SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996.
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_____________
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Florida 59-2543206
------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
28050 US 19 N, Suite 502, Clearwater, Florida 34621
---------------------------------------------------
(Address of principal executive office) (Zip code)
Issuer's telephone number: (813) 725-0882
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 ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
Class Outstanding at August 15, 1996
- ----- ------------------------------
Common stock $0.03 par value 7,432,061
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 1996 3
(unaudited) and December 31, 1995
Consolidated Statements of Operations 4
(unaudited) for the three months and six months ended
June 30, 1996 and 1995
Consolidated Statements of Cash Flows 5
(unaudited) for the six months ended
June 30, 1996 and 1995
Notes to Financial Statements (unaudited) 6 - 10
Item 2. Management's Discussion and Analysis or Plan 11 - 16
of Operation
Part II. OTHER INFORMATION
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,269,349 $ 656,506
Accounts receivable, net of allowance for
doubtful accounts of $90,170 and $36,127 1,031,552 439,311
Account receivable, related party -0- 199,359
Inventories 200,140 325,664
Prepaid expenses 33,859 84,392
------------ ------------
Total current assets 4,534,900 1,705,232
Property and equipment, net 251,206 246,568
Systems and software costs, net 200,000 1,416,667
Goodwill, net 2,449,200 2,515,694
Customer lists and support contracts, net 318,750 354,167
Other assets, net 66,371 167,908
------------ ------------
Total Assets $ 7,820,427 $ 6,406,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, related party $ -0- $ 300,000
Notes payable, other: 3,108 21,757
Accounts payable, trade 410,409 634,863
Deferred revenues 1,012,813 729,406
Accrued product costs 480,807 297,000
Accrued expenses 840,111 272,104
------------ ------------
Total current liabilities 2,747,248 2,255,130
Promissory notes payable, stockholders with conversion futures -0- 2,324,335
Common stock subject to put options 140,000 140,000
------------ ------------
Total liabilities 2,887,248 4,719,465
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
authorized, 20,500 and 387,750 shares issued and
outstanding at June 30, 1996 and December 31, 1995,
respectively 615 11,633
Common stock, $.03 par value, 20,000,000 shares authorized,
7,257,845 and 3,125,013 issued and outstanding at
June 30, 1996 and December 31, 1995 , respectively 217,735 93,751
Additional paid-in capital 19,793,395 14,065,743
Less: Common stock, $.03 par value, 20,000 shares and 20,000
shares at June 30, 1996 and December 31, 1995, respectively,
subject to put options (140,000) (140,000)
Note receivable, shareholders (-0-) (559,000)
Accumulated deficit (14,938,566) (11,785,356)
------------ ------------
Total stockholders' equity 4,933,179 1,686,771
------------ ------------
Total Liabilities and Stockholders' Equity $ 7,820,427 $ 6,406,236
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,103,940 $ 871,994 $ 2,569,929 $ 1,490,449
Operating expenses:
Cost of Revenues 1,040,161 475,011 1,792,051 1,056,656
Development 129,533 227,222 156,209 473,665
Selling, general and administrative
(Including write-down of software in
June 1996 of $1,075,000) 2,870,100 799,987 3,733,911 1,656,422
----------- ----------- ----------- -----------
Operating Loss (2,935,854) (630,226) (3,112,242) (1,696,294)
Other income (expense) (53,401) (12,460) (40,968) (14,206)
----------- ----------- ----------- -----------
Net loss ($2,989,255) ($ 642,686) ($3,153,210) ($1,710,500)
=========== =========== =========== ===========
Net loss per common share ($ 0.60) ($ 0.21) ($ 0.67) ($ 0.57)
=========== =========== =========== ===========
Weighted Average Common Stock Outstanding 4,972,207 3,023,013 4,738,483 3,023,013
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
----------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,153,210) ($1,710,500)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation, write-down and amortization 1,389,687 292,204
Increase in provision for doubtful accounts 54,043 12,423
Stock-based compensation 198,113 232,500
Decrease (increase) in:
Accounts receivable, trade (646,285) (479,546)
Inventories 125,523 (67,502)
Prepaid expense 50,533 12,088
Other current assets -- 25,798
Other assets 77,790 --
Increase (decrease) in:
Accounts payable and accrued expenses 349,108 (26,616)
Accrued Product Costs 183,807 (21,394)
Deferred revenue 283,407 283,849
----------- -----------
Net cash used in operating activities (1,087,484) (1,446,696)
----------- -----------
Cash flows from investing activities:
(Additions) to, disposal of, property and equipment (51,998) (81,460)
Note receivable, stockholders -- (559,000)
Other -- 11,973
----------- -----------
Net cash provided (used) in investing activities (51,998) (628,487)
-----------
Cash flows from financing activities:
Proceeds from loans, related parties -- 859,505
Repayment of loans, related parties (300,000) --
Repayment of loans, other (18,649) (63,960)
Repayment of obligations under capital leases (2,108) (6,702)
Settlement of acquisition obligations (1,550,000) --
Net proceeds from issuance of stock 6,623,082 --
Redemption of Preferred Stock (1,000,000) --
----------- -----------
Net cash provided by financing activities 3,752,325 788,843
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,612,843 (1,286,340)
Cash and cash equivalents, beginning of period 656,506 1,589,837
----------- -----------
Cash and cash equivalents, end of period $ 3,269,349 $ 303,497
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
INTERIM PRESENTATION
The interim consolidated financial statements of Lasergate Systems, Inc. (the
"Company") are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto in its Form 10-KSB for the year ended
December 31, 1995. In the opinion of management, the accompanying consolidated
financial statements (with all explanations contained in these Notes ) contain
all adjustments necessary for a fair presentation of the results of operations
for this interim period. Interim results are not necessarily indicative of the
results for a full fiscal year.
OPERATIONAL AND FUNDING MATTERS AND REPORTING BASIS
The information contained in Note 3 to the Financial Statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995 remains current related to the status of certain of the Company's
operational and funding matters and, accordingly, should be referred to in
conjunction with this Form 10-QSB.
For the six months ended June 30, 1996, the Company used $1,087,484 of cash in
operating activities and incurred a loss of $3,153,210. It also has an
accumulated deficit at June 30, 1996 of $14,938,566. In recent years the Company
has had to rely on proceeds from private placements and public offerings of its
securities, and loans (some of which were converted to stock) in order to fund
its operations. (See below).
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles. In view of the matters described in
the preceding paragraph, recoverability of a major portion of the recorded asset
amounts shown in the Company's 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. As more fully described in the Company's
Annual Report on Form 10- KSB for 1995, management has taken various actions and
revised its operating and financial requirements, which it believes are
sufficient to provide the Company with the ability to continue in existence (see
below).
On March 27, 1996, the Company commenced the Private Placement of the Company's
newly established Series E Preferred Stock at $10.00 per share. On April 22,
1996, 162,500 shares of the Series E Convertible Preferred Stock successfully
closed with the Company receiving total proceeds, net of offering costs of
$1,450,582.
On June 10, 1996, the Company commenced a Private Placement of 8,000 shares, at
$750 per share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock.
On June 27, 1996 the Company used $329,359 of the proceeds of the Series F
Private Placement to repay the entire Note Payable-Related Party of $300,000 and
the interest accrued through that date. In addition, on June 28, the Company
used $1,000,000 of the proceeds to redeem 95,950 shares of Series A Convertible
Preferred Stock held by the same parties. These shares were potentially
convertible into 2,636,126 shares of common stock had they not been redeemed.
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<PAGE>
REVENUE RECOGNITION
The Company's revenue recognition policy is fully explained in the notes to the
Company's financial statements in its Annual Report on Form 10-KSB for 1995.
During the quarter ended March 31, 1996, the Company had one customer
installation which had been contracted to require more than ninety days to
effect, and accordingly, the percentage of completion method was used to account
for income. During the quarter ended June 30, 1996, this installation was
completed. Accordingly, the remainder of the revenue, costs and resulting profit
have been recognized.
CLASSIFICATION OF EXPENSES
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, affect the comparability of the information being reported on.
For quarterly reporting in 1995, 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 is being done in 1996. For the purposes of this report,
these types of costs were separately identified and reclassified as cost of
revenues in order to report the results of operations for 1995 on a basis
consistent with that used in 1996. These costs were approximately $216,090 and
$392,580 for the three months and six months ending June 30, 1995.
NET LOSS PER COMMON SHARE
The net loss per common share amount is based on the weighted average number of
common 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 are antidilutive. At June 30, 1996, there were options and
warrants outstanding to purchase 3,031,067 common shares at prices ranging from
$1.00 to $5.50 per share, in addition to 12,500 Series E Shares which converted
on July 3, 1996 into 174,216 common shares and 8,000 Series F shares which can
convert into as many as 17,777,778 common shares (see Note 7).
NOTE 2 - SETTLEMENT OF ACQUISITION OBLIGATION
In order to simplify the Company's capital and debt structure, on March 11,
1996, the Company and GIS Systems Limited Partnership ("GIS") agreed to, among
other things, settle the remaining obligation to GIS totaling $2,324,335 by the
Company making a cash payment to GIS of $1,550,000, canceling the $559,000 note
receivable from GIS, and canceling 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.
On April 12, 1996, the transactions contemplated by the March 11 agreement were
consummated. The payment of $1,550,000 was principally provided from the
proceeds of the Series E Private Placement.
NOTE 3 - SYSTEMS AND SOFTWARE COSTS
The Company markets products that typically require substantial customization in
order to meet the customers' particular requirements. Near the end of June 1996
the Company commenced an assessment of its marketing strategy related to the
Company's current software products. While the Company has been able to reduce
the cost of installing, customizing, and servicing (maintaining) the customized
software, these costs have remained higher than targeted levels. With
anticipated increased revenues, though no assurances are given, the Company
continues to believe that it would
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<PAGE>
successfully generate profits from the current software. The Company
commissioned the referred to assessment to determine whether the Company's
computer products could be modified in order to provide more product options to
its customers without incurring substantial customization costs. Although the
assessment principally focused on the conceptual design of the products to be
offered and was not an inquiry as to whether any technological innovations
needed to be implemented in order for the Company to competitively market its
products, the Company's marketing and development personnel confirmed that the
ticketing, access control and other technologies which define the current
products remain competitive in the marketplace.
