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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, 1998
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 (I.R.S. employer identification number)
of incorporation or organization)
4131 Westmark Drive, Dubuque, Iowa 52002-2627, (319) 556-8392
(Address of principal executive offices, including zip code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 17, 1998 was $16,303,935. 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, 1998:
4,802,375.
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 1, 1998 (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, and 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. 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. Historically, most of the
Company's products have been 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. In addition, the Company has recently begun
to develop and market products for use in conjunction with IntelliCAD, a
recently developed CAD platform developed by Visio Corporation ("Visio").
Accordingly, the Company's business and financial results are linked to the
continued market acceptance of AutoCAD and MicroStation and the future
acceptance of IntelliCAD. However, the Company has been and continues to
attempt 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, Bentley Systems, and
Visio."
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. ("LANDCADD"), a Colorado-based
developer of software applications for landscape architecture and irrigation
design (the "LANDCADD Acquisition"). In March, 1995 the Company acquired
certain assets of Facility Mapping Systems, Inc. ("FMS"), a California-based
developer of computer-aided pre-design asset 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").
The Company has not acquired a business since CIBC. 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: automated mapping; facilities
management; plant and power managementpre-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
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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,
MicroStation, and IntelliCAD.
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 such as
Autodesk and its subsidiary, Softdesk, Inc. 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 increasingly focused 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,
home builders, 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, MicroStation or IntelliCAD, the Company
has not devoted significant marketing efforts to date on serving this category
of users. However, the Company has recently developed and 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 70 resellers located in more than 50
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 1998 or
approximately 6.1% 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,
translating products into foreign languages, the lack of control over
fluctuations in the value of foreign currencies, import/export duties and
quotas, and unexpected regulatory, economic or political changes in foreign
markets. See "Risk Factors -- Foreign Operations."
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Products
The Company's products are organized into the following product
families: Civil Engineering/Surveying; 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, several of the Company's
products include a similar graphical user interface, which makes it easier for
users to learn to use additional Eagle Point products. Suggested list prices
for the Company's products range from approximately $95 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 IntelliCAD. Prior to
January 31, 1998, the Company was an authorized reseller of AutoCAD. However,
the Company was notified by Autodesk, the manufacturer of AutoCAD, that as of
January 31, 1998, the Company would no longer be allowed to resell AutoCAD. See
"Risk Factors -- Dependence on Autodesk, Bentley Systems, and Visio; --
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 building services
professionals to design and manage buildings. Walls, windows, doors, floors and
roofs, along with internal utilities and fixtures, can be modeled to allow the
user to develop several design variations. Through the use of real time
simulation features, the building owner can then "walk through" the building to
help in selecting the favored design. Once selected, the designer can then
complete final construction documents and automatically estimate the building
materials necessary in order to prepare for the bidding and construction phase
of the project. 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, landscape contractors, nurseries, and government
planners to develop plans for
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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 2,000 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
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 56 professionals at
June 30, 1998.
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 350,000 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
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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, Support and Maintenance
The Company believes that providing its customers with direct and
value-added training, support, and maintenance services helps ensure that
customers obtain the maximum benefits offered by its products. The Company
believes that its training, support, and maintenance programs also enhance the
Company's relationships with customers and help to differentiate the Company
from CAD-based application developers that do not offer direct training, support
and maintenance. Moreover, the Company believes that the demand by users for
various training, support and maintenance 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 a one-year support contract basis, an as-
used fee basis, or a part of a one, two or three year VIP support and
maintenance contract. The Company also conducts training seminars to educate
customers on the functionality of the Company's products. For a fee, customers
may discuss products with and receive technical assistance directly from the
Company's in-house professionals who participated in the development of such
products. The Company believes that such programs help to foster customer
loyalty and allow the Company to develop product enhancements that can be
marketed to other users.
Approximately 24% of the Company's revenues for fiscal 1998 were
attributable to customer training, support, and maintenance 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 were 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
cancellation of the Company's ability to resell AutoCAD, it appears that
Autodesk and Softdesk together have increased competitive pressures and may
continue to do so. The Company's inability to resell
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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. In 1996
Bentley Systems made an undisclosed equity investment in GEOPAK Corporation, an
application solutions provider and competitor to the Company. Most recently, in
June of 1998 Visio purchased the architectural software technology from Ketiv
Technologies, Inc., 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, MicroStation, or IntelliCAD-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 previously stated, two of the sources of competition for the
Company are Autodesk, the developer of AutoCAD, and Bentley Systems, the
developer of MicroStation. Approximately 52.9% of the Company's net revenues
for fiscal 1998 were related to AutoCAD, including 37.1% from the sale of the
Company's software products designed for use with AutoCAD and 15.8% derived from
the resale by the Company of AutoCAD. In addition, 4.1% 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 locking mechanism 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
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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 1998, sales of such ten modules
accounted for approximately 9% of the Company's net revenues for such period.
None of the Company's other modules rely upon such ten modules.
The Company is not engaged in any material disputes with other parties
with respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. The litigation of such a
claim may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages and may also be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim (which
license may not be available on commercially reasonable terms). As the number
of software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims.
Employees
As of June 30, 1998, the Company had 185 employees, including 103 in
sales and marketing, 51 in product development and 31 in general and
administrative functions.
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, Bentley Systems, and Visio. In fiscal 1998,
approximately 52.9% of the Company's net revenues were related to AutoCAD,
including 37.1% from the sale of Eagle Point software products designed for use
with AutoCAD and 15.8% derived from the resale by the Company of AutoCAD. In
addition, 4.1% of the Company's net revenues in this period were derived from
the sale of Eagle Point software products designed for use with MicroStation.
