent A. Straka has been employed by the Company since November 1990 in
various sales, marketing-related, and management positions. Since July, 1996
Mr. Straka has served as Vice President - Marketing and Business Development.
From June 1989 until he joined the Company, Mr. Straka held various marketing
positions with Land's End, Inc., a mail-order provider of apparel and specialty
products.
William P. LeMay has been employed by the Company since October 1992 in
various research and development and management positions. Since December, 1995
Mr. LeMay has served as Chief Technology Officer. From March, 1984 until he
joined the Company, Mr. LeMay was a product manager Accugraph Corporation, a
developer of software applications for the civil engineering market.
ITEM 11. EXECUTIVE COMPENSATION
Except for information referred to in Item 402(a)(8) of Regulation S-K, the
information contained under the headings "Executive Officer Compensation" and
"Directors Meetings and Committees" in the Proxy Statement (which Proxy
Statement will be filed with the Securities and Exchange Commission on or before
October 28, 1996) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Directors,
Officers and Principal Stockholders" in the Proxy Statement (which Proxy
Statement will be filed with the Securities and
-20-
Exchange Commission on or before October 28, 1996) is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the information relating to Item 11 hereof and except for information
referred to in Item 402(a)(8) of Regulation S-K, the information contained under
the headings "Executive Officer Compensation", "Directors Meetings and
Committees" and "Certain Relationships and Related Transactions" in the Proxy
Statement (which Proxy Statement will be filed with the Securities and Exchange
Commission on or before October 28, 1996) is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
--------------------
The following financial statements are filed as part of this report:
. Report of Independent Auditors on Financial Statements.
. Financial Statements:
Balance Sheets - June 30, 1996 and June 30, 1995.
Statements of Income - years ended June 30, 1996, June 30, 1995
and June 30, 1994.
Statements of Stockholders' Equity - years ended June 30, 1996,
June 30, 1995 and June 30, 1994.
Statements of Cash Flows - years ended June 30, 1996, June 30,
1995 and June 30, 1994.
Notes to financial statements - June 30, 1996.
(a)(2) Financial Statement Schedules
-----------------------------
Any schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) Exhibits
--------
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Securities and Exchange Commission.
Exhibit No. Description
- ----------- -----------
3.1* -- Certificate of Incorporation of the Company.
3.2* -- By-laws of the Company.
10.1* -- Loan Agreement between the Company and the City of
Dubuque, dated January 20, 1992
-21-
10.2* -- Loan Agreement between the Company and the City of Dubuque,
dated July 6, 1993.
10.3* -- Loan Agreement between the Company and the City of Dubuque,
dated May 16, 1994.
10.4* -- Community Economic Betterment Account Agreement between the
Company and the Iowa Department of Economic Development,
dated July 18, 1991.
10.5* -- Community Economic Betterment Account Agreement between the
Company and the Iowa Department of Economic Development,
dated July 15, 1993.
10.6* -- Asset Purchase Agreement between the Company and Facility
Mapping Systems, Inc., dated March 31, 1995.
10.7* -- Asset Purchase Agreement between the Company and LANDCADD,
Inc., dated January 1, 1995.
10.8* -- Redemption Agreement between the Company, and Scott J.
Taylor, dated August 5, 1994.
.10.9**** -- Employment Agreement with Rodney L. Blum.
.10.10**** -- Employment Agreement with Dennis J. George.
.10.11**** -- Employment Agreement with John F. Biver.
.10.12** -- Eagle Point Software Corporation Stock Option Plan.
.10.13*** -- Eagle Point Software Corporation, 1995 Employee Stock
Purchase Plan.
10.14* -- Purchase Agreement between VisionOne Partnership and the
Company, dated as of May 1, 1995.
10.15* -- Indemnification Agreement among the Company, Rodney L. Blum,
John F. Biver and Dennis J. George.
10.16***** -- Merger Agreement between the Company and ECOM Associates,
Inc., dated November 9, 1995.
10.17***** -- Asset Purchase Agreement between the Company and Computer
Integrated Building Corporation, dated July 29, 1996.
11.1***** -- Statement re: computation of per share earnings.
21.1***** -- Subsidiaries
23.1***** -- Consent of Deloitte & Touche LLP.
27***** -- Financial Data Schedule
- ---------------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-91950)
-22-
** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96914)
*** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96918)
**** Incorporated by reference from the Company's 1995 Annual Report on Form
10-K
***** Filed herewith.
. Indicates management contract or compensatory plan or arrangement.
- -----------------------
(b) Reports on Form 8-K
-------------------
None.
