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Filed pursuant to Rule 424 (b)(1)
Registration No. 333-35755
PROSPECTUS
EGAN SYSTEMS, INC.
1,500,000 SHARES OF COMMON STOCK
1,500,000 WARRANTS
All of the shares (the "Shares") and all of the Warrants (the "Warrants")
of the Company offered hereby are to be sold for the accounts of the selling
Warrantholders or selling shareholders set forth herein (the "Selling
Shareholders"). The Company is registering the Warrants and the Shares pursuant
to certain registration rights and other contractual obligations incurred by the
Company as a condition of the original issuance of the Warrants. The Company
will not receive any of the proceeds from the sale of the Warrants or the Shares
by the Selling Shareholders. The Company will, however, receive the exercise
price with respect to the exercise of any of the Warrants described herein. The
Company estimates that total expenses will be approximately $52,560 in
connection with this offering ("Offering") of the Shares and Warrants. (See
"Selling Shareholders" and "Plan of Distribution").
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the NASDAQ Electronic Bulletin Board under the symbol EGNS. There is
no present market for the Warrants and there is no assurance that any such
market will develop.
On October 16, 1997, the average of the last reported bid and asked prices
of the Company's Common Stock in the over-the-counter market as reported by NASD
was $1.51.
See "Certain Market Information and Dividends"
The 1,500,000 Shares of Common Stock, Par Value $.05 Per Share (The "Common
Stock") being offered hereby, are to be offered from time to time upon the
exercise of certain Warrants described herein. All the 1,500,000 Warrants being
offered hereby were issued pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended. See "The Company"
and "Selling Stockholders".
The Selling Shareholders may sell the Shares and Warrants to or through
underwriters and also may sell the Shares or Warrants directly to other
purchasers or through agents or brokers, from time to time, in the
over-the-counter market at prevailing prices in such market. See "Plan of
Distribution."
UNTIL NOVEMBER 26, 1997 (40 DAYS AFTER THE DATE OF THE PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
INVESTMENTS IN THE SECURITIES INVOLVE A HIGH DEGREE OF RISK (SEE "RISK
FACTORS").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 20, 1997
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION................................................................ 3
ADDITIONAL INFORMATION............................................................... 3
PROSPECTUS SUMMARY................................................................... 3
THE COMPANY.......................................................................... 3
THE OFFERING......................................................................... 4
SUMMARY FINANCIAL INFORMATION........................................................ 5
RISK FACTORS......................................................................... 6
USE OF PROCEEDS...................................................................... 9
DIVIDEND POLICY...................................................................... 9
MARKET FOR COMMON EQUITY AND RELATED MATTERS......................................... 10
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 11
DESCRIPION OF BUSINESS............................................................... 16
MANAGEMENT........................................................................... 19
EXECUTIVE COMPENSATION............................................................... 19
SECURITY OWNERSHIP OF MANAGEMENT..................................................... 20
SELLING SHAREHOLDERS AND SELLING WARRANT HOLDERS..................................... 21
PLAN OF DISTRIBUTION................................................................. 23
DESCRIPTION OF SECURITIES............................................................ 24
COMMON STOCK....................................................................... 24
NON-CUMULATIVE VOTING.............................................................. 24
TRANSFER AGENT....................................................................... 24
WARRANTS............................................................................. 24
REPORTS TO SECURITY HOLDERS.......................................................... 25
ELIMINATION OF MONETARY LIABILITY OF OFFICERS AND DIRECTORS.......................... 25
SHARES ELIGIBLE FOR FUTURE SALES..................................................... 25
INDEMNIFICATION OF DIRECTORS AND OFFICERS............................................ 26
LEGAL PROCEEDINGS.................................................................... 26
LEGAL MATTERS........................................................................ 26
EXPERTS.............................................................................. 26
FURTHER INFORMATION.................................................................. 26
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
</TABLE>
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AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (The "Exchange Act"), and,
accordingly, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information filed
with the Commission are available for inspection and copying at the public
reference facilities maintained by the Commission at Room 1026, 450 Fifth Street
NW, Washington, DC 20549, at the Commission's regional offices located at 7
World Trade Center in New York, New York 10007, at Citicorp Center, 500 W.
Madison Street, Suite 1400, Chicago Illinois 60611 and at 5757 Wilshire
Boulevard, Los Angeles, California 90024.
Copies of such material also may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street NW, Judiciary Plaza, Washington, DC
20549 at prescribed rates and are also available on the Commission's web site at
http:/sec.gov.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Commission under
the Securities Act with regard to the Securities offered hereby. The Prospectus
does not contain all of the information set forth in the Registration Statement
and in the Exhibits and Schedules thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to such Registration Statement and the Exhibits and Schedules
thereto.
The Registration Statement and any amendments thereto, including Exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
The Company intends to distribute Annual Reports containing audited
financial statements to its Shareholders.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus in connection with the offering made herein and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company. The Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy by any person in any
jurisdiction in which it is unlawful for said person to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, imply that the information contained
herein is correct as of any date subsequent to the date hereof.
PROSPECTUS SUMMARY
The following is a selective summary of certain information contained in
this Prospectus. This summary is qualified in its entirety by the more detailed
information and financial statements (and notes thereto) appearing elsewhere in
this Prospectus. Investors should carefully consider information set forth under
the heading "Risk Factors".
THE COMPANY
Egan Systems, Inc., ("The Company") was organized under the laws of the
State of Delaware on March 16, 1987. Its original certificate of incorporation
authorized the Company to issue 50,000,000 shares of Common Stock at $.01 par
value. By an amended certificate of Incorporation, on August 17, 1987, the
number of authorized shares of Common Stock was changed to 10,000,000 shares at
.05 par value per share.
The Company is engaged in the business of developing, selling and
supporting computer software products, particularly products related to the
COBOL computer language. The Company's main business has been and continues to
be the creation and sale of COBOL language dialects that permit programs written
in heretofore proprietary versions of COBOL to move (migrate) to inexpensive
high performance systems available from a variety of suppliers without the need
to rewrite the programs.
Much of the Company's existing business is with firms who at one time or
another enjoyed a relationship with Data General Corp. ("D.G.") and employed one
or more versions of D.G.'s customers that had been D.G.'s but also, by the
quality of Egan's product offerings, to make D.G. both a distributor of one of
the Company's products, Interactive COBOL, and in December of 1996 to become an
Accredited Service Provider to D.G. for the Company's VX COBOL product. Under
terms of this agreement, D.G. will, in return for a commission, market Egan's VX
product and migration skills to a portion of D.G.'s customer base. While no
contracts have been awarded under this agreement yet, there are already bids
outstanding, valued in the hundreds of thousands of dollars.
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Ninety percent (90%) of the Company's current customers are VARs or
Resellers who employ the Company's products to create software programs that are
resold to users. A small percentage purchase the Company's products for internal
use by their respective organizations, The Company's products are in use all
over the world.
There are several direct competitors for the Company's COBOL products,
including Liant, Micro Focus, AcuCOBOL, Realia and others which are much larger
and better funded. There are 75 to 100 companies offering products that may
compete with the Company's Year 2000 product and most, if not all, are larger
than Egan Systems. The Company expects that competition will increase with the
perceived realization of the enormity of the year 2000 problem as that year
approaches.
The Company's principal executive offices are located at 1501 Lincoln
Avenue, Holbrook, New York, 11741. Its telephone number is 516-588-8000. The
Company was formed for the purpose of establishing a computer system and to make
software sales.
THE OFFERING
This Prospectus covers an aggregate of 1,500,000 Shares of the Company's
Common Stock, par value $.05 cents per share which may be offered from time to
time by Warrant Holders who had previously been granted registration rights by
the Company and who, upon exercise of their respective Warrants and the payment
to the Company of the Warrant exercise prices, will be entitled to receive up to
1,500,000 Shares of the Company's Common Stock offered herein by this
Prospectus.
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SUMMARY FINANCIAL INFORMATION
The following summary consolidated financial information concerning the
Company has been derived from the financial statements included elsewhere in
this Prospectus and should be read in conjunction with such consolidated
financial statements and the notes thereto. See "Financial Statements":
<TABLE>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Sales........................ 772,767 926,236 888,694 770,092 854,791 445,457 476,692
Gross Profit................. 673,128 841,489 814,162 704,204 778,817 406,126 444,807
Total Expense................ 681,047 704,558 825,901 877,437 838,880 454,531 443,603
Net Income (loss)............ 91,720 213,744 60,058 (107,345) 15,911 (9,074) 33,089
Net Income (loss) per
share...................... .01 .02 .01 (.01) .00 .00 .00
Weighted Average Shares...... 12,781,234 14,533,462 10,431,756 10,168,333 10,185,000 10,185,000 19,875,500
BALANCE SHEET DATA
Working Capital
(deficiency)............... (8,996) (34,006) 14,569 (35,640) 17,845 (60,167) 696,572
Total Assets................. 225,829 385,675 683,146 589,612 641,476 587,863 1,384,996
Long Term Liabilities........ 659,839 619,424 -- 75,750 -- 75,750 130,000
Stockholders' Equity......... (610,743) (396,999) 74,349 342,004 517,915 587,836 1,136,004
</TABLE>
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RISK FACTORS
The Securities offered hereby are highly speculative and involve a high
degree of risk. They should be purchased only by persons who can afford to lose
their entire investment. Each prospective investor should carefully consider the
following risk factors, as well as all of the other information set forth
elsewhere in this Prospectus.
(1) RECENTLY COMMENCED BUSINESS OPERATIONS -- INSIGNIFICANT RECORDS OF EARNINGS
In addition to other information disclosed in this Prospectus, the
following Risk Factors should be considered carefully in evaluation the Company
and its business before purchasing Shares or exercising Warrants for Shares of
the Company's Common Stock offered hereby.
(2) LIMITED OPERATING HISTORY
The Company was founded on March 16, 1987 as a Delaware Corporation and for
the first five years of its existence experienced very substantial losses,
totaling almost $2 million. While the Company's performance has improved over
the last five years, the initial losses have not been recaptured. The Company
has no borrowing agreement with any financial organization and is solely
dependent on cash on hand and revenue from ongoing sales to fund its development
investments as well as supporting existing sales and future growth activity.