The Company recently began offering products that operate with IntelliCAD and
also began reselling IntelliCAD. Accordingly, only 1.5% of the Company's fiscal
1998 revenues were related to IntelliCAD. The Company's business and financial
results are linked to the continued market acceptance of AutoCAD, MicroStation,
and IntelliCAD. The timing of major AutoCAD, MicroStation , or IntelliCAD
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,
Bentley Systems, the developer of MicroStation, or Visio, the developer of
IntelliCAD, have thus far been facilitated by cooperation from Autodesk's,
Bentley Systems', and Visio's development personnel. However, there exists no
material contractual or other formal relationship obligating Autodesk, Bentley
Systems, or Visio to provide such cooperation. The Company was previously
authorized by Autodesk to resell AutoCAD. However the Company was notified by
Autodesk that as of January 31, 1998 the Company would no longer be authorized
to resell AutoCAD. The Company's inability to resell AutoCAD 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,
Bentley Systems or Visio could have a material adverse effect on the Company's
business, operating results or financial condition.
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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 and may
continue to do so. The inability to market itself as an authorized reseller of
AutoCAD may hurt the perception of the Company in the marketplace. In 1996
Bentley Systems made an undisclosed equity investment in GEOPAK Corporation, an
application solutions provider and competitor to the Company. In June of 1998,
Visio purchased the architectural software technology from Ketiv Technologies,
Inc., an application solution 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, MicroStation-based, or
IntelliCAD-based software applications including Autodesk, Bentley Systems, and
Visio. 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 sources
of competition or that competitive pressures will not have a material adverse
effect on the Company's business, operating results or financial condition. See
"Business -- Competition."
Losses from Operations. Though the Company was profitable for the past
three fiscal quarters, the Company incurred operating losses for six consecutive
fiscal quarters prior to October 1, 1997 due to adverse market conditions. There
can be no assurances that the Company will be profitable in the future.
Management of Growth. The Company's business has experienced
significant growth at various times over the past several years. The Company has
completed expansion of its principal facility and if the Company experiences
significant growth again, 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. In the past, the Company has pursued acquisitions of
businesses, products and technologies that are complementary to those of the
Company. 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 successful in finding potential acquisition candidates. Any failure to
effectively integrate future acquisitions could have a material adverse effect
on the Company's business, operating results or financial condition.
Acquisitions may also give rise to the assumption of contingent liabilities by
the Company.
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, Autodesk, Bentley Systems, or Visio (See "--Dependence on
Autodesk, Bentley Systems, and Visio"), customer acceptance of software
applications, product
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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/98, the Internet, CD ROM Technology, etc. Economic and other
factors affecting the building, construction, architecture, mapping and
engineering industries could also affect demand for the Company's products in
one or more particular quarters. The Company historically has operated with
little or no backlog. A significant portion of the Company's net revenues in a
quarter are derived from orders received late in that quarter, which makes the
Company's financial performance more susceptible to an unexpected downturn in
business and quarterly results difficult to forecast. In addition, the
Company's expense levels are based in part on expectations of future revenue
levels, and a shortfall in revenues could result in a disproportionate decrease
in the Company's net income. As the markets in which the Company competes
mature and new and existing companies compete for customers, price competition
is likely to intensify and such competition could affect quarterly operating
results. In addition, operating results historically have been seasonally lower
during the first and fourth quarters than during the other quarters of the
fiscal year.
Technological Demands of the Marketplace. The software industry is
characterized by rapid technological changes and advances which can result in
relatively short product lifecycles. The Company's future success will depend
upon its ability to enhance its current products and introduce new products that
keep pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its customers. To meet this goal the
Company periodically upgrades certain of its products. There can be no
assurance that the Company will be successful in introducing and marketing
product enhancements or new products, or that such products will be accepted by
the market. The Company's software products, like software products generally,
may contain undetected errors or bugs when introduced, or as new versions are
released. While the Company's current products have not experienced significant
post-release software error bugs to date, there can be no assurance that such
problems will not occur in the future, particularly as the Company expands its
product offerings and its products become more complex and sophisticated. Any
such defective software may result in a loss of or delay in market acceptance of
the Company's products or an increased warranty expenses or product recalls.
See "Business -- Products" and "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
-10-
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 6.1% of the Company's revenues in
fiscal 1998 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,
in translating products into foreign languages, the lack of control over
fluctuations in the value of foreign currencies, import/export duties and
quotas, and unexpected regulatory, economic or political changes in foreign
markets. There can be no assurance that these factors will not adversely affect
the Company's international revenues or its overall financial performance.
Reliance on Headquarters. Substantially all of the Company's
administrative, sales, marketing, training, customer service, product
development and product ordering and shipping activities are conducted from a
single facility located in Dubuque, Iowa (the "Dubuque Facility"). A loss with
respect to all or part of this facility or a disruption in the Company's
telecommunications and management information systems would have a material
adverse effect on the Company's results of operations.
Potential Volatility of Stock Price. The stock market has historically
and recently 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 the sale of the Company.
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.
-11-
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)
Item 3. Legal Proceedings
An action against the Company had 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 to cover future costs and necessary expenses relating to the
litigation. The Company has recently settled these disputes and the charge taken
by the Company adequately covered all costs and expenses related thereto.
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, 1998 was 211, 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, 1998 the closing sales price of the Company's Common
Stock was $7.375. 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, 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
September 30, 1997......................................... $4.56 $3.13
December 31, 1997.......................................... $4.59 $3.00
March 31, 1998............................................. $5.75 $4.00
June 30, 1998.............................................. $8.88 $4.25
Item 6. Selected Financial Data
The statement of operations data presented below for each of the
fiscal years ended June 30, 1998, 1997 and 1996 and the balance sheet data at
June 30, 1998 and 1997 have been derived from the Company's financial
statements, which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is included elsewhere in this Report on Form
10-K. The statement of operations data presented below for each of the fiscal
years ended June 30, 1995 and 1994 and the balance sheet data at June 30, 1996,
1995 and 1994 have also been audited by Deloitte & Touche but are not included
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.
