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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, 1997
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 42-1204819
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification 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
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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 17, 1997 was $7,817,891. 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 17, 1997:
4,809,354.
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 2, 1997 (the "Proxy Statement").
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PART I
Item 1. Business
Eagle Point Software Corporation (the "Company" or "Eagle Point") is a
developer and marketer of application software for use by professionals in the
architecture, engineering, construction ("AEC") industries. The Company's
product line includes software 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 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 pre-design planning and asset
management software applications for planning and 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 structural engineers (the "ECOM Merger"). In July, 1996 the Company acquired
substantially all of the assets of Computer Integrated Building Corporation
("CIBC"), a California-based developer of software applications for home
building professionals (the "CIBC Acquisition"). Unless otherwise indicated, all
references herein to the "Company" refer to Eagle Point Software Corporation and
its predecessors.
The AEC Software Market
The Company's software products are principally designed for use by
professionals in the AEC industries. These professionals use AEC-related
software in a variety of applications, including: pre-design planning; asset
management; civil engineering/surveying; architecture and building design;
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 application software is highly fragmented,
with over 100 companies estimated to be offering some form of AEC 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 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.
The Company has focused limited resources on serving the segments of
the AEC market consisting of large organizations, (such as FORTUNE 1000
companies, large engineering and consulting firms and larger city/state/federal
government agencies). 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 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 a large portion 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 developing 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 and the incorporation of local engineering regulations and
requirements. The Company anticipates that an increasing number of its products
may be translated into foreign languages, contingent upon economic feasibility,
in the future to enhance their appeal to international customers. At this time
the Company does not have any international offices. The Company's
international revenues (excluding Canada) were $849,000 in fiscal 1997 or
approximately 5.4% 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."
Products
The Company's products are organized into the following product
families: Civil Engineering/Surveying; Building Design and Construction;
Hydrology/Hydraulics; Landscape Architecture; 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
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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. However, the Company has been notified by Autodesk, the
producers of AutoCAD, that as of January 31, 1998 the Company will no longer be
allowed to resell AutoCAD. See "Risk Factors --Dependence on Autodesk and
Bentley Systems; --Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Overview".
Civil Engineering/Surveying. 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.
Building Design and Construction. The Building Design and
Construction product series can be used by architects and home building
professionals to design homes and 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. A portion of the Building Design and Construction product line
was acquired by the Company on July 29, 1996 in connection with the CIBC
Acquisition.
Hydrology/Hydraulics. The Hydrology/Hydraulics product series aids
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. The Landscape Architecture product series is
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 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 product line was acquired by
the Company on January 1, 1995 in connection with the LANDCADD Acquisition.
Structural Engineering. The Structural Engineering products series
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
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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 which consisted of 74 professionals
at June 30, 1997 representing 31% less telesales professionals than were
employed by the Company as of 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. 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 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.
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 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. 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
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and allow the Company to develop product enhancements that can be marketed to
other users.
Approximately 23% of the Company's revenues for fiscal 1997 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. A majority of the modules
offered 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 market has been intense and continues to
increase. In March of 1997, Autodesk, who was primarily a CAD software
provider, acquired Softdesk, Inc. ("Softdesk"), an application solutions
provider and a principal competitor to the Company. In light of Autodesk's
recent cancellation of the Company's ability to resell AutoCAD, it appears that
Autodesk and Softdesk together have increased competitive pressures. The
Company's inability to resell AutoCAD will have an adverse effect on the
Company's revenues and gross profit, and may also have an adverse effect on the
Company's ability to sell its own products. In addition, the inability to
market itself as an authorized reseller of AutoCAD may hurt the perception of
the Company in the marketplace. Also, in 1996 Bentley Systems made an
undisclosed equity investment in GEOPAK Corporation, an application solutions
provider and competitor to the Company.
The Company currently faces competition from two basic types of
competitors. The first category includes companies principally offering
integrated proprietary CAD software and application solutions. The primary
competitors within this group are Autodesk, Intergraph Corporation, Bentley
Systems and a number of mid-sized companies serving various foreign markets.
Most of the Company's competitors within this group have significantly greater
financial and marketing resources than the Company.
To a lesser extent, the Company competes with the second category of
competitors which includes companies which offer AEC application software
products, many of which are AutoCAD or MicroStation-based, similar to products
offered by the Company. The primary competitor in this category was Softdesk,
which, as a subsidiary of Autodesk, offers a broad line of software applications
for the AEC market. Intergraph Corporation, Research Engineers and GEOPAK, as
well as a number of smaller companies, also serve certain target markets within
the AEC market.
As identified, two of the sources of competition for the Company are
Autodesk, the developer of AutoCAD, and Bentley Systems, the developer of
MicroStation. Approximately 52.6% of the Company's net revenues for fiscal 1997
were related to AutoCAD, including 36.7% from the sale of the Company's software
products designed for use with AutoCAD and 15.9% derived from the resale by the
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Company of AutoCAD. In addition, 5.1% 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.
The Company believes that the principal bases for competition in the
AEC 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."
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. Ten of the Company's currently offered modules
depend on licensed technology. For fiscal 1997, sales of such ten modules
accounted for approximately 10% of the Company's net revenues for such period.
None of the Company's other modules rely upon such ten 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
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As of June 30, 1997, the Company had 193 employees, including 95 in
sales and marketing, 65 in product development and 33 in general and
administrative functions.
Recent Developments
The Company has been notified by AutoDesk that as of January 31, 1998,
the Company will no longer be allowed to resell AutoCAD. This will have an
adverse effect on revenues and gross profit and could also have an adverse
effect on the Company's ability to sell it's own products.
