U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27102
eGames, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2694937
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2000 Cabot Boulevard West, Suite 110
Langhorne, PA 19047-1811
(address of Principal executive offices)
Issuer's Telephone Number, Including Area Code: 215-750-6606
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Check whether the issuer (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 ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 9,749,975 shares of common stock, no
par value per share, as of February 12, 2001.
Transitional Small Business Disclosure Format (check one): Yes ( ) No ( X )
EXPLANATORY NOTE
eGames, Inc. (the "Company") is amending its Form 10-QSB to restate its interim
financial statements for the three and six month periods ended and as of
December 31, 2000, and has revised it interim financial statements for the three
and six month periods ended December 31, 1999 for comparative purposes, to
address certain revenue recognition issues. The Company has concluded, based
upon receipt of delayed reporting of sell-through results from its food and drug
retailers, that it does not have the ability to make reliable estimates of
product returns for shipments to food and drug retailers in accordance with SFAS
No. 48, "Revenue Recognition When the Right of Return Exists," and the
additional guidance provided in the SEC's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." This Form 10-QSB/A reflects the
sale of the Company's products to its food and drug retailers on a product
sell-through basis to the end consumer. The Company previously recognized
revenue upon shipment of its products to its customers and recorded an allowance
for product returns at the time of shipment. The revenues, product costs and
royalty costs relating to product shipments to food and drug retailers have been
restated in this Form 10-QSB/A to reflect this change in revenue recognition
policy for shipments to food and drug retailers. In addition, net sales
associated with product shipments to customers that traditionally have sold PC
software products are recognized at the time that title passes to the customer.
Such net sales have been restated in this Form 10-QSB/A because the Company
determined in fiscal 2001 that certain of such product sales provided that title
passed to the customer only upon receipt of the Company's product by the
customer, and that, therefore, net sales could only be recognized upon the
customer's receipt of such product shipments.
This Form 10-QSB/A includes changes to the (i) Financial Statements and (ii)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
INDEX
Page
------
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet as of December 31, 2000............. 3
Consolidated Statements of Operations for the three and six
months ended December 31, 2000 and 1999 ....................... 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 2000 and 1999............................... 5
Notes to Consolidated Financial Statements..................... 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 11-19
Signatures ............................................................... 20
Item 1. Financial Statements
eGames, Inc.
Consolidated Balance Sheet
(Unaudited)
As of
December 31,
ASSETS 2000
- ------ ------------
Current assets:
Cash and cash equivalents $ 62,707
Accounts receivable, net of allowances totaling $2,215,581 2,758,524
Inventory 4,256,023
Prepaid royalties and other expenses 524,767
Net current assets of discontinued operation 530,208
------------
Total current assets 8,132,229
Furniture and equipment, net 219,989
Intangibles and other assets, net 64,874
Net long term assets of discontinued operation 224,750
------------
Total assets $ 8,641,842
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Note payable $ 58,480
Accounts payable 2,989,269
Customer advance payments 926,766
Revolving credit facility 1,050,000
Accrued expenses 1,215,102
Deferred revenues 45,000
Capital lease obligations 282,732
------------
Total current liabilities 6,567,349
Note payable, net of current portion 89,843
------------
Total liabilities 6,657,192
Stockholders' equity:
Common stock, no par value (40,000,000 shares authorized;
9,981,875 issued and 9,749,975 outstanding) 9,134,234
Additional paid-in capital 1,148,550
Accumulated deficit (7,741,584)
Treasury stock, at cost - 231,900 shares (501,417)
Accumulated other comprehensive loss (55,133)
------------
Total stockholders' equity 1,984,650
------------
Total liabilities and stockholders' equity $ 8,641,842
============
See accompanying notes to the consolidated financial statements.
eGames, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
------------------------- --------------------------
2000 1999 2000 1999
------------------------- --------------------------
Net sales $ 2,590,453 $ 3,091,300 $ 3,735,327 $ 5,652,936
Cost of sales 1,413,188 1,259,498 2,164,192 2,263,775
----------- ----------- ------------ -----------
Gross profit 1,177,265 1,831,802 1,571,135 3,389,161
Operating expenses:
Product development 176,325 220,745 357,472 463,592
Selling, general and administrative 1,548,259 1,526,085 2,988,385 2,878,354
----------- ----------- ------------ -----------
Total operating expenses 1,724,584 1,746,830 3,345,857 3,341,946
----------- ----------- ------------ -----------
Operating income (loss) (547,319) 84,972 (1,774,722) 47,215
Interest expense, net 23,370 6,197 30,723 9,907
----------- ----------- ------------ -----------
Income (loss) from continuing operations
before income taxes (570,689) 78,775 (1,805,445) 37,308
Provision (benefit) for income taxes (39,638) 149,000 (11,792) 245,000
----------- ----------- ------------ -----------
Loss from continuing operations (531,051) (70,225) (1,793,653) (207,692)
Discontinued operation (Note 4):
Income from discontinued operation, net of
income tax provision (benefit) for three
months of $5,357 and $3,106, and for six
months of ($19,668) and ($3,598) 89,072 97,474 67,656 160,707
----------- ----------- ------------ -----------
Net Income (loss) ($ 441,979) $ 27,249 ($ 1,725,997) ($ 46,985)
=========== =========== ============ ===========
Net Income (loss) per common share:
- Basic ($ 0.05) $ 0.00 ($ 0.18) $ 0.00
=========== =========== ============ ===========
- Diluted ($ 0.05) $ 0.00 ($ $0.18) $ 0.00
=========== =========== ============ ===========
Weighted average common shares
outstanding - Basic 9,749,975 9,697,486 9,749,975 9,665,729
Dilutive effect of common stock equivalents - 0 - 437,493 - 0 - - 0 -
----------- ----------- ------------ -----------
Weighted average common shares
outstanding - Diluted 9,749,975 10,134,979 9,749,975 9,665,729
=========== =========== ============ ===========
See accompanying notes to the consolidated financial statements.