-23-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Eagle Point Software Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Eagle Point
Software Corporation and subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
Des Moines, Iowa
July 29, 1996
-24-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 3,106,704 $ 15,742,926
Short-term investments 7,508,561
Accounts receivable (net of allowances of $251,344 and $192,878, respectively) 3,857,170 2,465,222
Interest receivable 255,290
Inventories 369,172 607,622
Prepaid expenses 150,081 319,729
Other assets 22,933 30,381
------------ ------------
Total current assets 15,269,911 19,165,880
INVESTMENTS 2,466,032
PROPERTY & EQUIPMENT, NET 5,945,320 3,655,730
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization
of $242,753 and $363,818, 213,417 282,921
NON-COMPETE AGREEMENTS (net of accumulated
amortization of $52,600 and $5,170, respectively) 203,174 64,430
DEFERRED INCOME TAXES 497,945 410,509
------------ ------------
TOTAL ASSETS $ 24,595,799 $ 23,579,470
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 288,523 $ 146,295
Accounts payable 252,768 645,496
Accrued expenses 966,754 1,103,948
Income taxes payable 3,051 635,211
Deferred revenues 1,540,998 1,291,889
Deferred income taxes 2,590 60,979
------------ ------------
Total current liabilities 3,054,684 3,883,818
LONG-TERM DEBT 502,187 600,326
CEBA FORGIVABLE LOAN 110,000 110,000
------------ ------------
Total liabilities 3,666,871 4,594,144
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 13, 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at June 30, 1996 and June 30, 1995
Common stock, $.01 par value; 20,000,000 shares authorized; 4,941,730 and 4,912,000
shares issued and outstanding at June 30, 1996 and 1995, respectively 49,417 49,120
Additional paid-in capital 17,535,942 17,477,138
Retained earnings 3,343,569 1,459,068
------------ ------------
Total stockholders' equity 20,928,928 18,985,326
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,595,799 $ 23,579,470
============ ============
See notes to consolidated financial statements.
-25-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
Net revenues:
Product sales $14,579,749 $13,344,033 $7,695,538
Training and support 4,582,375 2,487,385 1,231,782
----------- ----------- ----------
Total net revenues 19,162,124 15,831,418 8,927,320
----------- ----------- ----------
Cost of revenues:
Product sales 4,370,127 4,385,884 2,847,155
Training and support 703,136 448,387 304,181
----------- ----------- ----------
Total cost of revenues 5,073,263 4,834,271 3,151,336
----------- ----------- ----------
Gross profit 14,088,861 10,997,147 5,775,984
----------- ----------- ----------
Operating expenses:
Selling and marketing 6,421,005 4,323,806 2,377,091
Research and development 3,510,830 2,129,310 1,697,922
General and administrative 1,679,702 1,493,006 819,691
Charge for purchased research and development 1,038,764
Acquisition related charges 43,075
----------- ----------- ----------
Total operating expenses 11,654,612 8,984,886 4,894,704
----------- ----------- ----------
Operating income from continuing operations 2,434,249 2,012,261 881,280
Other income (expense):
Interest income 734,710 31,595
Interest expense (23,791) (197,598) (155,735)
Other income (expense), net 30,863 29,685 (9,118)
----------- ----------- ----------
Income from continuing operations before income taxes 3,176,031 1,875,943 716,427
Income tax expense 1,099,632 558,906 177,467
----------- ----------- ----------
Income from continuing operations 2,076,399 1,317,037 538,960
Loss from discontinued operations, net of tax (125,330)
----------- ----------- ----------
Net income $ 2,076,399 $ 1,317,037 $ 413,630
=========== =========== ==========
Weighted average common and common equivalent shares outstanding 4,957,988 3,873,126 5,010,091
=========== =========== ==========
Earnings per common and common equivalent share:
Income from continuing operations $ 0.42 $ 0.34 $ 0.11
Loss from discontinued operations (0.03)
----------- ----------- ----------
Net income $ 0.42 $ 0.34 $ 0.08
=========== =========== ==========
See notes to consolidated financial statements.
-26-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
Balances at July 1, 1993 $ 100 $ 81,009 $1,341,079 $ 1,422,188
Net income 0 0 413,630 413,630
------- ----------- ---------- -----------
Balances at June 30, 1994 100 81,009 1,754,709 1,835,818
Purchase and retirement of 1,625,000 shares of common stock (33) (81,009) (910,222) (991,264)
Five-for-one stock split 270 (270)
Issuance of 37,000 shares of common stock relating to an acquisition 4 295,996 296,000
Contingent payment relating to purchase and retirement of 1,625,000
shares of common stock (133,390) (133,390)
Change in par value of common stock from $.0001 to $.01 33,779 (33,779)
Issuance of 1,500,000 shares of common stock in connection with the
Company's public offering, net of $2,270,079 of offering expenses 15,000 17,214,921 17,229,921
Excess of purchase price over net book value of facilities acquired
from VisionOne Partners (568,796) (568,796)
Net income 1,317,037 1,317,037
------- ----------- ---------- -----------
Balances at June 30, 1995 49,120 17,477,138 1,459,068 18,985,326
Issuance of 29,730 shares common stock relating to acquisition 297 58,804 (191,898) (132,797)
Net income 2,076,399 2,076,399
------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1996 $49,417 $17,535,942 $3,343,569 $20,928,928
======= =========== ========== ===========
See notes to consolidated financial statements.
