SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1995
[ ] 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.
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(Exact name of small business issuer in its charter)
FLORIDA 59-2543206
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(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
28050 U.S. 19 NORTH, SUITE 502, CLEARWATER, FLORIDA 34621
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(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
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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
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(Title of Class)
REDEEMABLE WARRANTS
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(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 statement 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 $2,835,206.
At March 31, 1996, 4,798,492 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock of Lasergate Systems, Inc. held by
non-affiliates (4,777,992 shares) was $7,614,925.
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Documents incorporated by reference: Proxy Statement for the Company's 1996
Annual Meeting of Shareholders Incorporated by Reference into Part III of this
Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (the "Company") is a corporation that was organized
under the laws of the State of Florida in 1985. The Company is an integrator and
provider of admission control and revenue accounting systems worldwide.
GENERAL
The Company is engaged in the development, assembly, marketing, servicing
and installation of admission control and revenue accounting systems for general
admission and reserve seating at entertainment events. The systems can be 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 has developed two versions of the general admission ticketing
product called "Admits Gold" and "Admits Platinum." Each system provides
computerized point-of-sale general admission tickets, including timed admission
tickets and/or wristband tickets for amusement and water parks. Admits Gold is
generally marketed to smaller facilities with ten or less points of sale. Admits
Platinum is marketed to facilities with more than ten points of sale.
The Company's reserved seating ticketing product, "Select-a-Seat," allows
the customer to ticket and assigns individual seats for a particular performance
or for a series of performances. The Select-a-Seat System controls individual
box office ticket sales and optionally has the capability of taking telephone
and mail order reservations, group reservations, remote outlet sales and season
subscription sales.
The Company's admission control system, known as "Gatepas", employs various
applications of laser scanning bar code technology to automate and verify
admission to attractions and provide revenue control and accountability. Gatepas
reduces fraud inherent in situations involving cash transactions when proper
controls are not implemented. Gatepas creates a detailed record and permits
individual charges for both overall facility admission and access to each of the
facility's attractions or events. This is an optional system that can be
purchased to be used in conjunction with the Admits Platinum system.
The Company markets the Passmaker Video ID System in conjunction with the
Admits Platinum product, that can be used to issue on-the spot personalized
credentials for season passes, membership cards, and employee cards. Producing a
personalized credential involves bringing together information, a photo image, a
bar code, and some fixed text onto a medium for tamper proof, durable use by a
customer, employee, or member.
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A computer software system option for any of the ticketing systems can
include on-line credit card authorizations allowing a report writer and the
ability to sell a ticket with as few as two key strokes.
The Company has installed various configurations of Gatepas and/or Admits
Gold or Admits Platinum in over 200 facilities including:
* SUN VALLEY, Sun Valley, Idaho
* WORLD OF COCA COLA, Atlanta, Georgia
* SNOWBIRD, Snowbird, Utah
* HOUSE OF BLUES, a night club chain in Los Angeles, California, New
Orleans, Louisiana and Cambridge, Massachusetts
* THE FLORIDA AQUARIUM, Tampa, Florida
* THE GUGGENHEIM MUSEUM, New York, New York
* SUNDAY RIVER, Bethel, Maine
* STEAMBOAT SPRINGS SKI RESORT, Steamboat Springs, Colorado
* THE BASKETBALL HALL OF FAME, Springfield, Massachusetts
* ROCK N ROLL HALL OF FAME, Cleveland, Ohio
The Company's Select-a-Seat system is used in over 80 installations
including:
* CARNEGIE HALL, New York, New York
* BOSTON RED SOX, Boston, Massachusetts
* MGM GRAND HOTEL, Las Vegas, Nevada
* ROYAL ONTARIO MUSEUM, Toronto, Ontario, Canada
* ABBEY THEATRE, Dublin, Ireland
Current installations of the Company's systems vary from those which
provide for simple admissions tickets allowing access by patrons to a park or
stadium, to those which provide for more complex arrangements such as tickets
with 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, consisting
of a series of lines or bars. As an example, bar code technology is commonly
used to identify consumer products for checkout at supermarkets. Individually
bar-coded tickets are printed by both Admits Gold and Admits Platinum. 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 stripe technology. Generally magnetic stripe technology
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 is held by
Gatepas in individual records identified by the unique bar code. The bar code is
scanned by a laser scanner. If the bar code is valid, to permit access 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 and the combination of a third party scanning product with
Admits Gold to utilize numerous ticket printing point-of-sale stations
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and turnstiles to process simultaneous information at each location. Gatepas and
Admits Platinum can be configured to accommodate facilities of most any size.
ADMITS GOLD AND ADMITS PLATINUM
The Company's Admits computer software systems provides general admission
ticketing for facilities that desire the flexibility of offering tickets that
can be printed for a variety of applications, with and without bar codes. It
ranges from simple entry fees to timed admission and tickets of decrementing
value.
ADMITS GOLD. Admits Gold is particularly well-suited for use by smaller
facilities with one to ten selling stations. The computer program is installed
on a personal computer with an MS-DOS operating system.
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. Admits Platinum is better-suited than Admits
Gold for larger applications, such as ski resorts and large amuse ment parks, in
which numerous ticketing stations are required. Operating on a personal computer
workstation with a UNIX host, Admits 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, although not protected by
a registered copyright, is deemed by the Company to be proprietary, and the
Company relies upon a combination of contract and trade secret laws to protect
its proprietary interest in such software. See "Intellectual Property." It is
the 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
competes on the basis of its reputation in the market, based on the number and
quality of its installed sites. In the Admits Platinum and Gatepas systems, each
ticket is given a unique bar code that, 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 subject to tampering,
Gatepas maintains the records for each ticket holder on the system computer and
only recognizes those tickets produced by Admits Platinum. This makes
counterfeiting nearly impossible and discourages ticket holders from
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manipulating the value of their ticket. While competitors offer systems which
supply many of the same features as Admits Platinum and Gatepas, the Company
believes that the large number of features and flexibility of its systems gives
the Company a competitive advantage in marketing its products. See
"Competition."
The Company continues its success with respect to the installation of
Admits Platinum in the ski area market. The system provides for fast lift
ticketing and season pass production in addition to mobile scanning at lift
entry areas. Recent installations include Snowbird in Snowbird, Utah and Sunday
River in Bethel, Maine.
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 ink on paper and is printed by a standard thermal or laser
printer, it cannot be demagnetized (unlike magnetic tickets) and will generally
remain valid even if the ticket is folded or mutilated. The system can 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, a
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 a ticket attendant. The
terminal can also be operated to request patron survey information.
An automated point-of-sale terminal menu is much like a bank ATM. The
patron answers questions about the type of ticket desired on a touch screen,
inserts cash and the terminal can print 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.
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 Admits Platinum or the Admits Gold System varies
widely, ranging from approximately $30,000 to $750,000, depending on the
complexity of the system desired, the kinds of additional features added to the
system, 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 Admits
Platinum systems the Company has installed were purchased for prices ranging
from approximately $50,000 to $250,000. The price for the Admits Gold System
also varies depending on generally the same factors
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as Admits Platinum. However, as this product is specifically targeted to the
lower end of the market the price range is generally under $100,000.
ADMITS FEATURES. Both Admits systems are 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. Both Admits systems are menu driven, allowing individuals
without computer skills to operate them. The Systems are also flexible, allowing
facility personnel to modify the charge (i.e., apply a coupon or a discount,
give consideration to the age of the ticket holder, etc.) to the ticket holder
for a given ride or attraction. A ticket or card can be printed at one of
several locations and can include the name of the facility (including a logo, if
desired). The type of ticket and any other information specified by the facility
may also be included. 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 systems 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, a 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 comprehensive computer software
systems. Each can be purchased separately for inclusion in a facility's existing
computer system or, more typically, with a number of additional optional
hardware or software components with which the Company can integrate at the
customer's request. Such additional hardware items may include ticket printers,
cash drawers, personal computers, customer display devices and attended or
automated point of sale terminals. What the Company believes to be the
proprietary nature of the Admits systems is a result of the inter-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. Additional software systems could include, but are not limited to,
credit card processing, season pass capability, fundraising, and access control.
SELECT-A-SEAT
The Company entered the reserve seating market in February 1995 with the
purchase of GIS Systems Limited Partnership (referred to herein as "GIS". See
"Recent Acquisitions."). The Company's reserve seating software system is called
"Select-a-Seat". 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
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theaters. Depending upon the availability of storage area on the hardware, the
Select-a-Seat software system 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 is installed in over 80 customer sites servicing
over 200 facilities worldwide, including the United States, Canada, Australia,
Singapore and Ireland. The software system can be used in venues ranging from a
one-selling station system to potentially an unlimited number of selling
stations. However, historically, most of our customer base typically have
between 25 - 150 selling stations. What the Company believes to be the
proprietary nature of Select-a-Seat is the interrelationship of the terminals
with 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
posting, account verification, financial auditing, seat status auditing, ticket
printing and client invoicing.
Select-a-Seat systems have been sold to 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 generation.
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, give system
owners a powerful tool for direct mailings.
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Select-a-Seat offers features 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.
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.
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.
The Company's technology, through its admission and access control systems,
reduces fraud and labor costs while enhancing accountability and profitability.
Within the United States alone, the entertainment and recreation industry
encompass tens of thousands of facilities adaptable to the Company's systems.
Included are family entertainment centers, fairgrounds, stadiums, water parks,
amusement parks, arenas, zoos, aquariums, museums, ice skating facilities, movie
theaters and convention centers.
Use of bar codes permits Gatepas scanning equipment or radio frequency
hand-held scanners to closely monitor general attendance at both amusement/theme
park facilities as well as ski resorts. By recognizing tickets with valid bar
codes, these scanning devices reduce the possibility of admission from
counterfeit tickets. Bar-coded tickets cannot be successfully altered by the
holder to defeat the system and are more durable than the fragile magnetic
strips.
FEATURES. The Company's Gatepas system integrates the scanning technology
of bar codes with scanners placed in turnstiles, and hand-held or stationary
readers. The Company believes the proprietary nature of Gatepas is the
interrelationship of the 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. After it is processed, if the ticket is valid,
Gatepas responds with an audible signal and, if desired, opens a turnstile. If
the ticket holder does not pass through the turnstile, the ticket retains its
prior value. In facilities where tickets decrease in value as used, display
devices may be 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 location of point value for individual events.
Facility personnel can thus access a statistical summary of cash receipts,
attendance and other statistical information about admissions as it is
occurring. The computer can be programmed to generate a summary of the day's
activity, including the cash and credit card transactions, the number
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of patrons entering the facility and individual attractions and other
statistical information. Such data, along with summary weekly, monthly or annual
data, assists facilities in managing their business and can highlight
irregularities in ticket collections.
SOFTWARE AND COMPUTERS. The Company holds a federal registered copyright,
granted in 1987, on its gate-control software included in the Gatepas system,.
The Gatepas system was designed and developed by the Company. This copyright
affords the Company the protection of the federal copyright laws until the year
2062. The Company has introduced an upgrade to its ticketing and reporting
software based on software acquired when the Company purchased Delta and GIS.
The software 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 the
upgraded software. See "Intellectual Property."
FACILITY MANAGEMENT SYSTEM
Through its acquisition of GIS (see "Recent Acquisitions"), the Company
commenced marketing of 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
sales of these systems are covered by an agreement with the third party owner of
the software. This software is sold alone or along with various optional
hardware such as personal computers, printers and other related equipment. Since
August of 1995 this product has not been a primary focus of the Company's sales
force, nor does the Company expect it to account for meaningful revenue in 1996.
RESORT MANAGEMENT SYSTEM
The Company acquired a Resort Management System in December 1994 upon its
acquisition of Delta Information Services, Inc. (Referred to herein as "Delta."
See "Recent Acquisitions."). The Resort Management System is a computer software
system that provides a resort with the ability to manage golf tee time 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-sale station to perform sales and
reservation functions throughout the 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. This product has not
been a primary focus of the Company's sales force, nor does the Company expect
it to account for meaningful revenue in 1996.
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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 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 critical components with its proprietary software. Many of the
components are enhanced by off-the-shelf hardware readily available from
numerous sources. However, all subsections and unique operating environments are
fully integrated and all Company software is tested to ensure proper operation
and delivery of the highest quality product possible.
INSTALLATION AND TRAINING. The Company's technicians install each of the
Company's systems, 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.
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
fiber-optics systems.
The Company provides initial training for the administrators of each system
at each installation and provides a user manual. The Company offers training of
facility personnel; however, the Company has not historically engaged any of the
personnel at the supervisory level and relies upon these individuals to train
the end users who operate the Company's system within the customer's
environment. 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 had historically offered a
three-month warranty for its products. After the end of the warranty period, the
Company had offered its customers a maintenance and servicing contract for an
annual fee. However, both companies recently acquired by the Company (see
"Recent Acquisitions"), Delta and GIS, had historically offered a one-year
warranty period followed also by a maintenance and service contract. The Company
continued the one-year warranty practice throughout 1995. Effective June 1,
1996, the Company wil most likely return to its original practice of a 90-day
warranty period. The Company contract provides for telephone response to calls
for assistance during certain business hours and days, or available around the
clock, seven days a week for certain additional charges, standard updates to the
system purchased, 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 link-up from the Company's headquarters
to each site. If more extensive modifications are required or if a facility
requires training for additional personnel, Company personnel will make
additional site visits for a fee. Approximately 11% of the Company's revenue for
the year ended December 31, 1995 was generated by maintenance and servicing
fees.
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In early 1995, the Company intended to install the "Admits Platinum"
product at all of the original "Lasergate" product sites. The Company had
reserved $281,000 as of December 31, 1994, for the conversions. However, the
Company was ultimately able to enhance the Lasergate product at many of these
sites which made reinstallation unnecessary. As a result, only $21,400 was spent
in 1995 for required conversions. The remaining Lasergate sites present upgrade
opportunities in 1996 and $57,000 has been reserved to accomplish the upgrades.
In 1996, the Company intends to enhance several of the original Delta and
GIS sites and has reserved $240,000 to accomplish this. While these enhancements
are likely to result in future product and service revenues, no absolute
assurance can be given at this time.
RESEARCH AND DEVELOPMENT
The Company's engineers are engaged in developing enhancements and
applications for the Company's technology. Such applications are intended to
create new markets for the Company's products and to develop new products to
compete more effectively. The Company's technical staff will concentrate their
efforts on completing the technology necessary for such new installations,
although there can be no assurance that the Company will be able to develop or
market such new products or applications. The Company has expended $585,348 and
$345,379 during fiscal years 1995 and 1994, respectively, on research and
development. Included is research and development conducted by Delta and GIS
prior to their acquisitions by the Company. See "Recent Acquisitions."
MARKETING
The Company currently markets its Admits Platinum, Admits Gold and
Select-a-Seat products through its direct sales staff. Marketing is accomplished
by several avenues; participation in industry trade shows, targeted direct mail
campaigns, advertising in trade periodicals, direct sales and joint sales
efforts to specific accounts with certain other vendors. The Company plans to
market the Admits Gold product through a reseller channel of distribution by the
end of 1996, potentially supplementing revenues in 1997. The Company is also
planning to augment its direct sales staff with a telemarketing staff,
specifically seeking additional business from current customers. The
telemarketing staff may also be able to generate new sales leads for both the
direct sales staff and reseller channels.
The Company believes that certain of its prior customers using one or more
of the Company's products may currently have or may soon develop a need for
additional products offered by the Company. Therefore, 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 through targeted direct mail
campaigns and telemarketing.
The Company has also recently aligned itself with certain partners in
related industry sales and has successfully secured sales contracts in the
process. The Company does not have exclusive arrangements with any vendors with
whom the Company has from time-to-time partnered, however, as these arrangements
have been mutually beneficial in the past, the Company intends to further pursue
this "partner selling" option.
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The Company has primarily concentrated its marketing on the domestic
amusement park and entertainment industries, ski resorts and
stadiums/multi-purpose arenas. The Company intends to expand the market for
Admits Gold, by targeting zoos, aquariums, museums, movie theaters, ice rinks,
high schools and religious organizations. The Company also intends to expand the
market for all its products through the presentation of alternative financing
options. One method allows a customer to acquire a system on a per-ticket-charge
basis, eliminating the up-front capital costs normally associated with a
purchase. The Company would derive its revenue under such a program from either
fees charged based on the number of tickets sold or the number of uses for each
ticket.
CUSTOMERS
Through March 31, 1996, the Company (including the Delta company and the
GIS company) had installed over 220 general admission systems, and over 80
Select-a-Seat systems. Listed below is one example of each type of installation:
CARNEGIE HALL, NEW YORK, NEW YORK. SELECT-A-SEAT was installed in Carnegie
Hall in 1985. There are over 35 users of this system that sells tickets to all
concert performances, taking telephone reservations and processing season
subscription ticket sales;
ROCK N ROLL HALL OF FAME, CLEVELAND, OHIO. The ADMITS GOLD SYSTEM installed
at the Rock n Roll Hall of Fame includes 10 point-of-sale ticketing stations and
provides for automated scanning and access control. The system has been
operating since opening day in September, 1995 and has processed over 1,000,000
tickets;
SNOWBIRD SKI RESORT, SNOWBIRD, UTAH. The ADMITS PLATINUM SYSTEM at Snowbird
Ski Resort includes 15 point-of-sale stations for lift ticket sales, and 3 video
imaging stations for season pass sales. The system was installed in 1995 and has
processed over 300,000 skier visits annually;
THE FLORIDA AQUARIUM, TAMPA, FLORIDA. The Company, in April 1995, installed
its GATEPAS and ADMITS PLATINUM SYSTEMS in The Florida Aquarium. The systems
provide for a computerized point-of-sale ticketing system and laser scanning bar
code technology to automate and verify admission and access to the facility. The
systems have sold and scanned approximately 1,200,000 tickets since its Grand
Opening.
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, 1995 and December 31, 1994,
the Company's backlog was $1,190,000 and $200,000, respectively. The backlog
represented sales to numerous sites with purchase prices ranging from
approximately $2,000 to over $350,000. However, unlike the situation in 1994
wherein one customer
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represented over 48% of the year's revenue, no one customer in 1995 represented
more than 10% of the Company's sales.
COMPETITION
The Company faces competition from different sources with respect to each
of its products. The Company is unaware of any one competitive source with the
capabilities to supply the number of different admission and ticketing products
which the Company offers. The Company believes it has a competitive advantage
over any other single company due to the Company's ability to satisfy a great
variety of software or hardware requirements a customer might have with respect
to ticketing, access control and reserve seating.
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. They include, among
others, PACER CATS, and GATEWAY TICKETING SYSTEMS(TM). While those 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 Admits competes effectively with these companies on the basis of
pricing and ease of installation, use and maintenance.
SELECT-A-SEAT. The Company's Select-a-Seat reserve seating system competes
against companies such as TICKETMASTER, INC., SELECT TICKETING SYSTEMS and
PROLOGUE SYSTEMS INC. Many of those companies have resources substantially
greater than the Company. The Company believes, however, that it competes
effectively both in pricing and over all functionality of 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 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 can range from $1.50 per ticket to over
$10.00 per ticket. The Company's Select-a-Seat system, as an alternative to the
national ticketing companies, allows facilities to control their own ticket
inventory, maintaining lower ticketing service charges and retaining ticketing
service charge revenue. When organizations purchase Select-a-Seat, all tickets
sold over the telephone, the Internet, or 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.
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 as well as various forms of bar code readers. The
Company's primary competitor for its Gatepas system is Data Service Company of
America, Inc. which offers access control by allowing users to swipe their
bar-coded ticket through a
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slot reader. The Company believes Gatepas competes effectively with Data Service
Company of America, Inc.
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 whom it has contractual agreements.
PRODUCTION AND SUPPLIERS
The Company produces each of its systems by enhancing, integrating and
assembling various components readily available from numerous suppliers. A few
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 BOCA Systems,
Inc., Alvarado Corporation, Indiana Cash Drawer Corporation, Jetstar, Inc., Arco
Distributors, Inc., American Microsystems, Inc., Digital Equipment Corporation
and Data General. The other products the Company offers are primarily software.
Any hardware 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 at its headquarters and
installs it along with appropriate hardware on-site for its various customers.
PERSONNEL
Effective January 1, 1996 the Company entered into an agreement with a firm
that provides all administrative services relating to payroll, personnel and
employee benefits. Management continues to hire, dismiss, set pay rates and
supervise the employees. Among other advantages, the new arrangement enables the
Company to reduce its administrative and benefit costs relating to employees.
As of December 31, 1995, the Company employed 27 individuals, including 4
in management, 14 in engineering and customer support, 3 in direct sales and 6
support staff personnel. The Company also retained 15 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.
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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 its copyrighted
software for interfacing bar codes, omnidirectional laser scanners, and related
computer and system components provides the Company with a competitive
advantage. Through acquisition of GIS, the Company acquired a registered
trademark in the name "Select-a-Seat" and a registered federal copyright in the
software comprising the Select-a-Seat system. The copyright affords the Company
the protection until the year 2066. The Company believes the trademark and
copyrighted software provides the Company with a competitive advantage.
