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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
June 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission file number 2-95836-NY
Egan Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3250816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
1501 Lincoln Ave., Holbrook, New York 11741
(Address of principal executive offices)
(516) 588 - 8000
Registrant's telephone number
89K Cabot Court, Hauppauge, New York
(Former name, former address and former fiscal year if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
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The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
7/31/96 Common Stock 10,185,000
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EGAN SYSTEMS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets as of
June 30, 1996 (unaudited) and December 31, 1995 1
Condensed consolidated statements of operations (unaudited)
for the six months ended June 30, 1996 and 1995 2
Condensed consolidated statements of cash flows (unaudited)
for the six months ended June 30, 1996 and 1995 3
Notes to condensed consolidated financial
statements (unaudited) 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
6 - 7
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 8
SIGNATURES 9
EXHIBITS 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1996 1995
(Unaudited)
Current Assets
Cash $ 18,755 $ 8,158
Accounts receivable 77,364 89,005
Inventory 14,983 33,716
Other current assets 7,914 5,339
Total Current Assets 119,016 136,218
Property and Equipment - net 63,868 66,828
Other Assets
Computer software development costs - net 401,853 383,440
Security deposits 3,126 3,126
Total Other Assets 404,979 386,566
Total Assets $ 587,863 $ 589,612
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,236 $ 9,496
Payroll taxes payable 41,638 102,722
Accrued expenses and other current liabilities 41,153 52,184
Due to officer 7,156 7,456
Due to stockholder 85,000 -
Total Current Liabilities 179,183 171,858
Long-term debt 75,750 75,750
Total Liabilities 254,933 247,608
Stockholders' Equity
Common stock - $.05 par value, shares authorized -
30,000,000 shares, issued and outstanding
10,185,000 in 1996 and 1995 509,250 509,250
Additional paid-in capital 1,752,814 1,752,814
Deficit (1,929,134) (1,920,060)
Total Stockholders' Equity 332,930 342,004
Total Liabilities and Stockholders' Equity $ 587,863 $ 589,612
The condensed consolidated balance sheet at December 31, 1995 has been
derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
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EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Net sales $ 174,331 $ 196,641 $ 445,457 $ 414,535
Cost and expenses:
Cost of goods sold 28,739 11,585 39,331 38,426
Research and development costs 72,028 65,584 179,319 180,621
Selling, shipping,
general and administrative 75,092 114,592 126,629 167,267
Interest 1,231 3,136 2,462 6,886
Depreciation and amortization 53,495 36,439 106,790 75,530
Loss on sale of license - - - 4,475
230,585 231,336 454,531 473,205
Net (loss) income $ (56,254) $ (34,695) $ (9,074) $ (58,670)
Weighted average number of
common shares outstanding 10,185,000 9,901,667 10,185,000 9,901,667
Earnings (loss) per common share:
Primary and fully diluted $ (0.01) $ 0.00 $ (0.00) $ (0.01)
See notes to condensed consolidated financial statements.
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PART I
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
Six Months Ended
June 30,
1996 1995
Net cash provided by operating activities $ 48,140 $ 45,993
Cash flows from investing activities:
Sale of license - 70,000
Purchase of property and equipment (10,040) (11,446)
Computer software development costs (112,203) (85,886)
Net cash used in investing activities (122,243) (27,332)
Cash flows from financing activities:
Due to stockholders 84,700 2,100
Payment of long-term debt - (24,042)
Proceeds from sale of common stock - 25,000
Net cash provided by financing activities 84,700 3,058
Net increase in cash 10,597 21,719
Cash - beginning of period 8,158 300
Cash - end of period $ 18,755 $ 22,019
Supplemental cash flows information:
Interest paid $ - $ 6,911
Taxes paid $ 470 $ -
See notes to condensed consolidated financial statements.
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EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. STATEMENT PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial
position of Egan systems, Inc. and Subsidiary as of June 30, 1996 and the
results of their operations and cash flows for the six months ended June 30,
1996 and 1995.
Primary net income per common share is computed based on the weighted average
number of outstanding common shares and equivalents (stock options, warrants
and convertible note payable). Primary and fully diluted earnings per common
share also assumed the conversion of the subordinated convertible note
payable. As of the date of this report, if the options and warrants were
exercised, the total shares outstanding would amount to 14,415,000 shares.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles for interim reporting under Form 10-QSB have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1995.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the operating results for the full year.