eGames, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
December 31,
--------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss ($1,725,997) ($ 46,985)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation, amortization and other non-cash items 118,012 164,313
Loss from discontinued operation (67,656) (160,707)
Changes in items affecting operations:
Restricted cash - 0 - 17,560
Accounts receivable (463,019) (1,001,282)
Prepaid royalties and other expenses (317,439) (104,953)
Inventory (1,824,563) (423,410)
Accounts payable 1,003,555 316,982
Customer advance payments 926,766 - 0 -
Accrued expenses 499,284 826,987
Deferred revenues 45,000 - 0 -
----------- -----------
Net cash used in operating activities (1,806,057) (411,495)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (37,248) (64,686)
Purchase of software rights and other assets (4,980) (1,225)
----------- -----------
Net cash used in investing activities (42,228) (65,911)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants and options - 0 - 247,543
Proceeds from borrowings under revolving credit facility 2,250,000 250,000
Repayments of borrowings under revolving credit facility (1,200,000) (250,000)
Repayments of convertible subordinated debt (150,000) - 0 -
Repayments of note payable (26,500) (24,078)
Repayments of capital lease obligations (6,342) (2,552)
----------- -----------
Net cash provided by financing activities 867,158 220,913
Effect of exchange rate changes on cash and cash equivalents (3,630) 1,798
Net cash used in discontinued operation (91,714) (200,502)
----------- -----------
Net decrease in cash and cash equivalents (1,076,471) (455,197)
Cash and cash equivalents:
Beginning of period 1,139,178 1,313,853
----------- -----------
End of period $ 62,707 $ 858,656
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 39,411 $ 20,722
=========== ===========
Cash paid for income taxes $ - 0 - $ 236,000
=========== ===========
Non cash investing and financing activities:
Acquisition of furniture, equipment and other current assets
through capital leases $ 294,070 $ 26,809
=========== ===========
See accompanying notes to the consolidated financial statements.
eGames, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The Notes to Consolidated Financial Statements included in
the Company's Form 10-KSB for the fiscal year ended June 30, 2000 should be read
in conjunction with the accompanying statements. These statements include all
adjustments the Company believes are necessary for a fair presentation of the
statements. The interim operating results are not necessarily indicative of the
results for a full year.
During the first quarter of fiscal 2001, the Company adopted the Emerging Issues
Task Force ("EITF") 00-14, "Accounting for Certain Sales Incentives".
Accordingly, net sales amounts for current and prior periods reflect the
reclassification of consumer and retailer rebate costs, from selling, general
and administrative expenses to net sales.
Description of Business
eGames, Inc. (the "Company"), a Pennsylvania corporation incorporated in July
1992, develops, publishes, markets and sells a diversified line of personal
computer software primarily for consumer entertainment. The Company targets the
growing market of home personal computer ("PC") users who value full-featured,
value-priced and easy-to-use entertainment software. The Company's sales are
made through various national distributors on a non-exclusive basis in addition
to direct relationships with certain national and regional retailers. The
Company's products generally sell at retail for under $15, a price point that is
intended to generate impulse purchases in mass market shopping environments.
Consolidation
The consolidated financial statements include the accounts of the Company and
its previously wholly-owned subsidiary, which due to the sale of this operation
in May 2001, the relevant balances and transactions have been presented as a
discontinued operation. All inter-company balances and transactions have been
eliminated.
Revenue Recognition
Product Sales:
- --------------
The Company previously recognized revenue upon shipment of its products to its
customers and recorded an allowance for product returns. The Company has
concluded, based upon receipt of delayed reporting of sell-through results from
its food and drug retailers, which have not historically sold consumer PC
software products, that the Company does not have the ability to make reliable
estimates of product returns for shipments to food and drug retailers in
accordance with SFAS No. 48, "Revenue Recognition When the Right of Return
Exists" and the additional guidance provided in the SEC's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". Accordingly,
the Company's revenues in fiscal 2001 and 2000 associated with product shipments
to food and drug retailers are recognized based on the timing of the actual
sell-through of the Company's products to the end consumer at the retail
location as reported to the Company from the respective food and drug retailer.
Revenues associated with the Company's product shipments to its customers that
traditionally have sold consumer PC software products (i.e., mass merchant
retailers or distributors serving such retailers) are recognized at the time
title to the inventory passes to these customers, less a historically based
provision for anticipated product returns. The Company determined in fiscal 2001
that certain of its product sales to these customers provided that title passed
to the customer only upon receipt of the Company's product by the customer and
that, therefore, net sales could only be recognized upon the customer's receipt
of such product shipments. Title passes to these customers either upon shipment
of the product or receipt of the product by these customers based on the terms
of the sale transaction.
Notes to Consolidated Financial Statements (continued)
Customers generally have the right to return products purchased from the
Company. The Company recognizes product sales to its customers who traditionally
have sold consumer PC software products, in accordance with the criteria of SFAS
No. 48, at the time of the sale based on the following: the selling price is
fixed at the date of sale, the buyer is obligated to pay the Company, title of
the product transfers to the buyer, the buyer has economic substance apart from
the Company, the Company does not have further obligations to assist the buyer
in the resale of the product and the returns can be reasonably estimated at the
time of sale. While the Company has no other obligations to perform future
services subsequent to shipment, the Company provides telephone customer support
as an accommodation to purchasers of its products and as a means of fostering
customer loyalty. Costs associated with this effort are insignificant and,
accordingly, are expensed as incurred.
Allowance For Product Returns and Price Markdowns:
- --------------------------------------------------
The Company distributes the majority of its products through several third-party
distributors and directly to national and regional retailers. The distribution
of these products is governed by distribution agreements, direct sale agreements
or purchase orders, which generally allow for product returns and price
markdowns. For shipments to its customers that have traditionally sold consumer
PC software products, the Company records an allowance for returns and markdowns
as a reduction of gross sales at the time title of the products pass to the
customer. This allowance, which is reflected as a reduction of accounts
receivable, is estimated based primarily upon historical experience. During the
quarters ended December 31, 2000 and 1999, the Company's provisions for product
returns and price markdowns for customers that have traditionally sold consumer
PC software products were approximately $862,000 and $473,000 or 42% and 17% of
related gross shipments, respectively. During the six months ended December 31,
2000 and 1999, the Company's provisions for product returns and price markdowns
for customers that have traditionally sold consumer PC software products were
approximately $1,087,000 and $1,041,000 or 33% and 17% of related gross
shipments, respectively.
Customer Advance Payments
Although the Company recognizes revenue from food and drug retailers based on
the timing of the actual sell-through of the Company's products to the end
consumer, the Company may receive payments from these food and drug retailers in
advance of such products being sold to the end consumer. These payments are
recorded as customer advance payments in the Company's Consolidated Balance
Sheet until such time as the products are actually sold through to the end
consumer. After the products are sold through to the end consumer, the customer
advance payment amount is recorded as revenue. In the event that the Company
receives customer advance payments that ultimately exceed the actual product
sell-through of the Company's products to the end consumer at such retailers,
the Company would owe these retailers such excess amounts.
