SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
6307.00 - DRAFT #2
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 SEPTEMBER 30, 2000
---- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
2-95836-NY
COMMISSION FILE NUMBER
EGAN SYSTEMS, INC.
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(Exact name of registrantas specified in its charter)
DELAWARE 13-325081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 LINCOLN AVE., HOLBROOK, NEW YORK 11741
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(Address of principal executive offices)
Registrant's telephone number including area code: (516) 588-8000
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(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 .
--- ---
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
- ----- ------- ------------------
10/30/00 Common Stock 19,646,652
EGAN SYSTEMS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets as of
September 30, 2000 (unaudited) and December 31, 1999 1
Condensed consolidated statements of operations (unaudited) for the
nine months ended September 30, 2000 and 1999 2
Condensed consolidated statements of cash flows (unaudited) for the
nine months ended September 30, 2000 and 1999 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
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(Unaudited)
ASSETS
Current Assets
Cash $ 90,811 $ 449,990
Accounts receivable 111,899 111,837
Inventory 10,445 8,910
Prepaid expenses and other current assets 7,093 8,764
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Total Current Assets 220,248 579,501
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Property and Equipment - net 154,735 189,302
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Other Assets
Computer software development costs - net 787,175 803,030
Security deposits 3,126 3,126
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Total Other Assets 790,301 806,156
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Total Assets $ 1,165,284 $ 1,574,959
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 175,917 $ 175,917
Accrued expenses and other current liabilities 70,804 50,544
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Total Current Liabilities 246,731 226,461
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Stockholders' Equity
Common stock - $.05 par value, shares authorized -
30,000,000 shares, issued
and outstanding, 19,646,652
in 2000 and 18,646,652 in 1999 982,233 932,333
Additional paid-in capital 4,827,201 4,877,201
Deficit (4,528,481) (4,098,536)
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1,281,053 1,710,998
Notes receivable - stock purchase (362,500) (362,500)
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Total Stockholders' Equity 918,553 1,348,498
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Total Liabilities and Stockholders' Equity $ 1,165,284 $ 1,574,959
=========== ==========
The condensed consolidated balance sheet at December 31, 1999 has been derived
from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
1
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net product sales $ 164,560 $ 373,815 $ 565,774 $ 1,065,197
Custom services income 68,734 -- 68,734 442,030
----------- ----------- ----------- -----------
233,294 373,815 634,508 1,507,227
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Cost and expenses:
Cost of goods sold 27,326 19,207 36,611 208,625
Research and development costs 67,488 74,916 184,519 214,230
Selling, shipping,
general and administrative 167,536 109,801 492,427 567,536
Interest income (3,713) (6,354) (12,271) (21,366)
Royalties 3,015 9,000 25,581 24,390
Promotion and advertising -- -- 3,941 27,711
Interest expense -- 86 -- 338
Depreciation and amortization 111,215 127,510 333,645 346,415
----------- ----------- ----------- -----------
372,867 414,166 1,064,453 1,367,879
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Net (loss) income $ (139,573) $ (40,351) $ (429,945) $ 139,348
=========== =========== =========== ===========
Net (loss) income per common share:
Basic $ (0.01) $ 0.00 $ (0.02) $ 0.01
=========== =========== =========== ===========
Fully diluted $ -- $ -- $ -- $ 0.01
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Cash dividends per common share None None None None
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
Nine Months Ended
September 30,
2000 1999
---- ----
Net cash used in operating activities $ (79,955) $ (100,299)
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Cash flows from investing activities:
Purchase of property and equipment (6,893) (48,682)
Computer software development costs (276,330) (307,842)
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Net cash used in investing activities (283,224) (356,524)
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Net decrease in cash (359,179) (456,823)
Cash - beginning of period 449,990 1,036,429
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Cash - end of period 90,811 $ 579,606
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Supplemental cash flows information:
Taxes paid $ 2,047 $ 2,753
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Interest paid $ -- $ 338
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See notes to condensed consolidated financial statements.
3
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 September 30, 2000 and the results of
their operations and cash flows for the nine months ended September 30, 2000 and
1999.
