- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|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 PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27102
eGames, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2694937
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2000 Cabot Boulevard West, Suite 110
Langhorne, PA 19047-1833
(address of Principal executive offices)
Issuer's Telephone Number, Including Area Code: 215-750-6606
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,592,440 shares of common
stock, no par value per share, as of May 12, 1999. Transitional Small Business
Disclosure Format (check one):
Yes ( ) No ( X )
<PAGE>
eGames, Inc.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31, 1999.......... 3
Consolidated Statements of Operations for the three
and nine months ended March 31, 1999 and 1998 ...... 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998 ...................... 5
Notes to Consolidated Financial Statements............... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 9-14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................... 15
Signatures ......................................................... 16
Exhibit Index ......................................................... 17
Exhibits ......................................................... 18
Page 2
<PAGE>
eGames, Inc.
Item 1. Financial Statements
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
As of
March 31,
ASSETS 1999
----------
<S> <C>
Current assets:
Cash and cash equivalents $1,761,414
Restricted cash 17,296
Accounts receivable, net of allowances - $915,262 2,825,503
Inventory 1,105,675
Prepaid expenses 101,178
----------
Total current assets 5,811,066
Furniture and equipment, net 399,493
Goodwill and other assets 547,413
----------
Total assets $6,757,972
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 169,572
Accounts payable 1,126,238
Accrued expenses 837,215
Capital lease obligations 13,791
----------
Total current liabilities 2,146,816
Capital lease obligations 28,507
Notes payable 188,408
Convertible subordinated debt 150,000
----------
Total liabilities 2,513,731
Stockholders' equity:
Common stock, no par value (40,000,000 shares authorized;
9,791,508 issued) 8,796,889
Additional paid in capital 1,148,550
Accumulated deficit (5,405,135)
Treasury stock, at cost - 161,900 shares (277,928)
Accumulated other comprehensive loss (18,135)
----------
Total stockholders' equity 4,244,241
----------
Total liabilities and stockholders' equity $6,757,972
==========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3
<PAGE>
eGames, Inc.
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $2,521,715 $2,953,543 $8,639,041 $7,344,727
Cost of sales 937,492 1,115,977 2,954,800 2,752,600
---------- ---------- ---------- ----------
Gross profit 1,584,223 1,837,566 5,684,241 4,592,127
Operating expenses:
Product development 260,534 99,553 703,166 239,833
Selling, general and administrative 1,165,769 1,115,183 3,464,272 2,924,550
---------- ---------- ---------- ----------
Total operating expenses 1,426,303 1,214,736 4,167,438 3,164,383
---------- ---------- ---------- ----------
Operating income 157,920 622,830 1,516,803 1,427,744
Interest expense, net 8,146 13,608 32,427 37,617
---------- ---------- ---------- ----------
Income before taxes 149,774 609,222 1,484,376 1,390,127
Provision for income taxes 74,520 1,904 158,787 3,069
---------- ---------- ---------- ----------
Net income 75,254 607,318 1,325,589 1,387,058
Accretion of beneficial conversion
feature on preferred stock - 0 - - 0 - - 0 - (117,991)
---------- ---------- ---------- ----------
Net income attributable
to common stock $ 75,254 $ 607,318 $1,325,589 $1,269,067
========== ========== ========== ==========
Net income per common share:
- Basic $ 0.01 $ 0.07 $ 0.14 $ 0.15
- Diluted $ 0.01 $ 0.06 $ 0.13 $ 0.13
Weighted average common shares
outstanding - Basic 9,467,659 9,283,659 9,459,673 8,498,607
Dilutive effect of common stock equivalents 762,102 550,280 427,189 1,119,945
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - Diluted 10,229,761 9,833,939 9,886,86 9,618,552
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4
<PAGE>
eGames, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,325,589 $1,387,058
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 299,073 189,239
Changes in items affecting operations net of effect
from acquired business:
Restricted cash (765) 10,000
Accounts receivable (673,972) (1,791,856)
Prepaid expenses 1,703 68,915
Inventory (154,900) (446,133)
Accounts payable (17,311) 791,190
Accrued expenses 328,227 (81,755)
---------- ----------
Net cash provided by operating activities 1,107,644 126,658
