SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No. 2 on FORM 10-KSB/A
--------------------------------
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1994
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
(Exact name of small business issuer in its charter)
Florida 59-2543206
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
28050 U.S. 19 North, Suite 502, Clearwater, Florida 34621
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.03 par value
(Title of Class)
Redeemable Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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
- -
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was $1,066,470.
At March 31, 1995, 3,022,027 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock of Lasergate Systems, Inc. held by
non-affiliates (3,022,027 shares) was $23,042,955.
-1-
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (the "Company") is a corporation which was
organized under the laws of the State of Florida in 1985. The description of the
Company's business in this Item 1 gives effect to the integration with the
Company's business of the business of Delta Information Services, Inc. ("Delta")
by virtue of the Company's acquisition of all of the outstanding stock of Delta
on December 22, 1994 and the business of GIS Systems Limited Partnership ("GIS")
by virtue of the Company's acquisition of substantially all of the assets of GIS
on February 15, 1995, effective as of January 1, 1995. See "Recent
Acquisitions."
GENERAL
The Company is engaged in the development, assembly, marketing,
servicing and installation of admission control and revenue accounting systems
for both general admission and reserve seating. These systems are used primarily
at amusement parks, theme parks, water parks, night clubs and other public
facilities including state, county and local fairs, theaters, professional and
university athletic and multi-purpose arenas, movie theaters, aquariums, race
tracks, museums, zoos, casinos, ski resorts and golf courses. The Company's
technology has applications in, and the Company intends to expand its marketing
efforts for its admission control and revenue accounting and reserve seating
systems to include other types of amusement and entertainment facilities which
would benefit from the use of such systems. In addition, the Company has
licensed and begun to market a resort management system, which includes the
ability to manage sales by concession stand and retail shows (the "Resort
Management System") and has marketed and sold a computer facility scheduling and
management system for convention centers, fairs, museums, theaters, stadiums and
arts and athletic organizations (the "Facility Management System") which is
owned by a third party and which the Company is currently negotiating with such
third party to continue to market and sell.
The Company's admission control system, which is known as GATEPAS
("Gatepas"), employs various applications of laser scanning bar code technology
to automate and verify admission to attractions and provide revenue control and
accountability while reducing fraud inherent in situations involving cash
transactions when proper controls are not implemented. Gatepas creates a
detailed record of and permits individual charges for both overall facility
admission and access to each of the facility's attractions or events. The
Company has developed two versions of its general admission ticketing product
called "Admits", each of which are computerized point-of-sale systems which
issue general admission tickets, including timed admission tickets and wristband
tickets for amusement and water parks. "Admits Gold" is marketed to smaller
facilities with ten or less points of sale; "Admits Platinum" is for larger
systems and can be programmed to print bar-coded tickets so that, combined with
Gatepas, the Company can provide a facility with both ticketing and access con-
trol. The Company's reserve seat ticketing system ("Select-a-Seat") generates
tickets which assign individual seats and seasons tickets to patrons. This
computer software system includes on-line credit card authorizations, a report
writer and the ability to sell a ticket with as few as two key strokes.
-2-
<PAGE>
The Company has installed various configurations of Gatepas and/or
Admits Gold or Platinum in over 100 facilities including:
* KNOTT'S CAMP SNOOPY at the Mall of America in Bloomington,
Minnesota
* LUNA PARK, Sydney, New South Wales, Australia
* PORTO EUROPA, Wakayama, Japan
* HOUSE OF BLUES, a night club chain in Los Angeles, California,
New Orleans, Louisiana and Cambridge, Massachusetts
* RIPLEY'S BELIEVE IT OR NOT MUSEUM, Pigeon Forge, Tennessee
* THE FLORIDA AQUARIUM, Tampa, Florida
* THE METROPOLITAN MUSEUM OF ART, New York, New York
* THE GUGGENHEIM MUSEUM, New York, New York
* STEAMBOAT SPRINGS SKI RESORT, Steamboat Springs, Colorado
* THE BASKETBALL HALL OF FAME, Springfield, Massachusetts
The Company's Select-a-Seat system is used in over 80 installations
including:
* CARNEGIE HALL, New York, New York
* FENWAY PARK, Boston, Massachusetts
* MGM GRAND HOTEL, Las Vegas, Nevada
* ROYAL ONTARIO MUSEUM, Toronto, Ontario, Canada
* BRISBANE ENTERTAINMENT CENTER, Brisbane, Queensland, Australia
* ABBEY THEATRE, Dublin, Ireland
The Company's Facility Management System is used in over ten
installations including:
* AMARILLO CIVIC CENTER, Amarillo, Texas
* FLORENCE CIVIC CENTER, Florence, South Carolina
* PITTSBURGH SYMPHONY, Pittsburgh, Pennsylvania
* LAS VEGAS CONVENTION CENTER, Las Vegas, Nevada
* PUTRA WORLD TRADE CENTER, Kuala Lumpur, Malaysia
The Company's Resort Management System is used at the following two
facilities:
* BOYNE USA, Traverse City, Michigan
* SHANTY CREEK GOLF RESORT, Bellaire, Michigan
Current installations of the Company's systems vary from those which
provide for simple admissions tickets to allow access by patrons to a park or
stadium, to those which provide for more complex arrangements such as tickets of
decrementing value (the point or monetary value of the ticket decreases with
each use) which permit limited access to individual events and attractions
within a park or which specify a particular seat attributed to each ticket.
Certain of the Company's products identify tickets with a bar code, which
consists of a series of lines or bars that, for example, is commonly used
-3-
<PAGE>
to identify consumer products for checkout at supermarkets. Individually
bar-coded tickets are printed by Admits and are authorized for use by the holder
upon printing. Relevant data concerning the remaining value and restrictions of
the ticket are available from Gatepas each time the bar code is read and
processed. Bar code technology differs from magnetic strip technology which
generally encodes information in a magnetic strip which is part of a ticket.
With bar codes, no information is actually contained in the bar code, but
instead is held by Gatepas in individual records identified by the unique bar
code. The bar code is scanned by a laser scanner and, if the bar code is valid,
the Gatepas releases a turnstile. This validation process, in conjunction with
the Company's proprietary processing and storage features, permits the
combination of Gatepas and Admits Platinum to utilize numerous ticket printing
point-of-sale stations and turnstiles to process simultaneous information at
each location. Accordingly, Gatepas and Admits Platinum can be configured to
accommodate facilities of most any size. The Company also intends to integrate
Gatepas with Select-a-Seat to offer customers a more comprehensive integrated
product line in which a facility can control both general admission and assign
specific seats at particular events.
GATEPAS
BACKGROUND. Bar codes, which have been available for use since the
1970s, consist of a series of lines or bars printed on paper or plastic. By
varying the width of the bars and spaces between the bars, a bar code provides
an item, such as a ticket, with a unique identity. Bar codes are commonly used,
for example, in the supermarket industry in which each product is designated
with a Universal Product Code or UPC which becomes a part of the packaging of
that item. Laser scanners attached to cash registers identify the bar code on
each product to speed consumer check out.
The Company applies this technology through its admission and access
control systems in order to reduce fraud and labor costs while enhancing
accountability and profitability in the amusement and entertainment industries
as well as other public assembly facilities. Within the United States alone,
these industries encompass thousands of facilities including family
entertainment centers, fairgrounds, stadiums, water parks, amusement parks,
arenas, zoos, aquariums, museums, ice skating facilities, movie theaters,
convention centers, race tracks, ski resorts and performing arts theaters. Of
particular significance to the Company is the recent rapid growth of these
industries in the United States, Europe and Asia.
Use of bar codes permits purchasers of Gatepas to closely monitor
general attendance at their facility as well as usage of specific attractions.
By only recognizing tickets with valid bar codes that have been issued by the
facility, Gatepas reduces the possibility of admission from counterfeit tickets
and generally assists facilities to reduce fraud. Similarly, since the current
value and permitted use of the ticket is recorded on the Gatepas computers, it
cannot be altered by the holder, unlike commonly used magnetic strips. Bar coded
tickets are also considerably more durable in the hands of a ticket holder than
the fragile magnetic strips, especially when printed on inexpensive paper and
plastic.
The industry trend toward increased accountability and security of cash
is occurring in both the private and public business sectors. Many family
operated facilities recently have been acquired
-4-
<PAGE>
by larger corporate entities which typically require more stringent management
and accounting controls. Facilities operated in the public sector have
experienced significant reductions in the level of public subsidy from tax
revenues thereby increasing the need to implement greater management controls
and more sophisticated marketing techniques at these facilities. Accordingly,
optimizing revenue, insuring accountability of cash resources and controlling
facility access are becoming more significant issues for facility managers.
FEATURES. The Company's Gatepas system integrates the scanning
technology of bar codes commonly found in supermarkets with scanners which are
placed in turnstiles, and hand-held or stationary readers. The proprietary
nature of Gatepas is a result of the unique interrelationship of these
components, as well as the software which links them, rather than the components
themselves. To gain entry to a facility or an individual attraction, the bar
code on the card or ticket is scanned by a laser scanner located at the point of
entry. The ticket can be scanned in any direction by the ticket holder and,
after it is processed, if the ticket is valid, Gatepas responds with an audible
signal and, if desired, opens a turnstile so the ticket holder can gain
admission. If the ticket holder does not pass through the turnstile, the ticket
retains its prior value. In facilities which decrease the value of a ticket as
it is used, display devices are placed throughout the facility to simply read
the ticket value so that a holder can determine the remaining value of a ticket.
Signs are generally posted indicating the point value of individual events.
Facility personnel can access a statistical summary of cash receipts,
attendance and other statistical information about admissions as it is
occurring. The computer generates a summary of the day's activity, including the
cash and credit card transactions, the number of patrons entering the facility
and individual attractions and other statistical information requested. This
data, along with summary weekly, monthly or annual data, assists facilities in
managing their business and highlights irregularities in ticket collections.
SOFTWARE AND COMPUTERS. The Company holds a registered copyright,
granted in 1987, in its gate-control software included in Gatepas, which was
designed and developed by the Company. This copyright affords the Company the
protection of the federal copyright laws against the unauthorized use and
reproduction of its Gatepas software until the year 2062. The Company has
recently introduced an upgrade to its ticketing and reporting software based on
software acquired when the Company purchased Delta and GIS. The software
constituting the upgrade is not protected by a registered copyright, however,
the Company deems it proprietary and relies upon a combination of contract,
copyright and trade secret laws to protect its proprietary interest in such
software. See "Intellectual Property."
ADMITS
The Company's Admits computer software system provides general
admission ticketing for facilities that desire the flexibility of offering
tickets that can be printed for a variety of applications, both with and without
bar codes, ranging from simple entry fees to timed admission and tickets of
decrementing value. Admits Gold is utilized by smaller facilities, with ten or
less points where tickets
-5-
<PAGE>
are issued. The computer program is installed on a personal computer with a
MS-DOS operating system. It is particularly well-suited for use by movie
theaters and their specific accounting requirements. The Admits Gold software
was developed by GIS. Admits Platinum is better-suited for larger applications,
such as ski resorts and large amusement parks, in which numerous ticketing
stations are required. Operating on a personal computer workstation with a UNIX
host, Admit Platinum can include, in addition to the ticketing issuance
capabilities of Admits Gold, point-of-sale software for gift shops and
concession stands as well as a link to Gatepas for bar code scanner and
turnstile features. The Admits Platinum software was developed by the Company
and Delta and, although not protected by a registered copyright, the Company
deems it proprietary and relies upon a combination of contract and trade secret
laws to protect its proprietary interest in such software. See "Intellectual
Property."
FEATURES. Admits is easily adapted to allow a facility to meet any
ticketing requirements. Applications range from ticketing for simple general
admission to a facility to more complex ticketing, such as season passes,
tickets which admit the holder to certain or all rides and/or areas of the park
and discount tickets which may only be used at certain times of the day or on
certain days. Admits is menu driven, allowing individuals without computer
skills to operate it, and is flexible, so that facility personnel are able to
modify the charge to the ticket holder for a given ride or attraction. A ticket
or card can be printed at one of several locations and includes the name of the
facility (including a logo, if desired), the type of ticket and any other
information specified by the facility. Tickets can be designed in the form of
paper tickets for single day use, laminated plastic cards with photographs for
season pass use, or wristbands for use by children or in water parks.
