UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999.
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number: 0-26170
EAGLE POINT SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 42-1204819
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number)
4131 WESTMARK DRIVE, DUBUQUE, IA 52002-2627
(address of principal executive offices)
(319) 556-8392
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest applicable date.
Common Stock, par value $.01 per share, outstanding as of May 10, 1999:
4,832,627 shares.
EAGLE POINT SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
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PAGE
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Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations -
for the three and nine month periods, ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosure about Market Risk 11
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
------------------------------------------
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,895,784 $ 4,662,570
Short-term investments 11,050,396 8,011,236
Accounts receivable (net of allowances of $253,596 and $161,545, respectively) 1,342,633 1,600,282
Interest receivable 98,515 87,643
Deferred income taxes 663,475 663,475
Inventories 140,973 137,071
Prepaid expenses and other assets 201,798 137,474
------------------ ----------------
Total current assets 16,393,574 15,299,751
INVESTMENTS 2,010,388 2,002,748
PROPERTY & EQUIPMENT, NET 6,648,993 7,048,077
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$231,928 and $82,675 respectively) 222,980 300,832
NON-COMPETE AGREEMENTS (net of accumulated amortization of $242,908
and $194,592 respectively) 182,157 155,472
DEFERRED INCOME TAXES 613,497 613,497
------------------ ----------------
TOTAL ASSETS $ 26,071,589 $ 25,420,377
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 99,233 $ 100,172
Accounts payable 274,924 190,297
Accrued expenses 1,216,742 1,095,713
Deferred revenues 2,334,764 3,164,794
Income taxes payable 222,016 139,602
------------------ ----------------
Total current liabilities 4,147,679 4,690,578
LONG-TERM DEBT 40,313 220,029
DEFERRED REVENUES 161,429 184,486
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Total liabilities 4,349,421 5,095,093
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
------------------ ----------------
1999 1998
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at March 31, 1999 and June 30, 1998 Common stock, $.01 par value;
20,000,000 shares authorized, 4,941,730 shares issued and outstanding
at March 31, 1999 and June 30, 1998 49,417 49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 4,686,545 3,326,457
------------------ ----------------
22,271,904 20,911,816
Treasury stock, at cost; 109,093 shares at March 31, 1999
and 150,276 shares at June 30, 1998 (549,736) (586,532)
------------------ ----------------
Total stockholders' equity 21,722,168 20,325,284
------------------ ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,071,589 $ 25,420,377
================== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
1999 1998 1999 1998
NET REVENUES
Product sales $ 2,557,806 $ 2,948,805 $ 7,939,578 $ 8,003,822
Training and support 1,047,262 911,476 2,996,967 2,355,582
-------------- -------------- -------------- -------------
TOTAL NET REVENUES 3,605,068 3,860,281 10,936,545 10,359,404
-------------- -------------- -------------- -------------
COST OF REVENUES
Product sales 606,551 1,017,341 1,690,845 2,667,196
Training and support 113,089 146,357 306,425 431,391
-------------- -------------- -------------- -------------
TOTAL COST OF REVENUES 719,640 1,163,698 1,997,270 3,098,587
-------------- -------------- -------------- -------------
GROSS PROFIT 2,885,428 2,696,583 8,939,275 7,260,817
-------------- -------------- -------------- -------------
OPERATING EXPENSES:
Selling and marketing 1,126,686 1,306,991 3,435,116 3,625,398
Research and development 650,931 529,939 2,082,924 2,167,153
General and administrative 620,447 556,616 1,904,079 1,574,845
-------------- -------------- -------------- -------------
TOTAL OPERATING EXPENSES 2,398,064 2,393,546 7,422,119 7,367,396
-------------- -------------- -------------- -------------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS 487,364 303,037 1,517,156 (106,579)
OTHER INCOME (EXPENSE):
Interest income, net of expense 180,748 175,567 570,665 496,367
Other income (expense) 548 (2,458) 1,472 4,433
-------------- -------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 668,660 476,146 2,089,293 394,221
Income tax expense 216,827 156,482 693,025 87,830
-------------- -------------- -------------- -------------
NET INCOME $ 451,833 $ 319,664 $ 1,396,268 $ 306,391
============== ============== ============== =============
Weighted average common shares outstanding 4,832,570 4,791,454 4,824,844 4,806,002
============== ============== ============== =============
Basic income per share $ 0.09 $ 0.07 $ 0.29 $ 0.06
============== ============== ============== =============
Weighted average common and common
Equivalent shares outstanding 4,973,139 4,859,759 4,993,937 4,828,782
============== ============== ============== =============
Diluted income per share $ 0.09 $ 0.07 $ 0.28 $ 0.06
============== ============== ============== =============
SEE NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
--------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,396,269 $ 306,391