Furthermore, the Company typically operates without back orders, shipping most
orders on day of receipt. The Company can only broadly estimate sales of both
existing and new products, with no real assurance that these estimates will be
met. Therefore, the Company has no certitude of ongoing revenue inflow and
ability to fund continuing development. An unexpected shortfall in revenue
could, given the rather fixed schedule of the Company's operating expenses,
result in adverse operating profits and an inability to meet development
schedules and anticipated revenues.
(3) The Company has recently increased its engineering staff level and acquired
additional equipment and space in anticipation of an as of yet unrealized
increase in business activity involving the Company's Y2K and migration products
and services. Should these new opportunities fail to materialize, the Company's
ongoing profitability will be severely strained. The Company is also challenged
quickly and efficiently to integrate both the new personnel and facilities into
its ongoing business activity with minimal interruption.
(4) COMPETITION
The market for the Company's products, both the COBOL language and the Year
2000 Tools and Services is intensely competitive and characterized by rather
rapid change. To maintain its business in the computer language area the Company
must continue to accommodate new operating environments, such as the latest
versions of the popular Microsoft operating systems Windows 95 and NT, but also
react to customer demand for additional features, network performance
enhancements, development tools and other improvements. The Company's COBOL
language is continually being compared by the Company's existing customers to
products offered by the Company's language marketplace. Egan Systems directly
competes with divisions of or subsidiaries of IBM, Fujitsu, Computer Associates
and Digital Equipment Corp. as well as with other much larger companies whose
sole or principal business is the COBOL language such as Micro Focus,
ACCUCOBOL and Ryan-McFarlan. There is no guarantee that the Company can continue
to compete successfully in this market, given the resources available to its
competition. Additionally, the COBOL language itself is considered out of date
by proponents of 4GL or fourth generation languages, the most notable of which
is Oracle, with products from other companies such as Informix and Sybase
enjoying growing success.
(5) The Company's existing customers are primarily resellers, companies that
purchase quantities of licenses every year. They continue to purchase Egan's
COBOL products rather than another for reasons of compatibility, performance
and/or cost. None of these reasons is sufficient to guarantee a continued
relationship and, indeed, most of the Company's customers could decide to move
to a different manufacturer other than
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COBOL without excessive effort. There is no assurance that this will not occur,
regardless of the Company's efforts to retain their business. In similar
fashion, the unique attributes of the Company's products make it difficult to
replace other suppliers products with its own, so recovering from the loss of a
customer by acquiring a new one has not been easy for the Company.
(6) The Company is one of over 200 firms offering products created to address
the year 2000 or Millennium problem. Well over 95% of these competing firms are
larger than Egan Systems and almost all have greater market recognition. The
Company is competing with firms as large as IBM, Computer Associates, Computer
Horizons, Keane Associates, Viasoft etc., etc. In this market, as in most
involving computer software, change is constant and even well established
companies can find themselves falling behind the technology. There can be no
assurance that the Company's new products are appropriately evolving or will
remain so. Furthermore, competing with companies so large and so numerous will
be very difficult no matter how attractive the Company's offerings become.
(7) LIMITED EXPERIENCE OF MANAGEMENT
The Company's management has never been fully responsible for all aspects
of a company's management prior to the founding of Egan Systems. There can be no
assurance that should the Company become larger or more successful, existing
management will be equal to the task. The principal officers of the Company have
had only limited prior experience in business as a designer and supplier of
COBOL language products used by computer programs or solutions.
(8) PRODUCT CONCENTRATION
All of the Company's products are involved or work with the COBOL computer
language. This concentration in one narrow market greatly increases the risk the
Company faces that a shift away from this COBOL language will effectively reduce
or remove entirely the Company's only current sources of revenue. While the
Company believes this to be unlikely, the success of Companies offering 4GL
alternatives to COBOL and other so called 3rd generation languages is quite
real.
(9) DIVIDEND POLICY
The Company has never paid any cash dividend on its capital stock. It is
the Company's current policy to retain any earnings it achieves to finance the
growth and development of its business. Any payments of cash dividend in the
future will depend upon the financial condition, capital requirements and
earnings of the Company as well as upon such other factors as the Board of
Directors may deem relevant.
(10) DILUTION
As of June 30, 1997, there were outstanding (a) employee stock options to
purchase 1,820,000 shares of Common Stock. See "Business", "Recent Development",
and "Management".
Any exercise of Warrants will usually take place at a time when the Company
would be able, in all likelihood, to obtain funds from the private sale of the
Company's Common Stock at prices higher than the exercise prices of the
Warrants. As a result, investors in the securities offered by the Shareholders
and Warrant holders hereby incur substantial dilution of their investments as
the issuance of such a significant number of additional securities, or even the
possibility thereof, may depress the price of such securities.
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(11) COMPETITION
There are several direct competitors for the Company's COBOL products,
including Liant, Micro Focus, AcuCOBOL, Realia and others which are much larger
and better funded. There are 75 to 100 companies offering products that may
compete with the Company's Year 2000 product and most, if not all, are larger
than Egan systems. The Company expects that competition will increase with the
perceived realization of the enormity of the year 2000 problem as that year
approaches.
(12) RELIANCE UPON OFFICERS AND DIRECTORS
The Company is wholly dependent, at present, upon Edward J. Egan, a
Director, its Chairman, President, Chief Executive Officer and Treasurer and
upon Ralph Jordan, a Director, and the President of the Company's wholly owned
subsidiary, Envyr Corporation. None of these persons is covered by key person
life insurance. Some management personnel are relatively new to the Company, and
the Company's success in the future will depend in part on successful
assimilation of new management personnel. In addition, the Company's future
success will depend in part upon its ability to attract and retain other highly
qualified personnel. The Company competes for such personnel with other
companies, academic institutions, government entities and other far better
kindred organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The loss of key personnel
or inability to hire and retain qualified personnel could have a substantial
adverse effect on the Company's business and results of operations. The Company
is presently negotiating to hire an additional executive officer. See
"Business -- Recent Developments" and "Management Directors and Executive
Officers".
The Company's current Directors and Officers and their affiliates
beneficiary own approximately 21% of the Company's issued and outstanding Common
Stock. As a result of their Common Stock ownership, the Company's current
Directors, Officers and their affiliates will have significant influence over
all matters requiring approval by the Company's Stockholders, including the
election of Directors. Through any Directors whom they nominate and elect, they
may have the ability to direct policy and influence the Company's day-to-day
operations. See "Principal Shareholders, Management" and "Selling Shareholders."
(13) INSURANCE
Due to the high cost of insurance, the Company does not carry any insurance
policies, other than for property damage and general liability.
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USE OF PROCEEDS
Since all of the Shares offered hereby are to be sold for the account of
Selling Stockholders, the Company will not receive any cash proceeds pursuant to
this Offering.
The Company may, however, receive cash proceeds to the extent outstanding
warrants are exercised by a Selling Stockholder. If the Warrants are exercised
in full, as to which there can be no assurance, the net proceeds would be
approximately $562,500. The Company will use such proceeds to
fund additional development and marketing of the Company's products. Respecting
the ultimate proceeds of any exercise of any of these Warrants, the Company will
make temporary investments of any of such proceeds in interest bearing savings
accounts, certificates of deposit, United States Government obligations or in
money Market certificates. United States Government obligations are not
necessarily those backed by the full, faith and credit of the United States
Government. Company policy does not require temporary investments to be
investment grade as determined by a nationally recognized statistical rating
organization nor does it require that such investments have any additional
safety features such as insurance.
DIVIDEND POLICY
The payment by the Company of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Company does not contemplate
or anticipate paying any dividends on its Common Stock in the foreseeable
future.
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MARKET FOR COMMON EQUITY AND RELATED MATTERS
The table below sets forth the high and low closing bid prices of the
Company's Common Stock for the quarters indicated. The shares are not traded in
the over-the-counter market and quotations are available, on the Eastern
Regional "Pink Sheets" and on the NASDAQ Electronic Bulletin Board (Symbol
EGNS). The Company can only supply a general estimate of the price range of its
shares on a quarterly basis.
<TABLE>
<CAPTION>
BID PRICES
--------------
CALENDAR YEAR HIGH LOW
- ------------- ---- ---
<S> <C> <C>
1995
First Quarter .................................... $.31 $.06
Second Quarter ................................... $.22 $.06
Third Quarter .................................... $.25 $.03
Fourth Quarter ................................... $.17 $.03
1996
First Quarter .................................... $.44 $.16
Second Quarter ................................... $.38 $.25
Third Quarter .................................... $.38 $.28
Fourth Quarter ................................... $.38 $.25
1997
First Quarter .................................... 3 .34375
Second Quarter ................................... 2.875 1.21875
Third Quarter .................................... 2.53125 1.78125
Fourth Quarter (thru October 16) ................. 1.71875 1.46875
</TABLE>
On October 16, 1997 the high bid and asked quotation for the Company
Common Stock were $1.45 and $1.55 per share, respectively.
The Company believes that as of September 30, 1997, there were 82
Shareholders of record of the Company's Common Stock.
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MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 AND 1996:
NET SALES
For the six months ended June 30, 1997 and 1996, revenue totaled approximately
$477,000 and $445,000, respectively. Sales have increased approximately 7% as
a result of higher sales to existing customers and greater exposure to new
customers through the Company's internet page.
In January 1997, the Company signed a new marketing agreement with Data General
Corp. whereby Egan Systems, Inc. has become an accredited service provider.
Under this agreement, Data General Corp. will, for a commission, market certain
Egan Systems, Inc. products and skills to a portion of the Data General
Corp.'s customer base. The Company is optimistic that this agreement will
continue to provide a substantial new revenue source for at least the next
fiscal year.
Management remains optimistic that the Company will remain profitable in 1997.