---------- ----------
Cash flows from investing activities:
Acquisition, net of cash acquired (12,428) - 0 -
Purchase of furniture and equipment (185,457) (139,040)
Purchase of software rights and other assets (98,490) (143,900)
Loan to related party - 0 - 2,000
---------- ----------
Net cash used in investing activities (296,375) (280,940)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (277,928) - 0 -
Proceeds from exercise of warrants and options 407,063 274,200
Repayment of notes payable (74,778) (28,984)
Repayment of lease obligations (57,860) (23,366)
---------- ----------
Net cash (used in) provided by financing activities (3,503) 221,850
---------- ----------
Net increase in cash and cash equivalents 807,766 67,568
Cash and cash equivalents:
Beginning of period 953,648 445,474
---------- ----------
End of period $1,761,414 $ 513,042
========== ==========
Supplemental cash flow information:
Cash paid for interest $ 43,272 $ 42,651
========== ==========
Cash paid for income taxes $ 112,051 $ 3,069
========== ==========
Non cash investing and financing activities:
Capital lease additions $ 26,809 $ - 0 -
========== ==========
150,000 shares of Common Stock issued in
connection with an acquisition $ 213,000 $ - 0 -
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5
<PAGE>
eGames, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
were prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The Notes to Consolidated Financial
Statements included in the Form 10-KSB for the fiscal year ended June 30, 1998
should be read in conjunction with the accompanying statements. These statements
include all adjustments the Company believes are necessary for a fair
presentation of the statements. The interim operating results are not
necessarily indicative of the results for a full year.
Description of Business
eGames, Inc., formerly RomTech, Inc., (the "Company"), a Pennsylvania
corporation incorporated in July 1992, develops, publishes, markets and sells a
diversified line of personal computer software primarily for consumer
entertainment and small office/home office applications. In October 1995, the
Company completed its initial public offering coincident with its acquisition of
Applied Optical Media Corporation ("AOMC"), a developer of educational and
reference software titles. In April 1996, the Company acquired Virtual Reality
Laboratories, Inc. ("VRLI"), a software developer of landscape generation, space
exploration, scheduling and business forms manipulation programs. In August
1998, the Company acquired all of the outstanding stock of Software Partners
Publishing and Distribution Limited ("Software Partners"), a U.K. distributor of
personal computer software for consumer entertainment and small office/home
office applications. On March 31, 1999, Software Partners changed its name to
eGames Europe Limited ("eGames Europe"). As a result of these acquisitions,
together with the Company's own internal development efforts, the Company offers
software titles in the game and personal/business productivity markets for use
at home and in the office. The Company's product lines enable it to serve
customers who are seeking a broad range of high-quality, value priced software.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All inter-company balances and
transactions have been eliminated.
2. Preferred Stock
During the nine months ended March 31, 1998, the Company amortized the
accretion of the beneficial conversion feature of the Company's Class Two and
Class Three Convertible Preferred Stock to accumulated deficit in the amount of
$117,991, which negatively impacted the net income for that period. During the
nine months ended March 31, 1999, there was no Convertible Preferred Stock
outstanding.
Page 6
<PAGE>
eGames, Inc.
Notes to Consolidated Financial Statements (continued)
3. Acquisition
On August 14, 1998, the Company acquired all of the outstanding shares
of Software Partners Publishing and Distribution Limited ("Software Partners"),
in exchange for 150,000 shares of the Company's Common Stock, valued at
approximately $213,000, which was the fair value of the Company's Common Stock
on the closing date of the acquisition. This acquisition was accounted for as a
purchase and the corresponding goodwill in the approximate amount of $308,000
will be amortized over five years. On March 31, 1999, Software Partners changed
its name to eGames Europe Limited ("eGames Europe"). For the quarter ended March
31, 1999, eGames Europe contributed $774,000 in net sales and $183,000 in net
income, and for the nine months ended March 31, 1999, eGames Europe contributed
$1,794,000 in net sales and $447,000 in net income.
