<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 SEPTEMBER 30, 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
- ---- ----- ------------------
10/19/99 Common Stock 18,646,652
<PAGE> 2
EGAN SYSTEMS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets as of
September 30, 1999 (unaudited) and December 31, 1998 1
Condensed consolidated statements of operations (unaudited) for the
nine months ended September 30, 1999 and 1998 2
Condensed consolidated statements of cash flows (unaudited) for the
nine months ended September 30, 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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 579,606 $ 1,036,429
Accounts receivable 196,056 399,855
Inventory 8,525 18,020
Acquired technology costs 1,106,550 40,000
Prepaid expenses and other current assets 8,763 26,525
----------- -----------
Total Current Assets 1,899,500 1,520,829
----------- -----------
Property and Equipment - net 184,519 165,337
----------- -----------
Other Assets
Computer software development costs - net 703,987 713,060
Security deposits 3,126 3,126
----------- -----------
Total Other Assets 707,114 716,186
----------- -----------
Total Assets $ 2,791,132 $ 2,402,352
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 263,870 $ -
Accrued expenses and other current liabilities 41,632 56,070
----------- -----------
Total Current Liabilities 305,502 56,070
----------- -----------
Stockholders' Equity
Common stock - $.05 par value, shares authorized -
30,000,000 shares, issued and outstanding, 18,646,652
in 1999 and 1998 932,333 932,333
Additional paid-in capital 4,877,201 4,877,201
Deficit (2,961,404) (3,100,752)
----------- -----------
2,848,130 2,708,782
Notes receivable - stock purchase (362,500) (362,500)
----------- -----------
Total Stockholders' Equity 2,485,630 2,346,282
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,791,132 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales $ 373,815 $ 645,346 $ 1,065,197 $ 1,091,400
Custom services income - - 442,030 145,200
----------- ----------- ----------- -----------
373,815 645,346 1,507,227 1,236,600
----------- ----------- ----------- -----------
Cost and expenses:
Cost of goods sold 19,207 14,811 208,625 44,405
Research and development costs 74,916 56,697 214,230 217,501
Selling, shipping,
general and administrative 189,801 162,995 567,536 479,925
Interest income (6,354) (10,351) (21,366) (29,196)
Royalties 9,000 8,399 24,390 13,752
Promotion and advertising - 47,021 27,711 177,860
Interest expense 86 - 338 625
Depreciation and amortization 127,510 76,375 346,415 225,129
Consulting - - - 200,000
----------- ----------- ----------- -----------
414,166 355,947 1,367,879 1,330,001
----------- ----------- ----------- -----------
Net income (loss) $ (40,351) $ 289,399 $ 139,348 $ (93,401)
=========== =========== =========== ===========
Net income (loss) per common share:
Basic $ 0.00 $ 0.02 $ 0.01 $ (0.01)
=========== =========== =========== ===========
Fully diluted $ - $ 0.01 $ 0.01 $ -
=========== =========== =========== ===========
Cash dividends per common share None None 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>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net cash used in operating activities $ (100,299) $ (3,120)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (48,682) (75,467)
Computer software development costs (307,842) (302,259)
----------- -----------
Net cash used in investing activities (356,524) (377,726)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock-warrants/options - 540,500
----------- -----------
Net cash provided by financing activities - 540,500
----------- -----------
Net (decrease) increase in cash (456,823) 159,654
Cash - beginning of period 1,036,429 880,438
----------- -----------
Cash - end of period $ 579,606 $ 1,040,092
=========== ===========
Supplemental cash flows information:
Taxes paid $ 2,753 $ 3,234
=========== ===========
Interest paid $ 338 $ 625
=========== ===========
Schedule of non-cash activity:
Common stock issued for consulting services rendered $ - $ 200,000
=========== ===========
</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 September 30, 1999 and the results of
their operations and cash flows for the nine months ended September 30, 1999 and
1998.