Prepaid Royalties
Prepaid royalties represent advance payments made to licensors of software and
intellectual properties used in the Company's products. Prepaid royalties are
expensed at contractual royalty rates based on net product sales.
Marketing and Sales Incentive Costs
Marketing costs for which the Company pays its resellers, such as slotting and
advertising fees, are charged to expense as incurred and were approximately
$402,000 and $365,000 for the quarters ended December 31, 2000 and 1999,
respectively and were approximately $772,000 and $604,000 for the six months
ended December 31, 2000 and 1999, respectively.
Sales incentive costs, such as rebates and coupons, that the Company offers to
the retail consumer are recorded as reductions to net sales as incurred and were
approximately $205,000 and $317,000 for the quarters ended December 31, 2000 and
1999, respectively and were approximately $313,000 and $362,000 for the six
months ended December 31, 2000 and 1999, respectively.
Notes to Consolidated Financial Statements (continued)
Permanent Racking and Fixture Costs
The Company has included the costs of all long-term racking and fixtures already
shipped to retail stores for use in its Store-In-A-Store ("SIAS") program within
the Balance Sheet classification of "Prepaid royalties and other expenses". The
Company expenses these costs over a one-year period from the date the racks are
placed into use at retail locations. As of December 31, 2000, the Company had
$184,000 of these costs reflected in the "Prepaid royalties and other expenses"
section of its Balance Sheet. Any costs relating to permanent racking and
fixtures not yet in use at retail locations are classified in the inventory
section of the Company's Balance Sheet, and as of December 31, 2000 these costs
amounted to $109,000.
New Accounting Pronouncements
During the first quarter of fiscal 2001, the Company adopted Emerging Issues
Task Force ("EITF") 00-14, "Accounting for Certain Sales Incentives".
Accordingly, net sales amounts for current and prior periods reflect the
reclassification of consumer and retailer rebate costs, from selling, general
and administrative expenses to net sales.
Additionally, the Company has evaluated its revenue recognition policies based
upon Staff Accounting Bulletin 101 "Revenue Recognition" and related amendments
and interpretations. Accordingly, the Company determined it should recognize
revenues for fiscal 2001 and 2000 associated with product shipments to food and
drug retailers based on the timing of the actual product sell-through activity
to the end consumer of the Company's products at these retail locations and not
at the time the Company ships its products to these food and drug retailers. The
Company made this decision following its determination that it was not able to
adequately estimate, at time of product shipment, the amount of product returns
for product shipments to food and drug retailers. Revenues associated with the
Company's product shipments to its customers that traditionally have sold
consumer PC software products (such as mass-merchant retailers, or distributors
servicing such retailers) are recognized at the time title to these products
passes to these customers, less a historically-based provision for anticipated
product returns.
The Company is currently evaluating the potential impact of Emerging Issues Task
Force ("EITF") 00-10 "Accounting for Shipping and Handling Fees and Costs". This
pronouncement will become effective by the Company's fourth quarter of fiscal
2001. The Company does not expect the adoption of EITF 00-10 to have a
significant impact on its results of operations, financial position or cash
flows.
2. Comprehensive Income (Loss)
On July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income".
This Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income (loss) is computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) ($ 441,979) $ 27,249 ($1,725,997) ($ 46,985)
Other comprehensive income (loss):
Foreign currency translation adjustment 75,185 (8,778) 14,065 10,051
----------- ----------- ----------- -----------
Comprehensive income (loss) ($ 366,794) $ 18,471 ($1,711,932) ($ 36,934)
=========== =========== =========== ===========
Notes to Consolidated Financial Statements (continued)
3. Common Stock
On November 10, 2000, the Company received notification from Nasdaq that its
common stock had failed to maintain a minimum bid price of $1.00 over a period
of 30 consecutive trading days as required for continued listing on the Nasdaq
SmallCap Market as set forth in Marketplace Rule 4310 (c) (4) (the "Rule"). In
accordance with Marketplace Rule 4310 (c) (8) (B), the Company had 90 calendar
days, or until February 8, 2001, to regain compliance with this Rule. On
February 7, 2001, the Company requested a hearing before a Nasdaq Listing
Qualifications Panel, which stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.
4. Discontinued Operation
On May 11, 2001, the Company sold eGames Europe Limited, its wholly-owned
subsidiary located in the United Kingdom, to a non-related third-party. The
Company has reflected the relevant activity and account balances for this
operation as a discontinued operation within each of the respective financial
statements included in this report. The Company received $300,000 in net
proceeds, which approximated the discontinued operation's net book value. The
net proceeds consisted of: $150,000 in cash provided at closing, $120,000 in a
note receivable to be payable in twelve monthly payments of $10,000 each, and
$30,000 in cash held in escrow to be released to the Company, pending any
unresolved claims, six months following the closing of the sale. The amounts in
the accompanying consolidated financial statements and footnotes have been
reclassified for all periods presented to give effect to the discontinued
operation.
Net sales for the discontinued operation for the quarters ended December 31,
2000 and 1999 were approximately $768,000 and $612,000, respectively and for the
six months ended December 31, 2000 and 1999 were $1,359,000 and $1,189,000,
respectively.
The income from the discontinued operation was approximately $89,000 and $97,000
for the quarters ended December 31, 2000 and 1999, respectively, which amounts
were net of income tax provisions of approximately $5,000 and $3,000,
respectively. The income from the discontinued operation was approximately
$68,000 and $161,000 for the six months ended December 31, 2000 and 1999,
respectively, which amounts were net of income tax benefits of approximately
$20,000 and $4,000, respectively.
Included in the Company's Consolidated Balance Sheet for December 31, 2000, were
net current assets of discontinued operation totaling approximately $530,000,
primarily comprised of accounts receivable, which was partially offset by
accounts payable and accrued expenses. Additionally, in the Company's
Consolidated Balance Sheet for December 31, 2000 were net long term assets of
discontinued operation totaling approximately $225,000, primarily comprised of
un-amortized goodwill related to the prior acquisition of this discontinued
operation during fiscal 1999 and certain furniture and equipment costs.
5. Operations by Reportable Segments
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information about an
enterprise's operating segments and related disclosures about its products,
geographic areas and major customers.