The Company has most recently concluded, as a result of the assessment, that
instead of marketing products that require substantial customization, it will
design and offer its products in a modular fashion. They will consist of a
primary product with optional pre-developed modules to meet specific customer
needs that would require limited or no customization by the Company.
Additionally, the implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Although no assurances can be given,
management expects that applying the Company's proprietary technology in this
fashion will be a highly effective method of providing business solutions to the
entertainment industry.
Accordingly, the Company has commenced the development of this new marketing
approach and expects the new products, incorporating the modular concept, will
be available for sale by the second quarter of 1997. The current software will
continue to be marketed until that time and the Company will continue to support
the software for some period beyond the introduction of the new product for
those customers who intend to continue using the current software.
Because of the recent strategic decision described above, the Company reviewed
the valuation of the current software cost (pre-write down amortized balance of
$1,275,000 at June 30, 1996) in accordance with the net realizable value
determination provisions under SFAS No. 86 "Computer Software to be Sold,
Leased, or Otherwise Marketed". As a result, a write-down of $1,075,000 has been
made to the software's carrying value. The software's estimated net realizable
value as adjusted of $200,000 at June 30, 1996 principally relates to the
Company's engineers estimate of the value of the current products proven program
and product design which will be incorporated into the new product concept and
is expected to be fully realized (recoverable) through future revenues.
The Company expects to incur approximately $250,000 to $400,000 of new product
development costs by the second quarter of 1997 in order to complete the
development of the new product.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in 1997 in the areas of product
development and customer support. In addition, the product will have a new
appearance which is more user friendly. As a result, the Company expects its new
products to be more competitive in the market.
NOTE 4 - DEPRECIATION AND AMORTIZATION
Depreciation and Amortization Expense for the six months ended June 30, 1996 and
1995 was $1,389,687 and $292,204. This includes a write-down at June 30, 1996 of
$1,075,000. Accumulated depreciation and amortization as of June 30, 1996 and
1995 was $2,166,718 and $777,031.
NOTE 5 - PRODUCT COST LIABILITY
At December 31, 1995 the Company reserved $297,000 to provide enhancements, free
of charge, on systems installed in earlier years. During the first quarter of
1996, $203,000 was spent for these enhancements. All but one of the remaining
sites were enhanced during June and July, 1996 while product shortages were
occurring. However, some of these modifications were more costly to perform than
originally estimated, and the Company has committed to making similar
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<PAGE>
enhancements to additional customers. As a result, an additional $387,000 has
been accrued at June 30, 1996 in order to provide for the cost of completing all
enhancements committed.
NOTE 6 - NOTE PAYABLE, RELATED PARTY
On June 15, 1995, the Company borrowed $300,000 under a Convertible Secured
Promissory Note due March 30, 1996, advanced from a former shareholder at an
annual interest rate of 9.5%. On June 27, 1996 the Company used $329,359 to
repay the entire Note Payable-Related Party of $300,000 and the interest accrued
through that date. In addition, on June 28, 1996 the Company paid $1,000,000 to
the same related party in order to redeem 95,950 shares of Series A Convertible
Preferred Stock. These shares were potentially convertible into 2,636,126 shares
of common stock had they not been redeemed.
NOTE 7 - STOCKHOLDERS' EQUITY
ISSUANCE OF STOCK
On March 27, 1996, the Company commenced a private placement of shares of the
Company's newly established Series E Preferred Stock at $10.00 per share. On
April 22, 1996, 162,500 shares of the Series E Preferred Stock successfully
closed with the Company receiving total proceeds, net of commissions and
offering costs, of $1,450,582. As of June 30, 1996, 150,000 Series E shares had
converted into 2,453,686 common shares. On July 3, 1996, the remaining 12,500
Series E shares were converted into 174,216 shares of common stock.
On June 10, 1996, the Company commenced a private placement of 8,000 shares, at
$750 a share, of the Company's newly established Series F Convertible Preferred
Stock. On June 27, 1996, the placement closed with the Company receiving
$5,172,500, net of commissions and offering expenses, for the sale of 8,000
shares of preferred stock. Each Series F share has a face value of $1,000, bears
a 4% cumulative dividend, and is convertible into shares of common stock after
August 7, 1996 at generally, the average market price for the five trading days
preceding conversion. However, if such average market price is more than $1.00,
the conversion price will be $1.00, and one preferred share will convert into
1,000 shares of common stock; and if such average market price is less than
$0.45, the conversion price will be $0.45, and one preferred share will convert
into 2,222 shares of common stock. Thus, the 8,000 Series F shares are
convertible into between 8,000,000 and 17,777,778 shares of common stock. In
addition, the cumulative dividend on these shares is convertible into shares of
common stock in the same manner as the Series F shares.
On June 28, 1996 the Company used $329,359 to repay the entire Note
Payable-Related Party of $300,000 and the interest accrued through that date. In
addition, the Company paid $1,000,000 to the same related party in order to
redeem 95,950 shares of Series A Convertible Preferred Stock. These shares were
potentially convertible into 2,636,126 shares of common stock had they not been
redeemed.
Paid-in capital has also increased in 1996 by approximately $198,000 as a result
of the recording of stock-based compensation.
RESERVATION AND AUTHORIZATION OF COMMON STOCK
Upon the sale of 8,000 shares of Series F Convertible Preferred Stock, the
Company reserved 8,000,000 shares of common stock to provide for their
conversion. If the average market price of the Company's common stock is less
than $1.00 per share (thus permitting the holders of the Company's Series F
Preferred Stock to convert it into more than 8,000,000 shares of common stock),
the private investors which purchased the Series F shares have agreed to not
request conversion of more preferred shares than the amount which would require
the issuance of 8,000,000 common shares until the Company increases its
authorized number of shares of common stock. The Board of Directors plan to
amend the Company's Articles of Incorporation to increase the number of
authorized shares of common stock. Upon approval of this amendment by the
shareholders of the Company, the Company will reserve 9,777,778 additional
shares to allow for the possibility of the Series F shares converting into as
many as 17,777,778 common shares.
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<PAGE>
NOTE 8 - 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 former
president 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 the former president's suit is without merit and
intends to vigorously defend the action. There have been no significant changes
regarding this action since last quarter.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
Six Months Ended
----------------
1996 1995
---- ----
Interest $29,359 $2,043
Income Taxes -0- -0-
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 notes of $2,324,335) and
recorded assets at aggregate fair value of approximately $3,750,000, with
assumed payables of approximately $50,000.
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<PAGE>
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with the financial
statements and notes thereto, and is qualified in its entirety by reference
thereto.
NEW DEVELOPMENTS AFFECTING OPERATIONS
The Company markets products that typically require substantial customization in
order to meet the customers' particular requirements. Near the end of June 1996
the Company commenced an assessment of its marketing strategy related to the
Company's current software products. While the Company has been able to reduce
the cost of installing, customizing, and servicing (maintaining) the customized
software, these costs have remained higher than targeted levels. With
anticipated increased revenues, though no assurances are given, the Company
continues to believe that it would successfully generate profits from the
current software. The Company commissioned the referred to assessment to
determine whether the Company's computer products could be modified in order to
provide more product options to its customers without incurring substantial
customization costs. Although the assessment principally focused on the
conceptual design of the products to be offered and was not an inquiry as to
whether any technological innovations needed to be implemented in order for the
Company to competitively market its products, the Company's marketing and
development personnel confirmed that the ticketing, access control and other
technologies which define the current products remain competitive in the
marketplace.
The Company has most recently concluded, as a result of the assessment, that
instead of marketing products that require substantial customization, it will
design and offer its products in a modular fashion. They will consist of a
primary product with optional pre-developed modules to meet specific customer
needs that would require limited or no customization by the Company.
Additionally, the implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Although no assurances can be given,
management expects that applying the Company's proprietary technology in this
fashion will be a highly effective method of providing business solutions to the
entertainment industry.
Accordingly, the Company has commenced the development of this new marketing
approach and expects the new products, incorporating the modular concept, will
be available for sale by the second quarter of 1997. The current software will
continue to be marketed until that time and the Company will continue to support
the software for some period beyond the introduction of the new product for
those customers who intend to continue using the current software.
Because of the recent strategic decision described above, the Company reviewed
the valuation of the current software cost (pre-write down amortized balance of
$1,275,000 at June 30, 1996) in accordance with the net realizable value
determination provisions under SFAS No. 86 "Computer Software to be Sold,
Leased, or Otherwise Marketed". As a result, a write-down of $1,075,000 has been
made to the software's carrying value. The software's estimated net realizable
value as adjusted of $200,000 at June 30, 1996 principally relates to the
Company's engineers estimate of the value of the current products proven program
and product design which will be incorporated into the new product concept and
is expected to be fully realized (recoverable) through future revenues.
The Company expects to incur approximately $250,000 to $400,000 of new product
development costs by the second quarter of 1997 in order to complete the
development of the new product.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in 1997 in the areas of product
development and customer support. In addition, the product will have a new
appearance which is more user friendly. As a result, the Company expects its new
products to be more competitive in the market.
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<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995
REVENUES:
Revenues increased 27% to $1,103,940 for the second quarter of 1996 from
$871,994 for the second quarter of 1995. The continuing increase in revenues is
primarily attributable to marketing activities by a larger sales staff, from the
Company's enhanced products, and from new market accessibility resulting from
the acquisition of Delta Information Services, Inc. ("Delta") in December 1994
and GIS effective January 1995. Maintenance revenues represented approximately
11% of total revenues for the three months ended June 1996 and for the three
months ended June 1995.
CLASSIFICATION OF EXPENSES:
Cost of revenues for the second quarter of 1996 includes 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. In the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995, cost of revenues was
reported on a basis consistent with 1996. However, for quarterly reporting in
1995, cost of revenues included principally the hardware and software acquired
for customer installations and support, but 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 is
being done in 1996. For the purposes of this report, these types of costs were
separately identified and reclassified from Development or SG&A to cost of
revenues in order to report the results of operations for 1995 on a basis
consistent with that used in 1996.