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 1997,
approximately 52.6% of the Company's net revenues were related to AutoCAD,
including 36.7% from the sale of Eagle Point software products designed for use
with AutoCAD and 15.9% derived from the resale by the Company of AutoCAD. In
addition, 5.1% 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. During fiscal year
1997, 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, 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, however the
Company has been notified by AutoDesk that as of January 31, 1998 the Company
will no longer be allowed to resell AutoCAD. This will have an adverse effect on
revenues and gross profit and could also have an adverse effect on the Company's
ability to sell it's own products. Any further adverse change in the business
results of, or the Company's relationship with, Autodesk, or Bentley Systems
could have a material adverse effect on the Company's business, operating
results or financial condition.
Competition. Competition in the AEC market has been intense and
continues to increase. In March of 1997, Autodesk, who was primarily a CAD
software provider, acquired Softdesk, Inc., an application solutions provider
and a principal competitor to the Company. In light of Autodesk's recent
cancellation of the Company's ability to resell AutoCAD, it appears that
Autodesk and Softdesk together have increased competitive pressures. The
Company's inability to resell AutoCAD will have an adverse effect on the
Company's revenues and gross profit, and may also have an adverse effect on the
Company's ability to sell its own products. In addition, the inability to market
itself as an authorized reseller of AutoCAD may hurt the perception of the
Company in the marketplace. Also, in 1996 Bentley Systems made an undisclosed
equity investment in GEOPAK Corporation, an application solutions provider and
competitor to the Company.
The Company faces competition from companies offering stand-alone CAD
systems as well as from companies offering AutoCAD-based or MicroStation-based
software applications including Autodesk and 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 software industry are relatively low and the risk
of new competitors entering the market is high. In addition, the AEC software
industry is experiencing consolidation which has resulted 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
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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."
Losses from Operations. The Company has incurred operating losses for
the past four quarters. Due to a continued softness in the AutoCAD related
marketplace and increasing competitive pressures, including those related to the
acquisition by Autodesk, of Softdesk, there can be no assurances as to when the
Company will return to profitability.
Management of Growth. The Company's business has grown significantly
over the past several years. The Company has recently completed expansion of 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. The Company has pursued 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 may 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. The Company believes that such contingent payments, if any, would not
have a material adverse effect on the Company's results of operations.
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 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
-9-
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 "Business -- 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".
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 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 5.4% of the Company's revenues in
fiscal 1997 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
-10-
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 54% 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:
Location General Description
- --------------------------------------------------- ---------------------------------------------------
Eagle Point Software Corporation: Corporate headquarters and
Dubuque, Iowa principal operating facility of
77,000 square feet (the "Dubuque Facility") (owned)
Former LANDCADD operations: Development facility consisting
Denver, Colorado of 6,000 square feet (leased)
Former ECOM operations: Development facility consisting
Milwaukee, Wisconsin of 220 square feet (leased)
- --------------------------------------------------------------------------------------------------------
Item 3. 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
-11-
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 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 17, 1997 was 224, some of
which are street name holders and depository trusts representing beneficial
shareholders. The Company has more than 1,000 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 17, 1997 the closing sales price of the Company's Common
Stock was $3.50. 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
- ------------- -------------------
September 30, 1995 ........................ $24.25 $16.25
December 31, 1995 ........................ $22.25 $15.25
March 31, 1996 ........................ $21.00 $ 8.00
June 30, 1996 ........................ $10.75 $ 6.50
September 30, 1996 ........................ $ 7.00 $ 3.63
December 31, 1996 ........................ $ 6.38 $ 3.50
March 31, 1997 ........................ $ 5.50 $ 3.25
June 30, 1997 ........................ $ 4.56 $ 3.00
Item 6. Selected Financial Data
The statement of operations data presented below for each of the
fiscal years ended June 30, 1997, 1996, 1995, 1994 and 1993 and the balance
sheet data at June 30, 1997, 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 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,
--------------------------
1997 1996(1) 1995(2) 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
Statement of Income Data(3)(4):
Net revenues:
Product sales $12,213 $14,580 $13,344 $7,695 $6,051
Training and support 3,592 4,582 2,487 1,232 801
------- ------- ------- ------ ------
Total net revenues 15,805 19,162 15,831 8,927 6,852
------- ------- ------- ------ ------
Cost of revenues
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Cost of Product Sales, Training, & Support 4,782 5,073 4,834 3,151 2,374
Charge for revaluation of capitalized software 294(7) - - - -
------- ------- ------- ------ ------
Total cost of revenues 5,076 5,073 4,834 3,151 2,374
------- ------- ------- ------ ------
Gross profit 10,729 14,089 10,997 5,776 4,478
------- ------- ------- ------ ------
Operating expenses:
Selling and marketing 5,594 6,421 4,324 2,377 1,814
Research and product development 3,817 3,511 2,129 1,698 1,158
General and administrative 2,476 1,680 1,493 820 588
Non-recurring charges 866(8) 43 1,039(5) - -
------- ------- ------- ------ ------
Total operating expenses 12,753 11,655 8,985 4,895 3,560
------- ------- ------- ------ ------
Operating income (loss) from continuing
operations (2,024) 2,434 2,012 881 918
------- ------- ------- ------ ------
Interest income (expense), net 601 711 (166) (156) (77)
Other income (expense), net 126 31 30 (9) (7)
------- ------- ------- ------ ------
Income (loss) from continuing operations
before income taxes (1,297) 3,176 1,876 716 834
Income tax expense (benefit) (633) 1,100 559 177 239
------- ------- ------- ------ ------
Income (loss) from continuing operations (664) 2,076 1,317 539 595
Income (loss) from discontinued operations - - - (125) (9)
------- ------- ------- ------ ------
Net income (loss) $ (664) $ 2,076 $ 1,317 $ 414 $ 586
======== ======= ======= ====== ======
Per Share:
Income (loss) from continuing operations (.13) $ .42 $ .34(5) $ .11 $ .12
Net income (loss) (.13) $ .42 $ .34 $ .08 $ .12
Weighted average number of common
shares outstanding(6) 4,930(9) 4,958 3,873 5,010 5,010
Fiscal Year Ended June 30,
--------------------------
1997 1996(1) 1995(2) 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
Balance Sheet Data(3)(at period end):
Working capital $11,429 $12,215 $15,282 $ 76 $ 577
Total assets 22,967 24,596 23,579 5,605 5,014
Total debt 578 901 857 2,197 1,955
Stockholders' equity 19,756(9) 20,929 18,985 1,836 1,422
(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 15 of Notes to Financial Statements.