Based on the Company's organizational structure and its presentation of the
discontinued operation, the Company operates in only one reportable segment,
which is publishing interactive entertainment software for personal computers.
Notes to Consolidated Financial Statements (continued)
6. Revolving Credit Facility
On August 9, 2000, the Company entered into a $2,000,000 revolving credit
facility ("new credit facility") with a commercial bank, which expires on
October 31, 2001. This credit facility was established to provide, among other
things, additional working capital to support the Company's operations. Amounts
outstanding under this new credit facility are charged interest at one-half of
one percent above the bank's current prime rate and such interest is due
monthly. The new credit facility is collateralized by substantially all of the
Company's assets. The new credit facility requires the Company, among other
things, to maintain certain financial covenants, such as: a minimum working
capital balance of $1,500,000 and a maximum senior debt to effective net worth
ratio of 1.50 to 1.00. Additionally, this new credit facility had an initial
minimum effective net worth covenant starting at $3.1 million at June 30, 2000,
which increases by $150,000 quarterly to a $3.7 million requirement at June 30,
2001. Effective net worth is defined as the Company's stockholders' equity less
its intangibles and other assets.
As of December 31, 2000, the Company was not in compliance with the maximum
senior debt to effective net worth ratio and minimum effective net worth
covenants. The bank has waived the Company's non-compliance with these covenants
at December 31, 2000. The Company believes that it will continue to be in
non-compliance with the already identified covenants through June 30, 2001 and
is currently working with its bank on a mutually agreeable resolution to the
non-compliance issue. As of February 12, 2001, the Company had a $950,000
outstanding balance under this credit facility and continued to have full access
to the remaining balance available under this $2,000,000 credit facility.
7. Liquidity
The Company's ability to achieve and maintain positive cash flow depends upon a
variety of factors, including the timeliness and success of the collection of
outstanding accounts receivable; the timeliness of product returns and the
Company's ability to resell such products after return; the creditworthiness of
the primary distributors and retail customers of the Company's products; the
continuing retail demand for value-priced PC game software; the development and
sell-through of the Company's products, the costs of developing, producing and
marketing such products; and various other factors, many of which are beyond the
Company's control. In the future, the Company expects its cash and working
capital requirements to be affected by each of these factors. However, there can
be no assurances that the Company will be able to achieve and maintain a
positive cash flow or that additional financing will be available if and when
required or, if available, will be on terms satisfactory to the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The accompanying consolidated financial statements as of December 31, 2000
include the accounts of eGames, Inc. (the "Company") and its previously
wholly-owned subsidiary that is presented as a discontinued operation. Dollar
amounts discussed within the Company's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" have been rounded to the nearest
thousand ('000).
Forward-Looking Statements
This Quarterly Report on Form 10-QSB/A and in particular Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements about circumstances that have not yet occurred,
including, without limitation, statements regarding the Company's
Store-In-A-Store program resulting in the longer-term placement of the Company's
products in the food and drug retail channel, which is intended to increase
sales volume within this channel and decrease the rate of product returns due to
longer product exposure on retailers' product shelves; the level of the
Company's international net sales remaining at between 5 % and 10% of the
Company's consolidated net sales for the remainder of fiscal 2001; the Company's
efforts to increase distribution of its products via the Internet; the Company's
intention to reduce the use of outside professional service vendors in order to
continue to cut future operating expenses; the transition of the Company's
international product distribution to a licensing model, and the ability of this
new model to earn a royalty for the Company; the possibility of customer advance
payments exceeding the actual product sell-through at retail stores, and the
resulting requirement that the Company be required to repay these retailers; the
sufficiency of the Company's cash and working capital balances to fund the
Company's operations; the expectation that certain new accounting pronouncements
will not have a significant impact on the Company's results of operations,
financial position or cash flows; as well as other statements including words
such as "anticipate", "believe" or "expect" and statements in the future tense.
These forward-looking statements are subject to business and economic risks, and
actual events or the Company's actual future results could differ materially
from those set forth in the forward-looking statements due to such risks and
uncertainties. The Company will not necessarily update information if any
forward looking statement later turns out to be inaccurate.
The following important factors, among others discussed elsewhere in this
report, could cause the Company's actual results to differ materially from those
indicated by the forward-looking statements contained in this report: the market
acceptance of the Company's Store-in-a-Store program in the food and drug retail
channel and the sustainability of the program over time; the ability of the
Store-in-a-Store program to secure longer-term shelf space for the Company's
products; whether the longer-term placement of the Company's products at retail
will result in better sell-through rates and therefore fewer returns from the
food and drug retail channel; the market acceptance and successful sell-through
results for the Company's products at retail stores and the ability of the
Company to accurately estimate sell-through volume when an order is shipped to,
or received by, a customer that has traditionally sold PC software; the amount
of unsold product that is returned to the Company by retail stores; the
Company's ability to accurately predict the amount of product returns that will
occur and the adequacy of the reserves established for such returns; the
Company's ability to reduce outside professional vendors costs; the success of
the Company's international product distribution to earn a royalty for the
Company and the ability of licensors to pay the Company such royalties; the
success of the Company's distribution strategy, including its ability to enter
into new distribution and direct sales relationships on commercially acceptable
terms; the allocation of adequate shelf space for the Company's products in
major retail chain stores; the Company's ability to collect outstanding accounts
receivable and establish adequate reserves for un-collectible receivables;
increased selling, general and administrative costs, including increased legal
expenses; the continued increase in the number of computers in homes in North
America and the world; the ability to deliver products in response to orders
within a commercially acceptable time frame; downward pricing pressure;
fluctuating costs of developing, producing and marketing the Company's products;
the Company's ability to license or develop quality content for its products;
the Company's ability to access alternative distribution channels and the
success of the Company's efforts to develop its Internet sales; consumers'
continued demand for value-priced software; increased competition in the
value-priced software category; and various other factors, many of which are
beyond the Company's control. Risks and uncertainties that may affect the
Company's future results and performance also include, but are not limited to,
those discussed under the heading "Risk Factors" in the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2000 as filed with the
Securities and Exchange Commission and other documents filed with the
Commission.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
Three Months Ended December 31, 2000 and 1999
Net Sales
Net sales for the quarter ended December 31, 2000 were $2,590,000 compared to
$3,091,000 for the quarter ended December 31, 1999, representing a decrease of
approximately $501,000 or 16%. The $501,000 decrease in net sales was primarily
attributable to the Company's decrease in net sales to its North American
traditional software distributors and retailers of $1,212,000 and a decrease in
net sales to international customers of $6,000. These net sales decreases were
partially offset by an increase in the Company's net sales to North American
food and drug retailers of $717,000.