COST OF REVENUES:
Cost of revenues for the second quarter of 1996 increased to $1,040,161 from
$475,011 for the second quarter of 1995. The increase resulted primarily from
the increased sales, and the additional accrual of product cost liabilities (see
Note 5 to the financial statements). Cost of revenues represented 94% of
revenues during the second quarter of 1996 as compared to 54% during the second
quarter of 1995. However, if this accrual is excluded, cost of revenues as a
percentage of revenues was 59% in 1996 compared to 54% of revenues in 1995. This
difference was primarily caused by inefficiencies in 1996 due to product
shortages and delayed shipments by vendors . This was the result of the Company
fully utilizing credit lines with vendors and having to delay the placement of
orders with vendors until cash was available from accounts receivable
collections. Shipment interruptions and delays occurred from May through and
July, 1996. Normal shipments resumed in mid-July 1996, shortly after completion
of the Series F private placement (see Note 7 of the financial statements).
DEVELOPMENT COSTS:
Development costs decreased to $129,533 for the second quarter of 1996 from
$227,222 for the second quarter of 1995, a decrease of $97,689, or 43% . Of this
amount, $20,000 was the result of higher allocations to cost of revenue. The
remaining $77,689 decrease is a result of development efforts in 1996 being
directed towards providing enhancements to previously installed systems (see
Note 5 to the financial statements). Accordingly, these costs were charged to
the accrued product cost reserve. The Company intends to continue to develop
products and enhance existing products to ensure competitive viability in the
marketplace, (See Note 3 to the financial statements).
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses (SG&A) increased to $2,870,100 for
the second quarter of 1996 from $799,987 for the second quarter of 1995,
representing a $2,070,113 or 259% increase. These amounts represent 260%
-12-
<PAGE>
of revenues in 1996 and 92% of revenues in 1995. The increase was due to several
items, including a write-down of capitalized software, and increases in
compensation expense, shareholder relations expense, professional fees, and
other expenses.
Capitalized software was written down $1,075,000 at June 30, 1996 due to the
development of a replacement product which is expected to be available for sale
in the second quarter of 1997 (see Note 3 to the financial statements). SG&A in
1995 did not include any write-downs or write-offs.
Employee compensation expenses increased to $750,000 for the second quarter of
1996 from $244,000 for the second quarter of 1995, an increase of $506,000. Of
this amount, $365,000 represents a provision for one-half of the cash-based and
stock-based incentive compensation that is planned for the executive group and
managers for 1996. Since no provision was made in the first quarter of 1996,
one-half of the annual amount was provided for in the second quarter. At this
time last year, no amounts had been accrued. The remainder of the increase in
compensation expense, $141,000, represents increased commissions of $71,000 due
to increased sales increased salaries of $20,000 due to increased headcount and
decreased allocations to cost of revenues.
Shareholder relations expenses totaled $110,000 in 1996 versus $7,000 in 1995.
This increase of $103,000 includes a $100,000 payment to a public relations firm
engaged to inform the Company's shareholders, and others interested in the
Company's activities.
Accounting, legal and other professional services increased $83,000, to $189,000
in 1996 from $106,000 in 1995. Legal fees represent $46,000 of the increase, of
which $13,000 represents services rendered in preparing the Company's defense to
a suit brought by a former President/CEO of the Company which the Company
intends to vigorously defend. The remaining $33,000 of the increased legal fees
relates primarily to the two private placements completed. No expenses related
to these placements have been capitalized.
Net loss increased to $2,989,255 ($.60) a share for the second quarter of 1996
from $642,686 ($.21) a share for the second quarter of 1995. The components of
the decrease in the Company's net loss are explained above.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
REVENUES:
Revenues increased 72% to $2,569,929 for the six months ended June 1996 from
$1,490,449 for the six months ended 1995. The continuing increase in revenues is
primarily attributable to marketing activities by a larger sales staff, from the
Company's enhanced products, and from new market accessibility resulting from
the acquisition of Delta Information Services, Inc. ("Delta") in December 1994
and GIS Limited Partnership ("GIS") effective January 1995. Maintenance revenues
represent approximately 11% of total revenues for the six months ended June 1996
and June 1995.
COST OF REVENUES:
Cost of revenues increased to $1,792,051 for the six months ended 1996 from
$1,056,656 of the six months ended 1995. The increase resulted from the
increased sales, and the additional accrual of product cost liabilities (see
Note 5 to the financial statements). This represents 70% of revenues for the six
months ended June 1996, and 71% of revenues for the six months ended June 1995.
However, if this accrual is excluded, cost of revenues as a percentage of
revenues was 55% in 1996 compared to 71% of revenues for the six months ended
June 1995. This difference was primarily caused by inefficiencies in 1995 due to
the integration of the new products acquired from Delta and GIS.
DEVELOPMENT COSTS:
Development costs decreased to $156,209 for the six months ended 1996 from
$473,665 for the six months ended 1995, a decrease of $317,456, or 67% . Of this
amount, $74,000 was the result of higher allocations to cost of revenues. The
remaining $243,456 is a result of development efforts in 1996 being directed
towards providing enhancements to previously installed systems (see Note 5 to
the financial statements), and higher than usual development costs in 1995 due
to the integration of the new products acquired from Delta and GIS.
During the first quarter of 1996, existing development personnel were used to
enhance certain systems previously installed in 1995 or earlier. These related
costs of approximately $203,000 were charged against a product cost reserve
established at December 31, 1995 for this purpose. Accordingly, since these
costs were previously anticipated and expensed in 1995, development costs for
1996 have been favorably impacted.
During 1995, the Company dedicated significant resources towards integrating
acquired products and resolving technical difficulties involved with the
installation and maintenance of the products.
The Company intends to continue to develop products and enhance existing
products to ensure competitive viability in the marketplace, (See Note 3 to the
financial statements).
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses (SG&A) increased to $3,733,911 for
the six months ended of 1996 from $1,656,422 for the six months ended 1995,
representing a $2,077,489 or 125% increase. These amounts represent 145% of
revenues in 1996 and 111% of revenues in 1995. The increase was due to several
items, including a write-down of capitalized software and increases in
compensation expense, shareholder relations expense, professional fees, and
other expenses.
Capitalized software was written down $1,075,000 at June 30, 1996 due to the
development of a replacement product which is expected to be available for sale
in the second quarter of 1997 (see Note 3 to the financial statements). SG&A in
1995 did not include any write-downs or write-offs.
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<PAGE>
Employee compensation expenses increased to $1,011,000 from $630,000, an
increase of $381,000. One component of this is an increase of $365,000 due to a
provision for one-half of the cash-based and stock-based incentive compensation
that is planned for the executive group and managers in 1996. In 1995, incentive
compensation was recorded when paid, with none being paid in the six months
ended June 30. Other components of the increase include decrease in consulting
expenses of $94,000, an increase in commissions expense of $92,000 due to
increased sales and an increase in salaries of $18,000 due to increased
headcount.
Shareholder relations expenses totaled $110,000 in 1996 versus $7,000 in 1995.
This increase of $103,000 includes a $100,000 payment to a public relations firm
engaged to inform the Company's shareholders and others interested in the
Company's activities.
Accounting, legal and other professional services increased $93,000, to $302,000
in 1996 from $209,000 in 1995. Legal fees increased $29,000 of which $13,000
represents services rendered related to preparing the Company's defense to a
suit brought by a former President/CEO of the Company which the Company intends
to vigorously defend. The remaining $16,000 of the increased legal fees consists
of a decrease I fees for general business purposes and an increase of
approximately $33,000 due to the two private placements completed. No expenses
related to these placements have been capitalized.
Net loss increased to $3,153,210 ($.67) a share for the six months ended June
30, 1996 from $1,710,500 ($.57) a share for the six months ended June 30, 1995.
The components of the decrease in the Company's net loss are explained above.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1996, the Company used $1,087,484 of cash in
operating activities and incurred a loss of $3,153,210. It has also accumulated
a deficit of $14,938,566 from its inception in March 1985 through June 30, 1996.
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) in order to fund
its operations.
In order to simplify the Company's capital and debt structure, on March 11,
1996, the Company executed an agreement with GIS in which the Company agreed to
make a cash payment of $1,550,000 and cancel the $559,000 note receivable from
GIS and the $199,359 account receivable from GIS in exchange for GIS canceling
the Company's promissory notes in the aggregate amount of $2,324,335 and GIS
returning their 109,333 shares of Common Stock and their 111,800 shares of
Series B Preferred stock for retirement. On April 12, 1996, the transactions
contemplated by the March 11 agreement were consummated. The cash payment of
$1,550,000 made to GIS was principally provided from the net proceeds of the
Series E Private Placement described below.
On March 27, 1996, the Company commenced a Private Placement of 350,000 shares
of the Company's newly established Series E Preferred Stock at $10.00 per share.
162,500 shares of the Series E Preferred Stock successfully closed with the
Company receiving total proceeds, net of offering costs, of $1,450,582.
On June 10, 1996, the Company commenced a Private Placement of 8,000 shares, at
$750 per share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock.
On June 27, 1996 the Company used $329,359 of the proceeds of the Series F
Private Placement to repay the entire Note Payable-Related Party of $300,000 and
the interest accrued through that date. In addition, on June 28, the Company
used $1,000,000 of the proceeds to redeem 95,950 shares of Series A Convertible
Preferred Stock held by the same parties. These shares were potentially
convertible into 2,636,126 shares of common stock had they not been redeemed.
The Company expects to incur approximately $250,000 to $400,000 of new product
development costs by the second quarter of 1997 in order to complete the
development of a new (replacement) product.
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<PAGE>
Since the Company does not purchase components for its products until an order
is received, there is typically a backlog of orders for systems. The Company
defines backlog as a signed contract, typically with some type of financial
assurance such as a deposit. As of June 30, 1996 and December 31, 1995, the
Company's backlog was approximately $900,000 and $1,200,000, respectively.