-12-
Fiscal Year Ended June 30,
--------------------------
1998 1997 1996\\(1)\\ 1995\\(2)\\ 1994
------- ------- ----------- ----------- ------
(In thousands, except per share data)
Statement of Income Data\\(3)(4)\\:
Net revenues:
Product sales $10,439 $12,213 $14,580 $13,344 $7,695
Training and support 3,382 3,592 4,582 2,487 1,232
------- ------- ------- ------- ------
Total net revenues 13,821 15,805 19,162 15,831 8,927
------- ------- ------- ------- ------
Cost of revenues
Cost of Product Sales, Training, & Support 3,792 4,782 5,073 4,834 3,151
Charge for revaluation of capitalized software - 294\\(7)\\ - - -
------- ------- ------- ------- ------
Total cost of revenues 3,792 5,076 5,073 4,834 3,151
------- ------- ------- ------- ------
Gross profit 10,029 10,729 14,089 10,997 5,776
------- ------- ------- ------- ------
Operating expenses:
Selling and marketing 4,902 5,594 6,421 4,324 2,377
Research and product development 2,769 3,817 3,511 2,129 1,698
General and administrative 2,174 2,476 1,680 1,493 820
Non-recurring charges - 866\\(8)\\ 43 1,039\\(5)\\ -
------- ------- ------- ------- ------
Total operating expenses 9,845 12,753 11,655 8,985 4,895
------- ------- ------- ------- ------
Operating income (loss) from continuing operations 184 (2,024) 2,434 2,012 881
------- ------- ------- ------- ------
Interest income (expense), net 679 601 711 (166) (156)
Other income (expense), net 36 126 31 30 (9)
------- ------- ------- ------- ------
Income (loss) from continuing operations
before income taxes 899 (1,297) 3,176 1,876 716
Income tax expense (benefit) 246 (633) 1,100 559 177
------- ------- ------- ------- ------
Income (loss) from continuing operations 653 (664) 2,076 1,317 539
Income (loss) from discontinued operations - - - - (125)\\(4)\\
------- ------- ------- ------- ------
Net income (loss) 653 $ (664) $ 2,076 $ 1,317 $ 414
======= ======= ======= ======= ======
Per Share:
Basic income (loss) from continuing operations $ .14 $ (.13) $ .42 $ .34\\(5)\\ $ .11
Basic net income (loss) $ .14 $ (.13) $ .42 $ .34 $ .08
Weighted average number of basic common
shares outstanding\\(6)(9)\\ 4,802 4,930 4,931 3,873 5,010
Balance Sheet Data\\(3)\\(at period end):
Working capital $10,609 $11,429 $12,215 $15,282 $ 76
Total assets 25,421 22,967 24,596 23,579 5,605
Total debt 320 578 901 857 2,197
Stockholders' equity\\(9)\\ 20,325 19,756 20,929 18,985 1,836
(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,
-13-
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.
(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. 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.
(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 2 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 in May 1997, 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. The Company had repurchased as
treasury stock 123,000 shares at an aggregate cost to the Company of
$508,875 at June 30, 1997 and 171,200 shares at an aggregate cost to the
Company of $673,000 at June 30, 1998. The authorization to repurchase the
Company's common stock expired on June 15, 1998 and has not been extended
or reinstated.
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
-14-
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. The expansion of its product line was accomplished
through both internal development and 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 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. 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.
In 1997 Autodesk, the company whose CAD platform the majority of the
Company's business is based upon bought Softdesk, 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 in 1996 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. These resales accounted for approximately 15%, or $2.0
million, of the Company's revenues and 3%, or $326,000, of the Company's gross
profit for fiscal 1998. 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 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. 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."
-15-
Forward Looking Information.
This Annual Report on Form 10-K contains forward looking statements,
including, without limitation, the acceptance by the marketplace of the
Company's products, the Company's attempts to reduce its reliance on AutoCAD,
the ability of the Company to sell more products internationally, the
competitive advantages of the Company's telesales professionals, the effective
of the Company's training and support programs on its customer relationships,
the ability of the Company to keep pace with technological developments, and the
ability of the Company to adequately address the Year 2000 issue. These forward
looking statements involve risks and uncertainties, which could cause actual
results to differ from those projected. The Company may not be correct in its
predictions with respect to the issues addressed in such forward looking
statements.
Fiscal 1998 Compared to Fiscal 1997.
Net revenues decreased $2.0 million, or 12.6% to $13.8 million for the
fiscal year ended June 30, 1998 ("the 1998 Period"), from $15.8 million for the
fiscal year ended June 30, 1997 (the "1997 Period"). The Company experienced a
decrease in product sales and training and supports sales, as a result of many
factors, including a changing competitive environment resulting from the merger
between Autodesk and Softdesk and the equity investment in GeoPak by Bentley
Systems. 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,
$1,633,189 of software revenues that were part of a continuing upgrade
promotion, were deferred and therefore not recognized in the 1998 Period. The
revenues deferred under this promotion will be recognized upon the future
release and subsequent shipment of the product upgrades.
Gross profit decreased $0.8 million, or 9.0% to $10.0 million for the
1998 Period from $10.8 million for the 1997 Period as a result of the decrease
in net revenues. Gross profit as a percentage of net revenues increased to 72.6%
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 69.1% in
the 1998 Period from 67.9% in the 1997 Period. The sales of Eagle Point products
decreased slightly to 77.1% of product sales in the 1998 Period from 77.4% in
the 1997 Period. The resales of AutoCAD decreased to 19.5% in the 1998 Period
from 22.6% in the 1997 Period. Gross profit margin from product sales was aided
by an increase in gross profit margins on Eagle Point products, which was
primarily 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 $294,000 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
83.1% in the 1998 Period from 76.0% in the 1997 Period, primarily due to an
improvement in the sales mix toward support and maintenance revenues, which
carry higher gross profit margins than training revenues.
Selling and marketing expense decreased $700,000, or 12.4%, to $4.9
million in the 1998 Period from $5.6 million in the 1997 Period. As a percentage
of net revenues, selling and marketing expenses increased slightly to 35.5% in
the 1998 Period from 35.4% in the 1997 Period.
Research and development expense decreased $1.0 million or 27.5% to
$2.8 million in the 1998 Period from $3.8 million in the 1997 Period. As a
percentage of net revenues, research and development expenses decreased to 20.0%
in the 1998 Period from 24.2% in the 1997 Period. The decrease was primarily due
to lower personnel costs associated with research and development as well as
$271,500 in capitalized development costs.
-16-
General and administrative expense decreased $300,000, or 12.2%, to
$2.2 million in the 1998 Period from $2.5 million in the 1997 Period. As a
percentage of net revenues general and administrative expense remained steady at
15.7% in the 1998 Period and in the 1997 Period.