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(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.
(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.
(7) During fiscal year 1997, the Company incurred a charge of $294,000 related
to the charge for revaluation of certain capitalized software products to
more accurately reflect anticipated future revenues for those products.
(8) In connection with the CIBC Acquisition the portion of the aggregate
purchase price related to the 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 the Notes to Financial Statements. During fiscal
year 1997 the Company incurred a charge of $235,000 reflecting claims,
settlements, and contingencies relating issues asserted by former employees
and the U.S. Department of Labor based on the 1938 Fair Labor Standards
Act. The Company made a decision to consolidate operations from certain of
it's remote offices to the home office. During fiscal year 1997, the
Company incurred charges of $156,000 relating office closings and
restructuring due to those closings.
(9) The Board of Directors for the Company authorized subject to certain
business and market conditions the repurchase of up to 500,000 shares of
the Company's Common Stock in the open market from time to time or in
privately negotiated transactions. At June 30, 1997, the Company had
repurchased as treasury stock 123,000 shares at an aggregate cost to the
Company of $508,875.
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 professionals. Over half of the
Company's software 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 software as a result of the ECOM Merger. On July 29, 1996, the
Company added 2 modules of Building Designed Construction software as a result
of the CIBC Acquisition. The LANDCADD Acquisition, the FMS Acquisition and the
CIBC 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
-14-
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 reflect a non-recurring charge for purchased research and
development of approximately $475,000 for fiscal 1997 and $1.0 million for
fiscal 1995. 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.
The Company resells AutoCAD in order to facilitate the additional
sales of the Company's software application products. Resales of AutoCAD
represented approximately 15.9% of net revenues in fiscal 1997. The resales of
AutoCAD carry a substantially lower gross-margin than sales of Eagle Point
software products and represented approximately 3.8% of gross profit in the same
period. The Company has been notified by AutoDesk that as of January 31, 1998,
the Company will no longer be allowed to resell AutoCAD. This will have an
adverse effect on revenues and gross profit and could also have an adverse
effect on the Company's ability to sell it's own products. See "Risk Factors--
Competition."
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 and Seasonality."
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 1997 Compared to Fiscal 1996.
Net revenues decreased by $3.4 million, or 17.5% to $15.8 million for
the fiscal year ended June 30, 1997 from $19.2 million for the fiscal year ended
June 30, 1996. The Company experienced a decrease in product sales and training
and supports sales, primarily attributable to a soft AutoCAD and AutoCAD-related
market for the majority of the year, the negative impact from customers delaying
purchases of Eagle Point products and services 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.
-15-
Gross profit decreased $3.4 million, or 23.9% to $10.7 million for
fiscal 1997 from $14.1 million for fiscal 1996 as a primary result of the
decrease in net revenues. Gross profit was also adversely impacted in fiscal
1997 due to the $294,000 one-time charge for revaluation of capitalized software
to more accurately reflect anticipated future revenues from certain products.
Gross profit as a percentage of net revenues decreased to 67.9% in fiscal 1997
from 73.5% in fiscal 1996. Proforma gross profit as a percentage of net
revenues, excluding the one-time charge for revaluation of capitalized software
was 69.7% for fiscal 1997. Gross profit as a percentage of corresponding net
revenues relating to product sales decreased to 67.9% in fiscal 1997 from 70.0%
in fiscal 1996 primarily due to a decreased percentage of sales of Eagle Point's
software products and an increased percentage of resales of AutoCAD in the sales
mix. Gross profit as a percentage of corresponding net revenues relating to
training and support decreased to 76.0% in fiscal 1997 from 84.7% in fiscal 1996
primarily due to increased cost relating to providing training.
Selling and marketing expense decreased $800,000, or 12.9%, to $5.6
million in fiscal 1997 from $6.4 million in fiscal 1996. As a percentage of net
revenues, selling and marketing expenses increased to 35.4% in fiscal 1997 from
33.5% in fiscal 1996. The decrease in expense was primarily due to the lower
personnel costs associated with reduced sales and marketing. The increase in
percentage was primarily attributable to the decrease in net revenues exceeding
the corresponding decrease in expense.
Research and development expense increased $300,000 or 8.7% to $3.8
million in fiscal 1997, from $3.5 million in fiscal 1996. As a percentage of net
revenues, research and development expenses increased to 24.2% in fiscal 1997
from 18.3% in fiscal 1996. The increased research and development expenses
related primarily to the increased personnel costs associated with an increase
in the development staff.
General and administrative expense increased $800,000, or 47.3%, to
$2.5 million in fiscal 1997 from $1.7 million in fiscal 1996. As a percentage of
net revenues general and administrative expense increased to 15.7% in fiscal
1997 from 8.8% in fiscal 1996. The increase was attributable primarily to higher
overhead expenses related to the expanded facilities and higher risk management
costs.
Non-recurring 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. As compared to the $43,000 charge for acquisition related
expenses incurred in fiscal 1996 in connection with the ECOM Merger.