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
completion of the April 1996 and June 1996 Private Placements and the operating
revenues from sales in 1996 should be sufficient to fund operations through
1997. See "Operational and Funding Matters and Reporting Basis" of Note 1 to the
financial statements.
Part II-Other Information
Item 2 - Changes in Securities
On June 6, 1996, the Board of Directors of the Registrant authorized a new
series of preferred convertible stock, par value $.03, designated as the "Series
F Preferred Stock." The authorized number of such shares of the Series F Stock
is 8,000 (the "Series F Shares"). Each Series F Share has a face value of
$1,000, bears a 4% cumulative dividend (the "Dividend") and is convertible into
Common Shares at the average market price for the five trading days preceding
conversion. However, if such average market price is more than $1.00, the
conversion price will be $1.00, and one Series F Share will convert into 1,000
Common Shares; if such average market price is less than $0.45, the conversion
price will be $0.45, and one Series F Share will convert into 2,222 Common
Shares. Thus, the Series F. Shares are convertible into between 8,000,000 and
17,777,778 Common Shares. Additionally, the Dividend is convertible into Common
shares in the same manner as the Series F Shares. The Series F Shares limit the
rights of the holders of shares of Common Stock or other series of preference
shares by providing a liquidation preference of $1,000 per Series F share. The
Series F. Shares rank pari passu with the shares of the other series of
preferred stock. On June 20, 1996, the Company commenced a private placement of
the Series F Shares, at $750 per share. On June 27, 1996, the private placement
closed with the Company receiving $5,172,500, net of commissions and offering
expenses for the sale of the Series F Shares.
Item 6-Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Form of Series F Subscription Agreement for the Purchase
of Shares of Series F Preferred Stock
4.2 Form of Registration Rights Agreement With Respect to the
Purchases of Shares of Series F Preferred Stock
27.1 Financial Data Schedule
(b) Reports on Form 8-K: The Company has not filed any reports on Form 8-K
during the quarter ended June 30, 1996.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 1996.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lasergate Systems, Inc.
Registrant
Date: August 19, 1996 /s/Philip P. Signore
--------------------
PHILIP P. SIGNORE
Vice President and
Chief Financial officer
-17-
REGULATION S SECURITIES SUBSCRIPTION AGREEMENT
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES
LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
REGULATION S ("REGULATION S") PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN
REGULATION S) UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO
AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY OR TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OF SOLICITATION WOULD BE
UNLAWFUL. INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN
MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Regulation S Securities Subscription Agreement (the "Agreement"
or the "Subscription Agreement") is executed by the undersigned (the
"Subscriber") in connection with the offer and subscription by the Subscriber
for shares of Series F Preferred Stock (the "Preferred Stock") of Lasergate
Systems, Inc., a Florida corporation (the "Company"), and offered in units of
not less than 100 shares. The Company is offering an aggregate face amount of
$4,000,000.00 (U.S.) (4,000 shares with a face amount of $1,000 (U.S.) per
share) at an aggregate purchase price of $3,000,000.00 (U.S.), the purchase
price representing a 25% discount to (or 75% of) the total face amount of the
shares purchased. The rights and preferences of the Preferred Stock, including
the terms on which the Preferred Stock may be converted into Common Stock of the
Company ("Shares"), are set forth in the Certificate of Designation of Series F
Preferred Stock attached hereto as Exhibit A (the "Certificate of Designation").
The solicitation of this Subscription and, if accepted by the Company, the offer
and sale of Preferred Stock, are being made in reliance upon the provisions of
Regulation S ("Regulation S") promulgated under the United States Securities Act
of 1933, as amended (the "Act"). The Preferred Stock and the Shares issuable
upon conversion thereof are sometimes referred to herein as the "Securities."
The Subscriber wishes to subscribe for the number of
<PAGE>
shares of Preferred Stock set forth in Section 15 in accordance with the terms
and conditions of the Certificate of Designation and this Agreement. It is
agreed as follows:
1. Offer to Subscribe; Purchase Price
The Subscriber hereby offers to purchase and subscribe for the number
of shares of Preferred Stock, and at the price, set out in Section 15 of this
Agreement. The Closing shall be deemed to occur when this Agreement has been
executed by both the Subscriber and the Company (the "Closing") and payment
shall have been made by the Subscriber, by wire transfer, as directed in writing
by the Company on the day so directed, to an escrow agent, against the Company's
delivery of certificates representing the Preferred Stock subscribed for. If the
Closing does not occur, the funds of the Subscriber shall be returned from
escrow. The payment shall be made by delivering same day funds in United States
Dollars as designated above.
2. Representations; Access to Information; Independent Information;
Independent Investigation
The Subscriber represents and warrants to and covenants with the
Company, on its own behalf and on behalf of each person or entity for which the
Subscriber is acting as a fiduciary, as follows:
2.1 Offshore Transaction. The Subscriber represents and
warrants to the Company that (i) neither the Subscriber
nor any of the investors on whose behalf the Subscriber
may purchase and hold Preferred Stock or Shares (the
"Investors") is a "U.S. person" as that term is defined in
Rule 902(o) of Regulation S (a copy of which definition is
attached as Exhibit B), and neither the Subscriber nor any
Investor is an entity organized or incorporated under the
laws of any foreign jurisdiction by any "U.S person"
principally for the purpose of investing in securities not
registered under the Act, unless the Subscriber is or was
organized or incorporated by "U.S. persons" who are
accredited investors (as defined in Rule 501(a) under the
Act) and who are not natural persons, estates or trusts
("Institutional Investors"), and all owners of interests
in such entity who are "U.S. persons" are Institutional
Investors, and not natural persons, estates or trusts;
(ii) the Preferred Stock was not offered to the Subscriber
or to any Investor in the United States and at the time of
execution of this Subscription Agreement and of any offer
to the Subscriber or to the Investors to purchase the
Preferred Stock hereunder, the Subscriber and each such
Investor was physically outside the United States; (iii)
the Subscriber is purchasing the Securities for its own
account and not on behalf of or for the benefit of any
U.S. person and the sale and resale of the Securities have
not been prearranged with any buyer in the United States;
(iv) the Subscriber and to the best knowledge of the
Subscriber each distributor, if any, participating in the
offering of the Securities, has agreed and the Subscriber
hereby agrees that all offers and sales of the Securities
prior to the expiration of a period commencing on the
Closing of all Preferred Stock offered and ending
forty-five (45) days thereafter (the "Restricted Period")
shall not be made to U.S. persons or for the account or
benefit of U.S. persons and
2
<PAGE>
shall otherwise be made in compliance with the provisions
of Regulation S. Subscriber has not been engaged or acted
as or on behalf of a distributor or dealer (and is not an
affiliate of a distributor or dealer) with respect to this
transaction.
2.2 Independent Investigation. The Subscriber, in offering to
subscribe for the Securities hereunder, has relied upon an
independent investigation made by it and has, prior to the
date hereof, been given access to and the opportunity to
examine all books and records of the Company, and all
material contracts and documents of the Company. The
Subscriber will keep confidential all non-public
information regarding the Company that the Subscriber
receives from the Company. In making its investment
decision to purchase the Preferred Stock, the Subscriber
is not relying on any oral or written representations or
assurances from the Company or any other person or any
representation of the Company or any other person other
than as set forth in this Agreement, public filings of the
Company or in a document executed by a duly authorized
representative of the Company making reference to this
Agreement. The Subscriber has such experience in business
and financial matters that it is capable of evaluating the
risk of its investment and determining the suitability of
its investment. The Subscriber is a sophisticated
investor, as defined in Rule 506(b)(2)(ii) of Regulation
D, and an accredited investor as defined in Rule 501 of
Regulation D, a copy of which definition is attached
hereto as Exhibit C.
2.3 Economic Risk. The Subscriber understands and acknowledges
that an investment in the Shares involves a high degree of
risk, including a possible total loss of investment. The
Subscriber represents that the Subscriber is able to bear
the economic risk of an investment in the Preferred
Shares. In making this statement the Subscriber hereby
represents and warrants that the Subscriber has adequate
means of providing for the Subscriber's current needs and
contingencies; the Subscriber is able to afford to hold
the Preferred Shares for an indefinite period and the
Subscriber further represents that the Subscriber has such
knowledge and experience in financial and business matters
that the Subscriber is capable of evaluating the merits
and risks of the investment in the Preferred Shares to be
received by the Subscriber. Further, the Subscriber
represents that the Subscriber is able to bear the
economic risks of an investment in the Preferred Shares;
the Subscriber has no present need for liquidity in such
Preferred Shares; the Subscriber can afford a complete
loss of such investment in the Preferred Shares; and the
Subscriber is willing to accept such investment risks. The
Subscriber understands that upon mutual agreement of the
Company and J.P. Carey Enterprises, Inc., as agent for the
Subscribers, the Closing may be for less than 4,000
Preferred Shares.
2.4 No Government Recommendation or Approval. The Subscriber
understands that no United States federal or state agency
or similar agency of any other country has passed upon or
made any recommendation or endorsement of the Company,
this transaction or the subscription of the Securities.
3
<PAGE>
2.5 No Directed Selling Efforts in Regard to this Transaction.
The Subscriber has not, and to the best of the
Subscriber's knowledge, neither the Company nor any
distributor, if any, participating in the offering of the
Securities nor any person acting for the Company or any
such distributor has conducted any "directed selling
efforts" as that term is defined in Rule 902 of Regulation
S. Such activity includes, without limitation, the mailing
of printed material to investors residing in the United
States, the holding of promotional seminars in the United
States, the placement of advertisements with radio or
television stations broadcasting in the United States or
in publications with a general circulation in the United
States, which discuss the offering of Shares.
2.6 Reliance on Representation. This Agreement is made by the
Company with the Subscriber in reliance upon such
Subscriber's representations and covenants made in this
Section 2, which by his execution of this Agreement the
Subscriber hereby confirms. If the Subscriber includes or
consists of more than one person or entity, the
obligations of the Subscriber shall be joint and several
and the representations and warranties herein contained
shall be deemed to be made by and be binding upon each
such person or entity and their respective heirs,
executors, administrators, successors and assigns.