Primary net income per common share is computed based on the weighted average
number of outstanding common shares. The number of shares used in the
computation were 18,646,652 and 18,541,652 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, warrants and convertible note
payable. 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 23,329,294 and
21,408,104 in 1999 and 1998, respectively. Fully diluted earnings per share
amounts do not include the effects of dilutive securities for 1998 because they
are anti-dilutive.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
for interim reporting under Form 10-QSB have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1998.
The results of operations for the nine months ended September 30, 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 nine months ended September 30, 1999 and 1998, accumulated amortization
amounted to approximately $1,155,000 and $773,000, and amortization of computer
software development costs charged to operations was approximately $317,000 and
$197,000, 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. ACQUIRED TECHNOLOGY COSTS:
Acquired technology costs represents amounts paid by the Company for the rights
to use certain software utilized in the Company's year 2000 assessment and
remediation service. The software costs are being charged to operations based on
revenues from customers contracting with the Company for the use of the
technology.
The Company periodically assesses the value of this asset by comparing its
carrying cost to its net realizable value. The amounts by which the carrying
cost exceeds the net realizable value is written off. For the nine months ended
September 30, 1999, no amounts have been written off.
NOTE 5. 401(K) SAVINGS PLAN:
In March 1999, the Company adopted a 401(k) savings plan that covers all
employees of the Company. The plan is effective March 1, 1999. Contributions to
the plan may be made by all eligible employees up to fifteen percent of their
salary. The Company will match twenty-five percent of the employee's
contributions up to four percent of each employees base salary.
For the nine months ended September 30, 1999, the Company incurred contribution
expense of approximately $5,000 related to this plan.
NOTE 6. 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. In July,
1999, one of the directors resigned from the Board of Directors and his stock
options were cancelled.
NOTE 7. RECLASSIFICATIONS:
Certain amounts in the 1998 financial statements have been reclassified to
conform to the presentation in 1999.
5
<PAGE> 8
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET SALES:
For the nine months ended September 30, 1999 and 1998, total revenue
approximated $1,507,000 and $1,237,000, respectively. Revenues have increased
approximately 22% due to new revenue sources derived from custom services income
related to client software migration, year 2000 assessment and remediation,
consulting and custom software generation work performed on behalf of new and
some existing customers.
Management is optimistic that the Company will remain profitable in 1999. As of
September 30, 1999, the Company's efforts in China regarding it's joint venture
with Intermost called Tech 2020 has not resulted in any executed contract or
revenue. The Company is continually evaluating new opportunities that management
hopes will substantially contribute to revenue. However, the Company is quite
small and remains subject to technological obsolescence and competitive market
conditions.
COST AND EXPENSES:
Cost of goods sold for the nine months ended September 30, 1999 and 1998 were
approximately $209,000 and $44,000 and gross profit percentages were
approximately 86% and 96%, respectively. The reduced gross profit margin in 1999
results from the combination of high gross margins achieved on sales of the
Company's regular software products and lower gross margins achieved on a
portion of the new custom services income. In 1999 and 1998, the Company
purchased rights to software for use with the new Year 2000 Assessment and
Remediation and custom service line of business that the Company has recently
engaged in. As of September 30, 1999, approximately $1,106,000 and $264,000
related to this purchase has been classified as acquired technology costs and as
an account payable, respectively, on the balance sheet. Management is optimistic
that all the costs of the acquired technology will be utilized in new custom
services work with customers within one year.
Research and development costs were approximately $214,000 and $218,000 for the
nine months ended September 30, 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 nine
months ended September 30, 1999 and 1998 were approximately $568,000 and
$480,000, respectively. The capitalization of computer software development
costs for the nine months ended September 30, 1999 and 1998 reduced SG&A
expenses by approximately $309,000 and $302,000, respectively. The increase in
SG&A and 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 nine months ended September 30, 1999 and 1998, promotion and advertising
expense was approximately $28,000 and $178,000, 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. In 1999, the Company is reevaluating its promotion and
advertising campaign.