Operating income from continuing operations decreased $4.4 million, or
184.1%, to a $2.0 million operating loss in fiscal 1997 from a $2.4 million
operating profit in fiscal 1996 and, as a percentage of net revenues, decreased
to -12.8% in fiscal 1997 from 12.7% in fiscal 1996. Excluding the $866,000 of
non-recurring charges in fiscal 1997 and the $294,000 charge for revaluation of
capitalized software in fiscal 1997 and the $43,000 of non-recurring charges in
fiscal 1996 the operating income from continuing operations decreased $3.3
million to $864,000 operating loss in fiscal 1997 from a $2.5 million operating
profit in fiscal 1996, and as a percentage of revenues decreased to -5.5% in
fiscal 1997 from 12.9% in fiscal 1996, as a result of the factors described
above.
Interest expense increased $8,000 to $32,000 in fiscal 1997 from
$24,000 in fiscal 1996. Interest income decreased $102,000 to $633,000 in fiscal
1997 from $735,000 in fiscal 1996. The decrease was primarily attributed to a
reduction in the cash position relative to expenditures for the Company's
expansion of its facilities.
The Company's effective tax rate on the loss from continuing
operations was 48.8% for fiscal 1997 compared to the effective tax rate on
income from continuing operations was 34.6% in fiscal
-16-
1996. The primary reason for the higher effective tax rate was the Company's
utilization of research and development tax credits in addition to the tax
benefits relating to the Company's tax loss position. Effective July 1, 1996
through June 30, 1997 the federal government reinstated the research and
development tax credit. This tax credit was subsequently extended to June 30,
1998.
Fiscal 1996 Compared to Fiscal 1995.
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
-17-
$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.
Liquidity and Capital Resources
The Company has funded it's operations to date primarily through cash
generated from operations, borrowings and equity capital financings. At June 30,
1997, the Company had cash, cash equivalents and short-term investments of $11.3
million and working capital of $11.4 million as compared with cash, cash
equivalents, short-term investments, and long-term investments of $13.1 million
and working capital of $12.2 million as of June 30, 1996. The decreases are
primarily attributable to 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, 1997, 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, 1997, these loans carried a weighted
average interest rate of approximately 2.5% per annum. These loans mature at
various dates through the year 2002.
During fiscal 1997 the Company completed its expansion of the Dubuque
Facility. The Company had expended $3.5 million in total toward this expansion
project, which included investment in land, buildings, electronic data systems,
furniture and equipment.
The Company used a portion of it's resources 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 products for the twelve months ended March 31, 1996, were less than $410,000
and as such no contingent payment was due.
-18-
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. Accordingly,
as of June 30, 1997, the Company recorded a payable of $79, 597 to be paid in a
lump sum within 90 days from the end of the earn-out period.
In 1997, the Board of Directors authorized, subject to certain business and
market conditions, the purchase of up to 500,000 shares of the Company's common
stock in the open market from time to time or in privately negotiated
transactions. At June 30, 1997, the Company had repurchased as treasury stock,
123,000 shares at an aggregate cost to the company of $508,875. On July 1, 1997,
the Company subsequently re-issued 20,924 shares out of treasury stock for the
purpose of meeting its obligations under the Eagle Point Software Corporation
stock purchase plan. The Company expects to continue repurchasing stock in
fiscal year 1998.
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 1998.
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, 1997) is incorporated herein by reference.
-19-
Executive Officers of the Registrant
Information with respect to executive officers of the Company.
Name Age Position
---- --- --------
Rodney L. Blum 42 Chairman of the Board, President and
Chief Executive Officer
Dennis J. George 34 Vice President, Chief Financial
Officer, Treasurer and Secretary;
Director
John F. Biver 42 Vice President - Civil Division;
Director
Edward T. Graham 34 Vice President - Building Design
and Services Division
Brent A. Straka 29 Vice President - Marketing and
Business Development Division
William P. Le May 43 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 -
Building Design and Services 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. Le May has been employed by the Company since October 1992 in
various research and development and management positions. Since December, 1995
Mr. Le May has served as Chief Technology Officer. From March, 1984 until he
joined the Company, Mr. Le May 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, 1997) is incorporated herein by reference.
-20-
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 Exchange Commission on or before
October 28, 1997) 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 SK, 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, 1997) 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, 1997 and June 30, 1996.
Statements of Operations - years ended June 30, 1997,
June 30, 1996 and June 30, 1995.
Statements of Stockholders' Equity - years ended June 30,
1997, June 30, 1996 and June 30, 1995.
Statements of Cash Flows - years ended June 30, 1997,
June 30, 1996 and June 30, 1995.
Notes to financial statements - June 30, 1997.
(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
- ----------- -----------
-21-
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.
/o/10.9**** -- Employment Agreement with Rodney L. Blum.
/o/10.10**** -- Employment Agreement with Dennis J. George.
/o/10.11**** -- Employment Agreement with John F. Biver.
/o/10.12** -- Eagle Point Software Corporation Stock Option Plan.
/o/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.