2.7 No Registration. Subscriber understands that the Preferred
Stock and the Common Stock issuable upon conversion of the
Preferred Stock have not been registered under the Act and
are being offered and sold pursuant to an exemption from
registration contained in the Act based in part upon the
representations of Subscriber contained herein. The Common
Stock does, however, carry certain registration rights as
set forth in the Registration Rights Agreement executed by
the parties hereto (the "Registration Rights Agreement").
2.8 No Public Solicitation. Subscriber knows of no public
solicitation or advertisement of an offer in connection
with the proposed issuance and sale of the Preferred
Stock.
2.9 Investment Intent. Subscriber is acquiring the Preferred
Stock to be issued and sold hereunder (and the Shares
issuable upon conversion of the Preferred Stock) for the
Subscriber's own account (or for beneficiaries' accounts
over which the Subscriber has investment discretion but no
discretionary voting or dispositive authority). Subscriber
and each other party acquiring Preferred Stock and the
shares issuable upon conversion of the Preferred Stock
pursuant to this Agreement are acquiring such securities
for investment and not with a view to the distribution
thereof. Subscriber understands that Subscriber must bear
the economic risk of this investment indefinitely unless
the sale of such Preferred Stock or such Shares is
registered pursuant to the Act, or an exemption from such
registration is available, and that except as set forth in
the Registration Rights Agreement, the Company has no
present intention of registering any such sale of the
Preferred Stock or such Shares. Subscriber represents and
warrants to the Company that it has no present plan or
intention of selling the Preferred Stock or the Shares in
4
<PAGE>
the United States, has made no predetermined arrangements
to sell the Preferred Stock or the Shares other than as
provided in the Registration Rights Agreement and that the
offering by the Company of its securities to the
Subscriber, as contemplated in this Subscription Agreement
(the "Offering"), together with any subsequent resale of
the Preferred Stock or the Shares, is not part of a plan
or scheme to evade the registration provisions of the Act.
Subscriber currently has no short position in the Shares,
including any short call position or any long put position
or any contract or arrangement that has the effect of
eliminating or substantially diminishing the risk of
ownership of the Preferred Stock or the Shares, nor has
engaged in any hedging transaction with respect to the
Preferred Stock or the Shares. Subscriber covenants that
neither Subscriber nor its affiliates nor any person
acting on its or their behalf has the intention of
entering, or will enter during the Restricted Period, into
any put option, short position or any hedging transaction
or other similar instrument or position with respect to
the Shares or securities of the same class as the Shares
and neither Subscriber nor any of its affiliates nor any
person acting on its or their behalf will use at any time
Shares acquired pursuant to this Agreement to settle any
put option, short position or other similar instrument or
position that may have been entered into prior to the
execution of this Agreement.
2.10 No Sale in Violation of the Act. Subscriber further
covenants that Subscriber will not make any sale, transfer
or other disposition of the Preferred Stock or the Shares
in violation of the Act (including Regulation S), the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") or the rules and regulations of the Securities and
Exchange Commission (the "Commission") promulgated
thereunder.
2.11 Incorporation and Authority. Subscriber has the full power
and authority to execute, deliver and perform this
Agreement and to perform its obligations hereunder. This
Agreement has been duly approved by all necessary action
of Subscriber, including any necessary shareholder
approval, has been executed by persons duly authorized by
Subscriber, and constitutes a valid and legally binding
obligation of Subscriber, enforceable in accordance with
its terms.
2.12 No Reliance on Tax Advice. Subscriber has reviewed with
his, her or its own tax advisors the foreign, federal,
state and local tax consequences of this investment, where
applicable, and the transactions contemplated by this
Agreement. Subscriber is relying solely on such advisors
and not on any statements or representations of the
Company or any of its agents and understands that
Subscriber (and not the Company) shall be responsible for
the Subscriber's own tax liability that may arise as a
result of this investment or the transactions contemplated
by this Agreement.
2.13 Independent Legal Advice. Subscriber acknowledges that
Subscriber has had the opportunity to review this
Agreement and the transactions contemplated by this
Agreement with his or her own legal counsel. Subscriber is
relying solely on
5
<PAGE>
such counsel and not on any statements or representations
of the Company or any of its agents for legal advice with
respect to this investment or the transactions
contemplated by this Agreement, except for the
representations, warranties and covenants set forth herein
and in the opinion provided for in Section 7.5 herein.
Subscriber acknowledges that the law firm of Nelson
Mullins Riley & Scarborough, L.L.P., which is acting as
escrow agent in connection with this transaction, is not
legal counsel to Subscriber and has not provided legal
advice to Subscriber.
2.14 Compliance. If Subscriber becomes subject to Section 13(d)
of the Exchange Act, Subscriber will duly file the
required Schedule thereunder.
2.15 Not an Affiliate. Subscriber is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the
Act) of the Company.
2.16 No Pledges. Subscriber has not pledged the Securities, and
will not pledge the Securities during the Restricted
Period (as defined below), as collateral in a margin
account or otherwise with a U.S. person.
2.17 No Inquiries. Subscriber has not been the subject of a
regulatory inquiry by the Commission.
2.18 Warranties of Other Parties. If Subscriber is purchasing
the Preferred Stock for the accounts of parties other than
Subscriber (as contemplated by Section 2.9 above),
Subscriber has full power and authority to make the
representations, warranties and agreements made pursuant
to this Agreement on behalf of the owners of such
accounts, and agrees that each representation, warranty
and agreement made by Subscriber herein is also made by
and on behalf of each owner of each such account.
3. Resales
Subscriber acknowledges and agrees that the Securities may and will
only be resold (a) in compliance with Regulation S; (b) pursuant to a
Registration Statement under the Act; or (c) pursuant to an exemption from
registration under the Act.
4. Legends; Subsequent Transfer of Securities
4.1 Legends. The certificate(s) representing the Preferred
Stock shall bear the legend set forth below and any other
legend, if such legend or legends are reasonably required
by the Company to comply with state, federal or foreign
law. Assuming that there are no changes in the material
facts set forth in Section 2 of this Agreement or
applicable law from the date hereof until the date of
conversion, and subject to the Company's transfer agent's
receipt of a legal opinion from legal counsel to the
Company, the certificate representing the Shares into
which
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<PAGE>
the Preferred Stock is converted after the Restricted
Period shall not bear a legend.
"The shares of preferred stock of Lasergate
Systems, Inc. (the "Issuer") represented by
this certificate have been issued pursuant to
Regulation S, promulgated under the Securities
Act of 1933, as amended (the "Act"), and have
not been registered under the Act or any
applicable state securities laws. These shares
may not be offered or sold within the United
States or to or for the account of a "U.S.
Person" (as that term is defined in Regulation
S) during the period commencing on the sale of
these securities and ending on the forty-fifth
(45th) day following completion of the
Regulation S offering of the Issuer pursuant to
which these shares have been issued, which day
is ______________, 1996 (the "Restricted
Period"). The shares of preferred stock
represented by this certificate may first be
converted into common stock of the issuer on
________________, 1996. The Issuer will notify
the transfer agent of the date of completion of
such offering and of the expiration of such
Restricted Period. Following expiration of the
Restricted Period, these shares may not be
offered or sold unless such offer or sale is
registered or exempt from registration under
the Act."
4.2 Transfers. Subject to receipt of a legal opinion from
legal counsel to the Company, the Company agrees, and
shall instruct its agents, that the Securities may be
transferred to any person or entity who is not an
affiliate of the Company if such transfer occurs after the
Restricted Period, without (a) any further restriction on
transfer (provided the transfer is made in compliance with
the Act) or (b) the entry of a "stop transfer" order
against such Securities, and the Securities delivered to
the transferee shall not bear a legend. The Company may
place a stop transfer order on any Common Stock issued
upon conversion of Preferred Stock during the Restricted
Period for the duration of the Restricted Period. Upon
election by the Subscriber to convert the Preferred Stock
into Shares, the Subscriber shall deliver to the Company a
duly completed Notice of Conversion (a "Notice of
Conversion") in the form attached to this Agreement.
5. Issuance of Further Securities
5.1 Restrictions on Additional Issuances. The Company will not
issue any debt or equity securities for cash in public or
private capital raising transactions for a
7
<PAGE>
period of ninety (90) days after the Closing, without
prior written notice of such issuance to the Subscriber.
6. Representations, Warranties and Covenants of Company
The Company represents and warrants to and covenants with the
Subscriber as follows:
6.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of
Florida and has all requisite corporate power and
authority to carry on its business as now conducted and as
proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have
a material adverse effect on the business or properties of
the Company and its subsidiaries taken as a whole. The
Company to its knowledge is not the subject of any pending
or threatened investigation or administrative or legal
proceeding by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, or the
Securities and Exchange Commission which have not been
disclosed in the reports referred to in Section 6.5 below.
6.2 Corporate Condition. None of the Company's filings made
pursuant to the Exchange Act, including, but not limited
to, those reports referenced in Section 6.5 below,
contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the
statements made, in light of the circumstances under which
they were made, not misleading. There have been no
material adverse changes in the Company's financial
condition or business since the date of those reports
which have not been disclosed to Subscriber in writing.
6.3 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders
necessary for the authorization, execution and delivery of
this Agreement, the performance of all obligations of the
Company hereunder and the authorization, issuance (or
reservation for issuance) and delivery of the Preferred
Stock being sold hereunder and the Common Stock issuable
upon conversion of the Preferred Stock have been taken,
and this Agreement constitutes a valid and legally binding
obligation of the Company, enforceable in accordance with
its terms.
6.4 Valid Issuance of Preferred Stock and Common Stock. The
Preferred Stock, when issued, sold and delivered in
accordance with the terms hereof for the consideration
expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations
of the Subscriber in this Agreement, will be issued in
compliance with all applicable U.S. federal and state
securities laws. The Common Stock issuable upon conversion
of the Preferred Stock when issued in accordance with the
terms of the Certificate of Designation, shall be duly and
validly issued and outstanding, fully paid and
nonassessable,
8
<PAGE>
and based in part on the representations and warranties of
Subscriber and any transferee of the Preferred Stock, will
be issued in compliance with all applicable U.S. federal
and state securities laws.