6
<PAGE> 9
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (CONT'D.):
INTEREST INCOME:
Interest income for the nine months ended September 30, 1999 and 1998, was
approximately $21,000 and $29,000, respectively, and was related to cash
invested by the Company in short-term financial instruments.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense for the nine months ended September 30,
1999 and 1998 was approximately $346,000 and $225,000, respectively. The
increase in 1999 is attributed to increased amortization of capitalized computer
software costs.
LIQUIDITY:
For the nine months ended September 30, 1999, the Company's net cash used in
operations was approximately ($100,000) and is substantially comprised of net
income of $139,000, a reduction of accounts receivable of $204,000 depreciation
and amortization of $346,000, an increase in acquired technology costs of
($1,066,550) and an increase in account payable of $264,000. The increase in
acquired technology software costs and account payable at September 30, 1999 is
attributed to the Company's purchase of rights to remediation and analytical
software which the Company optimistically expects to utilize within one year in
its new custom services line of business. This compares to the nine months ended
September 30, 1998 where net cash used in operations was approximately ($3,000)
and was substantially comprised of a net loss of ($93,000), depreciation and
amortization of $225,000, an increase in accounts receivable of ($292,000) and
$200,000 in consulting expense accounted for as a non-monetary transaction.
Net cash used in investing activities during the nine months ended September 30,
1999 and 1998 was approximately $357,000 and $378,000, respectively. This was
attributed to purchases of new computer hardware and software of approximately
$49,000 and $75,000 to support the Company's ongoing research and development
activities and to the capitalization of computer software development costs of
$308,000 and $302,000, for the nine months ended September 30, 1999 and 1998,
respectively.
Net cash provided by financing activities for the nine months ended September
30, 1999 and 1998 was approximately $0 and $541,000, respectively. This was
attributed to the exercise of common stocks warrants and/or options.
Management believes that the Company has obtained sufficient cash resources to
meet its expected needs in the present fiscal year. Management does not
anticipate additional large capital expenditures in the current year except as
discussed above. At present the Company does not maintain a line of credit
facility with a lending institution.
INFLATION AND SEASONALITY:
The Company does not anticipate inflation will significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonability.
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 September 30, 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: 10/18/99
---------------------
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>
Nine Months Ended
September 30,
---------------
1999 1998
---- ----
<S> <C> <C>
Income (loss) available to common stockholders
used in primary EPS $ 139,348 $ (93,401)
Interest expense on convertible note payable - 625
------------ ------------
Income (loss) available to common stockholders
after assumed conversions of dilutive securities $ 139,348 $ (92,776)
============ ============
Weighted average number of common shares in
primary EPS 18,646,652 18,541,652
Effect of dilutive securities 4,682,642 2,866,452
------------ ------------
Weighted average number of common shares and
dilutive potential common stock used in
fully diluted EPS 23,329,294 21,408,104
============ ============
Net income (loss) per common share:
Basic $ 0.01 $ (0.01)
============ ============
Fully diluted $ 0.01 $ -
============ ============
</TABLE>
For 1998, 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 SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRELY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 579,606
<SECURITIES> 0
<RECEIVABLES> 209,137
<ALLOWANCES> 13,081
<INVENTORY> 8,525
<CURRENT-ASSETS> 1,899,500
<PP&E> 184,519
<DEPRECIATION> 29,500
<TOTAL-ASSETS> 2,791,132
<CURRENT-LIABILITIES> 305,502
<BONDS> 0
0
0
<COMMON> 932,333
<OTHER-SE> 1,553,297
<TOTAL-LIABILITY-AND-EQUITY> 2,791,132
<SALES> 1,507,227
<TOTAL-REVENUES> 1,507,227
<CGS> 208,625
<TOTAL-COSTS> 1,367,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 338
<INCOME-PRETAX> 139,348
<INCOME-TAX> 0
<INCOME-CONTINUING> 139,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,348
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