The Company's net sales to North American traditional software distributors and
retailers decreased by $1,212,000. These net sales decreases resulted in large
part from industry-wide reductions of PC software inventory levels held by North
American software retailers and distributors. Market factors that negatively
affected net sales to the North American traditional consumer software retailers
included: distribution partners reducing their inventories by decreasing their
replenishment orders for the Company's products; increased competition in the
value-priced segment of the consumer software marketplace as several major
software publishers initiated price cuts on previously higher-priced products;
overall slower sales of PC game software in traditional retail software
channels; and, certain office superstores reducing their selection of
value-priced consumer software products, requiring the Company to increase its
return provisions for the three months ended December 31, 2000.
The Company's net sales to North American food and drug retailers increased by
$717,000 compared to the same quarter a year ago. During fiscal 2001, the
Company has continued to increase its distribution efforts to North American
food and drug retailers, in an attempt to offset some of the previously
discussed net sales decreases to its North American traditional software retail
and distribution customers. During fiscal 2001, the Company established its
first "Store-in-a-Store" entertainment software display sections in
approximately 4,000 food and drug retail stores. The establishment of these
Store-In-A-Store software display sections within certain national and regional
food and drug retail stores is intended to help secure longer-term placement of
the Company's products in this retail channel, with the goal of increasing
product sell through volume at these food and drug retailers while decreasing
the rate of product returns due to longer product exposure on the retailers'
product shelves.
The Company's international net revenues, inclusive of both product net sales
and royalty revenues, for the quarter ended December 31, 2000 decreased by
$6,000 compared to the same period a year ago. As a percentage of net sales, the
Company's international net revenues represented approximately 6% and 5% of the
Company's net sales for the quarters ended December 31, 2000 and 1999,
respectively. The Company anticipates that international net revenues will range
from 5% to 10% of the Company's consolidated net sales for the remainder of
fiscal 2001.
On May 11, 2001, the Company sold its wholly-owned subsidiary "eGames Europe
Limited", located in the United Kingdom, to a non-related third-party. By
affecting this sale, the Company transitioned the majority of its international
product distribution efforts to a licensing revenue model, whereby the Company
no longer bears the working capital risk of supporting these multi-country
product sales efforts, but will earn a royalty fee based upon net product sales
covered under various licensing arrangements with third-party developers. The
Company has reflected the net sales activity for this operation as a
discontinued operation within the Company's Consolidated Statements of
Operations. Net sales for the discontinued operation for the quarters ended
December 31, 2000 and 1999 were $768,000 and $612,000, respectively.
The Company has continued to implement programs designed to increase sales of
its products over the Internet, including: entering into cross-promotional
agreements with larger, high-profile companies to offer coupons for discounts
for the Company's products on websites and in newsletters; continual
improvements and updates to its website and electronic distribution
capabilities; and incorporation of optional, user-friendly on-line functionality
into its products. Net sales of the Company's products via the Internet for the
quarters ended December 31, 2000 and 1999 were $43,000 and $37,000,
respectively, or approximately 2% and 1% of the Company's net sales,
respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Most of the Company's non-exclusive arrangements with its traditional software
distributors and retailers allow for product returns or price markdowns. During
the quarters ended December 31, 2000 and 1999, the Company's provisions for
product returns and price markdowns relating to product shipments to its
traditional software customers totaled approximately $862,000 and $473,000, or
42% and 17% of related gross shipments, respectively. This $389,000 increase in
the provision for product returns and price markdowns relating to product
shipments to its traditional software customers was primarily associated with
the Company's office superstore customers that returned products in connection
with their transition away from value-priced casual gaming software titles.
Although the Company has experienced an increase in product shipments to food
and drug retailers, the majority of these product shipments have been
"promotional" in nature, meaning that the Company's products were merchandised
in those retail stores for only six to eight weeks. As a result of this short
promotional period, the Company has experienced a higher and more unpredictable
rate of product returns from food and drug retailers compared to product return
rates from traditional software retailers and distributors where the Company's
products typically have a longer period of time to sell through to end
consumers.
Cost of Sales
Cost of sales for the quarter ended December 31, 2000 were $1,413,000 compared
to $1,259,000 for the quarter ended December 31, 1999, representing an increase
of $154,000 or 12%. This $154,000 increase in cost of sales was caused primarily
by a $215,000 increase in the provision for inventory obsolescence primarily
caused by the discontinuance of various end of lifecycle products and the
scrapping of unsold, date-sensitive consumer income tax software that the
Company distributed to many of its food and drug retailers, and a $110,000
increase in the Company's distribution, packaging and reclamation costs largely
associated with the Company's product shipments to food and drug retailers. Most
of the revenues related to product shipments to food and drug retailers have
been deferred until such time as product sell through to the end consumer is
reported to the Company by the food and drug retailer. These costs of sales
increases were partially offset by decreases in product costs and royalty costs
of $149,000 and $22,000, respectively, primarily related to the decrease in the
Company's net sales for the quarter ended December 31, 2000. Product costs
consist mainly of replicated compact discs, printed materials, protective jewel
cases and boxes for certain products.
Gross Profit Margin
The Company's gross profit margin for the quarter ended December 31, 2000
decreased to 45.4% of net sales from 59.3% of net sales for the quarter ended
December 31, 1999. This 13.9% decrease in gross profit margin was caused
primarily by an increase in provision for inventory obsolescence of 8.4%, as a
percentage of net sales, primarily caused by the discontinuance of various end
of lifecycle products and the scrapping of unsold date-sensitive consumer income
tax software that the Company distributed to many of its food and drug
retailers, a 5.3% increase, as a percentage of net sales, in the Company's
distribution, packaging and reclamation costs largely associated with certain
revenues being deferred until such time (if ever) that these products sales to
the end consumer are reported to the Company by the food and drug retailer, and
a 4.5% increase, as a percentage of net sales, in product costs related to sales
of third-party publisher software titles. These decreases to the Company's gross
profit margin were partially offset by a 4.8% decrease in the product costs
associated with the sales of Company published software titles.