6.5 Current Public Information. The Company represents and
warrants to the Subscriber that the Company is a
"reporting issuer" as defined in Rule 902(l) of Regulation
S and it has a class of securities registered under
Section 12(g) of the Exchange Act and has filed all the
materials required to be filed as reports pursuant to the
Exchange Act for a period of at least twelve months
preceding the date hereof (or for such shorter period as
the Company was required by law to file such material).
The Subscriber has obtained copies of the Company's Form
10-KSB Annual Report for the year ended December 31, 1995
and Form 10-QSB for the fiscal quarter ended March 31,
1996. The Company undertakes to furnish the Subscriber
with copies of such other information as may be reasonably
requested by the Subscriber prior to consummation of this
Offering.
6.6 No Directed Selling Efforts in Regard to this Transaction.
The Company has not, and to the best of the Company's
knowledge neither the Subscriber nor any distributor, if
any, participating in the offering of the Securities nor
any person acting for the Company or any such distributor
has conducted any "directed selling efforts" as that term
is defined in Rule 902 of Regulation S. Such activity
includes, without limitation, the mailing of printed
material to investors residing in the United States, the
holding of promotional seminars in the United States, the
placement of advertisements with radio or television
stations broadcasting in the United States or in
publications with a general circulation in the United
States, which discuss the offering of Shares. The Company
represents and warrants that the Offering is not part of a
plan or scheme to evade the registration provisions of the
Act.
6.7 No Conflicts. The execution and delivery of this Agreement
and the consummation of the issuance of the Securities and
the transactions contemplated by this Agreement do not and
will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or
constitute a default under, the Certificate of
Incorporation or bylaws of the Company, or any indenture,
mortgage, deed of trust or other material payment or
instrument to which the Company is a party or by which it
or any of its properties or assets are bound, or any
existing applicable decree, judgment or order of any
court, Federal or State regulatory body, administrative
agency or other governmental body having jurisdiction over
the Company or any of its properties or assets.
6.8 Issuance of Securities. The Company will issue one or more
certificates representing the Preferred Shares in the name
of Subscriber in such denominations to be specified by the
Company prior to closing. Upon conversion of the Preferred
Shares in accordance with their terms, the Company will
issue one or more certificates representing Shares in the
name of Subscriber and in such denominations to be
specified by Subscriber prior to conversion. Subject to
9
<PAGE>
the Company's transfer agent's receipt of a legal opinion
from legal counsel to the Company, the Shares to be issued
upon conversion of the Preferred Shares shall not bear any
restrictive legends. The Company further warrants that no
instructions other than these instructions, and
instructions for a "stop transfer" until the end of the
Restricted Period, have been given to the transfer agent
and also warrants that the Shares shall otherwise be
freely transferable by Subscriber on the books and records
of the Company subject to compliance with Federal and
State securities laws, the receipt of a legal opinion from
legal counsel to the Company and the terms of the
Preferred Shares. The Company will notify the transfer
agent of the date of completion of the Offering and of the
date of expiration of the Restricted Period. Nothing in
this section shall affect in any way Subscriber's
obligations and agreement to comply with all applicable
securities laws upon resale of the Securities.
6.9 No Action. The Company has not taken and will not take any
action that will affect in any way the running of the
Restricted Period or the ability of Subscriber to resell
freely the Securities in accordance with applicable
securities laws and the Agreement.
6.10 Compliance with Laws. As of the date hereof, the conduct
of the business of the Company complies in all material
respects with all material statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable
thereto. The Company has not received notice of any
alleged violation of any statute, law, regulations,
ordinance, rule, judgement, order or decree from any
governmental authority. The Company shall comply with all
applicable securities laws with respect to the sale of the
Securities, including but not limited to the filing of all
reports required to be filed in connection therewith with
the Securities and Exchange Commission or any stock
exchange or the NASDAQ Stock Market or any other
regulatory authority.
6.11 Litigation. Except as disclosed in the Company's Annual
Report on Form 10- KSB and the Company's most recently
filed Form 10-QSB, there is no action, suit or proceeding
before or by any court or governmental agency or body,
domestic or foreign, now pending or, to the knowledge of
the Company, threatened, against or affecting the Company,
or any of its properties, which could reasonably be
expected to result in any material adverse change in the
business, financial condition or results of operations of
the Company, or which could reasonably be expected to
materially and adversely affect the properties or assets
of the Company.
6.12 No U.S. Offering. The Company represents that it has not
offered the Securities to the Subscriber or any Investor
in the U.S. or to any person in the United States or any
U.S. person.
6.13 Disclosures. There is no fact known to the Company (other
than general economic conditions known to the public
generally) that has not been disclosed
10
<PAGE>
in writing to the Subscriber that (a) could reasonably be
expected to have a material adverse effect on the
business, financial condition or results of operations of
the Company, or which could reasonably be expected to
materially and adversely affect the properties or assets
of the Company or (b) could reasonably be expected to
materially and adversely affect the ability of the Company
to perform its obligations pursuant to this Subscription
Agreement and the issuance of the Preferred Stock
hereunder.
6.14 Commissions. Except for a fee which is payable by the
Company to J.P. Carey Enterprises, Inc., no other person,
firm or corporation will be entitled to receive any
brokerage fee, commission or other similar payment from
the Company in connection with the consummation of the
transactions contemplated hereby and the Company shall not
make any such payment to any person, firm or corporation
other than J.P. Carey Enterprises, Inc.
6.15 Capitalization. The Company, as of the date of the
Closing, will have outstanding the number of shares of
Common Stock, Preferred Stock and Warrants as set forth on
Exhibit D.
7. Additional Covenants of Company
7.1 Accountants. The Company shall, until at least the second
anniversary of the date of the Closing (the "Closing
Date"), maintain as its independent auditors an accounting
firm that is authorized to practice before the SEC.
7.2 Corporate Existence and Taxes. The Company shall, until at
least the second anniversary of the Closing Date, maintain
its corporate existence in good standing, and shall pay
all its taxes when due except for taxes which the Company
disputes.
7.3 Reserved Shares and Listings. For so long as any shares of
Preferred Stock held by the Subscriber remain outstanding:
(a) the Company will reserve from its authorized
but unissued shares of Common Stock ("Common
Stock") a sufficient number of Shares to permit
the conversion in full of the outstanding
shares of Preferred Stock; and
(b) the Company will maintain the listing of its
Shares on the NASDAQ SmallCap Market System.
7.4 Liquidated Damages for Late Conversion. As set forth in
the Certificate of Designation, the Company shall use its
best efforts to issue and deliver, within three (3)
business days after the Subscriber has fulfilled all
conditions and submitted all necessary documents duly
executed and in proper form required for conversion (the
"Deadline"), to the Subscriber or any party receiving
Preferred
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<PAGE>
Stock by transfer from the Subscriber (together with the
Subscriber, a "Holder"), at the address of the Holder on
the books of the Company, a certificate or certificates
for the number of Shares of Common Stock to which the
Holder shall be entitled. The Company understands that a
delay in the issuance of the Shares of Common Stock beyond
the Deadline could result in economic loss to the Holder.
As compensation to the Holder for such loss, the Company
agrees to pay liquidated damages to the Holder for late
issuance of Shares upon conversion in accordance with the
following schedule (where "No. Business Days Late" is
defined as the number of business days beyond seven (7)
business days from the date of receipt by the Company of a
Notice of Conversion and the transfer agent of all
necessary documentation duly executed and in proper form
required for conversion, including the original
certificate representing the Preferred Shares to be
converted, all in accordance with this Agreement, the
Certificate of Designation and the requirements of the
transfer agent):
No. Business Days Late Liquidated Damages
1 $500
2 $1,000
3 $1,500
4 $2,000
5 $2,500
6 $3,000
7 $3,500
8 $4,000
9 $4,500
10 $5,000
>10 $5,000 + $1,000 for each
Business Day Late beyond
10 days
The Company shall pay the Holder any liquidated damages
incurred under this Section by check upon the earlier to
occur of (i) issuance of the Shares to the Holder or (ii)
each monthly anniversary of the receipt by the Company of
such Holder's Notice of Conversion. Nothing herein shall
limit the Subscriber's right to pursue actual damages for
the Company's failure to issue and deliver shares of
Common Stock to the Subscriber in accordance with the
terms of the Certificate of Designation.
7.5 Conversion Notice. The Company agrees that, in addition to
any other remedies which may be available to the
Subscriber, including, but not limited to, remedies
available under Section 7.4 of this Agreement, in the
event the Company fails for any reason to effect delivery
to the Subscriber of certificates representing Shares
within three business days following receipt by the
Company of a Notice of Conversion, the Investor will be
entitled to revoke the Notice of Conversion by delivering
a notice to such effect to the Company whereupon the
Company and
12
<PAGE>
the Subscriber shall each be restored to their respective
positions immediately prior to delivery of such Notice of
Conversion.
7.6 Opinion of Counsel. Subscriber shall, upon purchase of the
shares of Preferred Stock, receive an opinion letter from
Parker, Chapin, Flattau & Klimpl, L.L.P., counsel to the
Company, to the effect that (i) the Company is duly
incorporated and validly existing; (ii) this Agreement,
the issuance of the Preferred Stock, and the issuance of
the Common Stock upon conversion of the Preferred Stock
have been duly approved by all required corporate action,
and that all such securities, upon due issuance, shall be
validly issued and outstanding, fully paid and
nonassessable; (iii) this Agreement and the Registration
Rights Agreement are valid and binding obligations of the
Company, enforceable in accordance with their terms,
except as enforceability of any indemnification provisions
may be limited by principles of public policy, and subject
to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of laws
governing specific performance and other equitable
remedies; and (iv) based upon the representations and
warranties of the Company and each Subscriber in the
Offering, the offer and sale of the Preferred Stock to the
Subscriber is exempt from the registration requirements of
the Securities Act; except that with respect to the
foregoing opinions counsel may add such qualifications as
are consistent with firm practice, including an assumption
that the transaction does not constitute a plan or scheme
to evade the registration provisions of the Act.
