_______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number: 0-26170
EAGLE POINT SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 42-1204819
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
4131 WESTMARK DRIVE, DUBUQUE, IA 52002-2627
(address of principal executive offices)
(319) 556-8392
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest applicable date.
Common Stock, par value $.01 per share, outstanding as of May 12, 1997:
4,941,730 shares
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________________________________________________________________________________
EAGLE POINT SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
-----------------------------
PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets -
March 31, 1997 and June 30, 1996 3
Statements of Operations -
for the three months ended March 31, 1997 and 1996
and the nine months ended March 31, 1997 and 1996 5
Statements of Cash Flows -
for the nine months ended March 31, 1997 and 1996 6
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE POINT SOFTWARE CORPORATION
BALANCE SHEETS
- -------------------------------------------------------------------
MARCH 31, JUNE 30,
------------- ------------
1997 1996
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,415,441 $ 3,106,704
Short-term investments 4,981,096 7,508,561
Accounts receivable (net of
allowances of $377,383 and $251,344,
respectively) 1,985,717 3,857,170
Income tax receivable 688,177
Interest receivable 67,969 255,290
Inventories 516,401 369,172
Prepaid expenses 219,348 150,081
Other assets 39,947 22,933
------------- ------------
Total current assets 14,914,096 15,269,911
INVESTMENTS 2,466,032
PROPERTY & EQUIPMENT (net of
accumulated depreciation of $2,934,184
and $2,178,552 , respectively) 7,562,386 5,945,320
SOFTWARE DEVELOPMENT COSTS (net of
accumulated amortization of
$69,544 and $242,753, respectively) 69,417 213,417
GOODWILL (net of accumulated
amortization of $101,666 and $52,600,
respectively) 164,179 203,174
DEFERRED INCOME TAXES 497,945 497,945
------------- ------------
TOTAL ASSETS $23,208,023 $24,595,799
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 261,023 $ 288,523
Accounts payable 192,127 252,768
Accrued expenses 1,281,875 966,754
Income taxes payable 3,051
Deferred revenues 752,824 1,540,998
Deferred income taxes 2,590 2,590
------------- ------------
Total current liabilities 2,490,439 3,054,684
LONG-TERM DEBT 331,540 502,187
CEBA FORGIVABLE LOAN 0 110,000
------------- ------------
Total liabilities $ 2,821,979 $ 3,666,871
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EAGLE POINT SOFTWARE CORPORATION
BALANCE SHEETS (CONTINUED)
- -------------------------------------------------------------------
MARCH 31, JUNE 30,
------------- -----------
1997 1996
STOCKHOLDERS' EQUITY: (Unaudited) (Audited)
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at March 31, 1997 and June 30, 1996
Common stock, $.01 par value; 20,000,000 shares authorized; 4,941,730 shares
issued and outstanding at March 31, 1997 and June 30, 1996 49,417 49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 2,800,685 3,343,569
------------- -----------
Total stockholders' equity 20,386,044 20,928,928
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $23,208,023 $24,595,799
============= ===========
SEE NOTES TO FINANCIAL STATEMENTS
EAGLE POINT SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues:
Product sales $3,193,611 $3,281,828 $ 9,459,025 $10,931,164
Training and support 876,788 1,223,516 2,882,903 3,411,788
------------ ----------- ----------- ------------
Total net revenues 4,070,399 4,505,344 12,341,928 14,342,952
------------ ----------- ----------- ------------
Cost of revenues:
Product sales 1,004,132 1,012,196 3,079,225 3,198,747
Training and support 220,757 152,311 616,495 495,075
Write-down of capitalized software 266,153 266,153
------------ ----------- ----------- ------------
Total cost of revenues 1,491,042 1,164,507 3,961,873 3,693,822
------------ ----------- ----------- ------------
Gross profit 2,579,357 3,340,837 8,380,055 10,649,130
------------ ----------- ----------- ------------
Operating expenses:
Selling and marketing 1,320,950 1,659,853 4,331,210 4,819,301
Research and development 964,966 949,778 2,838,890 2,623,951
General and administrative 692,230 397,755 1,866,490 1,178,216
Charge for purchased research and
development and other acquisition related expenses 2,733 475,393 43,075
Charge for claims, settlements and contingencies 234,794
Office closing and restructuring charges 155,935 155,935
------------ ----------- ----------- ------------
Total operating expenses 3,134,081 3,010,119 9,902,712 8,664,543
------------ ----------- ----------- ------------
Operating income (loss) (554,724) 330,718 (1,522,657) 1,984,587
Other income:
Interest income, net of interest expense 143,362 164,210 455,103 549,714
Other income, net 6,040 5,932 125,584 22,709
------------ ----------- ----------- ------------