The Company 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 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 safeguards 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 safeguard 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 may 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 Admits, Select-a-Seat and Gatepas is a result of the
inter-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.
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The Company intends to apply for patents to protect its product
enhancements as they are developed. There can be no assurance that 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
On December 23, 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 targeted primarily for the ski industry
and other family entertainment facilities. Delta was purchased from James
Potter, Marion Audrey Potter and Derek Betty (the "Sellers"). 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. 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. These
services were rendered in 1995 and the consultant contract expired in December,
1995. The Company currently offers the Delta product under the name of "Admits
Platinum" as a product alone alone and in combination with the Gatepas product.
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 for the entertainment industry. The Admits Gold, Select-a-Seat and
Facility Management System are all products which the Company now offers. 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 and the Company's promissory
note in the principal amount of $1,733,335. 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, also agreed to serve as
consultants to the Company for terms which have since expired for fees of
$11,051 and $1,666 per month, respectively. On March 11, 1996, the Company
restructured its arrangement with GIS whereby in exchange for a payment of
$1,550,000, the 109,333 shares of common stock were redeemed and the two
promissory notes held by GIS for $591,000 and $1,733,335, were canceled. In
addition, the $559,000 loan from the Company to GIS was extinguished by the
return to the Company of the shares of Series B Preferred Stock. This March 11
agreement was successfully executed on April 12, 1996.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 10,760 square feet of office
space in Clearwater, Florida. The lease expires on April 30, 1999. The Company
has the right under its written lease agreement to one five-year renewal of the
lease at prevailing market rates. The Company also has a right of first refusal
for additional office space in the same building as space becomes available.
From February 1996 through February 1997, the rent payable will be approximately
$10,000 per month each month.
ITEM 3. LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer,
Donald Turner, has commenced an action against the Company in a Florida state
court. Mr. Turner alleges, among other things, that he was wrongfully terminated
from his employment and seeks damages which in the aggregate could exceed
$1,000,000. The Company believes Mr. Turner's suit is without merit and intends
to continue vigorously defending the action.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on December 21,
1995, stockholders voted on proposals to (i) elect five directors to a
classified Board of Directors, (ii) amend its Articles of Incorporation to
increase the number of authorized shares of Common Stock, $.03 par value, from
5,000,000 to 20,000,000, (iii) approve amendments to its 1994 Stock Option Plan
(the "Plan"), and (iv) approve the grant of 250,000 stock options to its Chief
Executive Officer. Proxies for the meeting were solicited pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, and there was no
solicitation in opposition.
All five nominees for directors were elected with the following persons
receiving the votes shown beside their names below. Each Class I Director was
elected for a one year term, the Class II Director was elected for a two year
term and each Class III director was elected for a three year term.
NAME CLASS FOR WITHHELD
- ---- ----- --- --------
Jacqueline E. Soechtig III 2,726,595 236,833
Stewart L. Krug I 2,785,008 178,420
Timothy Mahoney I 2,780,949 182,479
Frank W. Swacker III 2,723,967 239,461
Lawrence W. Umstandter II 2,726,997 236,431
The proposal to amend its Articles of Incorporation to increase the number
of authorized shares of Common Stock was approved by the following vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
1,871,373 66.3% 1,063,047 35.9% 22,816 .8%
The proposal to amend the Plan so as to increase the number of options
which could be granted under the Plan to 600,000 was rejected by the following
vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
865,177 41.7 % 1,174,368 56.6% 33,853 .2%
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The proposal to amend the Plan so as to limit the number of shares that may
be subject to options granted to any one employee in any fiscal year to 200,000
to comply with Section 162(m) of the Internal revenue Code was adopted by the
following vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
2,315,649 78.5% 588,124 19.9% 45,255 1.5%
The proposal to amend the Plan so as to allow non-qualified stock options
to be granted with an exercise price no less than 25% of the fair market value
of the Common Stock on the date of grant was adopted by the following vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
1,810,602 61.4% 1,015,133 34.4% 121,296 4.1%
The proposal to amend the Plan so as to provide that upon the initial
election and upon each reelection as a director, outside directors will receive
an automatic grant of 5,000 options for each year of the term for which they are
to serve was adopted by the following vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
1,838,951 62.2% 1,037,094 35.1% 80,986 2.7%
The proposal to approve the grant of certain stock options to its
Chief Executive Officer was adopted by the following vote:
BROKER NON-VOTES
SHARES VOTED FOR SHARES VOTED AGAINST AND SHARES ABSTAINING
---------------- -------------------- ---------------------
1,855,464 62.6% 1,055,449 35.6% 52,515 1.8%
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On October 18, 1994 the Company's Common Stock began trading on the NASDAQ
Stock Market under the symbol LSGT. During the fiscal year prior thereto there
was no trading in the Company's Common Stock. The following tables set forth the
high and low sales prices for the Common Stock on the NASDAQ Stock Market for
the periods indicated:
QUARTER ENDED HIGH SALES PRICE LOW SALES PRICE
- ------------- ---------------- ---------------
December 31, 1994 14 7/8 6 1/4
March 31, 1995 13 3/4 7 1/2
June 30, 1995 9 5/8 4 3/8
September 30, 1995 6 1/4 3 3/4
December 31, 1995 6 5/8 1 3/4
As of March 29, 1996 there were 1,587 holders of record of the Common Stock. No
dividends have ever been declared or paid on the Company's Common Stock. The
closing price of the Common Stock on March 29, 1996 was $1 19/32 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Since the second quarter of 1994, a number of significant events have had a
material impact upon the Company's operating results, and its current and future
prospects. In addition to a change in control and a public offering of its
securities, the changes included replacement of all of the Company's senior
executives including the President/CEO as well as most of its other personnel,
two acquisitions which included an additional customer base of over 200 sites,
and various product integration and development efforts. As a result of the
successful implementation of these changes, the Company believes it currently
has the management, personnel, products, market position and commitment to
become a leader in providing business solutions to the entertainment industry.
In December 1994 the Company acquired all the outstanding capital stock of
Delta. This Ontario, Canada based company was engaged in the sale of admission
control and revenue accounting systems targeted primarily at the ski industry.
It was determined that the addition of Delta's ski install base, its name
recognition as a leader in that industry, and its product functionality and
audit safeguards would be of significant value to the Company. Moreover, it was
determined the Delta software could be integrated with Gatepas to provide a
product that the Company believed would be superior to currently available
alternative systems.
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In February 1995, the Company acquired substantially all of the assets of
GIS Limited Partnership. This Tampa, Florida based company was engaged in the
sale of admission control and revenue accounting systems targeted specifically
at fine arts facilities, museums, sporting facilities and various reserved
seating entertainment facilities.
The purchase of both Delta and GIS brought a significant install base to
the Company which among other benefits provided significant additional annual
maintenance revenues. The combination of diversity of product capability in the
various entertainment marketplaces and the goodwill and sales reference impact
of its install base made the acquisition very desirable. Management believes
that the quality of the acquired install base, which includes a number of high
profile facilities, will have a positive impact on its future sales efforts.
These factors have allowed the Company to enter markets not previously
accessible to it or cost effective As a result of the Delta and GIS
acquisitions, revenues did substantially increase during 1995. However, as
anticipated, the acquisition costs, both in time and money, and the costs of
integrating the operations and personnel of these completely separate companies
was expensive and the increased costs related to the integration process
together with other costs related to the other changes referred to above,
affected at the company, more than offset the increased revenues.
Due to the Company's net loss for 1995 of $4,206,782 and its history of
operating losses which have accumulated to $11,785,356 at December 31, 1995,
along with the Company's need for additional financing and/or capital infusion
to fund operations for 1996 and to satisfy its cash obligations, our independent
certified public accountants have qualified their accountants' report on the
Company's 1995 financial statements as to a going concern uncertainty. The
Company is currently in process of completing a private placement which the
Company is confident will be successfully completed in the very near future.
While no assurance can be given, if the private placement is successfully
completed in the near future and no other factors change or occur, the auditors
will consider reissuing their accountants' report and removing the going concern
qualification. The following commentary within "Management's Discussion and
Analysis" further addresses the Company's operations for 1995 and its plans to
reduce operating losses and to obtain financing and/or capital infusion. These
matters are also discussed in Note 3 to the financial statements.
RESULTS OF OPERATIONS: 1995 COMPARED TO 1994
Revenues:
Revenues increased to $2,835,206 in 1995 from $1,047,414 in 1994,
representing a $1,787,792, or 171%, increase. Revenues consisted of system sales
and installations of $2,508,206 in 1995 and $885,102 in 1994, and maintenance
and support of $300,000 in 1995 and $162,312 in 1994. The increase in system
sales and installations (over sixty installations in 1995 and less than six
installations in 1994) was primarily attributable to marketing activities from
an increased sales staff, from the Company's enhanced products, and from new
market accessibility as a result of the acquisitions of Delta and GIS.
In 1995, the Company's principal products Select-A-Seat, Admits Platinum
and Admits Gold represented approximately 39%, 28% and 11% of revenues,
respectively. In 1994 the principal product represented 85% of revenues.
Maintenance and support represented 11% and 15% of revenues in 1995 and 1994,
respectively. In 1996, the Company anticipates a similar product mix for
Select-A-Seat and Admits Platinum with Admits Gold increasing to approximately
20% of revenues. While maintenance and support revenue for 1996 is expected to
increase, its percentage of total revenues is not expected to increase.
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In 1995, no customers represented 10% or more of revenues. As the total
customer base grows the likelihood of having certain customers exceed 10% of
total revenues in future years is reduced. In 1994, two major customers
represented 48% and 10% of total revenues, respectively.
Although no assurances can be given, based on actual sales for the first
two months of 1996 and committed sales orders to date, revenues for 1996 will be
at least at the level achieved in 1995, with greater revenues being targeted.
The foregoing is a forward looking statement contingent upon no cancellation of
existing sales orders and the receipt of future sales orders at the current
rate.
Cost of Revenues:
Cost of revenues in 1995 included the costs associated with the hardware
and software acquired for the Company's customers and the estimated direct costs
associated with the engineering and installation of the systems, and the
provision of customer support. While the Company believes that the estimated
direct costs are reasonably stated and classified in all material respects, the
Company plans to further refine its procedures for capturing and reporting this
information in 1996. Such refinement could, to some extent, affect the
comparability of this information.
In 1994, cost of revenues included principally the third party hardware and
software acquired for customer installations and support. The estimated direct
costs associated with engineering and installing systems and providing customer
support were not specifically categorized and reported as cost of revenues. In
1994, such costs were included in development costs. In 1995, approximately
$900,000 of these categories of costs were separately identified and classified
as cost of revenues.
For discussion purposes herein, cost of revenues will exclude the amounts
of direct cost allocated from development costs to cost of revenues in 1995.
Cost of revenues (exclusive of direct costs) increased to $1,522,440
($2,422,440 less $900,000 of direct costs in 1995) from $914,838 in 1994,
representing a $607,602, or 66%, increase. The increase resulted from the costs
related to increased sales. As a percentage of revenues, cost of revenues in
1995 was 54% of revenues compared to 87% of revenues in 1994. The ratio of cost
of revenues to revenues is a function of whether the sales or services are
hardware or software intensive. Hardware sales result in lower gross margins as
hardware is not developed by the Company but acquired, as is certain software,
for the customers. Sales of the Company's software and related systems
development and support activities provides the Company greater gross margins.
In addition, the Company's ability to price its products and services favorably
impacts gross margins and therefore the cost of revenues percentage. These
factors contributed to the change in the cost of revenues to revenues percentage
between 1995 and 1994 since in 1995 a greater percentage of revenues was made up
of systems development and support.
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Development Costs:
Development costs increased to $1,485,348 ($585,348 plus $900,000 of direct
costs) in 1995 from $345,379 in 1994, an increase of $1,139,929, or 330%. As a
percentage of revenues, development cost increased to 52% in 1995 from 33% in
1994. The increase reflects the increased revenues in 1995, the costs of
development of four new products and the integration costs associated with
integrating products of the Company, GIS and Delta. The Company intends to
continue to develop products and enhance existing products to ensure competitive
viability in the marketplace.
Selling, General and Administrative:
Selling, general and administrative expenses increased to $4,082,914 in
1995 from $2,091,116 in 1994, representing a $1,991,798, or 95% increase. As a
percentage of revenues, these expenses were 144% in 1995 and 200% in 1994 which
reflects the increase in revenues in 1995:
The principal components of the $1,991,798 increase in selling, general and
administrative in 1995 as compared to 1994 are described below.
Sales and marketing expenses increased to $1,036,506 in 1995 from $525,180
in 1994, representing a $511,326 increase. This increase was attributed to
increased salaries and commissions of $338,756 and travel and entertainment of
$95,129 associated with the Company's increased marketing efforts in 1995. The
significantly increased marketing efforts are partly responsible for increased
revenues in 1995 and should also benefit future period results.
General and administrative expenses increased to $3,046,408 in 1995 from
$1,565,936 in 1994, representing a $1,480,472 increase. The principal components
of the increase are as follows:
* Amortization of intangibles in the amount of $515,078 related to the Delta
and GIS acquisitions (none in 1994).
* $427,731 of legal costs associated with various items, including matters
related to Delta and GIS which were not capitalized, Securities and
Exchange Commission filings and related contracts and agreements, and
defense of legal actions. In 1994, approximately $80,000 of legal costs
were incurred, excluding legal fees related to the 1994 public offering
which were netted against the offerings' proceeds.
* $98,148 of bad debt expense related to increased revenues. In 1994, bad
debt expense was $44,965.
* $112,500 of executive compensation associated with the granting of
non-qualified stock options.
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Other Income (Expense)
Interest expense decreased to $45,061 in 1995 from $80,035 in 1994,
reflecting in part the payment and/or conversion to stock of certain of the
Company's debt existing in 1994.
Net other income (expense) increased to $93,775 in 1995 from ($18,430) in
1994, an increase of $112,205. The increase is composed of an increase in
earnings from an equity interest in a joint venture of $85,496 (See Note 2 to
the financial statements), an increase in interest income of $10,232, and an
increase in miscellaneous income of $16,475.
Income Taxes:
The Company currently has substantial net operating loss carry forward for
which the Company has not recognized a tax benefit due to the uncertainty
related to when and how much of the tax benefits will be ultimately realized
(See Note 10 to the financial statements).
Net Loss:
Net loss increased to $4,206,782 ($1.39 a share) in 1995 from $2,402,384
($1.62 a share) in 1994. As discussed above, the Company believes that 1995
operations were impacted by various factors including the integration process
involved with combining the Company with Delta and GIS.
The Company incurred total compensation expense and related costs of
$2,361,280 in 1995 compared to $1,477,268 in 1994, an increase of $884,012 or
60%. A portion of this increase was attributable to the integration process. As
a result of substantially completing this integration process in 1995, the
Company was able to curtail or eliminate in many cases the use of consultants by
December 31, 1995. Although no assurances can be given, based on actual
compensation expense and related costs for the first two months of 1996 and
management's plan for 1996, reduced levels of these costs are expected to
maintain the current sales level described earlier. The foregoing is a forward
looking statement contingent on several factors including: no unexpected
turnover of personnel; no need for additional expenses for unbudgeted personnel;
and no unexpected adjustment to compensation levels currently being paid.
FINANCIAL CONDITION: 1995 COMPARED TO 1994
Total assets increased to $6,406,236 on December 31, 1995 from $3,478,831
on December 31, 1994, representing an increase of $2,927,405, or 84%. The
principal contributing factor to the increase was the acquisition of GIS
effective January, 1995. On December 31, 1995 the balance sheet reflects
intangibles of $3,229,000 (e.g., goodwill) related to the acquisition.
Total liabilities increased to $4,719,465 on December 31, 1995 from
$1,920,339 on December 31, 1994, representing an increase of $2,799,126, or
146%. The principal contributing factors to the increase are the $2,324,335
promissory notes associated with the GIS acquisition subsequently repaid at a
substantial discount, (See Note 4 to the financial statements and "Liquidity and
Capital Resources"
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below), and the increase in deferred revenues of $667,406 ($729,406 in 1995 and
$62,000 in 1994), resulting from increased revenues.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of
In March 1994, the Financial Accounting Standards Board issued the SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles held and used by the entity along with goodwill
should be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum
of the expected future cash flows (undiscounted and without interest) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the asset. SFAS No.
121 also generally required long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of the carrying amount
or the fair value less cost to sell. SFAS No. 121 will be effective for the
Company's 1996 fiscal year. The Company has not finalized its assessment of the
potential impact of adopting SFAS No. 121 at this time; however, on a
preliminary basis management does not believe the impact will be material to the
financial statements.
Accounting for Stock Based Compensation
SFAS No. 123 Accounting for Stock Based Compensation was issued by the
Financial Accounting Standards Board in October 1995. As it relates to stock
options granted to employees, SFAS No. 123 permits companies to continue using
the accounting method promulgated by the Accounting Principals Board Opinion No.
25 ("APB No. 25"), Accounting for Stock Issued to Employees, to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. SFAS No. 123's accounting
recognition method can be adopted anytime subsequent to the issuance of the
Statement in October 1995, and would pertain to stock option awards granted or
modified or settled for cash after the date of adoption. If the Company elects
to continue using the method under APB No. 25, SFAS No. 123's pro forma
disclosures are required after December 31, 1995. Management has not completely
analyzed the provisions of SFAS No. 123; accordingly, management has not
determined whether or not SFAS No. 123's accounting recognition provisions will
be adopted or APB No. 25's method will be continued. In addition, management has
not yet determined the potential effect that SFAS No. 123's accounting
provisions, if adopted, will have on the Company's financial statements.
-25-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flow for 1995
and 1994:
1995 1994
Net cash used in operating activities $(2,833,237) $(1,631,156)
Net cash used in investing activities (708,917) (675,531)
Net cash provided by financing activities 2,608,823 3,881,147
------------ ------------
Net increase(decrease) in cash
And cash equivalents $ (933,331) $ 1,574,460
============ ============
The Company used cash of $2,833,237 in 1995 and $1,631,156 in 1994 for
operating activities. From its inception in October 1985 through December 31,
1995, the Company incurred a cumulative loss of $11,785,356 with a loss of
$4,206,782 for the year ended December 31, 1995. The Company's net loss of
$4,206,782 in 1995 was due primarily to expenditures related to the factors
referred to under the caption "Results of Operations: 1995 Compared to 1994"
above. Included in the net loss for 1995 were non-cash expenses and income
totaling $1,034,175 which included (i) depreciation/amortization expenses of
$575,985, and (ii) equity-related transactions totaling $487,250 of compensation
expense recognized from the grant of stock options. Cash which was used to
purchase items classified as current assets increased by $480,110 with accounts
receivable increasing by $505,141, investment in inventories increasing by
$115,022 and prepaid expenses and insurance decreasing by $140,053. These uses
of cash were offset by an increase in accounts payable and accrued expenses of
$152,074 and an increase in deferred revenue of $667,406.
The Company used cash for investment purposes in the amounts of $708,917 in
1995 and $675,531 in 1994 principally related to the acquisition of GIS
($559,000) and Delta ($500,000), respectively.
The Company was provided cash by financing activities of $2,608,823 in 1995
and $3,881,147 in 1994. The Company relied on net proceeds from public and
private offerings and loans and advances from related parties to fund its
operations during 1995 and 1994. A private offering in 1995 and a public
offering in 1994, provided $1,870,976 and $3,906,002, respectively. The
Company's private placement of 208,600 shares of non-transferable, convertible
Series D Preferred Stock was completed October 1995.
In 1995 the Company borrowed $859,505, consisting of $559,505 as an
unsecured cash advance from two former shareholders as evidenced by a promissory
note due October 1996, at an annual interest rate of 8%, and $300,000 as an
additional unsecured cash advance from the same parties evidenced by a
convertible secured promissory note due March 30, 1996, at an annual interest
rate of 9.5%. In June 1995, the Company issued 79,950 shares of its Series A
Preferred Stock in satisfaction of the $559,505 promissory note and $200,000 of
additional note payables outstanding since 1994. In 1994 loans from the same
individuals provided $1,259,505 to the Company all but $200,000 of which had
been previously repaid.
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
-26-
<PAGE>
Company's Common Stock valued at $765,331, 111,800 shares of the Company's
Series B Preferred Stock valued at $559,000, and the Company's unsecured,
non-interest bearing promissory notes in the aggregate amount of $2,324,335. In
addition, the Company agreed to assume certain liabilities of GIS and loaned GIS
$559,000 as evidenced by a promissory note from GIS due March 31, 1996, which
was secured by the pledge to the Company of the 111,800 shares of the Company's
Series B Preferred Stock.
On March 11, 1996, the Company and GIS Systems Limited Partnership executed
an agreement whereby the parties agreed to, among other things, settle the
remaining obligation to GIS totaling $2,324,335 at a discount, cancel the
$559,000 note receivable from GIS, cancel the $199,359 account receivable from
GIS, and redeem the 109,333 shares of Common Stock and 111,800 shares of Series
B Preferred Stock previously issued to GIS. In connection therewith, the Company
agreed to pay to GIS the sum of $1,550,000.