Operating Expenses
Product development expenses for the quarter ended December 31, 2000 were
$176,000 compared to $221,000 for the quarter ended December 31, 1999, a
decrease of $45,000 or 20%. This decrease was caused primarily by a decrease in
salary and related costs due to headcount reductions among the Company's
technology-related staff and no employee bonus accrual for the quarter ended
December 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Selling, general and administrative expenses for the quarter ended December 31,
2000 were approximately $1,549,000 compared to approximately $1,526,000 for the
quarter ended December 31, 1999, an increase of approximately $23,000 or 2%.
This $23,000 increase was caused primarily by increases in salary related costs
and bad debt expense of $80,000 and $55,000, respectively, which costs increases
were partially offset by decreases in public corporation expense and
professional service expense of $75,000 and $45,000, respectively. The $80,000
increase in salary related expense was primarily related to increase sales and
marketing resources needed to support the growing number of customer accounts
being serviced by the Company. The $55,000 increase in bad debt expense was
necessary as certain of the Company's customers have begun to show some
potential weakness in being able to repay their outstanding receivable balance
with the Company.
In January 2001, the Company effected a 25% reduction in its workforce in order
to save an estimated $150,000 in salary and related expenses per quarter. The
Company is also reducing its utilization of outside professional service vendors
in order to continue to cut operating expenses going forward.
Interest Expense, Net
Net interest expense for the quarter ended December 31, 2000 was approximately
$23,000 compared to approximately $6,000 for the quarter ended December 31,
1999, an increase of approximately $17,000. The $17,000 increase was primarily
due to the increased utilization of the revolving credit facility for the
quarter ended December 31, 2000 compared to the same period a year earlier.
Provision (Benefit) for Income Taxes
(Benefit) for income taxes for the quarter ended December 31, 2000 was ($40,000)
compared to a provision for income taxes of $149,000 for the quarter ended
December 31, 1999, a decrease in the provision for income taxes of $189,000.
This $189,000 decrease in the provision for income taxes was primarily due to
the $649,000 increase in the Company's loss from continuing operations before
income taxes for the quarter ended December 31, 2000.
Loss from Continuing Operations
As a result of the various factors discussed above, the Company recognized a
$531,000 loss from continuing operations for the quarter ended December 31,
2000, compared to a $70,000 loss from continuing operations for the quarter
ended December 31, 1999, an increase of $461,000 in losses from continuing
operations.
Income from Discontinued Operation
Income from discontinued operation for the quarter ended December 31, 2000 was
$89,000, net of a $5,000 income tax provision, compared to income from
discontinued operation for the quarter ended December 31, 1999 of $97,000, net
of a $3,000 income tax provision, resulting in an $8,000 decrease in income from
discontinued operation. This $8,000 decrease was caused by increases in
operating expenses and provision for income taxes of $6,000 and $2,000,
respectively.
Net Income (loss)
As a result of the factors discussed above, net (loss) increased to ($442,000)
for the quarter ended December 31, 2000 from net income of $27,000 for the
quarter ended December 31, 1999, a decrease in profitability of $469,000.
Weighted Average Common Shares
The weighted average common shares outstanding on a diluted basis decreased by
385,004 for the quarter ended December 31, 2000 to 9,749,975 from 10,134,979 for
the quarter ended December 31, 1999. This 385,004 decrease in weighted average
common shares outstanding was caused primarily by a decrease in common stock
equivalents resulting from the Company's recording of a net loss for the quarter
ended December 31, 2000. Such common stock equivalents were excluded from the
diluted shares calculation, because their inclusion would have had an
anti-dilutive effect.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
Six Months Ended December 31, 2000 and 1999
Net Sales
Net sales for the six months ended December 31, 2000 were $3,735,000 compared to
$5,653,000 for the six months ended December 31, 1999, representing a decrease
of $1,918,000 or 34%. The $1,918,000 decrease in net sales was primarily
attributable to the Company's decrease in net sales to its North American
traditional software distributors and retailers of $2,729,000, which net sales
decrease was partially offset by net sales increases to North American food and
drug retailers of $769,000 and to international customers of $42,000.
The Company's net sales to North American traditional software distributors and
retailers decreased by $2,729,000 during the six months ended December 31, 2000
compared to the same period a year ago. This decrease resulted in large part
from industry-wide reductions of PC software inventory levels held by North
American software retailers and distributors.
The Company's net sales to North American food and drug retailers increased by
$769,000 during the six months ended December 31, 2000 compared to the same
period a year ago. As discussed above, during fiscal 2001, the Company has
continued to increase its distribution efforts to North American food and drug
retailers, in an attempt to offset some of the previously discussed net sales
decreases to its North American traditional software retail and distribution
customers.
The Company's international net revenues, inclusive of both product net sales
and royalty revenues, for the six months ended December 31, 2000 increased by
$42,000 compared to the same period a year ago. As a percentage of net sales,
the Company's international net revenues represented approximately 7% and 4% of
the Company's net sales for the six months ended December 31, 2000 and 1999,
respectively. The Company anticipates that international net revenues will range
from 5% to 10% of the Company's consolidated net sales for the remainder of
fiscal 2001.
On May 11, 2001, the Company sold its wholly-owned subsidiary "eGames Europe
Limited", located in the United Kingdom, to a non-related third-party. By
affecting this sale, the Company transitioned the majority of its international
product distribution efforts to a licensing revenue model, whereby the Company
no longer bears the working capital risk of supporting these multi-country
product sales efforts, but will earn a royalty fee based upon net product sales
covered under various licensing arrangements with third-party developers. The
Company has reflected the net sales activity for this operation as a
discontinued operation within the Company's Consolidated Statements of
Operations. Net sales for the discontinued operation for the six months ended
December 31, 2000 and 1999 were $1,359,000 and $1,189,000, respectively.
Net sales of the Company's products via the Internet for the six months ended
December 31, 2000 and 1999 were $95,000 and $58,000, respectively, or
approximately 3% and 1% of the Company's net sales, respectively.