Facilities are able to utilize the ability of the Admits system to
generate a wide variety of ticket types and to easily change the value of a
ticket-type to enhance revenues. For example, an amusement park can lower the
points needed to enter an attraction during low-usage periods to equalize patron
traffic and generate more revenue during low-use time periods. Similarly, the
park can offer commercial sponsorship for various attractions during specific
time periods, attracting advertising income. The system's flexibility permits
numerous variations of ticketing strategies to encourage facility attendance and
increase usage.
Admits Gold and Admits Platinum are complex computer software systems.
Each can be purchased alone for inclusion in a facility's existing computer
system or, more typically, with a number of additional optional hardware
components which the Company's technician will integrate with the software, at
the customers request. These additional hardware items include ticket printers,
cash drawers, personal computers, customer display devices and attended or
automated point of sale terminals. The proprietary nature of Admits is a result
of the relationship of these components and the increased number of functions
that this relationship provides, as well as the software which links them,
rather than the components themselves.
ADMITS PLATINUM AND GATEPAS. The Company has combined the
laser-scanning capabilities of Gatepas with the general admission ticketing
software of Admits Platinum to create a comprehensive admission system that is
flexible enough to meet a variety of customer needs. It is the
-6-
<PAGE>
Company's belief that this comprehensive system provides the Company with an
advantage over its competitors by providing customers with a variety of
functions which can be customized to the needs of an installation. The system
also competes on the basis of its reputation in the market, based on the number
and quality of its installed sites. In this system, each ticket is given a
unique bar code which, when processed, identifies the conditions under which it
can be used, the remaining value of that ticket and the time, place and
frequency of admission. As a ticket passes a laser scanner, the bar codes are
scanned, allowing Gatepas to simultaneously release the turnstile or perform
another function while reducing the value of the ticket. This system may
accommodate millions of active tickets in use and thousands of different ticket
types, varying from tickets that admit holders during specified hours, during
specified days or that are issuable for children, adults, senior citizens or
other special categories.
Unlike other forms of admission control which can be tampered with,
Gatepas maintains the records for each ticket holder on the system computer and
only recognize those tickets which Admits Platinum produced. This makes
counterfeiting nearly impossible and prevents ticket holders from manipulating
the value of their ticket. While the Company's competitors offer systems which
supply many of the same features as Admit Platinum and Gatepas, the Company
believes that the large number of features and flexibility of these systems
gives the Company a competitive advantage in marketing its products. See
"Competition."
This combined admission control system utilizes the following basic
components:
Ticket. A bar-coded ticket is printed at one of several locations.
Since the bar code is simply ink on paper and is printed by a standard thermal
or laser printer, it cannot be demagnetized or fraudulently manufactured (unlike
the magnetic tickets and strips of tickets) and will generally remain valid even
if the ticket is folded or mutilated. The system can also be augmented to
provide season passes with photographic identification cards as well as group
ticketing and reservation applications to print numerous tickets simultaneously
for sales through brokers or to groups.
Attended and Automated Point of Sale Terminals. Tickets can be sold
either by an attendant with a point-of-sale terminal, which includes a cash
drawer, terminal to select the ticket type and ticket printer, or by an
automated point-of-sale terminal. As a ticket is printed, a computer record is
made of the bar code, the type of ticket sold, its cost and the type of payment.
These can be reconciled later against the funds collected by the ticket agent.
The terminal can also be operated to request patron survey information.
An automated point-of-sale terminal works much like a bank ATM. The
patron answers questions about the type of ticket desired on a touch screen,
inserts either cash or a credit card and the terminal prints the ticket. Both
the automated and attended point-of-sale terminal have the capability of
directly communicating with credit card companies to check the patron's credit
and make the appropriate charge. Accountability for cash receipts occurs by
tracking and reporting all cash and other collections and the subsequent use of
the ticket issued. Each transaction and entry updates the record for each bar
code.
-7-
<PAGE>
Scanner. The scanners provided by Gatepas can be directly linked to
Admits Platinum software to read bar-coded tickets produced by the Admits
Platinum software.
Price. The price for the Gatepas/Admits Platinum system varies widely,
ranging from approximately $15,000 to $750,000, depending on the complexity of
the system desired and the number of people expected to use the system, which
affects the number of entry points and the equipment required. To date, most of
the systems the Company has installed were purchased for prices ranging from
approximately $50,000 to $300,000.
The Company's revenues have historically been derived from sales of
this system. The Company, however, is exploring the marketing of this system on
a usage basis in which case the Company would receive a per ticket charge for
each ticket generated and scanned. See "Marketing."
SELECT-A-SEAT
The Company entered the reserve seating market in February 1995 upon
its acquisition of GIS. The Company's reserve seating software system called
"Select-a-Seat," was designed and developed by GIS. Select-a-Seat software
controls reserve seating as well as general admission ticket sales and can be
purchased with the capability of taking telephone and mail order reservations,
group reservations, remote outlet sales and season subscription sales. These
capabilities make it particularly well-suited for concerts, sporting arenas and
theaters. It can store a perpetual data base of ticket buyers, allowing system
users to enhance their marketing abilities by having easy access to the name,
ticket purchase history, payment history and demographic information such as
age, performance preference and source of sale for its customer base. This
flexibility allows facilities to use Select-a-Seat to computerize their box
office management, reservation and event marketing in one system, without
reliance on outside ticket vendor services.
The Select-a-Seat system has over 80 installations servicing over 200
facilities which together sell in excess of 30 million tickets annually in the
United States, Canada, Australia, Singapore and Ireland. The software system can
be used in venues ranging from a one-terminal theater system to a 200-terminal
ticket selling network. The proprietary nature of Select-a-Seat is a result of
the unique interrelationship of these terminals through the software which links
them, rather than the terminals themselves. The software can be used for
distribution and control of admission tickets for theaters, professional and
university athletic and multi-purpose arenas, race tracks, theme parks, museums
and zoos.
TICKETING. Select-a-Seat maintains a constant inventory of all
available seats in a facility, including section, row and seat information. At
the time of sale, the system prints tickets for a customer with the pertinent
performance information as well as the seating location in the facility.
Select-a-Seat displays a series of prompts on a computer screen, leading the
ticket seller through the selling process. Once a ticket sale is completed, all
pertinent performance records are updated and inventory is simultaneously
depleted. The Select-a-Seat season ticketing program provides for rapid,
efficient and simple entry of season ticket purchases or account data, seat
assignment, payment
-8-
<PAGE>
posting, account verification, financial auditing, seat status auditing, ticket
printing and client invoicing.
Select-a-Seat has been purchased by entrepreneurs and governmental
agencies who have established regional or city-wide ticket distribution networks
as an alternative to the national ticketing providers such as TicketMaster. With
Select-a-Seat, a facility can control its own ticket inventory, maintain
reasonable ticketing service charges and retain ticketing service charge
revenue. By retaining the per-ticket service income, many organizations purchase
Select-a-Seat for use as a source of revenue.
MARKETING. In addition to ticket and revenue control functions,
Select-A-Seat can be used to store various characteristics of each individual
patron, such as car parking preferences, novelty purchases made, performance
preferences and past responses to various forms of advertising. These
characteristics, combined with demographic and biographic data, gives system
owners a powerful tool for direct mailings.
Select-a-Seat offers features that are specifically designed to meet
the needs of various market niches such as performing arts venues, large
stadiums, city-wide ticket bureaus and professional sports teams. The Company
expects that Select-a-Seat will be integrated with Gatepas to create an
integrated admission control and reserve seating system for venues such as
amusement parks with events that have reserve seating or stadiums and arenas
which also desire an admission/access control capability.
PRICE. The price of Select-a-Seat varies depending on the modules
purchased and the number of concurrent users provided for, ranging from a basic
price of $7,000 for a single terminal box office to $600,000 for multi-terminal
access and modules to support season tickets, telephone orders, reporting and
credit card authorizations. To date, most of the Select-a-Seat systems installed
were purchased for prices ranging from approximately $35,000 to $200,000.
FACILITY MANAGEMENT SYSTEM
Through its acquisition of GIS, the Company commenced marketing the
Facility Management System, a relational database software application the
proprietary rights to which are owned by a third party. This system is designed
to manage functions and events for a public or private facility. The Facility
Management System is the combination of booking and scheduling software with
industry standard office automation products, such as word processing systems.
The system operates using standard IBM-compatible personal computers and the
MicroSoft Windows(TM) computer program. The Company's past sales of these
systems are covered by an agreement with the third party owner of the software.
The Company is negotiating an additional agreement with the third party which is
intended to authorize future sales by it of these systems. This software is sold
alone or along with various optional hardware such as personal computers,
printers and other related machinery.
-9-
<PAGE>
FEATURES. The Facility Management System tracks room usage and
availability and resource usage and availability. Resource usage include
employees, meal service and equipment. The system also generates client
contracts and billing statements. the Facility Management System can be used by
any organization that books space or schedules activities, including
multi-purpose arenas, theaters, convention centers, hotels, meeting planners,
universities, recreation centers and museums. The system uses a standard
month-at-a-glance calendar format to display to operators room availability and
room usage. The Facility Management System also includes a simple booking
process that is easy to learn. Single or recurring events can be entered into
the system along with all pertinent event information, such as requirements for
labor, equipment and meal service billing rates and event coordination
responsibilities.
Once an event is booked, the system can generate budgets, estimate
expenses, send reminders to appropriate staff of event responsibilities and
generate an event contract. To further enhance the Facility Management System,
customers can add off-the-shelf software products for word processing,
accounting and graphic design. The Facility Management System has a security
system to control operator activity and extensive reporting capabilities to
manipulate the database, based on individual client requirements.
MODULES. The Facility Management System is offered to purchasers in
individual modules that are combined to create a system which is appropriate to
the needs of a facility. Some of the modules offered include: space management,
equipment usage, staffing, billing, meal service, budgeting, calendar schedules,
marketing, exhibition and electronic mail.
PRICE. The price of the Facility Management System depends upon the
modules purchased and the number of concurrent users provided for. The range is
from a basic price of $6,000 for a single user to $100,000 for a multi-user
system, including all available software modules. To date, most of the Facility
Management Systems were purchased for prices ranging from approximately $15,000
to $75,000.
RESORT MANAGEMENT SYSTEM
The Company entered the resort management market in December 1994 upon
its acquisition of Delta. The Resort Management System is a computer software
system which provides a resort with the ability to manage tee time golf and
tennis reservations, pro shop sales, group services, membership, concession
stand sales and restaurant management. The system uses distributed processing
technology which allows each point-of-sales station to perform sales and
reservation functions throughout a facility, including administering
reservations, ticket sales, room service, dining, gift shop and group services.
The system integrates with off-the-shelf inventory control and accounting
software to offer a complete software package for a resort. The Company offers
this software system alone or together with optional hardware which meets the
purchaser's individual requirements.
FEATURES. The tee time reservation system is designed to handle
advanced and daily reservations at single or multiple facility golf and tennis
resorts. The tee time reservation portion of
-10-
<PAGE>
the system utilizes a multi-user program that stores information in a central
database so that one or more operators can access information and make
reservations at any time from any workstation at the resort. Other capabilities
of the system include matching players by ability, couples or other criteria,
scheduling tee times weeks or months in advance and booking special events or
groups.
Other elements of the system assist a facility to achieve total
facility integration by incorporating reservations with access control, retail
point-of-sales and food and beverage point-of-sale. From any workstation an
operator can make a reservation for golf or tennis, sell merchandise or book
group activities.
PARTNERSHIP. Pursuant to the acquisition of Delta, the Company
effectively owns one-half of the equity interest in the Deltan Limited
Partnership, a Michigan limited partnership which owns, develops, markets and
sells the Tee Time golf reservation software included in the Resort Management
System. The partnership agreement provides that the Company appoints two members
of the partnership's five-member management committee and that the Company is
entitled to one-half of the profits of the partnership.
PRICE. The Company has installed the Resort Management System in two
locations since its introduction in January 1995. The price for the system
varies on the number of golf courses and number of users on the system and can
range from approximately $14,000 to $75,000.
PRODUCT SERVICING AND ADMINISTRATION
The Company has developed a number of common procedures for producing
and servicing each of its products.
ASSEMBLY AND TESTING. The Company purchases the components for its
systems, such as the computer equipment and circuit boards, turnstiles, metal
housings, laser scanners and ticket printers from a variety of sources and
assembles and integrates each of these components with its proprietary software
at its headquarters. Many of these components are enhanced off-the-shelf
hardware which are readily available from numerous sources. However, all
subsections and unique operating environments are fully integrated and all
software is tested at the Company's headquarters prior to shipment to ensure
proper operation.
