<PAGE>
- --------------------------------------------------------------------------------
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-26170
Eagle Point Software Corporation
(Exact name of registrant as specified in its charter)
Delaware 42-1204819
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
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 November 9, 1998:
4,820,835 shares
- --------------------------------------------------------------------------------
<PAGE>
Eagle Point Software Corporation
Form 10-Q
For the quarter ended September 30, 1998
Index
PART I. Financial Information
-----------------------------
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Operations -
for the three months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows -
for the three months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. Other Information
--------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
------------- ------------
1998 1998
ASSETS (Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,064,903 $ 4,662,570
Short-term investments 7,020,822 8,011,236
Accounts receivable (net of allowances of $328,556 and $161,545, respectively) 1,155,002 1,600,282
Interest receivable 83,750 87,643
Deferred income taxes 663,475 663,475
Inventories 131,394 137,071
Prepaid expenses and other assets 231,268 137,474
------------ ------------
Total current assets 13,350,614 15,299,751
INVESTMENTS 4,024,138 2,002,748
PROPERTY & EQUIPMENT, NET 6,993,212 7,048,077
SOFTWARE DEVELOPMENT COSTS (net of accumulated amortization of
$143,566 and $82,675, respectively) 264,955 300,832
NON-COMPETE AGREEMENTS (net of accumulated amortization of $210,281 and
$194,592 respectively) 139,784 155,472
DEFERRED INCOME TAXES 613,497 613,497
------------ ------------
TOTAL ASSETS $ 25,386,200 $ 25,420,377
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 89,382 $ 100,172
Accounts payable 116,818 190,297
Accrued expenses 1,103,560 1,095,713
Deferred revenues 2,629,550 3,164,794
Income taxes payable 193,742 139,602
------------ ------------
Total current liabilities 4,133,052 4,690,578
LONG-TERM DEBT 220,029 220,029
DEFERRED REVENUES 166,854 184,486
------------ ------------
Total liabilities $ 4,519,935 $ 5,095,093
============ ============
</TABLE>
3
<PAGE>
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
------------- ------------
1998 1998
STOCKHOLDERS' EQUITY: (Unaudited) (Audited)
<S> <C> <C>
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
at September 30, 1998 and June 30, 1998
Common stock, $.01 par value; 20,000,000 shares authorized; 4,941,730 shares
issued and outstanding at September 30, 1998 and June 30, 1998 49,417 49,417
Additional paid-in capital 17,535,942 17,535,942
Retained earnings 3,781,111 3,326,457
------------ ------------
21,366,470 20,911,816
Treasury stock, at cost; 124,686 shares at September 30, 1998 and 150,276 shares
at June 30, 1998 (500,205) (586,532)
------------ ------------
Total stockholders' equity 20,866,265 20,325,284
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,386,200 $25,420,377
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues:
Product sales $2,670,846 $2,264,986
Training and support 970,857 636,826
---------- ----------
Total net revenues 3,641,703 2,901,812
---------- ----------
Cost of revenues:
Product sales 538,048 788,244
Training and support 95,158 144,300
---------- ----------
Total cost of revenues 633,206 932,544
---------- ----------
Gross profit 3,008,497 1,969,268
---------- ----------
Operating expenses:
Selling and marketing 1,166,808 987,301
Research and development 710,786 846,130
General and administrative 629,798 495,639
---------- ----------
Total operating expenses 2,507,392 2,329,070
---------- ----------
Operating income (loss) from continuing operations 501,105 (359,802)
Other income (expense):
Interest income, net of expense 198,757 147,245
Other income (expense) 647 2,262
---------- ----------
Income (loss) from continuing operations
before income taxes 700,509 (210,295)
Income tax expense (benefit) 243,748 (91,359)
---------- ----------
Net income (loss) $ 456,761 $ (118,936)
========== ==========
Weighted average common shares outstanding 4,816,278 4,826,457
========== ==========
Basic income (loss) per share $ 0.09 $ (0.02)
========== ==========
Weighted average common and common
equivalent shares outstanding $4,996,598 $4,828,948
========== ==========
Diluted income (loss) per share $ 0.09 $ (0.02)
========== ==========
</TABLE>
5
<PAGE>
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income (loss) $ 456,761 $ (118,936)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 274,153 288,580
Amortization of software development costs 60,891 19,583
Changes in assets and liabilities:
Accounts receivable 445,249 656,887
Interest receivable 3,893 (32,813)
Income taxes payable 54,140 187,477