The cash payment of $1,550,000 made to GIS on April 12, 1996, the date of
closing, was principally provided from the net proceeds of the April 1996
Private Placement described below.
On March 27, 1996, the Company commenced a Private Placement of up to
350,000 shares, at $10.00 per share, of the Company's newly established Series E
Preferred Stock. Through April 15, 1996 139,000 shares of the Private Placement
successfully closed with the Company receiving total proceeds, net of offering
costs of $1,271,982. On April 15, 1996, remaining stock subscriptions totaling
$1,335,000 (133,500 shares) which will result in an additional $1,155,500 net
proceeds to the Company when paid have been received. The Company also
anticipates receiving additional stock subscriptions for 77,500 shares which,
when paid, would provide net proceeds of $697,500.
The above mentioned note payable-related party of $300,000 is currently due
and is expected to be paid from the net proceeds of the private placement to be
received after April 15, 1996.
While no assurances can be given, management believes that the current
organization infrastructure and the Company's products are sufficient to support
revenues greater than the levels achieved in 1995. In addition, while no
assurances can be given, management believes that the Company's operations
should continue to progress throughout 1996 and that the net proceeds from the
April 1996 Private Placement and the operating revenues from sales in 1996
should be sufficient to fund operations through 1996. Any significant new
marketing and development programs will only be initiated if external financing
has been obtained.
-27-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the
year ended December 31, 1995, 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-6
Notes to Consolidated Financial Statements ......................F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-28-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference herein
in the "Election of Directors" section of the Company's definitive Proxy
Statement to be filed for the Company's 1996 Annual Meeting of Shareholders
pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference herein
in the "Executive Compensation" section of the Company's definitive Proxy
Statement to be filed for the Company's 1996 Annual Meeting of Shareholders
pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference herein
in the "Security Ownership of Certain Beneficial Owners and Management" section
of the Company's definitive Proxy Statement to be filed for the Company's 1996
Annual Meeting of Shareholders pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference herein
in the "Certain Relationships and Related Transactions" section of the Company's
definitive Proxy Statement to be filed for the Company's 1996 Annual Meeting of
Shareholders pursuant to Regulation 14A.
-29-
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form SB-2, Registration No.
33-79980).
3.1 Articles of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form
SB-2, Registration No. 33-79980).
3.2 Articles of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement on Form
SB-2, Registration No. 33-79980).
3.3 Articles of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 4.1 to the Company's Form 8-K dated February 15,
1995, File No. 0-15873).
3.4* Articles of Amendment to Articles of Incorporation
3.5* Articles of Amendment to Articles of Incorporation
3.6 By-laws, as amended (incorporated by reference to Exhibit 3.4 of the
Company's Annual Report on Form 10-K, File No. 0-15878, for the year
ended December 31, 1994).
4.1* Form of Subscription Agreement for Series D Preferred Stock.
4.2* Form of Subscription Agreement for Series E Preferred Stock
10.1 Lease, dated February 27, 1992, between the Company and PNC Realty
Holding Corp. of Florida (incorporated by reference to Exhibit 10.1 of
the Company's Annual Report on Form 10-K, File no. 0-15873, for the year
ended December 31, 1992).
10.2 Lease, dated as of February 20, 1995, between the Company and 28050
Corporate Square Associates, L.P. (incorporated by reference to Exhibit
10.2 of the Company's Annual Report on Form 10-K, File No. 0-15873, for
the year ended December 31, 1994).
10.3 Form of Financial Advisory and Investment Banking Agreement between the
Company and Sterling Foster & Co. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form SB-2, Registration
No. 33-79980).
-30-
<PAGE>
10.4 Promissory Note in the principal amount of $100,000 by the Company to
SupeRadio Canada, Ltd. (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on form SB-2, Registration No.
33-79980).
10.5 Form of Promissory Note by the Company to Donald G. Turner and Margaret
J. Turner (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form SB-2, Registration No. 33-79980).
10.6 Promissory Note by the Company to Richard Friedman and Jeffrey Markowitz
(incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form SB-2, Registration No. 33-79980).
10.7 Promissory Note by the Company to Richard Friedman and Jeffrey Markowitz
(incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form SB-2, Registration No. 33-79980.
10.8 Stock Purchase Agreement by and among 1103065 Ontario Inc., Delta
Information Services, Inc., James Potter, Marion Audrey Potter and Derek
Betty (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
dated December 22, 1994, File No. 0-15873).
10.9 Registration Rights and Put Agreement by and among James Potter, Marion
Audrey Potter, Derek Betty and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K dated December 22, 1994, File No.
0-15873).
10.10 Asset Purchase Agreement by and between the Company and GIS Systems
Limited Partnership (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.11 Series B Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.1 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.12 Series C Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.13 Promissory Note made by GIS Systems Limited Partnership payable to the
Company (incorporated by reference to Exhibit 99.2 to the Company's Form
8-K dated February 15, 1995, File No. 0-15873).
10.14 The Series B Preferred Stock Pledge and Call Agreement by and among the
Company, GIS Systems Limited Partnership and Nationsbank of Florida, N.A.
(incorporated by reference to Exhibit 99.4 to the Company's Form 8-K
dated February 15, 1995, File No. 0-15873).
-31-
<PAGE>
10.15 Consulting Agreement by and between the Company and Fred Maglione
(incorporated by reference to Exhibit 99.5 to the Company's Form 8-K
dated February 15, 1995, File No. 0- 15873).
10.16 Consulting Agreement between James Potter, 1103065 Ontario Inc. and the
Company (incorporated by reference to Exhibit 10.2 to the Company's Form
8-K dated December 22, 1994, File No. 0-15873).
10.17* Letter Agreement among the Company, GIS Systems Limited Partnership,
Nicholas Flaskay, and Fred Maglione.
10.18 Employment Agreement of Jacqueline E. Soechtig (incorporated by reference
to Exhibit 10.17 of the Company's Annual Report on Form 10-K, File No.
0-15873, for the year ended December 31, 1994).
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of
the Company's Annual Report on Form 10-K, File No. 0-15873, for the year
ended December 31, 1994).
27.1* Financial Data Schedule
- ----------------
* Filed herewith.
For the Company's financial statements for the period ended December 31,
1995, see Part II, Item 7 of this Report on Form 10-KSB.
(b) The Company filed a report on Form 8-K on October 21, 1995 with respect
to Item 5 "Other Events." The report disclosed the completion of a private
placement of 208,600 shares of convertible Series D Preferred Stock resulting in
net proceeds to the Company of approximately $1,796,074 and included an
Unaudited Condensed Pro Forma Consolidated Balance Sheet of the Company as of
September 30, 1995.
-32-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LASERGATE SYSTEMS, INC.
AND SUBSIDIARIES
December 31, 1995 and 1994
<PAGE>
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 F-5 - F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
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, 1995 and 1994, 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, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $4,206,782 during the year ended December 31,
1995 and, as of that date, the Company has current liabilities exceeding its
current assets by $549,898, and the Company has an accumulated deficit of
$11,785,356. The Company requires additional financing and or capital infusion
in order to fund its operations and satisfy its cash obligations. While the
Company is currently in the process of obtaining additional capital infusion,
there is no assurance that all of these monies will be received. These factors,
among others as discussed in Note 3 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
April 12, 1996, (Except for
Paragraph 8 of Note 3 and
Note 16, as to which the
date is April 15, 1996)
F-1
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1995 1994
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 656,506 $ 1,589,837
Accounts receivable, net of allowance for
doubtful accounts of $36,000 and $17,000 439,311 152,529
Account receivable, related party 199,359 -
Inventories 325,664 124,680
Prepaid expenses 84,392 116,948
------------ -----------
Total current assets 1,705,232 1,983,994
Property and equipment, net 246,568 96,993
Systems and software costs, net of amortization of
$283,333 and $-0- 1,416,667 529,558
Goodwill, net of amortization of $132,579 and $-0- 2,515,694 536,919
Customer lists and support contracts, net of amortization of
$70,833 and $-0- 354,167 125,000
Other assets, net 167,908 206,367
------------ -----------
$ 6,406,236 $ 3,478,831
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, related parties $ 300,000 $ -
Notes payable, other 21,757 74,910
Accounts payable, trade 634,863 530,260
Deferred revenues 729,406 62,000
Accrued product costs 297,000 281,075
Accrued expenses 272,104 112,094
------------ -----------
Total current liabilities 2,255,130 1,060,339
Notes payable, related party - 200,000
Promissory notes payable, stockholders with conversion futures 2,324,335 -
Obligations to issue common stock and common stock options 140,000 450,000
Common stock subject to put options - 210,000
------------ -----------
Total liabilities 4,719,465 1,920,339
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
authorized, 387,750 and 36,364 shares issued and
outstanding at December 31, 1995 and 1994, respectively 11,633 1,091
Common stock, $.03 par value, 20,000,000 shares authorized,
3,125,013 and 2,913,680 issued and outstanding at
December 31, 1995 and 1994, respectively 93,751 87,412
Additional paid-in capital 14,065,743 9,258,563
Less: Common stock, $.03 par value, 20,000 and 30,000 shares
at December 31, 1995 and 1994, respectively,
subject to put options (140,000) (210,000)
Notes receivable, stockholders (559,000) -
Accumulated deficit (11,785,356) (7,578,574)
----------- -----------
1,686,771 1,558,492
----------- -----------
$ 6,406,236 $ 3,478,831
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Revenues $ 2,835,206 $ 1,047,414
Operating Expenses:
Cost of revenues 2,422,440 914,838
Development 585,348 345,379
Selling, general and administrative 4,082,914 2,091,116
----------- -----------
Operating loss (4,255,496) (2,303,919)
Other income (expense)
Interest expense (45,061) (80,035)
Other, net 93,775 (18,430)
----------- -----------
Loss before income taxes (4,206,782) (2,402,384)
Income taxes - -
----------- -----------
Net loss $(4,206,782) $(2,402,384)
=========== ===========
Net loss per common share $ (1.39) $ (1.62)
=========== ===========
Weighted Average Common Stock Outstanding 3,023,346 1,487,246
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ---------------- Common
Stock Notes
Additional Subject Receivables Accu-
Par Par Paid-in to Put Stock- mulated
Shares Value Shares Value Capital Option holders Deficit
-------- ------ ---------- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 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 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 Delta acquisition 100,000 3,000 697,000
Issuance of Series A preferred stock for
satisfaction 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)
-------- ------ ---------- ------- ---------- -------- ------- ---------
Issuance of common stock at $7.00 a share and
preferred stock at $5.00 per share in
connection with GIS acquisition 111,800 3,353 109,333 3,279 1,317,697
Less: note receivable collateralized by preferred
stock (559,000)
Issuance of preferred stock in Private Placement at
$10 per share less offering expenses of $215,024 208,600 6,258 1,864,718
Grants of stock options for 1994 and 1995
executive compensation 937,250
Conversion of preferred to common stock (28,600) (858) 110,000 3,300 (2,442)
Issuance of common stock for satisfaction of
notes payable, related party 79,950 2,400 757,106
Exchange of preferred stock (36,364) (1,091)
16,000 480 611
Issuance of common stock under stock option plan 2,000 60 1,940
Exercise of common stock put option (10,000) (300) (69,700) 70,000
Net loss - - - - - - - (4,206,782
-------- ------ ---------- ------- ---------- -------- ------- ---------
Balance, December 31, 1995 387,750 $11,633 3,125,013 $93,751 $14,065,743 $(140,000) $(559,000)$(11,715,356
======== ====== ========== ======= ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,206,782) $(2,402,384)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization of property and equipment 59,778 7,433
Amortization of intangibles 516,207 74,637
(Gain) loss in joint venture (48,060) 37,486
Increase (decrease) in allowance for doubtful accounts 19,000 (70,855)
Common stock issued principally for services - 131,422
Obligations to issue options granted as
compensation for services (75,000) 450,000
Compensation recognized from grant of stock options 562,250 -
Employment services contributed by officers/stockholders - 83,200
Financing costs satisfied and to be satisfied by issuance
of common stock - 100,000
Decrease (increase) in:
Accounts receivable, trade (305,782) 70,107
Account receivable, related party (199,359) -
Inventories (115,022) (46,423)
Prepaid expenses 53,028 (116,849)
Other (principally related to prepaid insurance) 87,025 (65,313)
Increase (decrease) in:
Accounts payable and accrued expenses 136,149 (130,422)
Accrued product costs 15,925 281,075
Deferred revenue 667,406 (34,270)
----------- ----------
Net cash used in operating activities (2,833,237) (1,631,156)
----------- ----------
Cash flows from investing activities:
Additions to property and equipment (121,772) (82,213)
Loan to GIS stockholders related to GIS acquisition (559,000) -
Advances to joint venture - (63,761)
Acquisition of Delta - (500,000)
Other acquisition costs (28,145) -
Other - (29,557)
----------- ----------
Net cash used in investing activities (708,917) (675,531)
----------- ----------
Cash flows from financing activities:
Proceeds from secondary public or private offering, net of
offering costs 1,870,976 3,906,002
Proceeds from exercise of warrants/stock options 2,000 15,000
Repurchase of common stock subject to put option (70,000) -
Proceeds from loans, other 36,924 95,584
Proceeds from loans, related parties 859,000 1,259,505
Repayment of loans, related parties - (887,005)
Repayment of loans, other (90,077) (120,674)
Repayment of loans, bank - (387,265)
----------- ----------
Net cash provided by financing activities 2,608,823 3,881,147
----------- ----------
Net increase (decrease) in cash and cash equivalents (933,331) 1,574,460
Cash and cash equivalents, beginning of year 1,589,837 15,377
----------- ----------
Cash and cash equivalents, end of year $ 656,506 $1,589,837
=========== ==========
</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, 1995 and 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
Year ended December 31,
--------------------------------
1995 1994
---- ----
Interest $31,155 $81,847
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1995:
The Company acquired substantially all the assets of GIS Systems Limited
Partnership for total consideration of approximately $3,700,000 (common stock of
$765,331, preferred stock of $559,000, and promissory note of $2,324,335) and
recorded assets at aggregate fair value of approximately $3,750,000, with
assumed payables of approximately $50,000.
The Company issued 79,950 shares of preferred stock in satisfaction of related
party notes payable of $759,505.
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).
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 4).
The Company issued 36,364 shares of Series A preferred stock to two major
stockholders 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, 1995 and 1994
NOTE 1 - DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (LSI) (the "Company") was organized and incorporated in
the State of Florida in 1985. 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 principal products "Select-a-Seat", "Admits Platinum" and "Admits
Gold", represent approximately 39%, 28% and 11% of revenues in 1995,
respectively.
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. (see Note 2).
In December 1994, the Company formed Lasergate Systems Canada Company to
facilitate the acquisition of Delta Information Services, Inc. (Delta) (see Note
4).
Effective January 1995, the Company acquired substantially all the assets of GIS
Systems Limited Partnership (GIS) (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Lasergate Systems, Inc. (the Company) and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. While
actual results could differ from those estimates, management does not expect the
variances, if any, to have a material effect on the financial statements.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 represent the fair values assigned in connection with
the Company's acquisition of GIS and Delta in December 1994 and January 1995
(see Note 4). Such costs are amortized on a product-by-product basis. The annual
amortization expense is 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.
The Company's expenditures related to the development of its systems and
software along with the cost to integrate GIS and Delta products with the
Company's products in 1995 have been expensed and included in development costs.
No amounts have been capitalized by the Company during 1995 and 1994, except
those recorded as a result of the GIS and Delta acquisitions, 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-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INTANGIBLES
Intangibles which were recognized in connection with the Company's acquisition
of GIS and Delta in 1995 and 1994, respectively, relate to systems and software
costs (see above), non-competition agreements, customer list and support
contracts, and goodwill. Such costs have been and are being 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. Amortization expense for 1995 was $516,207 and is included in selling,
general and administrative expenses. Management reviews, 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 is the
primary focal point in the assessment and analysis for potential impairment.
During 1995 and 1994, no impairment has been identified.
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, 1995 and 1994, 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 ($77,790
and $29,730) and share of the joint venture's net earnings (loss) from
operations ($48,060 and $(37,436)) are classified in other assets and other
income (expense), respectively, in the accompanying consolidated financial
statements for 1995 and 1994, respectively. The Company has not guaranteed any
of the joint venture's liabilities nor does the Company have any commitments to
fund its operations.
PRODUCT COST LIABILITY
The Company has established a product cost liability. The Company has
historically offered a three month warranty for its products. For the period
commencing after the end of the warranty period, the Company had offered its
customers a maintenance and service contract for an annual fee. However, both
companies acquired, Delta and GIS, offered a one year warranty period followed
by a maintenance and service contract. The Company continued the one year
warranty practice throughout 1995. Effective June 1, 1996 the Company will most
likely return to its original 90 day warranty period.
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In early 1995, the Company intended to install the "Delta" product at all of the
original "Lasergate" product sites. The Company had reserved $281,000 at
December 31, 1994 for the conversions. However, the Company was ultimately able
to enhance the Lasergate product at many of these sites which made
reinstallation unnecessary. As a result, only $21,400 was spent in 1995 for
required conversions. The remaining original Lasergate sites present upgrade
opportunities in 1996 and $57,000 has been reserved to accomplish the upgrades.
In 1996, the Company intends to enhance, at no charge to their customers,
several of the original Delta and GIS sites and has reserved $240,000 to
accomplish this. While these enhancements are likely to result in future product
and service revenues, no absolute assurance can be given at this time.
Product cost provisions are classified as cost of revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amount of cash, accounts receivable, accounts
payable and accrued expenses and notes payable, approximate fair value because
of the short-term maturities of these assets and liabilities.
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 acceptance of the system by 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.
Revenues include product sales and service revenues. Service revenues represent
approximately 11% and 15%, respectively, of total revenues in 1995 and 1994.
Deferred revenues include customer deposits of $384,731 and $62,000 and advanced
billings in accordance with contract terms of $344,675 and $-0- at December 31,
1995 and 1994, respectively.
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts. While the Company
believes that the estimated direct costs are reasonably stated and classified in
all material respects, the Company intends to further refine its procedures of
capturing and reporting this information in 1996. Such refinement could, to some
extent, effect the comparability of the information being reported on.
During 1994 and 1995, certain of the Company's contracts with customers afforded
the Company the opportunity to develop products for their customers which were
also new products for the Company not subject to exclusive arrangements with the
customers. The resulting cost of these products is included in development costs
versus cost of revenues along with other development costs related to
enhancement of existing products during 1995.
In 1994, cost of revenues included principally the hardware and software
acquired for customer installations and support. The estimated direct costs
associated with engineering and installing systems and providing customer
support were not specifically categorized and reported as cost of revenues as
was done in 1995. In 1994, such costs were included in development costs. In
1995, approximately $900,000 of these types of costs were separately identified
and classified as cost of revenues.
INCOME TAXES
Under the liability method specified in Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," 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.
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)
and the effect of the convertible securities were not included in the
calculation of net loss per share because they were either antidilutive and/or
insignificant.
RECLASSIFICATIONS
Certain reclassifications of accounts and amounts have been made to the 1994
financial statements to conform to the 1995 presentation.
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of
In March 1994, the Financial Accounting Standards Board issued the SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity along with goodwill should
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest) is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset. SFAS No. 121 also
generally required long-lived assets and certain identifiable intangibles to be
disposed of to be reported at the lower of the carrying amount or the fair value
less cost to sell. SFAS No. 121 will be effective for the Company's 1996 fiscal
year. The Company has not finalized its assessment of the potential impact of
adopting SFAS No. 121 at this time; however, on a preliminary basis management
does not believe the impact will be material to the financial statements.
Accounting for Stock Based Compensation
SFAS No. 123 Accounting for Stock Based Compensation was issued by the Financial
Accounting Standards Board in October 1995. As it relates to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principals Board Opinion No. 25
("APB No. 25"), Accounting for Stock Issued to Employees, to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. SFAS No. 123's accounting
recognition method can be adopted anytime subsequent to the issuance of the
Statement in October 1995, and would pertain to stock option awards granted or
modified or settled for cash after the date of adoption. If the Company elects
to continue using the method under ABP No. 25, SFAS No. 123's pro forma
disclosures are required after December 31, 1995. Management has not completely
analyzed the provisions of SFAS No. 123; accordingly, management has not
determined whether or not SFAS No. 123's accounting recognition provisions will
be adopted or APB No. 25's method will be continued. In addition, management has
not yet determined the potential effect that SFAS No. 123's accounting
provisions, if adopted, will have on the Company's financial statements.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
company as a going concern. However, for the year ended December 31, 1995, the
Company incurred a loss of $4,206,782 and has an accumulated deficit of
$11,785,356 at December 31, 1995 and used cash in operating activities of
$2,833,237 during 1995. In addition at December 31, 1995 current liabilities
exceeded current assets by $ 549,898.
In recent years the Company has had to rely on proceeds from private and public
placements and loans ( some of which were converted to stock ) from former
principals stockholders to fund its operations. (See Statements of Cash Flows ).