Primary net income per common share is computed based on the weighted average
number of outstanding common shares. The number of shares used in the
computation were 19,368,874 and 18,646,652 in 2000 and 1999, respectively. Fully
diluted net income per common share is computed based on the weighted average
number of outstanding common shares plus the shares that would be outstanding
assuming conversion of the outstanding options and warrants. For purposes of the
fully diluted computations, the number of shares that would be issued from the
exercise of stock options and warrants has been reduced by the number of shares
that could have been purchased from the proceeds at the average market price of
the Company's stock. The number of shares used in the computation of fully
diluted earnings per share were 19,568,874 and 23,329,294 in 2000 and 1999,
respectively. Fully diluted earnings per share amounts do not include the
effects of dilutive securities for 2000 because they are anti-dilutive.
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, 1999.
The results of operations for the nine months ended September 30, 2000 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. As of and for
the nine months ended September 30, 2000 and 1999, accumulated amortization
amounted to approximately $1,460,000 and $1,155,000, and amortization of
computer software development costs charged to operations was approximately
$292,000 and $317,000, respectively.
NOTE 3. INVENTORY:
Inventory, which consists primarily of miscellaneous computer peripherals, is
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
4
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. 401(K) SAVINGS PLAN:
In March 1999, the Company adopted a 401(k) savings plan that covers all
employees of the Company. The plan is effective March 1, 1999. Contributions to
the plan may be made by all eligible employees up to fifteen percent of their
salary. The Company will match twenty-five percent of the employee's
contributions up to four percent of each employees base salary.
For the nine months ended September 30, 2000 and 1999, the Company incurred
contribution expense of approximately $6,000 related to this plan.
NOTE 5. ISSUANCE OF COMMON STOCK:
In 1993, in order to assist the Company in raising additional capital by the
sale of the Company's common stock, a director voluntarily surrendered 1,000,000
of his shares of the Company's $.05 par value common stock to the treasury in
order to comply with certain financial requirements imposed on the Company under
the terms of the new stock sale agreement. In March 2000, since the financial
terms and conditions imposed on the Company had expired, the Company reissued
the 1,000,000 shares previously surrendered by the director. The 1,000,000
shares of the Company's $.05 par value common stock issued to this director in
2000 was not previously disclosed in the calculation of fully diluted earnings
per share. The Company has determined that had this disclosure been made it
would have had no material affect upon the calculation of basic and fully
diluted earnings per share.
NOTE 6. ACQUIRED TECHNOLOGY:
In 1999 and 1998, the Company purchased rights for the use of certain software
to be utilized in the Company's year 2000 assessment and remediation services.
Certain of these software costs were charged in 1999 and 1998 to cost of goods
sold based on revenues from customers contracting with the Company for the use
of the technology.
At December 31, 1999, the Company wrote off the remaining costs approximating
$1,107,000 based on its assessment of the software's net realizable value at
that time. However, the Company is currently negotiating with the software
vendor to apply these costs to other software with application to the Company's
products and services. As of the date of this financial statement the outcome of
these negotiations is uncertain. However, the Company believes it will be
successful in its negotiations and that the software vendor will ultimately
allow these costs to be applied to other software for future use by the Company.
If the Company is successful in its negotiations and is able to apply the costs
to new software, the Company will recognize income in the future period to the
extent of the applicable credits.
5
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES:
For the nine months ended September 30, 2000 and 1999, total revenue
approximated $635,000 and $1,507,000, respectively. Revenue has declined for the
nine months ended September 30, 2000 versus the same period in the prior year
due to the reduction in 2000 of custom service work such as client software
migration, Year 2000 assessment and remediation, consulting and custom software
generation work performed on behalf of new and some existing customers.
Additionally, the decline is attributed to a reduction in demand for some of the
Company's products by new and existing customers. In February 2000, the Company
released a new product called "CGI COBOL" which is designed to enable existing
cobol programmers to create web server application software without the need for
programmers to learn and employ a new software language. Initial sales of the
product commenced in the second quarter of 2000 and interest in the product is
high. In June 2000, the Company released a new upgraded product called
"Interactive Cobol 3". The Company feels that this new enhanced featured product
will convince existing customers to purchase an upgrade of the product and also
attract new customers to purchase the new product.