The following summary of unaudited pro-forma financial information
gives effect to the eGames Europe acquisition as though it had occurred on July
1, 1997, after giving effect to certain adjustments, primarily the elimination
of inter-company sales and amortization of goodwill. The pro-forma financial
information, which is for informational purposes only, is based upon certain
assumptions and estimates and does not necessarily reflect the results that
would have occurred had the acquisition taken place at the beginning of the
period presented, nor are they necessarily indicative of future consolidated
results.
<TABLE>
<CAPTION>
Pro-Forma Financial Information
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $2,522,000 $3,258,000 $8,697,000 $8,376,000
Net income attributable to common stock $ 75,000 $ 508,000 $1,217,000 $1,044,000
Net income per diluted share $ 0.01 $ 0.05 $ 0.12 $ 0.11
</TABLE>
4. Comprehensive Income
On July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income". This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -------------------------
1999 1998 1999 1998
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net income attributable to common stock $75,254 $607,318 $1,325,589 $1,269,067
Other comprehensive loss:
Foreign currency translation adjustment (19,104) - 0 - (18,135) - 0 -
------- -------- ---------- ----------
Comprehensive income $56,150 $607,318 $1,307,454 $1,269,067
======= ======== ========== ==========
</TABLE>
Page 7
<PAGE>
eGames, Inc.
Notes to Consolidated Financial Statements (continued)
5. Common Stock
On October 26, 1998, the Company's Board of Directors authorized the
Company to purchase up to $1,000,000 of its shares of Common Stock in
open-market purchases on the Nasdaq SmallCap Market. As of May 12, 1999, 216,900
shares at an approximate cost of $446,000 had been acquired by the Company
pursuant to the repurchase program.
6. Revolving Line of Credit
On March 10, 1999, the Company entered into a $1,000,000 revolving
credit facility with a commercial bank. Amounts outstanding under this credit
facility are charged interest at one-half of one percent above the bank's
current prime rate and such interest is due monthly. This credit facility was
established to provide, among other things, additional working capital during
the Company's anticipated continued growth. As of May 12, 1999, the Company had
not utilized any amount of this credit facility.
Page 8
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The accompanying consolidated financial statements as of March 31, 1999
include the accounts of eGames, Inc., formerly RomTech, Inc., ("eGames"), and
its wholly owned subsidiaries.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Net sales for the three months ended March 31, 1999 were $2,522,000
compared to $2,954,000 for the three months ended March 31, 1998, representing a
decrease of $432,000 or 14.6%. The reduction in sales resulted primarily from
the transition to the Company's new sales and distribution strategy, which
involved terminating the Company's exclusive North American distribution
relationship with GT Interactive Software Corporation's Value Products Division
("GT Value Products"). The Company believes that this strategy could increase
the Company's direct sales to retailers, improve the Company's future operating
margins and expand its North American retail distribution. The sales decrease
reflects a decrease in sales of the Company's Galaxy of Games and Galaxy of Home
Office Help product lines in the amounts of $415,000 and $882,000 respectively,
which were partially offset by a $1,040,000 increase in sales of the Company's
Game Master Series and Galaxy of Arcade products. The increases in sales of the
Game Master Series and Galaxy of Arcade products are a result of the Company's
continuing transition from distributing primarily shareware titles to
full-release software game titles, which incorporate proprietary software into
the products rather than using shareware content. eGames Europe, acquired on
August 14, 1998, accounted for $774,000 in net sales for the three months ended
March 31, 1999, which represented 30.7% of the Company's sales for that period.