Inventories 5,676 155,654
Prepaid expenses (93,794) (122,367)
Accounts payable (73,479) 49,521
Deferred revenues (535,244) 433,939
Accrued expenses (9,785) (171,409)
Other 13,611 9,368
------------ -----------
Net cash provided by operating activities 602,072 1,355,484
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments (3,035,151) (7,014,746)
Proceeds from maturaties of investments 2,004,177 -
Purchases of property and equipment, net (219,288) (193,251)
Capitalized software development costs (25,014) -
------------ -----------
Net cash used in investing activities (1,275,276) (7,207,997)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (10,790) (131,767)
Purchases of treasury stock (22,279) (118,816)
Proceeds from issuance of treasury stock 108,606 80,453
------------ -----------
Net cash provided by (used in) financing activities 75,537 (170,130)
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (597,667) (6,022,643)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,662,570 8,806,452
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,064,903 $ 2,783,809
============ ===========
</TABLE>
6
<PAGE>
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------------------
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest $ (1,129) $ (1,419)
========= ==========
Income taxes $191,531 $(280,759)
======== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. Interim Financial Statements
The accompanying financial statements of Eagle Point Software Corporation
(the "Company") are unaudited. In the opinion of the Company's management, the
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial position of the
Company as of September 30, 1998 and June 30, 1998, and the results of
operations and cash flows for the three-month period ended September 30, 1998.
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.
8
<PAGE>
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.
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, 1998 and the Company's report on
Form 10-K for the year ended June 30, 1998.
Results of Operations
Net revenues increased $740,000 or 25.5% to $3.6 million for the three
months ended September 30, 1998 (the "1998 Period"), from $2.9 million for the
three months ended September 30, 1997 (the "1997 Period"). The Company
experienced growth in product sales and training and support revenues. The
increase in product sales was attributable primarily to increased sales and
marketing efforts and also the release of product upgrades in both the civil
surveying and landscape architectural product lines. Training and support
revenues were favorably affected in the 1998 Period by the release of product
upgrades and an increased emphasis by the Company on customer training. $129,000
of the 1998 Period's software revenues, that were part of a continuing upgrade
promotion, were deferred. Additionally, $864,000 of previously deferred software
revenues were recognized during the quarter as the product upgrades, for which
the revenue was initially deferred, were shipped.
Gross profit increased $1.0 million, or 52.8% to $3.0 million for the 1998
Period from $2.0 million in the 1997 Period. Gross profit as a percentage of net
revenues increased to 82.6% 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 79.8% in the 1998 Period from 65.2% in the 1997 Period as a
result of 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, increased to 70.4% of product sales in the 1998 Period from 55.8% in
the 1997 Period. Gross profit as a percentage of corresponding net revenues
relating to training and support increased to 90.2% in the 1998 Period from
77.3% in the 1997 Period primarily due to an improvement in the sales mix toward
support and maintenance revenues, which have higher gross profit margins than
training revenues.
9
<PAGE>
Selling and marketing expense increased $180,000, or 18.2% to $1.2 million
in the 1998 Period from $987,000 in the 1997 Period. As a percentage of net
revenues, selling and marketing expenses decreased to 32.0% in the 1998 Period
from 34.0% in the 1997 Period. The increase is primarily attributable to
expanded direct marketing, advertising and other promotional activities, and
higher personnel costs associated with the growth in sales volume. The decrease
as a percentage of net revenues is as a result of the growth in sales volume
increasing at a faster pace than that of sales and marketing expenses.
Research and development expense decreased $135,000, or 16.0% to $711,000
in the 1998 Period from $846,000 in the 1997 Period. As a percentage of net
revenues, research and development costs decreased to 19.5% in the 1998 Period
from 29.2% in the 1997 Period. The decrease was primarily attributable to lower
personnel costs associated with research and development as well as $25,000 in
capitalized development costs.