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 840,965 809,344
Amortization of software development costs 183,253 55,395
Changes in assets and liabilities:
Accounts receivable 257,649 171,205
Interest receivable (10,872) (72,358)
Income taxes payable 82,414 382,572
Inventories (3,903) 377,904
Prepaid expenses (64,320) (75,007)
Accounts payable 84,627 (283,531)
Deferred revenues (853,086) 1,913,892
Accrued expenses 121,027 2,436
Other (79,008) 56,432
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Net cash provided by operating activities 1,955,015 3,644,675
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (425,743) (399,833)
Software development costs:
Capitalized software costs (105,401) (126,244)
Purchases of software (25,000)
Purchase of investments (13,075,110) (14,031,758)
Proceeds from maturities of investments 10,028,311 6,512,567
-------------- ------------
Net cash used in investing activities (3,577,943) (8,070,268)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (180,654) (245,450)
Purchases of treasury stock (245,064) (164,178)
Proceeds from issuance of treasury stock 281,860 80,453
-------------- ------------
Net cash used in financing activities (143,858) (329,175)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (1,766,786) (4,754,768)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,662,570 8,806,452
-------------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,895,784 $ 4,051,684
============== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest 9,594 7,639
Income taxes 519,008 (294,742)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Eagle Point Software
Corporation and its subsidiary (collectively the "Company" or "Eagle Point") are
unaudited. In the opinion of the Company's management, the financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial position of the Company as of March 31,
1999 and June 30, 1998, and the results of operations and cash flows for the
nine-month period ended March 31, 1999.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this quarterly report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 30, 1998.
2. DEFERRED REVENUES AND REVENUE RECOGNITION
The Company derives substantially all of its product revenues from the license
of its software products. Revenue is recognized upon shipment of the product,
provided that no significant vendor, post-contract support, or product upgrade
obligations remain outstanding and collection of the resulting receivable is
deemed probable. The Company has no significant vendor and post-contract support
obligations associated with its product sales. Dependent upon the timing of
future product upgrade releases and market conditions, the Company may extend
promotions where product upgrade obligations are associated with the shipment of
software products. Based upon the terms of the promotions extended, a portion or
all of the product revenues may be deferred until the promotional product
upgrade is released and subsequently shipped. The Company recognizes its service
revenues from maintenance and support contracts ratably over the period of the
arrangements. These contracts generally have terms of one year or less. The
Company recognizes its service revenues from training arrangements in the period
in which the training occurs. The Company's product returns historically have
been insignificant.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q contains forward looking statements,
including without limitation the results of any litigation brought against the
Company. These forward looking statements involve risks and uncertainties, which
could cause actual results to differ from those projected. These as well as
other risks and uncertainties are detailed from time to time in reports filed by
the Company with the Securities and Exchange Commission, including this report
on Form 10-Q for the quarter ended March 31, 1999 and the Company's report on
Form 10-K for the year ended June 30, 1998.
RESULTS OF OPERATIONS
The Company's performance for the third quarter of fiscal year 1999 closely
paralleled performance for the first nine months of fiscal year 1999. The
discussion and analysis that follows, therefore, is limited to a discussion of
the first nine months as a whole and does not include a separate discussion of
the third quarter unless otherwise noted.
Net revenues increased $577,000 or 5.6% to $10.9 million for the nine
months ended March 31, 1999 (the "1999 Period"), from $10.4 million for the nine
months ended March 31, 1998 (the "1998 Period"). The Company experienced a
slight decrease in product sales and an increase in training and support
revenues. The decrease in product sales was attributable primarily to a decrease
in the revenues generated from resales of third party products. Training and
support revenues were favorably affected in the 1999 Period by the release of
product upgrades and an increased emphasis by the Company on support and
maintenance programs. $359,000 of the 1999 Period's software revenues that were
part of a continuing upgrade promotion were deferred. Additionally, $1.5 million
of previously deferred software revenues were recognized during the 1999 Period
as the product upgrades, for which the revenue was initially deferred, were
shipped.
Gross profit increased $1.6 million, or 23.1% to $8.9 million for the 1999
Period from $7.3 million in the 1998 Period. Gross profit as a percentage of net
revenues increased to 81.7% in the 1999 Period from 70.1% in the 1998 Period.