-27-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- ---------------------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,076,399 $ 1,317,037 $ 413,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 731,082 480,308 356,036
Amortization of software development costs 273,747 336,162 184,594
Charge for purchased research and development 1,038,764
Deferred income taxes (145,825) (347,359) (63,014)
Changes in assets and liabilities, net of
assets and liabilities acquired in connection
with the acquisitions of ECOM during 1996 and
LANDCADD and FMS during 1995:
Accounts receivable (1,383,093) (1,184,683) 609,467
Inventories 238,450 (417,745) (3,269)
Prepaid expenses 170,498 (282,500) 51,658
Accrued interest receivable (255,290)
Accounts payable (403,987) 305,803 (37,982)
Income taxes payable (632,160) 506,016 129,195
Deferred revenues 194,344 747,158 195,945
Accrued expenses (171,556) 782,056 62,895
Other 55,818 (32,976) 66,364
------------ ----------- -----------
Net cash provided by operating activities 748,427 3,248,041 1,965,519
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (3,017,681) (956,971) (818,847)
Software development costs:
Capitalized costs (74,744) (92,705) (314,535)
Purchases of software (129,500) (9,000) (100,000)
Purchase of investments (9,974,593)
Payments to acquire companies, net of
cash acquired (728,473)
------------ ----------- -----------
Net cash used in investing activities (13,196,518) (1,787,149) (1,233,382)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (188,131) (238,613) (33,784)
Change in notes payable (160,000)
Proceeds from long-term debt 425,250 436,013
Change in cash overdraft (351,961)
Purchase and retirement of common stock (1,124,654)
Proceeds from issuance of common stock 17,229,921
Payment to VisionOne Partners to
acquire facility (2,632,275)
------------ ----------- -----------
Net cash provided by (used in)
financing activities (188,131) 13,659,629 (109,732)
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (12,636,222) 15,120,521 622,405
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 15,742,926 622,405 --
------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,106,704 $15,742,926 $ 622,405
============ =========== ===========
(Continued)
-28-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
1996 1995 1994
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid (received) for:
Interest $ 28,534 $ 186,596 $ 155,226
=========== =========== =========
Income taxes $ 1,887,737 $ 395,165 $ (8,185)
=========== =========== =========
Non-cash investing and financing
activities:
Long-term debt and other
non-current liabilities
assumed in business acquisitions $ 97,887
Long-term debt issued in business
acquisitions $ 186,175 173,580
Common stock issued in business
acquisitions (132,797) 296,000
Payments to acquire companies, net of
cash acquired:
Fair value of assets acquired $ 1,363,635
Liabilities assumed (165,582)
Long-term debt issued (173,580)
Common stock issued (296,000)
-----------
$ 728,473
===========
(Concluded)
See notes to consolidated financial statements.
-29-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations - Eagle Point Software Corporation and its
subsidiary (the "Company") is engaged in the development, production and
sale of software for the engineering, construction, structural,
architectural and geographic information systems markets.
Financial Statements - Prior to June 30, 1995, the Company leased its
facilities from VisionOne Partners (the "Partnership"), an entity under
common ownership and common management. The Partnership was formed solely
to construct facilities for lease to the Corporation. Since the Partnership
was formed with a nominal investment by the individual partners and the
Corporation guaranteed its debt, the Partnership was considered to be a
special-purpose entity which required the entities to be combined in
accordance with rules promulgated by the Financial Accounting Standards
Board.
On June 30, 1995, the Company purchased its facilities from the Partnership
(see Note 16). Due to the purchase, the Partnership is no longer considered
a special-purpose entity and combined financial statements are no longer
required. However, as these transactions were all between entities under
common control, they have been accounted for in a manner similar to a
pooling-of-interests. The June 30, 1995 and 1994 statements of income
represent the historical combined operations of the Company and the
Partnership. All significant intercompany accounts and transactions between
these entities have been eliminated for financial statement purposes.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of three months or less when purchased to be
cash equivalents.
Investments - The Company adopted an investment policy during the current
year to address ongoing management of the Company's short-term investments
with maturity terms not exceeding two years. In conjunction with the
investment policy, the Company implemented Statement of Financial
Accounting ("SFAS") No. 115, entitled "Accounting for Certain Investments
in Debt and Equity Securities" in 1996. This statement addresses the
accounting and reporting for investments in debt and equity securities that
have readily determinable fair values. All the Company's investments are
accounted for as held-to-maturity and reported at amortized cost.
Inventories - Inventories are stated at the lower of cost (first in, first
out) or market and consist of the following as of June 30:
1996 1995
Manuals and diskettes $150,031 $260,450
Finished software products 209,516 282,794
Other supplies 9,625 64,378
-------- --------
$369,172 $607,622
======== ========
-30-
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
ESTIMATED
USEFUL LIFE
Buildings and land improvements 20-40 Years
Computer equipment and purchased software 3-5 Years
Furniture and fixtures 7-10 Years
Office equipment 5-7 Years
Vehicles 5 Years
Non-Compete Agreements - Non-compete agreements are being amortized using
the straight-line method over the five year term of the agreements.
Income Taxes - The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Under the liability method specified by SFAS No. 109, a
deferred tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities,
measured using enacted tax rates.
Concentrations - As of June 30, 1996, the Company held $9.97 million in
various Treasury Notes. The Company's temporary cash investments, $2.6 and
$15.4 million as of June 30, 1996 and 1995, were placed in a money market
account with William Blair Mutual Funds, Inc. These are primarily funds
that were received on June 16, 1995 from the Company's public stock
offering (see Note 2).