INSTALLATION AND TRAINING. The Company's technicians install each of
the Company's systems in each location, providing any customization required and
overseeing the placement of all equipment. The purchaser is responsible for
installation of standard telephone-type cabling to link each component to the
central computer. These low-voltage cables are dedicated to the system and are
not expensive or difficult to install. This cabling method allows both new and
existing purchasers to easily install the Company's systems and allows existing
installations to expand their existing systems as their business grows. The
Company also provides interfaces into various local area networks (LANs) and
fiberoptics systems.
-11-
<PAGE>
The Company provides initial training for the administrators of each
system at each installation and provides a user manual. The Company will also
train facility personnel; however, the Company does not engage any of the
personnel which operate the Company's systems within a facility. Additional
training is available either at the installation site or the Company's
headquarters at the option and expense of the purchaser.
WARRANTY MAINTENANCE AND SERVICING. The Company offers a full one-year
warranty for any defects in its systems, except for bar-code scanners which are
warranted for 90 days. For the period commencing after the end of the warranty
period, the Company offers its customers a maintenance and servicing contract
for an annual fee. This contract provides for a telephone response to calls for
assistance which is available around the clock, seven days a week, standard
updates to the system pur chased, the user guides and repair or replacement (at
customer expense) of hardware components. The Company's engineering staff is
able to diagnose and correct most problems through computer linkup from the
Company's headquarters to each site. However, if more extensive modifications
are required or if a facility requires training for additional personnel, such
facility may request that Company personnel make additional site visits for a
fee. Approximately 15.5% of the Company's revenue for the year ended December
31, 1994 was generated by maintenance and servicing fees.
In order to remedy the technical problems experienced at certain
locations as well as standardize the Company's products to allow for more
cost-effective ongoing customer support, the Company committed to reinstall new
software and related required hardware at several of the Company's customer
sites and has reserved approximately $280,000 for the cost of reinstallations.
To date, four reinstallation's have been completed and the Company expects to
conduct an additional eight installations in 1995.
SECURITY. To provide appropriate back-up and security, the systems
include a back-up power source for the computer to protect against power
failures. The Company's systems automatically produce a duplicate copy of all
their computer records each night which are stored on magnetic tape.
RESEARCH AND DEVELOPMENT
The Company's engineers are engaged in developing numerous enhancements
and applications for the Company's technology. These applications are intended
to create new markets for the Company's products and to develop new products so
that the Company can compete more effectively in an industry which is
characterized by rapid technological change. As the Company is successful in
marketing its products for use in new industries, the Company's technical staff
will concentrate their efforts on completing the technology necessary for such
new installations. There can be no assurance that the Company will be able to
develop or market such new products or applications. The Company has expended
$345,379 and $293,351 during fiscal years 1994 and 1993, respectively, on
research and development. This does not include research and development
conducted by Delta or GIS during these periods which was acquired by the
Company.
-12-
<PAGE>
MARKETING
The Company currently markets all of its products through the efforts
of its senior management, as well as a sales staff of five employees. The
Company is a party to a joint venture with PMSI Group PTY Limited, an Australian
company, to market and sell products in certain territories in the Pacific Rim.
The Company also intends to develop additional marketing arrangements for the
Company's products with other entities in Asia and Australia. Marketing efforts
primarily take place at industry conventions, at regional seminars, through
targeted direct mail and by advertising in trade periodicals. Additionally,
customers have been attracted by the positive impressions created from existing
installations. The Company has expanded and intends to continue to expand its
marketing efforts with respect to its products as it financial condition
permits.
The Company believes that certain of its prior customers which are
using one or more of the Company's products may currently have or may soon
develop a need for additional products which the Company offers. As a result, in
addition to seeking new customers and new markets for its products, the Company
intends to market its full product line to its existing customer base.
The Company has primarily concentrated its marketing on the domestic
amusement and entertainment industries. The Company intends to expand the market
for Gatepas, Admits Gold, Admits Platinum and Select-a-Seat by emphasizing new
applications and enhancements which will reduce the possibility of fraud
inherent in existing admission systems. The Company also intends to expand the
market for its products by exploring the marketability of offering alternative
methods for customers to purchase its products. Alternative methods which the
Company currently intends to explore include the leasing of its products to
customers and the offering of Gatepas, Admits Gold and Admits Platinum Systems
on a long-term per-ticket charge basis. A customer acquiring a system on a
per-ticket-charge basis would essentially eliminate the up-front capital cost
normally associated with a purchase. The Company would derive its revenue under
such a program from fees charged based on the number of tickets sold and the
number of uses for each ticket.
CUSTOMERS
As of the date of this Report, the Company (including Delta and GIS)
has installed over 100 general admission systems, over 80 Select-a-Seat systems,
10 Facility Management Systems and two Resort Management Systems, including:
KNOTT'S CAMP SNOOPY AT THE MALL OF AMERICA, BLOOMINGTON, MINNESOTA.
Knott's Camp Snoopy, the largest indoor theme amusement park in the United
States, has installed the Company's Gatepas and Admits Platinum systems. Since
it is located in a shopping mall, Camp Snoopy does not charge general admission.
The system, installed in August 1992, provides a decrementing ticketing system
for each attraction. Patrons pay for a card with points which can be used on any
of the park's attractions. Attractions charge a specific point value for each
use. There are currently 56 scanning devices in Camp Snoopy, 13 attended
point-of-sale terminals and eight automated ticket selling machines. To date,
this system has sold approximately 1.8 million tickets and has scanned and
-13-
<PAGE>
electronically processed these tickets over 14 million times. At its peak usage,
this system has processed over 5,000 rides per hour.
WORLD OF COCA-COLA MUSEUM, ATLANTA, GEORGIA. The Gatepas and Admits
Platinum systems installed at the World of Coca-Cola Museum, a museum of the
history of Coca-Cola, includes four on-site point-of-sales terminals and an
off-site reservation and telephone sales system for daily admission of over
3,000 people. This system was installed in 1989 and was the first installation
of the Company's full access and revenue control system.
BLUE MOUNTAIN RESORTS, COLLINGWOOD, ONTARIO, CANADA. The Resort
Management System and Admits Platinum system at Blue Mountain Resorts includes
15 stations for ticket sales and four stations for season pass sales. The system
has been installed since 1989 and processes 400,000 skier visits annually.
BOYNE USA, BOYNE FALLS, MICHIGAN. The Resort Management System and
Admits Platinum system installed at Boyne Mountain includes 20 ticketing
stations and 20 point-of-sale stations for food sales, ski rental and golf tee
time scheduling. The system processes over 300,000 skier visits per year and
reserves golf tee times for five separate golf courses.
CARNEGIE HALL, NEW YORK, NEW YORK. Select-a-Seat was installed in
Carnegie Hall in 1985. There are over 35 users on this system selling tickets to
all concert performances, taking telephone reservations and processing season
subscription ticket sales.
BRISBANE ENTERTAINMENT CENTRE, BRISBANE, QUEENSLAND, AUSTRALIA. The
Brisbane Entertainment Centre is the largest indoor entertainment facility in
Brisbane, the capital city of Queensland, Australia. Select-a-Seat is installed
at the Entertainment Centre and is also used by a number of theaters and
professional sporting organizations in the region. The system includes 14
terminals installed at the Entertainment Centre as well as terminals installed
in retail shops throughout Queensland. The system processes well over 1,000,000
tickets annually.
PUTRA WORLD TRADE CENTRE, KUALA LUMPUR, MALAYSIA. The Putra World Trade
Center includes 164,000 square feet of exhibition space, along with the
3,285-seat Plenary Hall, which is suitable for conferences, conventions,
concerts, sporting events and theatrical performances. The Company's Facility
Management System is used to schedule all event activity at the Center, market
the Center to prospective clients and to track equipment and resource usage. The
system has been installed since 1994 and has over 20 users on a personal
computer local-area network.
The only customers which accounted for more than 10% of the Company's
revenues in the year ended December 31, 1994 (not including Delta and GIS) was
Matsushita Investment Development Company (owner of Porto Europa) in Wakayama,
Japan and Luna Park in Sydney, Australia, which accounted for approximately 48%
and 10% of the Company's revenues for such year, respectively. Management of the
Company expects that each new installation may account for a large part of the
Company's revenues in the year of installation and decrease dramatically
thereafter. As
-14-
<PAGE>
more systems are installed and the Company secures additional support and
maintenance contracts to service such installations, the severe fluctuations in
revenue should lessen as a result of the relatively stable income such contracts
will provide.
Due to the length of time it takes for the Company to purchase,
customize and install certain of its products, there may occasionally be a
significant backlog of orders for equipment. As of December 31, 1994 and March
31, 1995, the Company's backlog (as of December 31, 1994, not including GIS) was
$200,000 and $670,000, respectively. The backlog represented sales to numerous
sites with purchase prices ranging from approximately $7,000 to $85,000.
COMPETITION
The Company faces competition from different sources with respect to
each of its products. The Company is unaware of any one source with the
capabilities to supply the number of different admission, ticketing and facility
management products which the Company offers. In this respect, the Company
believes it has a competitive advantage over any other single company due to its
ability to satisfy a great variety of software or hardware requirements a
customer might have with respect to ticketing, access control, reserve seating
and facility and resort management.
GATEPAS. The primary competing technology for the Company's Gatepas
system is magnetic strips, such as those located on the back of most credit
cards and many forms of paper tickets. Magnetic strips contain information about
the ticket directly on the strip, making it possible to change the value of the
ticket by coding new information in the strip. It is also possible to
counterfeit tickets with magnetic strips by reproducing tickets with the same
encoding on the strip. Conversely, Gatepas utilizes bar codes which generate a
unique code for each ticket and the information about each ticket is contained
in the computer rather than on the ticket. This limits tampering from the
outside and permits a full record of ticket usage. The Company has developed a
communications link between the scanner and central computer. Paper tickets
without bar codes are especially susceptible to fraud, as they are easy to
counterfeit and reuse and it is expensive to provide personnel to count and
track them. The Company's primary competitor for its Gatepas system is Data
Services, Inc. which offers access control through scanners that allow users to
insert their bar-coded ticket into a slot. The Company believes it is able to
compete effectively with Data Services, Inc.
ADMITS. There are several companies in the United States offering basic
computerized ticketing capabilities which are similar to those the Company
offers through its Admits Gold and Admits Platinum systems. These include, among
others, Pacer Software Inc., Gateway and Select Ticket Systems. While all of
these firms have automated ticketing programs similar to that of the Company,
and many of them have resources substantially greater than those of the Company,
the Company believes that it competes effectively with these companies on the
basis of pricing and ease of installation, use and maintenances.
Select-a-Seat. The Company's Select-a-Seat reserve seating system
competes against companies such as TicketMaster, Inc., Select Ticket Systems,
Prologue Systems and ArtSoft. Many
-15-
<PAGE>
of these companies have resources substantially greater than those of the
Company. The Company believes, however, that it competes effectively in pricing
its Select-a-Seat system and that the Company has a competitive advantage in
that the Select-a-Seat software will operate with a wide variety of hardware
products which a customer might already own. The computerized reserved seat
ticket industry has historically been dominated by two national ticketing
companies, Ticketron, Inc. and TicketMaster, Inc. Ticketron, Inc. was recently
acquired by TicketMaster, Inc., leaving only one national ticketing company,
TicketMaster, Inc. TicketMaster, Inc. leases their equipment and software to
arenas, stadiums and theaters and establishes remote sales locations and
telephone reservations centers to sell tickets. Ticket buyers pay a service
charge to TicketMaster, Inc. for their services. Service charges range from
$1.50 per ticket to $7.50 per ticket. The Company's Select-a-Seat system is an
alternative to the national ticketing companies, allowing facilities to control
their own ticket inventory, maintain lower ticketing service charges and retain
ticketing service charge revenue. When organizations purchase Select-a-Seat, all
tickets sold over the telephone and at remote sales locations can carry a
per-ticket service charge which the owner of the system retains. Therefore, many
organizations purchase Select-a-Seat as a source of revenue. For a discussion of
Select-a-Seat, see the information included under the caption "Select-a-Seat"
above.
FACILITY MANAGEMENT SYSTEM. The Facility Management System sold by the
Company competes against companies such as Ungerbach, CEO and Concentrix, each
of which may have greater resources than the Company. The Company believes the
Facility Management System competes effectively in price and function and that
the Facility Management System has an advantage over other systems in that it
can operate with a Microsoft Windows(R) program. The Company has a license of
the proprietary rights to the system which allows the Company to market and sell
the system.