Most of the Company's non-exclusive arrangements with its traditional software
distributors and retailers allow for product returns or price markdowns. During
the six months ended December 31, 2000 and 1999, the Company's provision for
product returns and price markdowns relating to product shipments to its
traditional software customers totaled approximately $1,087,000 and $1,041,000,
or 33% and 17% of related gross shipments, respectively. This $46,000 increase
in the provision for product returns and price markdowns relating to product
shipments to its traditional software customers was primarily associated with
the Company's office superstore customers that returned products in connection
with their transition away from value-priced casual gaming software titles.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cost of Sales
Cost of sales for the six months ended December 31, 2000 were $2,164,000
compared to $2,264,000 for the six months ended December 31, 1999, representing
a decrease of $100,000 or 4%. This $100,000 decrease in cost of sales was caused
primarily by decreases in product costs and royalty costs of $342,000 and
$137,000, respectively, which largely related to the decrease in the Company's
net sales for the six months ended December 31, 2000. These costs of sales
decreases were partially offset by a $209,000 increase in the provision for
inventory obsolescence primarily caused by the discontinuance of various end of
lifecycle products and the scrapping of unsold date-sensitive consumer income
tax software that the Company distributed to many of its food and drug
retailers, and a $170,000 increase in the Company's distribution, packaging and
reclamation costs largely associated with the Company's product shipments to
food and drug retailers. Certain revenues related to these product shipments
have been deferred until such time as product sell through to the end consumer
is reported to the Company by the food and drug retailer. Product costs consist
mainly of replicated compact discs, printed materials, protective jewel cases
and boxes for certain products.
Gross Profit Margin
The Company's gross profit margin for the six months ended December 31, 2000
decreased to 42.1% of net sales from 60.0% of net sales for the six months ended
December 31, 1999. This 17.9% decrease in gross profit margin was caused
primarily by an increase in provision for inventory obsolescence of 6.1%, as a
percentage of net sales, due to the discontinuance of various end of lifecycle
products and the scrapping of unsold date-sensitive consumer income tax software
that the Company distributed to many of its food and drug retailers, a 7.3%
increase, as a percentage of net sales, in the Company's distribution, packaging
and reclamation costs largely as a result of certain revenues being deferred
until such time (if ever) that these products sales to the end consumer are
reported to the Company by the food and drug retailer, and a 3.6% increase, as a
percentage of net sales, in product costs associated with the sales of
third-party publisher software titles.
Operating Expenses
Product development expenses for the six months ended December 31, 2000 were
$358,000 compared to $464,000 for the six months ended December 31, 1999, a
decrease of $106,000 or 23%. This $106,000 decrease was caused primarily by a
decrease in salary and related costs due to headcount reductions among the
Company's technology-related staff and no employee bonus accrual for the six
months ended December 31, 2000.
Selling, general and administrative expenses for the six months ended December
31, 2000 were approximately $2,988,000 compared to approximately $2,878,000 for
the six months ended December 31, 1999, an increase of approximately $110,000 or
4%. This $110,000 increase was caused primarily by increases in marketing
promotion costs, salary related costs and bad debt expense of $168,000, $98,000
and $41,000, respectively, which cost increases were partially offset by
decreases in public corporation expense of $148,000 and in depreciation and
amortization expense of $44,000. The $168,000 increase in marketing promotion
costs was associated with the Company's increased distribution efforts with food
and drug retailers and the additional costs charged by traditional software
retailers and distributors to support sales of the Company's products relating
to the increased competition for retail shelf space. The $98,000 increase in
salary related expense was primarily related to additional sales and marketing
resources needed to support the growing number of customer accounts being
serviced by the Company. The $41,000 increase in bad debt expense was necessary
as certain of the Company's customers have begun to show some potential weakness
in being able to repay their outstanding receivable balance with the Company.
Interest Expense, Net
Net interest expense for the six months ended December 31, 2000 was $31,000
compared to $10,000 for the six months ended December 31, 1999, an increase of
$21,000. The $21,000 increase was primarily due to the increased utilization of
the revolving credit facility for the six months ended December 31, 2000
compared to the same period a year earlier.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Provision (Benefit) for Income Taxes
(Benefit) for income taxes for the six months ended December 31, 2000 was
approximately ($12,000) compared to a provision for income taxes of
approximately $245,000 for the six months ended December 31, 1999, a decrease in
the provision for income taxes of approximately $257,000. This $257,000 decrease
in the provision for income taxes was primarily due to the $1,843,000 increase
in the Company's loss from continuing operations before income taxes for the six
months ended December 31, 2000.
Loss from Continuing Operations
As a result of the various factors discussed above, the Company recognized a
$1,794,000 loss from continuing operations for the six months ended December 31,
2000, compared to a $208,000 loss from continuing operations for the six months
ended December 31, 1999, an increase of $1,586,000 in losses from continuing
operations.
Income from Discontinued Operation
Income from discontinued operation for the six months ended December 31, 2000
was $68,000, net of a $20,000 income tax benefit, compared to income from
discontinued operation for the six months ended December 31, 1999 of $161,000,
net of a $4,000 income tax benefit, resulting in a $93,000 decrease in income
from discontinued operation. This $93,000 decrease in income from discontinued
operation was caused primarily by an increase in operating expenses of $149,000
largely associated with increased marketing promotion costs to support product
sales. This increase in operating expenses was partially offset by increases of
$40,000 in gross profit and $16,000 in income tax benefit.
Net loss
As a result of the factors discussed above, net loss increased to $1,726,000 for
the six months ended December 31, 2000 from net loss of approximately $47,000
for the six months ended December 31, 1999, a decrease in profitability of
$1,679,000.
Weighted Average Common Shares
The weighted average common shares outstanding on a diluted basis increased by
84,246 for the six months ended December 31, 2000 to 9,749,975 from 9,665,729
for the six months ended December 31, 1999. This 84,246 increase in weighted
average common shares outstanding was caused primarily by an increase in the
number of common shares outstanding during the six months ended December 31,
2000. Common stock equivalents ("CSE's") were excluded from the weighted average
shares calculations due to their anti-dilutive impact caused by the net losses
for both six-month periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
As of December 31, 2000, the Company's cash and working capital balances were
$63,000 and $1,565,000, respectively, and the Company's total stockholders'
equity balance at December 31, 2000 was $1,985,000.
Net cash used in operating activities was $1,806,000 and $411,000 for the six
months ended December 31, 2000 and 1999, respectively. The $1,806,000 in net
cash used in operating activities resulted primarily from the Company's net loss
of $1,726,000. Additional items contributing to the $1,806,000 in net cash used
in operating activities were increases in inventory, accounts receivable and
prepaid expenses of $1,825,000, $463,000 and $317,000, respectively. These net
cash uses were partially offset by cash sources of $1,004,000 in increased
accounts payable, $927,000 in increased customer advance payments, $499,000 in
increased accrued expenses, $118,000 in depreciation, amortization and other
non-cash items and $45,000 in increased deferred revenues. The $927,000 in
customer advance payments approximates the amount of customer payments from food
and drug retailers that have exceeded the amount of revenue recognized by the
Company relating to the actual product sell through of the Company's products to
the end consumer reported by food and drug retailers.