Revenues - 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 and post-
contract support 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. 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. The Company's product returns historically have been
insignificant.
Cost of Revenues - Cost of revenues consists primarily of purchases of
third party products, costs of manuals and other materials, software
development cost amortization, royalties, costs related to the Company's
system production department and personnel and other costs associated with
training and support.
Software Development Costs - Software development costs are stated at the
lower of unamortized cost or net realizable value. The Company capitalizes
software development costs subsequent to the establishment of technological
feasibility and until the product is available for general release. Costs
incurred prior to the establishment of technological feasibility are
charged to research and development expenses. Costs associated with product
enhancements that extend the original product's life are also capitalized
upon technological feasibility. Amortization of product development costs
begins the month of general release and extends on a straight-line basis
over 18 months, which results in amortization expense no less than that
which would result from using the ratio of current gross revenues to total
-31-
expected gross revenues. Purchased software development costs are
capitalized and amortized over 18 to 36 months.
Earnings Per Share - Earnings per common and common equivalent share for
all years presented were determined by dividing applicable income amounts
by the weighted average number of common shares and dilutive common share
equivalents outstanding during the period. Shares issued within a one year
period prior to the Company's initial public offering, at prices below the
offering price, have been included in the calculation of weighted average
number of common shares for the years ended June 30, 1995 and 1994, in
accordance with rules promulgated by the Securities and Exchange
Commission.
Statement of Financial Accounting Standards - During 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." The new
standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award
when granted and is recognized as an expense over the service period, which
is usually the vesting period. This standard will be effective for the
Company beginning in 1996, and requires measurement of awards made
beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new method
of accounting. The Company intends to follow these disclosure requirements
for its employee stock plans. As a result, adoption of the new standard
will not impact the Company's results of operations.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the allowance
for doubtful accounts and allowance for sales returns as well as
realization of intangible assets. Actual results could differ from those
estimates.
Fair Value Disclosure - The carrying value of the long-term debt
approximates fair value as interest rates approximate the rate management
believes the Company could refinance the obligations, given the current
market conditions. The carrying value of other financial assets, other than
investments which are discussed in Note 4, and liabilities approximate
their fair values because of the short maturity of those instruments.
2. INITIAL PUBLIC OFFERING
In June 1995, the Company completed a public offering of 2,300,000 shares
of common stock, consisting of 1,500,000 new shares and 800,000 previously
issued shares (including 300,000 shares relating to the exercise of an
over-allotment option by the underwriters), at $13 per share. Prior to the
offering, there was no public market for the Company's common stock. The
Company's stock trades on the NASDAQ National Market System under the
symbol "EGPT".
The net proceeds of the offering, after deducting underwriting discounts
and applicable expenses, were $17,229,921. During June 1995, the Company
used $2,750,000 of the proceeds to acquire its facilities from the
Partnership (See Note 16). The remaining proceeds are intended to be used
for general corporate purposes including capital expenditures and possible
future acquisitions.
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3. ACQUISITIONS
ECOM Associates, Inc.
In November, 1995 the Company merged with ECOM Associates, Inc. ("ECOM"), a
Wisconsin corporation, exchanging all the capital stock of ECOM for 29,730
shares of the Company's common stock. The transaction was accounted for as
a pooling of interests. The pooling did not have a material effect on the
financial statements previously presented and therefore such statements
have not been restated. ECOM, located in Milwaukee, Wisconsin, is a
software developer for the structural engineering market place.
Facility Mapping Systems, Inc.
On March 31, 1995, the Company acquired certain assets of Facility Mapping
Systems, Inc. ("FMS"), a developer and marketer of software for the
geographical information systems market.
The purchase price was $410,000 cash. Additionally, the Company is
obligated to make a contingent payment equal to (1) 100% of the revenues
between $410,000 and $670,000 received by the Company in connection with
the sale of FMS products, during the 12 month period ended March 31, 1996,
plus (2) 50% of such revenues exceeding $670,000. At the discretion of FMS,
the contingent payment is required to be made either in cash or in Company
common stock based on the market value per share at the time of the
contingent payment, as defined. For the 12 months ended March 31, 1996
sales of FMS products did not exceed the $410,000 minimum requirement.
Therefore, no contingent payment has been recorded as of June 30, 1996. Due
to the uncertainty regarding the amount and form of the contingent payment,
no contingent payment was recorded as of June 30, 1995. As part of the
acquisition, a five year non-compete agreement was entered into between the
Company and two former employees of FMS.
LANDCADD, Inc.
On January 1, 1995, the Company acquired substantially all of the assets
and business and assumed certain liabilities of LANDCADD, Inc.
("LANDCADD"), a developer and marketer of software for landscape
architecture, irrigation design and environmental planning.