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operation of the Company, which in turn is
dependent upon the Company's ability to succeed in its future operations or
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Management has taken various actions, which are discussed below, to revise its
operating and financial requirements, which it believes are sufficient to
provide the Company with the ability to continue existence. These actions along
with further discussion of the 1995's operations follows:
A number of significant events have had a material impact on the Company's
operating results, and its current and future prospects. In addition to a change
in control and a public offering of its securities in 1994, the significant
events included replacement of all of the Company's senior executives, including
the President/CEO as well as most of its other personnel, two acquisitions which
included an additional customer base responsibility of over 200 locations,
integration of personnel from both acquired companies, various related product
integration and development efforts and a physical relocation to consolidate the
operations and personnel of all companies. These events were expensive in terms
of both time and money and took considerable attention from the management team
to focus on these activities.
Although revenues increased to $2,835,206 in 1995 from $1,047,414 in 1994, the
increased costs related to the integration process together with the other costs
related to the other changes at the Company referred to above more than offset
the increased revenues. The acquisitions and integration of Delta and the assets
of GIS also resulted in increased legal and accounting expenses and other
non-recurring operating expenses.
Personnel related expenses, including fees paid to consultants holding key
positions in sales, marketing and technical areas totaled $2,361,280. However,
as the integration process progressed in 1995, the Company was able to curtail
or eliminate in many cases the use of consultants by the end of 1995. By
December 31, 1995 personnel in the Company totaled 27 individuals and several
consultants. The current staffing level in April, 1996 is 34 and the plan for
1996 contemplates minimal increase in that level.
Although no assurances can be given, based on actual compensation expense and
related costs for the first two months of 1996 and management's plan for 1996,
reduced levels of these costs are expected to maintain the current sales level
described below. The foregoing is a forward looking statement contingent on
several factors including: no unexpected turnover of personnel; no need for
additional expenses for unbudgeted personnel; and no unexpected adjustment to
compensation levels currently being paid.
Although no assurances can be given, based on actual sales for the first two
months of 1996 and committed sales orders to date, revenues for 1996 will be at
least at the level achieved in 1995, with greater revenues being targeted. The
foregoing is a forward looking statement contingent upon no cancellation of
existing sales orders and the receipt of future sales orders at the current rate
On March 27, 1996, the Company commenced a Private Placement of 350,000 shares,
at $10.00 a share, of the Company's newly established Series E Preferred Stock.
Through April 15, 1996, 139,000 shares of the Private Placement successfully
closed with the Company receiving total proceeds, net of offering costs of
$1,271,982. On April 15, 1996 remaining stock subscriptions totaling $1,155,500
net proceeds to the Company when paid have been received. The Company also
anticipates receiving additional stock subscriptions for 77,500 shares which
will provide net proceeds of $697,500. (See Note 16).
On April 12, 1996 , the Company paid GIS the sum of $1,550,000 to settle the
remaining obligations to GIS. This represented a substantial discount of amounts
due owed and redeemed the 109,333 shares of common stock and 111,800 shares of
Series B Preferred Stock previously issued to GIS. ( See Note 16 ).
The Company plans to repay the note payable-related party of $300,000 that is
currently due. This will be paid from the net proceeds of the private placement
to be received after April 15, 1996.
While no assurances can be given, management believes that the current
organization infrastructure and the Company's products are sufficient to support
revenues greater than the levels achieved in 1995. In addition, while no
assurances can be given, management believes that the Company's operations
should continue to progress throughout 1996 and that the net proceeds from the
April 1996 Private Placement and the operating revenues from sales in 1996
should be sufficient to fund operations through 1996. Any significant new
marketing and development programs will only be initiated if external financing
has been obtained.
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 4 - ACQUISITION OF BUSINESSES
On February 15, 1995, effective January 1, 1995 (the date control transferred),
the Company acquired substantially all of the assets of GIS Systems Limited
Partnership ("GIS"). The purchase price for the acquisition was valued at
approximately $3,700,000. The purchase price consisted of 109,333 shares of the
Company's common stock valued at $765,331, 111,800 shares of the Company's
Series B Preferred Stock valued at $559,000, the Company's promissory note in
the principal amount of $591,000 (see Note 9) and the Company's promissory note
in the principal amount of $1,733,335 (see Note 9). In addition, the Company
agreed to assume certain liabilities of GIS (aggregating $45,718) and loaned GIS
$559,000 (see paragraph below). Direct acquisition costs aggregating $82,744
(principally legal and accounting fees) were incurred in connection with the
acquisition. The promissory notes, totalling $2,324,335, were convertible into
preferred stock and derived their valuation from the underlying preferred stock.
The common stock valuation of $7.00 per share and the preferred stock valuation
of $5.00 per share reflected the agreed-upon price between the buyer and sellers
and was approved by the Company's Board of Directors after giving effect to such
factors as the restrictions and the size of the blocks of common and preferred
stock.
The loan of $559,000 to GIS evidenced by a promissory note is secured by the
111,800 shares of the Company's Series B Preferred Stock and was due March 31,
1996. The sellers had the option of returning preferred stock if the assignable
call provision of $5.00 per share was not exercised. Accordingly, the note
receivable is presented as a reduction of stockholders' equity.
The total purchase price of GIS was allocated based on fair value of net
tangible assets acquired, with the excess allocated to identifiable intangible
components based on their individual estimated fair values and the remainder was
allocated to goodwill.
The purchase price, including the direct acquisition costs, was allocated as
follows:
Inventory $ 85,962
Prepaid expenses and other current assets 20,472
Fixed assets 87,581
Accounts payables assumed (45,718)
Systems and software costs 1,200,000
Customer list and support contracts 300,000
Goodwill 2,083,113
--------------
$ 3,731,410
==============
See Note 16.
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
===========
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 4 - ACQUISITION OF BUSINESSES - Continued
Pursuant to the acquisition of Delta, the Company effectively acquired a 50%
equity interest in Deltan 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. During 1995, 10,000
options were exercised resulting in $70,000 of common stock (10,000 shares)
being retired, leaving a remaining balance subject to put options at December
31, 1995, of $140,000.
The above two transactions have been accounted for as purchases in accordance
with APB No. 16 Business Combinations, accordingly, the results of Delta's and
GIS' operations have been included in the Company's consolidated financial
statements from the date of acquisition. The following are the unaudited pro
forma results of operations for the year ended December 1994, assuming the
transactions were effective January 1, 1994, after including the impact of
certain adjustments such as consulting fees, amortization of intangibles and
reduction of selling, general and administrative expenses (principally salaries
and wages and rent to reflect personnel not transferred and lease space not
assumed).
Delta and
Delta GIS GIS Combined
------------ ------------ ------------
Revenues $ 1,801,000 $ 4,473,000 $ 5,208,000
Net Income (Loss) $(2,521,000) $(2,322,000) $(2,440,000)
Income (Loss) per
Common Share $(1.50) $(1.45) $(1.37)
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the period presented and are
not intended to be a projection of future results of operations.
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 5 - INVENTORIES
Inventories as of December 31, consist of the following:
1995 1994
-------- -------
Installations-in-process $172,411 $111,016
Parts and systems 153,253 13,664
--------- --------
$325,664 $124,680
========= ========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, consist of the following:
1995 1994
-------- --------
Furniture and equipment $357,346 $167,061
Vehicles - 16,705
Purchased software 12,231 8,976
Test equipment 49,812 34,002
-------- --------
419,389 226,744
Less accumulated depreciation 172,821 129,751
-------- --------
$246,568 $ 96,993
======== ========
NOTE 7 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1995 1994
-------- -------
Non-competition agreement net of amortization
of $28,333 and $-0- $ 56,667 $ 85,000
Investment in and advances to joint venture 77,790 29,730
Other 33,451 91,637
-------- --------
$167,908 $206,367
======== ========
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 8 - NOTES PAYABLE
At December 31, 1995 and 1994, the Company had an outstanding balance of $21,757
and $74,910 under a premium financing agreement due in 1996, at an annual
interest rate of 9.25%.
At December 31, 1994, the Company had outstanding borrowings under promissory
notes payable to two former stockholders of $200,000 representing unsecured cash
advances due in October 1996, at an annual interest rate of 8%. In February
1995, the Company increased the borrowings to $759,505 which was subsequently
settled in full in June 1995 by the issuance of 79,950 shares of Series A
Preferred Stock. In June 1995, the Company borrowed $300,000 under a convertible
secured promissory note due March 30, 1996 from these same individuals at an
annual rate of 9.5% (see Note 16).
NOTE 9 - ACQUISITION OBLIGATIONS
At December 31, 1995, the "promissory notes payable, stockholders with
conversion features" totaling $2,324,335 which is associated with the GIS
acquisition (see Note 4) were, at the Company's election, either payable in cash
or by conversion into preferred and common stock prior to March 31, 1996. The
promissory notes for $591,000 were convertible into 118,200 shares of Series B
Preferred Stock. The other promissory notes totaling $1,733,335 were convertible
into the number of common stock shares determined by dividing $1,733,335 by the
quoted market value of the common stock near the date of the conversion. The
Company's stated intent since the acquisition date of GIS and at December 31,
1995 has been to satisfy the obligations, which are non-interest bearing, by the
issuance of preferred stock and common stock and not by a cash payment.
Accordingly, the promissory notes at December 31, 1995 were not classified as
current liabilities as current assets will not be used to satisfy the promissory
notes. The obligations were subsequently satisfied in April 1996 as part of the
March 11, 1996 agreement between the Company and GIS, such agreement was not
contemplated at December 31, 1995. The settlement did involve some amount of
cash along with other consideration, however, such cash was provided by a
Private Placement completed in April 1996 (See Note 16).
At December 31, 1995, the balance sheet reflects "common stock subject to put
options" of $140,000. This obligation is further described in Note 4 as it
pertains to the Company's acquisition of Delta.
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 10 - INCOME TAXES
The Company has a net operating loss (NOL) for income tax purposes of
approximately $9,000,000 at December 31, 1995 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,
--------------------------
1995 1994
---- ----
Intangibles $ 70,000 $ --
Bad debt allowance, employee
vacation pay, and other accruals 190,000 10,000
Compensation related to stock options 350,000 168,000
Net operating loss carryforward (1) 3,340,000 2,250,000
---------- ----------
3,950,000 2,428,000
Less valuation allowance (3,950,000) (2,428,000)
---------- ----------
$ - $ -
============ ==========
(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.
The Company's computed effective tax rate differs from the Federal statutory tax
rate as follows:
1995 1994
------ -----
Federal statutory rate 34 % 34 %
Effect of net operating losses (NOL) or NOL carryforward (34)% (34)%
----- -----
Effective tax rate, after the effect of NOL 0 % 0 %
===== =====
F-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facilities under an operating lease,
which expires in 1999.
Future minimum payments under this operating lease are as follows:
1996 $116,148
1997 134,512
1998 173,521
1999 50,218
2000 and thereafter -
------------
$474,399
============
Rental expense for the years ended December 31, 1995 and 1994 was $89,027 and
$51,305, respectively.
LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, has
commenced an action against the Company in Florida state court. The individual
alleges, among other things, that he was wrongfully terminated from his
employment and seeks damages which in the aggregate could exceed $1,000,000. The
Company believes the suit is without merit and intends to vigorously defend the
action.
The Company is also involved in other legal actions. Management does not believe
that the ultimate resolution of these and the above matter will have a material
effect on the Company's financial position.
F-19
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY
COMMON STOCK
During October 1994, the Company completed a secondary offering of 920,000 units
at a price of $5.50 per share. Each unit consisted of one share of stock and two
redeemable warrants. Net proceeds to the Company was approximately $3,906,000
after deducting underwriters' discounts/commissions of $506,000 and offering
costs of $647,998.
In December 1995, the Company's authorized shares of common stock was increased
from 5,000,000 to 20,000,000.
PREFERRED STOCK
The Company's articles of incorporation authorize a total of 2,000,000 shares
preferred stock. The Company's Board of Directors has established Series A, B, C
and D convertible preferred stock (see Note 16).
Series of Preferred Stock
-------------------------------------------------
A B C D Total
Authorized shares
December 31, 1995 200,000 230,000 350,000 350,000 1,130,000
Outstanding shares
December 31, 1995 95,950 111,800 - 180,000 387,750
December 31, 1994 36,364 - - - 36,364
Outstanding share amounts
December 31, 1995 $2,879 $3,354 - $5,400 $11,633
December 31, 1994 $1,091 - - - $ 1,091
All series contain specific provisions as to conversion into shares of common
stock and liquidation values. The shares are nonvoting and, except for Series A,
participate equally as to dividends declared with the Company's common stock.
The Series A preferred stock bears a cumulative dividend at an annual rate of 8%
of its liquidation value ($959,500).
In June 1995, the Company issued 95,950 shares of its newly designated Series A
preferred stock to former principal stockholders in satisfaction of $759,505 in
promissory notes due October 1996 and in conversion of 36,364 shares of
previously designated Series A preferred stock.
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
ISSUANCE OF COMMON STOCK FOR SERVICES
During the year ended December 31, 1994, the Company issued an aggregate of
1,398,390 shares of its common stock 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
and 1,198,390 shares being issued at $.36/share from April to September 1994.
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. 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 with a value of $300,000. 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 former 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-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
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 OPTION PLANS
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 Compensation/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. The exercise price for
non-qualified stock options may not be less than 25% 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-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
In March 1995, the Board of Directors, subject to stockholder approval, adopted
amendments to the Company's 1994 stock option plan which included that the
number of shares which could be granted under the Plan would be increased from
58,333 to 600,000 shares. At the annual stockholders meeting in December 1995,
the proposal to increase the number of shares was not approved.
Information as to shares subject to options is as follows:
<TABLE>
<CAPTION>
Shares Price per Share
------------------ ---------------
ISO NQSO
------- -------
<S> <C> <C> <C>
Options outstanding, January 1, 1994 -- --
Options granted 82,667 18,300 $1.00 - 13.00
Options canceled or forfeited (45,667) $1.00
Options exercised (500) (1,500) $1.00
------- -------
Options outstanding, December 31, 1994 36,500 16,800
Options granted -- --
Options canceled or forfeited (3,500) (14,800) $1.00 - $3.633
------- -------
Options outstanding, December 31, 1995 33,000 2,000
======= =======
Exercise price range per share of options
outstanding at year end $ 1.00 $1.00 - 13.00
======= ==============
</TABLE>
As of December 31, 1995, all stock options are exercisable
NON-QUALIFIED STOCK OPTIONS
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 year
employment agreement. Of the total options granted, 125,000 were granted as a
signing bonus effective October 31, 1994 and were immediately exerciseable 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 the fair value of $5.00 per share (determined by the Board of
Directors considering various factors as restrictions, etc.) and the exercise
price, has been recorded in the consolidated statement of operations for 1994.
In addition, the corresponding obligation to issue (grant) common stock options
also has been reflected in the balance sheet as of December 31, 1994. Of the
remaining balance of 250,000 options, 125,000 options vested on October 31, 1995
and 125,000 options will vest on October 31, 1996. In accordance with accounting
provisions of APB No. 25, the Company has recorded compensation expense in 1995
of $562,500 and will record additional expense of $187,500 in 1996.
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
With the Company granting options in 1995 with the full vesting of the 125,000
options related to the 1994 sign-up bonus and the related December 31, 1994
obligation of $375,000 along with the additional 125,000 options vesting October
1995, paid-in capital in 1995 was increased by $937,250.
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.
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
Price per
Shares Share
---------- ----------
Warrants outstanding, January 1, 1994 . 13,400 $ 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
Warrants granted ...................... -- --
Warrants exercised .................... -- --
---------- -------------
Warrants outstanding, December 31, 1995 2,121,067 $3.75 - 9.08
========== =============
F-24
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
As of December 31, 1995, all warrants were exercisable.
RESERVATION OF COMMON STOCK
At December 31, 1995, the aggregate number of the Company's shares of common
stock reserved for issuance upon exercise of options and warrants, conversion of
convertible debt, and preferred stock totaled approximately 6,130,000 shares.
NOTE 13 - FOURTH QUARTER ITEMS
During the fourth quarter of 1995, there were several adjustments related to
revenues, and selling, general and administrative items which in the aggregate
increased net loss by approximately $242,000 ($.08 a share) related to the
previous three quarters of 1995.
There were no material fourth quarter adjustment in 1994 that affected the
previous three quarters of 1994.
For the financial statements for the year ended December 31, 1995, the Company
reclassified certain amounts to cost of revenues (formerly cost of products
sold) previously included in selling, general and administrative expenses (see
Note 2). The reclassification had no effect on the reported operating loss in
the previous three quarters of 1995.
NOTE 14 - SALES TO MAJOR CUSTOMERS
Percentage of Net Sales
Year ended December 31,
-----------------------------
Customer 1995 1994
-------- -------- ---------
A - 47.9%
B - 10.4%
In 1995, there were no customers representing 10% or more of revenues.
In 1994, the major customers are also foreign customers whose sales aggregated
approximately $611,000, including sales to Lasergate Systems Asia-Pacific Pty.
Limited of $109,000 (see Note 1).
F-25
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 15 - EMPLOYEE BENEFIT PLAN
Effective July 1, 1995 the Lasergate Systems, Inc. Profit Sharing 401(k) Plan
was established covering substantially all employees. The Company made no
contribution to the Plan during 1995.
NOTE 16 - SUBSEQUENT EVENTS
On March 27, 1996, the Company commenced a Private Placement of 350,000 shares,
at $10.00 a share, of the Company's newly established Series E Preferred Stock.
Through April 15, 1996, 139,00 shares of the Private Placement successfully
closed with the Company receiving total proceeds, (net of offering costs) of
$1,271,982.
On March 11, 1996, the Company and GIS Systems Limited Partnership executed an
agreement whereby the parties agreed to, among other things, settle the
remaining obligation to GIS totaling $2,324,335 by making a cash payment to GIS
of $1,550,000, cancelling the $559,000 note receivable from GIS, cancelling the
$199,359 account receivable from GIS, and with GIS returning to the Company for
retirement the 109,333 shares of Common Stock and 111,800 shares of Series B
Preferred Stock previously issued to GIS.
The cash payment of $1,550,000 to GIS on April 12, 1996 was principally provided
from the proceeds of the Private Placement described above.
The $300,000 obligation to the Company's former stockholders (see Note 8) will
be paid in full including interest at the time the Private Placement becomes
fully subscribed and the proceeds are received.
At April 15, 1996 the Company has stock subscriptions for 133,500 shares which
will represent net proceeds of $1,155,500. In addition, the Company anticipates
receiving stock subscriptions for additional shares of 79,500 (net proceeds of
$697,500) which along with the stock subscriptions already received at April 15,
1996 should be paid within a short period of time.
F-26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LASERGATE SYSTEMS, INC.
(Registrant)
By: /S/ JACQUELINE E. SOECHTIG
---------------------------
Jacqueline E. Soechtig
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/S/ JACQUELINE E. SOECHTIG President and Chief Execu- April 12, 1996
- -------------------------- tive Officer (Principal
Jacqueline E. Soechtig Executive Officer)
/S/ STEWART L. KRUG Director April 12, 1996
- --------------------------
Stewart L. Krug
/S/ TIMOTHY E. MAHONEY Director April 12, 1996
- --------------------------
Timothy E. Mahoney
/S/ FRANK W. SWACKER Director April 12, 1996
- --------------------------
Frank W. Swacker
<PAGE>
/S/ LARRY W. UMSTADTER Director April 12, 1996
- --------------------------
Larry W. Umstadter
/S/ JOHN P. WARNICK Vice President-Finance, April 12, 1996
- -------------------------- Chief Financial Officer,
John P. Warnick Secretary and Treasurer
(Principal Financial and
Accounting officer)
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LASERGATE SYSTEMS, INC.
------------------------------
Pursuant To Provisions Of Section 607.1006
Of The Florida Business Corporation Act
------------------------------
Lasergate Systems, Inc. (the "Corporation"), a corporation organized and
existing under the Florida Business Corporation Act, does hereby certify that,
pursuant to Section 607.0821 of the Florida Business Corporation Act, the Board
of Directors of the Corporation adopted the following resolution at a meeting
duly held on August 1, 1995, which resolution is in full force and in effect as
of the date hereof:
WHEREAS, The Board of Directors of the Corporation is authorized, within
the limitation stated in the Articles of Incorporation to fix by resolutions the
designation of each series of preferred stock, par value $.03 ("Preferred
Stock") and powers, preferences and relative, participating, optional, or other
special rights and qualifications, limitations or restrictions thereof,
including, without limiting the generality of the foregoing, such provisions as
may be desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution or resolutions of the Board of Directors
under the Florida Business Corporation Act;
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to authorize and fix the terms of a
series of preferred stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, That there is hereby authorized such number
and series of Preferred Stock on the terms and with the provisions herein set
forth:
A. DESIGNATION OF THE SERIES. There shall be a series of Preferred Stock
designated as "Series D Preferred Stock." Each share of such series shall be
referred to herein as a "Series D Share." The authorized number of such Series D
Shares is 350,000.
