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, 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 (I.R.S. Employer
of 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
5/4/00 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
March 31, 2000 (unaudited) and December 31, 1998 1
Condensed consolidated statements of operations (unaudited) for the
three months ended March 31, 2000 and 1999 2
Condensed consolidated statements of cash flows (unaudited) for the
three months ended March 31, 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
EGAN SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 359,285 $ 449,990
Accounts receivable 87,517 111,837
Inventory 8,270 8,910
Prepaid expenses and other current assets 8,363 8,764
----------- -----------
Total Current Assets 463,435 579,501
----------- -----------
Property and Equipment - net 177,547 189,302
----------- -----------
Other Assets
Computer software development costs - net 799,030 803,030
Security deposits 3,126 3,126
----------- -----------
Total Other Assets 802,156 806,156
----------- -----------
Total Assets $ 1,443,138 $ 1,574,959
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 175,917 $ 175,917
Accrued expenses and other current liabilities 42,817 50,544
----------- -----------
Total Current Liabilities 218,734 226,461
----------- -----------
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 (4,222,630) (4,098,536)
----------- -----------
1,586,904 1,710,998
Notes receivable - stock purchase (362,500) (362,500)
----------- -----------
Total Stockholders' Equity 1,224,404 1,348,498
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,443,138 $ 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
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Net sales $ 242,326 $ 651,028
--------- ---------
Cost and expenses:
Cost of goods sold 13,471 160,244
Research and development costs 63,442 89,903
Selling, shipping,
general and administrative 162,424 149,998
Interest income (4,438) (1,716)
Royalties 16,366 --
Promotion and advertising 3,941 27,611
Interest expense -- 252
Depreciation and amortization 111,215 92,020
--------- ---------
366,421 518,312
--------- ---------
Net (loss) income $(124,094) $ 132,716
========= =========
Net (loss) income per common share:
Basic $ (0.01) $ 0.01
========= =========
Fully diluted $ -- $ 0.01
========= =========
Cash dividends per common share 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>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 4,755 $ 39,336
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (2,065) (14,723)
Computer software development costs (93,395) (124,644)
----------- -----------
Net cash used in investing activities (95,460) (139,367)
----------- -----------
Net decrease in cash (90,705) (100,031)
Cash - beginning of period 449,990 1,036,429
----------- -----------
Cash - end of period $ 359,285 $ 936,398
=========== ===========
Supplemental cash flows information:
Taxes paid $ 2,047 $ 252
=========== ===========
Interest paid $ -- $ 1,328
=========== ===========
</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 March 31, 2000 and the results of their
operations and cash flows for the three months ended March 31, 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 18,813,319 and 18,646,542 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 19,013,319 and 23,364,103 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 three months ended March 31, 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 three months ended March 31, 2000 and 1999, accumulated amortization
amounted to approximately $1,265,000 and $921,000, and amortization of computer
software development costs charged to operations was approximately $97,000 and
$82,000, 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 three months ended March 31, 2000 and 1999, the Company incurred
contribution expense of approximately $1,000 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 no material affect upon the calculation of basic and fully diluted
earnings per share.
NOTE 6. ACQUIRED TECHNOLOGY:
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 were charged in 1999 to cost of goods
sold 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 year ended
December 31, 1999, $1,106,550 related to these costs have been written off.
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 - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET SALES:
For the three months ended March 31, 2000 and 1999, total revenue approximated
$242,000 and $651,000, respectively. Revenues has declined in the first quarter
of 2000 versus the same period in the prior year due to the absence in the first
quarter of 2000 of custom service work such as client software migration, Year
2000 assessment and remediation work and consulting and custom software
generation work performed on behalf of new and some existing customers. In
February 2000, the Company released a new product called "cgi COBOL" which is
designed to enable existing COBOL programmers to create web server application
software without the need to learn and employ a new software language. Initial
sales of the product have commenced in the second quarter of 2000 and interest
in the product is high. In June 2000, the Company expects to release 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.
As of March 31, 2000, 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 three months ended March 31, 2000 and 1999 were
approximately $13,000 and $160,000 and gross profit percentages were
approximately 95% and 75%, 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. No customer services work was
performed in 2000.
Research and development costs were approximately $63,000 and $90,000 for the
three months ended March 31, 2000 and 1999, respectively. The reduction is due
to the Company reducing the number of employees and expenditures related to
research and development in the first quarter 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 three
months ended March 31, 2000 and 1999 were approximately $162,000 and $150,000,
respectively. The capitalization of computer software development costs for the
three months ended March 31, 2000 and 1999 reduced SG&A expenses by
approximately $93,000 and $125,000, 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 three months ended March 31, 2000 and 1999, promotion and advertising
expense was approximately $4,000 and $28,000, respectively. The higher amount in
1999 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 March 31, 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 - THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (CONT'D):
INTEREST INCOME:
Interest income for the three months ended March 31, 2000 and 1999, was
approximately $4,000 and $2,000, respectively, and was related to cash invested
by the Company in short-term financial instruments.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense for the three months ended March 31, 2000
and 1999 was approximately $111,000 and $92,000, respectively. The increase in
2000 is attributed to increased amortization of capitalized computer software
costs.
LIQUIDITY:
For the three months ended March 31, 2000, the Company's net cash provided by
operations was approximately $5,000 and is substantially comprised of net loss
of ($124,000), a reduction of accounts receivable of $24,000 and depreciation
and amortization of $111,000. As of March 31, 2000, the Company still has
$176,000 in liabilities related to the purchase of technology software and 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 three
months ended March 31, 1999 where net cash provided by operations was
approximately $39,000 and was substantially comprised of net income of $133,000,
depreciation and amortization of $93,000, an increase in accounts receivable of
($67,000) and an increase in other current assets of ($87,000).
Net cash used in investing activities during the three months ended March 31,
2000 and 1999 was approximately ($95,000) and ($140,000), respectively. This was
attributed to purchases of new computer hardware and software of approximately
$2,000 and $15,000 to support the Company's ongoing research and development
activities and to the capitalization of computer software development costs of
$93,000 and $125,000, for the three months ended March 31, 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 noted
elsewhere in this Form 10-QSB. 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>
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, 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: 5/4/00
______________________
9
<PAGE>
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 (loss) income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
(Loss) income available to common stockholders $ (124,094) $ 132,716
============ ============
Weighted average number of common shares in
primary EPS 18,813,319 18,646,542
Effect of dilutive securities 200,000 4,717,561
------------ ------------
Weighted average number of common shares and
dilutive potential common stock used in
fully diluted EPS 19,013,319 23,364,103
============ ============
Net (loss) income per common share:
Basic $ (0.01) $ 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarter ended March 31, 2000 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> $359,285
<SECURITIES> 0
<RECEIVABLES> 100,598
<ALLOWANCES> 13,081
<INVENTORY> 8,270
<CURRENT-ASSETS> 463,435
<PP&E> 177,547
<DEPRECIATION> 13,820
<TOTAL-ASSETS> 1,443,138
<CURRENT-LIABILITIES> 218,734
<BONDS> 0
0
0
<COMMON> 932,333
<OTHER-SE> 510,805
<TOTAL-LIABILITY-AND-EQUITY> 1,443,138
<SALES> 242,326
<TOTAL-REVENUES> 242,326
<CGS> 13,471
<TOTAL-COSTS> 366,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (124,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,094)
<EPS-BASIC> 0.01
<EPS-DILUTED> 0
</TABLE>