The Companys' products traditionally offer relatively high gross margins. The
Company has a number of additional promising software products in its
development pipeline which it expects to release in the near future and which
the Company expects to contribute substantially to sales. 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, 1997 and 1996 were
approximately $32,000 and $39,000, respectively, and gross profit percent was
approximately 93% and 91%, respectively. The improvement in the gross margin has
been attributed by management to lower sales of certain computer hardware which
is at significantly lower gross margins than computer software which is the
Company's main revenue source.
Research and development costs were approximately $150,000 and $179,000 for the
six months ended June 30, 1997 and 1996, respectively. The Company continues
to expend significant amounts of its funds developing new software and to
remain competitive in its specific field of expertise. The decline in research
and development is substantially due to the Company capitalizing approximately
$47,000 more computer software development costs in 1997 than in 1996 related
to new Company products which have achieved technological feasibility in 1997.
Selling, shipping and general and administrative expenses (SG&A) was
approximately $128,000 and $127,000 for the six months ended June 30, 1997 and
1996, respectively. The capitalization of computer software development costs
for the six months ended June 30, 1997 and 1996 reduced SG&A expenses by
approximately $159,000 and $112,000, respectively. See research and development
comments above.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1997 and 1996 was
approximately $2,000 and $2,000, respectively. In 1997, interest expense was
reduced by approximately $4,000 in interest income related to cash balances
invested in interest bearing accounts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended June 30, 1997
and 1996 was approximately $132,000 and $107,000, respectively. The increase is
substantially attributed to the increase in amortization of capitalized
computer software costs of approximately $25,000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Years ended December 31 1996 and 1995
NET SALES
For the years ended December 31, 1996 and 1995, revenue totaled
approximately $855,000 and $770,000, respectively. Sales have increased
approximately 11% as a result of the sales increase related to the release of
the Company's updated COBOL 2.1 software.
The Company has recently signed a new marketing agreement with Data General
Corp, whereby Egan Systems, Inc. has become an Accredited Service Provider.
Under this agreement, Data General Corp. will, for a commission, market certain
Egan Systems, Inc. products and skills to a portion of the Data General Corp.'s
customer base. The Company is optimistic that this agreement will provide a
substantial new revenue source for at least the next fiscal year.
Management remains optimistic that the Company will remain profitable in
1997. The Company's products traditionally offer relatively high gross margins.
The Company has a number of additional promising software products in its
development pipeline which it expects to release in the near future and which
the Company expects will contribute substantially to sales. 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 years ended December 31, 1996 and 1995 were
approximately $76,000 and $66,000, respectively, and gross profit percent was
approximately 91%.
Research and development costs were approximately $348,000 and $421,000 for
the year ended December 31, 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. The decline is due to the
Company capitalizing approximately $40,000 more computer software development
costs in 1996 than in 1995 related to new Company products which have achieved
technological feasibility in 1996.
Selling, shipping and general and administrative expenses (SG&A) for the
years ended December 31, 1996 and 1995 were approximately $535,000 and $651,000,
respectively. SG&A costs, net of research and development costs, was
approximately $187,000 and $220,000 for the years ended December 31, 1996 and
1995, respectively. Accordingly, the capitalization of computer software
development costs for the years ended December 31, 1996 and 1995 reduced SG&A
expenses by approximately $348,000 and $421,000, respectively. The decrease in
SG&A costs was attributed primarily to a reduction in payroll in 1996 of
approximately $56,000.
INTEREST EXPENSE
Interest expense for the years ended December 31, 1996 and 1995 was
approximately $10,000 and $14,000, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the nine months ended September
30, 1996 and 1995 was approximately $161,000 and $114,000, respectively. The
increase is substantially attributed to the increase in amortization of
capitalized software costs of $48,000.
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LIQUIDITY
As of June 30, 1997, the Company's net cash provided by operations was
approximately $118,000 and is substantially attributed to the net income of
$33,000, depreciation and amortization of $132,000 less an increase in accounts
receivable of $40,000 as compared to the balances at December 31, 1996.
Net cash used in investing activities during the six months ended June 30, 1997
was approximately $201,000. Cash was used to purchase computer software and
hardware equipment of approximately $42,000 to support the Company's ongoing
research and development activities and $159,000 was attributed to the
capitalization of computer software development costs.
Net cash provided by financing activities approximated $715,000 resulting from
the sale of common stock, the exercise of common stock options and warrants and
the issuance of convertible notes payable.
Management believes that the Company has sufficient resources to meet its
expected needs in the present fiscal year. Management has directed significant
Company resources in the six months ended June 30, 1997 towards the Company's
attempt to development a product for the "Millenium 2000" problem. At present
the Company does not maintain a line of credit facility with a lending
institution.
CAPITAL RESOURCES
During the six months ending June 30, 1997, the Company expects $15,000 in
professional fees, including legal and accounting services which have already
been rendered.
The Company believes it has sufficient funds to accomplish its immediate
objectives.
The Company has no present commitments and does not anticipate any need to
require additional capital resources.
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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<PAGE> 14
DESCRIPTION OF BUSINESS
GENERAL
Egan Systems, Inc. (The Company) was incorporated under the laws of the
State of Delaware on March 16, 1987.
The Company is engaged in the business of developing, selling and
supporting computer software products, particularly products related to the
COBOL computer language. The Company's main business has been, and continues to
be, the creation and sale of COBOL language dialects that permit programs
written in heretofore proprietary versions of COBOL to move (migrate) to
inexpensive high performance systems available from a variety of suppliers
without the need to rewrite the programs.
Egan Systems is focused on the substantial opportunities presented by the
downsizing or rightsizing of computer systems employing the COBOL computer
language. The most widespread of all computer languages for business and
commercial use, COBOL still accounts for the majority of new computer programs
and is found on millions of systems world wide ranging in size from PCs to
mainframes.
Until the mid 1980's, almost all COBOL programs were written in a version
of COBOL unique and proprietary to the computer system it was created to run on.
As an example, software created to execute on an IBM mini would only run on an
IBM mini, not on an IBM mainframe or much less, a system created by Digital
Equipment Company (DEC) or Data General (D.G.). To switch to a different system
manufacturer meant the total re-write of all programs and frequently the
reconstruction of all data files. With the time required commonly measured in
programmer years and skilled programmers commanding wages approaching $100 per
hour, the appeal of a re-write was small; however, the economic motivation to
migrate from tradition proprietary mini and mainframe computers continues to
grow rapidly.
Currently available PCs, micro and super micro computers, workstations and
networks have become vastly less expensive to acquire and maintain while
offering higher (frequently much higher) performance. Available from numerous
sources, including the traditional large manufacturers, these systems offer an
"open systems" approach. That is to say, they support a series of common
operating systems, MS-DOS, UNIX, OS/2 and Novell. Multiple manufacturers
providing essentially the same products have resulted in ever faster and less
expensive computer hardware systems. For the most part, COBOL programs written
in proprietary dialects cannot run on these attractive systems without expensive
and time consuming re-write of COBOL Migration Products.
COBOL MIGRATION PRODUCTS
With the acquisition of Envyr Corp. in 1988, the Company introduced its
first software product. This product, a combined hardware and software solution
called ICHost, permitted programs written in Data General's proprietary
Interactive COBOL to run on inexpensive MS-DOS PCs without any conversion or re-
write. A $10,000 PC could and did replace a $250,000 minicomputer. Often, the PC
ran substantially faster. Furthermore, the transformation could be achieved in a
single day. Over time, ICHost became a software only product, was expanded to
the additional open systems operating environments of UNIX and Novell, was
enhanced with additional development utilities, enriched with broad selection of
additional features and a compiler and debugger, all designed to provide more
appeal to the software developer.
UNIQUE CAPABILITY
The Company's ICHost software, when installed on a single PC running the
popular MS-DOS operating system from Microsoft, will permit up to 129
individuals to simultaneously employ programs written in COBOL on inexpensive
"dumb" terminals connected to the PC via three wire serial lines. This
capability is particularly attractive where small multi-user computer systems
are appropriate and simplicity, reliability and the lowest cost are essential.
In 1992 the Company concluded an arrangement with Data General Corp.
("D.G.") to acquire the Interactive COBOL name, source code development and
support rights. In turn, the Company committed to
14
<PAGE> 15
develop a version of ICHost for D.G.'s proprietary AOS/VS operating system and
to support D.G.'s open systems product offerings. Under terms of the agreement,
in April 1994, D.G. became a distributor of the Company's ICHost product, which
was renamed Interactive COBOL 2.
In the first quarter of 1995, the Company released another COBOL product to
address a second heretofore proprietary COBOL opportunity that exists within
D.G.'s customer base, specifically a product called VS COBOL with INFOS. Just as
the name implies, this language consists of two separate products, VS COBOL, a
COBOL language similar to, but different from, Interactive COBOL and an
extremely unique data base architecture called INFOS. Both are, as indicated,
unique to D.G. minicomputers, frequently large proprietary M.V. systems. There
is no easy or reasonable method to migrate programs and data from these systems
to any higher performance and/or less expensive environment. The Company
provides a software vehicle (called an emulation) whereby programs written in VS
COBOL will easily transfer to inexpensive high performance systems available
from numerous manufacturers. For the INFOS portion of the conversion, the
Company constructs its software to interface with INFOS emulation products which
have been announced by two other firms.
In the market for COBOL languages that are not specific to a particular
hardware manufacturer, there are numerous products loosely characterized by
being either fast or portable. Portability refers to the ease with which
programs written in a particular vendors COBOL can be moved between dissimilar
computer systems. Typically, portable COBOLs are slow performers and fast COBOLs
are difficult to move. Egan Systems' core COBOL technology is both portable and
fast. The Company intends to introduce a broad market version of its Interactive
COBOL which will offer a unique combination of speed and mobility.
In March of 1994, the Company entered into an agreement with Monarch
Software, a software firm based in Raleigh, North Carolina. Under terms of the
agreement, the Company acquired a five year exclusive license to the source code
for an E-mail product called OEO, or Open Electronic Office. This product
emulates Data General's popular but proprietary CEO software, but, unlike CEO,
will run an open system computers. The rights to any improvements, enhancements
and derivative software created by the Company for this source code remain the
property of the Company. The Company paid Monarch Software $75,000 for this
exclusive license and granted Monarch Software exclusive distribution rights for
an equal period.
