<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 2-95836-NY
Egan Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3250816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 Lincoln Ave., Holbrook, New York 11741
(Address of principal executive offices)
(516) 588 - 8000
Registrant's telephone number
(Former name, former address and former fiscal year if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
04/22/98 Common Stock 18,646,652
<PAGE> 2
EGAN SYSTEMS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets as of
March 31, 1999 (unaudited) and December 31, 1998 1
Condensed consolidated statements of operations
(unaudited) for the three months ended
March 31, 1999 and 1998 2
Condensed consolidated statements of cash flows
(unaudited) for the three months ended
March 31, 1999 and 1998 3
Notes to condensed consolidated financial statements (unaudited) 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 7
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 8
SIGNATURES 9
EXHIBITS 10 - 11
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash $ 936,398 $ 1,036,429
Accounts receivable 467,246 399,855
Inventory 14,000 18,020
Other current assets and prepaid expenses 153,310 66,525
------------ -----------
Total Current Assets 1,570,954 1,520,829
------------ -----------
Property and Equipment - net 170,435 165,337
------------ -----------
Other Assets
Computer software development costs - net 755,309 713,060
Security deposits 3,126 3,126
------------ -----------
Total Other Assets 758,435 716,186
------------ -----------
Total Assets $ 2,499,824 $ 2,402,352
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accrued expenses and other current liabilities $ 20,826 $ 56,070
------------ -----------
Total Liabilities 20,826 56,070
------------ -----------
Stockholders' Equity
Common stock - $.05 par value, shares authorized -
30,000,000 shares, issued and outstanding, 18,646,652 and
16,335,660 in 1999 and 1998 932,333 932,333
Additional paid-in capital 4,877,201 4,877,201
Deficit (2,968,036) (3,100,752)
------------ -----------
2,841,498 2,708,782
Notes receivable - stock purchase (362,500) (362,500)
------------ -----------
Total Stockholders' Equity 2,478,998 2,346,282
------------ -----------
Total Liabilities and Stockholders' Equity $ 2,499,824 $ 2,402,352
============ ===========
</TABLE>
The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
1
<PAGE> 4
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 651,028 $ 242,061
--------- ---------
Cost and expenses:
Cost of goods sold 160,244 20,542
Research and development costs 89,903 79,021
Selling, shipping,
general and administrative 149,998 153,193
Interest income (1,716) (8,949)
Royalties -- 1,697
Promotion and advertising 27,611 63,463
Interest expense 252 625
Depreciation and amortization 92,020 74,377
--------- ---------
518,312 383,969
--------- ---------
Net income (loss) $ 132,716 $(141,908)
========= =========
Net income (loss) per common share:
Primary $ 0.01 $ (0.01)
========= =========
Fully diluted $ 0.01 $ (0.01)
========= =========
Cash dividends per common share None None
</TABLE>
========= =========
See notes to condensed consolidated financial statements.
2
<PAGE> 5
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 39,337 $(120,237)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (14,723) (30,139)
Computer software development costs (124,644) (86,571)
----------- ---------
Net cash used in investing activities (139,367) (116,710)
----------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock - warrants -- 231,500
----------- ---------
Net cash provided by financing activities -- 231,500
----------- ---------
Net decrease in cash (100,031) (5,447)
Cash - beginning of period 1,036,429 880,438
----------- ---------
Cash - end of period $ 936,398 $ 874,991
=========== =========
Supplemental cash flows information:
Taxes paid $ 252 $ 1,214
=========== =========
Interest paid $ 1,328 $ 1,250
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
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 March 31, 1999 and the results of their
operations and cash flows for the three months ended March 31, 1999 and 1998.
Basic net income per common share is computed based on the weighted average
number of outstanding common shares. The number of shares used in the
computation were 18,646,652 and 16,335,660 in 1999 and 1998, respectively. Fully
diluted net income per common share is computed based on the weighted average
number of outstanding common shares plus the shares that would be outstanding
assuming conversion of the outstanding options and warrants. For purposes of the
fully diluted computations, the number of shares that would be issued from the
exercise of stock options and warrants has been reduced by the number of shares
that could have been purchased from the proceeds at the average market price of
the Company's stock. The number of shares used in the computation of fully
diluted earnings per share were 23,364,103 and 21,160,965 in 1999 and 1998,
respectively. Fully diluted earnings per share amounts are not presented for
1998 because it is anti-dilutive.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
for interim reporting under Form 10-QSB have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1998.