The operating income from continuing operations was $184,000 in the
1998 Period compared to a net loss of $2.0 million in the 1997 Period. The net
loss for the 1997 Period included other non-recurring charges of $866,000.
Excluding these other charges, the 1997 Period resulted in an operating loss of
$1.2 million. As a percentage of net revenues, operating income from continuing
operations was 1.3% in the 1998 Period as compared to an operating loss of 12.8%
in the 1997 Period (7.3% in the 1997 Period when the non-recurring charges are
excluded).
Interest expense decreased $26,000 to $6,000 in the 1998 Period from
$32,000 in the 1997 Period. Interest income increased $53,000 to $686,000 in the
1998 Period from $633,000 in the 1997 Period. The increase in interest was
primarily attributed to higher balances of cash, cash equivalents, and
investments. Other income decreased $90,000 to $36,000 in the 1998 Period from
$126,000 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.
The Company's effective tax rate on income from continuing operations
was 27.4% for the 1998 Period compared to the effective tax rate on the loss
from continuing operations of 48.8% in the 1997 Period. The primary reason for
the lower effective tax rate was the Company's utilization of research and
development tax credits.
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.
Gross profit decreased $3.41 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 write-down 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
-17-
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
write-down of capitalized software in fiscal 1997 and the $43,000 of non-
recurring charges in fiscal 1996charge for acquisition related expenses incurred
in fiscal 1996 in connection with the ECOM Merger, 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 income 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 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.
Liquidity and Capital Resources
The Company's financial position remains strong, with working capital
of $10.6 million and long-term debt of only $220,000. Cash, short-term, and
long-term investments aggregated approximately $14.7 million at June 30, 1998.
The Company also has available a $2.0 million unsecured line of credit from its
principal commercial bank. At June 30, 1998, the Company had no borrowings
outstanding under this line of credit.
-18-
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, 1998, 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.
To date, the Company has not entered into any interest rate, currency
or other market risk hedging instruments.
On July 29, 1996, the Company completed the CIBC Acquisition. The
purchase price was $550,000 cash. Additionally, the Company was 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 the Company made a subsequent payment of $79,597.
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, 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 and on July 1, 1998, the Company re-issued 20,924 and 24,003
shares respectively out of treasury stock for the purpose of meeting its
obligations under the Eagle Point Software Corporation stock purchase plan. The
authorization to repurchase the Company's common stock expired on June 15, 1998
and has not been extended or reinstated.
Impact of the Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Computer
systems based on a two-digit format will be unable to interpret dates beyond the
year 1999 which could cause a system failure or other computer errors, leading
to disruptions in operations. The Company believes that it has four general
areas of potential exposure with respect to the Y2K problem: (1) its own
software products; (2) internal informational systems; (3) computer hardware and
other equipment related systems; and (4) external. Based on the Company's
analysis through September 17, 1998, the Company does not believe that the Y2K
issue will materially affect its business.
The Company believes that its own software products will not be
effected by the Y2K issue because the Company's products are graphical computer
aided design software involving geometric and analytical computations and
graphic representations which do not store or manipulate date-related fields.
Beginning in the second quarter of 1998, the Company began to develop
a systematic plan (the "Y2K Plan") to evaluate its Y2K exposure with respect to
its internal informational systems. In accordance with this plan, the Company
identified two primary internal information systems pursuant to which the
Company could have exposure -- its accounting and financial support system (the
"Accounting System") and its sales database (the "Sales Database"). The Company
believes that, based on industry
-19-
reports, the Accounting System is already Y2K compliant, but has not yet
received formal certification of such compliance from the Accounting System's
manufacturer. The Company intends to seek such certification in the near future.
If the Accounting System is already Y2K compliant, the Company will not incur
any significant Y2K related costs with respect to the Accounting System. The
Company has determined that the Sales Database is not currently Y2K compliant.
However, the Company has received, at not cost to the Company, from the Sales
Database's manufacturer the necessary software upgrade to cause the Sales
Database to become Y2K compliant. While the Company expects the Sales Database
upgrade to be effective, the Company has not yet tested such upgrade and there
can be no assurance that it will be successful.
The third type of potential Y2K exposure relates to the Company's
computer hardware and other equipment related systems (such as the Company's
workstations and phone system). The Company is in the early stages of
identifying and evaluating such systems' Y2K exposure. Due to the early stage of
analysis with respect to the Company's computer hardware and other equipment
related systems, the Company cannot yet estimate the costs involved, although
the Company does not expect such costs to have a material adverse effect on its
financial condition.
The fourth aspect of the Company's Y2K analysis involves evaluating
major vendors' Y2K exposure and their efforts to address such exposure. The
Company is currently working on a formal procedure to evaluate such third
parties, but has not yet commenced such process. As part of this formal
procedure, the Company expects to survey its key vendors through written or
telephone inquiries. The Company intends to have existing employees conduct such
inquiries beginning in the fourth quarter of calendar year 1998 and does not
expect the costs of such inquiries to be material. If the Company determines,
after conducting the aforementioned surveys and inquiries, that its vendors' Y2K
issues' could result in material disruptions to their respective businesses, the
Company may seek alternative suppliers.
The Company expects to be Y2K compliant with respect to its own
systems, and have completed its Y2K analysis with respect to third parties, no
later than mid-1999.
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 1999. 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, 1998) is incorporated herein by reference.
-20-
Executive Officers of the Registrant
Information with respect to executive officers of the Company.
Name Age Position
---- --- --------
Rodney L. Blum 43 Chairman of the Board, President and
Chief Executive Officer
Dennis J. George 35 Vice President, Chief Financial Officer,
Treasurer and Secretary; Director
John F. Biver 43 Vice President - Civil Division; Director
Edward T. Graham 35 Vice President - Building Design and Services Division
Brent A. Straka 30 Vice President - Marketing and Business Development
Division
Randy K. Ambrosy 29 Vice President - International and Landscaping Divisions
William P. Le May 44 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.