On March 9, 1995, the Company sold the rights and license to the OEO
product to Transoft Ltd., a U.K. based software firm for $100,000 and additional
discounts on the purchase of certain software products from Transoft. The
Company has been granted distribution rights to OEO by Transoft.
ANALYSIS OF CUSTOMERS
The Company has always focused its sales on current or prior users of Data
General hardware and software and most particularly on a category of customer
known as a reseller or VAR. Resellers create programs which are sold, modified,
improved and sold again. In general they purchase multiple copies of COBOL every
year and require a level of ongoing support that decreases with time, a
consideration of some import given the need to devote valuable programmer skills
to new products and features. The Company deals directly with approximately 70
resellers and indirectly through distribution with another 40.
The Company also engages in the business as a designer and supplier of
COBOL language products used by computer programmers to create computer programs
or solutions. One particular feature of the Company's current COBOL computer
product offering is uniquely suited to adaptation and incorporation into a
mechanism to reduce greatly the programmer's labor involved in the year 2000 or
millennium solution.
The Company enjoyed 28% of its sales total in 1996 to and through one
company, Gerry Manning & Associates, that functions as a distributor for the
Company.
The Company's software is in use in North and South America, Europe,
Africa, Asia and Australia.
Much of the Company's existing business is with firms which at one time or
another enjoyed a relationship with Data General Corp. and employed one or more
versions of the Data General's COBOL products. In providing an alternative to
D.G.'s proprietary products, the Company was able to gain customers
15
<PAGE> 16
that had been Data General's but also, by the quality of Egan's product
offerings, to make D.G. a distributor of one of the Company's products,
Interactive COBOL, and in December of 1996 to become an Accredited Service
Provider to D.G. for the Company's VX COBOL product. Under terms of this
agreement, Data General will in return for a commission, market Egan's VX
product and migration skills to a portion of D.G.'s customer base. While no
contracts have been awarded under this agreement to date, there are already bids
outstanding valued in the hundreds of thousands of dollars.
NEW PRODUCTS
In 1996 the Company introduced new features into its traditional customer
base enhanced versions of its Interactive COBOL (ICOBOL) product, and Open Data
Base Convention (ODBC), a new Terminal Emulation Product (ICDGTERM) and a
support product called Watch. ODBC allows PC products like Crystal Report and
Microsoft ACCESS to read and extract Data contained in ICOBOL's ISAM data files,
for the purpose of creating ad hoc reports, etc. ICDGTERM inexpensively allows a
PC to emulate a variety of proprietary terminals. WATCH allows supervisory or
support individuals to view and even take control of a terminal operated
distantly from the viewer for the purpose of instruction or correction. The
Company believes that continual product improvement coupled with appropriate
accessory products are necessary to retain existing customers and gain new ones.
In June of 1996, the Company announced and provided preliminary
specifications for versions of ICOBOL created to run in native mode on Windows
'95 and Window NT. In addition, the Company announced that, with the acquisition
and incorporation of technology from Flexus International Corp. of Bangor, PA,
user of traditionally character based ICOBOL will be able to create Graphical
User Interface (GUI) screens not unlike those common to PC based Windows
programs for existing ICOBOL programs. Egan Systems will pay royalties to Flexus
for all Flexus screen development and runtime licenses the Company sells. These
new products have been available for evaluation by prospective customers since
December of 1996 and were released for sale and delivery in late May of 1997.
The Company has posted a web site at www.icobol.com where existing
customers can usefully obtain the latest release of all products for which they
are licensed and others interested in the Company can obtain product and pricing
information. All the Company's products are copyrighted.
NEW OPPORTUNITIES
The Company for the last ten years has also been engaged in the development
activity related to the business as a designer and supplier of COBOL language
products used by computer programmers to create computer programs or solutions.
One particular feature of the Company's current COBOL computer product offering
uniquely suited to adoption and incorporation into a mechanism to reduce greatly
the programmer's labor involved in the year 2000 or millennium solution.
In response to a 1959 request from the Department of Defense for a common
business computer language, in April of 1960 initial specification for a new
programming language called COBOL (Common Business Oriented Language) was
released and is referred to as COBOL-60. In January of 1963, the American
National Standards Institute met to create COBOL standards and in 1968 released
ANSI COBOL-68. Subsequently ANSI-74 and ANSI-85 standards were released.
COBOL was and is the computer language of business and government. It is
employed world wide by hundreds of thousands of organizations. According to
International Data Corp. there are some 180 billion lines of COBOL code in use.
In 1994, 56% of all new multi-user programs were written in COBOL and virtually
every mainframe computer in the world employs it. And on New Years Day, the year
2000, it may all well crash.
The problem occurs because of COBOL's long history. In the 1960's, 70's and
80's computer memory and disk storage was very expensive and limited. Efforts
were made, therefore, to minimize the size of computer code wherever possible.
On common mechanism employed was to truncate a date descriptor to six characters
(mmddyy) instead of the full eight (mmddyyyy). This saved two characters and
really was
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<PAGE> 17
worthwhile, given the frequency with which the date occurs in programs and data
of all types. The computer simply assumed the preface 19 in all year
descriptions.
Now move forward to January 1, 2000. The computer's internal clock
registers the date change and the computer's software starts another days' work
in the year 00. That is, 1900. And therein lies the problem.
Correcting the problem is superficially simple and straightforward. Locate
and change every deficient date descriptor in every line of source code in every
COBOL program an organization's computer system(s) employ. Find every instance
where a recognized date descriptor modifies or is modified by an unknown date
descriptor. Make the changes without damaging the program. Be sure to find and
correct every one, because if one is overlooked, the consequences might be very
serious. An organization's source code may contain only one or two million lines
of code or, as is reported for Lockheed, 150 million lines of code.
The problem is one of magnitude, compounded by the fact that by definition
many, even most, of the programs with the Year 2K problem were written years
ago. Their authors have departed and un- or under-documented code was viewed as
job security.
Egan Systems, Inc. has been providing an analysis tool with every copy of
its compiler technology shipped since 1991. The Company believes that this tool,
in substantially modified form, can provide the user with a mechanism to
identify accurately, locate and characterize every deficient date descriptor in
a set of source codes, regardless of size. With this information, additional
tools can be created to facilitate appropriate modification of the sources on a
manual basis and, in some cases, on an automated basis. Additionally, it is
possible that certain utilities already possessed by the Company may provide one
method to address the need to modify any data fields that require correction.
Because the Company is skilled in COBOL and possesses certain technology
that the Company believes will be useful in addressing this very substantial
opportunity and because the Company can greatly benefit from the increased sales
and recognition such a product family will generate, Egan Systems is devoting
substantial resources to the development of the aforementioned tools.
The Company began shipping its Year 2K tool suite in the third quarter of
1997.
Various entities report that there are at least 200 companies world wide
addressing at least some aspect of the Y2K opportunity, many, if not most of
which, are larger than Egan Systems, Inc. Far fewer, however, are engaged in the
development and support of the COBOL language.
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<PAGE> 18
INVENTORY, SUPPLIES AND MANUFACTURING
The Company maintains sufficient quantities of material on hand to satisfy
normal shipping requirements. The Company is not forced to rely on any single
vendor or group of vendors to satisfy its materials requirements.
COMPETITION
The computer software industry is very highly competitive and populated by many
large and medium size companies and subject to rather rapid technological
advance. There is no assurance that the Company will continue to grow or even
to maintain a competitive position. The Company will continue to seek to
develop successful products that address market niches that provide appropriate
opportunity but are small enough to avoid determined penetration by larger,
better funded competitors.
INTELLECTUAL PROPERTY
All of the Company's products and source code is protected by copyright.
Furthermore all delivered executable code for MS-DOS, Novell and the various
Unix versions that execute on systems employing Intel or Intel cloned
processors is protected from illicit duplication by the requirement for the
presence of a unique mechanical security device available only from the
Company. This type of protection has been extended to all categories of Unix
systems with the introduction of Interactive COBOL in April, 1994.
RESEARCH AND DEVELOPMENT EXPENDITURES
For the years ended December 31, 1996 and 1995, research and development
expenditures amounted to approximately $587,000 and $622,000, of which
approximately $240,000 and $201,000 was capitalized as of December 31, 1996 and
December 31, 1995, respectively.
EMPLOYEES
Egan Systems has 7 full time employees, 5 of which are engaged in software
development and 2 involved in sales and administration.
PROPERTIES
Egan Systems leases part of a building at 1501 Lincoln Avenue, Holbrook, New
York, containing approximately 1,250 square feet, of which approximately 800
square feet are used for executive and clerical offices and production and the
remaining 450 square feet is used for warehousing, shipping and receiving. The
lease requires monthly rent payments of $580 and expires on October 31, 1997.
The Company also occupies a part of a building at 4904 Waters Edge Drive,
Raleigh, North Carolina containing 2,000 square feet used for research and
product development. The lease expires on January 31, 2000, and requires annual
payments of approximately $35,000. During the year ended December 31, 1996, the
Company paid approximately $41,000 for the rental of properties.
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<PAGE> 19
MANAGEMENT
OFFICERS AND DIRECTORS
The Executive Officers and Directors of the Company are as follows.
<TABLE>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Edward J. Egan............................ 57 Director, Chairman, President, Chief
Executive Officer, and Treasurer
Ralph Jordan.............................. 45 Director, President of Envyr Corp.
Subsidiary
Barbara Jean Schultz...................... 46 Director and Secretary
Jack Laskin............................... 70 Director
</TABLE>
Edward J. Egan has been a Director, Chairman of the Board, President, Chief
Executive Officer and Treasurer of the Company since March 10, 1987. From 1983
through December 1986, Mr. Egan had been Executive Vice President of Diplomat
Systems Corp, which was a wholly owned subsidiary of Diplomat Electronics Corp.
Prior to that Mr. Egan had been Sales and Marketing Manager for Computer
Products at Schweber Electronics Corp., Westbury, New York.
