10-Q 1 d10q.txt FORM 10-Q -------------------------------------------------------------------------------- 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, 2001. -------------- 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 7, 2001: 4,619,409 shares. -------------------------------------------------------------------------------- Eagle Point Software Corporation Form 10-Q For the quarter ended March 31, 2001 Index PART I. Financial Information -----------------------------

2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5

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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 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, 2001 and June 30, 2000, and the results of operations and cash flows for the nine-month period ended March 31, 2001. 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, 2000. 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 product upgrade obligations remain outstanding and collection of the resulting receivable is deemed probable. 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 also derives product revenues from the sale of equipment used in the automated data collection surveying markets. The Company recognizes its product support 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. 3. Business Combination On December 1, 1999, the Company purchased substantially all of the assets of Surveyors Module International, LLC, ("SMI") a Tennessee limited liability company. The purchase price was approximately $2,000,000 in cash. Additionally, the Company is obligated to make contingent cash payments during each of the next two years equal to (1) 70% of the gross profits attributable to the acquired business, after making specific adjustments, for adjusted annual gross profits between $1,650,000 and $2,500,000, plus (2) 85% of the adjusted gross profits above $2,500,000. SMI, located in Church Hill, Tennessee, is a software developer for the surveying hand-held data collection marketplace. 8 The result of operations for SMI are included in the Company's consolidated operating results from December 1, 1999. Pro forma results of operations for the nine-month period ended March 31, 2001 as if the acquisition had occurred at the beginning of such period is as follows: Nine Months Ended ----------------- March 31 Consolidated 2001(actual) 2000(pro forma) ------------ ------------ --------------- Total revenues $13,094,015 $14,869,894 Net income (loss) $ (275,015) $ 711,237 Earnings per share: Basic $ (0.06) $ 0.15 Diluted $ (0.06) $ 0.14 4. Executive Severance Effective October, 2000 the employment of John Biver, a Vice President of the Company, terminated and effective November, 2000 the employment of Rod Blum, the Company's President and Chief Executive Officer, terminated. Pursuant to the terms of Mr. Blum's and Mr. Biver's employment agreements, they will receive a combined total of severance benefits of approximately $997,000, substantially all of which was paid in the second and third quarters of fiscal 2001. 5. Acquisition Proposal On March 6, 2001, the Company issued a press release announcing that it had received a proposal from an entity formed by John Biver, a founder, former Vice President, and current director of the Company, that contemplates the acquisition of all of the outstanding shares of common stock of the Company not owned by Mr. Biver at a price of $6.40 per share. All stockholders of the Company other than Rodney Blum (the Company's former President and Chief Executive Officer and a current director) and Dennis George (the Company's Vice President-Finance and Chief Financial Officer and a current director) would, under the proposal, receive the $6.40 per share consideration, in cash, for all of their shares. Mr. Blum and Mr. George would receive the $6.40 per share consideration, in cash, for all of their shares except, with respect to 78,125 shares and 39,062 shares held by Mr. Blum and Mr. George, respectively, they would receive a 7-year subordinated promissory note from the surviving corporation in the principal amount of $6.40 per related share acquired. The proposal contemplates that Mr. Blum would be required to purchase from the surviving entity in the merger the operating assets of the Company's Building Design and Construction Division and Structural Division for a cash purchase price of approximately $1.1 million. In its March 6, 2001 press release, the Company indicated that a Special Committee of its Board of Directors had been formed to evaluate the proposal. The full text of the March 6, 2001 press release is as an exhibit to the Company's Current Report on Form 8-K dated March 7, 2001, filed with the Securities and Exchange Commission. There can be no assurance that any transaction will ultimately result from the proposal or, if entered into, that it will provide for terms similar to these discribed herein. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward Looking Information This quarterly report on Form 10-Q contains forward-looking statements. 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, 2001 and the Company's report on Form 10-K for the year ended June 30, 2000. Results of Operations Net revenues decreased $279,000 or 5.3% to $5.0 million for the three months ended March 31, 2001 (the "2001 Quarter"), from $5.2 million for the three months ended March 31, 2000 (the "2000 Quarter"). The Company experienced a decrease in product revenues and an increase in training and support revenues. The decrease in product revenues is primarily attributable to soft market conditions resulting in lower demand for the Company's products. Training and support revenues were favorably affected by the release of new products and product upgrades in the previous and current fiscal years, as well as an increased emphasis by the Company on support and maintenance programs. In addition, the Company recognized $174,000 of previously deferred software revenues in the 2001 Quarter as the product upgrades, for which the revenues were originally deferred, were shipped. For the nine months ended March 31, 2001 (the "2001 Period"), and the nine-month period ended March 31, 2000 (the "2000 Period") net revenues remained steady at $13.1 million. Product revenues decreased $346,000 or 3.8% to $8.7 million for the 2001 Period from $9.1 million for the 2000 Period while training and support revenues increased $358,000 or 8.9 % to $4.36 million for the 2001 Period from $4.0 million for the 2000 Period as a result of the factors described above. Gross profit remained steady at $3.6 million for both the 2001 Quarter and the 2000 Quarter. For the 2001 Period, gross profit decreased $442,000 or 4.6% to $9.2 million from $9.7 million for the 2000 Period. Gross profit as a percentage of net revenues increased to 72.6% in the 2001 Quarter from 68.4% in the 2000 