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 September 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 November 14, 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 SEPTEMBER 30, 1996
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 1996 3
(unaudited) and December 31, 1995
Consolidated Statements of Operations 4
(unaudited) for the three months and nine months ended
September 30, 1996 and 1995
Consolidated Statements of Cash Flows 5
(unaudited) for the nine months ended
September 30, 1996 and 1995
Notes to Financial Statements (unaudited) 6 - 10
Item 2. Management's Discussion and Analysis or Plan 11
of Operation
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,537,579 $ 656,506
Accounts receivable, net of allowance for
doubtful accounts of $93,771 and $36,127 933,185 439,311
Account receivable, related party -0- 199,359
Inventories 92,920 325,664
Prepaid expenses 28,967 84,392
------------ ------------
Total current assets 3,592,651 1,705,232
Property and equipment, net 292,282 246,568
Systems and software costs, net 188,888 1,416,667
Goodwill, net 2,415,952 2,515,694
Customer lists and support contracts, net 301,042 354,167
Other assets, net 145,376 167,908
------------ ------------
Total Assets $ 6,936,191 $ 6,406,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, related party $ -0- $ 300,000
Notes payable, other: 29,556 21,757
Accounts payable, trade 166,268 634,863
Deferred revenues 677,367 729,406
Accrued product costs 470,684 297,000
Accrued expenses 1,008,156 272,104
------------ ------------
Total current liabilities 2,352,031 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 2,492,031 4,719,465
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares authorized, 8,000 and
387,750 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively 240 11,633
Common stock, $.03 par value, 20,000,000 shares authorized,
7,432,061 and 3,125,013 issued and outstanding at
September 30, 1996 and December 31, 1995 , respectively 222,961 93,751
Additional paid-in capital 19,835,419 14,065,743
Less: Common stock, $.03 par value, 20,000 shares and 20,000
shares at September 30, 1996 and December 31, 1995, respectively,
subject to put options (140,000) (140,000)
Note receivable, shareholders -0- (559,000)
Accumulated deficit (15,474,460) (11,785,356)
------------ ------------
Total stockholders' equity 4,444,160 1,686,771
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,936,191 $ 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,005,860 $ 777,895 $ 3,575,790 $ 2,268,344
Operating expenses:
Cost of Revenues 481,203 542,590 2,273,254 1,599,246
Development 150,821 98,048 312,884 571,713
Selling, general and administrative
(Including write-down of software in
June 1996 of $1,075,000) 946,694 964,288 4,674,753 2,620,707
----------- ----------- ----------- -----------
Operating Loss (572,858) (827,031) (3,685,101) (2,523,322)
Other income (expense) 36,965 (6,535) (4,003) (20,742)
----------- ----------- ----------- -----------
Net loss ($ 535,893) ($ 833,566) ($3,689,104) ($2,544,064)
=========== =========== =========== ===========
Net loss per common share ($ 0.07) ($ 0.28) ($ 0.65) ($ 0.84)
=========== =========== =========== ===========
Weighted Average Common Stock Outstanding 7,428,274 3,023,013 5,656,674 3,023,013
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,689,104) ($2,544,064)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation, write-down and amortization 1,490,775 440,003
Increase in provision for doubtful accounts 57,644 150,733
Stock-based compensation 244,988 326,250
Decrease (increase) in:
Accounts receivable, trade (551,520) (572,394)
Inventories 232,744 71,888
Prepaid expense 55,425 38,911
Other current assets (87,375) 40,009
Other assets 77,790 --
Increase (decrease) in:
Accounts payable and accrued expenses 308,663 (151,149)
Accrued Product Costs 173,684 (21,394)
Deferred revenue (52,039) 551,259
----------- -----------
Net cash used in operating activities (1,738,325) (1,669,948)
----------- -----------
Cash flows from investing activities:
(Additions) to, disposal of, property and equipment (123,725) (82,666)
Note receivable, stockholders -- (559,000)
Other -- 29,657
----------- -----------
Net cash provided (used) in investing activities (123,725) (612,009)
----------- -----------
Cash flows from financing activities:
Proceeds from loans, related parties -- 859,505
Repayment of loans, related parties (300,000) --
Proceeds from loans 30,200 --
Repayment of loans, other (29,067) (74,910)
Repayment of obligations under capital leases (31,092) (8,651)
(Settlement)/Procceds 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 3,743,123 775,944
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,881,073 (1,506,013)
Cash and cash equivalents, beginning of period 656,506 1,589,837
----------- -----------
Cash and cash equivalents, end of period $ 2,537,579 $ 83,824
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 30, 1996, the Company used $1,738,325 of
cash in operating activities and incurred a loss of $3,689,104. It also has an
accumulated deficit at September 30, 1996 of $15,474,460. 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.