Randy K. Ambrosy has been employed by the Company since September 1991
in various sales and management positions. Since April, 1998 Mr. Ambrosy has
served as Vice President - International and Landscaping Divisions. From June
1990, until he joined the Company, Mr. Ambrosy was a sales engineer at Sencore
Electronics a manufacturer of electronic test equipment.
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 at Accugraph
Corporation, a developer of software applications for the civil engineering
market.
-21-
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, 1998) is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of Directors,
Officers and Principal Stockholders" in the Proxy Statement (which Proxy
Statement will be filed with the Securities and Exchange Commission on or before
October 28, 1998) is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Except for the information relating to Item 11 hereof and except for information
referred to in Item 402(a)(8) of Regulation S-K, the information contained under
the headings "Executive Officer Compensation", "Directors Meetings and
Committees" and "Certain Relationships and Related Transactions" in the Proxy
Statement (which Proxy Statement will be filed with the Securities and Exchange
Commission on or before October 28, 1998) 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, 1998 and June 30, 1997.
Statements of Operations - years ended June 30, 1998, June 30,
1997 and June 30, 1996.
Statements of Stockholders' Equity - years ended June 30, 1998,
June 30, 1997 and June 30, 1996.
Statements of Cash Flows - years ended June 30, 1998, June 30,
1997 and June 30, 1996.
Notes to financial statements - June 30, 1998.
(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.
-22-
(a)(3) Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
Exhibit No. Description
----------- -----------
3.1* -- Certificate of Incorporation of the Company.
3.2* -- By-laws of the Company.
10.1* -- Loan Agreement between the Company and the City of Dubuque,
dated January 20, 1992.
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**** -- Employment Agreement with Rodney L. Blum.
.10.9**** -- Employment Agreement with Dennis J. George.
.10.10**** -- Employment Agreement with John F. Biver.
.10.11** -- Eagle Point Software Corporation Stock Option Plan.
.10.12*** -- Eagle Point Software Corporation Stock Purchase Plan.
10.13* -- Purchase Agreement between VisionOne Partnership and the
Company, dated as of May 1, 1995.
10.14***** -- Merger Agreement between the Company and ECOM Associates, Inc.,
dated November 9, 1995.
10.15***** -- Asset Purchase Agreement between the Company and Computer
Integrated Building Corporation, dated July 29, 1996.
11.1# -- Statement re: computation of per share earnings.
21.1# -- Subsidiaries
23.1# -- Consent of Deloitte & Touche LLP.
27# -- Financial Data Schedule
- -------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-91950)
** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96914)
*** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96918)
**** Incorporated by reference from the Company's 1995 Annual Report on
Form 10-K
***** Incorporated by reference from the Company's 1996 Annual Report on
Form 10-K
# Filed herewith.
. Indicates management contract or compensatory plan or arrangement.
- -------------------
(b) Reports on Form 8-K
None.
-23-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Eagle Point Software Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Eagle Point
Software Corporation and subsidiary as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. 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 Eagle Point Software Corporation
and subsidiary at June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
Des Moines, Iowa
July 31, 1998
-24-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 4,662,570 $ 8,806,452
Short-term investments 8,011,236 2,488,616
Accounts receivable (net of allowances of $161,545 and
$206,385, respectively) 1,600,282 1,800,698
Interest receivable 87,643 -
Inventories 137,071 509,328
Prepaid expenses and other assets 137,474 97,048
Income taxes receivable - 439,146
Deferred income taxes 663,475 134,694
----------- -----------
Total current assets 15,299,751 14,275,982
INVESTMENTS 2,002,748 -
PROPERTY & EQUIPMENT, NET 7,048,077 7,525,413
SOFTWARE DEVELOPMENT COSTS (net of accumulated
amortization of $82,675 and $119,262, respectively) 300,832 81,780
NON-COMPETE AGREEMENTS (net of accumulated
amortization of $194,592 and $131,839, respectively) 155,472 227,595
DEFERRED INCOME TAXES 613,497 856,685
----------- -----------
TOTAL ASSETS $25,420,377 $22,967,455
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 100,172 $ 257,981
Accounts payable 190,297 485,817
Accrued expenses 1,095,713 1,042,778
Deferred revenues 3,164,794 1,060,780
Income taxes payable 139,602 -
----------- -----------
Total current liabilities 4,690,578 2,847,356
LONG-TERM DEBT 220,029 319,567
DEFERRED REVENUES 184,486 44,260
----------- -----------
Total liabilities 5,095,093 3,211,183
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at June 30, 1998 and 1997 - -
Common stock, $.01 par value; 20,000,000 shares authorized;
4,941,730 shares issued and outstanding at June 30, 1998 and 1997 49,417 49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 3,326,457 2,679,788
----------- -----------
20,911,816 20,265,147
Treasury stock, at cost; 150,276 shares at June 30, 1998 and
123,000 shares at June 30, 1997 (586,532) (508,875)
----------- -----------
Total stockholders' equity 20,325,284 19,756,272
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,420,377 $22,967,455
=========== ===========
See notes to consolidated financial statements.
-25-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------
1998 1997 1996
Net revenues:
Product sales $10,438,778 $12,212,660 $14,579,749
Training and support 3,382,360 3,592,162 4,582,375
----------- ----------- -----------
Total net revenues 13,821,138 15,804,822 19,162,124
----------- ----------- -----------
Cost of revenues:
Product sales 3,220,424 3,921,305 4,370,127
Training and support 571,177 860,793 703,136
Charge for revaluation of capitalized software - 294,233 -
----------- ----------- -----------
Total cost of revenues 3,791,601 5,076,331 5,073,263
----------- ----------- -----------
Gross profit 10,029,537 10,728,491 14,088,861
----------- ----------- -----------
Operating expenses:
Selling and marketing 4,902,045 5,593,808 6,421,005
Research and development 2,769,364 3,817,284 3,510,830
General and administrative 2,174,181 2,475,287 1,679,702
Non-recurring charges - 866,122 43,075
----------- ----------- -----------
Total operating expenses 9,845,590 12,752,501 11,654,612
----------- ----------- -----------
Operating income (loss) from continuing operation 183,947 (2,024,010) 2,434,249
Other income (expense):
Interest income 686,065 632,983 734,710
Interest expense (6,467) (32,207) (23,791)
Other income, net 35,805 126,426 30,863
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 899,350 (1,296,808) 3,176,031
Income tax expense (benefit) 246,613 (633,027) 1,099,632
----------- ----------- -----------
Net income (loss) $ 652,737 $ (663,781) $ 2,076,399
=========== =========== ===========
Weighted average common shares outstanding 4,802,375 4,930,119 4,931,089
=========== =========== ===========
Basic income (loss) per share $ 0.14 $ (0.13) $ 0.42
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding 4,861,947 4,930,119 4,957,988
=========== =========== ===========
Diluted income (loss) per share $ 0.13 $ (0.13) $ 0.42
=========== =========== ===========
See notes to consolidated financial statements.