Upon the Company's termination of its exclusive North American
distribution relationship with GT Value Products, the Company entered into a new
relationship with GT Value Products whereby GT Value Products will continue to
serve as the Company's exclusive distributor of the Company's products to
WalMart, Target and Kmart stores. The new understanding with GT Value Products
will also allow the Company to pursue relationships with other distribution
partners and accept orders directly from retailers. The Company has added two
experienced professionals to its sales force in order to help support the
Company's direct sales to retailers.
The Company's product sales to GT Value Products accounted for 70% and
86% of the Company's net sales for the three months ended March 31, 1999 and
1998, respectively. This reduction in sales to GT Value Products during the
third fiscal quarter reflects the change in the Company's relationship with GT
Value Products. The Company believes that for the year ending June 30, 1999,
sales to GT Value Products could account for approximately 75% of the Company's
net sales, which would be less than the 81% of the Company's sales through GT
Value Products for the year ended June 30, 1998. In a continuing effort to
diversify the Company's distribution channels, including distribution via the
Internet, the Company has added features to its existing web-site to facilitate
on-line orders and launched a new web-site offering demonstration versions of
the Company's products, that can be downloaded from the Internet. In December
1998, the Company entered into a distribution and marketing agreement with
Digital River Inc. to facilitate the sale of the Company's products via the
Internet. For the three months ended March 31, 1999, the Company recorded
$23,000 in net sales from the Internet, which reflects a 240% increase from the
preceding three month period.
Cost of sales for the three months ended March 31, 1999, were $938,000
compared to $1,116,000 for the three months ended March 31, 1998, representing a
decrease of $178,000 or 15.9%. This decrease resulted primarily from a $323,000
decrease in product costs associated with the decrease in sales, net of
manufacturing cost improvements, which was partially offset by a $130,000
Page 9
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
increase in royalty expense relating to sales of the Company's products. The
increase in royalty expense is attributable in part to the Company's shift from
shareware products to full-release products. The Company's gross profit margin
increased to 62.8% for the three months ended March 31, 1999 from 62.2% for the
three months ended March 31, 1998. The primary causes of this increase were the
increased sales derived from the higher margin Game Master Series products and
cost reductions due to higher production volumes and improved third party
manufacturing processes.
Product development expenses for the three months ended March 31, 1999
were $261,000 compared to $100,000 for the three months ended March 31, 1998, an
increase of $161,000 or 161%. This increase was primarily due to increases in
salary and related costs and outside developer costs resulting from increased
product development efforts incurred to improve the quality and quantity of the
Company's product offerings. The largest component of the Company's increased
development efforts reflects the Company's continuing transition from
distributing shareware-based software titles to distributing full release
software titles, such as the Company's Game Master Series, Galaxy of Arcade, and
Galaxy of Games products. Also, certain employment costs have been incurred
relating to the Company's increased efforts to improve the quality assurance
process of the Company's product development activities.
Selling, general and administrative expenses for the three months ended
March 31, 1999 were $1,166,000 compared to $1,115,000 for the three months ended
March 31, 1998, representing an increase of $51,000 or 4.6%. This increase was
primarily due to the increased operating expenses associated with eGames
Europe's United Kingdom-based operations, which was acquired on August 14, 1998.
These increased operating expenses were offset by certain decreases in marketing
promotional costs.
Net interest expense for the three months ended March 31, 1999 was
$8,000 compared to $14,000 for the three months ended March 31, 1998,
representing a decrease of $6,000 due primarily to a reduction in debt.
Income tax expense for the three months ended March 31, 1999 was
$75,000 compared to $2,000 for the three months ended March 31, 1998,
representing an increase of $73,000. This increase is largely due to foreign
income tax liabilities, which are not offset by the Company's existing net
operating loss from its United States' operations.