<PAGE>
1. VOTING RIGHTS. Except as otherwise required by law, the holders of
Series D Shares shall not be entitled to vote separately as a series or
otherwise on any matter submitted to a vote of the stockholders of the
Corporation. Notwithstanding the foregoing, without the prior written consent of
the holders of the Series D Shares,
(a) the Corporation shall not amend, alter, or repeal (whether
by amendment, merger, or otherwise) any of the provisions of its articles of
incorporation or any resolutions of the board of directors or any instrument
establishing and designating the Series D Shares or any other capital stock of
the Corporation in determining the relative rights and preferences thereof so as
to affect any materially adverse change in the rights, privileges, powers, or
preferences of the holders of the Series D Shares, provided, however, that the
Corporation shall not be prevented from redeeming the Corporation's Series A, B
and C Preferred Stock, $.03 par value (the "Series A, B and C Shares") or
converting any or all such Series A, B And C Shares into shares of Common Stock
without the prior consent of the holders of the Series D Shares and without
effecting the same changes with respect to the Series D Shares;
(b) the Corporation shall not create or designate any additional
preferred stock senior in right as to dividends, redemptions and liquidation to
the Series D Shares; and
(c) the Corporation shall not permit any subsidiary to enter into
any agreement with any person or entity which, in the absence of a default
thereunder, would prevent the corporation from performing in all material
aspects its obligations with respect to the Series D Shares.
2. DIVIDENDS. The holders of record of Series D Shares shall be entitled to
receive when, as and if declared by the Board of Directors, out of funds legally
available therefor, dividends payable in cash, stock or otherwise. When
dividends become so payable, the Board of Directors of the Corporation shall
declare such dividends and cause them to be paid, to the full extent of any
funds legally available therefor. In the event that the corporation shall pay on
the Corporation's Common Stock, $.03 par value per share (the "Common Stock")
any dividend, whether in cash, property, or otherwise, the corporation shall pay
a dividend on the Series D Shares in an amount per share which is equal to that
which holders of the Series D Shares would have been entitled had they converted
such shares into Common Stock immediately prior to the payment of such dividend.
3. CONVERSION RIGHTS AND TRANSFERABILITY. The Series D Shares shall not be
transferable and shall be convertible as follows:
(a) OPTIONAL CONVERSION. Subject to and upon compliance with the
provisions of this Section 3, the holders of any Series D Shares shall have the
right at such holders' option, at any time or from time to time, commencing with
October 1, 1995 with respect to up to one-half of the Series D Shares owned by
such holders and November 1, 1995 with
-2-
<PAGE>
respect to all of the Series D Shares owned by such holders and without the
payment of any additional consideration therefor, to convert such Series D
Shares into fully paid and nonassessable shares of the Corporation's Common
Stock, upon the terms hereinafter set forth at the rate (the "Conversion Rate")
of one share of Common Stock for each Conversion Factor Dollar Amount (as
defined below) of Liquidation Value represented by the shares of Series D
Preferred Stock being converted. The Conversion Factor Dollar Amount shall be
(i) 65% of the average of the closing bid price of the Corporation's Common
Stock as quoted on NASDAQ for the five trading days immediately preceding
conversion or, if not quoted on NASDAQ, 65% of the average Current Market Price
(as defined in Section 3(e) below) for the five trading days immediately
preceding conversion; provided, however, that the Conversion Factor Dollar
Amount shall not be less than $1.00.
(b) MECHANICS OF CONVERSION. The holder of the Series D Shares
may exercise the conversion right specified in Section 3(a) by surrendering to
the Corporation or transfer agent of the Corporation the certificate or
certificates for all the Series D Shares. Conversion shall be deemed to have
been effected on the date when delivery of notice of an election to convert and
of certificates for the Series D Shares is made, and such date is referred to
herein as the "Conversion Date." Subject to the provisions of Section 3(d)(iii),
as promptly as practicable thereafter (and after surrender of the certificate or
certificates representing shares of Series D Preferred Stock to the Corporation
or any transfer agent of the Corporation in the case of conversions pursuant
hereto) the Corporation shall issue and deliver to or upon the written order of
such holder a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check or cash with respect
to any fractional interest in a share of Common Stock as provided in Section
3(e). Subject to the provisions of Section 3(d)(iii), the person in whose name
the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a holder of record of such Common Stock on the applicable
Conversion Date.
(c) FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of Series D Shares. If more than one
Series D Share shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of such
series so surrendered. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of any Series D Shares, the
Corporation shall pay out of funds legally available therefor a cash adjustment
in respect of such fractional interest in an amount equal to that fractional
interest of the then Current Market Price (as defined in Section 3(e) below).
(d) CONVERSION RATE ADJUSTMENTS. The Conversion Rate for the
Series D Shares shall be subject to adjustment from time to time as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS
OR COMBINATIONS. If the Corporation shall (x) declare a dividend or
make a
-3-
<PAGE>
distribution on its Common Stock in shares of its Common Stock, (y)
subdivide or reclassify the outstanding shares of Common Stock into a
greater number of shares of Common Stock or (z) combine or reclassify
the outstanding shares of Common Stock into a smaller number of shares
of Common Stock, the Conversion Rate in effect for Series D Shares at
the time of the record date for such dividend or distribution or the
effective date of such subdivision, combination or reclassification
shall be adjusted to that price determined by multiplying the
Conversion Rate in effect for each Series D Share by a fraction (x)
the numerator of which shall be the total number of issued and
outstanding shares of Common Stock immediately prior to such dividend,
distribution, subdivision, combination or reclassification and (y) the
denominator of which shall be the total number of issued and
outstanding shares of Common Stock immediately after such dividend,
distribution, subdivision, combination or reclassification. Successive
adjustments in the Conversion Rate shall be made whenever any event
specified above shall occur.
(ii) ROUNDING OF CALCULATIONS; MINIMUM ADJUSTMENT.
All calculations under this Section 3(d) shall be made to the nearest
cent or to the nearest one hundredth (1/100th) of a share, as the case
may be. Any provision of this Section 3 to the contrary
notwithstanding, no adjustment in the Conversion Rate shall be made if
the amount of such adjustment would be less than 1%; but any such
amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or
amounts so carried forward, shall aggregate 1% or more.
(iii) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON
CERTAIN ADJUSTMENTS. In any case in which the provisions of this
Section 3(d) shall require that an adjustment shall become effective
immediately after a record date for an event, the Corporation may
defer until the occurrence of such event (x) issuing to the holder of
any Series D Share converted after such record date and before the
occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by
such event over and above the shares of Common Stock issuable upon
such conversion before giving effect to such adjustment and (y) paying
to such holder any amount of cash in lieu of a fractional share of
Common Stock pursuant to Section 3(c); provided that the Corporation
upon request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional shares, and such cash, upon the occurrence of the event
requiring such adjustment.
(e) CURRENT MARKET PRICE. The Current Market Price at any
time shall mean, in the event the equity security is publicly traded, the last
reported sale price regular way or, in case no such reported sale takes place on
such day, the average of the last closing bid and asked prices regular way, in
either case on the principal national securities exchange on which
-4-
<PAGE>
such equity security is listed or admitted to trading, or if not listed or
admitted to trading on any national securities exchange, the closing sale price
for such day reported by NASDAQ, or if such equity security is so traded, but
not so quoted, the average of the closing reported bid and asked prices of such
equity security as reported by NASDAQ or any comparable system or, if such
equity security is not listed on NASDAQ or any comparable system, the average of
the closing bid and asked prices as furnished by two members of the National
Association of Securities Dealers, Inc., selected in good faith from time to
time by the Board of Directors of the Corporation for that purpose. If such
equity security is not traded in such manner that the quotations referred to
above are available for the period required hereunder, Current Market Price per
share of such equity security shall be deemed to be the fair value as determined
in good faith by the Board of Directors of the Corporation, irrespective of any
accounting treatment.
(f) STATEMENT REGARDING ADJUSTMENTS. Whenever the Conver-
sion Rate for the Series D Shares shall be adjusted as provided in Section 3(d),
the Corporation shall forthwith file, at the office of any transfer agent for
the Series D Shares and/or at the principal office of the Corporation, a
statement showing in detail the method of calculation of such adjustment, the
facts requiring such adjustment and the Conversion Price that shall be in effect
after such adjustment, and the Corporation shall also cause a copy of such
statement to be sent by mail, first class postage prepaid, to each holder of
Series D Shares at its address appearing on the Corporation's records. Each such
statement shall be signed by the Corporation's chief financial officer. Where
appropriate, such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of Section 3(g).
(g) NOTICE TO HOLDERS. In the event the Corporation shall
propose to take any action of the type described in Section 3(d)(i), the
Corporation shall give notice to each holder of Series D Shares in the manner
set forth in Section 3(f), which notice shall specify the record date, if any,
with respect to any such action and the approximate date on which such action is
to take place. Such notice shall also set forth such facts with respect thereto
as shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Conversion
Rate and the number, kind or class of shares or other securities or property
which shall be deliverable upon conversion of Series D Shares. In the case of
any action which would require the fixing of a record date, such notice shall be
given at least ten days prior to the date so fixed, and in the case of all other
action, such notice shall be given at least 15 days prior to the taking of such
proposed action. Failure to give notice, or any defect therein, shall not affect
the legality or validity of any such action.
(h) TREASURY STOCK. For the purposes of this Section 3, the
sale or other disposition of any Common Stock theretofore held in the
Corporation's treasury shall be deemed to be an issuance thereof.
(i) Costs. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock upon conversion of any Series D Shares; provided that
the Corporation shall not be required to
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<PAGE>
pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the Series D Shares in respect of which such shares are
being issued.
4. LIQUIDATION.
(a) SERIES D PREFERENCE. Upon any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of Series D Shares shall be entitled, before any distribution or payment is made
upon any shares of Common Stock, to be paid an amount per share equal to the
liquidation value described in this Section 4(a) (the "Liquidation Value"). The
per share Liquidation Value of the Series D Shares is equal to the sum of the
following:
(i) $10 per share, plus
(ii) an amount equal to any accrued and unpaid dividends
on such share subject to reduction if thereafter paid,
provided, however, that if upon any dissolution, liquidation or winding up of
the Corporation, the net assets available for distribution to the Corporation's
shareholders shall be insufficient to permit payment to the holders of Series D
Shares, the shares of the Corporation's Series A Preferred Shares, $.03 per
value (the "Series A Shares") the shares of the Corporation's Series B Preferred
Stock, $.03 par value (the "Series B Shares") and the shares of the
Corporation's Series C Preferred Stock, $.03 par value (the "Series C Shares")
of the amount distributable as aforesaid, the entire assets of the Corporation
to be so distributed shall be distributed on a pro rata basis in accordance with
their respective Liquidation Values among the holders of Series D Shares, the
Series A Shares, the Series B Shares and the Series C Shares. Neither the
consolidation nor merger of the Corporation with or into any other corporation
or other entities, nor the sale, transfer or lease of all or substantially all
of the assets of the Corporation shall itself be deemed to be a liquidation,
dissolution, or winding-up of the Corporation within the meaning of this Section
4. Notice of the liquidation, dissolution, or winding-up of the Corporation
shall be mailed, by first-class mail, postage prepaid, not less than 20 days
prior to the date on which such liquidation, dissolution, or winding-up is
expected to take place or become effective, to the holders of record of the
Series D Shares at their respective addresses as the same appear on the books of
the Corporation or supplied by them in writing to the Corporation for the
purpose of such notice; but no defect in such notice or in the mailing thereof
shall affect the validity of the liquidation, dissolution, or winding-up.
(b) General.
(i) All of the preferential amounts to be paid to the
holders of the Series D Shares pursuant to Section 4(a) shall be
paid or set apart for payment before the payment or setting apart
for payment of any amount for, or the
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<PAGE>
distribution of any assets of the Corporation to, the holders of
the Common Stock in connection with such liquidation, dissolution
or winding up.
(ii) After setting apart or paying in full the preferen-
tial amounts aforesaid to the holders of record of the issued and
outstanding Series A, B, C and D Preferred Shares as set forth in
Section 4(a), the holders of record of Common Stock shall be
entitled to participate in any distribution of any remaining
assets of the Corporation, and the holders of record of the
Series D Shares shall not be entitled to participate in such
distribution.
5. REACQUIRED SHARES. Any Series D Shares redeemed, purchased, converted or
otherwise acquired by the Corporation in any manner whatsoever shall not be
reissued as part of such Series D shall be retired promptly after the
acquisition thereof. All such shares shall upon their retirement and the filing
of any certificate required in connection therewith pursuant to the Florida
Business Corporation Act become authorized but unissued shares of Preferred
Stock.
6. COPIES OF AGREEMENT, INSTRUMENTS, DOCUMENTS. Copies of any of the
agreements, instruments or other documents referred to in this Amendment shall
be furnished to any stockholder upon written request to the Corporation at its
principal place of business.
The foregoing was authorized by the Board of Directors at a meeting duly
held on August 1, 1995. Shareholder action was not required for this Amendment.
Executed on August 1, 1995
LASERGATE SYSTEMS, INC.
By: /s/ Jacqueline Soechtig
------------------------------------
Jacqueline Soechtig,
President and Director
By: /s/ Vickie L. Guth
------------------------------------
Vickie L. Guth,
Vice President and Assistant Secretary
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<PAGE>
STATE OF FLORIDA )
: SS.:
COUNTY OF PINELLAS )
On this 1st day of August, 1995, before me, a Notary Public in and for the
State and County aforesaid, personally appeared Jacqueline Soechtig, who
acknowledged to the fact that she is the President and a Director of Lasergate
Systems, Inc., and that she executed as said officer and director the foregoing
Articles of Amendment of said corporation as her act and deed and as the act and
deed of said corporation.
WITNESS my hand and seal of office on the date and year first aforesaid.
-----------------------------
NOTARY PUBLIC
Notary Public Commission expires:
[notarial seal]
-8-
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LASERGATE SYSTEMS, INC.
------------------------------
Pursuant to Provisions of Section 607.1006
of the Florida Business Corporation Act
------------------------------
Lasergate Systems, Inc. (the "Corporation"), a corporation
organized and existing under the Florida Business Corporation Act, does hereby
certify that, pursuant to section 607.0821 of the Florida Business Corporation
Act, the Board of Directors of the Corporation adopted the following resolution
at a meeting duly held on March 28, 1996, which resolution is in full force and
in effect as of the date hereof:
WHEREAS, the Board of Directors of the Corporation is
authorized, within the limitation stated in the Articles of Incorporation to fix
by resolutions the designation of each series of preferred stock, par value $.03
("Preferred Stock") and powers, preferences and relative, participating,
optional, or other special rights and qualifications, limitations or
restrictions thereof, including, without limiting the generality of the
foregoing, such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other subjects or matters as may be fixed by resolution or resolutions
of the Board of Directors under the Florida Business Corporation Act;
WHEREAS, it is the desire of the Board of Directors of the
Corporation, pursuant to its authority as aforesaid, to authorize and fix the
terms of a series of Preferred Stock and the number of shares constituting such
series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby
authorized such number and series of Preferred Stock on the terms and with the
provisions herein set forth:
A. DESIGNATION OF THE SERIES. There shall be a series of
Preferred Stock designated as "Series E Preferred Stock." Each share of such
series shall be referred to herein as a "Series E Share." The authorized number
of such Series E Shares is 350,000.
-1-
<PAGE>
1. VOTING RIGHTS. Except as otherwise required by law, the
holders of Series E Shares shall not be entitled to vote separately as a series
or otherwise on any matter submitted to a vote of the stockholders of the
Corporation. Notwithstanding the foregoing, without the prior written consent of
the holders of the Series E Shares,
(a) the Corporation shall not amend, alter, or repeal
(whether by amendment, merger, or otherwise) any of the provisions of its
articles of incorporation or any resolutions of the board of directors or any
instrument establishing and designating the Series E Shares or any other capital
stock of the Corporation in determining the relative rights and preferences
thereof so as to affect any materially adverse change in the rights, privileges,
powers, or preferences of the holders of the Series E Shares, provided, however,
that the Corporation shall not be prevented from redeeming the Corporation's
Series A, B, C and D Preferred Stock, $.03 par value (the "Series A, B, C and D
Shares") or converting any or all such Series A, B, C and D Shares into shares
of Common Stock without the prior consent of the holders of the Series E Shares
and without effecting the same changes with respect to the Series E Shares;
(b) the Corporation shall not create or designate any
additional preferred stock senior in right as to dividends, redemptions and
liquidation to the Series E Shares; and
(c) the Corporation shall not permit any subsidiary to
enter into any agreement with any person or entity which, in the absence of a
default thereunder, would prevent the Corporation from performing in all
material aspects its obligations with respect to the Series E Shares.
2. DIVIDENDS. The holders of record of Series E Shares
shall be entitled to receive when, as and if declared by the Board of Directors,
out of funds legally available therefor, dividends payable in cash, stock or
otherwise. When dividends become so payable, the Board of Directors of the
Corporation shall declare such dividends and cause them to be paid, to the full
extent of any funds legally available therefor. In the event that the
Corporation shall pay on the Corporation's Common Stock, $.03 par value per
share (the "Common Stock") any dividend, whether in cash, property, or
otherwise, the Corporation shall pay a dividend on the Series E Shares in an
amount per share which is equal to that which holders of the Series E Shares
would have been entitled had they converted such shares into Common Stock
immediately prior to the payment of such dividend.
3. CONVERSION RIGHTS AND TRANSFERABILITY. The Series E
Shares shall not be transferable and shall be convertible as follows:
(a) OPTIONAL CONVERSION. Subject to and upon compliance
with the provisions of this Section 3, the holders of any Series E Shares shall
have the right at such holders' option, at any time or from time to time,
commencing with May 13, 1996 with respect to up to one-half of the Series E
Shares owned by such holders and May 28, 1995 with respect to all of the
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<PAGE>
Series E Shares owned by such holders and without the payment of any additional
consideration therefor, to convert such Series E Shares into fully paid and
nonassessable shares of the Corporation's Common Stock, upon the terms
hereinafter set forth at the rate (the "Conversion Rate") of one share of Common
Stock for each Conversion Factor Dollar Amount (as defined below) of Liquidation
Value represented by the shares of Series E Preferred Stock being converted. The
Conversion Factor Dollar Amount shall be 70% of the average of the closing bid
prices of the Corporation's Common Stock as quoted on NASDAQ for the five
trading days immediately preceding conversion or, if not quoted on NASDAQ, 70%
of the average Current Market Price (as defined in Section 3(e) below) for the
five trading days immediately preceding conversion; provided, however, that the
Conversion Factor Dollar Amount shall not be less than $.40.
(b) MECHANICS OF CONVERSION. The holder of the
Series E Shares may exercise the conversion right specified in Section 3(a) by
surrendering to the Corporation or transfer agent of the Corporation the
certificate or certificates for all the Series E Shares. Conversion shall be
deemed to have been effected on the date when delivery of notice of an election
to convert and of certificates for the Series E Shares is made, and such date is
referred to herein as the "Conversion Date." Subject to the provisions of
Section 3(d)(iii), as promptly as practicable thereafter (and after surrender of
the certificate or certificates representing shares of Series E Preferred Stock
to the Corporation or any transfer agent of the Corporation in the case of
conversions pursuant hereto) the Corporation shall issue and deliver to or upon
the written order of such holder a certificate or certificates for the number of
full shares of Common Stock to which such holder is entitled and a check or cash
with respect to any fractional interest in a share of Common Stock as provided
in Section 3(e). Subject to the provisions of Section 3(d)(iii), the person in
whose name the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a holder of record of such Common Stock on the
applicable Conversion Date.
(c) FRACTIONAL SHARES. No fractional shares of
Common Stock or scrip shall be issued upon conversion of Series E Shares. If
more than one Series E Share shall be surrendered for conversion at any one time
by the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of such series so surrendered. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any Series E Shares,
the Corporation shall pay out of funds legally available therefor a cash
adjustment in respect of such fractional interest in an amount equal to that
fractional interest of the then Current Market Price (as defined in Section 3(e)
below).
(d) CONVERSION RATE ADJUSTMENTS. The Conversion
Rate for the Series E Shares shall be subject to adjustment from time to time as
follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS
RECLASSIFICATIONS OR COMBINATIONS. If the Corporation shall (x)
declare a dividend or make a
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<PAGE>
distribution on its Common Stock in shares of its Common
Stock, (y) subdivide or reclassify the outstanding shares of
Common Stock into a greater number of shares of Common Stock
or (z) combine or reclassify the outstanding shares of Common
Stock into a smaller number of shares of Common Stock, the
Conversion Rate in effect for Series E Shares at the time of
the record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be adjusted to that price determined by
multiplying the Conversion Rate in effect for each Series E
Share by a fraction (x) the numerator of which shall be the
total number of issued and outstanding shares of Common Stock
immediately prior to such dividend, distribution, subdivision,
combination or reclassification and (y) the denominator of
which shall be the total number of issued and outstanding
shares of Common Stock immediately after such dividend,
distribution, subdivision, combination or reclassification.
Successive adjustments in the Conversion Rate shall be made
whenever any event specified above shall occur.