-26-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------------
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
BALANCES AT JULY 1, 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
Purchase of 48,200 shares of
treasury stock (164,178) (164,178)
Issuance of 20,924 shares of
treasury stock under employee
stock purchase plan (6,068) 86,521 80,453
Net income 652,737 652,737
---------- -----------
BALANCE AT JUNE 30, 1998 $49,417 $17,535,942 $3,326,457 $(586,532) $20,325,284
======= =========== ========== ========= ===========
See notes to consolidated financial statements.
-27-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652,737 $ (663,781) $ 2,076,399
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,079,738 1,025,455 731,082
Amortization of software development costs 87,455 468,939 273,747
Charge for purchased research and development - 475,393 -
Forgiveness of CEBA loan - (110,000) -
Deferred income taxes (285,593) (496,024) (145,825)
Changes in assets and liabilities, net of assets and liabilities
acquired in connection with the acquisitions of CIBC during 1997
and ECOM during 1996:
Accounts receivable 200,416 2,056,472 (1,383,093)
Inventories 372,257 (140,156) 238,450
Prepaid expenses (33,155) 71,436 170,498
Interest receivable (87,643) 255,290 (255,290)
Accounts payable (295,520) 233,049 (403,987)
Income taxes payable/receivable 578,748 (442,198) (632,160)
Deferred revenues 2,244,240 (435,958) 194,344
Accrued expenses 52,935 76,024 (171,556)
Other 64,852 4,402 55,818
------------ ----------- ------------
Net cash provided by operating activities 4,631,467 2,378,343 748,427
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (602,402) (2,585,778) (3,017,681)
Software development costs:
Capitalized costs (271,507) - (74,744)
Purchases of software (35,000) (305,081) (129,500)
Purchase of investments (15,040,940) - (9,974,593)
Proceeds from maturities of investments 7,515,572 7,485,977 -
Payments to acquire companies, net of cash acquired - (551,676) -
------------ ----------- ------------
Net cash provided by (used in) investing activities (8,434,277) 4,043,442 (13,196,518)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (257,347) (213,162) (188,131)
Purchase of treasury stock (164,178) (508,875) -
Proceeds from issuance of treasury stock 80,453 - -
------------ ----------- ------------
Net cash used in financing activities (341,072) (722,037) (188,131)
------------ ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,143,882) 5,699,748 (12,636,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,806,452 3,106,704 15,742,926
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,662,570 $ 8,806,452 $ 3,106,704
============ =========== ============
(Continued)
-28-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 6,375 $ 30,013 $ 28,534
============ =========== ============
Income taxes $ 416,525 $ 313,728 $ 1,887,737
============ =========== ============
Non-cash investing and financing activities:
Long-term debt and other non-current liabilities
assumed in business acquisitions
Long-term debt issued in business acquisitions $ 79,597 $ 186,175
Common stock issued in business acquisitions - (132,797)
Forgiveness of CEBA loan 110,000 -
Payments to acquire companies, net of cash acquired:
Fair value of assets acquired $ 631,273
Liabilities assumed -
Long-term debt issued (79,597)
Common stock issued -
-----------
$ 551,676
===========
See notes to consolidated financial statements. (Concluded)
-29-
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations - Eagle Point Software Corporation and its
subsidiary (the "Company") is engaged in the development, production and sale
of software for the engineering, construction, structural and architectural
markets.
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 - 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:
1998 1997
Manuals and diskettes $100,159 $150,937
Finished software products 23,614 353,214
Other supplies 13,298 5,177
-------- --------
$137,071 $509,328
======== ========
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.
-30-
Concentrations - The Company held approximately $10.0 million and $2.5
million in various U.S. Treasury Notes as of June 30, 1998 and 1997,
respectively. The Company's temporary cash investments, $1.2 million and $1.1
million as of June 30, 1998 and 1997, respectively, were placed in a money
market account with William Blair Mutual Funds, Inc. and $3.2 million and
$7.6 million as of June 30, 1998 and 1997, respectively, were placed in a
money market repurchase account at a local bank. These are primarily funds
that were received from the Company's public stock offering in 1995.
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, 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 products 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.
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.
Earnings Per Share - During the second quarter of fiscal 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" which replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share ("Basic
EPS" and "Diluted EPS"), and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Earnings per share amounts for all periods have been restated to
conform to SFAS No. 128.
-31-
A reconciliation of the numerators and denominators used in the basic and
diluted net income (loss) per share amounts follows:
Fiscal Year Ending June 30,
--------------------------------------------
1998 1997 1996
Numerator:
Numerator for basic and diluted net income
(loss) per share - net income (loss) $ 652,737 $ (663,781) $2,076,399
========== ========== ==========
Denominator:
Denominator for basic net income (loss) per
share - weighted average shares 4,802,375 4,930,119 4,931,089
Net effect of stock options based on the
treasury stock method using the average
market price during the period 59,572 - 26,899
---------- ---------- ----------
Denominator for diluted net income (loss)
per share 4,861,947 4,930,119 4,957,988
========== ========== ==========
The Company has restated all prior years to comply with this standard.
Statement of Financial Accounting Standards - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income," which will be adopted by the Company in fiscal 1999.
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 1999. 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.
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 3, and liabilities approximate their fair values
because of the short maturity of those instruments.
-32-
Reclassification Certain prior year amounts have been reclassified to conform
to classifications adopted in fiscal year 1998. Such reclassifications had no
effect on net income or stockholders' equity.