The results of operations for the three months ended March 31, 1999 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 three months ended March 31, 1999 and 1998, accumulated amortization
amounted to approximately $921,000 and $641,000, and amortization of computer
software development costs charged to operations was approximately $82,000 and
$66,000, 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.
4
<PAGE> 7
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. 401 (K) SAVINGS PLAN:
In March 1999, the Company's Board of Directors adopted a 401 (k) savings plan
that covers all employees of the Company. The plan is effective March 1, 1999.
Contributions to the plan may be made by all eligible employees up to fifteen
percent of their salary. The Company will match twenty five percent of the
employee's contributions up to four percent of each employees base salary.
For the three months ended March 31, 1999, the Company incurred contribution
expense of approximately $1,000 related to this plan.
NOTE 5. BOARD OF DIRECTORS/STOCK OPTIONS:
In January 1999, two new individuals were elected to the Board of Directors. The
new directors were each granted 50,000 stock options. The options, which expire
in January 2001, give the holder the right to buy one share of the Company's
$.05 par value common stock at $.36 per share for each option held.
5
<PAGE> 8
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET SALES:
For the three months ended March 31, 1999 and 1998, revenue totaled
approximately $651,000 and $242,000, respectively. Sales have increased
approximately 162% due to greater exposure to new customers through the
Company's internet page, new revenue sources arising from the Company's
Accredited Service Provider agreement with Data General, sales of the Company's
upgraded Year 2000 compliant versions of its existing COBOL programs and new
revenue sources derived from services performed utilizing the Company's Year
2000 suite of tools allowing the customer to address the Year 2000 problem
itself.
Management is optimistic that the Company will remain profitable in 1999. As of
March 31, 1999, the Company's efforts in China regarding its Joint Venture with
Intermost called Tech 2020 has not resulted in any executed contracts or
revenue. The Company is aggressively pursuing new opportunities that management
hopes will substantially contribute to revenue. However, the Company is quite
small and remains subject to technological obsolescence and competitive market
conditions.
COST AND EXPENSES:
Cost of goods sold for the three months ended March 31, 1999 and 1998 were
approximately $160,000 and $21,000 and gross profit percent was approximately
75% and 92%, respectively. The decline in gross profit margin in 1999 results
from high gross margins achieved on regular products combined with lower gross
margins on the service revenues derived from the new Year 2000 suite of tools.
Research and development costs were approximately $90,000 and $79,000 for the
three months ended March 31, 1999 and 1998, respectively. The Company continues
to expend significant amounts of its funds developing new software and to remain
competitive in its specific field of expertise.
Selling, shipping and general and administrative expenses (SG&A) for the three
months ended March 31, 1999 and 1998 were approximately $150,000 and $153,000,
respectively. The capitalization of computer software development costs for the
three months ended March 31, 1999 and 1998 reduced SG&A expenses by
approximately $125,000 and $87,000, respectively. The increase in capitalized
computer software development costs was attributed primarily to an increase in
employees in the Company's software development facility.
PROMOTION AND ADVERTISING EXPENSE:
For the three months ended March 31, 1999 and 1998, promotion and advertising
expense was approximately $28,000 and $63,000, respectively, and was directly
related to the Company's efforts to market its new Year 2000 Impact Assessment
and Remediation Tools and Services product as well as to expand the Company's
overall visibility. As of March 31, 1999, the Company is reevaluating its
promotion and advertising campaign.
INTEREST INCOME:
Interest income for the three months ended March 31, 1999 and 1998, was
approximately $2,000 and $9,000, respectively, and was related to cash invested
by the Company in short-term financial instruments.
6
<PAGE> 9
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (CONT'D.):
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense for the three months ended March 31, 1999
and 1998 was approximately $92,000 and $74,000, respectively. The increase in
1999 is attributed to the increase in amortization of capitalized computer
software costs.
