SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2000
[ ] 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 Identification No.
incorporation or organization)
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
---- ----- ------------------
8/2/00 Common Stock 19,646,652
<PAGE>
EGAN SYSTEMS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets as of
June 30, 2000 (unaudited) and December 31, 1999 1
Condensed consolidated statements of operations (unaudited) for the
six months ended June 30, 2000 and 1999 2
Condensed consolidated statements of cash flows (unaudited) for the
six months ended June 30, 2000 and 1999 3
Notes to condensed consolidated financial statements (unaudited) 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 7
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 8
SIGNATURES 9
EXHIBITS 10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
----------- -----------------
(Unaudited)
Current Assets
<S> <C> <C>
Cash $ 265,782 $ 449,990
Accounts receivable 47,364 111,837
Inventory 13,350 8,910
Prepaid expenses and other current assets 7,663 8,764
--------------- ---------------
Total Current Assets 334,159 579,501
--------------- ----------------
Property and Equipment - net 165,285 189,302
--------------- ----------------
Other Assets
Computer software development costs - net 795,053 803,030
Security deposits 3,126 3,126
--------------- ---------------
Total Other Assets 798,179 806,156
--------------- ----------------
Total Assets $ 1,297,623 $ 1,574,959
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 175,917 $ 175,917
Accrued expenses and other current liabilities 63,580 50,544
--------------- ---------------
Total Current Liabilities 239,497 226,461
--------------- ----------------
Stockholders' Equity
Common stock - $.05 par value,
shares authorized - 30,000,000
shares, issued and outstanding, 19,646,652
in 2000 and 18,646,652 in 1999 932,333 932,333
Additional paid-in capital 4,877,201 4,877,201
Deficit (4,388,908) (4,098,536)
------------------ -------------------
1,420,626 1,710,998
Notes receivable - stock purchase (362,500) (362,500)
---------------- -----------------
Total Stockholders' Equity 1,058,126 1,348,498
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 1,297,623 $ 1,574,959
================= ==================
</TABLE>
The condensed consolidated balance sheet at December 31, 1999 has been derived
from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
1
<PAGE>
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales $ 158,888 $ 482,384 $ 401,214 $ 691,382
Custom services income - - - 442,030
-------------- -------------- -------------- --------------
158,888 482,384 401,214 1,133,412
-------------- -------------- -------------- ----------------
Cost and expenses:
Cost of goods sold (4,186) 29,174 9,285 189,418
Research and development costs 53,589 49,411 117,031 139,314
Selling, shipping,
general and administrative 162,467 227,737 324,891 377,735
Interest income (4,120) (13,296) (8,558) (15,012)
Royalties 6,200 15,390 22,566 15,390
Promotion and advertising - 100 3,941 27,711
Interest expense - - - 252
Consulting 111,215 126,885 222,430 218,905
-------------- -------------- -------------- --------------
325,165 435,401 691,586 953,713
-------------- -------------- -------------- --------------
Net (loss) income $ (166,277) $ 46,983 $ (290,372) $ 179,699
============== ============== ============== ==============
Net (loss) income per common share:
Basic $ (0.01) $ 0.00 $ (0.02) $
================= ================= =============== =
0.01
Fully diluted $ - $ 0.00 $ - $ 0.01
============== ================= ============== =================
Cash dividends per common share None None None None
============== ============== ============== =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June30,
2000 1999
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 6,228 $ (154,006)
--------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (3,624) (31,764)
Computer software development costs (186,812) (200,452)
---------------- -----------------
Net cash used in investing activities (190,436) (232,216)
---------------- -----------------
Net decrease in cash (184,208) (386,222)
Cash - beginning of period 449,990 1,036,429
--------------- ------------------
Cash - end of period $ 265,782 $ 650,207
=============== ================
Supplemental cash flows information:
Taxes paid $ 2,047 $ 950
=============== =================
Interest paid $ - $ 252
=============== =================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
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, 2000 and the results of their
operations and cash flows for the six months ended June 30, 2000 and 1999.