The purchase price was $819,580 consisting of $350,000 cash, a non-interest
bearing note payable for $200,000 (imputed discount of $26,420 at January
1, 1995) and 37,000 shares of Company common stock (valued by the Company's
Board of Directors at $8 per share). The note is payable over three years
in quarterly installment of $16,667 beginning March 1, 1995. Additionally,
the Company is obligated to make a contingent cash payment equal to 25% of
the revenues received by the Company in connection with the sale of
LANDCADD products exceeding $1,100,000 for the calendar year ending
December 31, 1995. As of December 31, 1995, the Company recorded a payable
of $186,175 with interest payable of $19,333 to be paid quarterly through
December 31, 1997. Due to the uncertainty regarding the amount of the
contingent payment, no contingent payment was recorded as of June 30, 1995.
As part of the acquisition, a five year non-compete agreement was entered
into between the Company and the former owners of LANDCADD.
LANDCADD and FMS acquisitions have been accounted for under the purchase
method, and accordingly, the results of operations of such businesses are
included in the Company's results from their respective dates of
acquisition. For each acquisition, the aggregate cost over fair value of
acquired net assets has been assigned principally to purchased research and
development in process and software development costs based on their
estimated fair market values. The portion of the purchase prices allocated
to research and development that had not yet reached technological
feasibility and had no
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alternative future use was charged to expense on the date of purchase.
Amounts allocated to software development costs and other intangibles will
be amortized on a straight-line basis over their estimate useful lives not
to exceed five years.
Purchase price allocations were as follows:
LANDCADD FMS TOTAL
Current assets $ 122,603 $ 122,603
Property and equipment 67,987 $ 31,125 99,112
Software development costs and
other intangibles 75,043 59,640 134,683
Purchased research and development
in process 719,529 319,235 1,038,764
Current liabilities (128,044) (128,044)
Non-current liabilities (37,538) (37,538)
----------- -------- ----------
$ 819,580 $410,000 $1,229,580
========= ======== ==========
The following table presents selected unaudited pro forma financial
information for the year ended June 30, 1995, assuming the companies had
combined as of the beginning of the period. For purposes of this pro forma
financial information, the $1,038,764 charge for purchased research and
development has been eliminated to more appropriately reflect operations on
a recurring basis.
1995
Net revenues $17,064,004
Income from continuing operations 2,045,441
Net income 2,045,441
Income from continuing operations per
common and common equivalent share $ 0.53
Net income per common and common
equivalent share 0.53
Weighted average common and common
equivalent shares outstanding 3,884,721
The pro forma results are not necessarily indicative of either actual
results of operations that would have occurred had the acquisitions
occurred as of the beginning of each respective period, or future results.
4. INVESTMENTS
Investments represents U.S. Treasury Notes. Notes due in one year or less
have interest rates ranging from 5.625-7.00% with maturity dates ranging
from September 30, 1996 to June 30, 1997. Market value at June 30, 1996 for
these investments was approximately $7,513,281. The Company holds one note
due
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after one year with an interest rate of 5.25% and a maturity date of
December 31, 1997. Market value at June 30, 1996 for this investment was
approximately $2,473,438.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of June 30:
1996 1995
Land $ 637,400 $ 137,400
Buildings and land improvements 1,723,845 1,723,845
Building construction in progress 1,198,748
Computer equipment and purchased 3,143,659 2,007,095
software
Furniture and fixtures 844,877 755,995
Office equipment 508,944 313,309
Vehicles 66,399 51,487
----------- -----------
8,123,872 4,989,131
Accumulated depreciation (2,178,552) (1,333,401)
----------- -----------
$ 5,945,320 $ 3,655,730
=========== ===========
6. ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30:
1996 1995
Salaries and commissions $281,874 $ 280,013
Public offering expenses 515,345
Other 684,880 308,590
-------- ----------
$966,754 $1,103,948
======== ==========
7. NOTES PAYABLE
At June 30, 1996, the Company had a $2,000,000 unsecured operating line of
credit agreement with the bank which expires December 1, 1996. Borrowings
under the line of credit accrue interest at the prime rate (8.25% at June
30, 1996). At June 30, 1996 there was no borrowings outstanding under the
line.
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8. LONG-TERM DEBT
Long-term debt consists of the following as of June 30:
1996 1995
Community Development Block Grant
Loan from the City of Dubuque,
interest at 3%, principal and
interest payments of $3,973 are
due quarterly with final payment
during October 2000,
collateralized by certain
equipment purchased with the
loan proceeds. $ 66,662 $ 80,297
Community Development Block
Grant Loan from the City of
Dubuque, interest at 5%,
interest-only payments were
due annually through January
1995, principal and interest
payments of $28,872 are due
annually beginning January
1996 with final payment
during January 2000,
collateralized by certain
equipment purchased with the
loan proceeds. 102,378 125,000
Community Development Block
Grant Loan from the City of
Dubuque, interest at 3%,
principal and interest
payments of $7,946 are due
quarterly with final payment
during February 2002,
collateralized by certain
inventory, accounts
receivable, equipment and
fixtures of the Company and
guaranteed by certain
stockholders of the Company. 167,284 193,554
Note payable acquired in
acquisition of ECOM,
interest at 5.25%, interest
and principal payments of
$1,235 quarterly with final
payment in September, 1998. 11,446
Non-interest bearing note
payable to the former owners
of LANDCADD for contingent
revenue payment, due in
quarterly installments of
$25,689 with final payment
during December 1997, net of
unamortized discount of
$15,145 based on an imputed
interest rate of 9%. 164,675
Community Economic Betterment
Account Loan from the Iowa
Department of Economic
Development, non-interest
bearing note requiring
annual payments of $28,571
beginning November 1995 with
final payment in November
2001, collateralized by
certain equipment purchased
with the loan proceeds and
guaranteed by certain
stockholders of the Company.
