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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-26170
Eagle Point Software Corporation
(Exact name of registrant as specified in its charter)
Delaware 42-1204819
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4131 Westmark Drive, Dubuque, IA 52002-2627
(address of principal executive offices)
(319) 556-8392
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest applicable date.
Common Stock, par value $.01 per share, outstanding as of November 8, 1999:
4,846,476 shares.
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Eagle Point Software Corporation
Form 10-Q
For the quarter ended September 30, 1999
Index
PART I. Financial Information
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Page
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Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Operations -
for the three month period, ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows -
for the three months ended September 30,1999 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 10
PART II. Other Information
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Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
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September 30, June 30,
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1999 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,669,394 $ 5,481,640
Short-term investments 10,033,410 11,040,912
Accounts receivable (net of allowances of $188,781 and $218,309, respectively) 1,846,845 1,654,487
Interest receivable 69,063 83,914
Deferred income taxes 242,927 242,927
Inventories 94,316 120,531
Income taxes receivable - 3,942
Prepaid expenses and other assets 379,620 82,671
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Total current assets 19,335,575 18,711,024
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PROPERTY & EQUIPMENT, NET 6,510,953 6,555,782
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$400,311 and $335,941 respectively) 114,202 157,967
NON-COMPETE AGREEMENTS (net of accumulated amortization of $299,943
and $276,863 respectively) 125,122 148,202
DEFERRED INCOME TAXES 570,505 570,505
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TOTAL ASSETS $26,656,357 $26,143,480
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 67,064 $ 71,434
Accounts payable 136,462 112,773
Accrued expenses 1,114,893 1,094,578
Deferred revenues 2,479,537 2,403,456
Income taxes payable 62,867 -
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Total current liabilities 3,860,823 3,682,241
LONG-TERM DEBT 61,087 64,342
DEFERRED REVENUES 232,544 214,692
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Total liabilities 4,154,454 3,961,275
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
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September 30, June 30,
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1999 1999
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at September 30, 1999 and June 30, 1999
Common stock, $.01 par value; 20,000,000 shares authorized, 4,941,730
shares issued and outstanding at September 30, 1999 and June 30, 1999 49,417 49,417
Additional paid-in capital 17,624,290 17,624,290
Retained earnings 5,305,418 5,058,091
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22,979,125 22,731,798
Treasury stock, at cost; 95,254 shares at September 30,1999
and 108,877 shares at June 30, 1999 (477,222) (549,593)
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Total stockholders' equity 22,501,903 22,182,205
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,656,357 $26,143,480
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months Ended
September 30,
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1999 1998
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Net revenues
Product sales $2,202,060 $2,670,846
Training and support 1,269,065 970,857
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Total net revenues 3,471,125 3,641,703
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Cost of revenues
Product sales 598,619 538,048
Training and support 110,099 95,158
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Total cost of revenues 708,718 633,206
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Gross profit 2,762,407 3,008,497
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Operating expenses:
Selling and marketing 1,203,617 1,166,808
Research and development 766,173 710,786
General and administrative 632,827 629,798
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Total operating expenses 2,602,617 2,507,392
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Operating income 159,790 501,105
Other income (expense):
Interest income, net of expense 202,695 198,757
Other income (expense) 21,828 647
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Income before income taxes 384,313 700,509
Income tax expense 136,986 243,748
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Net income $ 247,327 $ 456,761
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Weighted average common
shares outstanding 4,846,476 4,816,278
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Basic income per share $ 0.05 $ 0.09
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Weighted average common
and common equivalent
shares outstanding 4,947,116 4,996,598
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Diluted income per share $ 0.05 $ 0.09
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
September 30,
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1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 247,327 $ 456,761
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 289,928 274,153
Amortization of software development costs 64,370 60,891
Changes in assets and liabilities:
Accounts receivable (192,358) 445,249
Interest receivable 14,851 3,893
Income taxes payable/receivable 66,809 54,140
Inventories 26,215 5,676
Prepaid expenses (296,949) (93,794)
Accounts payable 23,689 (73,479)
Deferred revenues 93,933 (535,244)
Accrued expenses 20,315 (9,785)
Other 23,080 13,611
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Net cash provided by operating activities 381,210 602,072
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (245,099) (219,288)
Software development costs:
Capitalized software costs (20,605) (25,014)
Purchases of software - -
Purchase of investments (2,012,575) (3,035,151)
Proceeds from maturities of investments 3,020,077 2,004,177
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Net cash provided by (used in) investing
activities 741,798 (1,275,276)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (7,625) (10,790)
Purchases of treasury stock - (22,279)
Proceeds from issuance of treasury stock 72,371 108,606
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Net cash provided by financing activities 64,746 75,537
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NET CHANGE IN CASH AND CASH EQUIVALENTS 1,187,754 (597,667)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,481,640 4,662,570
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,669,394 $ 4,064,903
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest $ 146 $ (1,129)
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Income taxes $ 70,117 $ 191,531
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September
30, 1999 and June 30, 1999, and the results of operations and cash flows for the
three-month period ended September 30, 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, 1999.
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.
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 Company's exposure with respect to Year 2000
related issues. 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 September 30, 1999 and
the Company's report on Form 10-K for the year ended June 30, 1999.