Primary net income per common share is computed based on the weighted average
number of outstanding common shares. The number of shares used in the
computation were 19,223,575 and 18,646,652 in 2000 and 1999, respectively. Fully
diluted net income per common share is computed based on the weighted average
number of outstanding common shares plus the shares that would be outstanding
assuming conversion of the outstanding options and warrants. For purposes of the
fully diluted computations, the number of shares that would be issued from the
exercise of stock options and warrants has been reduced by the number of shares
that could have been purchased from the proceeds at the average market price of
the Company's stock. The number of shares used in the computation of fully
diluted earnings per share were 19,423,575 and 23,707,652 in 2000 and 1999,
respectively. Fully diluted earnings per share amounts do not include the
effects of dilutive securities for 2000 because they are anti-dilutive.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
for interim reporting under Form 10-QSB have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1999.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the operating results for the full year.
NOTE 2. COMPUTER SOFTWARE DEVELOPMENT COSTS:
Computer software development costs for products are capitalized subsequent to
the establishment of technological feasibility. Capitalization ceases when the
products are available for general release to customers at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated life of the product, which is estimated at three years. As of and for
the six months ended June 30, 2000 and 1999, accumulated amortization amounted
to approximately $1,363,000 and $1,038,000, and amortization of computer
software development costs charged to operations was approximately $195,000 and
$200,000, respectively.
NOTE 3. INVENTORY:
Inventory, which consists primarily of miscellaneous computer peripherals, is
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
4
<PAGE>
EGAN SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. 401(K) SAVINGS PLAN:
In March 1999, the Company adopted a 401(k) savings plan that covers all
employees of the Company. The plan is effective March 1, 1999. Contributions to
the plan may be made by all eligible employees up to fifteen percent of their
salary. The Company will match twenty-five percent of the employee's
contributions up to four percent of each employees base salary.
For the six months ended June 30, 2000 and 1999, the Company incurred
contribution expense of approximately $3,000 related to this plan.
NOTE 5. ISSUANCE OF COMMON STOCK:
In 1993, in order to assist the Company in raising additional capital by the
sale of the Company's common stock, a director voluntarily surrendered 1,000,000
of his shares of the Company's $.05 par value common stock to the treasury in
order to comply with certain financial requirements imposed on the Company under
the terms of the new stock sale agreement. In March 2000, since the financial
terms and conditions imposed on the Company had expired, the Company reissued
the 1,000,000 shares previously surrendered by the director. The 1,000,000
shares of the Company's $.05 par value common stock issued to this director in
2000 was not previously disclosed in the calculation of fully diluted earnings
per share. The Company has determined that had this disclosure been made it
would have had no material affect upon the calculation of basic and fully
diluted earnings per share.
NOTE 6. ACQUIRED TECHNOLOGY:
In 1999 and 1998, the Company purchased rights for the use of certain software
to be utilized in the Company's year 2000 assessment and remediation services.
Certain of these software costs were charged in 1999 and 1998 to cost of goods
sold based on revenues from customers contracting with the Company for the use
of the technology.
At December 31, 1999, the Company wrote off the remaining costs approximating
$1,107,000 based on its assessment of the software's net realizable value at
that time. However, the Company is currently negotiating with the software
vendor to apply these costs to other software with application to the Company's
products and services. As of the date of this financial statement the outcome of
these negotiations is uncertain. However, the Company believes it will be
successful in its negotiations and that the software vendor will ultimately
allow these costs to be applied to other software for future use by the Company.
If the Company is successful in its negotiations and is able to apply the costs
to new software, the Company will recognize income in the future period to the
extent of the applicable credits.
5
<PAGE>
Item 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NET SALES:
For the six months ended June 30, 2000 and 1999, total revenue approximated
$401,000 and $1,133,000, respectively. Revenue has declined for the six months
ended June 30, 2000 versus the same period in the prior year due to the absence
in 2000 of custom service work such as client software migration, Year 2000
assessment and remediation, consulting and custom software generation work
performed on behalf of new and some existing customers. Additionally, the
decline is attributed to a reduction in demand for some of the Company's
existing products to new users. In February 2000, the Company released a new
product called "CGI" COBOL" which is designed to enable existing cobol
programmers to create web server application software without the programmers to
create web server application software without the need to learn and employ a
new software language. Initial sales of the product commenced in the second
quarter of 2000 and interest in the product is high. In June 2000, the Company
released a new upgraded product called "Interactive Cobol 3". The Company feels
that this new enhanced featured product will convince existing customers to
purchase an upgrade of the product and also attract new customers to purchase
the new product.
The Company is continually evaluating new opportunities that management hopes
will substantially contribute to revenue. However, the Company is quite small
and remains subject to technological obsolescence and competitive market
conditions.
