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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number: 0-26170
Eagle Point Software Corporation
(Exact name of registrant as specified in its charter)
Delaware 42-1204819
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4131 Westmark Drive, Dubuque, IA 52002-2627
address of principal executive offices)
(319) 556-8392
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest applicable date.
Common Stock, par value $.01 per share, outstanding as of February 10, 1998:
4,791,454 shares
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Eagle Point Software Corporation
Form 10-Q
For the quarter ended December 31, 1997
Index
PART I. Financial Information
-----------------------------
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations -
for the three and six month periods ended
December 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
for the six months ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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December 31, June 30,
---------------- ----------------
1997 1997
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $3,005,320 $8,806,452
Short-term investments 7,015,910 2,488,616
Accounts receivable (net of allowances of $173,544 and $206,385, respectively) 1,595,671 1,800,698
Income tax receivable 120,202 439,146
Interest receivable 101,583 -
Deferred income taxes 134,694 134,694
Inventories 331,963 509,328
Prepaid expenses and other assets 218,355 97,048
---------------- ----------------
Total current assets 12,523,698 14,275,982
INVESTMENTS 3,003,642
PROPERTY & EQUIPMENT, NET 7,215,357 7,525,413
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$88,005 and $119,262, respectively) 104,157 81,780
NON-COMPETE AGREEMENTS (net of accumulated amortization of $163,216 and $131,389
respectively) 186,849 227,595
DEFERRED INCOME TAXES 856,685 856,685
---------------- ----------------
TOTAL ASSETS $23,890,388 $22,967,455
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $125,652 $257,981
Accounts payable 364,080 485,817
Accrued expenses 1,210,523 1,042,778
Deferred revenues 2,224,030 1,060,780
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Total current liabilities 3,924,285 2,847,356
LONG-TERM DEBT 242,016 319,567
DEFERRED REVENUES 64,814 44,260
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Total liabilities $4,231,115 $3,211,183
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3
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
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December 31, June 30,
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1997 1997
STOCKHOLDERS' EQUITY: (Unaudited) (Audited)
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at December 31, 1997 and June 30, 1997
Common stock, $.01 par value; 20,000,000 shares authorized; 4,941,730 shares
issued and outstanding at December 31, 1997 and June 30, 1997 $49,417 $49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 2,660,446 2,679,788
---------------- ----------------
20,245,805 20,265,147
Treasury stock, at cost; 150,276 shares at December 31, 1997 and 123,000 shares
at June 30, 1997 (586,532) (508,875)
---------------- ----------------
Total stockholders' equity 19,659,273 19,756,272
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,890,388 $22,967,455
================ ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------ -----------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues:
Product sales $2,789,482 $3,193,667 $5,054,467 $6,265,415
Training and support 807,829 925,427 1,444,655 2,006,114
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Total net revenues 3,597,311 4,119,094 6,499,122 8,271,529
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Cost of revenues:
Product sales 861,611 1,071,915 1,649,855 2,148,263
Training and support 140,734 224,539 285,034 395,738
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Total cost of revenues 1,002,345 1,296,454 1,934,889 2,544,001
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Gross profit 2,594,966 2,822,640 4,564,233 5,727,528
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Operating expenses:
Selling and marketing 1,331,105 1,588,445 2,318,407 3,010,260
Research and development 791,084 888,849 1,637,214 1,800,753
General and administrative 522,590 665,012 1,018,229 1,174,260
Non-recurring charges - 234,794 - 710,187
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Total operating expenses 2,644,779 3,377,100 4,973,850 6,695,460
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Operating loss from continuing operations (49,813) (554,460) (409,617) (967,932)
Other income, net:
Interest income, net of expense 173,554 153,041 320,800 311,741
Other income, net 4,629 (118) 6,891 119,544
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Income (loss) from continuing operations
before income taxes 128,370 (401,537) (81,926) (536,647)
Income tax expense (benefit) 22,707 (175,272) (68,652) (237,653)
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Net income (loss) $105,663 ($226,265) ($13,274) ($298,994)
==========================================================================
Weighted average number of common
shares outstanding 4,799,778 4,941,730 4,813,118 4,941,730
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Basic income (loss) per share $0.02 ($0.05) $0.00 ($0.06)
==========================================================================