Gross profit as a percentage of corresponding net revenues relating to product
sales increased to 78.7% in the 1999 Period from 66.7% in the 1998 Period. This
increase is attributable to a shift in the sales mix of product sales. Sales of
Eagle Point products, which have higher gross profit margins than resales of
third party products (i.e. AutoCAD and IntelliCAD), increased to 97.2% of
product sales in the 1999 Period from 72.5% in the 1998 Period as the Company no
longer resells AutoCAD. Gross profit as a percentage of corresponding net
revenue relating to training and support increased to 89.8% in the 1999 Period
from 86.7% in the 1998 Period primarily due to an improvement in the sales mix
toward support and maintenance revenues, which have higher gross profit margins
than training revenues.
8
Selling and marketing expense decreased $190,000 or 5.2% to $3.4 million
for the 1999 Period from $3.6 million in the 1998 Period. As a percentage of net
revenues, selling and marketing expenses decreased to 31.4% in the 1999 Period
from 35.0% in the 1998 period. The decrease as a percentage of net revenues is
as a result of the growth in sales volume while sales and marketing expenses
also decreased due to lower personnel costs.
Research and development expense decreased $84,000, or 3.9% to $2.1 million
in the 1999 Period from $2.2 million in the 1998 Period. As a percentage of net
revenues, research and development costs decreased to 19.0% in the 1999 Period
from 20.9% in the 1998 Period. The decrease was primarily attributable to lower
personnel costs associated with research and development.
General and administrative expense increased $329,000, or 20.9% to $1.9
million in the 1999 Period from $1.6 million in the 1998 Period. As a percentage
of net revenues, general and administrative costs increased to 17.4% in the 1999
Period from 15.2% in the 1998 Period. The increase is due primarily to higher
personnel costs and an increase in the general and administrative staff.
The operating income from continuing operations increased to net income of
$1.5 million in the 1999 Period from a net loss of $107,000 in the 1998 Period.
As a percentage of net revenues, operating income from continuing operations was
13.9% in the 1999 Period as compared to an operating loss of 1.0% in the 1998
Period as a result of the factors described above.
Interest expense increased $3,700 to $9,200 in the 1999 Period from $5,500
in the 1998 Period. Interest income increased $72,000 to $573,000 in the 1999
Period from $501,000 in the 1998 Period. The increase in interest was primarily
attributed to higher balances of cash, cash equivalents, and investments. Other
income decreased $2,200 to $1,800 in the 1999 Period from $4,000 in the 1998
Period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with working capital of
$12.2 million and long-term debt of only $40,000. Cash, short-term, and long-
term investments aggregated approximately $16.0 million at March 31, 1999. The
Company also has available a $2.0 million unsecured line of credit from its
principal bank. At March 31, 1999, the Company had no borrowings outstanding
under this line of credit.
The Company believes that existing cash balances, together with funds
generated from operations and borrowings available under its line of credit,
will be sufficient to fund its operations through fiscal 1999.
9
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 May 10, 1999, the Company does not believe that the Y2K issue will
materially affect its business or involve material costs to the Company.
The Company believes that its own software products will not be affected 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 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 has
determined that the Sales Database and the Accounting System are not currently
Y2K compliant. However, the Company has received, at no cost to the Company,
from the Sales Database's manufacturer and from the Accounting System's
manufacturer the necessary software upgrades to cause the Sales Database and the
Accounting System to become Y2K compliant. While the Company expects the Sales
Database and the Accounting System upgrades to be effective, the Company has not
yet tested such upgrades and there can be no assurance that they will be
successful. Both upgrades are scheduled to be completed by the end of August
1999.
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, servers and phone system). The Company has identified and
evaluated such systems' Y2K exposure and has begun remediation procedures on
system servers and workstations. The remediation tasks are scheduled to be
completed by the end of June 1999.
The fourth aspect of the Company's Y2K analysis involves evaluating major
vendors' Y2K exposure and their efforts to address such exposure. The Company
has begun to obtain documentation and certification from third parties regarding
their Y2K compliance. The Company has already taken the steps to upgrade several
3rd party products in enterprise-wide use. 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
August 1999.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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. To date,
the Company has not entered into any interest rate, currency or other market
risk hedging instruments.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Computer Integrated Building Corporation ("CIBC"), a corporation from whom
the Company purchased substantially all of the assets on July 29, 1996, had
initiated arbitration proceedings against the Company relating to the earnout
provision of the purchase agreement relating thereto. The matter has since been
resolved and all costs relating to the issue were not material to the company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement Regarding Computation of Net Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
--------------------------------
(Registrant)
Date: May 12, 1999 BY: /s/ Rodney L. Blum
- ------------------ ---------------------------------
Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: May 12, 1999 BY: /s/ Dennis J. George
- ------------------ -----------------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and
Accounting Officer)
14
EXHIBIT INDEX
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Exhibit No. Description
- ---------- -----------
11 Statement re: computation of net earnings per share
27 Financial Data Schedule
15