General and administrative expense increased $134,000, or 27.1% to $630,000
in the 1998 Period from $496,000 in the 1997 Period. As a percentage of net
revenues, general and administrative costs increased slightly to 17.3% in the
1998 Period from 17.1% in the 1997 Period. The increase is due primarily to
higher personnel costs and an increase in the size of the general and
administrative staff.
The operating income from continuing operations increased to net income of
$501,000 in the 1998 Period from an operating loss of $360,000 in the 1997
Period. As a percentage of net revenues, operating income from continuing
operations increased to 13.8% in the 1998 Period as compared to an operating
loss of 12.4% in the 1997 Period as a result of the factors described above.
Interest expense decreased $2,000 to $1,000 in the 1998 Period from $3,000
in the 1997 Period. Interest income increased $50,000 to $200,000 in the 1998
Period from $150,000 in the 1997 Period. The increase in interest income was
primarily attributed to higher balances of cash, cash equivalents, and
investments. Other income decreased $1,350 to $650 in the 1998 Period from
$2,000 in the 1997 Period.
Liquidity and Capital Resources
The Company's financial position remains strong, with working capital of
$9.2 million and long-term debt of only $220,000. Cash plus short-term and long-
term investments aggregated approximately $15.1 million at September 30, 1998.
The Company also has available a $2.0 million unsecured line of credit from its
principal bank. At September 30, 1998, the Company had no borrowings outstanding
under this line of credit.
In 1997, the Board of Directors authorized, subject to certain business and
market conditions, the purchase of up to 500,000 shares of the Company's stock
in the open market from time to time or in privately negotiated transactions. At
September 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 July 1,
1998, the Company reissued 20,924 and 24,003 shares, respectively, out of
treasury stock for the purpose of meeting it's obligations under the Eagle Point
Software
10
<PAGE>
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.
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.
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) it's own software
products; (2) internal information systems; (3) computer hardware and other
equipment related systems; and (4) external. Based on the Company's analysis
through November 9, 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 to evaluate its Y2K exposure with respect to its internal
information 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 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 has begun to have existing employees conduct such inquiries and does not
expect the costs of such inquiries to be material. If the Company determines,
after conducting the aforementioned surveys and
11
<PAGE>
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-calendar 1999.
12
<PAGE>
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.
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
<PAGE>
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: November 13, 1998 BY: /s/ Rodney L. Blum
- ------------------------ ------------------------------------------------
Rodney L. Blum
Chairman, President and Chief
Executive Officer
Date: November 13, 1998 BY: /s/ Dennis J. George
- ------------------------ -----------------------------------------------
Dennis J. George
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
14
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C> <C>
11 -- Statement re: computation of net earnings per share 16
27 -- Financial Data Schedule 17
</TABLE>
15
<PAGE>
EXHIBIT 11
EAGLE POINT SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT REGARDING COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
--------------------------
1998 1997
<S> <C> <C>
SHARES USED IN DETERMINING BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 4,816,278 4,826,457
========= =========
SHARES USED IN DETERMINING DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 4,816,278 4,826,457
Net effect of stock options based on the treasury stock
method using the average market price during the period. 180,320 0
--------- ---------
Total weighted average common and common equivalent
shares outstanding 4,996,598 4,826,457
========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,064,903
<SECURITIES> 7,020,822
<RECEIVABLES> 1,155,002
<ALLOWANCES> 328,556
<INVENTORY> 131,394
<CURRENT-ASSETS> 13,365,901
<PP&E> 11,547,385
<DEPRECIATION> 4,554,173
<TOTAL-ASSETS> 25,401,487
<CURRENT-LIABILITIES> 4,148,339
<BONDS> 327,043
0
0
<COMMON> 49,417
<OTHER-SE> 20,816,848
<TOTAL-LIABILITY-AND-EQUITY> 25,401,487
<SALES> 3,641,703
<TOTAL-REVENUES> 633,206
<CGS> 633,206
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 113,006
<LOSS-PROVISION> 929
<INTEREST-EXPENSE> 700,509
<INCOME-PRETAX> 243,748
<INCOME-TAX> 456,761
<INCOME-CONTINUING> 456,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,761
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0
</TABLE>