2. 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 ended July 29, 1997.
As of June 30, 1997, the Company recorded a payable of $79,597 which was paid
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:
Property and equipment $ 20,000
Software development costs and other intangibles 54,607
Purchased research and development in process 475,393
--------
$550,000
========
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.
-33-
3. INVESTMENTS
Investments consist of U.S. Treasury Notes, total investments as of June 30
were as follows:
1998 1997
---------------------------- --------------------------
Carrying Value Fair Value Carrying Value Fair Value
Short-term investments $8,011,236 $7,990,400 $2,488,616 $2,495,313
Long-term investments 2,002,748 2,001,000 - -
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of June 30:
1998 1997
Land $ 637,400 $ 637,400
Buildings and land improvements 4,052,663 4,047,973
Computer equipment and purchased software 4,621,072 4,063,267
Furniture and fixtures 1,349,547 1,331,307
Office equipment 590,724 569,056
Vehicles 76,691 76,691
----------- -----------
11,328,097 10,725,694
Accumulated depreciation (4,280,020) (3,200,281)
----------- -----------
$ 7,048,077 $ 7,525,413
=========== ===========
5. ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30:
1998 1997
Salaries and commissions $ 429,650 $ 285,042
Other 666,063 757,736
----------- -----------
$ 1,095,713 $ 1,042,778
=========== ===========
6. NOTES PAYABLE
At June 30, 1998, the Company had a $2,000,000 unsecured operating line of
credit agreement with the bank which expires December 1, 1998. Borrowings
under the line of credit accrue interest at the prime rate (8.5% at June 30,
1998). At June 30, 1998 there were no borrowings outstanding under the line.
-34-
7. LONG-TERM DEBT
Long-term debt consists of the following as of June 30:
1998 1997
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. $ 38,138 $ 49,035
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. 53,684 78,625
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. 112,857 140,217
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. 1,235 5,939
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. 114,287 142,857
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 made during
December 1997, net of unamortized discount of $1,681 for the
year ended June 30, 1997, based on an imputed interest rate
of 9%. - 49,040
-35-
1998 1997
Non-interest bearing note payable to the former owners of
LANDCADD, due in quarterly installments of $16,667 with
final payment made during December 1997, net of unamortized
discount of $1,092 for the year ended June 30, 1997, based
on an imputed interest rate of 9%. - 32,238
Non-interest bearing note payable to the former owners of
CIBC, paid September 1997 - 79,597
--------- --------
320,201 577,548
Less current portion (100,172) (257,981)
--------- --------
$ 220,029 $319,567
========= ========
At June 30, 1998, future principal payments on long-term debt for each of the
four years in the period ended June 30, 2002 are $100,172, $101,040, $66,933
and $52,056, respectively.
8. 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.
9. STOCKHOLDERS' EQUITY
Certain of the Company's loan agreements prohibit the payment of dividends on
the Company's capital stock without prior written consent.
In fiscal 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. Under this authorization, the Company purchased
48,200 shares and 123,000 shares in fiscal 1998 and 1997, respectively.
-36-
10. INCOME TAXES
Income tax (benefit) expense consists of the following for the years ended
June 30:
1998 1997 1996
Current:
Federal $ 524,106 $ (83,844) $1,213,729
State 8,100 (53,159) 31,728
--------- --------- ----------
Total current 532,206 (137,003) 1,245,457
--------- --------- ----------
Deferred:
Federal (272,584) (485,040) (141,234)
State (13,009) (10,984) (4,591)
--------- --------- ----------
Total deferred (285,593) (496,024) (145,825)
--------- --------- ----------
Income tax (benefit) expense $ 246,613 $(633,027) $1,099,632
========= ========= ==========
The approximate tax effects of temporary differences that give rise to
deferred tax assets (liabilities) were as follows as of June 30:
1998 1997 1996
Product development costs $ (43,431) $ (7,456) $ (19,632)
Depreciation (236,886) (200,290) (141,338)
Accrual to cash basis amortization - - (115,410)
Purchased research and development 425,213 460,504 329,073
Research and development tax credits - 169,719 -
Deferred revenues 656,719 54,432 27,440
Prepaid expenses (38,462) (27,526) (52,528)
Allowance for bad debts 25,748 42,619 44,235
Land acquired from Partnership 79,625 79,625 79,625
Building acquired from Partnership 246,773 252,765 258,143
Other 161,673 166,987 85,747
Iowa new jobs credits 176,000 178,000 178,000
Valuation allowance (176,000) (178,000) (178,000)
---------- --------- ---------
$1,276,972 $ 991,379 $ 495,355
========== ========= =========
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, 1998 and 1997, the Company's management determined that
approximately $176,000 and $178,000, respectively, of tax credits are
available to the Company since their agreement was entered into (see Note
15). However, as the Company incurs minimal Iowa taxes due to a small
percentage of the Company's gross revenues being generated in Iowa, only
$2,000 in credits were used to reduce 1998 Iowa state taxes. As the Company
had a loss in 1997, no credit was utilized. The remaining credits of $151,000
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
-37-
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:
1998 1997 1996
Computed statutory (benefit) expense $ 314,772 $ (453,882) $ 1,111,611
State income taxes, net of federal tax benefit (9,106) (42,334) 17,910
Research and development tax credits (62,234) (169,719) -
Other 3,181 32,908 (29,889)
----------- ----------- -----------
Income tax (benefit) expense $ 246,613 $ (633,027) $ 1,099,632
=========== =========== ===========
11. EXPORT SALES
Net revenues consisted of the following for the years ended June 30:
1998 1997 1996
Domestic $12,406,406 $14,525,719 $17,958,882
Export - Canada 565,299 430,322 639,210
Export - other 849,433 848,781 564,032
----------- ----------- -----------
$13,821,138 $15,804,822 $19,162,124
=========== =========== ===========
12. NON-RECURRING CHARGES
The non-recurring charges included in the accompanying consolidated
statements of operations consist of the following:
1997 1996
Charge of purchased research and development
and other acquisition related charges $ 475,393 $ 43,075
Charge for claims, settlements and
contingencies 234,794 -
Restructuring charges 155,935 -
----------- -----------
$ 866,122 $ 43,075
=========== ===========
Non-recurring charges for fiscal 1997 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.