LIQUIDITY:
As of March 31, 1999, the Company's net cash provided by operations was
approximately $39,000 and is substantially comprised of net income of $133,000,
depreciation and amortization of $92,000, by an increase in accounts receivable
of ($67,000) and by an increase in current assets and prepaid expenses of
($87,000). This compares to the three months ended March 31, 1998 where net cash
used in operations was approximately ($120,000) and was substantially comprised
of a net loss of ($142,000), depreciation and amortization of $74,000 and a
decrease in accrued expenses of ($28,000). The increase in accounts receivable
for the three months ended March 31, 1999 was attributed to higher sales for
that period.
Net cash used in investing activities during the three months ended March 31,
1999 and 1998 was approximately $139,000 and $117,000, respectively. This was
attributed to purchases of new computer hardware and software of approximately
$15,000 and $30,000 to support the Company's ongoing research and development
activities and to the capitalization of computer software development costs of
$125,000 and $87,000, for the three months ended March 31, 1998 and 1998,
respectively.
Net cash provided by financing activities for the three months ended March 31,
1999 and 1998 was approximately $0 and $232,000, respectively. This was
attributed to the exercise of common stocks warrants.
Management believes that the Company has obtained sufficient cash resources to
meet its expected needs in the present fiscal year. Management does not
anticipate a large capital expenditure in the current year related to the
Company's attempt to market and support the product for the "millennium 2000"
problem. At present the Company does not maintain a line of credit facility with
a lending institution.
INFLATION AND SEASONALITY:
The Company does not anticipate inflation will significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonality.
7
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Required by Item 601 of Regulation S-B.
(11) Statement regarding computation of per share earnings.
(27) Financial data schedule
(b) Reports on Form 8-K - The Company filed no
reports on Form 8-K during the quarter ended March 31, 1999.
8
<PAGE> 11
S I G N A T U R E S
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf of the undersigned, thereunto duly
authorized.
EGAN SYSTEMS, INC.
------------------
(Registrant)
/s/Edward J. Egan
----------------------------
Edward J. Egan (President)
And Chief Financial Officer)
Date: 04/29/99
9
<PAGE> 1
PART II, ITEM 6, EXHIBIT II.
EGAN SYSTEMS, INC.
COMPUTATION OF PER SHARE EARNINGS
Computation of per share earnings:
The following data show the amounts used in computing earnings per share and the
effect on income (loss) and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income (loss) available to common stockholders
used in basic EPS $ 132,716 $ (141,908)
Interest expense on convertible note payable -- 625
----------- ------------
Income (loss) available to common stockholders
after assumed conversions of dilutive securities $ 132,716 $ (141,283)
=========== ============
Weighted average number of common shares in
basic EPS 18,646,652 16,335,660
Effect of dilutive securities 4,717,451 4,825,305
----------- ------------
Weighted average number of common shares and
dilutive potential common stock used in
fully diluted EPS 23,364,103 21,160,965
=========== ============
Net income (loss) per common share:
Basic $ 0.01 $ (0.01)
=========== ============
Fully diluted $ 0.01 $ (0.01)
=========== ============
</TABLE>
For 1999, the effect of dilutive securities were not included in computing fully
diluted EPS because their effects are anti-dilutive.
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains suummary information extracted from the Company's Form
10-QSB for the quarter ended March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 936,398
<SECURITIES> 0
<RECEIVABLES> 467,246
<ALLOWANCES> 7,305
<INVENTORY> 14,000
<CURRENT-ASSETS> 1,570,954
<PP&E> 170,435
<DEPRECIATION> 9,625
<TOTAL-ASSETS> 2,499,824
<CURRENT-LIABILITIES> 20,826
<BONDS> 0
0
0
<COMMON> 932,333
<OTHER-SE> 1,546,665
<TOTAL-LIABILITY-AND-EQUITY> 2,499,824
<SALES> 651,028
<TOTAL-REVENUES> 651,028
<CGS> 160,244
<TOTAL-COSTS> 518,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 132,716
<INCOME-TAX> 0
<INCOME-CONTINUING> 132,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,716
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
