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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 March 31, 1998
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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 incorporation or organization) (I.R.S. employer 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_____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest applicable date.
Common Stock, par value $.01 per share, outstanding as of May 9, 1998:
4,791,454 shares
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Eagle Point Software Corporation
Form 10-Q
For the quarter ended March 31, 1998
Index
PART I. Financial Information
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Page
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Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations -
for the three and nine month periods ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. Other Information
--------------------------
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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March 31, June 30,
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1998 1997
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,051,684 $ 8,806,452
Short-term investments 9,008,161 2,488,616
Accounts receivable (net of allowances of $180,336 and $206,385, respectively) 1,629,493 1,800,698
Income tax receivable 56,574 439,146
Interest receivable 72,358 -
Deferred income taxes 134,694 134,694
Inventories 131,424 509,328
Prepaid expenses and other assets 172,056 97,048
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Total current assets 15,256,444 14,275,982
INVESTMENTS 999,646 -
PROPERTY & EQUIPMENT, NET 7,115,901 7,525,413
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$41,778 and $119,262, respectively) 177,629 81,780
NON-COMPETE AGREEMENTS (net of accumulated amortization of $178,904 and $131,839
respectively) 171,161 227,595
DEFERRED INCOME TAXES 856,685 856,685
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TOTAL ASSETS $24,577,466 $22,967,455
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 101,035 $ 257,981
Accounts payable 202,286 485,817
Accrued expenses 1,045,212 1,042,778
Deferred revenues 2,853,922 1,060,780
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Total current liabilities 4,202,455 2,847,356
LONG-TERM DEBT 231,063 319,567
DEFERRED REVENUES 165,010 44,260
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Total liabilities 4,598,528 3,211,183
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3
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
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March 31, June 30,
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1998 1997
STOCKHOLDERS' EQUITY: (Unaudited) (Audited)
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at March 31, 1998 and June 30, 1997
Common stock, $.01 par value; 20,000,000 shares authorized; 4,941,730 shares
issued and outstanding at March 31, 1998 and June 30, 1997 $49,417 $49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 2,980,111 2,679,788
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20,565,470 20,265,147
Treasury stock, at cost; 150,276 shares at March 31, 1998 and 123,000 shares
at June 30, 1997 (586,532) (508,875)
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Total stockholders' equity 19,978,938 19,756,272
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,577,466 $22,967,455
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended Nine Months Ended
March 31, March 31,
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1998 1997 1998 1997
Net revenues: (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Product sales $2,948,805 $3,193,611 $8,003,822 $9,459,025
Training and support 911,476 876,788 2,355,582 2,882,903
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Total net revenues 3,860,281 4,070,399 10,359,404 12,341,928
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Cost of revenues:
Product sales 1,017,341 1,004,132 2,667,196 3,079,225
Training and support 146,357 220,757 431,391 616,495
Charge for revaluation of capitalized software -- 266,153 -- 266,153
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Total cost of revenues 1,163,698 1,491,042 3,098,587 3,961,873
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Gross profit 2,696,583 2,579,357 7,260,817 8,380,055
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Operating expenses:
Selling and marketing 1,306,991 1,320,950 3,625,398 4,331,210
Research and development 529,939 964,966 2,167,153 2,838,890
General and administrative 556,616 692,230 1,574,845 1,866,490
Non-recurring charges -- 155,935 -- 866,122
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Total operating expenses 2,393,546 3,134,081 7,367,396 9,902,712
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Operating income (loss) from continuing 303,037 (554,724) (106,579) (1,522,657)
operations
Other income (expense), net:
Interest income, net of expense 175,567 143,362 496,367 455,103
Other income (expense), net (2,458) 6,040 4,433 125,584
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Income (loss) from continuing operations
before income taxes 476,146 (405,322) 394,221 (941,970)
Income tax expense (benefit) 156,482 (161,433) 87,830 (399,086)
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Net income (loss) $319,664 ($243,889) $306,391 ($542,884)
===================================================================
Weighted average number of common
shares outstanding 4,791,454 4,941,730 4,806,002 4,941,730
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Basic income (loss) per share $0.07 ($0.05) $0.06 ($0.11)
===================================================================
Weighted average common and common
equivalent shares outstanding 4,859,759 4,941,730 4,828,782 4,941,730
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Diluted income (loss) per share $0.07 ($0.05) $0.06 ($0.11)
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
March 31,
--------------------------------