-38-
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 acquisition
related expenses incurred in connection with the ECOM merger.
13. 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, 1998, 1997 and 1996, the Company's matching
contributions were $16,700, $17,826 and $12,700, respectively.
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. Total
shares sold under the Purchase Plan were 40,067.
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. During the
year ended June 30, 1998 an additional 282,570 options were granted by the
Company under the Plan at prices from $3.09 to $4.69 per share. Due to
terminations and related forfeitures of options throughout the year, there
were 457,701 options outstanding at June 30, 1998. As of June 30, 1998, 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 either 3
or 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.
-39-
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 1998, 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:
1998 1997 1996
Net earnings:
As reported $652,737 $(633,781) $2,076,399
Pro forma 486,083 (801,793) 1,947,626
Earnings per share:
As reported $ 0.14 $ (0.13) $ 0.42
Pro forma 0.10 (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 1998, 1997 and 1996: dividend yield of 0%;
expected volatility of 40%; risk-free interest rate of 5.50% in 1998 and
6.30% in 1997 and 1996; and expected lives of 5 years from grant date. A
summary of the status of the stock option plans as of June 30, 1998, 1997
and 1996, and the changes during the years ending on those dates is
presented below:
1998 1997 1996
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
OUTSTANDING AT BEGINNING OF YEAR 288,256 $ 10.00 203,150 $ 14.15 154,750 $ 13.00
Granted 282,570 3.70 137,506 4.31 81,300 16.46
Exercised - - - - -
Forfeited (113,125) (10.19) (52,400) (11.15) (32,900) (14.48)
--------- -------- --------
OUTSTANDING AT END OF YEAR 457,701 6.06 288,256 10.00 203,150 14.15
========= ======== ========
Options exercisable at year end 47,672 21,698 12,665
Weighted-average fair value of
options granted during the year $ 1.61 $ $1.93 $ 7.37
The following table summarizes information about fixed stock options
outstanding at June 30, 1998:
Options Options
Outstanding Exercisable
-------------------------- ----------------------
Weighted Weighted
Exercise Average Average
Price Remaining Exercise
Range Number Contractual Number Price
Life
$ 3.09 to $6.00 361,101 9.10 years 14,412 $ 4.11
9.94 to 13.00 64,050 7.12 years 28,205 12.90
17.50 to 20.88 32,550 7.51 years 5,055 19.10
------- ------
457,701 47,672
======= ======
14. LEASES
The Company leases certain office space and vehicles under operating
leases. Rent expense for the years ended June 30, 1998, 1997 and 1996, was
$76,521, $158,372 and $185,425, respectively. During 1996, the Company
subleased a portion of the leased office space to another company. Sublease
income for the year ended 1996 was $18,600. There was no sublease income
for the year ended June 30, 1998 and 1997.
At June 30, 1998, future minimum rental payments due under operating leases
for each of the three years in the period ended June 30, 2001 are $34,681,
$10,946 and $7,010, respectively.
15. 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, 1998 and 1997 the Company had received $55,000 in
reimbursement under this addendum.
16. SUBSEQUENT EVENT
On July 1, 1998 the Company re-issued 24,003 shares of treasury stock for
the purpose of meeting its obligations under the Eagle Point Software
Corporation stock purchase plan.
* * * * * *
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, this Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 1998 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 25th day of September, 1998.
Name Capacity
- ---- --------
/s/ Rodney L. Blum Chairman of the Board,
- --------------------------- President, Chief Executive Officer and
Rodney L. Blum Director (principal executive officer)
/s/ Dennis J. George Vice President, Chief
- --------------------------- Financial Officer, Secretary, Treasurer
Dennis J. George and Director (principal financial and
accounting officer)
/s/ John F. Biver Vice President and Director
- ---------------------------
John F. Biver
/s/ James P. Hickey Director
- ---------------------------
James P. Hickey
/s/ Thomas O. Miller Director
- ---------------------------
Thomas O. Miller
-41-
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
3.1* -- Certificate of Incorporation of the Company.
3.2* -- By-laws of the Company.
10.1* -- Loan Agreement between the Company and the City of Dubuque,
dated January 20, 1992.
10.2* -- Loan Agreement between the Company and the City of Dubuque,
dated July 6, 1993.
10.3* -- Loan Agreement between the Company and the City of Dubuque,
dated May 16, 1994.
10.4* -- Community Economic Betterment Account Agreement between the
Company and the Iowa Department of Economic Development, dated
July 18, 1991.
10.5* -- Community Economic Betterment Account Agreement between the
Company and the Iowa Department of Economic Development, dated
July 15, 1993.
10.6* -- Asset Purchase Agreement between the Company and Facility
Mapping Systems, Inc., dated March 31, 1995.
10.7* -- Asset Purchase Agreement between the Company and LANDCADD, Inc.,
dated January 1, 1995.
.10.8**** -- Employment Agreement with Rodney L. Blum.
.10.9**** -- Employment Agreement with Dennis J. George.
.10.10**** -- Employment Agreement with John F. Biver.
.10.11** -- Eagle Point Software Corporation Stock Option Plan.
.10.12*** -- Eagle Point Software Corporation Stock Purchase Plan.
10.13* -- Purchase Agreement between VisionOne Partnership and the
Company, dated as of May 1, 1995.
10.14***** -- Merger Agreement between the Company and ECOM Associates, Inc.,
dated November 9, 1995.
10.15***** -- Asset Purchase Agreement between the Company and Computer
Integrated Building Corporation, dated July 29, 1996.
11.1# -- Statement re: computation of per share earnings.
21.1# -- Subsidiaries
23.1# -- Consent of Deloitte & Touche LLP.
27# -- Financial Data Schedule
- -------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-91950)
** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96914)
*** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 33-96918)
**** Incorporated by reference from the Company's 1995 Annual Report on
Form 10-K
***** Incorporated by reference from the Company's 1996 Annual Report on
Form 10-K
# Filed herewith.
. Indicates management contract or compensatory plan or arrangement.