Borrowings become due upon
demand should the Company
not meet certain employment
obligations as of August 31,
1995, and for a thirteen
week period thereafter. 171,429 200,000
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1996 1995
Non-interest bearing note payable to the former
owners of LANDCADD, due in quarterly installments
of $16,667 with final payment during December 1997,
net of unamortized discount of $9,829 based on an
imputed interest rate of 9%. 106,836 147,770
-------- --------
790,710 746,621
Less current portion 288,523 146,295
-------- --------
$502,187 $600,326
======== ========
At June 30, 1996, future principal payments on long-term debt for each of
the five years in the period ended June 30, 2001 are $182,531, $99,627,
$101,040, $66,933, and $52,056, respectively.
9. COMMUNITY ECONOMIC BETTERMENT ACCOUNT ("CEBA") FORGIVABLE LOAN
The CEBA Agreement is an agreement between the Iowa Department of Economic
Development ("Department"), the City of Dubuque, Iowa, and the Company with
the funds designated to purchase machinery, equipment, and furnitures and
fixtures. It is collateralized by a purchase money security interest
covering machinery and equipment purchased with the loan proceeds and a
personal guarantee from certain stockholders of the Company.
As the Company has met certain employment obligations outlined in the
agreement, repayment of principal and interest under the loan has been
temporarily waived until September 30, 1996. Provided these obligations
continue to be satisfied as of September 30, 1996, repayment of principal
and interest will be permanently waived. Upon the Department granting
permanent forgiveness, the Company will recognize the $110,000 principal and
any accrued interest (none at June 30, 1996 or 1995) as income. Should the
obligations not be met, interest will accrue at 9%.
10. STOCKHOLDERS' EQUITY
On August 5, 1994, the Company repurchased, and subsequently retired,
1,625,000 shares of its common stock from a former shareholder for $991,264.
Additionally, the provisions of the repurchase agreement required an
additional payment upon the completion of a public stock offering prior to
June 30, 2001. On May 12, 1995, the Company made an additional $133,390
payment to satisfy the terms of the agreement.
On May 3, 1995, the Company, formerly an Iowa corporation, reincorporated in
the state of Delaware. In conjunction with this reincorporation, the number
of authorized shares of common stock was increased to 20,000,000 and the
related par value per share was increased from $.0001 to $.01. Additionally,
the Board of Directors was authorized to issue an aggregate of 1,000,000
shares of preferred stock with a $.01 par value per share. The specific
terms of the preferred stock, including number of shares, dividend rate,
voting rights, and conversion and redemption provisions, are to be
determined by the Board of Directors upon issuance.
Certain of the Company's loan agreements prohibit the payment of dividends
on the Company's capital stock without prior written consent.
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11. INCOME TAXES
Income tax expense consists of the following for the years ended June 30:
1996 1995 1994
Current:
Federal $1,213,729 $ 929,522 $203,690
State 31,728 (23,257) 9,579
---------- --------- --------
Total current 1,245,457 906,265 213,269
---------- --------- --------
Deferred:
Federal (141,234) (333,590) (35,867)
State (4,591) (13,769) 65
---------- --------- --------
Total deferred (145,825) (347,359) (35,802)
---------- --------- --------
Income tax expense $1,099,632 $ 558,906 $177,467
========== ========= ========
See Note 14 regarding income tax expense related to discontinued operations.
The approximate tax effects of temporary differences that give rise to
deferred tax assets (liabilities) were as follows as of June 30:
1996 1995 1994
Product development costs $ (19,632) $ (88,865) $(139,321)
Depreciation (141,338) (37,322) (64,560)
Accrual to cash basis amortization (115,410) (230,819) (346,229)
Purchased research and development 329,073 353,310
Research and development
tax credits 134,561
Deferred revenues 27,440 54,880 82,320
Prepaid expenses (52,528) (116,011) (16,098)
Allowance for bad debts 44,235 42,008 2,355
Land acquired from Partnership 79,625 79,625
Building acquired from Partnership 258,143 226,650
Other 85,747 66,074 42,868
Iowa new jobs credits 178,000 154,000
Valuation allowance (178,000) (154,000)
--------- --------- ---------
$ 495,355 $ 349,530 $(304,104)
========= ========= =========
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The State of Iowa offers an income tax credit to corporations who have
entered into certain training agreements under Iowa Law. During the years
ended June 30, 1996 and 1995, the Company's management determined that
approximately $190,000 and $170,000 of tax credits, respectively, are
available to the Company since their agreement was entered into (see Note
17). However, as the Company incurs minimal Iowa taxes due to a small
percentage of the Company's gross revenues being generated in Iowa, only
$16,000 in credits were used to reduce 1995 Iowa state taxes.