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $306,391 ($542,884)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 809,344 818,690
Amortization of software development costs 55,395 419,220
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 171,205 1,871,453
Interest receivable (72,358) 187,321
Income tax receivable 382,572 (688,177)
Inventories 377,904 (147,229)
Prepaid expenses (75,007) (69,267)
Accounts payable (283,531) (60,641)
Income taxes payable - (3,051)
Deferred revenues 1,913,892 (788,174)
Accrued expenses 2,436 315,121
Other 56,432 (17,014)
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Net cash provided by operating activities 3,644,675 1,660,761
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (399,833) (2,352,698)
Software development costs:
Capitalized costs (126,244) -
Purchases of software (25,000) (243,000)
Purchase of investments (14,031,758) -
Proceeds from maturities of investments 6,512,567 4,993,497
Payments to acquire companies, net of cash acquired - (551,676)
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Net cash provided by (used in) in investing activities (8,070,268) 1,846,123
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (245,450) (198,147)
Purchases of treasury stock (164,178) -
Proceeds from issuance of treasury stock 80,453 -
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Net cash used in financing activities (329,175) (198,147)
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NET CHANGE IN CASH AND CASH EQUIVALENTS
(4,754,768) 3,308,737
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,806,452 3,106,704
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $4,051,684 $6,415,441
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6
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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Nine Months Ended
March 31,
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1998 1997
(Unaudited) (Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest $ 7,639 $ 21,925
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Income taxes ($294,742) $292,144
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. Interim Financial Statements
The accompanying consolidated financial statements of Eagle Point Software
Corporation and subsidiary (the "Company" or "Eagle Point") are unaudited. In
the opinion of the Company's management, the financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to state
fairly the financial position of the Company as of March 31, 1998 and June 30,
1997, and the results of operations and cash flows for the three-month and nine-
month periods ended March 31, 1998 and 1997. Results for the three-month and
nine-month periods are not necessarily indicative of results for the full fiscal
year.
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
4. Reclassification
Certain amounts for fiscal year 1997 have been reclassified to conform to
classifications adopted in fiscal year 1998.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
This quarterly report on Form 10-Q contains forward looking statements,
including without limitation, the results of any litigation brought against the
Company. These forward looking statements involve risks and uncertainties, which
could cause actual results to differ from those projected. These as well as
other risks and uncertainties are detailed from time to time in reports filed by
the Company with the Securities and Exchange Commission, including this report
on Form 10-Q for the quarter ended March 31, 1998 and the Company's report on
Form 10-K for the year ended June 30, 1997.
Results of Operations
Net revenues decreased $1.9 million, or 16.1%, to $10.4 million for the
nine months ended March 31, 1998 (the "1998 Period"), from $12.3 million for the
nine months ended March 31, 1997 (the "1997 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. ("Autodesk") and Softdesk, Inc. ("Softdesk") Autodesk,
the company whose CAD platform, from which 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
notified Eagle Point that as of January 31, 1998, Eagle Point would no longer be
allowed to resell AutoCAD. The Company was allowed to continue to sell any
AutoCAD held in inventory as of January 31, 1998. The Company had enough
inventory to allow AutoCAD resales to continue at fairly normal levels for the
quarter ending March 31, 1998. However, the AutoCAD inventory remaining as of
March 31, 1998 was minimal. These resales accounted for approximately 21%, or
$2.2 million, of the Company's revenues and 6.7%, or $484,000, of the Company's
gross profit for the 1998 Period. The inability to resell AutoCAD in the future
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 its 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 its AutoCAD Release 13 product. In addition, $1,498,000 of the
1998 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 $1.1 million, or 13.4% to $7.3 million for the 1998
Period from $8.4 million for the 1997 Period as a result of the decrease in net
revenues. Gross profit as a percentage of net revenues increased to 70.1% in the
1998 Period from 67.9% in the 1997 Period. Gross profit as a percentage of
corresponding net revenues relating to product sales increased to
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
66.7% in the 1998 Period from 64.6% in the 1997 Period. The sales of Eagle Point
products decreased to 72.5% of product sales in the 1998 Period from 77.9% in
the 1997 Period. The resales of AutoCAD increased to 27.5% in the 1998 Period
from 22.1% in the 1997 Period. 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 relating to product sales was also adversely
impacted in the 1997 Period due to the $266,000 write-down of capitalized
software to more accurately reflect anticipated future revenues from certain
products. Gross profit as a percentage of corresponding net revenues relating to
training and support increased to 81.7% in the 1998 Period from 78.6% in the
1997 Period, primarily due to an improvement in the sales mix toward support
revenues, which carry higher gross profit margins than training revenues.