-22-
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
***** Incorporated by reference from the Company's 1996 Annual Report on Form
10-K
# Filed herewith.
/o/ 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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
Des Moines, Iowa
July 31, 1997, except for Note 18, as to
which the date is August 22, 1997
-24-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 8,806,452 $ 3,106,704
Short-term investments 2,488,616 7,508,561
Accounts receivable (net of allowances of $206,385 and
$251,344, respectively) 1,800,698 3,857,170
Interest receivable - 255,290
Inventories 509,328 369,172
Prepaid expenses and other assets 97,048 173,014
Income taxes receivable 439,146 -
Deferred income taxes 134,694 -
----------- -----------
Total current assets 14,275,982 15,269,911
INVESTMENTS - 2,466,032
PROPERTY & EQUIPMENT, NET 7,525,413 5,945,320
SOFTWARE DEVELOPMENT COSTS (net of accumulated
amortization of $119,262 and $242,753, respectively) 81,780 213,417
NON-COMPETE AGREEMENTS (net of accumulated
amortization of $131,839 and $52,600, respectively) 227,595 203,174
DEFERRED INCOME TAXES 856,685 497,945
----------- -----------
TOTAL ASSETS $22,967,455 $24,595,799
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 257,981 $ 288,523
Accounts payable 485,817 252,768
Accrued expenses 1,042,778 966,754
Deferred revenues 1,060,780 1,540,998
Other - 5,641
----------- -----------
Total current liabilities 2,847,356 3,054,684
LONG-TERM DEBT 319,567 502,187
CEBA FORGIVABLE LOAN - 110,000
DEFERRED REVENUES 44,260 -
----------- -----------
Total liabilities 3,211,183 3,666,871
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3, 13, 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at June 30, 1997 and June 30, 1996 - -
Common stock, $.01 par value; 20,000,000 shares authorized;
4,941,730 shares issued and outstanding at June 30, 1997 and 1996 49,417 49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 2,679,788 3,343,569
----------- -----------
20,265,147 20,928,928
Treasury stock, at cost; 123,000 shares at June 30, 1997 (508,875) -
----------- -----------
Total stockholders' equity 19,756,272 20,928,928
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,967,455 $24,595,799
=========== ===========
See notes to consolidated financial statements.
-25-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- ---------------------------------------------------------------------------------------------
1997 1996 1995
Net revenues:
Product sales $12,212,660 $14,579,749 $13,344,033
Training and support 3,592,162 4,582,375 2,487,385
----------- ----------- -----------
Total net revenues 15,804,822 19,162,124 15,831,418
----------- ----------- -----------
Cost of revenues:
Product sales 3,921,305 4,370,127 4,385,884
Training and support 860,793 703,136 448,387
Charge for revaluation of capitalized software 294,233 -- --
----------- ----------- -----------
Total cost of revenues 5,076,331 5,073,263 4,834,271
----------- ----------- -----------
Gross profit 10,728,491 14,088,861 10,997,147
----------- ----------- -----------
Operating expenses:
Selling and marketing 5,593,808 6,421,005 4,323,806
Research and development 3,817,284 3,510,830 2,129,310
General and administrative 2,475,287 1,679,702 1,493,006
Non-recurring charges 866,122 43,075 1,038,764
----------- ----------- -----------
Total operating expenses 12,752,501 11,654,612 8,984,886
----------- ----------- -----------
Operating income (loss) from continuing operations (2,024,010) 2,434,249 2,012,261
Other income (expense):
Interest income 632,983 734,710 31,595
Interest expense (32,207) (23,791) (197,598)
Other income, net 126,426 30,863 29,685
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes (1,296,808) 3,176,031 1,875,943
Income tax expense (benefit) (633,027) 1,099,632 558,906
----------- ----------- -----------
Net income (loss) $ (663,781) $ 2,076,399 $ 1,317,037
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding 4,930,119 4,957,988 3,873,126
=========== =========== ===========
Earnings per common and common equivalent share
Net income (loss) $ (0.13) $ 0.42 $ 0.34
=========== =========== ===========
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, 1997
- --------------------------------------------------------------------------------
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
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 of
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
Purchase of 123,000 shares
of treasury stock - - - $(508,875) (508,875)
Net loss - - (663,781) - (663,781)
------- ----------- ---------- --------- -----------
BALANCE AT JUNE 30, 1997 $49,417 $17,535,942 $2,679,788 $(508,875) $19,756,272
======= =========== ========== ========= ===========
-27-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (663,781) $ 2,076,399 $ 1,317,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,025,455 731,082 480,308
Amortization of software development costs 468,939 273,747 336,162
Charge for purchased research and development 475,393 - 1,038,764
Forgiveness of CEBA loan (110,000) - -
Deferred income taxes (496,024) (145,825) (347,359)
Changes in assets and liabilities, net of assets and liabilities
acquired in connection with the acquisitions of CIBC during 1997,
ECOM during 1996 and LANDCADD and FMS during 1995:
Accounts receivable 2,056,472 (1,383,093) (1,184,683)
Inventories (140,156) 238,450 (417,745)
Prepaid expenses 71,436 170,498 (282,500)
Accrued interest receivable 255,290 (255,290) -
Accounts payable 233,049 (403,987) 305,803
Income taxes payable/receivable (442,198) (632,160) 506,016
Deferred revenues (435,958) 194,344 747,158
Accrued expenses 76,024 (171,556) 782,056
Other 4,402 55,818 (32,976)
----------- ------------ -----------
Net cash provided by operating activities 2,378,343 748,427 3,248,041
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,585,778) (3,017,681) (956,971)
Software development costs:
Capitalized costs - (74,744) (92,705)
Purchases of software (305,081) (129,500) (9,000)
Purchase of investments - (9,974,593) -
Proceeds from maturities of investments 7,485,977 - -
Payments to acquire companies, net of cash acquired (551,676) - (728,473)
----------- ------------ -----------
Net cash provided by (used in) investing activities 4,043,442 (13,196,518) (1,787,149)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (213,162) (188,131) (238,613)
Proceeds from long-term debt - - 425,250
Purchase of treasury stock (508,875) - -
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 (722,037) (188,131) 13,659,629
----------- ------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,699,748 (12,636,222) 15,120,521
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,106,704 15,742,926 622,405
----------- ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,806,452 $ 3,106,704 $15,742,926
=========== ============ ===========
(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, 1997
- --------------------------------------------------------------------------------
1997 1996 1995
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 30,013 $ 28,534 $ 186,596
======== ========== ==========
Income taxes $313,728 $1,887,737 $ 395,165
======== ========== ==========
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 $ 79,597 $ 186,175 173,580
Common stock issued in business acquisitions - (132,797) 296,000
Forgiveness of CEBA loan 110,000 - -
Payments to acquire companies, net of cash acquired:
Fair value of assets acquired $631,273 $1,363,635
Liabilities assumed - (165,582)
Long-term debt issued (79,597) (173,580)
Common stock issued - (296,000)
-------- ----------
$551,676 $ 728,473
======== ==========
See notes to consolidated financial statements. (Concluded)
-29-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
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 and architectural
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 15). 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 statement of operation represents
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 original maturities of three months or less when purchased
to be cash equivalents.