7.7 Consultation with Legal Counsel. The Company shall consult
with its legal counsel regarding its Exchange Act filing
requirements including, but not limited to, the possible
obligation of the Company to file Forms 10-C and Form 8-K
in connection with the Offering, and will timely make any
and all such filings deemed necessary by such counsel.
7.8 Registration Rights. The Company will grant the Subscriber
the registration rights covering the Shares issuable on
conversion of the Preferred Stock on substantially the
terms of the Registration Rights Agreement attached hereto
as Exhibit E on the Closing Date.
8. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Florida, U.S.A., applicable to agreements made in and
wholly to be performed in that jurisdiction, except for matters arising under
the Act or the Exchange Act which matters shall be construed and interpreted in
accordance with such laws. Any action brought to enforce, or otherwise arising
out of, this Agreement shall be heard and determined in either a federal or
state court sitting in the State of Florida, U.S.A.
13
<PAGE>
9. Entire Agreement; Amendment
This Agreement, the Certificate of Designation, the Registration
Rights Agreement and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Except as expressly provided
herein, neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
10. Notices, Etc.
Any notice, demand or request required or permitted to be given by
either the Company or the Subscriber pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or by
facsimile, with a hard copy to follow by two day courier addressed to the
parties at the addresses of the parties set forth at the end of this Agreement
or such other address as a party may request by notifying the other in writing.
11. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
12. Severability
In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
13. Titles and Subtitles
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
14
<PAGE>
14. Amount
The undersigned Subscriber hereby subscribes for ________ shares of
Preferred Stock with a face value of __________ Dollars ($______________) (U.S.)
and pays herewith funds in the amount of
_______________________________________________ Dollars ($_____________________)
(U.S.).
The undersigned Subscriber acknowledges that this subscription shall
not be effective unless accepted by the Company as indicated below.
Dated this _____ day of _______________, 1996.
- ------------------------------------
(Name) (Please Print)
- ------------------------------------
(Signature)
- ------------------------------------
(Mailing Address)
- ------------------------------------
(Place of Execution)
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE ____ DAY OF
____________, 1996.
LASERGATE SYSTEMS, INC.
By:________________________________
Print Name:________________________
Title:______________________________
15
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the share(s) of Series F Preferred Stock)
The undersigned hereby irrevocably elects to convert _____ shares of Series F
Preferred Stock ("Preferred Stock"), represented by stock certificate No(s).
____ (the "Preferred Stock Certificate(s)") into shares of common stock ("Common
Stock") of Lasergate Systems, Inc. (the "Company") according to the conditions
of the Certificate of Designation of Series F Preferred Stock, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates. No fee will be charged to
the undersigned for any conversion, except for transfer taxes, if any.
The undersigned represents that it and each person or entity on whose behalf it
holds shares of Preferred Stock to be converted into Common Stock (each an
"Investor"): (i) is familiar with and understands the terms, conditions and
requirements contained in Regulation S ("Regulation S") and Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Act"); (ii) is not a "U.S.
Person" or "distributor" as defined in Regulation S; (iii) purchased the shares
of Preferred Stock for which conversion is being elected, and is purchasing the
Common Stock referenced herein, for its own account and for the account of each
Investor and not for the account or benefit of any U.S. Person; (iv) will comply
with the transfer restrictions contained in Section 4(1) of the Act and Rule 144
promulgated thereunder to the extent they are applicable; (v) has not had a
"short" position in the Company's securities at any time since the Purchase of
the Preferred Stock (including any short call position or any long put position
or any contract or arrangement that had the effect of eliminating or
substantially diminishing the risk of ownership of the Preferred Stock) nor has
it engaged in any hedging transaction with respect to the Preferred Stock or the
Common Stock; (vi) has no prior understanding with respect to the sale of the
Common Stock to any third party; (vii) has not engaged in any "directed selling
efforts" (as such term is defined in Regulation S) with respect to the Preferred
Stock or the Common Stock issuable upon conversion of the Preferred Stock;
(viii) purchased the Preferred Stock with investment intent, is purchasing the
Common Stock with investment intent and presently has no intent to sell, dispose
of or otherwise transfer the Common Stock; (ix) will make any sale, transfer or
other disposition of the Common Stock in full compliance with the Act, the
Exchange Act, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder; and (x) received the offer to
purchase the Preferred Stock outside the United States and, at the time the
Subscription Agreement pursuant to which the Preferred Stock was executed was,
and upon execution of this Notice of Conversion is, outside the United States.
The undersigned has obtained representations from each Investor with respect to
compliance with paragraphs (i) - (x) of this Notice.
Conversion Formula: ______________________________
Date of Conversion
------------------------------
Applicable Conversion Price
------------------------------
Signature
------------------------------
Name
Address:
==============================
* No shares of Common Stock will be issued until the original Preferred Stock
Certificate(s) to be converted and the Notice of Conversion are received by the
Company's Attorney or Transfer Agent. The original Preferred Stock
Certificate(s) to be converted and the Notice of Conversion must be received by
the Company's Attorney or Transfer Agent by the third business day following the
Date of Conversion, or such Notice of Conversion shall become null and void in
the discretion of the Company.
16
<PAGE>
LASERGATE SYSTEMS, INC.
Registration Rights Agreement
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into
as of _______________, 1996, by and among Lasergate Systems, Inc., a Florida
corporation (the "Company"), and the persons and entities listed on Exhibit A
attached hereto (the "Investors").
Recitals
WHEREAS, pursuant to Subscription Agreements (the "Agreements"), by
and among the Company and the Investors, the Company has agreed to sell and the
Investors have agreed to purchase an aggregate of up to 4,000 shares of Series F
Preferred Stock of the Company (the "Preferred Shares") convertible into shares
of the Company's Common Stock, $.03 par value per share (the "Shares"); and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investors' agreement to enter into the Agreements, the Company has agreed to
provide the Investors with certain registration rights with respect to the
Shares;
NOW THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Agreements and this Registration Rights Agreement, the Company and the Investors
agree as follows:
Agreement:
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, par value $.03
per share.
"Initiating Holders" shall mean holders of the Company's Preferred
Shares having an aggregate initial purchase price from the Company of $500,000
or more.
"Other Registrable Securities" shall mean those shares of Common
Stock heretofore or hereafter issued pursuant to one or more agreements granting
the purchasers of such securities the right to have the Company register such
securities or include such securities in any other registration of the Company's
equity securities.
"Registrable Shares" shall means (i) the Shares, and (ii) any Common
Stock of the Company issued or issuable in respect of the Shares or upon any
stock split, stock dividend, recapitalization or similar event; provided,
however, that Registrable Shares or other securities
<PAGE>
shall no longer be treated as Registrable Shares if (A) they have been sold to
or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, (B) they have been sold in a transaction exempt
from the registration and prospectus delivery requirements of the Securities Act
so that all transfer restrictions and restrictive legends with respect thereto
are removed upon consummation of such sale or (C) the Shares are available for
sale under the Securities Act (including Rule 144), in the opinion of counsel to
the Company, without compliance with the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and
restrictive legends with respect thereto may be removed upon the consummation of
such sale.
The terms "register", "registered" and "registration" shall refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registration Expenses" shall mean all expense incurred by the
Company in compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements (not to exceed $20,000) of one counsel for all the selling holders
of Registrable Shares for a limited "due diligence" examination of the Company,
and the reasonable expenses of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company, and excluding all
underwriting discounts and selling commissions applicable to the sale of the
Registrable Shares and all other payments to underwriters engaged by the
Investors, but not with respect to underwriters engaged by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Shares and all fees and
disbursements of one counsel for the selling holders of Registrable Shares
(other than the fees disbursements of such counsel included in Registration
Expenses).
2. Requested Registration.
The following registration rights will apply if, and only if, at any
time prior to the termination of this Agreement, Regulation S promulgated under
the Securities Act is rescinded or modified so as to preclude Initiating Holders
from reselling in United States public securities markets Shares received from
the Company pursuant to the Agreements following expiration of the Restricted
Period (as defined in the Agreements), or if, for any other reason, the Company
refuses to issue Shares at the times required by the Agreements bearing no
restrictive legend to Initiating Holders after expiration of the Restricted
Period; provided, however, that no Investor shall be entitled to request
registration pursuant to this Agreement (and such Investor shall not be
considered an Initiating Holder pursuant to this Agreement, and the securities
held by such
2
<PAGE>
Investor shall not be considered Registrable Shares pursuant to this Agreement)
if a representation or warranty of such Investor in the Agreements between the
Investor and the Company is inaccurate or was inaccurate when made, or the
Investor has failed to comply with the covenants and agreements of the Investor
set forth in the Agreements between the Investor and the Company:
(a) Request for Registration. If the Company shall
receive from Initiating Holders, at any time after two (2) and prior to
thirty-six (36) months following the final closing of the sale of Preferred
Shares pursuant to the Agreements, a written request that the Company effect a
registration with respect to all, but not less than all, of the Registrable
Shares held by such Initiating Holders (which notice shall specify the intended
method of disposition), the Company shall:
(i) promptly give written notice of the
proposed registration to all other holders of Registrable Shares; and
(ii) as soon as practicable use its best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Shares as are specified
in such request, together with all or such portion of the Registrable Shares of
any holder or holders of Registrable Shares joining in such request as are
specified in a written request given within fifteen (15) days after receipt of
such written notice from the Company; provided that the Company shall not be
obligated to effect, or to take any action to effect, any such registration
pursuant to this Section 2:
(A) after the Company has effected
one such registration pursuant to this Section 2(a) and such registration has
been declared or ordered effective by the Commission and the sale of such
Registrable Shares shall have closed; or
(B) within the period starting with
the date thirty (30) days prior to the Company's good faith estimated date of
filing of, and ending ninety (90) days following the effective date of, any
registered offering of the Company's securities to the general public.