Quarter, and decreased to 70.6% for the 2001 Period from 74.1% in the 2000 Period. Gross profit as a percentage of corresponding net revenues relating to product sales increased to 65.3% in the 2001 Quarter from 61.7% in the 2000 Quarter, and decreased to 60.3% in the 2001 Period from 67.2% in the 2000 Period. Both the increase in the 2001 Quarter and the decrease in the 2001 Period are due to a shift in the mix of product sales. Sales of Eagle Point proprietary products, which have higher gross profit margins than resales of third party products, increased to 79.3% of product sales in the 2001 Quarter from 77.3% in the 2000 Quarter, and decreased to 76.1% of product sales in the 2001 Period as compared to 85.2% in the 2000 Period. Gross profit as a percentage of corresponding net revenues relating to training and support revenues increased to 88.2% in the 2001 Quarter from 10 85.3% in the 2000 Quarter, and also increased to 91.1% in the 2001 Period from 89.6% in the 2000 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 expenses decreased $360,000 or 17.9% to $1.6 million in the 2001 Quarter from $2.0 million in the 2000 Quarter, and also decreased $371,000 or 7.8% to $4.4 million in the 2001 Period as compared to $4.7 million in the 2000 Period. As a percentage of net revenues, selling and marketing expenses decreased to 33.2% in the 2001 Quarter from 38.3% in the 2000 Quarter, and decreased to 33.7% in the 2001 Period from 36.6% in the 2000 Period. These decreases are due to lower personnel costs as well as reduced expenditures on sales and marketing activities. Research and development expenses decreased $128,000 or 13.9% to $794,000 in the 2001 Quarter from $922,000 in the 2000 Quarter. As a percentage of net revenues, research and development expenses decreased to 16.0% in the 2000 Quarter from 17.6% in the 2000 Quarter. These decreases are primarily due to the lower personnel costs associated with reduced staff and also due to the capitalization of $40,000 of research and development costs in the 2001 Quarter compared to none being capitalized in the 2000 Quarter. Research and development expenses increased $218,000 or 9.1% to $2.6 million in the 2001 Period from $2.4 million in the 2000 Period. As a percentage of net revenues, research and development expenses increased to 20.2% in the 2001 Period from 18.4% in the 2000 Period. The increases are due to higher personnel attributable to increased staff from the SMI Acquisition and due to the capitalization of $168,000 of research and development costs in the 2000 Period compared to $52,000 being capitalized for the 2001 Period. General and administrative expenses decreased $128,000 or 15.4% to $706,000 in the 2001 Quarter from $834,000 in the 2000 Quarter, and remained steady at $2.2 million for the 2001 Period and the 2000 Period. As a percentage of net revenues, general and administrative expenses decreased to 14.2% in the 2001 Quarter from 15.9% in the 2000 Quarter, and remained steady at 16.7% for both the 2001 and 2000 Periods. These decreases in the 2001 Quarter compared to the 2000 Quarter are due primarily to lower personnel costs attributable to reduced staff size. Operating income increased $633,000 to $460,000 in the 2001 Quarter from an operating loss of $173,000 in the 2000 Quarter. Operating income as a percentage of net revenue increased to 9.3% in the 2001 Quarter from -3.3% in the 2000 Quarter as a result of the factors described above. For the 2001 Period, the Company had on operating loss of $1.1 million as compared to operating income of $51,000 in the 2000 Period. In the 2001 Period the Company incurred severance and executive recruiting charges of $1.1 million. These charges included an aggregate of $997,000 for executive severance benefits relating to the terminated employment of Rod Blum, the Company's President and Chief Executive Officer, in November 2000 and John Biver, a Vice President of the Company, in October 2000 and an estimated $120,000 for costs relating to the executive search for a new CEO. In the 2000 Period the Company incurred $261,000 of acquisition charges which included a $79,000 charge for purchased research and development in connection with the SMI Acquisition and $182,000 of other acquisition related charges. Excluding these charges for the 2001 Period and the 2000 Period, operating income decreased 11 $285,000 or 91.3% to $27,000 in the 2001 Period from $312,000 in the 2000 Period and as a percentage of net revenues operating income decreased to 0.2% in the 2001 Period from 2.4% in the 2000 Period as a result of the factors described above. Interest income increased $9,000 to $193,000 in the 2001 Quarter from $184,000 in the 2000 Quarter and increased $37,000 to $618,000 in the 2001 Period from $581,000 in the 2000 Period. Other income decreased $18,000 to $27,000 in the 2001 Quarter from $45,000 in the 2000 Quarter, and also decreased $13,000 to $67,000 in the 2001 Period from $80,000 in the 2000 Period. The increase in interest income was primarily attributable to improved rates of returns on the Company's cash investments. Liquidity and Capital Resources The Company's financial position remains strong with working capital of $13.7 million and no long-term debt. Cash and short-term investments aggregated approximately $13.2 million at March 31, 2001. The Company also has available a $2.0 million unsecured line of credit from it's principal bank. At March 31, 2001 the Company had no borrowings outstanding under this line of credit. In July 2000, the Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 500,000 shares of the Company's common stock in the open market from time to time or in privately negotiated transactions. At March 31, 2001 the Company had repurchased 239,500 shares of its common stock at an aggregate cost to the Company of $956,000, all of which is held in treasury stock. 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 2001. 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. 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 -------------------------------- (Registrant) 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 (a) Exhibits: 11 Statement Regarding Computation of Net Earnings Per Share (b) Reports on Form 8-K Form 8-K filed on March 7, 2001 relating the Company's receipt of a proposal from John Biver to acquire all outstanding shares of common stock of the Company. 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 10, 2001 BY: /s/ Dennis J. George ------------------- -------------------------------- Dennis J. George Vice President, Chief Financial Officer, Treasurer and Secretary (As a duly authorized officer on behalf of the Registrant and as Principal Financial and Accounting Officer) 14 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 11 Statement re: computation of net earnings per share 15

EAGLE POINT SOFTWARE CORP 10-Q