NOTE 2. COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs for products are capitalized subsequent to
the establishment of technological feasibility. Capitalization ceases when
the products are available for general release to customers at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated life of the product, which is estimated at three years. For the six
months ended June 30, 1996 and 1995, accumulated amortization amounted to
$273,095 and $116,187, and amortization of computer software development costs
charged to operations was $93,790 and $60,358, respectively.
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NOTE 3. INVENTORY
Inventory, which consists of finished goods, specifically security devices and
documentation, is stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
NOTE 4. SALE OF LICENSE
On March 9, 1995, the Company sold for $100,000 the exclusive software license
it purchased for $75,000 in March 1994. The license allows the holder to
distribute the software to distributors and end-users. Furthermore, the
Company has retained certain rights to sell the software and the purchaser has
agreed to grant additional discounts to the Company amounting up to
approximately $175,000 on purchases by the Company. The Company has
recognized a loss of approximately $5,000 related to the sale of this license
which includes the write-off of approximately $40,000 in net capitalized
computer software development costs and $65,000 in net license purchase costs.
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Item 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net Sales
For the six months ended June 30, 1996 and 1995, revenue totaled approximately
$445,000 and $415,000, respectively. Sales have increased approximately 7% as
a result of the sales increase related to the release in January 1996 of the
Companys' updated COBOL 2.1 software.
Management remains optimistic that the Company will regain profitability in
1996. The Companys' products traditionally offer relatively high gross
margins. The Company has a number of additional software products in its
development pipeline which it expects to release in the near future and which
the Company expects to substantially contribute to sales. In addition,
management is analyzing expenditures with the goal of reducing disbursements
whenever possible. However, the Company is quite small and remains subject to
technological obsolescence and competitive market conditions.
Cost and Expenses
Cost of goods sold for the six months ended June 30, 1996 and 1995 were
approximately $39,000 and $38,000, and gross profit percent was approximately
91% and 91%, respectively.
Research and development costs were approximately $179,000 and $180,000 for
the six months ended June 30, 1996 and 1995, respectively. The Company
continues to expend significant amounts of its funds developing new software
and to remain competitive in its specific field of expertise.
Selling, shipping and general and administrative expenses (SG&A), net of
research and development costs, for the six months ended June 30, 1996 and
1995 were approximately $127,000 and $167,000, respectively. Accordingly, SG&A
costs, including research and development costs, was approximately $306,000
and $347,000 for the six months ended June 30, 1996 and 1995, respectively.
The capitalization of computer software development costs for the six months
ended June 30, 1996 and 1995 reduced SG&A expenses by approximately $112,000
and $86,000, respectively. The decrease in SG&A costs has been substantially
attributed to reductions in payroll and payroll benefits expense related to
the Company's software support staff in 1996.
In addition, the Company expects SG&A costs to continue to be lower in 1996
due to certain expenditures which were eliminated in 1995 as a result of the
Company's ongoing expense evaluation program.
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PART II, Item 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.):
Interest Expense
Interest expense for the six months ended June 30, 1996 and 1995 was
approximately $2,000 and $7,000, respectively.
Depreciation and amortization
Depreciation and amortization expense for the six months ended June 30, 1996
and 1995 was approximately $107,000 and $76,000, respectively. The increase is
substantially attributed to the increase in amortization of capitalized
computer software costs of $31,000.
Liquidity
As of June 30, 1996, the Company's net cash provided by operations was
approximately $48,000 and is substantially attributed to the net loss of
approximately $(9,000), depreciation and amortization of $107,000 and the
reduction in payroll tax liabilities of $(61,000) as compared to the balances
at December 31, 1995. Payroll tax liabilities were reduced as a result of a
loan received from a shareholder.
Net cash used in investing activities declined during the six months ended
June 30, 1996 by approximately $122,000 and is attributed to the purchase of
property and equipment of $10,000 to support the Company's ongoing research
and development activities and the capitalization of computer software
development costs of approximately $112,000.
Net cash provided by financing activities increased by approximately $85,000
for the six months ended June 30, 1996 due to a loan from a stockholder.
Management believes that the Company has sufficient cash resources to meet the
expected needs in the present fiscal year. Management does not anticipate any
additional large capital expenditures in the current year. At present the
Company does not maintain a line of credit facility with a lending
institution.
Inflation and Seasonality
The Company does not anticipate that inflation will significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonality.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Required by Item 601 of Regulation S-B.
(11) Statement regarding computation of per share earnings.
(b) Reports on Form 8-K - The Company filed no
reports on Form 8-K during the quarter ended June 30, 1996.
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S I G N A T U R E S
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
EGAN SYSTEMS, INC.
(Registrant)
/S/ Edward Egan
Edward Egan (President)
And Chief Financial Officer)
Date:
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