Results of Operations
Nine Months Ended March 31, 1999 and 1998
Net sales for the nine months ended March 31, 1999 were $8,639,000
compared to $7,345,000 for the nine months ended March 31, 1998, representing an
increase of $1,294,000 or 17.6%. The sales increase resulted primarily from a
$3,800,000 increase in sales of the Company's Game Master Series and Galaxy of
Arcade products, which was partially offset by decreases in sales of the
Company's Galaxy of Games and Galaxy of Home Office Help product lines in the
amounts of $1,030,000 and $827,000 respectively. The increase in sales of the
Company's Game Master Series and Galaxy of Arcade products, which are
full-release software products, reflects the continuing transition of the
Company from distributing mainly shareware titles to full-release software game
titles. eGames Europe, acquired on August 14, 1998, accounted for $1,794,000 in
net sales for the nine months ended March 31, 1999, and amounted to 20.8% of
Company's sales for that period. For the nine months ended March 31, 1999 and
1998, the Company's international sales accounted for 24.6% and 6.5%,
respectively.
Page 10
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company's product sales to GT Value Products accounted for 74% and
83% of the Company's net sales for the nine months ended March 31, 1999 and
1998, respectively. This decline in the percentage of GT Value Products sales to
net sales is the result of the increase in net sales from other sources,
principally increased international sales. The Company believes that for the
year ending June 30, 1999, sales to GT Value Products could account for
approximately 75% of the Company's net sales, which would be less than the 81%
of the Company's sales that occurred through GT Value Products for the year
ended June 30, 1998. In a continuing effort to diversify the Company's
distribution channels, including distribution via the Internet, the Company has
added features to its existing web-site to facilitate on-line orders and
launched a new web-site offering demonstration versions of the Company's
products, that can be downloaded from the Internet.
Cost of sales for the nine months ended March 31, 1999 were $2,955,000
compared to $2,753,000 for the nine months ended March 31, 1998, representing an
increase of $202,000 or 7.3%. This increase resulted primarily from increases in
royalty costs and inventory obsolescence costs of $293,000 and $83,000
respectively, which were partially offset by a decrease in product costs of
$184,000 relating to various manufacturing cost improvements. The Company's
gross profit margin increased to 65.8% for the nine months ended March 31, 1999
from 62.5% for the nine months ended March 31, 1998. The primary causes of this
increase were the increased sales derived from the higher margin Game Master
Series and cost reductions due to higher production volumes and improved third
party manufacturing processes.
Product development expenses for the nine months ended March 31, 1999
were $703,000 compared to $240,000 for the nine months ended March 31, 1998, an
increase of $463,000 or 192.9%. This increase was primarily due to increases in
salary and related costs and outside developer costs resulting from increased
product development efforts incurred to improve quality and quantity of the
Company's full release product offerings. The largest component of the Company's
increased development efforts reflects the Company's continuing transition from
distributing shareware-based software titles to distributing full release
software titles, such as the Company's Game Master Series, Galaxy of Arcade, and
Galaxy of Games products. Also, certain employment costs have been incurred
relating to the Company's increased efforts to improve the quality assurance
process of the Company's development effort.
Selling, general and administrative expenses for the nine months ended
March 31, 1999, were $3,464,000 compared to $2,925,000 for the nine months ended
March 31, 1998, representing an increase of $539,000 or 18.4%. This increase was
primarily due to the increased operating expenses associated with eGames
Europe's United Kingdom-based operations, which were acquired on August 14,
1998.
Net interest expense for the nine months ended March 31, 1999 was
$32,000 compared to $38,000 for the nine months ended March 31, 1998,
representing a decrease of $6,000.
Income tax expense for the nine months ended March 31, 1999 was
$159,000 compared to $3,000 for the nine months ended March 31, 1998,
representing an increase of $156,000. This increase is largely due to foreign
income tax liabilities, which are not offset by the Company's existing net
operating loss from its United States' operations.
Page 11
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
The financial information presented reflects the Company's financial position at
March 31, 1999.
As of March 31, 1999, the Company's cash and working capital balances
were $1,761,000 and $3,664,000, respectively. Net cash provided by operating
activities for the nine months ended March 31, 1999 and 1998 were $1,108,000 and
$127,000, respectively. The $1,108,000 net cash provided by operating activities
for the nine months ended March 31, 1999 was caused primarily by profitable
results from operations and an increase in accrued expenses, which were
partially offset by increases in accounts receivable and inventory.