RESORT MANAGEMENT SYSTEM. The Company's Resort Management System
primarily competes with service bureaus, which may be remote from a resort, that
book golf and other events at a facility. In addition, software companies
provide certain of the functions of the Resort Management System. The Company
believes that it competes effectively with such service bureaus by allowing
resorts to manage its facilities without the need or expense of outside
providers. The breadth of the Resort Management System is attractive to
purchasers who desire a comprehensive, state-of-the-art resort software system
from one vendor.
GENERAL. The Company generally enters into non-disclosure agreements
related to its proprietary technologies and trade secrets with its employees and
with those companies and individuals with which it has contractual agreements.
PRODUCTION AND SUPPLIERS
The Company produces each of its systems by enhancing, integrating and
assembling various components which are readily available from numerous
suppliers. Other components, such as metal housing and circuit boards are
specially manufactured for the Company to its specifications and ordered from
one of numerous suppliers. The Company's major suppliers of such components are
Advanced Logic Research, Inc., BOCA Systems, Inc., Alvarado Corporation, MS Cash
Drawer Corp.,
-16-
<PAGE>
Jetstar, Inc., Arco Distributors, Inc., and American Microsystems, Inc. The
proprietary nature of Gatepas, Admits and Select-a-Seat is a result of the
unique interrelationship of these components as well as the software which links
them, rather than the components themselves. The other products which the
Company offers are primarily software in nature. Any hardware which the Company
may supply to a customer will generally be purchased from one of the suppliers
listed above or others that make substantially similar products.
The Company assembles and tests its software in its headquarters and
installs it along with appropriate hardware on-site for its various customers.
PERSONNEL
As of December 31, 1994, the Company employed 16 individuals, including
3 in management, 4 in engineering and customer support, 2 in direct sales and 7
support staff personnel. The Company also retained 3 individuals who served as
consultants to the Company and who provide expertise in the areas of sales and
marketing. Following the acquisitions of Delta and GIS, as of March 31, 1995,
the Company increased its personnel to include 31 employees, including 4 in
management, 13 in engineering and customer support, 5 in direct sales and 9
support staff personnel. The Company also retains 12 individuals who serve as
consultants or temporary independent contractors and who provide expertise in
the areas of management, sales and marketing, and software programming.
The Company does not currently have employment contracts with any of
its personnel other than Ms. Soechtig, the Company's President and Chief
Executive Officer. The Company generally enters into non-disclosure and
non-competition agreements with its employees. None of the Company's employees
is represented by a union or covered by a collective bargaining agreement. The
Company believes its relations with its employees is excellent.
INTELLECTUAL PROPERTY
The Company holds a registered copyright, granted in 1987, for the
software included in Gatepas. This copyright affords the Company the protection
of the federal copyright laws against the unauthorized use and reproduction of
the Gatepas software until the year 2062. The Company believes that this
copyrighted software for interfacing bar codes, omnidirectional laser scanners,
and related computer and system components provides the Company with a
competitive advantage. Additionally, through its acquisition of GIS, the Company
acquired a registered trademark in the name "Select-a-Seat" and a registered
copyright in the software comprising the Select-a-Seat system. This copyright
affords the Company the protection of the federal copyright laws against the
unauthorized use and reproduction of the Select-a-Seat software until the year
2066. The Company believes that this copyrighted software provides the Company
with a competitive advantage.
The Company also regards certain features of its internal operations,
software and documentation as proprietary. The Company relies on a combination
of contract, copyright, trademark and trade secret laws and other measures to
protect its proprietary information. The
-17-
<PAGE>
Company enters into confidentiality agreements with each of its employees and
customers and, where appropriate, with certain vendors, in which each party
agrees not to use the Company's proprietary intellectual property for purposes
other than those for the benefit of the Company. In addition, the Company
attempts to safeguard its technology through security measures such as passwords
and codes. Policing unauthorized use of the Company's information and technology
is difficult, and there can be no assurance that these measures will be
successful or that the Company will have the financial resources necessary to
enforce its proprietary rights. Trade secret laws in the computer technology
area are rapidly developing and, should the Company's proprietary products be
appropriated it will seek to enforce its rights. While the Company's
competitiveness may be affected by its ability to protect its proprietary
information, the Company believes that because of the rapid pace of
technological change in the computer software industry, trade secret and
copyright protection are less significant competitive factors than the know-how,
ability and experience of the Company's employees, frequent product enhancements
and the timeliness and quality of support services. While competitors may be
able to develop software products with similar capabilities, the Company
believes that a competitor would have to devote substantial resources to develop
products that can compete effectively with the Company's products. Accordingly,
although the Company deems its proprietary interest in its trademarks and
copyrights to be important, it does not believe that its failure or inability to
protect that interest would have a material adverse effect on its business. The
competitive advantage derived from the technology involved in each of Gatepas,
Admits and Select-a-Seat is a result of the relationships of these components
and the variety of features that they are able to provide when integrated and
the software which links them, rather than the individual components themselves.
The Company intends to apply for patents to protect its product
enhancements as they are developed. There can be no assurance that these patents
will be obtained or that they will afford sufficient protection for the
Company's products. In addition, the Company may not have the resources
necessary to enforce its rights with respect to any of its copyrights, trade
secrets or prospective patents.
RECENT ACQUISITIONS
During the last quarter of the year ended December 31, 1994, the
Company acquired all of the outstanding stock of Delta. Additionally, during the
first quarter of the year ending December 31, 1995, the Company acquired
substantially all of the assets of GIS.
On December 22, 1994, the Company, through a wholly-owned subsidiary,
purchased all of the outstanding capital stock of Delta, a former supplier of
revenue control and ticketing systems primarily for the ski and golf resort
industries from James Potter, Marion Audrey Potter and Derek Betty (the
"Sellers"). The Admits Platinum and Resort Management System are both products
which the Company is now offering as a result of the Delta acquisition. The
purchase price for the acquisition was valued at $1,200,000 and included a cash
payment of $500,000 and a promissory note which was converted into 100,000
shares of the Company's common stock (the "Shares"). The Sellers were granted
certain registration rights for two years with respect to the Shares and a put
option to sell to the Company up to 10,000 of the Shares at $7.00 per share each
year for the next three years.
-18-
<PAGE>
Additionally, James Potter, one of the Sellers, agreed to act as a consultant to
the Company for one year for a fee of $70,000.
On February 15, 1995, the Company purchased substantially all of the
assets of GIS, a company formerly engaged in the business of design,
integration, installation and sale of admission control and revenue accounting
computer systems and software for the entertainment industry. The Admits Gold,
Select-a-Seat and Facility Management System are all products which the Company
now offers or, in the case of the Facility Management System, has offered and is
negotiating to continue to offer, as a result of the GIS acquisition. The
purchase price for the acquisition was valued at $3,700,000 and was based upon
the expected revenues of GIS and the competitiveness of its products. The
purchase price consisted of 109,333 shares of the Company's common stock,
111,800 shares of the Company's Series B Preferred Stock, the Company's
promissory note in the principal amount of $591,000 (which may be paid by the
issuance by the Company of 118,200 shares of Series B Preferred Stock) and the
Company's promissory note in the principal amount of $1,733,335 (which may be
paid by the issuance by the Company of 346,667 shares of the Company's Series C
Preferred Stock. In addition, the Company agreed to assume certain liabilities
of GIS and loaned GIS $559,000. Fred Maglione and Nicholas Flaskay, both
formerly associated with GIS, have also agreed to serve as consultants to the
Company for terms expiring on January 31, 1996 and August 1, 1995, respectively.
Mr. Maglione is being paid a fee of $11,051 per month and Mr. Flaskay, $1,666
per month.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Since early 1994 a number of significant events have impacted the
Company's operating results for 1994 and its current and future prospects. These
events include a change in control, a public offering, changes in the Company's
President/CEO and other senior executives and two acquisitions. As a result, the
Company believes that it currently has the management, the products, the market
position and the commitment to fulfill its mission to be a world leader in
providing business solutions to the facility-based entertainment industry.
In the fourth quarter of 1993, the failure to raise sufficient capital
to support the Company's operations and meet its obligations, compounded by a
bad debt write-off of $337,000, resulted in a serious cash shortage and caused
the Company to curtail its marketing efforts. The Company's inability to satisfy
the terms of an agreement with certain individuals who had provided collateral
to secure a line of credit, led to the issuance of 833,333 shares of the
Company's common stock, which represented a change in control of the Company.
Subsequent to the change in control, two principal shareholders provided loans
to the Company to fund its operations until the Company could complete its
October 1994 public offering. In the interim, while two members of the Board of
Directors served as President/CEO in succession, the Company focused it efforts
on raising the necessary capital to fund its operations. There were numerous
personnel changes in sales/marketing, management and staff as well as technical
management and staff throughout 1994. Revenue for 1994 was limited to one major
contract of $500,000, with a few smaller system sales and maintenance and
support contracts
-19-
<PAGE>
from existing customers. The decrease in revenue in 1994 was primarily
attributable to disruption in management and marketing efforts and certain
technical problems experienced with the Company's products caused by cash
shortages and changes in personnel.
Upon completion of its public offering, the Company recruited Ms.
Jacqueline Soechtig as its President/CEO. Ms. Soechtig immediately began to
restructure the Company by recruiting experienced management personnel to
provide key functions. She also began an assessment of the Company's products to
determine their technical reliability, and capabilities as well as their
position in the market. The assessment indicated that the Company needed to make
certain enhancements and improvements to its products to satisfy existing
customers and position the Company in the market for revenue growth. In order to
facilitate implementation of this program, in December 1994 the Company acquired
all the outstanding capital stock of Delta, an Ontario, Canada based company
engaged in the sale of revenue control and ticketing systems. It was determined
that Delta's software would enhance the reliability of the Company's products
and eliminate the technical problems that had been experienced at certain
installations. Moreover, it was determined that the Delta software could be
integrated with Gatepas to provide a product which the Company believed would be
superior to currently available alternative systems. In addition to the software
acquired, Delta also had a customer base of over 45 installations, primarily in
the ski industry, a market the Company had not previously had access to.
In order to remedy the technical problems experienced at certain
locations as well as standardize the Company's products to allow for more
cost-effective ongoing customer support, the Company committed to reinstall new
software and related required hardware at several of the Company's customer
sites and has reserved approximately $280,000 for the cost of reinstallations.
When revenue was recognized on the sale of the systems to these customers, there
was no obligation to provide post-contract support. The agreement to perform the
reinstallation without charge was made for marketing and ongoing support
purposes. To date, four reinstallation's have been completed and the Company
expects to conduct an additional eight installations in 1995.
In February 1995, the Company acquired substantially all of the assets
of GIS, a Tampa, Florida company engaged in the sale of admission control and
revenue accounting computer systems and software for the entertainment industry.
The Company's products which are used for general admission ticketing
applications were complemented by the primary GIS products which provided for
reserved seat ticketing and facilities management focusing on auditoriums,
theaters and sports arenas. As part of the GIS acquisition, the Company has
employed primarily all of the sales, customer support and technical GIS
personnel.
Both Delta and GIS are historically profitable companies. The Company
believes that the acquisitions of these companies enhances its product line both
in breadth and technical reliability, introduces the Company to markets not
previously accessible to it and creates a strong, referenceable customer base,
all of which should lead to increased revenue, as evidenced by the increase in
backlog from approximately $200,000 at December 31, 1994 to in excess of
$670,000 at March 31, 1995. By eliminating duplication of administrative costs
among the companies, management further believes that
-20-
<PAGE>
the Company can become a more diverse and profitable company much sooner than
would otherwise have been possible. However, the acquisition costs and
additional costs of integrating the operations and software of the three
companies will impact the Company's results of operations in 1995.
RESULTS OF OPERATIONS: 1994 COMPARED TO 1993
Revenues decreased 31.5% from $1,557,819 in 1993 to $1,066,470 in 1994.
Revenues consisted of system sales and installations of $1,510,785 and $885,102
in 1993 and 1994, respectively, maintenance and support of $47,034 and $162,312
in 1993 and 1994, respectively, and interest income of $0 and $19,056 in 1993
and 1994, respectively. The decrease in systems sales was primarily attributable
to a cash shortage during the first six months of the year which caused the
Company to temporarily curtail its marketing efforts. One major system sale to
Matsushita Investment and Development Company for an installation in Wakayama,
Japan, represented 48% of the Company's net sales in 1994. The remaining revenue
from system sales and installations included several small systems and the first
phases of the system installations at the Florida Aquarium and Luna Park in
Sydney, Australia (through the Company's joint venture affiliate in Australia).
Net loss increased 37% from $1,752,972 in 1993 to $2,402,384 in 1994.