Net cash used in investing activities for the six months ended December 31, 2000
and 1999 were $42,000 and $66,000, respectively. The $42,000 in net cash used in
investing activities resulted from purchases of $37,000 in furniture and
equipment and $5,000 in other assets.
Net cash provided by financing activities for the six months ended December 31,
2000 and 1999 were $867,000 and $221,000, respectively. The $867,000 in net cash
provided by financing activities reflects net proceeds from the Company's
borrowing under the revolving credit facility of $2,250,000, which was partially
offset by repayments of the borrowing under the revolving credit facility,
convertible subordinated debt, note payable and capital lease obligations of
$1,200,000, $150,000, $27,000 and $6,000, respectively.
Net cash used in the Company's discontinued operation for the six months ended
December 31, 2000 and 1999 was $92,000 and $201,000, respectively. The $92,000
in net cash used in the Company's discontinued operation resulted primarily from
$90,000 in net cash used in operating activities.
As December 31, 2000, the Company had received $927,000 in customer payments
from certain food and drug retailers for products shipped to such retailers
prior to the sale of such products to the end consumer being reported to the
Company from these retailers. These payments are recorded as customer advance
payments in the Company's Consolidated Balance Sheet until such time that these
retailers report to the Company that the products are actually sold to the end
consumer. After the products are sold through to the end consumer, the customer
advance payment amount is recorded as product revenue. In the event that the
Company receives customer advance payments that ultimately exceed the actual
product sell-through of the Company's products to the end consumer at such
retailers, the Company would owe these retailers such excess amounts. The
Company's management believes that it is highly likely that the ultimate product
sell-through of the Company's products will be substantially less than the
customer advance payment balances for these food and drug retailers. If these
retailers request that the Company repay this liability, it would likely result
in a serious liquidity issue for the Company.
On August 9, 2000, the Company entered into a $2,000,000 revolving credit
facility ("new credit facility") with a commercial bank, which expires on
October 31, 2001. This new credit facility replaced the $1,500,000 revolving
credit facility that it previously had with another commercial bank. Amounts
outstanding under this new credit facility are charged interest at one-half of
one percent above the bank's current prime rate and such interest is due
monthly. The new credit facility is collateralized by substantially all of the
Company's assets. The new credit facility requires the Company, among other
things, to maintain certain financial ratios, such as: a minimum working capital
balance of $1,500,000 and a maximum senior debt to effective net worth ratio of
1.50 to 1.00. Additionally, this new credit facility has a minimum effective net
worth covenant starting at $3.1 million at June 30, 2000 and increasing by
$150,000 quarterly to a $3.7 million requirement at June 30, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
As of December 31, 2000, the Company was not in compliance with the maximum
senior debt to effective net worth ratio and minimum effective net worth
covenants. The bank has waived the Company's non-compliance with these covenants
at December 31, 2000. The Company believes that it will continue to be in
non-compliance with the already identified covenants through June 30, 2001 and
is currently working with its bank on a mutually agreeable resolution to the
non-compliance issue. As of February 12, 2001, the Company had a $950,000
outstanding balance under this credit facility and continues to have full access
to the remaining balance available under this $2,000,000 credit facility.
The Company's ability to achieve and maintain positive cash flow depends upon a
variety of factors, including the timeliness and success of the collection of
outstanding accounts receivable, the creditworthiness of the primary
distributors and retail customers of the Company's products, the continuing
retail demand for value-priced PC game software, the development and
sell-through of the Company's products, the costs of developing, producing and
marketing such products, and various other factors, some of which are beyond the
Company's control. In the future, the Company expects its cash and working
capital requirements to be affected by each of these factors. There can be no
assurances that the Company will be able to achieve and maintain a positive cash
flow or that additional financing will be available if and when required or, if
available, will be on terms satisfactory to the Company.
On November 10, 2000, the Company received notification from Nasdaq that its
common stock had failed to maintain a minimum bid price of $1.00 over a period
of 30 consecutive trading days as required for continued listing on the Nasdaq
SmallCap Market as set forth in Marketplace Rule 4310 (c) (4) (the "Rule"). In
accordance with Marketplace Rule 4310 (c) (8) (B), the Company had 90 calendar
days, or until February 8, 2001, to regain compliance with this Rule. On
February 7, 2001, the Company requested a hearing before a Nasdaq Listing
Qualifications Panel, which stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.
New Accounting Pronouncements
During the first quarter of fiscal 2001, the Company adopted Emerging Issues
Task Force ("EITF") 00-14, "Accounting for Certain Sales Incentives".
Accordingly, net sales amounts for current and prior periods reflect the
reclassification of consumer and retailer rebate costs, from selling, general
and administrative expenses to net sales.
Additionally, the Company has evaluated its revenue recognition policies based
upon Staff Accounting Bulletin 101 "Revenue Recognition" and related amendments
and interpretations. Accordingly, the Company determined it should recognize
revenues for fiscal 2001 and 2000 associated with product shipments to food and
drug retailers based on the timing of the actual product sell-through activity
to the end consumer of the Company's products at these retail locations and not
at the time the Company ships its products to these food and drug retailers. The
Company made this decision following its determination that it was not able to
adequately estimate, at time of product shipment, the amount of product returns
for product shipments to food and drug retailers. Revenues associated with the
Company's product shipments to its customers that traditionally have sold
consumer PC software products (such as mass-merchant retailers, or distributors
servicing such retailers) are recognized at the time title to these products
passes to these customers, less a historically-based provision for anticipated
product returns.
The Company is currently evaluating the potential impact of Emerging Issues Task
Force ("EITF") 00-10 "Accounting for Shipping and Handling Fees and Costs". This
pronouncement will become effective by the Company's fourth quarter of fiscal
2001. The Company does not expect the adoption of EITF 00-10 to have a
significant impact on its results of operations, financial position or cash
flows.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eGames, Inc.
(Registrant)
Date: March 26, 2002 /s/ Gerald W. Klein
-------------- --------------------
Gerald W. Klein, President, Chief
Executive Officer and Director
Date: March 26, 2002 /s/ Thomas W. Murphy
-------------- --------------------
Thomas W. Murphy, Chief Financial
Officer and Chief Accounting Officer