Approximately $12,000 in credits will be used to reduce 1996 Iowa state
taxes. The credits of $142,000 remaining as of June 30, 1995 can be
carried forward to reduce Iowa taxes through 2005. The additional credits
of $36,000 earned but not utilized as of June 30, 1996 can be carried
forward to reduce Iowa taxes through 2006. Management has fully reserved
the deferred tax asset related to the credit carryforward as they believe
it is more likely than not that the benefit of the carryforward will not
be fully realized prior to its expiration.
Reconciliations of income tax expense with income tax expense computed
using statutory federal rates are as follows for the years ended June 30:
1996 1995 1994
Computed statutory expense $1,111,611 $656,580 $250,749
State income taxes, net of
federal tax benefit 17,910 (24,437) 6,269
Research and development
tax credits (84,134) (75,550)
Other (29,889) 10,897 (4,001)
---------- -------- --------
Income tax expense $1,099,632 $558,906 $177,467
========== ======== ========
12. EXPORT SALES
Net revenues consisted of the following for the years ended June 30:
1996 1995 1994
Domestic $17,958,882 $14,115,389 $8,426,887
Export - Canada 639,210 333,299 193,780
Export - Other 564,032 1,382,730 306,653
----------- ----------- ----------
$19,162,124 $15,831,418 $8,927,320
=========== =========== ==========
13. EMPLOYEE BENEFITS
Profit Sharing - Effective January 1, 1993, the Company established a
profit sharing plan under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to make contributions up to 15% of
their compensation. Under the plan, the Company may contribute to the
plan an amount of matching contributions which is determined at its
discretion. For the years ended June 30, 1996, 1995 and 1994, the
Company's matching contributions were $12,700, $10,313 and $5,505,
respectively.
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Stock Options - Concurrent with the Company's public offering, the Board
of Directors of the Company adopted and the stockholders approved the
Eagle Point Software Corporation Stock Option Plan (the "Plan") which
allows for the issuance of incentive stock options or nonqualified stock
options. Under the Plan, up to an aggregate of 750,000 shares of common
stock may be issued upon the exercise of stock options granted. The Plan
also provides that option prices may not be less than 100% of the fair
market value of the shares on the date of grant. No stock options may be
issued under the Plan after May 1, 2005. Concurrent with the offering, the
Company granted 153,550 options under the Plan at $13 per share. During
the year ending June 30, 1996 an additional 81,300 options were granted by
the Company under the plan at prices from $9.94 to $20.875 per share. Due
to terminations throughout the year, there were 203,530 options
outstanding at June 30, 1996. As of June 30, 1996 and 1995, no options had
yet been exercised.
Employee Stock Purchase Plans - Concurrent with the Company's public
offering, the Board of Directors of the Company adopted and the
stockholders approved the Eagle Point Software Corporation Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan, became effective
on July 1, 1995, permitting eligible employees of the Company to purchase
shares of common stock at below-market prices through payroll deductions.
Shares will be purchased at the lesser of 85% of the fair market value of
the common stock on the first trading day in an annual participation
period and 85% of the fair market value of the common stock on the last
trading day in such period. Under the Purchase Plan, up to 100,000 shares
may be sold. These shares may be newly issued shares or shares acquired by
the Company on the open market. Unless terminated earlier by the Board of
Directors, the Purchase Plan will terminate when 100,000 shares have been
sold.
14. LEASES
The Company leases certain office space and vehicles under operating
leases. Rent expense for the years ended June 30, 1996, 1995 and 1994,
was $185,425, $73,307 and $34,492, respectively. During 1994, the Company
began subleasing a portion of the leased office space to another company.
Sublease income for the years ended June 30, 1996, 1995 and 1994 was
$18,600, $25,351, and $5,000, respectively.
At June 30, 1996, future minimum rental payments due under operating
leases, net of sublease income, for each of the five years in the period
ended June 30, 2001 are $78,464, $56,787, $1,778, $1,778 and $1,778,
respectively.
15. DISCONTINUED HARDWARE OPERATIONS
In October 1993, the Company discontinued its computer hardware
manufacturing division.
The results of operations of the computer hardware manufacturing division
consisted of the following for the year ended June 30, 1994:
Revenue $ 795,693
Expenses 988,129
---------
Loss from operations before income tax benefit (192,436)
---------
Income tax benefit:
Current 39,894
Deferred 27,212
---------
67,106
---------
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Loss from discontinued operations $(125,330)
=========
16. RELATED PARTY TRANSACTIONS
Prior to June 30, 1995, the Company leased its facility from the
Partnership. On June 30, 1995, the Company purchased the facility from
the Partnership. The purchase price was $2,750,000, an amount determined
by the Company's Board of Directors to be the current fair market value of
the property based on a recent independent appraisal, consisting of
$2,632,275 cash and forgiveness of a note payable to the Company of
$117,725. However, the property is reflected on the Company's books at
the Partnership's historical net book value ($1,874,929 at June 30, 1995).
The $875,071 difference between the net book value and purchase price has
been recorded as a reduction of retained earnings, net of deferred taxes
of $306,275.