Net cash used in investing activities for the nine months ended March
31, 1999 and 1998 were $296,000 and $281,000, respectively. Purchases of
software rights and of furniture and equipment totaled $99,000 and $186,000
respectively for the nine months ended March 31, 1999.
On August 14, 1998, the Company acquired all of the outstanding shares
of Software Partners Publishing and Distribution Limited ("Software Partners"),
in exchange for 150,000 shares of the Company's Common Stock, valued at
approximately $213,000. On March 31, 1999 Software Partners changed its name to
eGames Europe Limited. Acquisition costs, net of cash received, were
approximately $12,000.
Net cash used in financing activities was $4,000 for the nine months
ended March 31, 1999 and net cash provided by financing activities was $222,000
for the nine months ended March 31, 1998. On October 26, 1998, the Company's
Board of Directors authorized the Company to purchase up to $1,000,000 of its
shares of Common Stock in open-market purchases on the Nasdaq SmallCap Market.
As of March 31, 1999, 161,900 shares at an approximate cost of $278,000 had been
acquired by the Company pursuant to the repurchase program. As of March 31,
1999, the Company had received net proceeds from the exercise of Common Stock
warrants and options totaling approximately $407,000.
On March 10, 1999, the Company entered into a $1,000,000 revolving
credit facility with a commercial bank. Amounts outstanding under this credit
facility are charged interest at one-half of one percent above the bank's
current prime rate and such interest is due monthly. This credit facility was
established to provide, among other things, additional working capital during
the Company's anticipated continued growth. As of May 12, 1999, the Company had
not utilized any amount of this credit facility.
The Company's ability to achieve positive cash flow depends upon a
variety of factors, including the timeliness and success of developing and
selling its products, the costs of developing, producing and marketing such
products and various other factors, some of which may be beyond the Company's
control. In the future, the Company's capital requirements will be affected by
each of these factors. The Company believes cash and working capital balances
will be sufficient to fund the Company's operations for the foreseeable future.
However, there can be no assurances that the Company will be able to sustain a
positive cash flow or that additional financing will be available if and when
required or, if available, will be on terms satisfactory to the Company.
Page 12
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Year 2000
The Company's State of Readiness
The Company has reviewed its critical information systems for Year 2000
compliance. The compliance review revealed that all but one of the Company's
critical information systems were Year 2000 compliant due to the fact that most
of the Company's network hardware and operating systems are "off-the-shelf"
products from third parties with Year 2000 compliant versions. The one critical
information system that required an upgrade to become Year 2000 compliant was
upgraded during December 1998.
The Company has determined that there should be no Year 2000 issues for
the products it has already sold since the Company's products predominantly
contain no date-sensitive software.
As part of the Company's Year 2000 compliance review, the Company is in
the process of contacting its primary vendors, distributors and customers to
determine the extent to which the Company is vulnerable to such third parties'
failures to address their Year 2000 compliance issues. The Company will continue
to work to obtain sufficient information and assurances from its significant
vendors, distributors and customers as part of its Year 2000 compliance review.
However, there can be no guarantee that third parties on which the Company's
business relies will adequately address their Year 2000 compliance issues nor is
there any guarantee that the failure by such third parties to adequately deal
with such issues would not have a material adverse effect on the Company and its
operations.
The Cost to Address the Company's Year 2000 Issues
The Company estimates that the cost of its Year 2000 compliance review,
including the upgrading of its critical information systems, will be less than
$15,000 and is not expected to be material to the Company's financial position,
cash flow or results of operations.
The Risks Associated with the Company's Year 2000 Compliance
The Company believes that its primary risk associated with Year 2000
compliance is the failure of third parties upon whom the Company's business
relies to timely address their Year 2000 issues. Failure by third parties to
adequately address their Year 2000 issues in a timely manner could result in
disruptions in the Company's supply of products, packaging and related
materials, late, missed or unapplied payments, temporary disruptions in order
processing and other general problems related to the Company's daily operations.