Barbara Jean Schultz has been a Director, Corporate Secretary of the
Company since March 10, 1987. Prior to that time Ms. Schultz had been an Officer
and Product Manager of Diplomat Systems from 1983 through 1986 and a Product
Manager and Assistant Product Manager at Schweber Electronics.
Ralph Jordan became a Director of the Company when the Company acquired
Envyr Corp., of which Company Mr. Jordan was President, in December 1987. Mr.
Jordan left Data General Corp. where he had headed its Languages Department in
November of 1986 to found Envyr Corp. Mr. Jordan is still President of the
Company's Envyr subsidiary, which is in the process of being absorbed into the
Company.
Jack Larkin has been a Director of the Company since its inception in March
of 1987. Prior to his retirement in 1986, Mr. Larkin was President of Diplomat
Electronics Corp., from 1983 through 1986 and Vice President of Marketing at
Schweber Electronics until 1983.
Each Director is elected by the Stockholders at the Annual Meeting of
Shareholders and holds office until the next Annual Meeting of Shareholders.
EXECUTIVE COMPENSATION
The Company, pursuant to oral agreements, has agreed to pay its Chairman of
the Board, President, Chief Executive Officer and Treasurer and its Secretary,
each of whom is also a Director of the Company. The Company has no written
employment agreements.
Compensation of Edward J. Egan and Barbara Jean Schultz for the year ended
December 31, 1996 amounted to approximately $90,000 and $41,000, respectively.
No other member of Management received any compensation from the Company.
19
<PAGE> 20
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of September 9, 1997
with respect to Shares of Common Stock of the Company beneficially owned by each
person known by the Company to beneficially own more than five percent of the
shares of outstanding Common Stock, by each Director of the Company, by each
Executive Officer of the Company and by all Directors and Officers as a group.
<TABLE>
AMOUNT AND
PERCENT OF
BENEFICIAL PERCENT OR
OWNERSHIP OF CLASS
NAME AND ADDRESS ------------ -------------
OF BENEFICIAL OWNER(1)(2)(3) COMMON STOCK %
- ---------------------------------------------------- ------------ -------------
<S> <C> <C>
Edward J. Egan...................................... 1,600,000 12.74%
Director, Chairman of the Board,
President, Chief Executive
Officer and Treasurer
Ralph Jordan........................................ 490,000(3) 3.75%
Director and President
Envyr Corporation
Barbara Jean Schultz................................ 200,000(4) 1.56%
Director and Secretary
Jack Larkin......................................... 370,000 2.86%
Director
All Directors and Officers as a group (4 persons)... 2,660,000(5) 20.91%
</TABLE>
- ---------------
(1) Unless otherwise noted, the addresses of all persons listed above are in
care of the Company.
(2) Each of the persons named in the above table disclaims beneficial ownership
of the Shares of the Company's Common Stock and the Warrants owned by such
person's spouse or by his or her children.
(3) Includes warrants to purchase 400,000 shares currently exercisable at $.25
per share.
(4) Includes warrants to purchase 200,000 shares currently exercisable at $.25
per share.
(5) Includes the 600,000 currently exercisable warrants referred in (3) and (4)
above.
Each exercisable Warrant entitles the Warrant Holder, on exercise and
payment of the exercise price to the Company, to receive one Share of the
Company's restricted Common Stock. These Warrants all expire on December 31,
1999.
A currently exercisable Warrant is one which is exercisable within 60 days
from the date hereof.
The percentage calculation for each of the above named persons is based
upon 12,557,000 authorized Shares of the Company's Common Stock outstanding as
of October 16, 1997, plus the number of the Shares of the Common Stock of the
Company's currently issuable upon exercise of the Warrants held by the above
named persons.
20
<PAGE> 21
SELLING SHAREHOLDERS
An aggregate of up to 1,500,000 Shares of the Company's Common Stock, par
value $.05 cents per share, may be offered by Warrant Holders who had previously
been granted registration rights by the Company and who, upon exercise of their
respective Warrants and the payment to the Company of the Warrant exercise
prices, will be entitled to receive the 1,500,000 Shares of the Company's Common
Stock offered herein by this Prospectus.
The following table sets forth certain information with respect to thirteen
persons or entities for whom the Company is registering for resale to the
public, either the Shares of the Company's Common Stock acquired by the exercise
of the 1,500,000 Warrants or the 1,500,000 Warrants which such persons or
entities own.
The following table reflects such person's or entities' ownership as of
July 1, 1997. The exercise price of the Warrants is $.375 per Share of Common
Stock. The Company could receive $562,500, if and when all
21
<PAGE> 22
these Warrants are exercised, but the Company will not receive any additional
funds from the sale of the Common Stock or from the sales of the Warrants unless
the Warrants are exercised.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF NUMBER TO BE
BENEFICIAL MAXIMUM OWNED IF PERCENT OF
OWNERSHIP OF PERCENT OF NUMBER TO MAXIMUM IS CLASS
NAME OF WARRANT HOLDERS(1) WARRANTS(2)(3) CLASS(2) BE SOLD SOLD AFTER SALE
- --------------------------------------- -------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Hugh O'Neill........................... 100,000 * 100,000 -0- -0-
3550 Lander Road
Cleveland, OH 44123
Tax ID ###-##-####
Vijay Khanchandam &.................... 200,000 1.6 % 200,000 -0- -0-
Manjeeta Khanchandani JT7EN
6 Cummings Road
Monmouth Junction, NJ 08852
Tax ID ###-##-#### ###-##-####
Alvin Katz............................. 100,000 * 100,000 -0- -0-
19674 Waters End Dr # 1003
Boca Raton FL 33434
Tax ID ###-##-####
Lawrence 0. Harjehausen Ttee........... 100,000 * 100,000 -0- -0-
U/A Dated 7/19/89
Lawrence 0 Harjehausen
Revocable Trust
9798 Dogwood Ave
Palm Beach Gardens, FL 33410
Tax ID ###-##-####
Bruce C. Barber........................ 100,000 * 100,000 -0- -0-
6525 Windsor Dr
Parkland, FL 33067
Tax ID ###-##-####
Steven N. Bronson...................... 100,000 * 100,000 -0- -0-
2101 W Commercial Blvd #1500
Fort Lauderdale, FL 33309
Eric R. Elliot......................... 100,000 * 100,000 -0- -0-
3101 W Commercial Blvd #1500
Ft. Lauderdale, FL 33309
Tax ID ###-##-####
George C. Barber....................... 100,000 * 100,000 -0- -0-
2808 Beach Drive
Tampa, FL 33629
Tax ID ###-##-####
J. Billet B V.......................... 200,000 1.6 % 200,000 -0- -0-
Wassenaarseweg 141
2596 CP Den Haag
The Netherlands
Tax ID ###-##-#### -- Holland
The Mark Vanlandingham &............... 100,000 * 100,000 -0- -0-
Sheryl M. Vanlandingham
Revocable Trust
29 Delamesa East
Irvine, CA 92720
Tax ID ###-##-#### ###-##-####
Vansan Corporation..................... 100,000 * 100,000 -0- -0-
16735 East Johnson Dr
Industry, CA 91745
Tax ID 95-269-4885
</TABLE>
22
<PAGE> 23
<TABLE>
AMOUNT AND
NATURE OF NUMBER TO BE
BENEFICIAL MAXIMUM OWNED IF PERCENT OF
OWNERSHIP OF PERCENT OF NUMBER TO MAXIMUM IS CLASS
NAME OF WARRANT HOLDERS(1) WARRANTS(2)(3) CLASS(2) BE SOLD SOLD AFTER SALE
- --------------------------------------- ------- ---- ------- --- ---
<S> <C> <C> <C> <C> <C>
The Stockton-Fasel Trust............... 100,000 * 100,000 -0- -0-
1337 Bellwood CT
Los Altos, CA 94024
Tax ID 545-6-8436
Ericson Manufacturing, Inc............. 100,000 * 100,000 -0- -0-
P.O. Box 890
Willoughby, OH 44044
Tax ID 34-068-0690
Total............................. 1,500,000 1,500,000
None of the above named persons has had any relationship with the registrant or
any of its predecessors or affiliates at any time in the past.
- ---------------
</TABLE>
Footnotes
* Represents less than one percent.
(1) Represents number of Warrants of the Company's Common Stock beneficially
owned by such person.
(2) All Warrants are currently exercisable and "Percent of Class" treats as
outstanding Shares issuable upon exercise of the Warrants.
(3) These Warrants are part of an aggregate of 1,500,000 Shares of Common Stock
purchased from the Company at $.25 per Warrant in a 1994 private placement
and are exercisable at $.375 per share.
PLAN OF DISTRIBUTION
The Selling Shareholders may exercise their respective Warrants by
paying the Company the exercise price of their personally owned Warrants and
thus acquiring the 1,500,000 Shares of the Company's Common Stock and then
selling such Shares pursuant to this Prospectus to the public.
The Selling Shareholders may sell the Warrants or Shares (the
"Securities"), being offered hereby: (i) through dealers or in ordinary brokers'
transactions, in the over-the-counter market or otherwise; (ii) at the market or
through marketmakers or into an existing market for the securities; or (iii) in
other ways not involving marketmakers or established trading markets, including
direct sales to purchasers or effective through agents, or (iv) in combinations
of any of such methods of sale. The Securities will be sold at market prices
prevailing at the time of sale or at negotiated prices.
If a dealer is utilized in the sale of the Securities in respect of which
the Prospectus is delivered, the Selling Security Holders will sell such
Securities to the dealer, as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale.
Sales of Securities "at the market" and not at a final price, which are
made into an existing market for the Securities, will be made by the Selling
Security Holders to or through a marketmaker, acting as principal or as agent.
Other sales may be made, directly or through an agent, to purchasers outside
existing trading markets. A selling broker may act as agent or may acquire the
Securities or interests therein as principal or pledgee and may, from time to
time, effect distributions of such Securities and interests.