Investments - The Company adopted an investment policy in the prior 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 Standard
("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:
1997 1996
Manuals and diskettes $150,937 $150,031
Finished software products 353,214 209,516
Other supplies 5,177 9,625
-------- --------
$509,328 $369,172
======== ========
-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 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 - The Company held $2.5 and $9.97 million in various U.S.
Treasury Notes as of June 30, 1997 and 1996, respectively. The Company's
temporary cash investments, $1.1 and $2.6 million as of June 30, 1997 and 1996,
respectively, were placed in a money market account with William Blair Mutual
Funds, Inc. and $7.6 million and $0.4 million as of June 30, 1997 and 1996,
respectively, were placed in a money market repurchase account at a local bank.
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 12 to 18 months, which results in
amortization expense no less than that which would result from using the ratio
of current gross revenues to total expected gross revenues. Purchased software
development costs are capitalized and amortized over 18 to 36 months.
-31-
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 year ended June 30, 1995, in accordance with
rules promulgated by the Securities and Exchange Commission.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which will be adopted by the Company in fiscal 1998. SFAS No. 128
requires companies to compute net income per share under two different
methods, basic and diluted, and to disclose the methodology used for the
calculation. If SFAS No. 128 had been applied by the Company during fiscal
1997 and 1996, basic net income (loss) per share would have been $(0.13) and
$0.42 and diluted net income (loss) per share would have been $(0.13) and
$0.42, respectively.
Statement of Financial Accounting Standards - Effective July 1, 1996, the
Company adopted the provisions of SFAS No. 121, "Accounting for Long-Lived
Assets to be Disposed Of." This statement requires companies to write down to
estimated fair value long-lived assets and certain identifiable intangibles.
The Company periodically reviews and assesses the realizability of its long-
lived and intangible assets, including product development costs. The amount
charged to expense related to this assessment was approximately $294,000 and
was included in the accompanying consolidated statement of operations for the
year ended June 30, 1997. The Company determined the value of the intangible
assets based on management's estimates of future cash flow projections.
Effective July 1, 1996, the Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applied Accounting Principles Board
("APB") Opinion 25 and related interpretations in accounting for its employee
stock option plans. Note 13 to the financial statements contains a summary of
the pro forma effects on reported net income and earnings per share for
fiscal 1997 and 1996 based on the fair value of options and shares granted as
prescribed by SFAS No. 123.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which will be adopted by the Company in fiscal 1998. SFAS No. 130 requires
companies to classify items of other comprehensive income in a financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the consolidated balance sheet. Adoption of the new
standard will not have a material impact on the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in
fiscal 1998. SFAS No. 131 requires companies to report a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets for its reportable operating segments. 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.
-32-
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 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 15). The remaining proceeds are intended to be used for general
corporate purposes including capital expenditures and possible future
acquisitions.
3. ACQUISITIONS
Computer Integrated Building Corporation
On July 29, 1996, the Company purchased substantially all assets of Computer
Integrated Building Corporation ("CIBC"), 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 Company in connection with the sale of
Computer Integrated Building Corporation's products plus (2) 50% of such
revenues exceeding $743,400, during the 12 month period ending July 29, 1997.
As of June 30, 1997, the Company recorded a payable of $79,597 with all
amounts payable September 29, 1997. As part of the acquisition, a three year
non-compete agreement was entered into between the Company and former owners.
The CIBC acquisition has been accounted for under the purchase method, and
accordingly, the results of operations of such business are included in the
Company's results from their respective dates of acquisition. For the
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 its estimated fair market value. The
portion of the purchase price 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. Amounts allocated to
software development costs and other intangibles will be amortized on a
straight-line basis over their estimated useful lives not to exceed five
years.
Purchase price allocation was as follows:
Current assets
Property and equipment $ 20,000
Software development costs and other intangibles 54,607
Purchased research and development in process 475,393
--------
$550,000
========
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The purchase did not have a material effect on the financial statements
previously presented and, therefore, such statements have not been restated.
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 plus (2) 50% of such revenues exceeding $670,000 during the 12
month period ended March 31, 1996. 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 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.
As part of the acquisition, a five year non-compete agreement was entered
into between the Company and the former owners of LANDCADD.
4. INVESTMENTS
Investments consist of U.S. Treasury Notes, total investments as of June 30:
1997 1996
------------------------------ -----------------------------
Carrying Value Fair Value Carrying Value Fair Value
Short-term investments $2,488,616 $2,495,313 $7,508,561 $7,513,281
Long-term investments - - 2,466,032 2,473,438
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5. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of June 30:
1997 1996
Land $ 637,400 $ 637,400
Buildings and land improvements 4,047,973 1,723,845
Building construction in progress - 1,198,748
Computer equipment and purchased software 4,063,267 3,143,659
Furniture and fixtures 1,331,307 844,877
Office equipment 569,056 508,944
Vehicles 76,691 66,399
----------- -----------
10,725,694 8,123,872
Accumulated depreciation (3,200,281) (2,178,552)
----------- -----------
$ 7,525,413 $ 5,945,320
=========== ===========
6. ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30:
1997 1996
Salaries and commissions $ 285,042 $281,874
Other 757,736 684,880
---------- --------
$1,042,778 $966,754
========== ========
7. NOTES PAYABLE
At June 30, 1997, the Company had a $2,000,000 unsecured operating line of
credit agreement with the bank which expires December 1, 1997. Borrowings
under the line of credit accrue interest at the prime rate (8.5% at June 30,
1997). At June 30, 1997 there were no borrowings outstanding under the line.