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 and its Quarterly Report on Form 10-QSB
for the quarter ending June 30, 1996, management has taken various actions
intended to eventually increase operating efficiencies and increase sales. The
most significant of these actions were the commencement of a rewriting of the
products and an increase in marketing and advertising expenses including hiring
additional sales personnel. Management believes that, when viewed in connection
with the capital raised during 1996 (see below), these actions will be
sufficient to provide the Company with the ability to continue in existence.
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.
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
-6-
<PAGE>
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.
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 September 30, 1996, the Company had three customer
installations 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.
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 $202,000 and
$594,000 for the three months and nine months ending September 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 September 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 8,000 Series F shares which can
convert into as many as 17,777,778 common shares (see Note 5).
NOTE 2 - 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 reduced the cost of
installing, customizing, and servicing (maintaining) the customized software,
these costs have remained higher than desired 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.
-7-
<PAGE>
The Company has 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 and a configuration layer 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 present 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 estimates the cost of developing the new products incorporating the
modular concept will total approximately $250,000 to $400,000 by the second
quarter of 1997. To date, the Company has incurred approximately $60,000 of
development costs for these products.
The Company installed a beta version consisting of three modules during November
1996, and anticipates selling this configuration to a different customer and
installing it during December 1996. The Company anticipates the completion of
additional modules at an average rate of one per month until approximately June,
1997, when the Company anticipates having the entire product line rewritten.
Additional beta sites will be selected so each module can be fully tested in a
"live" environment and new configurations with additional modules will be sold
before general release of the full product.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in 1997 in areas of product
development and customer support. In addition, the product will have a new
appearance which is more user friendly and will allow the user to modify a
configuration layer (without access to the source code) which can remain in
place when updating the product to a new revision level. As a result, the
Company expects its new products to be more competitive in the market.
NOTE 3 - DEPRECIATION AND AMORTIZATION
Depreciation and Amortization Expense for the three months ended September 30,
1996 and 1995 was $101,000 and $148,000. Accumulated depreciation and
amortization as of September 30, 1996 and 1995 was $2,268,000 and $644,000.
This includes a write-down at June 30, 1996 of $1,075,000.
NOTE 4 - PRODUCT COST LIABILITY (WARRANTY ALLOWANCE)
At June 30, 1996 the company had an accrued warranty allowance of $481,000,
which had been provided to cover the cost of enhancements to be made (free of
charge) to systems installed in prior periods. During the third quarter, $60,000
was spent for these enhancements and subsequently charged against this
allowance. Management has reviewed warranty costs incurred within the past year,
which had been provided for by estimating and recording known warranty
liabilities each quarter. Based on this review, management has decided to
provide for unknown warranty costs by providing a warranty allowance of 5% of
revenues. For the third quarter, this amounted to $50,000. Thus, the balance of
the accrued warranty allowance at September 30, 1996 was $471,000. Management
believes 5% is a conservative estimate of these costs (which are unknown at time
of sale)
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<PAGE>
but will continue to monitor them to ensure they are provided for on a current
basis in order to match the cost with the associated revenue.
NOTE 5 - 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.