Cost of sales decreased from 78.7% of revenues in 1993 to 60.5% of revenues in
1994 primarily due to improved cost estimating and control. However, an
additional $281,075 was charged to the cost of sales in 1994 as a reserve for
the one time estimated cost to reinstall new software and related required
hardware at 12 existing customer sites in order to remedy the technical problems
experienced by these customers. This reserve increased the total cost of goods
sold for 1994 to $914,838 or 87.3% of net sales. Selling general and
administrative ("SG&A") expenses in 1994 increased by $436,914 or 21.5% from
1993 SG&A expenses. Personnel-related expenses, which included fees paid to
consultants who held key positions in sales, marketing, technical and executive
management during 1994 increased by $936,021. This increase was offset in part
by a decrease in bad debt expense of $356,088 from the $401,053 in 1993, which
was primarily related to the failure of an amusement park proprietor to pay for
a system purchased during 1992, to $44,965 in 1994. The balance of SG&A expenses
cumulatively decreased $143,019 from $880,119 in 1993 to $737,100 in 1994.
Included in SG&A expenses in both 1993 and 1994 were non-cash stock options or
grants valued at $593,007 for personnel-related services and $120,044 for
financing costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $1,631,156 and $399,998 for operating
activities during 1994 and 1993, respectively. From its inception in October
1985 through December 31, 1994, the Company incurred a cumulative loss of
$7,578,574 with a loss of $2,402,384 for the year ended December 31, 1994. For
the year ended December 31, 1994, the Company's net loss was $2,402,384 due
primarily to expenditures related to the factors referred to under the caption
"Results of Operations 1994 compared to 1993" above. Included in the net loss
for 1994 were non-cash reconciling expenses of $813,323 which included (i)
depreciation/amortization expenses of $82,070, (ii) the Company's recognition of
a loss from its joint venture in Australia of $37,486, (iii) a reduction in the
allowance
-21-
<PAGE>
for doubtful accounts of $70,855, and (iv) equity-related transactions totaling
$764,622 from the issuance of Common Stock in exchange for services and
financing costs of $131,422 and $100,000, respectively, obligations to issue
stock options granted as compensation for services of $450,000 and additional
paid-in capital resulting from services contributed by officers/stockholders of
$83,200. Cash which was used to purchase items classified as current assets
increased by $158,478 with investment in inventories increasing $46,423 and
prepaid expenses and insurance increasing $182,162, while accounts receivable,
trade decreased $70,107. These uses of cash were partially reduced by an
increase in accounts payable and accrued expenses of $154,383.
The Company engaged in certain investing activities during 1994 which
included additions to property and equipment, product design costs, and advances
to its joint venture in Australia, aggregating $175,531. In addition in December
1994, Lasergate Systems Canada Company, a wholly-owned subsidiary of the
Company, acquired the capital stock of Delta for an aggregate consideration of
$1,200,000. The purchase price consisted of $500,000 of cash, and a promissory
note of $700,000, convertible into 100,000 shares of the Company's Common Stock.
The promissory note was immediately converted into Common Stock. The cumulative
cash used in these investing activities was $675,531.
Subsequent to the close of its fiscal year, in February 1995, the
Company acquired substantially all of the assets of GIS for an aggregate
consideration of approximately $3,700,000. The purchase price consisted of
109,333 shares of the Company's Common Stock, 111,800 shares of the Company's
Series B Preferred Stock and the Company's unsecured, non-interest bearing
promissory notes in the aggregate amount of $2,324,335. The promissory notes are
payable at the Company's option in cash or convertible Preferred Stock. In
addition, the Company has agreed to assume certain liabilities of GIS and has
loaned GIS $559,000 which has been evidenced by a promissory note of GIS due
March 1996, which is secured by the pledge to the Company of the 111,800 shares
of the Company's Series B Preferred Stock.
The Company engaged in certain financing activities during 1994. At
December 31, 1993, the Company had an outstanding balance on a revolving line of
credit of $299,765, payable to a financial institution, at the interest rate of
.5% over the prime rate per annum. The line was secured by a certificate of
deposit pledged by an individual. Having been unsuccessful in its efforts to
release the collateral when due, in 1994 the Company issued 833,333 shares of
Common Stock pursuant to its April 1993 agreement with the individual. In
September 1994, a certificate of deposit was pledged by two individuals who had
received an aggregate of 611,112 of the aforementioned shares of Common Stock to
secure the refinancing of $87,500 that had come due under two notes held by the
same financial institution for project financing. The two individuals (who have
since divested themselves of their Common Stock holdings) agreed not to demand
release of the two certificates of deposit pledged as collateral until March 31,
1996, and the financial institution agreed not to demand payment of outstanding
amounts drawn on the line of credit or the project financing notes as long as
the debts were secured by the collateral. In November 1994, the Board of
Directors authorized the prepayment of the line of credit and project financing
notes in their entirety and the release of the collateral to the two
individuals.
-22-
<PAGE>
During October 1994, the Company completed a public offering of 920,000
units at a price of $5.50 per unit, each unit consisting of one share of Common
Stock and two redeemable warrants each to purchase one share of Common Stock.
Net proceeds to the Company were approximately $3,900,000. Also during October,
the Company borrowed $95,584 under a premium financing agreement, of which
$20,674 was repaid by December, 1994.
From January through August 1994, the two individuals discussed above
loaned the Company an aggregate of $959,505 and deposited an additional $650,000
in escrow for the Company's operating expenses, if and when needed, of which
$300,000 was subsequently drawn. In September 1994, these individuals agreed not
to demand repayment of the loans (exclusive of the amounts drawn from escrow,
which were payable upon receipt of proceeds from the public offering) until
October 1996. During October 1994, $200,000 of the $959,505 in outstanding loans
was converted into 36,364 shares of the Company's Series A Preferred Stock and
the escrow advances were paid in their entirety. During November 1994 the Board
of Directors authorized the prepayment of $559,505 of the outstanding loans.
In December 1994, the Company received $15,000 in proceeds from the
exercise of warrants granted in 1993 in connection with financing activities.
During 1994, the Company repaid loans that were outstanding at December
31, 1993 in the aggregate amount of $127,500.
The Company has engaged in various transactions to reduce its
obligations to certain related parties. In August 1994, certain officers,
directors and shareholders of the Company converted $250,044 of debt owed to
them by the Company into Common Stock at a rate of $5.00 of debt for each share
of Common Stock. An executive officer and principal shareholder contributed
$83,200 of accrued salary to paid in capital in August 1994.
The Company anticipates that the improvements in its products, the
addition of new products and access to new markets resulting from the
acquisitions of Delta and GIS will result in substantial revenue growth.
However, prior to realizing this revenue growth, the Company expects to incur
additional expenses to integrate its newly acquired products into its product
line, to train its personnel and to promote the restructured Company to the
current customers and markets of the three companies. During this period, the
Company will fund its ongoing operations from the proceeds of the secondary
public offering. Subsequently the Company believes that it could achieve
positive cash flow by implementing a cost containment plan in 1995 that would
reduce expenditures by approximately $750,000 primarily by reducing salaries
and/or staffing in engineering, marketing and administration. However,
management believes that it can accelerate the growth of revenues and long-term
profitability by expanding its marketing efforts. In order to implement this
strategy for accelerated growth, the Company would incrementally increase its
sales staff, add a telemarketing department and expand its advertising and
marketing activities including trade conventions. Subject to availability of
funds, the additional costs associated with this increase in personnel and
expenditures will require additional funding. The Company intends to seek
financing of approximately $2,000,000
-23-
<PAGE>
during 1995 through the public and/or private sale of securities or short-term
or long-term borrowings. There can be no assurance that the Company will be able
to obtain such financing on acceptable terms, if at all. Without such additional
funding the Company will defer the implemention of these plans and will continue
to operate from the remaining proceeds of the public offering and operating
revenues. If projected revenue levels are not achieved, the Company may need to
reduce certain expenditures in order to sustain the Company's operations.
ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the year
ended December 31, 1994, which include the following items:
Page
Report of Independent Certified Public Accountants ............... F-1
Consolidated Balance Sheets ...................................... F-2
Consolidated Statements of Operations ............................ F-3
Consolidated Statements of Stockholders' Equity (Deficit) ........ F-4
Consolidated Statements of Cash Flows ............................ F-5
Notes to Consolidated Financial Statements ....................... F-7
-24-
<PAGE>
[LETTERHEAD OF GRANT THORNTON LLP]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lasergate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lasergate
Systems, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lasergate Systems, Inc. and
Subsidiaries at December 31, 1994 and 1993, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
April 7, 1995
F-1
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1994 1993
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,589,837 $ 15,377
Account receivable, net of allowance for
doubtful accounts of $17,000 and $87,855 152,529 151,781
Inventories 124,680 78,257
Prepaid expenses 116,948 99
---------- ----------
Total current assets 1,983,994 245,514
Property and equipment 96,993 22,214
Systems and software costs 529,558 -
Other assets (including goodwill of $536,919) 868,286 4,416
---------- ----------
$3,478,831 $ 272,144
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable:
Bank $ - $ 387,265
Other 74,910 100,000
Related parties - 153,365
Accounts payable, trade 530,260 404,958
Customer payment for future services 62,000 100,000
Accrued expenses:
Salaries and wages 53,647 128,370
Reinstallation 281,075 -
Other 58,447 212,979
---------- ----------
Total current liabilities 1,060,339 1,486,937
Notes payable, related party 200,000 -
Obligations to issue common stock
and common stock options 450,000 300,000
Common stock subject to put options 210,000 -
Commitments and contingencies - -
Stockholders' equity (deficit):
Preferred stock, $.03 par value, 2,000,000
shares authorized, 36,364 and -0-
shares of Series A issued and outstanding
at December 31, 1994 and 1993, respectively 1,091 -
Common stock, $.03 par value, 5,000,000 shares
authorized, 2,913,680 and 424,032 issued and
outstanding at December 31, 1994 and 1993,
respectively 87,412 12,721
Additional paid-in capital 9,258,563 3,648,676
Less: Common stock, $.03 par value, 30,000
shares subject to put options (210,000) -
Accumulated deficit (7,578,574) (5,176,190)
---------- ----------
1,558,492 (1,514,793)
---------- ----------
$ 3,478,831 $ 272,144
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1994 1993
------------ ------------
<S> <C> <C>
Revenues $ 1,066,470 $ 1,557,819
Cost of goods sold 914,838 1,226,144
----------- ----------
Gross profit 151,632 331,675
Selling, general and administrative expenses 2,473,981 2,037,067
---------- ----------
Operating loss (2,322,349) (1,705,392)
Interest expense 80,035 47,580
------------ ------------
Loss before income taxes (2,402,384) (1,752,972)
Income taxes - -
------------ -------------
Net loss $(2,402,384) $(1,752,972)
============ =============
Net loss per common share $ (1.62) $ (4.69)
============ =============
Weighted Average Common
Stock Outstanding 1,487,246 373,655
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994 and 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Additional Common Stock
Preferred stock Common stock Paid-in Subject to Accumulated
Shares Par Value Shares Par Value Capital Put Option Deficit
------ ----- --------- ------ --------- -------- ----------
Balance, January 1, 1993 - $ - 319,614 $ 9,588 $3,509,249 $ - $(3,423,218)
------ ----- --------- ------ --------- -------- ----------
Issuance of common stock at
$.36 per share for:
Performance awards and
services -
Executives and/or
major stockholders 43,996 1,319 14,519
Employees 3,000 90 990
Marketing agreement
-third party 24,167 725 7,975
Consulting agreement
-third party 18,000 540 5,940
Financing costs-Executives
and/or major stockholders 12,755 384 4,208
Board of Directors
compensation 2,500 75 825
Employment services
contributed by officers/
stockholders 104,970
Net loss - - - - (1,752,972)
------ ----- --------- ------ --------- -------- ----------
Balance, December 31, 1993 - - 424,032 $12,721 $3,648,676 $(5,176,190)
------ ----- --------- ------ --------- -------- ----------
Issuance of common stock
at $.36-$.50 per share for:
Performance awards and
services - Executives
and/or major
stockholders 290,483 8,715 95,860
Financing costs -
Executives 37,907 1,137 12,510
Major stockholders
(related to December
31, 1993 obligation) 833,333 25,000 275,000
Major stockholders 200,000 6,000 94,000
Cancellation of options-
Executives 26,667 800 8,800
Other 10,000 300 3,300
Issuance of common stock
at $5.00 per share for:
Satisfaction of debt -
Executives 36,083 1,083 179,336
Employees 13,925 418 69,208
Employment services contributed by
officers/stockholders 83,200
Issuance of 920,000 units
in secondary public offering
at $4.95 per unit (net of
underwriter's discount/
commissions), less
offering expenses of
$647,998 920,000 27,600 3,878,402
Exercise of warrants 21,250 638 14,362
Issuance of common stock
at $7.00 per share in
connection with acquisition 100,000 3,000 697,000
Issuance of Series A
preferred stock for:
Satisfaction of $200,000
of notes payable-
Major stockholders 36,364 $1,091 198,909
Common stock (30,000 shares)
subject to put option at
$7.00 per share (210,000)
Net loss (2,402,384)
------ ----- --------- ------ --------- -------- ----------
Balance, December 31, 1994 36,364 $1,091 2,913,680 $87,412 $9,258,563 $(210,000) $(7,578,574)
====== ===== ========= ====== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1994 1993
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,402,384) $(1,752,972)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 82,070 11,640
Loss in joint venture 37,486 -
Increase (decrease) in allowance for
doubtful accounts (70,855) 64,070
Common stock issued principally for services 131,422 37,590
Obligations to issue options granted as
compensation for services 450,000 -
Employment services contributed by
officers/stockholders 83,200 104,970
Financing costs satisfied and to be satisfied
by issuance of common stock 100,000 300,000
Decrease (increase) in:
Accounts receivable, trade 70,107 236,076
Inventories (46,423) 74,377
Prepaid expenses (116,849) 1,151
Other (principally related to prepaid
insurance) (65,313)
Increase (decrease) in:
Accounts payable and accrued expenses 154,383 423,100
Customer payment for future services (38,000) 100,000
---------- ----------
Net cash used in operating activities (1,631,156) (399,998)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (82,213) (9,214)
Product design costs (29,557)
Advances to joint venture (63,761) (3,456)
Acquisition of Delta Information Services, Inc. (500,000) -
Other - 900
---------- ----------
Net cash used in investing activities (675,531) (11,770)
---------- ----------
Cash flows from financing activities:
Proceeds from secondary public offering, net of
offering costs 3,906,002 -
Proceeds from exercise of warrants 15,000 -
Proceeds from loans, other 95,584 1 00,000
Proceeds from loans, bank - 387,266
Proceeds from loans, related parties 1,259,505 21,000
Repayment of loans, related parties (887,005) (28,000)
Repayment of loans, other (120,674) (108,000)
Repayment of loans, bank (387,265) -
--------- ----------
Net cash provided by financing activities 3,881,147 372,266
--------- ----------
Net increase (decrease) in cash and cash
equivalents 1,574,460 (39,502)
Cash and cash equivalents, beginning of year 15,377 54,879
--------- ----------
Cash and cash equivalents, end of year $ 1,589,837 $ 15,377
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1994 and 1993
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
YEAR ENDED
DECEMBER 31,
------------
1994 1993
---- ----
Interest $81,847 $44,936
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In April 1994, the Company issued 833,333 shares of common stock in satisfaction
of an obligation to issue the common stock which existed at December 31, 1993
for financing costs of $300,000 recorded for the year ended December 31, 1993.