Weighted average common and common
equivalent shares outstanding 4,805,275 4,941,730 4,817,003 4,941,730
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Diluted income (loss) per share $0.02 ($0.05) $0.00 ($0.06)
==========================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended
December 31,
-----------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net loss ($13,274) ($298,994)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 542,546 515,061
Amortization of software development costs 36,906 95,727
Charge for purchased research and development - 475,393
Forgiveness of CEBA Loan - (110,000)
Changes in assets and liabilities, net of assets and liabilities acquired
in connection with the acquisition of CIBC on July 29, 1996:
Accounts receivable 205,027 1,622,060
Interest receivable (101,583) 255,290
Income tax receivable 318,944 (570,370)
Inventories 177,365 (114,384)
Prepaid expenses (121,307) (112,376)
Accounts payable (121,737) 11,761
Income taxes payable - (3,051)
Deferred revenues 1,183,804 (857,759)
Accrued expenses 167,745 57,160
Other 40,746 7,018
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Net cash provided by operating activities 2,315,182 972,536
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (232,490) (2,141,015)
Software development costs:
Capitalized costs (34,283) -
Purchases of software (25,000) (243,000)
Purchase of investments (10,032,375) -
Proceeds from maturities of investments 2,501,979 5,001,017
Payments to acquire companies, net of cash acquired - (551,676)
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Net cash provided by (used in) in investing activities (7,822,709) 2,065,326
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (209,880) (164,077)
Purchases of treasury stock (164,178) -
Proceeds from issuance of treasury stock 80,453 -
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Net cash used in financing activities (293,605) (164,077)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (5,801,132) 2,873,785
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,806,452 3,106,704
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,005,320 $ 5,980,489
============ ===========
6
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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Six Months Ended
December 31,
------------------------------
1997 1996
(Unaudited) (Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest ($113,594) $ 19,787
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Income taxes ($390,175) $337,104
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Interim Financial Statements
The accompanying financial statements of Eagle Point Software Corporation (the
"Company") are unaudited. In the opinion of the Company's management, the
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial position of the
Company as of December 31, 1997 and June 30, 1997, and the results of operations
and cash flows for the three-month and six-month periods ended December 31, 1997
and 1996.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this quarterly report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 30, 1997.
2. Deferred Revenues and Revenue Recognition
The Company derives substantially all of its product revenues from the license
of its software products. Revenue is recognized upon shipment of the product,
provided that no significant vendor, post-contract support, or product upgrade
obligations remain outstanding and collection of the resulting receivable is
deemed probable. The Company has no significant vendor and post-contract support
obligations associated with its product sales. Dependent upon the timing of
future product upgrade releases and market conditions, the Company may extend
promotions where product upgrade obligations are associated with the shipment of
software products. Based upon the terms of the promotions extended, a portion or
all of the product revenues may be deferred until the promotional product
upgrade is released and subsequently shipped. The Company recognizes its service
revenues from maintenance and support contracts ratably over the period of the
arrangements. These contracts generally have terms of one year or less. The
Company recognizes its service revenues from training arrangements in the period
in which the training occurs. The Company's product returns historically have
been insignificant.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application of this statement is not permitted.
Under the new requirements, the Company is required to present both basic net
income per share and diluted net income per share. Basic net income per share
will exclude dilutive common stock equivalents. Diluted net income per share
will include common stock equivalents.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
This quarterly report on Form 10-Q contains forward looking statements,
including without limitation, the results of any litigation brought against the
Company. These forward looking statements involve risks and uncertainties, which
could cause actual results to differ from those projected. These as well as
other risks and uncertainties are detailed from time to time in reports filed by
the Company with the Securities and Exchange Commission, including this report
on Form 10-Q for the quarter ended December 31, 1997 and the Company's report on
Form 10-K for the year ended June 30, 1997.