8. LONG-TERM DEBT
Long-term debt consists of the following as of June 30:
1997 1996
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. $ 49,035 $ 66,662
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1997 1996
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. 78,625 102,378
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. 140,217 167,284
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. 5,939 11,446
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. 142,857 171,429
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 $1,681 and $15,145 for
the years ended June 30, 1997 and 1996, respectively, based on
an imputed interest rate of 9%. 49,040 164,675
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
$1,092 and $9,829 for the years ended June 30, 1997 and 1996,
respectively, based on an imputed interest rate of 9%. 32,238 106,836
Non-interest bearing note payable to the former owners of CIBC,
due September 1997 79,597 -
-------- --------
577,548 790,710
Less current portion 257,981 288,523
-------- --------
$319,567 $502,187
======== ========
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At June 30, 1997, future principal payments on long-term debt for each of
the five years in the period ended June 30, 2002 are $257,981, $99,539,
$101,040, $66,933 and $52,055, 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 furniture 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 met certain employment obligations outlined in the agreement,
the Department granted permanent forgiveness of the loan in fiscal 1997.
Accordingly, the Company recognized the $110,000 principal as other income
in fiscal 1997.
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.
In 1997, the Board of Directors authorized, subject to certain business and
market conditions, the purchase of up to 500,000 shares of the Company's
common stock. At June 30, 1997, the number of shares purchased under this
authorization was 123,000.
11. INCOME TAXES
Income tax (benefit) expense consists of the following for the years ended
June 30:
1997 1996 1995
Current:
Federal $ (83,844) $1,213,729 $929,522
State (53,159) 31,728 (23,257)
--------- ---------- --------
Total current (137,003) 1,245,457 906,265
--------- ---------- --------
Deferred:
Federal (485,040) (141,234) (333,590)
State (10,984) (4,591) (13,769)
--------- ---------- ---------
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Total deferred (496,024) (145,825) (347,359)
--------- ---------- ---------
Income tax (benefit)
expense $(633,027) $1,099,632 $ 558,906
========= ========== =========
The approximate tax effects of temporary differences that give rise to
deferred tax assets (liabilities) were as follows as of June 30:
1997 1996 1995
Product development costs $ (7,456) $ (19,632) $ (88,865)
Depreciation (200,290) (141,338) (37,322)
Accrual to cash basis amortization - (115,410) (230,819)
Purchased research and development 460,504 329,073 353,310
Research and development tax credits 169,719 - -
Deferred revenues 54,432 27,440 54,880
Prepaid expenses (27,526) (52,528) (116,011)
Allowance for bad debts 42,619 44,235 42,008
Land acquired from Partnership 79,625 79,625 79,625
Building acquired from Partnership 252,765 258,143 226,650
Other 166,987 85,747 66,074
Iowa new jobs credits 178,000 178,000 154,000
Valuation allowance (178,000) (178,000) (154,000)
--------- --------- ---------
$ 991,379 $ 495,355 $ 349,530
========= ========= =========
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, 1997 and 1996, the Company's management determined that
approximately $178,000 of tax credits are available to the Company since
their agreement was entered into (see Note 16). However, as the Company
incurs minimal Iowa taxes due to a small percentage of the Company's gross
revenues being generated in Iowa, only $12,000 in credits were used to
reduce 1996 Iowa state taxes. As the Company had a loss in 1997, no credit
was utilized. The credits of $153,000 generated during the period ended June
30, 1995 can be carried forward to reduce Iowa taxes through 2005.
Additional credits of $25,000 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 (benefit) expense with income tax (benefit)
expense computed using statutory federal rates are as follows for the years
ended June 30:
1997 1996 1995
Computed statutory (benefit) expense $(453,882) $1,111,611 $656,580
State income taxes, net of federal tax benefit (42,334) 17,910 (24,437)
Research and development tax credits (169,719) - (84,134)
Other 32,908 (29,889) 10,897
--------- ---------- --------
Income tax (benefit) expense $(633,027) $1,099,632 $558,906
========= ========== ========
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12. EXPORT SALES
Net revenues consisted of the following for the years ended June 30:
1997 1996 1995
Domestic $14,525,719 $17,958,882 $14,115,389
Export - Canada 430,322 639,210 333,299
Export - other 848,781 564,032 1,382,730
----------- ----------- -----------
$15,804,822 $19,162,124 $15,831,418
=========== =========== ===========
13. NON-RECURRING CHARGES
The non-recurring charges included in the accompanying consolidated
statements of operations consist of the following:
1997 1996 1995
Charge of purchased research and
development other acquisition related charges $475,393 $43,075 $1,038,764
Charge for claims, settlements and
contingencies 234,794 - -
Restructuring charges 155,935 - -
-------- ------- ----------
$866,122 $43,075 $1,038,764
======== ======= ==========
Non-recurring charges include a charge for purchased research and
development of $475,393 in connection with the acquisition of Computer
Integrated Building Corporation. The $234,794 incurred in December 1996, for
claims, settlements and contingencies relates to issues asserted by former
employees and the U.S. Department of Labor based on the 1938 Fair Labor
Standards Act.
In addition, the Company incurred charges of $155,935 in March of 1997
relating to office closings and restructuring in California and Colorado.
The closing of these offices was due primarily to management's decision to
consolidate product development and support.