During June 1994, current liabilities totaling $250,044 were converted into
50,008 shares of common stock ($5.00 per share).
In December 1994, the Company acquired Delta Information Services, Inc. for
total consideration of $1,200,000 (cash of $500,000 and common stock of
$700,000) and recorded intangible assets at an aggregate fair value of
$1,200,000. No liabilities were assumed in the transaction (see Note 3).
In October 1994, the Company issued 36,364 shares of Series A preferred stock to
two major shareholders of the Company in satisfaction of $200,000 of debt owed
to them by the Company.
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Lasergate Systems, Inc. (the Company), a Florida corporation and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Lasergate Systems, Inc. was organized and incorporated in the State of Florida
in 1985 and is engaged in the development, assembly, marketing, servicing and
installation of admission control and revenue accounting systems for use
primarily in the amusement park and entertainment industry, as well as other
public facilities.
In March 1993, the Company formed a joint venture (Lasergate Systems
Asia-Pacific Pty. Limited) with PMSI Group Pty. Limited, an Australian company,
to market and sell products of Lasergate Systems, Inc.
In December 1994, the Company formed Lasergate Systems Canada Company to
facilitate the acquisition of Delta Information Services, Inc. (see Note 3).
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined principally by the use of the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided using
the straight-line method over the estimated economic useful lives (5-10 years)
for financial statement and income tax purposes.
SYSTEMS AND SOFTWARE COSTS
Systems and software costs at December 31, 1994 represent the fair values
assigned in connection with the Company's acquisition of Delta Information
Services, Inc. on December 22, 1994 (see Note 3). Such costs shall be amortized
on a product-by-product basis. The annual amortization expense will be the
greater of the amount computed using the ratio that current gross revenues for
each product bear to the total of current and anticipated future gross revenues
for that product or the straight-line method over the remaining estimated
economic life (6 years) of the product. Since the acquired business had minor
operations for the period from the acquisition date through December 31, 1994,
no amortization expense has been recognized in 1994.
The Company's expenditures related to the development of its systems and
software have been expensed and included in research and development costs (See
separate research and development note). No amounts have been capitalized by the
Company during 1994 and prior years, except those related to the Delta
acquisition, since either the amounts qualifying for capitalization under
Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting for Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" once
technological feasibility (as defined) has been achieved, have been
insignificant or the customer specifically funded the development of the unique
and discrete systems and software through the customer contract.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INTANGIBLES
Intangibles which were recognized in connection with the Company's acquisition
of Delta Information Services, Inc. on December 22, 1994 (see Note 3) relate to
systems and software costs (see above), non-competition agreements, customer
list and support contracts, and goodwill. Such costs will be amortized using the
straight-line method over their respective estimated useful lives: systems and
software costs (see above), non-competition agreements--three (3) years,
customer list and support contracts--six (6) years, and goodwill--twenty (20)
years. Since the acquired business had only minor operations from the
acquisition date through December 31, 1994, no amortization expense has been
recognized in 1994. Beginning in 1995, management will review, at least on a
quarterly basis, whether or not any impairment has occurred with respect to such
acquired intangibles which could warrant an adjustment to the carrying values.
Undiscounted cash flow projections associated with the acquired business will be
the primary focal point in the assessment and analysis for potential impairment.
INVESTMENT IN JOINT VENTURE
The Company uses the equity method of accounting for its 50% investment in
Lasergate Systems Asia-Pacific Pty. Limited. At December 31, 1994 and 1993, and
for the years then ended, the joint venture's assets, liabilities and results of
operations are not significant. The Company's investment in/advances to ($29,730
and $3,456) and share of the joint venture's loss from operations ($37,486 and
$1,544) are classified in other assets and selling, general and administrative
expenses, respectively, in the accompanying consolidated financial statements
for 1994 and 1993, respectively. The Company has not guaranteed any of the joint
venture's liabilities nor does the Company have any commitments to fund its
operations.
FINANCING COSTS
Financing costs are being amortized over the term of the related loans.
REINSTALLATION LIABILITY
At December 31, 1994, the Company established a reinstallation reserve to
account for the estimated costs required to correct operating problems at
certain customer installations. Such costs are included in cost of goods sold in
the accompanying consolidated statements of operations.
REVENUE RECOGNITION
Revenues from the sale of equipment, which have been predominately under
short-term contracts during the periods presented herein, are recognized upon
the shipment of goods to the customer provided that no significant vendor or
post-contract support obligations remain outstanding and collection of the
resulting receivable is probable. Revenues from special sales sold under
evaluation periods are recognized at the end of this period.
Revenues from post contract customer support arrangements are recognized ratably
over the contract period if collectibility is probable. These support contracts
during 1993 included those assigned under the July 1993 AVT Marketing Support
Agreement (see Note 10).
INCOME TAXES
The Company adopted, effective January 1, 1993, SFAS No. 109, "Accounting for
Income Taxes". Under the liability method specified in SFAS No. 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense (benefit) is the result of changes in deferred tax assets
and liabilities. The change from Accounting Principles Board (APB) No.11 to SFAS
No. 109 had an immaterial effect on the financial statements.
F-8
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
RESEARCH AND DEVELOPMENT
Research and development costs, including systems and software costs incurred to
establish the technological feasibility of computer software, as defined by SFAS
No. 86, are expensed as incurred. Research and development costs included in
"Selling, general and administrative expenses" in the accompanying consolidated
statements of operations were $345,379 and $293,351 for the years ended December
31, 1994 and 1993, respectively.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during the periods. Common stock equivalents (options and warrants)
were not included in the calculation of net loss per share because they were
either antidilutive and/or insignificant. As discussed in Note 10, an obligation
to issue 833,333 shares of the Company's common stock was recorded in October
1993, however, the shares were not issued until April 1994. Supplemental loss
per share assuming the shares were issued in October 1993 would be ($1.38) per
share for the year ended December 31, 1994.
NOTE 2 - OPERATIONAL AND FUNDING MATTERS
For the year ended December 31, 1994, the Company incurred a loss of $2,402,384,
has an accumulated deficit of $7,578,574 and used cash in operating activities
of $1,631,156.
In October 1994, the Company successfully completed a secondary public offering,
with net proceeds to the Company of approximately $3,900,000. Subsequent to the
offering, the Company began to restructure its operations by recruiting
experienced management personnel and assessing the Company's position in the
market. Additionally, the Company acquired Delta Information Services, Inc. on
December 22, 1994 (see Note 3) and GIS Systems Limited Partnership effective
January 1, 1995 (see Note 13). Both Delta and GIS are historically profitable
companies. Management believes that the merger of the three companies enhances
its product line, improves its existing technology, increases its customer base,
and allows it to enter new markets. The combined companies on a pro forma basis
(unaudited) had revenues of approximately $5,200,000 in 1994. If this
approximate level of revenues or slightly greater level is achieved in 1995 as
management believes is possible (but no assurances can be given) coupled with
the elimination of duplicate costs among the companies and the reduction of
certain other costs, management believes that the Company should be able to
achieve positive cash flows by December 31, 1995 without significant additional
financing. The Company, however, has implemented a strategy for accelerated
growth of revenues to exceed the latter levels, and has committed to investing
in additional personnel, equipment, marketing and product development to achieve
this goal. These investments, together with additional costs of integrating the
operations of the three companies, could very possibly impact cash flows during
1995 and require additional funding. The Company intends to explore financing
alternatives which would provide approximately $2,000,000 to be used for
operational and expansion needs. There can be no assurance that such financing
will be successfully obtained. If projected revenue levels are not achieved in
1995, management believes that their cost containment plan would result in the
deferral of certain expenditures, primarily related to future growth, in order
to sustain its operations without significant additional funding in 1995.
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 3 - ACQUISITION OF BUSINESS
On December 22, 1994, Lasergate Systems Canada Company, a wholly-owned
subsidiary of the Company, acquired the capital stock of Delta Information
Services, Inc. (Delta) (a Canadian company) for aggregate consideration of
$1,200,000. The purchase price consisted of cash of $500,000 and a promissory
note of $700,000, convertible into 100,000 shares of the Company's unregistered
and restricted $.03 par value common stock valued at $7.00 a share. The common
stock valuation reflected the agreed-upon price between the buyer and seller and
was also determined by the Board of Directors after giving effect to such
factors as the restrictions and the size of the block of common stock, etc. The
promissory note was immediately converted into common stock in December 1994. In
addition, the Company incurred approximately $46,919 in direct acquisition costs
(principally legal and accounting fees). At the date of acquisition, Delta had
no tangible assets nor liabilities that were transferred to or assumed by the
Company.
The purchase price, including the direct acquisition costs, was allocated as
follows:
Computer software $ 500,000
Non-competition agreement 85,000
Customer list and support contracts 125,000
Goodwill 536,919
----------
$1,246,919
==========
Pursuant to the acquisition of Delta, the Company effectively acquired a 50%
equity interest in Delta Limited Partnership, which was inactive and had no
significant assets nor liabilities. In addition, the Company did not assume any
funding obligations and/or guarantees associated with their interest in the
limited partnership. Accordingly, the Company did not assign any value to the
partnership interest in the allocation of the purchase price of Delta.
The sellers were granted certain registration rights for two years with respect
to the shares of common stock issued and a put option to sell to the Company up
to 10,000 of the shares of the Company's common stock at $7.00 per share each
year for the next three years. The put option which has an aggregate value of
$210,000 has been classified as common stock subject to put options in the
consolidated balance sheets and represents the amount the Company would be
required to pay if all the put options were exercised. Additionally, one of the
sellers agreed to act as a consultant to the Company for one year for a fee of
$70,000.