The Securities offered hereby are eligible for sale only in certain states,
and, in some of those states, may be offered or sold only to "institutional
investors", as defined under applicable state securities law. No sales or
distributions, other than as described herein, may be effected after this
Prospectus shall have been appropriately amended or supplemented.
23
<PAGE> 24
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 30,000,000 Shares
of Common Stock, par value $.05 per Share, of which 12,557,000 shares were
issued and outstanding as of October 16, 1997. The holders of Common Stock (i)
have equal ratable rights to dividends from funds legally available therefore,
when, as and if declared from funds legally available therefore, when, as and if
declared by the Board of Directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; and (iii) do not have preemptive, subscription or
conversion rights and there are no redemption or sinking fund provisions
applicable thereto. All Shares of Common Stock now outstanding are fully paid
for and non-assessable and all Shares of Common Stock. which are the subject of
this Offering, when issued, will be fully paid for and non-assessable.
The holders of Shares of Common Stock of the Company are entitled to one
vote per Share for each Share held by them and do not have cumulative voting
rights. Holders of record of Shares of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of legally
available funds. Upon any liquidation, dissolution or winding up of the Company,
holders of Shares of Common Stock are entitled to share pro rata in any
distribution to the Shareholders. There are no preemptive or conversion rights
and no provisions for redemption, purchase, cancellation, surrender or mixing or
purchase fends. All of the issued and outstanding Shares of Common Stock of the
Company are fully paid and non-assessable and duly authorized.
NON-CUMULATIVE VOTING
The holders of Shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
Shares, voting for the election of Directors, can elect all of the Directors to
be elected, if they so choose. In such event the holders of the remaining Shares
will not be able to elect any of the Company's Directors.
WARRANTS
The Company has 8,725,000 Warrants outstanding, each of which entitles
the holder to purchase one share of Common Stock at prices ranging from $.25
cents a share to $.50 cents per share and which expire on December 31, 1999.
These Warrants do not include the 1,500,000 Warrants included in the
Registration Statement of which this Prospectus is a part. No fractional shares
of Common Stock will be issued upon the exercise of the Warrants and no cash
will be paid by the Company in lieu thereof. The holders of the Warrants do not
have any of the rights or privileges of shareholders of the Company prior to the
exercise of the Warrants.
The exercise price and number of shares of Common Stock issuable on
exercise of the Warrants are subject to adjustment in certain circumstances,
including the issuance of a stock dividend or a recapitalization,
reorganization, merger or consolidation of the Company.
TRANSFER AGENT
The transfer agent for the Common Stock and Warrants of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
24
<PAGE> 25
REPORTS TO SECURITY HOLDERS
The Company intends to send to its Shareholders, copies of its Annual
Report on Form 10KSB, which report contains audited financial statements but
does not intend to send its interim quarterly reports to its Security Holders.
Upon Request, the Company will provide copies to its Shareholders of its
Quarterly Reports on Form 10Q-SB filed with the Securities and Exchange
Commission. There were no matters submitted to a vote of Shareholders through
the solicitation of proxies or otherwise during the calendar year 1996.
ELIMINATION OF MONETARY LIABILITY FOR OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation also incorporates certain
provisions permitted under the General Corporation Law of Delaware relating to
the liability of Directors. The provisions eliminate a Director's liability for
monetary damages for a breach of a fiduciary duty, including gross negligence,
except in circumstances involving certain wrongful acts, such as a breach of a
Director's duty of loyalty or acts of omissions which involve intentional
misconduct or a summary violation of law. These provision do not eliminate a
Director's duty of care nor do they prevent recourse against Directors through
equitable remedies such as injunctive relief. Moreover, the provisions do not
apply to claims against a Director for violations of certain laws, including
Federal Securities Laws.
Respecting indemnification of Officers and Directors, as permitted by the
Delaware General Corporation Law, the Company shall, to the fullest extent
permitted by the Delaware General Corporation Law, as the same shall be added
and supplemented, indemnify and hold harmless any and all persons whom it shall
have power to indemnify under such Section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by such
Section, and the indemnification provided for therein shall not be deemed
exclusive of any other right, to which any persons may be entitled under any
By-Law, Resolution of Shareholders, Resolution of Directors, agreement or
otherwise, as permitted by said Articles, as to action in any capacity in which
he or she served at the request of the Company. These provisions may have the
practical effect in certain cases of eliminating the ability of Shareholders to
collect monetary damages from Directors. The Company believes that these
provisions will assist the Company in attracting or retaining qualified
individuals to serve as Directors. Insofar as indemnification for liabilities
under the Securities Act may be permitted pursuant to the above-described
provisions or otherwise to Directors, Officers and Controlling Persons of the
Company, the Company has been advised that, in the opinion of the SEC, that
indemnification is against public policy expressed in the Securities Act, and is
therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALES
In addition to the 1,500,000 Shares of Common Stock issued upon exercise of
the 1,500,000 Warrants covered by this Prospectus, an aggregate of an additional
1,820,000 Shares issuable on exercise of a comparable number of Warrants issued
to certain Employees and Directors, exercised at .25 cents per Share and an
aggregate of approximately 5,360,000 Shares of Common Stock issued in private
placements, or issuable upon conversion of loans or upon exercise of Stock
Warrants, are "Restricted Securities", as those terms are defined under Rule
144, promulgated under the Securities Act of 1933, as amended. In general, under
Rule 144, as currently in effect, subject to the satisfaction of certain other
conditions of Rule 144, a person, including an affiliate of the Company (or
persons whose shares are aggregated), who has beneficially owned "Restricted
Securities" of the Company for at least two years is entitled to sell, within
any three month period, a number of Shares that does not exceed the greater of
1% of the total number of issued and outstanding Shares of the same class or, if
the Common Stock is quoted on NASDAQ, the average weekly volume of trading
during the four calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned Restricted Shares of Common Stock for at
least two years is entitled to sell all his personally owned Shares under Rule
144, without regard to any of the limitations described above. As noted above,
1,500,000 Shares of Common Stock are included in this Prospectus, as well as
1,500,000 Warrants to acquire, upon exercise and payment to the Company of the
Exercise Price, 1,500,000 Shares of the Company's Common Stock. The Warrant
Holders who own these 1,500,000 Warrants may exercise their Warrants and acquire
the 1,500,000 Shares of Common Stock or they may sell their respectively held
and owned Warrants.
25
<PAGE> 26
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-Laws of the Company provide for indemnification of Directors and
Officers. A Section of the Delaware Revised Statutes contains provisions
entitling Directors and Officers of the Company to indemnification from
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorney's fees, as the result of an action or proceeding in which they may be
involved by reason of being or having been a Director or Officer of the Company,
provided said Director or Officer acted in good faith.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to Directors, Officers or persons
controlling the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
Officer or Controlling Person of the Registrant in the successful defense of any
action, suit or proceeding) is assessed by such Director, Officer or Controlling
Person in connection with the Securities being registered, the Registrant will,
unless in the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue by that court.
LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
LEGAL MATTERS
The validity of the Securities offered hereby, as well as other legal
matters, will be passed upon by James C. Sargent, Esq., General Counsel of Egan
Systems, Inc. 90 Broad Street, New York, New York 10004.
EXPERTS
The consolidated financial statements for the years ended as of December
31, 1996 and 1995, included in this Registration Statement, of which this
Prospectus is a part, have been so included in reliance on the report of
Patrusky, Mintz & Semel, Independent Accountants, given on the authority of said
Firm, as experts, in auditing and accounting.
FURTHER INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission"), 450 Fifth Street, N.W., Washington, D.C.
20549, on Form SB-2 under that Act with respect to the Securities offered
hereby. This Prospectus, as permitted by the Rules and Regulations of the
Commission, omits certain information contained in the Registration Statement.
For further information, reference is made to the Registration Statement and to
the Exhibits filed therewith. Statements contained in this Prospectus, as to the
contents of any contract or other documents referred to, are not necessarily
complete and such contract or statement needs to be qualified in all respects by
the provisions of the Exhibits. The Registration Statement may be inspected by
anyone, without charge, at the Commission, and copies of all or any part thereof
may be obtained from the Commission's principal office, in Washington, D.C.,
upon payment of the Commission's charge for copying.
26
<PAGE> 27
EGAN SYSTEMS, INC. AND SUBSIDIARY
Index To Financial Statements
<TABLE>
<CAPTION>
Page No.