Selling and marketing expense decreased $706,000, or 16.3% to $3.6 million
in the 1998 Period from $4.3 million in the 1997 Period. As a percentage of net
revenues, selling and marketing expenses decreased slightly to 35.0% in the 1998
Period from 35.1% in the 1997 Period. These decreases are primarily attributable
to lower personnel costs associated with a reduced selling and marketing staff.
Research and development expense decreased $671,000, or 23.7% to $2.2
million in the 1998 Period from $2.8 million in the 1997 Period. As a percentage
of net revenues, research and development expenses decreased to 20.9% in the
1998 Period from 23.0% in the 1997 Period. The decrease was primarily due to
lower personnel costs associated with research and development as well as an
increase in capitalized development costs. There was $126,000 of capitalized
development costs in the 1998 Period and none in the 1997 Period.
General and administrative expense decreased $292,000, or 15.6% to $1.6
million in the 1998 Period from $1.9 million in the 1997 Period. As a percentage
of net revenues, general and administrative expense increased slightly to 15.2%
in the 1998 Period from 15.1% in the 1997 Period. The decrease in expense was
primarily due to lower personnel costs associated with a reduced general and
administrative staff.
The operating loss from continuing operations decreased to a net loss of
$107,000 in the 1998 Period from a net loss of $1.5 million in the 1997 Period.
The net loss for the 1997 Period included other charges of $866,000. These
consisted of 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. In the 1997 Period, the Company also incurred charges of $156,000
relating to office closings and restructuring due to those closings. Excluding
other charges, the 1997 Period resulted in an operating loss of $657,000. As a
percentage of revenues, the operating loss from continuing operations decreased
to 1.0% in the 1998 Period from 12.3% in the 1997 Period (5.3% in the
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
1997 Period when the non-recurring charges are excluded.) as a result of the
factors described above.
Interest expense decreased $17,500 to $5,500 in the 1998 Period from
$23,000 in the 1997 Period. Interest income increased $23,000 to $501,000 in the
1998 Period from $478,000 in the 1997 Period. The increase in interest income
was primarily attributed to higher balances of cash, cash equivalents, and
investments. Other income decreased $121,000 to $4,000 in the 1998 Period from
$125,000 in the 1997 Period. Other income for the 1997 Period was 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
$11.1 million and long-term debt of only $231,000. Cash, short-term, and long-
term investments aggregated approximately $14.1 million at March 31, 1998. The
Company also has available a $2.0 million unsecured line of credit from its
principal commercial bank. At March 31, 1998, 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 March 31, 1998 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.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
An action against the Company has been brought by a group of former employees
asserting improper overtime pay practices under the 1938 Fair Labor Standards
Act. The Company and the Department of Labor have reached a settlement
agreement regarding such assertions. The Company took 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.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
-------------------------------------
(Registrant)
Date: May 15, 1998 BY: /s/ Rodney L. Blum
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Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: May 15, 1998 BY: /s/ Dennis J. George
- ------------------- ---------------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and
Secretary (Principal Financial
and Accounting Officer)
14
EXHIBIT INDEX
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Exhibit No. Description Page No.
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11 --Statement re: computation of net earnings per share
27 --Financial Data Schedule
15