This transaction has been accounted for as a purchase in accordance with APB No.
16 "Business Combinations". Accordingly, the results of Delta's operations have
been included in the Company's consolidated financial statements from the date
of acquisition. The following are pro forma results of operations for 1994 and
1993 assuming the transaction was effective as of January 1, 1993.
Unaudited
-----------
1994 1993
---- ----
Revenues $1,800,936 $ 2,707,417
Net loss (2,520,780) (1,689,075)
Loss per common share $(1.59) $(3.00)
NOTE 4 - INVENTORIES
Inventories as of December 31, consist of the following:
1994 1993
-------- -------
Finished goods $111,016 $68,917
Raw materials 13,664 9,340
-------- -------
$124,680 $78,257
======== =======
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, consist of the following:
1994 1993
---------- ----------
Furniture and equipment $167,061 $104,473
Vehicles 16,705 16,705
Purchased software 8,976 8,976
Test equipment 34,002 14,377
-------- --------
226,744 144,531
Less accumulated depreciation 129,751 122,317
-------- --------
$ 96,993 $ 22,214
======== ========
Depreciation expense for the years ended December 31, 1994 and 1993 was $7,434
and $11,640, respectively.
NOTE 6 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1994 1993
---------- -------
Goodwill (see Note 1) $536,919 $ -
Non-competition agreement 85,000 -
Customer list and support contracts (see Note 1) 125,000 -
Financing costs, less accumulated amortization of $74,636 25,364 -
Investment in and advances to joint venture 29,730 3,456
Other (principally prepaid insurance) 66,273 960
-------- ---------
$868,286 $ 4,416
======== =========
NOTE 7 - NOTES PAYABLE
At December 31, 1994, the Company had an outstanding balance of $74,910 due
under a premium financing agreement, at an annual interest rate of 9.25%.
Monthly installments of principal and interest of $11,034 are due through July
1995.
At December 31, 1994, the Company had outstanding borrowings under promissory
notes payable to two principal stockholders of $200,000, representing unsecured
cash advances due in October 1996, at an annual interest rate of 8% (see Note
13).
At December 31, 1993, the Company had an outstanding balance on a revolving line
of credit of $299,765, payable to a financial institution, at an interest rate
of prime plus 1/2% (7% at December 31, 1993), interest payable monthly. These
borrowings were repaid in their entirety during October 1994. The certificate of
deposit pledged by a principal stockholder as collateral was returned, and the
line of credit was terminated.
At December 31, 1993, the Company had an outstanding balance on project
financing loans payable to a financial institution in the amount of $87,500, at
an interest rate of prime plus 1% (7.5% at December 31, 1993), interest payable
monthly. These borrowings were repaid in their entirety during November 1994.
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 7 - NOTES PAYABLE - Continued
At December 31, 1993, the Company had borrowings under a senior secured
promissory note with a private investor in the amount of $100,000, at an annual
interest rate of 10%. Such borrowings were repaid in their entirety in June
1994. The Company granted warrants to the investor to purchase up to 8,333
shares of its common stock, at an initial price of $1.80 per share (subject to
change upon the occurrence of certain events, as defined in the warrant). In
June 1994, the warrants were increased to 21,250 and the exercise price was
changed $.706 per share. The warrants were exercised in December 1994 (see Note
10).
At December 31, 1993, the Company had outstanding borrowings under various notes
aggregating $125,865, representing cash advances made by a consultant, former
director and Chief Executive Officer, at an annual interest rate of 10%. At
December 31, 1993, there was $35,386 of accrued interest due on these
borrowings. In August 1994, the Company issued 32,250 shares of common stock in
repayment of the outstanding promissory note balances and accrued interest (see
Note 10, paragraph 4).
At December 31, 1993, the Company had outstanding borrowings of $27,500,
representing unsecured cash advances due on demand made by a former President of
the Company, at an annual interest rate of 10%. At December 31, 1993, there was
$2,473 of accrued interest due on these borrowings. Such borrowings and accrued
interest were repaid in their entirety in 1994. Additionally, 37,907 shares of
$.36 common stock were issued in 1994 in exchange for the borrowings not being
paid on demand.
NOTE 8 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method (see Note 1). The
effect on the 1993 financial statements as to the income tax provision and net
deferred taxes was not significant.
The Company has a net operating loss (NOL) for income tax purposes of
approximately $6,100,000 at December 31, 1994 which begins to expire in the year
2000. The deferred tax benefit is determined based on the difference between the
financial reporting and tax bases of assets and liabilities as measured by the
enacted tax rate which will be in effect when these differences are realized.
The Company cannot reasonably predict when it can utilize the NOL carryforward
and, therefore, the Company has recognized an equivalent valuation allowance
against the deferred tax benefit.
The principal types of temporary differences and their related tax effects that
give rise to the deferred tax assets are as follows:
December 31, December 31,
1994 1993
------------ ------------
Bad debt allowance, employee
vacation pay, and other accruals $ 10,000 $ 88,000
Stock options 168,000 -
Net operating loss carryforward (1) 2,250,000 1,449,000
---------- ----------
2,428,000 1,537,000
Less valuation allowance (2,428,000) (1,537,000)
---------- ----------
$ - $ -
========== ===========
(1)Certain transactions involving the beneficial ownership of the
Company have occurred which resulted in a stock ownership change for
purposes of Section 382 of the Internal Revenue Code of 1986, as
amended. Consequently, a portion of the Company's net operating loss
carryforward is subject to limitation on their utilization against
future income.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 8 - INCOME TAXES - Continued
The Company's computed effective tax rate differs from the Federal statutory tax
rate as follows:
1994 1993
---- ----
Federal statutory rate 34% 34%
Surtax exemption - -
Effect of net operating losses
(NOL) or NOL carryforward (34%) (34%)
---- ----
Effective tax rate, after the effect of NOL 0% 0%
===== =====
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facilities under an operating lease,
which expires in February 1995 (see Note 13 Subsequent Events).
Future minimum payments under this operating lease are as follows:
1995 $6,611
Rental expense for the years ended December 31, 1994 and 1993 was $51,305 and
$45,841, respectively.
FINANCIAL ADVISORY AND INVESTMENT BANKING AGREEMENT
In connection with the secondary public offering of 920,000 units in 1994, the
Company entered into a three-year financial advisory and investment banking
agreement with the underwriter for such public offering, which provides for fees
of $3,666 per month. Financial advisory and investment banking expense for the
year ended December 31, 1994 was $10,998.
LEGAL PROCEEDINGS
The Company knows of no material pending or threatened legal proceedings to
which the Company is a party or which any of its properties is subject. No such
proceedings are known to the Company to be contemplated by governmental
authorities.
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 10 - STOCKHOLDERS' EQUITY
CHANGE IN CAPITAL STRUCTURE
Effective June 22, 1994, the Company changed its capital structure. The number
of authorized shares of common stock was changed from 25,000,000 (pre-split) to
5,000,000 (post-split) and a reverse stock split of 1 for 12 shares reduced the
number of shares of outstanding common stock. The Company is authorized to issue
up to 2,000,000 shares of preferred stock, $.03 par value per share, the terms
of which (including, without limitation, dividend rates, conversion rights,
voting rights, terms of redemption and liquidation preferences) may be fixed by
the Board of Directors in its sole discretion. The holders of the common stock
will not be entitled to vote upon such matters. In October 1994, the Board of
Directors authorized 50,000 shares of Series A preferred stock with no voting
rights, dividends to accrue only upon declaration by the Board and a liquidation
value of $5.50 per share, plus unpaid dividends, if any.
ISSUANCE OF COMMON STOCK FOR SERVICES
During the years ended December 31, 1994 and 1993, the Company issued an
aggregate of 1,398,390 and 104,418 shares of its common stock, respectively,
for: (1) performance awards and services to executives and/or major
stockholders, (2) financing arrangements with executives and/or major
stockholders, (3) consulting and marketing services; and (4) other purposes.
Since the Company's common stock trading activity had been relatively limited
and these shares were issued prior to the secondary public offering in October
1994, its estimated fair value has been determined by the Board of Directors
considering various factors. As a result, the value of the services rendered or
received were used to determine the value of the transactions and not the
estimated fair value of the common stock issued. The fair value of the services
provided by executives and/or major stockholders was approved or determined by
the Board of Directors. The fair value of consulting and marketing services was
based on agreements with the parties involved. The valuation of services
resulted in 200,000 shares being issued at $.50/share in September 1994,
1,198,390 shares being issued at $.36/share from April to September 1994 and
104,418 shares being issued at $.36 per share for the year ended December 31,
1993.
On April 5, 1993, the Company entered into an agreement with an individual to
obtain funding for operations. As part of this agreement, the individual pledged
a $300,000 certificate of deposit to enable the Company to obtain a line of
credit with a financial institution (see Note 7). Under the terms of the
agreement, the Company committed to issuing shares of its common stock as an
inducement for the pledge of the certificate of deposit, the number of shares to
be calculated upon the occurrence of certain events, as defined. The Company
also granted a security interest in substantially all assets of the Company.
During October 1993, upon the expiration of the agreement and the occurrence of
certain events, the Company became obligated to issue 833,333 shares of its
common stock to this individual. Simultaneously, the Company recorded financing
costs (included in selling, general and administrative expenses in the
accompanying consolidated statements of operations) and a corresponding
obligation to issue common stock with a value of $300,000 ($.36 per share). In
April 1994, the Company completed its obligation through the issuance of the
shares of common stock to this individual and his designees, after notice was
duly given to stockholders, to complete its obligation.
In September 1994, the Company issued 200,000 shares of common stock valued at
$.50 per share to two principal stockholders as consideration for providing
funds to the Company. In September 1994, the Company also issued 32,250 shares
of common stock to a consultant and former director and Chief Executive Officer
of the Company, in payment of $161,251 of debt owed to him, 4,233 shares of
common stock to an employee of the Company and the son of a consultant, former
director and Chief Executive Officer, in payment of $21,167 of debt owed to him,
9,692 shares of common stock to a former employee of the Company and the son of
a consultant and former director and Chief Executive Officer, in payment of
$48,459 of debt owed to him, and 3,833 shares of common stock to a director and
executive officer of the Company, in payment of $19,167 of debt owed to her.
Total debt and liabilities satisfied aggregated $250,044.
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
During July 1993, the Company entered into a marketing support agreement with
Automated Venue Technologies ("AVT"), whereby AVT assigned a client base to the
Company and agreed to assist in promoting the products of the Company, in
consideration for the sum of $80,000 to be paid on or before November 15, 1993.
On December 7, 1993, the Company entered into a "Termination of Marketing
Support Agreement and Stock Issuance Agreement" with AVT. Under the terms of
these agreements, the Company issued 24,167 shares of its common stock at $.36
per share, total consideration of $8,700, in settlement for amounts agreed to be
owed, an agreement by AVT not to compete with the Company for a period of five
(5) years, and an agreement by one of AVT's partners to provide consulting
services to the Company.
SECONDARY PUBLIC OFFERING
During October 1994, the Company completed a secondary public offering of
920,000 units at a price of $5.50 per share. Each unit consisted of one share of
common stock and two (2) redeemable warrants. Net proceeds to the Company were
$3,906,002, after deducting underwriter's discounts/commissions of $506,000 and
offering costs of $647,998.
PREFERRED STOCK ISSUED
In October 1994, the Company issued of 36,364 shares of Series A preferred stock
to the two principal shareholders of the Company in satisfaction of $200,000 of
debt owed to them by the Company.
1988 INCENTIVE STOCK OPTION PLAN
In 1988, the Company adopted an incentive stock option plan. The number of
shares of common stock of the Company that may be awarded is 24,306. The option
price per share shall be determined by the option committee, but shall not be
less than 100% of the fair market value of the Company's common stock at the
time the option is granted. There were no options granted during 1993 and none
were outstanding as of December 31, 1993. During 1994, the Company terminated
this incentive stock option plan, and a new stock option plan was approved by
the Board of Directors (see below).
STOCK OPTIONS
In February 1994, the Board of Directors authorized the establishment of the
Company's 1994 Stock Option Plan. The plan permits the grant of options which
may be either incentive stock options (ISO's) or non-qualified stock options
(NQSO's). The total number of shares of common stock for options which may be
granted under the plan may not exceed 58,333 subject to adjustment, as defined.
The Stock Option Committee of the Board of Directors is authorized to determine
the number of options to be granted, the number of shares which will be subject
to any option and the exercise price. However, the exercise price may not be
less than 100% of the fair market value of the common stock on the date of
grant.