As discussed in Note 1, the June 30, 1995 and 1994 Statements of Income
represent the historical combined operations of the Company and the
Partnership. Condensed Partnership financial information, prior to
eliminations, is presented below.
1995 1994
Statements of Income:
Rent income - Company $221,457 $199,432
Depreciation expense 71,375 64,198
Interest and other expenses 165,771 132,586
17. INDUSTRIAL NEW JOBS TRAINING AGREEMENT
On September 14, 1992, the Company entered into a ten-year Industrial New
Jobs Training Agreement (the "Training Agreement") with Northeast Iowa
Community College, Calmar, Iowa, to educate and train certain employees.
The Training Agreement will provide the company with approximately
$146,000 in the form of reimbursement for training expenses incurred by
the Company during the term of the agreement. As of June 30, 1995, the
full $146,000 had been received by the Company.
On December 13, 1993 an addendum to the Training Agreement was entered
into. This addendum increased the amount of reimbursement for training
expenses incurred by the Company during the terms of the agreement by
approximately $216,000. As of June 30, 1996 and 1995, $118,500 and $97,500
had been received by the Company, respectively.
In May 1996, a second addendum to the Training Agreement was entered into.
This addendum increased the amount of reimbursement for training expenses
incurred by the Company during the terms of the agreement by approximately
$288,000. As of June 30, 1996 the Company had not received reimbursement
under this addendum.
18. SUBSEQUENT EVENT
On July 29, 1996, the Company purchased substantially all assets of
Computer Integrated Building Corporation, a developer and marketer of
computer software.
The purchase price was $550,000 cash. Additionally, the Company is
obligated to make a contingent cash payment equal to (1) 75% of the
revenues between $550,000 and $743,400 received by the
-41-
Company in connection with the sale of Computer Integrated Building
Corporation's products, during the 12 month period ending July 29, 1997,
plus (2) 50% of such revenues exceeding $743,400, during the 12 month
period ending July 29, 1997. As part of the acquisition, a three year non-
compete agreement was entered into between the Company and former owners.
* * * * * *
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SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, this Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 27, 1996 EAGLE POINT SOFTWARE CORPORATION
/s/ Rodney L. Blum
------------------------------
Rodney L. Blum
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities indicated on this 27th day of September, 1996.
Name Capacity
---- --------
/s/ Rodney L. Blum Chairman of the Board,
- ----------------------- President, Chief Executive Officer and
Rodney L. Blum Director (principal executive officer)
/s/ Dennis J. George Vice President, Chief
- ----------------------- Financial Officer, Secretary, Treasurer
Dennis J. George and Director (principal financial and
accounting officer)
/s/ John F. Biver Vice President and Director
- -----------------------
John F. Biver
/s/ James Hickey Director
- -----------------------
James Hickey
/s/ Thomas Miller Director
- -----------------------
Thomas Miller
-43-
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
3.1* -- Certificate of Incorporation of the Company.
3.2* -- By-laws of the Company.
10.1* -- Loan Agreement between the Company and
the City of Dubuque, dated January 20, 1992.
10.2* -- Loan Agreement between the Company and
the City of Dubuque, dated July 6, 1993.
10.3* -- Loan Agreement between the Company and
the City of Dubuque, dated May 16, 1994.
10.4* -- Community Economic Betterment Account
Agreement between the Company and the
Iowa Department of Economic Development,
dated July 18, 1991.
10.5* -- Community Economic Betterment Account
Agreement between the Company and the
Iowa Department of Economic Development,
dated July 15, 1993.
10.6* -- Asset Purchase Agreement between the
Company and Facility Mapping Systems,
Inc., dated March 31, 1995.
10.7* -- Asset Purchase Agreement between the
Company and LANDCADD, Inc., dated
January 1, 1995.
10.8* -- Redemption Agreement between the
Company, and Scott J. Taylor, dated
August 5, 1994.
.10.9**** -- Employment Agreement with Rodney L. Blum.
.10.10**** -- Employment Agreement with Dennis J. George.
.10.11**** -- Employment Agreement with John F. Biver.
.10.12** -- Eagle Point Software Corporation Stock
Option Plan.
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Sequential
Exhibit No. Description Page Number
- ----------- ----------- -----------
.10.13*** -- Eagle Point Software Corporation Stock
Purchase Plan.
10.14* -- Purchase Agreement between VisionOne
Partnership and the Company, dated as
of May 1, 1995.
10.15* -- Indemnification Agreement among the
Company, Rodney L. Blum, John F. Biver
and Dennis J. George.
10.16***** Merger Agreement between the
Company and ECOM Associates, Inc.,
dated November 9, 1995.
10.17***** Asset Purchase Agreement between the
Company and Computer Integrated
Building Corporation, dated July 29,
1996.
11.1***** -- Statement re: computation of per share
earnings.
21.1***** Subsidiaries
23.1***** -- Consent of Deloitte & Touche LLP.
27***** Financial Data Schedule
- -------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-91950)
** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96914)
*** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96918)
**** Incorporated by reference from the Company's 1995 Annual Report on Form
10-K
***** Filed herewith.
. Indicates management contract or compensatory plan or arrangement.
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