Income (loss) before income taxes (405,322) 500,860 (941,970) 2,557,010
Income tax expense (benefit) (161,433) 195,383 (399,086) 883,700
------------ ----------- ----------- ------------
Net income (loss) ($243,889) $ 305,477 ($542,884) $ 1,673,310
============ =========== =========== ============
Weighted average common and common equivalent
shares outstanding 4,941,730 4,970,906 4,941,730 4,971,288
============ =========== =========== ============
Net income (loss) per common and common
equivalent share ($0.05) $0.06 ($0.11) $0.34
============ =========== =========== ============
SEE NOTES TO FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
---------------------------------------
1997 1996
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($542,884) $ 1,673,311
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 818,690 528,846
Amortization of software development costs 419,220 248,293
Charge for purchased research and development 475,393
Forgiveness of CEBA Loan (110,000)
Changes in assets and liabilities:
Accounts receivable 1,871,453 (1,335,638)
Interest receivable 187,321
Income tax receivable (688,177)
Inventories (147,229) 51,035
Prepaid expenses (69,267) (13,211)
Accounts payable (60,641) (299,476)
Income taxes payable (3,051) (798,676)
Deferred revenues (788,174) 350,898
Accrued expenses 315,121 (206,915)
Other (17,014) 71,386
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Net cash provided by operating activities 1,660,761 269,853
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term bills 4,993,497
Purchases of property and equipment, net (2,352,698) (1,616,797)
Purchases of software (243,000) (129,500)
Payments to acquire companies, net of cash acquired (551,676)
------------- --------------
Net cash provided by (used in) in investing activities 1,846,123 (1,746,297)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (198,147) (177,518)
------------- --------------
Net cash used in financing activities (198,147) (177,518)
------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,308,737 (1,653,962)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,106,704 15,742,926
------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,415,441 $14,088,964
============= ==============
6
EAGLE POINT SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
- ------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
--------------------------------------
1997 1996
(Unaudited) (Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest ($264,573) ($549,714)
============== ===============
Income taxes $292,144 $1,712,415
============== ===============
SEE NOTES TO FINANCIAL STATEMENTS
7
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Eagle Point Software Corporation (the
"Company") are unaudited. In the opinion of the Company's management, the
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial position of the
Company as of March 31, 1997 and June 30, 1996, and the results of operations
and cash flows for the three-month and nine-month periods ended March 31, 1997
and 1996.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this quarterly report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 30, 1996.
2. INCOME TAXES
Income taxes differ from statutory rates principally due to research and
development tax credits. The research and development tax credits expired and
were not available for the period July 1, 1995 to June 30, 1996. Effective July
1, 1996 through June 30, 1997, the federal government has reinstated the
research and development tax credits. No assurance can be given that this tax
credit will continue beyond June 30, 1997.
3. BUSINESS COMBINATION
On July 29, 1996, the Company purchased substantially all of the assets of
Computer Integrated Building Corporation, a California Corporation ("CIBC").
The purchase price was $551,676 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. As
part of the acquisition, a three year non-compete agreement was entered into
between the Company and the former owners of CIBC. CIBC, located in Sebastopol,
California, is a software developer for the home builder marketplace.
4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
During October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ('FAS123'). FAS123 encourages companies to adopt a fair value
method of accounting for employee stock-based compensation and requires fair
value accounting for equity instrument issued to non-employees. FAS123, which
is effective for fiscal years beginning after December 15, 1995, also requires
certain disclosures regarding the fair value of stock-based arrangements.
Management has decided not to adopt the fair value method of accounting for
employee stock-based compensation.
8
5. CEBA FORGIVABLE LOAN
The Company entered into an agreement with the Iowa Department of Economic
Development, and the City of Dubuque, Iowa for the purpose of securing a
forgivable loan in support of economic development. The proceeds from the loan
were designated to purchase machinery, equipment, and furniture and fixtures.