(ii) ROUNDING OF CALCULATIONS; MINIMUM
ADJUSTMENT. All calculations under this Section 3(d) shall be
made to the nearest cent or to the nearest one hundredth
(1/100th) of a share, as the case may be. Any provision of
this Section 3 to the contrary notwithstanding, no adjustment
in the Conversion Rate shall be made if the amount of such
adjustment would be less than 1%; but any such amount shall be
carried forward and an adjustment with respect thereto shall
be made at the time of and together with any subsequent
adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate 1% or
more.
(iii) TIMING OF ISSUANCE OF ADDITIONAL
COMMON STOCK UPON CERTAIN ADJUSTMENTS. In any case in which
the provisions of this Section 3(d) shall require that an
adjustment shall become effective immediately after a record
date for an event, the Corporation may defer until the
occurrence of such event (x) issuing to the holder of any
Series E Share converted after such record date and before the
occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment
required by such event over and above the shares of Common
Stock issuable upon such conversion before giving effect to
such adjustment and (y) paying to such holder any amount of
cash in lieu of a fractional share of Common Stock pursuant to
Section 3(c); provided that the Corporation upon request shall
deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such
additional shares, and such cash, upon the occurrence of the
event requiring such adjustment.
(e) CURRENT MARKET PRICE. The Current Market Price
at any time shall mean, in the event the equity security is publicly traded, the
last reported sale price regular way or, in case no such reported sale takes
place on such day, the average of the last closing bid and asked prices regular
way, in either case on the principal national securities exchange on which
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<PAGE>
such equity security is listed or admitted to trading, or if not listed or
admitted to trading on any national securities exchange, the closing sale price
for such day reported by NASDAQ, or if such equity security is so traded, but
not so quoted, the average of the closing reported bid and asked prices of such
equity security as reported by NASDAQ or any comparable system or, if such
equity security is not listed on NASDAQ or any comparable system, the average of
the closing bid and asked prices as furnished by two members of the National
Association of Securities Dealers, Inc., selected in good faith from time to
time by the Board of Directors of the Corporation for that purpose. If such
equity security is not traded in such manner that the quotations referred to
above are available for the period required hereunder, Current Market Price per
share of such equity security shall be deemed to be the fair value as determined
in good faith by the Board of Directors of the Corporation, irrespective of any
accounting treatment.
(f) STATEMENT REGARDING ADJUSTMENTS. Whenever the
Conversion Rate for the Series E Shares shall be adjusted as provided in Section
3(d), the Corporation shall forthwith file, at the office of any transfer agent
for the Series E Shares and/or at the principal office of the Corporation, a
statement showing in detail the method of calculation of such adjustment, the
facts requiring such adjustment and the Conversion Price that shall be in effect
after such adjustment, and the Corporation shall also cause a copy of such
statement to be sent by mail, first class postage prepaid, to each holder of
Series E Shares at its address appearing on the Corporation's records. Each such
statement shall be signed by the Corporation's chief financial officer. Where
appropriate, such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of Section 3(g).
(g) NOTICE TO HOLDERS. In the event the Corporation
shall propose to take any action of the type described in Section 3(d)(i), the
Corporation shall give notice to each holder of Series E Shares in the manner
set forth in Section 3(f), which notice shall specify the record date, if any,
with respect to any such action and the approximate date on which such action is
to take place. Such notice shall also set forth such facts with respect thereto
as shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Conversion
Rate and the number, kind or class of shares or other securities or property
which shall be deliverable upon conversion of Series E Shares. In the case of
any action which would require the fixing of a record date, such notice shall be
given at least ten days prior to the date so fixed, and in the case of all other
action, such notice shall be given at least 15 days prior to the taking of such
proposed action. Failure to give notice, or any defect therein, shall not affect
the legality or validity of any such action.
(h) TREASURY STOCK. For the purposes of this Section
3, the sale or other disposition of any Common Stock theretofore held in the
Corporation's treasury shall be deemed to be an issuance thereof.
(i) COSTS. The Corporation shall pay all documentary,
stamp, transfer or other transactional taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any Series E Shares;
provided that the Corporation shall not be required to
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<PAGE>
pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the Series E Shares in respect of which such shares are
being issued.
4. LIQUIDATION.
(a) SERIES E PREFERENCE. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series E Shares shall be entitled, before any distribution or
payment is made upon any shares of Common Stock, to be paid an amount per share
equal to the liquidation value described in this Section 4(a) (the "Liquidation
Value"). The per share Liquidation Value of the Series E Shares is equal to the
sum of the following:
(i) $10 per share, plus
(ii) an amount equal to any accrued and
unpaid dividends on such share subject to reduction if
thereafter paid,
provided, however, that if upon any dissolution, liquidation or winding up of
the Corporation, the net assets available for distribution to the Corporation's
shareholders shall be insufficient to permit payment to the holders of Series E
Shares, the shares of the Corporation's Series A Preferred Shares, $.03 par
value (the "Series A Shares"), the shares of the Corporation's Series B
Preferred Stock, $.03 par value (the "Series B Shares"), the shares of the
Corporation's Series C Preferred Stock, $.03 par value (the "Series C Shares"),
and the shares of the Corporation's Series D Preferred Stock, $.03 par value
(the "Series D Shares") of the amount distributable as aforesaid, the entire
assets of the Corporation to be so distributed shall be distributed on a pro
rata basis in accordance with their respective Liquidation Values among the
holders of Series E Shares, the Series A Shares, the Series B Shares, the Series
C Shares and the Series D Shares. Neither the consolidation nor merger of the
Corporation with or into any other corporation or other entities, nor the sale,
transfer or lease of all or substantially all of the assets of the Corporation
shall itself be deemed to be a liquidation, dissolution, or winding-up of the
Corporation within the meaning of this Section 4. Notice of the liquidation,
dissolution, or winding-up of the Corporation shall be mailed, by first-class
mail, postage prepaid, not less than 20 days prior to the date on which such
liquidation, dissolution, or winding-up is expected to take place or become
effective, to the holders of record of the Series E Shares at their respective
addresses as the same appear on the books of the Corporation or supplied by them
in writing to the Corporation for the purpose of such notice; but no defect in
such notice or in the mailing thereof shall affect the validity of the
liquidation, dissolution, or winding-up.
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<PAGE>
(b) GENERAL.
(i) All of the preferential amounts to be
paid to the holders of the Series E Shares pursuant to Section
4(a) shall be paid or set apart for payment before the payment
or setting apart for payment of any amount for, or the
distribution of any assets of the Corporation to, the holders
of the Common Stock in connection with such liquidation,
dissolution or winding up.
(ii) After setting apart or paying in full
the preferential amounts aforesaid to the holders of record of
the issued and outstanding Series A, B, C, D and E Preferred
Shares as set forth in Section 4(a), the holders of record of
Common Stock shall be entitled to participate in any
distribution of any remaining assets of the Corporation, and
the holders of record of the Series E Shares shall not be
entitled to participate in such distribution.
5. REACQUIRED SHARES. Any Series E Shares redeemed, purchased,
converted or otherwise acquired by the Corporation in any manner whatsoever
shall not be reissued as part of such Series E shall be retired promptly after
the acquisition thereof. All such shares shall upon their retirement and the
filing of any certificate required in connection therewith pursuant to the
Florida Business Corporation Act become authorized but unissued shares of
Preferred Stock.
6. COPIES OF AGREEMENT, INSTRUMENTS, DOCUMENTS. Copies of any
of the agreements, instruments or other documents referred to in this Amendment
shall be furnished to any stockholder upon written request to the Corporation at
its principal place of business.
The foregoing was authorized by the Board of Directors at a
meeting duly held on March 28, 1996. Shareholder action was not required for
this Amendment.
Executed on March 28, 1996
LASERGATE SYSTEMS, INC.
By:/s/ Jacqueline Soechtig
----------------------------
Jacqueline Soechtig,
President and Director
By:/s/ John P. Warnick
----------------------------
John P. Warnick,
Vice President and Assistant
Secretary
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<PAGE>
STATE OF FLORIDA ) SS.:
:
COUNTY OF PINELLAS )
On this 28th day of March, 1996, before me, a Notary Public in
and for the State and County aforesaid, personally appeared Jacqueline Soechtig,
who acknowledged to the fact that she is the President and a Director of
Lasergate Systems, Inc., and that she executed as said officer and director the
foregoing Articles of Amendment of said corporation as her act and deed and as
the act and deed of said corporation.
WITNESS my hand and seal of office on the date and year first
aforesaid.
________________________________
NOTARY PUBLIC
Notary Public Commission expires:
[notarial seal]
-8-
SUBSCRIPTION AGREEMENT
--------------------------
LASERGATE SYSTEMS, INC.
--------------------------
Lasergate Systems, Inc.
28050 U.S. 19 North
Corporate Square
Suite 502
Clearwater, FL 34621
Dear Sir or Madam:
1. SUBSCRIPTION. The undersigned hereby applies to purchase _______ shares
of Series D Convertible Preferred Stock, $.03 par value per share (the
"Shares"), at a price of $10.00 per Share or an aggregate price of $_________.
Once this Agreement is executed by both the undersigned and Lasergate Systems,
Inc. (the "Company"), it is intended to create a binding agreement between the
undersigned and the Company with respect to the terms and conditions described
below.
This Subscription Agreement should be completed and executed by the
purchaser or by an authorized corporate officer, general partner or trustee, as
appropriate.
2. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER. The undersigned
acknowledges, represents, warrants and agrees as follows:
(a) ORGANIZATION AND AUTHORIZATION. The undersigned, if a corporation,
trust or partnership, is duly incorporated and validly existing in the country
of _______ and has all requisite power and authority to purchase and hold the
Shares. The decision to invest and the execution and delivery of this Agreement
by the undersigned, the performance by the undersigned of its obligations
hereunder and the consummation by the undersigned of the transactions
contemplated hereby requires no other proceedings on the part of the
undersigned. The undersigned signatory has all right, power and authority to
execute and deliver this Agreement on behalf of the undersigned. This Agreement
has been duly executed and delivered by the undersigned and, assuming the
execution and delivery hereof and thereof by the Company, will constitute the
legal, valid and binding obligations of the undersigned, enforceable against the
undersigned in accordance with its terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights of creditors generally and the availability of
equitable remedies.
<PAGE>
(b) EVALUATION OF RISKS. The undersigned has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of, and bearing the economic risks entailed by, an investment
in the Company and of protecting its interests in connection with this
transaction. It recognizes that its investment in the Company involves a high
degree of risk.
(c) DUE DILIGENCE. The undersigned has received a copy of such
documents as requested by the undersigned, has carefully reviewed such
documents, has had the opportunity to obtain any additional information
necessary to verify the accuracy of the information contained in such documents
and has been given the opportunity to meet with representatives of the Company
and to have them answer any questions and provide any additional information
regarding the terms and conditions of this particular investment deemed relevant
by the undersigned, and all such questions have been answered and requested
information provided to the undersigned's full satisfaction. Among the documents
received and reviewed by the undersigned are: (i) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994; (ii) the Company's Current
Report on Form 8-K dated December 22, 1994; (iii) the Company's Current Report
on Form 8-K dated February 15, 1995; (iv) the Company's Quarterly Report on Form
10-QSB for the Quarter ended March 31, 1995; (v) the Company's Preliminary Proxy
Statement as filed with the U.S. Securities and Exchange Commission (the "SEC")
on May 11, 1995; (vi) a comment letter from the SEC relating to the foregoing
filings; (vii) the Company's responses to the comment letter from the SEC and
accompanying amendments to the foregoing documents; and (viii) the Articles of
Amendment of Articles of Incorporation of the Company with respect to its Series
D Preferred Stock (the "Designation"). In making its decision to purchase the
Shares, the undersigned has relied solely upon its review of the documents
referred to above and this Agreement and independent investigations made by it
or its representatives. The undersigned is aware that the Division of
Enforcement of the SEC has informed the Company that it has commenced an
investigation regarding certain matters which may be related to the Company. The
undersigned is also aware of the following:
A. FINANCIAL CONDITION; HISTORICAL LOSSES. Although the Company
has been in existence since 1985, its first year with significant sales was
1989. The Company's cash requirements during 1993 significantly exceeded its
resources and there was a resulting significant loss from operations. During the
first quarter of 1994, the Company did not generate any revenues from sales of
its Admission Control Systems. Sales were lacking during such quarter due to the
Company's inability to raise sufficient capital. The resulting cash shortage
caused the Company to temporarily curtail its marketing efforts. Revenue for
1994 was limited to one major contract of $500,000, with a few smaller system
sales and maintenance and support contracts from existing customers. As of March
31, 1995, the Company had an accumulated deficit of $8,646,388. The Company
cannot predict with certainty when it might become profitable, if ever. At March
31, 1995, the Company had a $816,154 working capital deficit.
B. NEED FOR ADDITIONAL FINANCING. The Company is dependent on the
proceeds of the sale of the Shares to finance its business and planned growth
for approximately 24
-2-
<PAGE>
months. Thereafter, the proceeds of the sale of the Shares may not be sufficient
to meet the Company's needs for capital to expand its business. There can be no
assurance that, if needed, other financing will be available and, if available,
that it will be on terms which will be acceptable to the Company. Further, the
Company has agreed that it will not issue any shares of Common Stock or
Preferred Stock prior to October 18, 1996 without the consent of the Underwriter
of its October 1994 public offering, such consent not to be unreasonably
withheld. Although the Company has not obtained the consent of the Underwriter
to the issuance of the Shares, the Company believes that the withholding of such
consent is unreasonable.
C. RELIANCE ON TECHNICAL PERSONNEL. The Company relies on its
technical personnel to provide the skill necessary for the Company's
programming, product development, assembly, repair and other capabilities. The
Company does not have long term contracts with any of such personnel. There can
be no assurance that such personnel will remain employees of the Company.
The Company requires a wide range of skilled personnel to conduct its
proposed operations and will be dependent upon its ability to attract and retain
qualified management, scientific and marketing personnel. Although management of
the Company believes that such personnel will be available to the Company, there
can be no assurance that the Company will be successful in recruiting or
retaining them or that the Company will have sufficient funding for appropriate
levels of compensation for such individuals.
D. COMPANY'S NEW MANAGEMENT. The two executive officers and
three directors of the Company have been involved with the Company for a
relatively short period of time. Jacqueline E. Soechtig has been the Company's
Chief Executive Officer since October 1994 and Vickie L. Guth has been the
Company's Vice President--Finance and Chief Financial Officer since November
1993. Stewart L. Krug, Timothy Mahoney, Ms. Soechtig, Frank W. Swacker and
Lawrence W. Umstadter, the Company's directors, have served as directors since
May 1994, May 1994, October 1994, May 1995 and May 1995 respectively. There can
be no assurance that management's lack of history with the Company will not
adversely affect the Company's performance over the short term.
E. LACK OF SIGNIFICANT PATENT PROTECTION. The Company currently
does not hold any significant patents related to the creation or operation of
its products. The Company, however, intends to apply for patents to protect its
new products and enhancements once they are developed. In addition, the Company
generally requires each of its consultants, customers and major vendors to enter
into non-disclosure agreements to protect the Company's proprietary information.
There can be no assurance that these patents (if and when granted) and
agreements will afford the necessary protection from material infringement or
that the Company will have the financial resources necessary to enforce its
agreements or patents, if and when issued. There can also be no assurance that
the Company's technologies and prospective patents will not infringe upon
patents of others.
-3-
<PAGE>
F. DEPENDENCE ON EXISTING PRODUCTS; CONTINUED NEED TO DEVELOP AND
ENHANCE PRODUCTS. The Company's products are based on bar code and other
computer software technology. This technology has been available for many years
and may be surpassed or rendered obsolete by other computer-based technologies
or more advanced software. The Company continuously seeks ways to improve its
products through the introduction of enhancements and various additional
applications, which, by its nature is uncertain. Accordingly, there can be no
assurance that the Company will be able to develop such new products or
improvements.
The Company has recently recognized the need to upgrade certain portions of
the software included in its existing Admission Control Systems. In lieu of
utilizing the time and personnel necessary to develop this software, the Company
acquired Delta Information Services, Inc. ("Delta"), which provided the Company
with the enhanced software necessary to implement the upgrade. The Company is
currently in the process of offering to its existing customers the enhancements
afforded by the software acquired in the Delta acquisition without charge.
Although the Company believes that these enhancements will remedy any existing
deficiencies with its installed Admission Control Systems, there can be no
assurance that all of its existing customers will accept the product
enhancements. Moreover, customer acceptance of the product enhancements will not
necessarily ensure that these customers will look to the Company for their
future admission and access control system needs.
G. COMPETITION. Certain competitors provide similar services as
the Company, including the use of bar codes, magnetic strips and other
technology and software which provide certain aspects of the Company's products.
Such products are produced by numerous companies, many of which have resources
substantially greater than those of the Company.
H. LITIGATION. The Company's founder and former President and
Chief Executive Officer, Donald Turner, has commenced an action against the
Company in Florida state court. Mr. Turner alleges, among other things, that he
was wrongfully terminated from his employment and seeks damages which in the
aggregate could exceed $1,000,000. The Company believes that Mr. Turner's suit
is without merit and intends to vigorously defend the action.
I. DEPENDENCE UPON AMUSEMENT PARK, ENTERTAINMENT AND STATE COUNTY
AND LOCAL FAIR INDUSTRIES. The Company's business has historically in large part
been dependent upon sales of its Admission Control Systems to amusement and
theme parks and to state and county fairs. During recessionary times, attendance
at such facilities may decrease and, accordingly, during any such recessionary
times, the Company's operating results may be adversely affected, particularly
as to Admission Control Systems which may in the future be marketed on a per
ticket charge basis.
(d) INDEPENDENT COUNSEL. The undersigned acknowledges that it has been
advised to consult with its own attorney regarding legal matters concerning the
Company.
-4-
<PAGE>
(e) NO REGISTRATION. The undersigned understands that the sale of the
Shares has not been registered under the Securities Act of 1933, as amended (the
"Act"), in reliance upon an exemption therefrom for offerings outside the United
States. The undersigned understands that the Shares and/or the shares of
Company's Common Stock, $.03 par value (the "Common Stock"), into which the
Shares are convertible pursuant to the Company's Articles of Amendment to the
Articles of Incorporation creating and fixing the designation (the
"Designation") of the Series D Preferred Stock (the "Underlying Shares") must be
held indefinitely unless the sale or other transfer thereof is subsequently
registered under the Act or an exemption from such registration is available at
that time. The undersigned further understands that the Company has no
obligations with respect to registering the Shares or the Underlying Shares on
its behalf.
(f) OFFERING OUTSIDE THE UNITED STATES. The undersigned is not a "U.S.
Person" as defined in Regulation S promulgated under the Act ("Regulation
S")(1). The undersigned agrees not to reoffer or sell the Shares or the
Underlying Shares, and to cause any transferee permitted hereunder not to
reoffer or sell the Shares or the Underlying Shares, within the United States,
or for the account or benefit of, a U. S. Person (i) as part of the distribution
of the Shares or the Underlying Shares at any time or (ii) otherwise, with
respect to any of the Shares and the Underlying Shares related thereto until 60
days after the date hereof, except in either case in a transaction meeting the
requirements of Regulation S under the Act, including without limitation: the
offer (i) is not made to a person in the United States and either (A) at the
time the buy order is originated, the buyer is outside the United States or the
seller and any person acting on its behalf reasonably believe that the buyer is
outside the United States, or (B) the transaction is executed in, on or through
the facilities of a designated offshore securities market and neither the seller
nor any person acting on its behalf knows that the transaction has been
pre-arranged with a buyer in the United States; and (ii) no directed selling
efforts shall be made in the United States by the seller, an affiliate or any
person acting on their behalf.
- --------------------------
1 Pursuant to Regulation S, a "U.S. Person" means: (i) any natural
person resident in the United States, (ii) any partnership or
corporation organized or incorporated under the laws of the United
States, (iii) any estate of which any executor or administrator is a
U.S. Person, (iv) any trust of which any trustee is a U.S. Person,
(v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary account or similar account (other
than an estate or trust) held by a dealer or other fiduciary for the
benefit or account of a U.S. Person, (vii) any discretionary account
or similar account (other than a estate or trust) held by a dealer
or other fiduciary organized, incorporated or (if an individual
resident in the United States, or (viii) any partnership or
corporation if organized under the laws of any foreign jurisdiction
and formed by any U.S. Person principally for the purpose of
investing in securities not registered under the Act, unless it is
organized or incorporated and owned by accredited investors (as
defined in Rule 501(a) under the Act) who are not natural persons,
estates or trusts.
-5-
<PAGE>
(g) INVESTMENT INTENT. The undersigned is acquiring the Shares solely
for its own account as principal and not with a view to the distribution thereof
to or for the benefit or account of any U.S. Person, in whole or in part, and no
other person has a direct or indirect beneficial interest in such Shares. The
undersigned understands and agrees that it must bear the economic risk of its
investment in the Shares for an indefinite period of time. The undersigned will
not take any short position in the Company's Common Stock to be covered by any
of the Shares or the Underlying Shares and will not otherwise engage in any
hedging transactions such as option writing, equity swaps or other types of
derivative transactions with respect to the Company's Common Stock.