<S> <C>
Financial Statements For the Six Months Ended
June 30, 1997 and 1996
Condensed consolidated balance sheets as of
June 30, 1997 (unaudited) and December 31, 1996 F-2
Condensed consolidated statements of income (unaudited) for the
six months ended June 30, 1997 and 1996 F-3
Condensed consolidated statements of cash flows (unaudited) for the
six months ended June 30, 1997 and 1996 F-4
Notes to condensed consolidated financial statements (unaudited) F-5
Financial Statements For the Three Years Ended December 31, 1996
Report of Independent Auditors F-7
Consolidated balance sheets at December 31, 1996 and 1995 F-8
Consolidated statements of operations, years ended
December 31, 1996, 1995 and 1994 F-9
Consolidated statements of changes in stockholders' equity,
years ended December 31, 1996, 1995 and 1994 F-10
Consolidated statements of cash flow, years ended
December 31, 1996, 1995 and 1994 F-11
Notes to consolidated financial statements,
December 31, 1996, 1995 and 1994 F-12
</TABLE>
F-1
<PAGE> 28
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
----------- --------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 668,932 $ 37,298
Accounts receivable 125,697 85,358
Inventory 16,426 12,856
Other current assets 4,509 5,894
-------------- --------------
Total Current Assets 815,564 141,406
--------------- --------------
Property and Equipment - net 85,927 61,543
-------------- --------------
Other Assets
Computer software development costs - net 480,379 435,401
Security deposits 3,126 3,126
-------------- ---------------
Total Other Assets 483,505 438,527
-------------- ---------------
Total Assets $ 1,384,996 $ 641,476
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable $ 75,750 $ 75,750
Accounts payable 4,557 8,352
Payroll taxes payable 7,050 5,013
Accrued expenses and other current liabilities 24,479 27,290
Due to officer 7,156 7,156
-------------- --------------
Total Current Liabilities 118,992 123,561
Long-term debt - convertible notes payable 130,000 -
-------------- --------------
Total Liabilities 248,992 123,561
-------------- --------------
Stockholders' Equity
Common stock - $.05 par value, shares authorized -
30,000,000 shares, issued and outstanding, 12,005,000 and
10,185,000 in 1997 and 1996 600,250 509,250
Additional paid-in capital 2,406,814 1,912,814
Deficit (1,871,060) (1,904,149)
--------------- --------------
Total Stockholders' Equity 1,136,004 517,915
--------------- --------------
Total Liabilities and Stockholders' Equity $ 1,384,996 $ 641,476
=============== ==============
</TABLE>
The condensed consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
F-2
<PAGE> 29
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Net sales $ 476,692 $ 445,457
-------------- --------------
Cost and expenses:
Cost of goods sold 31,885 39,331
Research and development costs 149,601 179,319
Selling, shipping,
general and administrative 128,123 126,629
Interest, net of interest income 2,310 2,462
Depreciation and amortization 131,684 106,790
-------------- --------------
443,603 454,531
-------------- --------------
Net income (loss) $ 33,089 $ (9,074)
============== ==============
Weighted average number of
common shares outstanding 19,875,500 10,185,000
============== ==============
Earnings (loss) per common share:
Primary and fully diluted $ 0.00 $ (0.00)
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE> 30
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 117,681 $ 48,140
--------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (41,884) (10,040)
Computer software development costs (159,163) (112,203)
--------------- --------------
Net cash used in investing activities (201,047) (122,243)
--------------- --------------
Cash flows from financing activities:
Proceeds from exercise of common stock - options 312,500 -
Proceeds from exercise of common stock - warrants 127,500 -
Proceeds from issuance of convertible notes payable 130,000 -
Proceeds from sale of common stock 145,000 -
Due to stockholders - 84,700
--------------- --------------
Net cash provided by financing activities 715,000 84,700
--------------- --------------
Net increase in cash 631,634 10,597
Cash - beginning of period 37,298 8,158
--------------- --------------
Cash - end of period $ 668,932 $ 18,755
=============== ==============
Supplemental cash flows information:
Taxes paid $ 520 $ 470
=============== ==============
Interest paid $ 4,580 $ -
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE> 31
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, 1997 and the results of their
operations and cash flows for the six months ended June 30, 1997 and 1996.
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 notes payable). Primary and fully diluted earnings per common
share also assumed the conversion of the convertible note payable. As of the
date of this report, if the options and warrants were exercised, the total
shares outstanding would amount to 21,950,000 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, 1996.
The results of operations for the six months ended June 30, 1997 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 six months ended June 30, 1997 and 1996, accumulated amortization
amounted to approximately $481,000 and $273,000, and amortization of computer
software development costs charged to operations was approximately $114,000 and
$95,000, respectively.
NOTE 3. INVENTORY:
Inventory, which consists of finished goods, is stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
F-5
<PAGE> 32
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. COMMON STOCK/WARRANTS SALE:
In January 1997, the Company sold 580,000 shares of its $.05 par value common
stock at $.25 per share and granted stock warrants to purchase an additional
800,000 shares of its $.05 par value common stock at $.25 per share, the price
of which was significantly below the market price of the common stock on the
date of sale. The warrants expire in January 2001.
NOTE 5. CONVERTIBLE NOTES PAYABLE:
In January 1997, the Company received $130,000 in exchange for two convertible
notes due January 1, 2002 at 10% interest per annum. The notes are convertible
through January 2002 into 520,000 shares of the Company's $.05 par value common
stock at $.25 per share, the price of which was significantly below the market
price of the common stock on the date of exchange. In connection with the
issuance of one of the convertible notes payable in January 1997, detachable
stock warrants have been issued entitling the holder to purchase 200,000 shares
of the Company's $.05 par value common stock through January 1, 2002. In March
1997, 200,000 of the warrants related to this convertible note payable were
exercised.
NOTE 6. EXERCISE OF STOCK OPTIONS/WARRANTS:
STOCK OPTIONS:
In March and May 1997, a stockholder exercised 350,000 options in each month at
$.375 per share for a total of 700,000 shares of the Company's $.05 par value
common stock.
STOCK WARRANTS:
In March and June 1997, certain warrant holders exercised 100,000 warrants and
240,000 warrants, respectively, at $.375 per share for a total of 340,000
shares of the Company's $.05 par value common stock.
NOTE 7. SUBSEQUENT EVENTS:
In July 1997, 240,000 stock warrants were exercised by the holders at $.375 per
share for 240,000 shares of the Company's $.05 par value common stock.
In July 1997, 312,000 stock options were exercised by the holders at $.25 per
share for 312,000 shares of the Company's $.05 par value common stock.
F-6
<PAGE> 33
[PATRUSKY, MINTZ & SEMEL LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
EGAN SYSTEMS, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of Egan Systems,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for each of the three years ended December 31,
1996, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Egan Systems, Inc.
and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ PATRUSKY, MINTZ & SEMEL
New York, New York
January 31, 1997
F-7
<PAGE> 34
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current Assets
Cash (Note 2) $ 37,298 $ 8,158
Accounts receivable 85,358 89,005
Inventory (Note 2) 12,856 33,716
Other current assets 5,894 5,339
--------------- ---------------
Total Current Assets 141,406 136,218
--------------- ---------------
Property and Equipment (Notes 2 and 3) 61,543 66,828
--------------- ---------------
Other Assets
Computer software development costs - net (Notes 2 and 4) 435,400 383,440
Security deposits 3,126 3,126
--------------- ---------------
Total Other Assets 438,527 386,566
--------------- ---------------
Total Assets $ 641,476 $ 589,612
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt (Note 5) $ 75,750 $ -
Accounts payable 8,352 9,496
Payroll taxes payable 5,013 102,722
Accrued expenses and other current liabilities 27,290 52,184
Due to officer 7,156 7,456
--------------- ---------------
Total Current Liabilities 123,561 171,858
Long-Term Debt (Note 5) - 75,750
--------------- ---------------
Total Liabilities 123,561 247,608
--------------- ---------------
Commitments and Contingencies (Note 6)
Stockholders' Equity
Common stock - $0.05 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 1,912,814 1,752,814
Deficit (1,904,149) (1,920,060)
--------------- ---------------
Total Stockholders' Equity 517,915 342,004
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 641,476 $ 589,612
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 35
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 1) $ 854,791 $ 770,092 $ 888,694
-------------- -------------- --------------
Cost and expenses:
Cost of goods sold 75,974 65,888 74,532
Selling, shipping, general and
administrative expenses 534,645 640,745 653,654
Interest expense 9,976 14,372 13,042
Depreciation and amortization 218,285 151,957 84,673
Loss on sale of license - 4,475 -
-------------- -------------- --------------
838,880 877,437 825,901
-------------- -------------- --------------
Income (loss) before provision for income taxes 15,911 (107,345) 62,793
Provision for income taxes (Notes 2 and 10) - - 2,735
-------------- -------------- --------------
Net income (loss) $ 15,911 $ (107,345) $ 60,058
============== ============== ==============
Weighted average number of
common shares outstanding (Notes 2 and 8) 10,185,000 10,168,333 10,431,756
============== ============== ==============
Net income (loss) per common share (Note 2)
Primary and fully diluted $ .00 $ (.01) $ .01
============== ============== ==============
Cash dividends per common share None None None
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 36
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Shares Amount Paid-In Capital Deficit Total
------ ------ --------------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1993 6,295,000 $ 314,750 $ 1,161,024 $(1,872,773) $ (396,999)
Sale of stock 1,880,000 94,000 317,290 - 411,290
Stock issuance costs 260,000 13,000 (13,000) - -
Net income for 1994 - - - 60,058 60,058
---------- ----------- ----------- ----------- -----------
Balance
December 31, 1994 8,435,000 421,750 1,465,314 (1,812,715) 74,349
Sale of stock 100,000 5,000 20,000 - 25,000
Conversion of note payable 1,400,000 70,000 280,000 - 350,000
Stock issuance costs 250,000 12,500 (12,500) - -
Net loss for 1995 - - - (107,345) (107,345)
---------- ----------- ----------- ----------- -----------
Balance
December 31, 1995 10,185,000 509,250 1,752,814 (1,920,060) 342,004
Stock options - - 160,000 - 160,000
Net income for 1996 - - - 15,911 15,911
---------- ----------- ----------- ----------- -----------
Balance December 31, 1996 10,185,000 $ 509,250 $ 1,912,814 $(1,904,149) $ 517,915
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 37
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 15,911 $ (107,345) $ 60,058
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 218,285 151,957 84,673
Loss on sale of license - 4,475 -
Accounts receivable 3,647 48,589 (28,106)
Inventory 20,860 12,793 (36,221)
Other current assets (555) 3,874 (5,425)
Security deposits - - 2,637
Accounts payable (1,144) (4,764) 5,947
Payroll taxes payable (97,709) 16,012 56,073
Accrued expenses and other
current liabilities (24,896) 18,005 (27,764)
-------------- ------------- --------------
Net cash provided by operating
activities 134,399 143,596 111,872
-------------- ------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (25,419) (19,710) (40,882)
Computer software development costs (239,540) (200,586) (204,483)
Purchase of license - - (75,044)
Proceeds from sale of license - 100,000 -
-------------- ------------- --------------
Net cash used in investing activities (264,959) (120,296) (320,409)
-------------- ------------- --------------
Cash flows from financing activities:
Proceeds from sale of stock options 160,000 - -
Proceeds from sale of common stock - 25,000 411,290
Repayment of long-term debt - (42,542) (195,489)
Loans from officer (300) (2,100) (12,644)
-------------- ------------- --------------
Net cash provided (used in) by financing
activities 159,700 (15,442) 203,157
-------------- ------------- --------------
Net increase (decrease) in cash 29,140 7,858 (5,380)
Cash - beginning of year 8,158 300 5,680
-------------- ------------- --------------
Cash - end of year $ 37,298 $ 8,158 $ 300
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 38
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. GENERAL BUSINESS DESCRIPTION/CONCENTRATION OF CREDIT RISK:
The Company develops and markets proprietary computer software to programmers,
resellers and computer users. The Company's sales are made on credit to
customers who are based in the United States of America. One customer, a
domestic distributor, comprised approximately 28% and 22% of the Company's
sales in 1996 and 1995 and approximately 14% and 21% of the Company's accounts
receivable at December 31, 1996 and December 31, 1995, respectively.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include Egan Systems, Inc. "the Company"
and Envyr Corp., its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH:
Cash includes all cash balances and highly liquid investments with a maturity
or three months or less. The Company maintains its cash in various bank
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
INVENTORY:
Inventory, which consists primarily of finished goods, is stated at the lower
of cost or market. Cost is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets, or in the
case of leasehold improvements, over the life of the lease, if shorter.