Results of Operations
Net revenues decreased $1.8 million, or 21.4%, to $6.5 million for the six
months ended December 31, 1997 (the "1997 Period"), from $8.3 million for the
six months ended December 31, 1996 (the "1996 Period"). The Company experienced
a decrease in product sales and training and support sales as a result of many
factors, including a changing competitive environment resulting from the merger
between Autodesk, Inc. and Softdesk, Inc. Autodesk, the company whose CAD
platform the majority of the Company's business is based upon, controls a
significant portion of the AEC market, and Softdesk, Inc. was a major competitor
of Eagle Point. Additionally, Bentley Systems, the developer of the Microstation
CAD platform upon which a portion of the Company's civil engineering/surveying
modules are based, purchased an equity interest in GeoPak, also a competitor of
Eagle Point. In both of these situations, Eagle Point is now competing with
companies with whom it previously did not compete. As further evidence of the
new competitive pressures, Autodesk had notified Eagle Point that as of January
31, 1998, Eagle Point would no longer be allowed to resell AutoCAD. These
resales accounted for approximately 21%, or $1.4 million, of the Company's
revenues and 6%, or $292,000, of the Company's gross profit for the 1997 Period.
This will have an adverse effect on the Company's revenues and gross profit and
could have an adverse effect on the Company's ability to sell it's own products.
Difficulty in the marketplace is further compounded by delays in upgrades to
certain Eagle Point products as a result of a need to focus, during 1995 and
much of 1996, on addressing quality issues surrounding Autodesk's November, 1994
introduction of it's AutoCAD Release 13 product. In addition, $786,000 of the
1997 Period's software revenues, that were part of a continuing upgrade
promotion, were deferred. The revenues deferred under this promotion will be
recognized upon the future release and subsequent shipment of the product
upgrades.
Gross profit decreased $1.2 million, or 20.3% to $4.6 million for the 1997
Period from $5.8 million for the 1996 Period as a result of the decrease in net
revenues. Gross profit as a percentage of net revenues increased slightly to
70.2% in the 1997 Period from 69.2% in the 1996 Period. Gross profit as a
percentage of corresponding net revenues relating to product sales increased
slightly to 67.3% in the 1997 Period from 65.7% in the 1996 Period despite an
adverse shift in the sales mix of product sales. The sales of Eagle Point
products decreased to 72.0% of product sales in the 1997 Period from 78.8% in
the 1996 Period. The resales of AutoCAD increased to 28.0% of product sales in
the 1997 Period from 21.2% in the 1996 Period.
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Even with the shift in the sales mix, the gross profit margin from product sales
was aided by increases in gross profit margins on both AutoCAD resales and Eagle
Point products. The increase in the gross profit margin on Eagle Point products
was attributable to a reduction in costs associated with the implementation of
CD ROM technology and electronic documentation. Gross profit as a percentage of
corresponding net revenues relating to training and support remained the same at
80.3% for both the 1997 Period and the 1996 Period.
Selling and marketing expense decreased $692,000, or 23.0% to $2.3 million
in the 1997 Period from $3.0 million in the 1996 Period. As a percentage of net
revenues, selling and marketing expenses decreased slightly to 35.7% in the 1997
Period from 36.4% in the 1996 Period. These decreases are primarily attributable
to lower personnel costs associated with a reduced selling and marketing staff
size.
Research and development expense decreased $163,000, or 9.1% to $1.64
million in the 1997 Period from $1.8 million in the 1996 Period. As a percentage
of net revenues, research and development expenses increased to 25.2% in the
1997 Period from 21.8% in the 1996 Period. The decrease in expense was primarily
due to lower personnel costs associated with research and development. The
increase in percentage was primarily attributable to the decrease in net
revenues exceeding the corresponding decrease in expenses.