(h) ADDITIONAL TRANSFER RESTRICTIONS. The undersigned understands and
agrees that, in addition to the restrictions set forth in this Agreement, the
following restrictions and limitations are applicable to its purchase and any
resales, pledges, hypothecations or other transfers of the Shares or the
Underlying Shares:
A. The following legend reflecting all applicable restrictions will
be placed on any certificate(s) or other document(s) evidencing
the Shares or the Underlying Shares and the undersigned must
comply with the terms and conditions set forth in such legends
prior to any resales, pledges, hypothecations or other transfers
of the Shares or the Underlying Shares:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and the securities may not be
transferred (and if Preferred Stock, may not be converted) on behalf of any
U.S. Person, unless (A) the shareholder wishing to transfer (or convert)
such securities provides an opinion of experienced securities counsel
stating that the proposed transfer (or conversion) of Lasergate Systems,
Inc.'s securities is exempt from the registration provisions of all
applicable federal securities laws; or (B) said securities have been
registered pursuant to the Securities Act of 1933, as amended."
B. Stop transfer instructions have been or will be placed on any
certificates or other documents evidencing the Shares and the
Underlying Shares so as to restrict the resale, pledge,
hypothecation or other transfer thereof in accordance with the
provisions hereof and the provisions of Regulation S promulgated
under the Act.
(i) REPRESENTATIONS UPON CONVERSION. Upon electing to convert any of
the Shares into the Underlying Shares, the holder of the Shares being converted
will be required to certify that such holder is not a U.S. person, or to deliver
an opinion of counsel to the effect that the Shares and the Underlying Shares
delivered upon conversion thereof have been registered under the Act or are
exempt from registration thereunder.
-6-
<PAGE>
(j) NO ADVERTISEMENTS. The undersigned is not subscribing for Shares
as a result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
Neither the undersigned nor any affiliate nor any person acting on its behalf,
has made any "directed selling efforts" (as defined in Regulation S) in the
United States.
(k) INDEMNITY. The undersigned shall indemnify and hold harmless the
Company and each officer, director or control person of any such entity, who is
or may be a party or is or may be threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of or arising from (i) any
actual or alleged misrepresentation or misstatement of facts or omission to
represent or state facts made or alleged to have been made by the undersigned to
the Company, (or its agents or representatives), or omitted or alleged to have
been omitted by the undersigned, concerning the undersigned, or the
undersigned's authority to invest or financial position in connection with the
offering or sale of the Shares, or (ii) any breach of warranty or failure to
comply with any covenant contained in this Agreement, including, without
limitation, any such misrepresentation, misstatement or omission, or breach of
any warranty or covenant, contained herein or any other document submitted by
the undersigned, against losses, liabilities and expenses for which the Company,
or its officers, directors or control persons has not otherwise been reimbursed
(including attorneys' fees, judgments, fines and amounts paid in settlement in
matters settled in accordance with the provision of the following paragraph)
incurred by the Company, or such officer, director or control person in
connection with such action, suit or proceeding; provided, however, that the
undersigned will not be liable in any such case for losses, claims, damages,
liabilities or expenses that a court of competent jurisdiction shall have found
in a final judgment to have arisen primarily from the gross negligence or
willful misconduct of the Company or the party claiming a right to
indemnification.
In case any proceeding shall be instituted involving any person in respect
to whom indemnity may be sought, such person (the "Undersigned Indemnified
Party") shall promptly notify the undersigned, and the undersigned, upon the
request of the Undersigned Indemnified Party, shall retain counsel reasonably
satisfactory to the Undersigned Indemnified Party to represent the Undersigned
Indemnified Party and any others the undersigned may designate in such
proceedings and shall pay as incurred the fees and expenses of such counsel
related to such proceeding. In any such proceeding, any Undersigned Indemnified
Party shall have the right to retain its own counsel at its own expense, except
that the undersigned shall pay as incurred the fees and expenses of counsel
retained by the Undersigned Indemnified Party in the event that (i) the
undersigned and the Undersigned Indemnified Party shall have mutually agreed to
the retention of such counsel or, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the undersigned and the
Undersigned Indemnified Party and representation of both parties by the same
counsel would be inappropriate, in the reasonable opinion of the Undersigned
Indemnified Party, due to actual or potential differing interests between them.
The undersigned shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the undersigned agrees to indemnify
the Undersigned Indemnified Party to the extent set forth in this Agreement.
-7-
<PAGE>
In the event a claim for indemnification as described herein is determined
to be unenforceable by a final judgment of a court of competent jurisdiction,
then the undersigned shall contribute to the aggregate losses, claims, damages
or liabilities to which the Company or its officers, directors, agents,
employees or controlling persons may be subject in such amount as is appropriate
to reflect the relative benefits received by each of the undersigned and the
party seeking contribution on the one hand and the relative faults of the
undersigned and the party seeking contribution on the other, as well as any
relevant equitable considerations.
The provisions of this Agreement relating to indemnification and
contribution shall survive termination of this Agreement and shall be binding
upon any successors or assigns of the undersigned.
(l) IN MAKING AN INVESTMENT DECISION THE PURCHASER MUST RELY ON HIS OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED.
(m) THE SHARES AND THE UNDERLYING SHARES MAY NOT BE OFFERED,
TRANSFERRED, RESOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR REGULATION S UNDER THE SECURITIES
ACT, IF APPLICABLE, OR ANY OTHER APPLICABLE EXEMPTION THEREFROM. THE PURCHASER
IS AWARE THAT IT WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME UNLESS TRANSFERRED IN ACCORDANCE WITH THE
ABOVE.
(n) The undersigned understands that Baytree Associates, Inc. is to
receive a placement fee equal to 10% of the gross proceeds from the sale of the
Shares contemplated hereby.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company acknowledges,
represents, warrants and agrees as follows:
(a) ORGANIZATION AND AUTHORIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Florida and has all req uisite corporate power and authority to own and operate
its properties and assets and to carry on its business as currently conducted.
The Company is not in default or violation of any material term or provision of
its Articles of Incorporation or Bylaws nor will the consummation of the
transactions contemplated by this Agreement cause any such default or violation,
subject, however, to obtaining shareholder approval to amend its Certificate of
Incorporation to increase the number of authorized shares of Common Stock as
described below. The Company has all requisite corporate power and authority to
enter into this Agreement, to sell the Shares hereunder and to carry out and
perform its obligations under the terms of this Agreement. This Agreement is a
valid and binding obligation of the Company, enforceable in accordance with its
terms.
-8-
<PAGE>
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of 5,000,000 shares of Common Stock, and 2,000,000 shares of Preferred
Stock, par value $.03 per share. Upon issuance of the Shares pursuant to the
terms of this Agreement and payment therefor, the Shares will be duly
authorized, validly issued, fully paid and nonassessable. Upon issuance, the
Shares will not be subject to any preemptive or other preferential rights or
similar statutory or contractual rights. The undersigned understands that the
Company does not currently have sufficient authorized Common Stock for the
issuance of the Underlying Shares. The undersigned agrees that, notwithstanding
the terms of the Designation, conversion of the Shares will be subject to
shareholder approval of the increase in the Company's authorized shares of
Common Stock contemplated by the Preliminary Proxy Statement filed with the
Securities and Exchange Commission on May 11, 1995. The undersigned hereby
agrees that, notwithstanding any provisions of the Designation or any other
document, it shall have no right to convert the Shares until and unless the
shareholders shall have approved such increase in authorized shares of Common
Stock and the Company shall have implemented such increase.
(c) USE OF PROCEEDS. The Company will use up to $300,000 of the
proceeds from the sale of the Shares for the repayment of outstanding
convertible debt and the remainder for working capital purposes and the payment
of expenses related to the offering and sale of the Shares.
4. SUBSCRIPTION AND METHOD OF PAYMENT. The undersigned hereby subscribes
for the number of Shares set forth in Paragraph 1 and agrees to pay for such
Shares in cash or by certified check or wire transfer to the escrow agent named
the Escrow Agreement of even date herewith entered into by and among the
Company, Baytree Associates and the escrow agent named therein (the "Company
Payment") against delivery of the Shares at the Closing by such escrow agent.
The Closing shall take place as soon as practicable after due execution by
the undersigned and acceptance by the Company of this Subscription Agreement and
the Escrow Agreement.
5. MISCELLANEOUS.
(a) The undersigned agrees not to transfer or assign this Agreement, or
any of the undersigned's interest herein, and further agrees that the transfer
or assignment of Shares or the Underlying Shares shall be made only in
accordance with all applicable laws.
(b) This Agreement constitutes the entire agreement between the
undersigned and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by both of them.
(c) This Agreement shall be enforced, and construed in accordance with
the laws of the State of Florida.
-9-
<PAGE>
TYPE OF OWNERSHIP
___________________________ (Check One)
___________________________ Individual
___________________________ Trust
___________________________ Corporation
___________________________ Partnership
Please print here the exact name in which the investor desires to have the
Shares registered (must be beneficial owner).
_____________________________________
All correspondence relating to the undersigned's investment should be sent
(check one):
[ ] (i) to the address of the undersigned set forth on the signature page
hereof
[ ] (ii) to the following address:
___________________________
___________________________
___________________________
The undersigned may be contacted by telephone at the following telephone
number(s):
(i) Home Telephone: ( )
------------------------
(ii) Business Telephone: ( )
------------------------
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<PAGE>
SIGNATURE PAGE
FOR INDIVIDUALS
IN WITNESS WHEREOF, the undersigned has executed this Agreement at
______________________, _________________________ This ____ day of
_____________________ , 1995.
Number of Shares being subscribed for : ________________________
___________________________________
Print Name
___________________________________
Signature of Investor
___________________________________
Social Security Number
___________________________________
Residence Address
___________________________________
___________________________________
If the purchaser has indicated that the Shares will be held as JOINT
TENANT, TENANTS IN COMMON, or as COMMUNITY PROPERTY, please complete the
following:
___________________________________
Print Name of Spouse or Other Purchaser
___________________________________
Signature of Spouse or Other Purchaser
___________________________________
Social Security Number
___________________________________
Signature of Spouse or Other Purchaser
-11-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
Date:_________________________, 1995
IF YOU ARE PURCHASING SHARES WITH YOUR SPOUSE, YOU MUST BOTH SIGN THE
SIGNATURE PAGE. IF YOU ARE PURCHASING SHARES WITH ANOTHER PERSON NOT YOUR
SPOUSE, YOU MUST EACH FILL OUT ALL AREAS OF THIS AGREEMENT APPLICABLE TO AN
INDIVIDUAL PURCHASER.
-12-
<PAGE>
SIGNATURE PAGE
FOR TRUST INVESTORS
Note: Trustee empowered to bind the trust must sign.
Number of Shares
being subscribed for:
_____________________
________________________________________________________________________________
Name of Trust (please print or type)
________________________________________________________________________________
Name of trustee (please print or type)
________________________________________________________________________________
Date Trust was formed
By:______________________________
Trustee's Signature
Trustee's Address:
_________________________________________________
_________________________________________________
_________________________________________________
State of Organization: ________________________________________________________
Executed at _____________________________, _______________________This
City State
____________ day of _____________________, 1995.
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<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
Date:_________________________
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<PAGE>
SIGNATURE PAGE
FOR CORPORATE INVESTORS
Note: The officer authorized to bind the Corp. must sign.
Number of Shares
being subscribed for:
_____________________
________________________________________________________________________________
Name of Corp. (Please print or type)
By:_____________________________________________________________________________
(Signature of authorized agent)
Title:__________________________________________________________________________
Address of Principal
Corporate Offices:
___________________________________
___________________________________
___________________________________
Mailing Address,
If different:
___________________________________
___________________________________
___________________________________
State of Incorporation: ________________________________________________________
Executed at ______________, ____________ this ____ day of _____________, 1995.
City State
-15-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
Date:_________________________
-16-
<PAGE>
SIGNATURE PAGE
FOR PARTNERSHIP INVESTORS
Note: Partner(s) authorized to bind the partnership must sign.
Number of Shares
being subscribed for:
_____________________
________________________________________________________________________________
Name of Partnership (please print or type)
By:_____________________________________________________________________________
Signature of a general partner
By:_____________________________________________________________________________
Signature of additional general partner
(if required by partnership agreement)
Principal Business Address:
___________________________________
___________________________________
___________________________________
Mailing Address, if different:
___________________________________
___________________________________
State of Organization: _________________________________________________________
Executed at _____________________________, ______________________ This
City State
_______ day of ____________________ , 1995.
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<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
Date:_________________________
-18-
SUBSCRIPTION AGREEMENT
--------------------------
LASERGATE SYSTEMS, INC.
--------------------------
Lasergate Systems, Inc.
28050 U.S. 19 North
Corporate Square
Suite 502
Clearwater, FL 34621
Dear Sir or Madam:
1. SUBSCRIPTION. The undersigned hereby applies to purchase _______ shares
of Series E Convertible Preferred Stock, $.03 par value per share (the
"Shares"), at a price of $10.00 per Share or an aggregate price of $_________.
Once this Agreement is executed by both the undersigned and Lasergate Systems,
Inc. (the "Company"), it is intended to create a binding agreement between the
undersigned and the Company with respect to the terms and conditions described
below.
This Subscription Agreement should be completed and executed by the
purchaser or by an authorized corporate officer, general partner or trustee, as
appropriate.
2. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER. The undersigned
acknowledges, represents, warrants and agrees as follows:
(a) ORGANIZATION AND AUTHORIZATION. The undersigned, if a
corporation, trust or partnership, is duly incorporated and validly existing in
the country of _______ and has all requisite power and authority to purchase and
hold the Shares. The decision to invest and the execution and delivery of this
Agreement by the undersigned, the performance by the undersigned of its
obligations hereunder and the consummation by the undersigned of the
transactions contemplated hereby requires no other proceedings on the part of
the undersigned. The undersigned signatory has all right, power and authority to
execute and deliver this Agreement on behalf of the undersigned. This Agreement
has been duly executed and delivered by the undersigned and, assuming the
execution and delivery hereof and thereof by the Company, will constitute the
legal, valid and binding obligations of the undersigned, enforceable against the
undersigned in accordance with its terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights of creditors generally and the availability of
equitable remedies.
<PAGE>
(b) EVALUATION OF RISKS. The undersigned has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of, and bearing the economic risks entailed by, an investment
in the Company and of protecting its interests in connection with this
transaction. It recognizes that its investment in the Company involves a high
degree of risk.
(c) DUE DILIGENCE. The undersigned has received a copy of such
documents as requested by the undersigned, has carefully reviewed such
documents, has had the opportunity to obtain any additional information
necessary to verify the accuracy of the information contained in such documents
and has been given the opportunity to meet with representatives of the Company
and to have them answer any questions and provide any additional information
regarding the terms and conditions of this particular investment deemed relevant
by the undersigned, and all such questions have been answered and requested
information provided to the undersigned's full satisfaction. Among the documents
received and reviewed by the undersigned are: (i) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994; (ii) the Company's Current
Report on Form 8-K dated December 22, 1994; (iii) the Company's Current Report
on Form 8-K dated February 15, 1995; (iv) the Company's Current Report on form
8-K dated December 4, 1995; (v) the Company's Quarterly Report on Form 10-QSB
for the Quarters ended March 31, 1995, June 30, 1995 and September 30, 1995;
(vi) the Company's Proxy Statement with respect to its Annual Meeting of
Shareholders held on December 21, 1995; and (vii) the Articles of Amendment of
Articles of Incorporation of the Company with respect to its Series E Preferred
Stock (the "Designation"). In making its decision to purchase the Shares, the
undersigned has relied solely upon its review of the documents referred to above
and this Agreement and independent investigations made by it or its
representatives. The undersigned is aware that the Division of Enforcement of
the SEC has informed the Company that it has commenced an investigation
regarding certain matters which may be related to the Company. The undersigned
is also aware of the following:
A. FINANCIAL CONDITION; HISTORICAL LOSSES. Although the Company
has been in existence since 1985, its first year with significant sales was
1989. The Company's cash requirements during 1993 significantly exceeded its
resources and there was a resulting significant loss from operations. During the
first quarter of 1994, the Company did not generate any revenues from sales of
its Admission Control Systems. Sales were lacking during such quarter due to the
Company's inability to raise sufficient capital. The resulting cash shortage
caused the Company to temporarily curtail its marketing efforts. Revenue for
1994 was limited to one major contract of $500,000, with a few smaller system
sales and maintenance and support contracts from existing customers. As of
September 30, 1995, the Company had an accumulated deficit of $10,122,638. The
Company cannot predict with certainty when it might become profitable, if ever.
At September 30, 1995, the Company had a $923,812 working capital deficit.
B. NEED FOR ADDITIONAL FINANCING. The Company is dependent on
the proceeds of the sale of the Shares to finance its business and planned
growth for approximately 12 months. Thereafter, the proceeds of the sale of the
Shares may not be sufficient to meet the Company's needs for capital to expand
its business. There can be no assurance that, if needed, other
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<PAGE>
financing will be available and, if available, that it will be on terms which
will be acceptable to the Company.
C. RELIANCE ON TECHNICAL PERSONNEL. The Company relies on its
technical personnel to provide the skill necessary for the Company's
programming, product development, assembly, repair and other capabilities. The
Company does not have long term contracts with any of such personnel. There can
be no assurance that such personnel will remain employees of the Company.
The Company requires a wide range of skilled personnel to conduct its
proposed operations and will be dependent upon its ability to attract and retain
qualified management, scientific and marketing personnel. Although management of
the Company believes that such personnel will be available to the Company, there
can be no assurance that the Company will be successful in recruiting or
retaining them or that the Company will have sufficient funding for appropriate
levels of compensation for such individuals.
D. COMPANY'S NEW MANAGEMENT. The two executive officers and
three directors of the Company have been involved with the Company for a
relatively short period of time. Jacqueline E. Soechtig has been the Company's
Chief Executive Officer since October 1994 and John P. Warnick has been the
Company's Vice President--Finance and Chief Financial Officer since December
1995. Stewart L. Krug, Timothy Mahoney, Ms. Soechtig, Frank W. Swacker and
Lawrence W. Umstadter, the Company's directors, have served as directors since
May 1994, May 1994, October 1994, May 1995 and May 1995 respectively. There can
be no assurance that management's lack of history with the Company will not
adversely affect the Company's performance over the short term.
E. LACK OF SIGNIFICANT PATENT PROTECTION. The Company currently
does not hold any significant patents related to the creation or operation of
its products. The Company, however, intends to apply for patents to protect its
new products and enhancements once they are developed. In addition, the Company
generally requires each of its consultants, customers and major vendors to enter
into non-disclosure agreements to protect the Company's proprietary information.
There can be no assurance that these patents (if and when granted) and
agreements will afford the necessary protection from material infringement or
that the Company will have the financial resources necessary to enforce its
agreements or patents, if and when issued. There can also be no assurance that
the Company's technologies and prospective patents will not infringe upon
patents of others.
F. DEPENDENCE ON EXISTING PRODUCTS; CONTINUED NEED TO DEVELOP
AND ENHANCE PRODUCTS. The Company's products are based on bar code and other
computer software technology. This technology has been available for many years
and may be surpassed or rendered obsolete by other computer-based technologies
or more advanced software. The Company continuously seeks ways to improve its
products through the introduction of enhancements and various additional
applications, which, by its nature is uncertain. Accordingly, there can be no
assurance that the Company will be able to develop such new products or
improvements.
-3-
<PAGE>
The Company has recently recognized the need to upgrade certain portions of
the software included in its existing Admission Control Systems. In lieu of
utilizing the time and personnel necessary to develop this software, the Company
acquired Delta Information Services, Inc. ("Delta"), which provided the Company
with the enhanced software necessary to implement the upgrade. The Company is
currently in the process of offering to its existing customers the enhancements
afforded by the software acquired in the Delta acquisition without charge.
Although the Company believes that these enhancements will remedy any existing
deficiencies with its installed Admission Control Systems, there can be no
assurance that all of its existing customers will accept the product
enhancements. Moreover, customer acceptance of the product enhancements will not
necessarily ensure that these customers will look to the Company for their
future admission and access control system needs.
G. COMPETITION. Certain competitors provide similar services as
the Company, including the use of bar codes, magnetic strips and other
technology and software which provide certain aspects of the Company's products.
Such products are produced by numerous companies, many of which have resources
substantially greater than those of the Company.
H. LITIGATION. The Company's founder and former President and
Chief Executive Officer, Donald Turner, has commenced an action against the
Company in Florida state court. Mr. Turner alleges, among other things, that he
was wrongfully terminated from his employment and seeks damages which in the
aggregate could exceed $1,000,000. The Company believes that Mr. Turner's suit
is without merit and intends to vigorously defend the action.
I. DEPENDENCE UPON AMUSEMENT PARK, ENTERTAINMENT AND STATE COUNTY
AND LOCAL FAIR INDUSTRIES. The Company's business has historically in large part
been dependent upon sales of its Admission Control Systems to amusement and
theme parks and to state and county fairs. During recessionary times, attendance
at such facilities may decrease and, accordingly, during any such recessionary
times, the Company's operating results may be adversely affected, particularly
as to Admission Control Systems which may in the future be marketed on a per
ticket charge basis.