Paid-in capital has also increased in 1996 by approximately $245,000 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 for the
five trading days prior to conversion is less than $1.00 per share (thus
permitting the holders of the Company's Series F Preferred Stock to convert such
shares into more than 8,000,000 shares of common stock), the Company would not
have a sufficient number of authorized shares of common stock to permit
conversion of all the Series F Preferred Stock. The Board of Directors plans to
recommend to the Company's stockholders at the 1996 Annual Meeting of
Stockholders that they approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock. Upon
approval of this amendment by the stockholders 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.
-9-
<PAGE>
NOTE 6 - 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 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest And Income Taxes Paid:
Nine 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 ("GIS") 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.
In order to simplify the Company's capital and debt structure, on March 11,
1996, the Company and 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 $1,550,0000, 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.
-10-
<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 reduced the cost of
installing, customizing, and servicing (maintaining) the customized software,
these costs have remained higher than desired 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 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 and a configuration layer 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 present 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 estimates the cost of developing the new products incorporating the
modular concept will total approximately $250,000 to $400,000 by the second
quarter of 1997. To date, the Company has incurred approximately $60,000 of
development costs for these products.
The Company installed a beta version consisting of three modules during November
1996, and anticipates selling this configuration to a different customer and
installing it during December 1996. The Company anticipates the completion of
additional modules at an average rate of one per month until approximately June,
1997, when the Company anticipates having the entire product line rewritten.
Additional beta sites will be selected so each module can be fully tested in a
"live" environment and new configurations with additional modules will be sold
before general release of the full product.
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<PAGE>
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 and will allow the user to modify a
configuration layer (without access to the source code) which can remain in
place when updating the product to a new revision level. As a result, the
Company expects its new products to be more competitive in the market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1995
Revenues:
Revenues increased 29% to $1,005,860 for the third quarter of 1996 from $777,895
for the third quarter of 1995. The continuing increase in revenues is primarily
attributable to marketing activities by a larger sales staff, and from the
Company's enhanced products. Maintenance revenues represented approximately 11%
of total revenues for the three months ended September 1996 and September 1995.
Classification of Expenses:
Cost of revenues for the third 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 cost 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 third quarter of 1996 decreased to $481,203 from
$542,590 for the third quarter of 1995. Cost of revenues represented 48% of
revenues during the third quarter of 1996 as compared to 70% during the third
quarter of 1995. The decrease resulted primarily from a reduction in warranty
costs and improved efficiency of installations and support, offset partially by
increased activity due to increased sales.
Development Costs:
Development costs increased to $150,821 for the third quarter of 1996 from
$98,048 for the third quarter of 1995, an increase of $52,773, or 54% . The
Company intends to continue developing products and to enhance existing products
to ensure competitive viability in the marketplace, (See Note 2 to the financial
statements).
Selling, General and Administrative:
Selling, general and administrative expenses (SG&A) decreased to $946,694 for
the third quarter of 1996 from $964,288 for the third quarter of 1995,
representing a $17,594 or 2% decrease. These amounts represent 94% of revenues
in 1996 and 124% of revenues in 1995. The decrease resulted from lower
expenditures for several items, including professional fees, amortization, and
travel, partially offset by an increase in compensation expense.
-12-
<PAGE>
Legal and other professional services decreased $76,000, to $59,000 in 1996 from
$135,000 in 1995. Legal fees represent $19,000 of the decrease, and consulting
fees represent $57,000 of the decrease.
Amortization decreased $43,000 due to a write-down of capitalized software in
June 1996. Other expenses decreased $130,000, including bad debt of $65,000 and
travel of $28,000
Employee compensation expenses increased to $514,000 for the third quarter of
1996 from $282,000 for the third quarter of 1995, an increase of $232,000. Of
this amount, $100,000 represents a provision for cash-based and stock-based
incentive compensation that is planned for the executive group and managers for
1996. For the same period last year, no amounts had been accrued. The remainder
of the increase in compensation expense, $132,000, represents increased
commissions of $23,000 due to increased sales, and increased salaries of
$109,000 due to increased headcount.