Included in the non-recurring charges in the accompanying consolidated
statement of operations for 1996 is a $43,000 charge for purchased research
and development and other acquisition related expenses incurred in
connection with the ECOM merger. Included in the non-recurring charges in
the accompanying consolidated statement of operations for 1995 are charges
for purchased research and development and other acquisition related
expenses of $719,529 in connection with the LANDCADD acquisition and
$319,235 in connection with the FMS acquisition.
14. EMPLOYEE BENEFITS
Profit Sharing - The Company has 401(k) profit sharing plan. 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, 1997, 1996 and 1995, the Company's matching contributions were
$17,826, $12,700 and $10,313, respectively.
-39-
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 or 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.
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 154,750
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. During the year ending June 30,
1997 an additional 137,506 options were granted by the Company under the
plan at prices from $3.13 to $6.00 per share. Due to terminations and
related forfeitures of options throughout the year, there were 286,256
options outstanding at June 30, 1997. As of June 30, 1997, no options had
yet been exercised.
Under the Plan, the exercise price of each option equals the market price at
the time of the grant. Options granted to employees vest over 4 years from
the date of the grant and options to non-employee directors vest immediately
on the date of grant. All options expire no later than 10 years from the
date of grant.
The Company applies APB Opinion 25 in accounting for its Plan. Accordingly,
no compensation cost has been recognized for the Company's Purchase Plan and
Plan for 1997 or 1996. Had compensation cost been determined on the basis of
fair value pursuant SFAS No. 123, net earnings and earnings per share would
have been reduced as follows:
1997 1996
Net earnings:
As reported $(633,781) $2,076,399
Pro forma (801,793) 1,947,626
Earnings per share:
As reported $ (0.13) $ 0.42
Pro forma (0.16) 0.39
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: dividend yield of 0%; expected
volatility of 40%; risk-free interest rate of 6.30%; and expected lives of 5
years from grant date. A summary of the status of the stock option plans as
of June 30, 1997, 1996 and 1995, and the changes during the years ending on
those dates is presented below:
-40-
1997 1996 1995
------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
OUTSTANDING AT
BEGINNING OF YEAR 203,150 $ 14.15 154,750 $ 13.00
Granted 137,506 4.31 81,300 16.46 154,750 $13.00
Exercised - - - - - -
Forfeited (52,400) (11.15) (32,900) (14.48) - -
-------- -------- -------
OUTSTANDING AT
END OF YEAR 288,256 14.84 203,150 14.15 154,750 13.00
======== ======== =======
Options exercisable at year end 21,698 12,665 -
Weighted-average fair value of
options granted during the year $1.93 $7.37
The following table summarizes information about fixed stock options outstanding
at June 30, 1997:
Options Outstanding Options Exercisable
----------------------------------- ----------------------------
Weighted Weighted
Exercise Average Average
Price Remaining Exercise
Range Number Contractual Life Number Price
$ 3.13 to $6.00 120,206 9.44 years 2,000 $ 6.00
9.94 to 13.00 122,850 8.07 years 11,738 9.94
17.50 to 20.88 45,200 8.53 years 7,960 19.98
------- ------
288,256 21,698
======= ======
15. LEASES
The Company leases certain office space and vehicles under operating
leases. Rent expense for the years ended June 30, 1997, 1996 and 1995, was
$158,372, $185,425 and $73,307, respectively. During 1996 and 1995, the
Company subleased a portion of the leased office space to another company.
Sublease income for the years ended 1996 and 1995 was $18,600 and $25,351,
respectively. There was no sublease income for the year ended June 30,
1997.
At June 30, 1997, future minimum rental payments due under operating leases
for each of the five years in the period ended June 30, 2002 are $86,781,
$28,973, $5,238, $1,778 and $0, respectively.
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
-41-
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 was recorded as a reduction of retained earnings, net of deferred
taxes of $306,275.
As discussed in Note 1, the June 30, 1995 Statement of Income represents
the historical combined operations of the Company and the Partnership.
Condensed Partnership financial information, prior to eliminations, is
presented below.
Statement of Operations:
Rent income - Company $221,457
Depreciation expense 71,375
Interest and other expenses 165,771
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, 1997 the Company had received $55,000 in
reimbursement under this addendum.
18. SUBSEQUENT EVENT
On July 1, 1997 the Company re-issued 20,924 shares of treasury stock for
the purpose of meeting its obligations under the Eagle Point Software
Corporation stock purchase plan.
On August 22, 1997, the Company received notification from Autodesk, the
producers of AutoCAD, that as of January 31, 1998, the Company will no
longer be able to resell AutoCad. Total revenues and contribution to gross
profit for the years ended June 30, 1997 and 1996 were approximately
$2,519,000 and $423,000 and $2,584,000 and $502,000, respectively.
* * * * * *
-42-
SIGNATURES
Pursuant to the requirements of Section 13 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 26, 1997 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 26th day of September, 1997.
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 and
Dennis J. George Director (principal financial and
accounting officer)
/s/ John F. Biver Vice President and Director
- -----------------------
John F. Biver
/s/ James P. Hickey Director
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James P. Hickey
/s/ Thomas O. Miller Director
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Thomas O. Miller
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Exhibit Index
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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.
/o/10.9**** -- Employment Agreement with Rodney L. Blum.
/o/10.10**** -- Employment Agreement with Dennis J. George.
/o/10.11**** -- Employment Agreement with John F. Biver.
/o/10.12** -- Eagle Point Software Corporation Stock
Option Plan.
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Exhibit No. Description
- ----------- -----------
.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
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* 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
***** Incorporated by reference from the Company's 1996 Annual Report on Form
10-K
# Filed herewith.
/o/ Indicates management contract or compensatory plan or arrangement.
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