General and administrative expense decreased $156,000, or 13.3% to $1.0
million in the 1997 Period from $1.2 million in the 1996 Period. As a percentage
of net revenues, general and administrative expense increased to 15.7% in the
1997 Period from 14.2% in the 1996 Period. The decrease in expense was primarily
due to lower personnel costs associated with a reduced general and
administrative staff. The increase in percentage was primarily attributable to
the decrease in net revenues exceeding the corresponding decrease in expenses.
The operating loss from continuing operations decreased to a net loss of
$410,000 in the 1997 Period from a net loss of $968,000 in the 1996 Period. The
net loss for the 1996 Period included other charges of $710,000. These other
charges consisted of incurred non-recurring charges of $475,000 related to
purchased research and development in connection with the CIBC acquisition and
$235,000 to reflect 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. Excluding this non-recurring charge, the 1996 Period
resulted in an operating loss of $258,000. As a percentage of revenues, the
operating loss from continuing operations decreased to 6.3% in the 1997 Period
from 11.7% in the 1996 Period (3.1% in the 1996 Period when the non-recurring
charges are excluded) as a result of the factors described above.
Interest expense decreased $16,500 to $4,500 in the 1997 Period from
$21,000 in the 1996 Period. Interest income decreased $8,000 to $325,000 in the
1997 Period from $333,000 in the 1996 Period. The decrease in interest income
was primarily attributed to a reduced rate of return realized on the Company's
investments. Other income decreased $113,000 to $7,000 in the 1997 Period from
$120,000 in the 1996 Period. Other income for the 1996 Period was
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
impacted by a $110,000 one-time gain for the forgiveness of debt relating to an
economic development loan the Company received from the State of Iowa.
Liquidity and Capital Resources
The Company's financial position remains strong, with working capital of
$8.6 million and long-term debt of only $242,000. Cash, short-term, and long-
term investments aggregated approximately $13.0 million at December 31, 1997.
The Company also has available a $2.0 million unsecured line of credit from its
principal commercial bank. At December 31, 1997, the Company had no borrowings
outstanding under this line of credit.
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 December 31, 1997 the Company had repurchased as treasury
stock, 171,200 shares at an aggregate cost to the Company of $673,000. On July
1, 1997 the Company re-issued 20,924 shares out of treasury 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 existing cash balances, together with funds
generated from operations and borrowings available under its line of credit,
will be sufficient to fund its operations through fiscal 1998.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
An action against the Company has been brought by a group of former employees
asserting improper overtime pay practices under the 1938 Fair Labor Standards
Act. The Company has been working with the Department of Labor regarding these
assertions. The Company and the Department of Labor have reached a settlement
agreement. The Company has taken a $235,000 charge in December, 1996, which the
Company currently estimates to be sufficient to cover the settlement negotiated
with the Department of Labor as well as future costs and necessary expenses
relating to the ongoing litigation.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement Regarding Computation of Net Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
--------------------------------
(Registrant)
Date: February 13, 1998 BY: /s/ Rodney L. Blum
- ------------------------ --------------------------------------
Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: February 13, 1998 BY: /s/ Dennis J. George
- ------------------------ --------------------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
13
EXHIBIT INDEX
Exhibit No. Description Page No.
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11 --- Statement re: computation of net earnings per share
27 --- Financial Data Schedule
14
EXHIBIT 11
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT REGARDING COMPUTATION OF NET EARNINGS PER SHARE
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Six Months Ended
December 31,
---------------------------------------------
1997 1996
SHARES USED IN DETERMINING BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 4,813,118 4,941,730
====================== ======================
SHARES USED IN DETERMINING DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 4,813,118 4,941,730
Net effect of stock options based on the treasury stock
method using the average market price during the period 3,885 0
---------------------- ----------------------
Total weighted average common and common equivalent
shares outstanding 4,817,003 4,941,730
====================== ======================
15