Results of Operations
Net revenues decreased $170,000 or 4.7% to $3.4 million for the three
months ended September 30, 1999 (the "1999 Period"), from $3.6 million for the
three months ended September 30, 1998 (the "1998 Period"). The Company
experienced a decrease in product sales in the 1999 Period and an increase in
training and support revenues. The decrease in product revenues was attributable
primarily to the fact that in the 1998 Period the Company recognized a net
$735,000 of revenues previously deferred as part of a continuing upgrade
promotion. Training and support revenues were favorably affected in the 1999
Period by the release of new products and product upgrades in the previous
fiscal year as well as an increased emphasis by the Company on support and
maintenance programs. In addition, $28,000 of the 1999 Period's software
revenues, that were part of a continuing upgrade promotion, were deferred. The
revenues deferred under this promotion will be recognized upon the future
release and subsequent shipment of the product upgrades.
Gross profit decreased $246,000 or 8.2% to $2.7 million in the 1999 Period
from $3.0 million in the 1998 Period. Gross profit as a percentage of net
revenues decreased to 79.6% in the 1999 Period from 82.6% in the 1998 Period.
Gross profit as a percentage of corresponding net revenues relating to product
sales decreased to 72.8% in the 1999 Period from 79.8% in the 1998 Period
primarily due to increases in royalties associated with a change of mix of
product sales toward stand alone products. Gross profit as a percentage of
corresponding net revenues relating to training and support increased to 91.3%
in the 1999 Period from 90.2% 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.
Selling and marketing expense increased $37,000, or 3.2% to $1.204 million
in the 1999 Period from $1.167 million in the 1998 Period. As a percentage of
net revenues, selling and marketing expenses increased to 34.7% in the 1999
Period from 32.0% in the 1998 Period. The increase is primarily attributable to
expanded direct marketing, advertising and other promotional activities, and the
decrease in sales volume.
Research and development expense increased $55,000, or 7.8% to $766,000 in
the 1999 Period from $711,000 in the 1998 Period. As a percentage of net
revenues, research and development costs increased to 22.1% in the 1999 Period
from 19.5% in the 1998 Period. The
8
increase was primarily attributable to increased personnel costs associated with
research and development, and also due to lower sales volume.
General and administrative expense increased $3,000 or 0.5% to
$633,000 in the 1999 Period from $630,000 in the 1998 Period. As a percentage
of net revenues, general and administrative costs increased to 18.2% in the 1999
Period from 17.3% in the 1998 Period as a result of lower sales volume.
The operating income decreased to $160,000 in the 1999 Period from
$501,000 in the 1998 Period. As a percentage of net revenues, operating income
decreased to 4.6% in the 1999 Period from 13.8% in the 1998 Period as a result
of the factors described above.
Interest income increased $4,000 to $203,000 in the 1999 Period from
$199,000 in the 1998 Period. Other income increase $21,200 to $21,800 in the
1999 Period from $600 in the 1998 Period. The increased in interest income was
primarily attributable to higher cash balances. The increase in other income
was as a result of a refund of use taxes paid in a prior period.
Liquidity and Capital Resources
The Company's financial position remains strong, with working capital
of $15.4 million and long-term debt of only $61,000. Cash plus short-term
investments aggregated approximately $16.7 million at September 30, 1999. The
Company also has available a $2.0 million unsecured line of credit from its
principal bank. At September 30, 1999, the Company had no borrowings
outstanding under this line of credit.
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 November 8, 1999, the Company does not believe that the Y2K
issue will materially affect its business or involve material costs to the
Company.
The Company's most current version of its software products have been
tested and confirmed to be Y2K compliant. Previous product versions, as well as
products that the Company no longer actively sells, have not been tested for Y2K
compliance. Accordingly, no assurance can be given as to such prior products'
Y2K compliance status. In addition, since many of the Company's products run in
conjunction with 3rd party products such as AutoCAD, Microstation and
IntelliCAD, their Y2K compatibility can be dependent on the Year 2000
compatibility of those 3rd party products. According to public statements made
by the manufacturers of AutoCAD, Microstation and IntelliCAD, recent versions of
these products are
9
Y2K compliant. However, these companies gave no assurances as to the Y2K
compliance of significantly older versions of their respective products.
In 1998, the Company developed a systematic plan to evaluate its Y2K
exposure with respect to its internal informational systems. In accordance with
this plan, the Company identified systems pursuant to which the Company could
have exposure and performed remediation procedures to correct these systems.
All remediation activities have been completed and preliminary testing of the
internal information systems in a simulated Y2K environment has been completed.
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 remediation procedures have been
completed.
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 obtained documentation and certification from most vendors regarding their
Y2K compliance. Based upon the vendors who have responded, which includes
substantially all material vendors, it appears that there is no material Y2K
exposure to the Company. However, if the Company determines, after receiving
additional responses to the aforementioned inquiries, that its vendors' Y2K
issues could result in material disruptions to their respective businesses, the
Company may attempt to seek alternative suppliers.
Based upon the evaluation, remediation and testing activities described
above, we believe the Company's most recent product versions, internal systems,
computer hardware and other equipment systems will be Y2K compliant. However, as
identified above, our testing can only simulate the Year 2000. Accordingly, the
Company cannot guarantee that it will not be effected by Y2K-related problems,
particularly with respect to the Company's vendors.
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 2000. 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.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(ii) Amended and Restated By-laws
11 Statement Regarding Computation of Net Earnings Per Share
(b) Reports on Form 8-K:
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EAGLE POINT SOFTWARE CORPORATION
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(Registrant)
Date: November 12, 1999 BY: /s/ Rodney L. Blum
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Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: November 12, 1999 BY: /s/ Dennis J. George
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Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
13
EXHIBIT INDEX
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Exhibit No. Description
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3(ii) Amended and Restated By-laws
11 Statement re: computation of net earnings per share
14