Subject to the foregoing limitations in clauses (A) and (B) above,
the Company shall file a registration statement covering the Registrable Shares
so requested to be registered as soon as practicable after receipt of the
request or requests of the Initiating Holders, but no later than forty-five (45)
days following receipt of such request or requests, except in the event audited
financial statements not previously prepared are required to be prepared prior
to the filing of such registration statement, in which case such registration
statement must be filed as soon as practicable, but in any event within ninety
(90) days following receipt of such request or requests.
3
<PAGE>
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provision of Section 2(b) below, include
Other Registrable Securities, other securities of the Company which are held by
officers or directors of the Company or which are held by other holders of
registration rights, and may include securities of the Company being sold for
the account of the Company.
(b) Underwriting. If the Initiating Holders intend to
distribute the Registrable Shares covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to Section 2 and the Company shall include such information in the
written notice referred to in Section 2(a)(i) above. The right of any holder of
Registrable Shares to registration pursuant to Section 2 shall be conditioned
upon such holder's participation in such underwriting and the inclusion of such
holder's Registrable Shares in such underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such holder with
respect to such participation and inclusion) to the extent provided herein. A
holder of Registrable Shares may elect to include in such underwriting all or a
part of the Registrable Shares it holds.
(i) If the Company shall request inclusion in
any registration pursuant to Section 2 of securities being sold for its own
account, or if officers or directors of the Company holding other securities of
the Company or other holders of registration rights, shall request inclusion in
any registration pursuant to Section 2, the Initiating Holders shall, on behalf
of all holders of Registrable Shares, offer to include Other Registrable
Securities and the securities of the Company, such officers and directors and
such other holders of registration rights in the underwriting and may condition
such offer on their acceptance of the further applicable provisions of this
Agreement. The Company shall (together with all holders of Registrable Shares,
officers and directors, other holders of registration rights and holders of
Other Registrable Securities proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form with
the underwriter or representative of the underwriters selected for such
underwriting by the Company, which underwriter(s) shall be reasonably acceptable
to a majority in interest of the Initiating Holders.
(ii) Notwithstanding any other provision of
this Section 2, if the representative of the underwriters advises the Company in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the Company shall so advise all holders of Registrable Shares
and other shareholders whose securities would otherwise be underwritten pursuant
hereto, and the number of Registrable Shares and other securities that may be
included in the registration and underwriting shall be allocated in the
following manner: the securities of the Company held by officers and directors
of the Company (other than Registrable Shares) shall be excluded from such
registration and underwriting to the extent required by such limitation, and, if
a limitation on the number of shares is still required, the Other Registrable
Securities shall be excluded pro rata with Registrable Shares, unless another
method of determining such exclusion is specified in the agreements governing
the Other Registrable Securities, according to the relative number of Other
Registrable Securities requested to be included in such registration and
underwriting, from such registration and underwriting to the extent required by
such limitation, and, if a limitation on the number of shares is still required,
the number of Registrable Shares that may be included in the registration and
underwriting shall be allocated
4
<PAGE>
among all holders of Registrable Shares in proportion, as nearly as practicable,
to the respective amounts of Registrable Shares which they had requested to be
included in such registration at the time of filing the registration statement.
No Registrable Shares or any other securities excluded from the underwriting by
reason of the underwriter's marketing limitation shall also be included in such
registration.
(iii) If the Company or any officer, director
or holder of Registrable Shares or Other Registrable Securities who has
requested inclusion in such registration and underwriting as provided above
disapproves of the terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, the underwriter and the Initiating
Holders. The securities so withdrawn shall also be withdrawn from registration.
3. Expenses of Registration. The Company shall bear all Registration
Expenses incurred in connection with any registration, qualification or
compliance of the Registrable Shares pursuant to this Agreement. All Selling
Expenses shall be borne by the holders of the securities so registered pro rata
on the basis of the number of their shares so registered.
4. Registration Procedures. Pursuant to this Agreement, the Company
will keep each holder of Registrable Shares advised in writing as to the
initiation of a registration under this Agreement and as to the completion
thereof. At its expense, the Company will:
(a) Use reasonable efforts to keep such registration
effective for a period of one hundred eighty (180) days or until the holder or
holders of Registrable Shares have completed the distribution described in the
registration statement relating thereto or until the securities registered cease
to be Registerable Shares, whichever first occurs;
(b) Prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of
securities covered by such registration statement; and
(c) Furnish such number of prospectuses and other
documents incidental thereto, including any amendment of or supplement to the
prospectus, as a holder of Registrable Shares from time to time may reasonably
request.
5. Indemnification.
(a) The Company will indemnify each holder of Registrable
Shares, each of its officers, directors and partners, and each person
controlling such holder of Registrable Shares, with respect to which
registration has been effected pursuant to this Agreement, and each underwriter,
if any and each person who controls any underwriter, and their respective
counsel against all claims, losses, damages and liabilities (or actions,
proceedings or settlements in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, or other document incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any violation by
5
<PAGE>
the Company of the Securities Act or any rule or regulation thereunder
applicable to the Company in connection with any such registration and will
reimburse each such holder of Registrable Shares, each of its officers,
directors and partners, and each person controlling such holder of Registrable
Shares, each such underwriter and each person who controls any such underwriter,
for any legal and any other expenses as they are reasonably incurred in
connection with investigating and defending any such claim, loss, damage,
liability or action, provided, however, that the indemnity contained in this
Section 5(a) shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability or action if such Settlement is effected without the
consent of the Company; and provided further that the Company shall not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such holder
of Registrable Shares or underwriter and stated to be specifically for use
therein. The foregoing indemnity agreement is further subject to the condition
that insofar as it relates to any untrue statement, alleged untrue statement,
omission or alleged omission made in a preliminary prospectus, such indemnity
agreement shall not inure to the benefit of the foregoing indemnified parties if
copies of a final prospectus correcting the misstatement, or alleged
misstatement, omission or alleged omission upon which such loss, liability,
claim or damage is based is timely delivered to such indemnified party and a
copy thereof was not furnished to the person asserting the loss, liability,
claim or damage.
(b) Each holder of Registrable Shares will, if Registrable
Shares held by it are included in the securities as to which such registration
is being effected, indemnify the Company, each of its directors and officers and
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of the Securities Act and the rules and regulations
thereunder, each other such holder of Registrable Shares and each of its
officers, directors and partners, and each person controlling such holder of
Registrable Shares, and their respective counsel (collectively, the "Company,
Underwriters and Counsel") against all claims, losses, damages and liabilities
(or actions, proceedings or settlements in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
relating to such Holder contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein
relating to such holder or necessary to make the statements therein relating to
such holder not misleading or any violation by such holder of any rule or
regulation promulgated under the Securities Act applicable to such holder and
relating to action or inaction required of such holder in connection with any
such registration; and will reimburse the Company, such holders of Registrable
Shares, directors, officers, partners, persons, underwriters or control persons
for any legal or any other expense reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) relating to such
holder is made in such registration statement, prospectus, offering circular or
other document in reliance upon and in conformity with written information
furnished to the Company by such holder of Registrable Shares and stated to be
specifically for use therein; provided, however, that such indemnification
obligations shall not apply if the Company modifies or changes to a material
extent written information furnished by such Holder. Each holder of Registrable
Shares will, if Registrable Shares held by it are included in the
6
<PAGE>
securities as to which such registration is being effected, indemnify the
Company, Underwriters and Counsel against all claims, losses, damages and
liabilities (or actions, proceedings or settlements in respect thereof), arising
out of or based on any sale of Registrable Shares made by such holder following
receipt by such holder of written notice from the Company, Underwriters or
Counsel that the registration statement filed with respect to such Registrable
Shares contains an untrue statement of material fact or omits to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
(c) Each party entitled to indemnification under this
Section 5 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld or delayed), and the
Indemnified Party may participate in such defense at such Indemnified Party's
expense. No Indemnifying Party, in the defense of any such claim or litigation,
shall except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
6. Information by Holder of Registrable Shares. Each holder of
Registrable Shares shall furnish to the Company such information regarding such
holder of Registrable Shares and the distribution proposed by such holder of
Registrable Shares as the Company may reasonably request in writing and as shall
be reasonably required in connection with any registration referred to in this
Agreement.
7. Miscellaneous.
7.1 Governing Law. This agreement shall be governed by and
construed in accordance with the laws of the State of Florida without giving
effect to conflict of laws.
7.2 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7.3 Entire Agreement. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subject matter hereof.
7.4 Notices, etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
first-class mail, postage prepaid, or
7
<PAGE>
delivered by hand or by messenger or courier delivery service, addressed (a) if
to an Investor, at such Investor's address set forth on Exhibit A hereof, or at
such other address as such Investor shall have furnished to the Company in
writing, or (b) if to the Company at 28050 U.S. 19 North, Suite 502, Clearwater,
Florida 34621, Attn: President, or at such other address as the Company shall
have furnished to each Investor and each such other holder in writing.
7.5 Delays or Omissions. No delay or omission to exercise
any right, power or remedy accruing to any holder of any Registrable Shares,
upon any breach or default of the Company under this Agreement, shall impair any
such right, power or remedy of such holder nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or in
any similar breach or default thereunder occurring, nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions of
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.6 Counterparts. This agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Investors, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.7 Severability. In the case any provision of this
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
7.8 Amendments. The provisions of this Agreement may be
amended at any time and from time to time, and particular provisions of this
Agreement may be waived, with and only with an agreement or consent in writing
signed by the Company and by the Investors currently holding fifty percent (50%)
of the Registrable Shares as of the date of such amendment or waiver.
7.9 Termination of Registration Rights. This Agreement
shall terminate at such time as there ceases to be at least $500,000 in face
amount of outstanding Preferred Shares which constitute Registrable Shares as
defined herein.
8
<PAGE>
The foregoing Registration Rights Agreement is hereby executed as of the date
first above written.
LASERGATE SYSTEMS, INC. INVESTOR
By:__________________________ By:__________________________
Name:________________________ Name:________________________
Title:_______________________ Title:_______________________
9
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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