On February 5, 1994, the Board of Directors granted NQSO's to the former Senior
Vice President--Chief Technical Officer, Executive Vice President and a
marketing consultant to purchase up to 16,667, 12,500, and 12,500 shares,
respectively, of the Company's common stock. These options were waived by these
individuals effective May 23, 1994.
In June 1994 and October 1994, respectively, the Board of Directors granted
40,000 ISO's to officers and employees and 18,300 NQSO's to employees to
purchase shares of the Company's common stock at a price of $1.00 per share for
a term of five (5) years. In October 1994, the Board of Directors amended the
vesting requirement to be one year of continuous service to the Company, with
past service to be counted toward the requirement. Additionally, the Board of
Directors granted an ISO to a former employee to purchase 1,000 shares of the
Company's common stock at a price equal to the fair market value of the stock on
this date (after the secondary offering), exercisable upon the execution of a
general release form acceptable to the Company.
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
Information as to shares subject to options is as follows:
Shares Price per Share
-------- ---------------
ISO NQSO
--- ----
Options outstanding, January 1, 1994 - -
Options granted:
February 1994 41,667 - $1.00
June 1994 40,000 - $1.00
October 1994 (pre secondary offering) - 18,300 $1.00
October 1994 (post secondary offering) 1,000 - $13.00
Options exercised (500) (1,500) $1.00
Options cancelled (45,667) - $1.00
------ ------
Options outstanding, December 31, 1994 36,500 16,800
======= ======
Exercise price range per share of
options outstanding at year end $1.00 $1.00 - 13.00
==== ============
As of December 31, 1994, 15,500 ISO's and 16,800 NQSO's were exercisable at
exercise prices ranging from $1.00 - 13.00.
WARRANTS
In connection with the secondary public offering completed in October 1994, the
Company issued 1,840,000 redeemable warrants to purchasers of the Company's
common stock. These redeemable warrants were immediately detachable and
separately tradable from the common stock with which they were issued. Each
redeemable warrant expires on October 16, 1999, and entitles the holder,
commencing one year from the effective date of the offering, to purchase one
share of the Company's common stock for $5.50, the exercise price. The
redeemable warrants are subject to redemption commencing one year after the
effective date at a price of $.05 per redeemable warrant subject to the
occurrence of certain events, as defined.
Additionally, a warrant to purchase 276,000 shares at $9.08 was granted to the
underwriter, exercisable during the four years commencing one year from the
closing date of the offering.
In addition to the warrants discussed in Note 7, paragraph 5, the Company
granted warrants to purchase 4,167 shares of the Company's common stock at an
exercise price of $4.50 per share, which expire on May 20, 1998 and granted
warrants to purchase 900 shares of the Company's common stock at an exercise
price of $3.75 per share, which expire in July 1997, in connection with
financing activities in 1993.
Information as to warrants is as follows:
Range of
Shares Price per Share
------ ---------------
Warrants outstanding, January 1, 1993 - -
Warrants granted 13,400 $1.80 - 4.50
----------- -----------
Warrants outstanding, December 31, 1993 13,400 $1.80 - 4.50
Warrants granted 2,128,917 $.706 - 9.08
Warrants exercised (21,250) $ .706
----------- ------------
Warrants outstanding, December 31, 1994 2,121,067 $3.75 - 9.08
========= ===========
As of December 31, 1994, 4,167 warrants were exercisable at an exercise price of
$4.50 per share and 900 warrants were exercisable at an exercise price of $3.75
per share.
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
RESERVATION OF COMMON STOCK
At December 31, 1994, the aggregate number of the Company's shares of common
stock reserved for issuance upon exercise of options and warrants, when added to
the number of outstanding shares of common stock, exceeded the number of
authorized shares of 5,000,000. In February 1995, this condition was cured by
the underwriter of the Company's public offering agreeing not to exercise its
warrants to purchase a total of 276,000 shares of common stock until the
Company's authorized number of shares of common stock is increased. Effective
February 1995, the Board of Directors has proposed an amendment to the Company's
Articles of Incorporation to increase the number of authorized shares of common
stock from 5,000,000 to 12,000,000. This amendment must be approved by the
shareholders of the Company (see Note 13).
NOTE 11 - FOURTH QUARTER ADJUSTMENTS
During October 1994, the Company recorded compensation in the aggregate amount
of $450,000 ($.30 per share of common stock) representing the difference between
the exercise price and fair value of 125,000 options granted to the President
and Chief Executive Officer of the Company and 25,000 options granted to a
member of the Company's Board of Directors and former President and Chief
Executive Officer of the Company (see Note 13).
During December 1994, the Company recorded a provision for reinstallation work
at customer sites in the amount of $281,075 ($.19 per share of common stock).
The above items relate to the fourth quarter of 1994 and did not affect the
previous three quarters of 1994.
During the third quarter of 1993, in connection with the marketing support
agreement entered into with AVT, the Company recorded revenues of approximately
$609,000 and a corresponding equal amount for cost of sales principally for
three customers for which AVT had previously provided equipment and services.
Such revenues were earned by AVT, and were, in fact, not earned by the Company.
An adjustment was recorded to reduce revenues and cost of sales for such
amounts.
During 1993, the Company commenced a legal action against one of its customers
for collection of amounts due under terms of an agreement for sale of an
admission control system. In November 1993, a settlement agreement was entered
into between the Company and the customer, resulting in the Company recording
bad debt expense in the amount of approximately $337,000 ($.90 per share of
common stock).
During October 1993, the Company recorded financing costs and a corresponding
obligation to issue common stock in the amount of $300,000, based on a funding
agreement with an individual (see Note 10, paragraph 3)($.80 per share of common
stock).
During 1993, the Company incurred approximately $125,000 of costs in connection
with a private placement offering. As this offering was not successful, these
costs were charged to expense in the fourth quarter of 1993 ($.33 per share of
common stock).
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 12 - SALES TO MAJOR CUSTOMERS
Percentage of Net Sales
-----------------------
Year ended December 31,
Customer 1994 1993
-------- ---- ----
A 42.7%
B 17.4%
C 10.8%
D 47.9% (1)
E 10.4% (1)
(1) Represents sales in 1994 to foreign customers which aggregated approximately
$611,000, including sales to Lasergate Systems Asia-Pacific Pty. Limited of
$109,000 (see Note 1). There were no sales to foreign customers in 1993.
NOTE 13 - SUBSEQUENT EVENTS
CHANGE IN CAPITAL STRUCTURE
Effective February 15, 1995, the Board of Directors adopted a resolution to
change the Company's capital structure by establishing two additional series of
preferred stock -- Series B and Series C. The authorized number of Series B and
Series C shares is 230,000 and 350,000, respectively. Such shares contain no
voting rights and dividend rates may be fixed by the Board of Directors at its
sole discretion. Both series contain specific provisions as to conversion into
shares of the Company's common stock, liquidation values and mandatory
redemption requirements.
The Board of Directors has proposed an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
5,000,000 to 20,000,000. The amendment must be approved by the shareholders of
the Company.
ACQUISITION OF GIS SYSTEMS LIMITED PARTNERSHIP
On February 15, 1995, the Company executed an agreement to purchase
substantially all of the assets of GIS, a company formerly engaged in the
business of design, integration, installation and sale of admission control and
revenue accounting computer systems and software for the entertainment industry.
The Admits Gold, Select-a-Seat and Facility Management System are all products
which the Company now offers as a result of the GIS acquisition. The purchase
price for the acquisition was valued at $3,700,000 and was based upon the
expected revenues of GIS and the competitiveness of its products. The purchase
price consisted of 109,333 shares of the Company's common stock, 111,800 shares
of the Company's Series B preferred stock, the Company's promissory note in the
principal amount of $591,000 (which may be paid by the issuance by the Company
of 118,200 shares of Series B preferred stock) and the Company's promissory note
in the principal amount of $1,733,335 (which may be paid by the issuance by the
Company of 346,667 shares of the Company's Series C preferred stock). In
addition, the Company agreed to assume certain liabilities of GIS and loaned GIS
$559,000. Two officers formerly associated with GIS, have also agreed to serve
as consultants to the Company for terms expiring on January 31, 1996 and August
1, 1995, respectively, for fees of $11,051 and $1,666 per month, respectively.
The transaction will be accounted for as a purchase under APB No. 16 and as a
result, the operations of the acquired business will be included with the
Company's operations from January 1, 1995, the effective date of the Agreement.
F-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994 and 1993
NOTE 13 - SUBSEQUENT EVENTS - Continued
OPERATING LEASE
In February 1995, the Company entered into an operating lease for its new office
facility, as the lease term for the previous office and warehouse facilities
expired (see Note 9). The lease term is for the period of March 1, 1995 to April
30, 1999, with annual minimum rent as follows:
1995 $ 61,056
1996 116,144
1997 123,748
1998 148,418
1999 50,220
--------
$499,586
========
NOTE PAYABLE, RELATED PARTY
On February 6, 1995, the Company had additional borrowings of $559,505
representing an unsecured cash advance from two former shareholders under a
promissory note due October 1996, at an annual interest rate of 8%.
STOCK OPTION PLAN
On March 7, 1995, the Board of Directors, subject to shareholder approval,
adopted amendments to the Company's 1994 stock option plan. The number of shares
which may be granted was increased from 58,333 to 600,000 shares. The number of
shares granted to any optionee cannot exceed 200,000 in any year. The exercise
price of non-qualified stock options granted to employees and consultants cannot
be less than 25% of the fair market value of the common stock on the date of the
grant. Additionally, outside directors of the Company's Board of Directors will
be granted an option to purchase 5,000 shares of common stock for each year of
the respective term, with vesting as to 5,000 shares to occur at the beginning
of each year of such term.
STOCK OPTION GRANTS
On March 7, 1995, the Board of Directors, authorized the grant of 375,000
non-qualified stock options at an exercise price of $2.00 per share to the
Company's President and Chief Executive Officer, in connection with a three (3)
year employment agreement. Of the total options granted, 125,000 were granted as
a signing bonus effective October 31, 1994 and were immediately exercisable
since their issuance was not contingent on future services as are the remaining
250,000 options. Accordingly, compensation expense of $375,000, representing the
difference between fair value of $5.00 per share (determined by the Board of
Directors considering such factors as restrictions, etc.) and the exercise
price, has been recorded in the consolidated statement of operations for 1994.
In addition, a corresponding obligation to issue (grant) common stock options
also has been reflected in the balance sheet at December 31, 1994. The balance
of the 250,000 options, which are subject to shareholder approval, vest equally
(125,000 shares) on October 31, 1995 and 1996. The Company will record
additional compensation expense of $375,000 in 1995 and 1996 to correspond with
the Chief Executive Officer's period of service.
On March 7, 1995, the Board of Directors granted 25,000 non-qualified stock
options to the Company's former President and Chief Executive Officer, in
connection with services rendered to the Company in 1994. The exercise price of
the options is $2.00 per share and the options are immediately exercisable.
Accordingly, compensation expense of $75,000, representing the difference
between the fair value of $5.00 per share (determined by the Board of Directors)
and the exercise price, has been recorded in the consolidated statement of
operations for 1994. In addition, a corresponding obligation to issue (grant)
common stock options also has been reflected in the balance sheet at December
31, 1994.
On March 7, 1995, the Board of Directors granted 30,000 non-qualified stock
options at an exercise price of $5.00 per share to each of three of the
Company's senior executives for services to be rendered in 1995-1998.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LASERGATE SYSTEMS, INC.
By:/s/ JACQUELINE E. SOECHTIG
---------------------------
Jacqueline E. Soechtig
President and Chief Executive Officer
Dated: November 16, 1995
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000797324
<NAME> Lasergate Systems, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,589,837
<SECURITIES> 0
<RECEIVABLES> 169,529
<ALLOWANCES> 17,000
<INVENTORY> 124,680
<CURRENT-ASSETS> 1,983,994
<PP&E> 226,743
<DEPRECIATION> 129,750
<TOTAL-ASSETS> 3,478,831
<CURRENT-LIABILITIES> 1,060,339
<BONDS> 0
<COMMON> 8,937,066
0
200,000
<OTHER-SE> (7,578,574)
<TOTAL-LIABILITY-AND-EQUITY> 3,478,831
<SALES> 1,066,470
<TOTAL-REVENUES> 1,066,470
<CGS> 914,838
<TOTAL-COSTS> 3,388,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,035
<INCOME-PRETAX> (2,402,384)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,402,384)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,402,384)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> 0
</TABLE>