The Company is continually evaluating new opportunities that management hopes
will substantially contribute to revenue. 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 nine months ended September 30, 2000 and 1999 were
approximately $37,000 and $209,000 and gross profit percents were approximately
94% and 86%, respectively. The lower gross profit margin in 1999 results from
the lower proportional combination of high gross margins achieved on sales of
the Company's regular software products and lower gross margins achieved on a
portion of the new custom services income versus 2000.
Research and development costs were approximately $185,000 and $214,000 for the
nine months ended September 30, 2000 and 1999, respectively. The decease is due
to the Company reducing the number of employees and expenditures related to
research and development in 2000 in conjunction with the reduction in revenues.
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) for the nine
months ended September 30, 2000 and 1999 were approximately $492,000 and
$567,000, respectively. The capitalization of computer software development
costs for the nine months ended September 30, 2000 and 1999 reduced SG&A
expenses by approximately $276,000 and $308,000, respectively. The decrease in
SG&A expenses and capitalized computer software development costs was attributed
primarily to the reduction in employees and expenditures in the Company's
software development facility in conjunction with the reduction in revenues.
The Company is presently analyzing cost saving measures that it might implement
in the future due to the decline in revenues.
6
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (CONT'D):
PROMOTION AND ADVERTISING EXPENSE:
For the nine months ended September 30, 2000 and 1999, advertising and promotion
expense was approximately $4,000 and $28,000, respectively. The decrease in 2000
was directly related to the Company's substantial efforts in 1999 to market its
new Year 2000 Impact Assessment and Remediation Tools and Services product as
well as to expand the Company's overall visibility. As of June 30, 2000, the
Company is reevaluating its promotion and advertising campaign.
INTEREST INCOME:
Interest income for the nine months ended September 30, 2000 and 1999 was
approximately $12,000 and $21,000, respectively, and was related to cash
invested by the Company in short-term financial instruments.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense for the nine months ended September 30,
2000 and 1999 was approximately $334,000 and $346,000, respectively. The
decrease in 2000 is attributed to the decrease in capitalized computer software
costs in recent periods.
LIQUIDITY:
As of September 30, 2000, the Company's net cash used in operations was
approximately ($80,000) and is substantially comprised of net loss of ($430,000)
and depreciation and amortization of $334,000. As of September 30, 2000, the
Company still has $176,000 in liabilities related to the purchase of technology
software which is more fully described in the Company's December 31, 1999
10-KSB. The amount is reflected in accounts payable on the balance sheet. This
compares to the nine months ended September 30, 1999 where net cash used in
operations was approximately ($100,000) and was substantially comprised of net
income of $139,000, depreciation and amortization of $346,000, an increase in
acquired technology costs of ($308,000) and a decrease in accounts payable of
($280,000).
Net cash used in investing activities during the nine months ended September 30,
2000 and 1999 was approximately ($283,000) and ($356,000), respectively. This
was attributed to purchases of new computer hardware and software of
approximately $7,000 and $49,000 to support the Company's ongoing research and
development activities and to the capitalization of computer software
development costs of $276,000 and $308,000 for the nine months ended September
30, 2000 and 1999, respectively.
Management believes that the Company has sufficient cash resources to meet its
expected needs in the present fiscal year. Management does not anticipate
additional large capital expenditures in the current year except as discussed
above. At present the Company does not maintain a line of credit facility with a
lending institution.
INFLATION AND SEASONALITY:
The Company does not anticipate inflation will significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonality.
7
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.
(27) Financial data schedule
(b) Reports on Form 8-K - The Company filed no
reports on Form 8-K during the quarter ended September 30, 2000.
8
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.
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(Registrant)
/s/EDWARD J. EGAN
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Edward J. Egan
(President and Chief Financial
Officer)
Date: 10/30/00
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