Net loss decreased to $535,893 ($0.07 a share) for the third quarter of 1996
from $833,564 ($0.28 a share) for the third quarter of 1995. The components of
the decrease in the Company's net loss are explained above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues:
Revenues increased 58% to $3,575,790 for the nine months ended September 1996
from $2,268,344 for the nine months ended September 1995. The continuing
increase in revenues is primarily attributable to marketing activities by a
larger sales staff, and from the Company's enhanced products. Maintenance
revenues represent approximately 11% of total revenues for the nine months ended
September 1996 and September 1995.
Cost of Revenues:
Cost of revenues increased to $2,273,254 for the nine months ended September
1996 from $1,599,246 for the nine months ended September 1995. This represents
64% of revenues for the nine months ended September 1996, and 71% of revenues
for the nine months ended September 1995. This improvement (as a percent of
revenues) represents more efficient installations and support of products,
partially offset by a write-off of $104,000 of obsolete inventory at June 30,
1996.
Development Costs:
Development costs decreased to $312,884 for the nine months ended September 1996
from $571,713 for the nine months ended September 1995, a decrease of $258,829,
or 45%. This is a result of development efforts in early 1996 being directed
towards providing enhancements to previously installed systems, and higher than
usual development costs in 1995 due to the integration of the new products
acquired from Delta and GIS. This trend of lower reported development costs was
reversed during the third quarter of 1996, and is expected to continue due to
development efforts remaining at the present level or higher.
During 1996, development personnel were used to enhance certain systems
previously installed in 1995 or earlier. These related costs of approximately
$263,000 were charged against a product cost (warranty) reserve, which was
created by charging the expense to cost of revenues. Accordingly, since these
costs were previously anticipated and charged to cost of revenues, 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.
-13-
<PAGE>
The Company intends to continue to develop products and enhance existing
products to ensure competitive viability in the marketplace, (See Note 2 to the
financial statements).
Selling, General and Administrative:
Selling, general and administrative expenses (SG&A) increased to $4,674,753 for
the nine months ended September 1996 from $2,620,707 for the nine months ended
September 1995, representing a $2,054,046 or 78% increase. These amounts
represent 131% of revenues in 1996 and 116% of revenues in 1995. The increase
was due to several items, including a write-down of capitalized software.
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 2 to the financial statements). SG&A in
1995 did not include any write-downs or write-offs.
Employee compensation expenses increased to $996,000 from $490,000, an increase
of $506,000. One component of this is an increase of $400,000 due to a provision
for cash-based and stock-based incentive compensation that is planned for the
executive group and managers in 1996. For the same period last year, no amounts
had been accrued. Other components of the increase include an increase in
commissions expense of $115,000 due to increased sales, an increase in salaries
of $153,000 due to increased headcount, and a decrease in consulting expenses of
$162,000.
Shareholder relations expenses totaled $139,000 in 1996 versus $19,000 in 1995.
This increase of $120,000 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 $112,000, to
$405,000 in 1996 from $293,000 in 1995.
Net loss increased to $3,689,104 ($0.65) a share for the nine months ended
September 30, 1996, from $2,544,064 ($0.84) a share for the nine months ended
September 30, 1995. The components of the increase in the Company's net loss are
explained above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, the Company used $1,738,325 of
cash in operating activities and incurred a loss of $3,689,104. It has also
accumulated a deficit of $15,474,460 from its inception in March 1985 through
September 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.
The Company estimates the cost of developing the new products incorporating the
modular concept will total approximately $250,000 to $400,000 by the second
quarter of 1997. To date, the Company has incurred approximately $60,000 of
development costs for these products.
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 September 30, 1996 and December 31, 1995, the
Company's backlog was approximately $700,000 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
higher levels of revenue than those achieved in 1996. 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.
-14-
<PAGE>
Part II-Other Information
Item 6-Exhibits and Reports on Form 8-K
(a) Exhibits:
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 September 30, 1996.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1996.
-15-
<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: November 14, 1996 /s/ Philip P. Signore
--------------------------
PHILIP P. SIGNORE
Vice President and
Chief Financial Officer
-16-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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