NET INCOME PER COMMON SHARE:
Primary and full diluted net income per common share is computed based on the
weighted average number of outstanding common shares and equivalents (stock
options and warrants) plus the shares that would be outstanding assuming
conversion of the convertible notes payable. The number of shares used in the
computations were 10,185,000, 10,168,333 and 10,431,756 in 1996, 1995 and 1994,
respectively.
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 economic life of the products, which is estimated at three years
(Note 4).
F-12
<PAGE> 39
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.):
COMPUTER SOFTWARE DEVELOPMENT COSTS (CONT'D.):
It is reasonably possible that the remaining estimated economic life of the
products can be reduced significantly in the near term as a result of many
factors in the marketplace. As a result, the carrying amount of the
capitalized computer software costs may be reduced materially in the near term.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses.
Actual results could differ from those estimates.
INCOME TAXES:
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes," which requires the use of the liability
method of accounting for income taxes. The liability method measures deferred
income taxes by applying enacted statutory rates in effect at the balance sheet
date to the differences between the tax base of assets and liabilities and
their reported amounts in the financial statements. The resulting deferred tax
asset or liability is adjusted to reflect changes in tax laws as they occur.
Deferred income taxes reflect temporary differences in reporting assets and
liabilities for income tax and financial accounting purposes. These temporary
differences arise from net operating loss carryforwards (Note 10) and the
capitalization of computer software development costs (Note 4).
FINANCIAL INSTRUMENTS:
The Company's significant financial instruments include cash, receivables,
payables and short-term debt for which carrying amounts approximate fair value.
It is not practical to estimate the fair value of the Company's long-term debt.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Office furniture and equipment $ 82,092 $ 78,260
Computer software 54,357 46,183
Computer hardware 86,599 73,186
Leasehold improvements 3,975 3,975
-------------- --------------
227,023 201,604
Accumulated depreciation 165,480 134,776
--------------- --------------
$ 61,543 $ 66,828
============== ==============
</TABLE>
Depreciation expense charged to operations in each of the years ended December
31, 1996, 1995 and 1994 amounted to $30,705, $25,580 and $18,579, respectively.
F-13
<PAGE> 40
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 4. COMPUTER SOFTWARE DEVELOPMENT COSTS:
Computer software development costs consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computer software development costs $ 802,286 $ 562,746
Accumulated amortization 366,886 179,306
--------------- ---------------
$ 435,400 $ 383,440
=============== ===============
</TABLE>
Amortization expense charged to operations in 1996 and 1995 amounted to
$187,580 and $123,477, respectively.
NOTE 5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
6.5% note - due February 1, 1997 (A) $ 75,750 $ 75,750
-------------- --------------
75,750 75,750
Less current maturities 75,750 -
-------------- --------------
$ - $ 75,750
============== ==============
</TABLE>
(A) On February 6, 1994, the Company entered into an agreement to amend the
terms of a $499,750 convertible note, which was to mature April 23, 1995.
Pursuant to this amendment, $350,000 of the convertible note was converted into
1,400,000 shares of the Company's .05 par value common stock at $.25 per share,
with the option to purchase an equal number of additional shares at .375 per
share through February 15, 1999. Additionally, the Company repaid $74,000 of
the note and the balance of the note, $75,750, was modified to a 6.5% interest
bearing note, payable February 1, 1997.
Interest expense charged to operations on the above debt for the years ended
December 31, 1996 and 1995 amounted to $4,924 and $3,758, respectively.
F-14
<PAGE> 41
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
The Company leases office and warehouse facilities under noncancelable
operating leases expiring in February 2000. Minimum future annual rental
payments under these leases as of December 31, 1996, 1997, 1998 and 1999 are
approximately $41,000, $34,000, $36,000 and $6,400 respectively. Rent expenses
charged to operations in the years ended December 31, 1996, 1995 and 1994
amounted to $40,895, $40,324 and $51,994, respectively.
CONTRACTUAL COMMITMENT:
On July 27, 1992 the Company entered into a software development and licensing
agreement with a computer systems manufacturer. Pursuant to the agreement, the
Company received revenue for software support services and the development of
an enhanced source code licensed to the Company by the manufacturer.
In consideration of this license and proprietary rights to the Company, the
Company is obligated to discount to the manufacturer up to $740,000 from future
royalty fees, if any, that would be due from the manufacturer out of future
sales of the enhanced software (Note 13).
NOTE 7. RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged to operations for the
years ended December 31, 1996, 1995 and 1994 were approximately $348,000,
$421,000 and $419,000, respectively.
NOTE 8. STOCK OPTIONS/WARRANTS:
STOCK OPTIONS:
As of December 31, 1996, the Company has granted to the long-term debt note
payable holder options to purchase a total of 1,400,000 shares of the Company's
common stock at $.375 per share (Note 5). The options expire on February 15,
1999. As of December 31, 1996, no options have been exercised.
Pursuant to separate stock options, the Company has granted to six employees
and one director, options to purchase a total of 1,820,000 shares of the
Company's common stock at $.25 per share. Such options expire on December 27,
1999. As of December 31, 1996, no options have been exercised.
STOCK WARRANTS:
At December 31, 1996, the Company had outstanding stock warrants to four third
parties giving them the rights to purchase 2,445,000 shares of the Company's
common stock at prices ranging from $.375 to $.50 per share. The warrants
expire at various dates from March 31, 1999 through May 1, 2001. As of
December 31, 1996, no warrants have been exercised.
F-15
<PAGE> 42
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, AND 1995 AND 1994
NOTE 8. STOCK OPTIONS/WARRANTS (CONT'D):
In 1996, the Company sold stock warrants to certain shareholders for $160,000.
The stock warrants allow the holders to purchase 4,000,000 shares of the
Company's common stock at $.25 per share and expire on September 30, 1999. As
of December 31, 1996, no warrants have been exercised.
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION:
CASH TRANSACTIONS:
During the three years in the period ended December 31, 1996, the Company paid
cash for interest in the amount of $5,052, $12,614 and $11,042 in 1996, 1995
and 1994, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Company paid cash
for corporate income tax payments in the amount of $-0-, $-0- and $6,656,
respectively.
NON-CASH TRANSACTIONS:
During the year ended December 31, 1995, the Company converted $350,000 of its
convertible notes payable into 1,400,000 shares of its $.05 par value common
stock at $.25 per share (Note 5).
NOTE 10. INCOME TAXES:
The components of the deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Noncurrent Noncurrent
---------- ----------
<S> <C> <C>
Total deferred tax asset (Note 2) $ 498,700 $ 606,372
Total deferred tax liability (Note 2) (118,500) (114,649)
Valuation allowance (380,200) (491,723)
---------------- ---------------
Net deferred tax asset (liability) $ - $ -
================ ===============
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1995 and
1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ - $ - $ 2,735
Deferred tax expense 1,050 3,611 16,950
Benefit of net operating loss carryforwards (1,050) (3,611) (16,950)
Net change in valuation allowance - - -
-------------- -------------- --------------
Total $ - $ - $ 2,735
============== ============== ==============
</TABLE>
F-16
<PAGE> 43
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, AND 1995 AND 1994
NOTE 10. INCOME TAXES (CONT'D.):
Reconciliations of the differences between income taxes computed at Federal
statutory rates and consolidated provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at Federal statutory
tax rate $ - $ - $ 21,350
Surtax exemption - - (10,650)
State tax provisions - - 2,735
Benefit of operating loss carryforwards - - (10,700)
-------------- -------------- -------------
Provision for income taxes $ - $ - $ 2,735
============== ============== =============
</TABLE>
As of December 31, 1996, the Company has a net operating loss carryforward
available for Federal and State income tax purpose in the amount of
approximately $2,013,000, expiring from 2002 through 2011.
NOTE 11. LICENSE COSTS:
On March 9, 1995, the Company sold the exclusive software license which it
purchased in March 1994. The license allows the holder to distribute the
software to distributors and end-users. The Company received $40,000 at
closing and two $30,000 non-interest bearing notes payable due in equal
installments on June 7, 1995 and September 5, 1995, respectively. 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 of the software by the Company. The
Company has recognized a loss of approximately $5,000 related to the sale of
the 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.
NOTE 12. SUBSEQUENT EVENTS:
CONTRACTUAL COMMITMENT:
On January 9, 1997, the Company amended its software development and licensing
agreement with a computer systems manufacturer (Note 6) whereby the Company has
granted a license to the manufacturer to use and remarket certain programs
developed by the Company.
COMMON STOCK SALE:
In January 1997, the Company sold 580,000 shares of its $.05 par value common
stock at $.25 per share and granted stock warrants to purchase an additional
800,000 shares of its $.05 par value common stock at $.25 per share, the price
of which was significantly below the market price of the common stock on the
date of sale. The warrants expire in January 2001.
CONVERTIBLE NOTES PAYABLE:
In January 1997, the Company received $130,000 in exchange for two convertible
notes due January 1, 2002 at 10% interest per annum. The notes are convertible
from January 1998 through January 2002 into 520,000 shares of the Company's
$.05 par value common stock at $.25 per share, the price of which was
significantly below the market price of the common stock on the date of
exchange.
F-17