COST AND EXPENSES:
Cost of goods sold for the six months ended June 30, 2000 and 1999 were
approximately $9,000 and $189,000 and gross profit percents were approximately
98% and 83%, respectively. The lower 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. Cost of goods sold for the three months ended June 30,
2000 declined when compared to the six month period ended June 30, 2000
substantially as a result of an increase in inventory levels as calculated by
the Company at June 30, 2000.
Research and development costs were approximately $117,000 and $139,000 for the
six months ended June 30, 2000 and 1999, respectively. The reduction is due to
the Company reducing the number of employees and expenditures related to
research and development in 2000 in conjunction with the reduction in revenues.
The Company continues to expend significant amounts of its funds developing new
software and to remain competitive in its specific field of expertise.
Selling, shipping and general and administrative expenses (SG&A) for the six
months ended June 30, 2000 and 1999 were approximately $325,000 and $377,000
respectively. The capitalization of computer software development costs for the
six months ended June 30, 2000 and 1999 reduced SG&A expenses by approximately
$187,000 and $200,000 respectively. The decrease in capitalized computer
software development costs was attributed primarily to the reduction in
employees and expenditures in the Company's software development facility in
conjunction with the reduction in revenues.
PROMOTION AND ADVERTISING EXPENSE:
For the six months ended June 30, 2000 and 1999, advertising and promotion
expense was approximately $4,000 and $28,000, respectively. The decrease in 2000
was directly related to the Company's substantial efforts in 1999 to market its
new Year 2000 Impact Assessment and Remediation Tools and Services product as
well as to expand the Company's overall visibility. As of June 30, 2000, the
Company is reevaluating its promotion and advertising campaign.
6
<PAGE>
Item 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (Cont'd):
INTEREST INCOME:
Interest income for the six months ended June 30, 2000 and 1999, was
approximately $9,000 and $15,000, respectively, and was related to cash invested
by the Company in short-term financial instruments.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense for the six months ended June 30, 2000 and
1999 was approximately $222,000 and $219,000, respectively. The increase in 2000
is attributed to increased amortization of capitalized computer software costs.
LIQUIDITY:
As of June 30, 2000, the Company's net cash provided by operations was
approximately $6,000 and is substantially comprised of net loss of ($290,000), a
reduction of accounts receivable of $64,000 and depreciation and amortization of
$222,000. As of June 30, 2000, the Company still has $176,000 in liabilities
related to the purchase of technology software which is more fully described in
the Company's December 31, 1999 10-KSB. The amount is reflected in accounts
payable on the balance sheet. This compares to the six months ended June 30,
1999 where net cash used in operations was approximately ($154,000) and was
substantially comprised of net income of $180,000, depreciation and amortization
of $220,000, an increase in acquired technology costs of ($1,067,000) and an
increase in accounts payable of $528,000.
Net cash used in investing activities during the six months ended June 30, 2000
and 1999 was approximately ($190,000) and ($232,000), respectively. This was
attributed to purchases of new computer hardware and software of approximately
$4,000 and $32,000 to support the Company's ongoing research and development
activities and to the capitalization of computer software development costs of
$187,000 and $200,000 for the six months ended June 30, 2000 and 1999,
respectively.
Management believes that the Company has sufficient cash resources to meet its
expected needs in the present fiscal year. Management does not anticipate
additional large capital expenditures in the current year except as discussed
above. At present the Company does not maintain a line of credit facility with a
lending institution.
INFLATION AND SEASONALITY:
The Company does not anticipate inflation will be significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonality.
7
<PAGE>
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 June 30, 2000.
8
<PAGE>
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: 8/2/00
9
<PAGE>
PART ll, 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 (loss) income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
(Loss) income available to common stockholders $ (290,372) $ 179,699
================ ================
Weighted average number of common shares in
primary EPS 19,223,575 18,646,652
Effect of dilutive securities 200,000 5,061,000
--------------- ------------------
Weighted average number of common shares and
dilutive potential common stock used in
fully diluted EPS 19,423,575 $ 23,707,652
================== ===================
Net (loss) income per common share:
Basic $ (0.02) $ 0.01
================== ==================
Fully diluted $ - $ 0.01
================== ==================
</TABLE>
For 2000, the effect of dilutive securities were not included in computing fully
diluted EPS because their effects are anti-dilutive.
10