As the Company has met all the necessary requirements outlined in the agreement
for waiver of the principal and interest as of September 30, 1996, the Company
has recognized the $110,000 principal as other income.
6. OTHER ITEMS
Other charges of $710,000 were incurred during the nine months ended March 31,
1997. The Company incurred non-recurring charges in the quarter ended September
30, 1996, $475,000 related to purchased research and development in connection
with the CIBC acquisition. The Company also incurred a charge of $235,000 in
the quarter ended December 31, 1996, reflecting claims, settlements and
contingencies relating to issues asserted by former employees and the U.S.
Department of Labor based on the 1938 Fair Labor Standards Act.
7. RESTRUCTURING
The Company made a decision to consolidate operations from certain of it's
remote offices to the home office. In the quarter ended March 31, 1997, the
Company incurred charges of $156,000 relating to office closings and
restructuring due to those closings. The remaining charge of $266,000 incurred
in the quarter ended March 31, 1997, related to the write-down of certain
capitalized software products to more accurately reflect anticipated future
revenues for those products.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q contains forward looking statements,
including without limitation, the results of any litigation brought against the
Company. These forward looking statements involve risks and uncertainties,
which could cause actual results to differ from those projected. These as well
as other risks and uncertainties are detailed from time to time in reports filed
by the Company with the Securities and Exchange Commission, including this
report on Form 10-Q for the quarter ended March 31, 1997 and the Company's
report on Form 10-K for the year ended June 30, 1996.
RESULTS OF OPERATIONS
Net revenues decreased by $2.0 million, or 14%, to $12.3 million for the
nine months ended March 31, 1997 (the "1997 Period"), from $14.3 million for the
nine months ended March 31, 1996 (the "1996 Period"). The Company experienced a
decrease in product sales, primarily attributable to a soft AutoCAD and AutoCAD-
related market, the negative impact from customers delaying purchases of Eagle
Point products as they invest in upgrading their hardware and software as they
move from DOS to Windows, as well as uncertainty caused by the merger between
Autodesk, Inc. and Softdesk, Inc. These market conditions have negatively
effected the Company's results of operations over the past six quarters and
there can be no assurance that such conditions will not continue to adversely
effect the Company's net revenues or results of operations. Training and
support revenues decreased by $529,000, or 15.5%, to $2.9 million in the 1997
Period from $3.4 million for the 1996 Period.
Gross profit decreased $2.2 million, or 21.3%, to $8.4 million for the 1997
Period from $10.6 million for the 1996 Period as a result of the decrease in net
revenues. Gross profit as a percentage of net revenues decreased to 67.9% in
the 1997 Period from 74.2% in the 1996 Period. Gross profit as a percentage of
corresponding net revenues relating to product sales decreased to 64.6% in the
1997 Period from 70.7% in the 1996 Period primarily due to a reduced percentage
of sales of Eagle Point's software products and an increased percentage of
resales of AutoCAD in the sales mix. The sales of Eagle Point products, which
carry with them a higher gross profit margin, decreased to 77.9% of product
sales in the 1997 Period from 82.6% in the 1996 Period. The resales of AutoCAD,
which carry with them a lower gross profit margin, increased to 22.1% of product
sales in the 1997 Period from 17.4% in the 1996 Period. Gross profit relating
to product sales was also adversely impacted in the 1997 Perios due to the
$266,000 write-down of capitalized software to more accurately reflect
anticipated future revenues from certain products. Gross profit as a percentage
of corresponding net revenues relating to training and support in the 1997
Period decreased to 78.6% from 85.5% in the 1996 Period due to increased costs
associated with providing training to our clients.
Selling and marketing expense decreased $488,000, or 10.1%, to $4.3 million
in the 1997 Period from $4.8 million in the 1996 Period. As a percentage of net
revenues, selling and marketing expenses increased to 35.1% in the 1997 Period
from 33.6% in the 1996 Period. The
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
decrease in expenses was primarily attributable to lower personnel costs
associated with a reduced selling and marketing staff size.
Research and development expense increased $215,000, or 8.2%, to $2.8
million in the 1997 Period from $2.6 million in the 1996 Period. As a
percentage of net revenues, research and development expenses increased to 23.0%
in the 1997 Period from 18.3% in the 1996 Period. The increase is primarily
attributable to higher personnel costs associated with an expanded research and
development staff.