(d) INDEPENDENT COUNSEL. The undersigned acknowledges that it
has been advised to consult with its own attorney regarding legal matters
concerning the Company.
(e) NO REGISTRATION. The undersigned understands that the sale of
the Shares has not been registered under the Securities Act of 1933, as amended
(the "Act"), in reliance upon an exemption therefrom for offerings outside the
United States. The undersigned understands that the Shares and/or the shares of
Company's Common Stock, $.03 par value (the "Common Stock"), into which the
Shares are convertible pursuant to the Company's Articles of Amendment to the
Articles of Incorporation creating and fixing the designation (the
"Designation") of the Series E Preferred Stock (the "Underlying Shares") must be
held indefinitely unless the sale or other transfer thereof is subsequently
registered under the Act or an exemption from such registration is available at
that time in which case the undersigned will be required to provide a written
opinion of its
-4-
<PAGE>
experienced securities counsel stating that the proposed sale or transfer is
exempt from the registration provisions of all applicable federal securities
laws. The undersigned further understands that the Company has no obligations
with respect to registering the Shares or the Underlying Shares on its behalf.
(f) OFFERING OUTSIDE THE UNITED STATES. The undersigned is not a
"U.S. Person" as defined in Regulation S promulgated under the Act ("Regulation
S").1 The undersigned agrees not to reoffer or sell the Shares or the Underlying
Shares, and to cause any transferee permitted hereunder not to reoffer or sell
the Shares or the Underlying Shares, within the United States, or for the
account or benefit of, a U. S. Person (i) as part of the distribution of the
Shares or the Underlying Shares at any time or (ii) otherwise, with respect to
one half of the Shares and the Underlying Shares related thereto until 60 days
after the date hereof and with respect to all of the Shares and the Underlying
Shares related thereto until 45 days after the date hereof, except in either
case in a transaction meeting the requirements of Regulation S under the Act,
including without limitation: the offer (i) is not made to a person in the
United States and either (A) at the time the buy order is originated, the buyer
is outside the United States or the seller and any person acting on its behalf
reasonably believes that the buyer is outside the United States, or (B) the
transaction is executed in, on or through the facilities of a designated
offshore securities market and neither the seller nor any person acting on its
behalf knows that the transaction has been pre-arranged with a buyer in the
United States; and (ii) no directed selling efforts shall be made in the United
States by the seller, an affiliate or any person acting on their behalf.
(g) INVESTMENT INTENT. The undersigned is acquiring the Shares
solely for its own account as principal and not with a view to the distribution
thereof to or for the benefit or account of any U.S. Person, in whole or in
part, and no other person has a direct or indirect beneficial interest in such
Shares. The undersigned understands and agrees that it must bear the economic
risk of its investment in the Shares for an indefinite period of time. The
undersigned will not take any short position in the Company's Common Stock to be
covered by any of the Shares or the Underlying
- ------------------------
1 Pursuant to Regulation S, a "U.S. Person" means: (i) any natural
person resident in the United States, (ii) any partnership or
corporation organized or incorporated under the laws of the United
States, (iii) any estate of which any executor or administrator is a
U.S. Person, (iv) any trust of which any trustee is a U.S. Person, (v)
any agency or branch of a foreign entity located in the United States,
(vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. Person, (vii) any discretionary account or
similar account (other than a estate or trust) held by a dealer or
other fiduciary organized, incorporated or (if an individual resident
in the United States, or (viii) any partnership or corporation if
organized under the laws of any foreign jurisdiction and formed by any
U.S. Person principally for the purpose of investing in securities not
registered under the Act, unless it is organized or incorporated and
owned by accredited investors (as defined in Rule 501(a) under the
Act) who are not natural persons, estates or trusts.
-5-
<PAGE>
Shares and will not otherwise engage in any hedging transactions such as option
writing, equity swaps or other types of derivative transactions with respect to
the Company's Common Stock.
(h) ADDITIONAL TRANSFER RESTRICTIONS. The undersigned understands
and agrees that, in addition to the restrictions set forth in this Agreement,
the following restrictions and limitations are applicable to its purchase and
any resales, pledges, hypothecations or other transfers of the Shares or the
Underlying Shares:
A. The following legend reflecting all applicable restrictions
will be placed on any certificate(s) or other document(s)
evidencing the Shares or the Underlying Shares and the
undersigned must comply with the terms and conditions set
forth in such legends prior to any resales, pledges,
hypothecations or other transfers of the Shares or the
Underlying Shares:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and the
securities may not be transferred on behalf of any U.S. Person, unless
(A) the shareholder wishing to transfer such securities provides an
opinion of experienced securities counsel stating that the proposed
transfer of Lasergate Systems, Inc.'s securities is exempt from the
registration provisions of all applicable federal securities laws; or
(B) said securities have been registered pursuant to the Securities
Act of 1933, as amended.
B. Stop transfer instructions have been or will be placed on
any certificates or other documents evidencing the Shares
and the Underlying Shares so as to restrict the resale,
pledge, hypothecation or other transfer thereof in
accordance with the provisions hereof and the provisions of
Regulation S promulgated under the Act.
(i) REPRESENTATIONS UPON CONVERSION. Upon electing to convert any
of the Shares into the Underlying Shares, the holder of the Shares being
converted may be required to certify that such holder is not a U.S. person, or
to deliver an opinion of counsel to the effect that the Shares and the
Underlying Shares delivered upon conversion thereof have been registered under
the Act or are exempt from registration thereunder.
(j) NO ADVERTISEMENTS. The undersigned is not subscribing for
Shares as a result of or subsequent to any advertisement, article, notice or
other communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
Neither the undersigned nor any affiliate nor any person acting on its behalf,
has made any "directed selling efforts" (as defined in Regulation S) in the
United States.
(k) INDEMNITY. The undersigned shall indemnify and hold harmless
the Company and each officer, director or control person of any such entity, who
is or may be a party or
-6-
<PAGE>
is or may be threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from (i) any actual or alleged
misrepresentation or misstatement of facts or omission to represent or state
facts made or alleged to have been made by the undersigned to the Company, (or
its agents or representatives), or omitted or alleged to have been omitted by
the undersigned, concerning the undersigned, or the undersigned's authority to
invest or financial position in connection with the offering or sale of the
Shares, or (ii) any breach of warranty or failure to comply with any covenant
contained in this Agreement, including, without limitation, any such
misrepresentation, misstatement or omission, or breach of any warranty or
covenant, contained herein or any other document submitted by the undersigned,
against losses, liabilities and expenses for which the Company, or its officers,
directors or control persons has not otherwise been reimbursed (including
attorneys' fees, judgments, fines and amounts paid in settlement in matters
settled in accordance with the provision of the following paragraph) incurred by
the Company, or such officer, director or control person in connection with such
action, suit or proceeding; provided, however, that the undersigned will not be
liable in any such case for losses, claims, damages, liabilities or expenses
that a court of competent jurisdiction shall have found in a final judgment to
have arisen primarily from the gross negligence or willful misconduct of the
Company or the party claiming a right to indemnification.
In case any proceeding shall be instituted involving any person in respect
to whom indemnity may be sought, such person (the "Undersigned Indemnified
Party") shall promptly notify the undersigned, and the undersigned, upon the
request of the Undersigned Indemnified Party, shall retain counsel reasonably
satisfactory to the Undersigned Indemnified Party to represent the Undersigned
Indemnified Party and any others the undersigned may designate in such
proceedings and shall pay as incurred the fees and expenses of such counsel
related to such proceeding. In any such proceeding, any Undersigned Indemnified
Party shall have the right to retain its own counsel at its own expense, except
that the undersigned shall pay as incurred the fees and expenses of counsel
retained by the Undersigned Indemnified Party in the event that (i) the
undersigned and the Undersigned Indemnified Party shall have mutually agreed to
the retention of such counsel or, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the undersigned and the
Undersigned Indemnified Party and representation of both parties by the same
counsel would be inappropriate, in the reasonable opinion of the Undersigned
Indemnified Party, due to actual or potential differing interests between them.
The undersigned shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the undersigned agrees to indemnify
the Undersigned Indemnified Party to the extent set forth in this Agreement.
In the event a claim for indemnification as described herein is determined
to be unenforceable by a final judgment of a court of competent jurisdiction,
then the undersigned shall contribute to the aggregate losses, claims, damages
or liabilities to which the Company or its officers, directors, agents,
employees or controlling persons may be subject in such amount as is appropriate
to reflect the relative benefits received by each of the undersigned and the
party seeking contribution on the one hand and the relative faults of the
undersigned and the party seeking contribution on the other, as well as any
relevant equitable considerations.
-7-
<PAGE>
The provisions of this Agreement relating to indemnification and
contribution shall survive termination of this Agreement and shall be binding
upon any successors or assigns of the undersigned.
(l) IN MAKING AN INVESTMENT DECISION THE PURCHASER UST RELY ON
HIS OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED.
(m) THE SHARES AND THE UNDERLYING SHARES MAY NOT BE OFFERED,
TRANSFERRED, RESOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR REGULATION S UNDER THE SECURITIES
ACT, IF APPLICABLE, OR ANY OTHER APPLICABLE EXEMPTION THEREFROM. THE PURCHASER
IS AWARE THAT IT WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME UNLESS TRANSFERRED IN ACCORDANCE WITH THE
ABOVE.
(n) The undersigned understands that Baytree Associates, Inc. is
to receive a placement fee equal to 10% of the gross proceeds from the sale of
the Shares contemplated hereby and warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price equal to 110% of the closing price
of the Company's Common Stock on the date of the Closing.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company acknowledges,
represents, warrants and agrees as follows:
(a) ORGANIZATION AND AUTHORIZATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Florida and has all req uisite corporate power and authority to own and
operate its properties and assets and to carry on its business as currently
conducted. The Company is not in default or violation of any material term or
provision of its Articles of Incorporation or Bylaws nor will the consummation
of the transactions contemplated by this Agreement cause any such default or
violation. The Company has all requisite corporate power and authority to enter
into this Agreement, to sell the Shares hereunder and to carry out and perform
its obligations under the terms of this Agreement subject to the above. This
Agreement is a valid and binding obligation of the Company, enforceable in
accordance with its terms.
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, and 2,000,000 shares of Preferred
Stock, par value $.03 per share. Upon issuance of the Shares pursuant to the
terms of this Agreement and payment therefor, the Shares will be duly
authorized, validly issued, fully paid and nonassessable. Upon issuance, the
Shares will not be subject to any preemptive or other preferential rights or
similar statutory or contractual rights.
-8-
<PAGE>
(c) USE OF PROCEEDS. The Company will use up to $2,000,000 of the
proceeds from the sale of the Shares for the repayment of outstanding debt and
the remainder for working capital purposes and the payment of expenses related
to the offering and sale of the Shares.
4. SUBSCRIPTION AND METHOD OF PAYMENT. The undersigned hereby subscribes
for the number of Shares set forth in Paragraph 1 and agrees to pay for such
Shares in cash or by certified check or wire transfer to the Company (the
"Company Payment") against delivery of the Shares.
The Closing shall take place as soon as practicable after due execution by
the undersigned and acceptance by the Company of this Subscription Agreement.
5. MISCELLANEOUS.
(a) The undersigned agrees not to transfer or assign
this Agreement, or any of the undersigned's interest herein, and further agrees
that the transfer or assignment of Shares or the Underlying Shares shall be made
only in accordance with all applicable laws.
(b) This Agreement constitutes the entire agreement
between the undersigned and the Company with respect to the subject matter
hereof. This Agreement may be amended only by a writing executed by both of
them.
(c) This Agreement shall be enforced, and construed in
accordance with the laws of the State of Florida.
-9-
<PAGE>
TYPE OF OWNERSHIP
(Check One)
____________________________ Individual
____________________________ Trust
____________________________ Corporation
____________________________ Partnership
Please print here the exact name in which the investor desires to have the
Shares registered (must be beneficial owner).
_____________________________________
All correspondence relating to the undersigned's investment should be sent
(check one):
[ ] (i) to the address of the undersigned set forth on the signature page hereof
[ ] (ii) to the following address:
__________________________
__________________________
__________________________
The undersigned may be contacted by telephone at the following telephone
number(s):
(i) Home Telephone: ( )
---------------------------------
(ii) Business Telephone: ( )
---------------------------------
-10-
<PAGE>
SIGNATURE PAGE
FOR INDIVIDUALS
IN WITNESS WHEREOF, the undersigned has executed this Agreement at
______________, ___________ This ______ day of __________________, 1996.
Number of Shares being subscribed for : ________________________
________________________________________
Print Name
________________________________________
Signature of Investor
________________________________________
Social Security Number
________________________________________
Residence Address
________________________________________
________________________________________
If the purchaser has indicated that the Shares will be held as JOINT
TENANT, TENANTS IN COMMON, or as COMMUNITY PROPERTY, please complete the
following:
________________________________________
Print Name of Spouse or Other Purchaser
________________________________________
Signature of Spouse or Other Purchaser
________________________________________
Social Security Number
________________________________________
Signature of Spouse or Other Purchaser
-11-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:________________________________________
Name:
Title:
By:________________________________________
Name:
Title:
Date:___________________________, 1996
IF YOU ARE PURCHASING SHARES WITH YOUR SPOUSE, YOU MUST BOTH SIGN THE
SIGNATURE PAGE. IF YOU ARE PURCHASING SHARES WITH ANOTHER PERSON NOT YOUR
SPOUSE, YOU MUST EACH FILL OUT ALL AREAS OF THIS AGREEMENT APPLICABLE
TO AN INDIVIDUAL PURCHASER.
-12-
<PAGE>
SIGNATURE PAGE
FOR TRUST INVESTORS
Note: Trustee empowered to bind the trust must sign.
Number of Shares
being subscribed for:
_________________
________________________________________
Name of Trust (please print or type)
________________________________________
Name of trustee (please print or type)
Date Trust was formed
By:________________________________________
Trustee's Signature
Trustee's Address: ___________________________________
___________________________________
___________________________________
State of Organization: ________________________________________
Executed at ________________________________________, ______ This
City State
______________ day of ________________________________, 1996.
-13-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:________________________________________
Name:
Title:
By:________________________________________
Name:
Title:
Date: ____________________________, 1996
-14-
<PAGE>
SIGNATURE PAGE
FOR CORPORATE INVESTORS
Note: The officer authorized to bind the Corp. must sign.
Number of Shares
being subscribed for:
_____________________
________________________________________________________________________________
Name of Corp. (Please print or type)
By:_____________________________________________________________________________
(Signature of authorized agent)
Title:__________________________________________________________________________
Address of Principal
Corporate Offices:
___________________________________
___________________________________
___________________________________
Mailing Address,
If different:
___________________________________
___________________________________
___________________________________
State of Incorporation: _______________________________________________________
Executed at____________________, ________ this ______ day of ____________, 1996.
City State
-15-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:________________________________________
Name:
Title:
By:________________________________________
Name:
Title:
Date: _________________________, 1996
-16-
<PAGE>
SIGNATURE PAGE
FOR PARTNERSHIP INVESTORS
Note: Partner(s) authorized to bind the partnership must sign.
Number of Shares
being subscribed for:
_____________________
________________________________________________________________________________
Name of Partnership (please print or type)
By:_____________________________________________________________________________
Signature of a general partner
By:_____________________________________________________________________________
Signature of additional general partner
(if required by partnership agreement)
Principal Business Address:
___________________________________
___________________________________
___________________________________
Mailing Address, if different:
___________________________________
___________________________________
___________________________________
State of Organization: _______________________________________________________
Executed at____________________, ________
City State
This ______ day of ____________, 1996.
-17-
<PAGE>
SUBSCRIPTION ACCEPTED:
LASERGATE SYSTEMS, INC.
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
Date:______________________, 1996
-18-
LASERGATE SYSTEMS, INC.
28050 U.S. 19 North
Suite 502
Clearwater, Florida 34621
March , 1996
GIS Systems Limited Partnership
5405 Cypress Center Drive
Tampa, Florida 33609
Gentlemen:
Reference is made to that certain Asset Purchase Agreement (the "Purchase
Agreement") between Lasergate Systems, Inc. ("Lasergate") and GIS Systems
Limited Partnership ("GIS") dated January 1, 1995 and the ancillary documents
executed in connection with the closing (the "Closing") of the transaction
contemplated thereby including (i) the Escrow Agreement, (ii) the Common Stock
Pledge Agreement, (iii) the Series B Preferred Stock Pledge and Call Agreement,
(iv) the Promissory Note of GIS in the principal amount of $559,000, (v) the
Series B Promissory Note in the principal amount of $591,000, (vi) the Series B
Note Purchase Agreement, (vii) the Series C Promissory Note in the principal
amount of $1,733,335, (viii) the Series C Note Purchase Agreement, (ix) the
Consulting Agreement with Fred Maglione, (x) the Consulting Agreement with
Nicholas Flaskay, and (xi) the Indemnification Agreement among Lasergate,
Nicholas Flaskay and Fred Maglione (collectively with the Purchase Agreement,
the "Closing Documents"). The following sets forth our agreement with respect to
(i) the payment and cancellation of the promissory notes referenced above, (ii)
the repurchase of certain shares of Common Stock and Series B Preferred Stock of
Lasergate issued at the Closing, and (iii) the settlement of certain claims
between us.
On April 5, 1996 or such earlier date as Lasergate and GIS shall agree (the
"Settlement Closing Date"), Lasergate shall deliver to GIS the following:
1. A certified or bank cashier's check in the amount of 1,550,000;
2. The Promissory Note of GIS in the principal amount of $559,000
marked cancelled; and
3. A general release, in form and substance reasonably satisfactory to
GIS, of all claims and for all liabilities including, but not limited to,
those arising out of or in connection with the Closing Documents and any
claims against GIS, Nicholas Flaskay and/or Fred Maglione with respect to
their indemnification of Lasergate agreed to at the Closing.
-1-
<PAGE>
On the Settlement Closing Date, GIS shall deliver to Lasergate the
following:
1. A stock certificate representing 109,333 shares of Common Stock of
Lasergate for cancellation together with a stock power duly executed in
blank;
2. A stock certificate representing 111,800 shares of Series B
Preferred Stock of Lasergate for cancellation together with a stock power
duly executed in blank;
3. The Series B Promissory Note in the principal amount of $591,000
marked canceled;
4. The Series C Promissory Note in the principal amount of $1,733,335
marked canceled; and
5. A general release, in form and substance reasonably satisfactory to
Lasergate, of all claims and for all liabilities including, but not limited
to, those arising out of or in connection with the Closing Documents and
any claims for payments with respect to contracts with former clients of
GIS.
On the Settlement Closing Date, general releases will also be exchanged
between Lasergate and Nicholas Flaskay, and between Lasergate and Fred Maglione.
GIS represents and warrants to Lasergate that on the Settlement Closing
Date (i) GIS will be the owner of the foregoing shares of Common Stock and
Series B Preferred Stock, the Series B Promissory Note and the Series C
Promissory Note, in each case free and clear of all liens, claims and other
encumbrances and (ii) the execution and delivery of the documents to be
delivered by GIS on the Settlement Closing Date will have been duly authorized
by its limited partners and no other or further partnership act or proceeding on
the part of GIS will be necessary to consummate the transactions contemplated
hereby. Lasergate represents and warrants to GIS that on the Settlement Closing
Date, (i) Lasergate will be the owner of the aforementioned $559,000 Promissory
Note, free and clear of all liens, claims and other encumbrances and (ii) the
execution and delivery of the documents to be delivered by Lasergate on the
Settlement Closing Date will have been duly authorized by its Board of Directors
and no other or further act or proceeding on the part of Lasergate will be
necessary to consummate the transactions contemplated hereby.
If the foregoing correctly sets forth our understanding, please indicate
your agreement by signing below whereupon, this document will constitute a valid
and binding agreement of GIS and Lasergate enforceable in accordance with its
terms. Notwithstanding the
-2-
<PAGE>
foregoing, should either party default under the terms of this Agreement, the
other party shall not be deemed to have waived any claims or rights it would
otherwise have had under the Closing Documents.
Very truly yours,
LASERGATE SYSTEMS, INC.
By:
--------------------------------
Jacqueline Soechtig, President
AGREED TO:
GIS SYSTEMS LIMITED PARTNERSHIP
By:
------------------------------------
Nicholas Flaskay, President
------------------------------------
Nicholas Flaskay
------------------------------------
Fred Maglione
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000797324
<NAME> LASERGATE SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 657
<SECURITIES> 0
<RECEIVABLES> 439
<ALLOWANCES> 36
<INVENTORY> 326
<CURRENT-ASSETS> 1,705
<PP&E> 247
<DEPRECIATION> 60
<TOTAL-ASSETS> 6,406
<CURRENT-LIABILITIES> 2,255
<BONDS> 0
0
12
<COMMON> 94
<OTHER-SE> (11,785)
<TOTAL-LIABILITY-AND-EQUITY> 6,406
<SALES> 2,835
<TOTAL-REVENUES> 2,835
<CGS> 2,422
<TOTAL-COSTS> 7,091
<OTHER-EXPENSES> (94)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (4,207)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,207)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> 0
</TABLE>