While the Company believes its Year 2000 compliance review procedures will
adequately address the Company's internal Year 2000 issues, until the Company
receives responses from all of its significant vendors, distributors and
customers, the overall risks associated with the Year 2000 issue currently
remain difficult to accurately describe and quantify, and there can be no
guarantee that such uncertainty will not have a material adverse effect on the
Company's business, operating results and financial position.
The Company's Contingency Plan
The Company has not, to date, implemented a Year 2000 contingency plan.
The Company intends to develop and implement a contingency plan by the end of
June 1999. It is the Company's intention to devote whatever resources are
necessary to assure that all of its Year 2000 compliance issues are resolved.
Page 13
<PAGE>
eGames, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Forward-Looking Statements
This report contains statements that are forward-looking, as that term
is defined by the Private Securities Litigation Reform Act of 1995 and by the
Securities and Exchange Commission in rules, regulations and releases. These
statements include, but are not limited to, statements regarding: increases in
the Company's sales directly to retailers as opposed to through a distributor;
improvements in the Company's future operating margins; the expansion of the
Company's North American retail distribution; the projected percentage of sales
of the Company's products to GT Value Products during the 1999 fiscal year; the
Company's efforts in developing "full-release" software titles; the Company's
Internet marketing strategy; the sufficiency of the Company's cash and working
capital balances to fund the Company's operations in the future; and the
Company's expectations and cost estimates regarding its Year 2000 compliance
efforts. All forward-looking statements are based on current expectations
regarding significant risk factors, and the making of such statements should not
be regarded as a representation by the Company or any other person that the
results expressed in this report will be achieved.
The following important factors, among others, could cause the
Company's actual results to differ materially from those indicated by the
forward-looking statements contained in this report: the success of the
Company's branding strategy and market acceptance of the Company's products in
the United States and international markets; the allocation of adequate shelf
space for the Company's products in major retail chain stores; successful
sell-through results for the Company's products at retail stores; the Company's
ability to place orders directly with retailers as opposed to achieving sales
through a distributor; the success of the revised distribution relationship
between the Company and GT Value Products; the continued expansion of the
computer in homes in North America and the world; the ability to deliver
products in response to orders within a commercially acceptable time frame;
downward pricing pressure; fluctuating costs of developing, producing and
marketing the Company's products; access to alternative distribution channels
and the success of the Company's efforts to develop and implement its Internet
marketing strategy; consumers' continued demand for value-priced software;
increased competition in the value-priced software category; the ability of the
Company and its key distributors, vendors and suppliers to effectively address
Year 2000 compliance issues; and various other factors described in the
Company's reports, including Form 10-KSB, dated June 30, 1998, filed by the
Company with the Securities and Exchange Commission, many of which are beyond
the Company's control. The Company does not undertake to update any
forward-looking statement made in this report or that may be made from time to
time by or on behalf of the Company.
Page 14
<PAGE>
eGames, Inc.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 22, 1999, the Company filed a report on Form 8-K regarding the
Company entering into a $1 million revolving credit facility with a commercial
bank.
On April 21, 1999, the Company filed a report on Form 8-K regarding a
press release announcing the Company's unaudited results for the third quarter
ended March 31, 1999.
Page 15
<PAGE>
eGames, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eGames, Inc.
(Registrant)
Date: May 13, 1999 /s/ Gerald W. Klein
------------ --------------------
Gerald W. Klein, President,
Chief Executive Officer, Chief
Financial Officer and Director
Date: May 13, 1999 /s/ Thomas W. Murphy
------------ --------------------
Thomas W. Murphy, Controller
and Chief Accounting Officer
Page 16
<PAGE>
eGames, Inc.
Exhibit Index
Exhibit No. Description of Exhibit Page Number
----------- ---------------------- -----------
27.1 Financial Data Schedule
Page 17
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