General and administrative expense increased $688,000, or 58.4%, to $1.9
million in the 1997 Period from $1.2 million in the 1996 Period. As a
percentage of net revenues, general and administrative expense increased to
15.1% in the 1997 Period from 8.2% in the 1996 Period. This increase is due to
increased costs relating to the Company's expansion of the facilities, risk
management costs, and higher personnel costs associated with increased general
and administrative staff.
Other charges of $866,000 were incurred in the 1997 Period. The Company
incurred non-recurring charges of $475,000 related to purchased research and
development in connection with the CIBC acquisition. The Company also incurred
a charge of $235,000 reflecting claims, settlements and contingencies relating
to issues asserted by former employees and the U.S. Department of Labor based on
the 1938 Fair Labor Standards Act. The Company also incurred charges of
$156,000 relating to office closings and restructuring due to those closings.
Operating income from continuing operations decreased to a net loss of $1.5
million in the 1997 Period from net income of $2.0 million in the 1996 Period.
Excluding other charges, operating income from continuing operations decreased
$2.4 million to a net loss of $390,000 in the 1997 Period from net income of
$2.0 million in the 1996 Period, and as a percentage of revenues decreased to a
negative 3.1% in the 1997 Period from 14.2% in the 1996 Period, all as a result
of the factors described above.
Interest expense increased $2,000 to $23,000 in the 1997 Period from
$21,000 in the 1996 Period. Interest income decreased $93,000 to $478,000 in
the 1997 Period from $571,000 in the 1996 Period. The decrease in interest
income was due to a reduction in the Company's cash and cash investment
primarily relating to the funding of the expansion of the Company's headquarters
and principal operating facilities located in Dubuque, Iowa.
The Company received a non-recurring one-time gain of $110,000 in other
income in the 1997 Period. The gain resulted from the scheduled forgiveness of
debt relating to an economic development loan the Company received from the
State of Iowa (See Note 5 of "Notes to Financial Statements"). None of the
Company's current indebtedness are forgivable loans nor does the company expect
to receive any additional forgivable loans in the future.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company has completed the expansion of the Dubuque Facility with the
final cost of the project totaling $3.5 million all of which has been expended
as of March 31, 1997.
On July 29, 1996, the Company completed the CIBC acquisition. The purchase
price was $551,676 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.
On May 1, 1997, the Company's Board of Directors authorized a stock
repurchase program, approving the purchase of up to 500,000 shares of Common
Stock from time to time either in the open market or in privately negotiated
transactions.
The Company's financial position remains strong, with working capital of
$12.4 million and long-term debt of only $332,000. Cash, short-term, and long-
term investments aggregated approximately $11.4 million at March 31, 1997. The
Company also has available a $2.0 million unsecured line of credit from its
principal commercial bank, which currently has no outstanding balance. The
Company believes that existing cash balances, together with funds generated from
operations and borrowings available under its line of credit, will be sufficient
to fund its operations through fiscal 1997.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An action against the Company has been brought by a group of former employees
asserting improper overtime pay practices under the 1938 Fair Labor Standards
Act. The Company has been working with the Department of Labor regarding these
assertions. The Company and the Department of Labor have reached a settlement
agreement. The company has taken a $235,000 charge which the Company currently
estimates to be sufficient to cover the settlement negotiated with the
Department of Labor as well as future costs and necessary expenses relating to
the ongoing litigation.
ITEM 5. OTHER INFORMATION
On July 29, 1996, the Company purchased substantially all of the assets of
Computer Integrated Building Corporation, a California Corporation ("CIBC").
The purchase price was $551,676 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. As
part of the acquisition, a three year non-compete agreement was entered into
between the Company and the former owners of CIBC. CIBC, located in Sebastopol,
California, is a software developer for the home builder marketplace.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement Regarding Computation of Net Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
--------------------------------
(Registrant)
Date: May 15, 1997 BY: /s/ Rodney L. Blum
- ------------------- ----------------------------------
Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: May 15, 1997 BY: /s/ Dennis J. George
- ------------------- ----------------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
14
EXHIBIT INDEX
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Exhibit No. Description Page No.
- ----------- ----------- --------
11 --- Statement re: computation of net earnings per share
27 --- Financial Data Schedule
15