SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDEMENT NO. 2
ON
FORM 10-KSB/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1995
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
-------------------------------------------------
(Exact name of small business issuer in its charter)
FLORIDA 59-2543206
- ---------------------------------- -------------------
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
28050 U.S. 19 NORTH, SUITE 502, CLEARWATER, FLORIDA 34621
- --------------------------------------------------- -------
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.03 PAR VALUE
---------------------------------
(Title of Class)
REDEEMABLE WARRANTS
------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was $2,835,206.
At June 30, 1996, 7,257,845 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock of Lasergate Systems, Inc. held by
non-affiliates 7,237,329 shares was $6,784,996
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Since the second quarter of 1994, a number of significant events have had a
material impact upon the Company's operating results, and its current and future
prospects. In addition to a change in control and a public offering of its
securities, the changes included replacement of all of the Company's senior
executives including the President/CEO as well as most of its other personnel,
two acquisitions which included an additional customer base of over 200 sites,
and various product integration and development efforts. As a result of the
successful implementation of these changes, the Company believes it currently
has the management, personnel, products, market position and commitment to
become a leader in providing business solutions to the entertainment industry.
In December 1994, the Company acquired all the outstanding capital stock of
Delta. This Ontario, Canada based company was engaged in the sale of admission
control and revenue accounting systems targeted primarily at the ski industry.
It was determined that the addition of Delta's ski install base, its name
recognition as a leader in that industry, and its product functionality and
audit safeguards would be of significant value to the Company. Moreover, it was
determined the Delta software could be integrated with Gatepas to provide a
product that the Company believed would be superior to currently available
alternative systems.
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<PAGE>
In February 1995, the Company acquired substantially all of the assets of
GIS Limited Partnership. This Tampa, Florida based company was engaged in the
sale of admission control and revenue accounting systems targeted specifically
at fine arts facilities, museums, sporting facilities and various reserved
seating entertainment facilities.
The purchase of both Delta and GIS brought a significant install base to
the Company which among other benefits included significant additional annual
maintenance revenues. The combination of diversity of product capability in the
various entertainment marketplaces and the goodwill and sales reference impact
of its install base made the acquisitions very desirable. Management believes
that the quality of the acquired install base, which includes a number of high
profile facilities, will have a positive impact on its future sales efforts.
These factors have allowed the Company to enter markets not previously
accessible to it or that were not cost effective. As a result of the Delta and
GIS acquisitions, revenues did substantially increase during 1995. However, as
anticipated, the acquisition costs, both in time and money, and the costs of
integrating the operations and personnel of these separate companies was
expensive and the increased costs related to the integration process together
with other costs related to the other changes in the Company referred to above
more than offset the increased revenues.
Due to the Company's net loss for 1995 of $4,206,782 and its history of
operating losses which have accumulated to $11,785,356 at December 31, 1995,
along with the Company's need for additional financing and/or capital infusion
to fund operations for 1996 and to satisfy its cash obligations, our independent
certified public accountants had originally qualified their accountants' report
dated April 12, 1996 on the Company's 1995 financial statements as to a going
concern uncertainty. However, subsequent to March 31, 1996 the Company
successfully completed two private placements with the Company receiving (net of
commission and offering expenses) $1,271,982 from March 27, 1996 through April
15, 1996 and an additional $178,000 from April 16, 1996 through April 22, 1996
for a total of $1,450,582 from the first private placement and an additional
$5,172,500 from June 10, 1996 through June 27, 1996 from the second private
placement for a total of $6,623,082 of capital raised subsequent to year end.
Accordingly, the auditors have removed their going concern qualification. The
following commentary within "Management's Discussion and Analysis" addresses the
Company's operations for 1995 and its plan to reduce operating losses and its
success in obtaining a capital infusion. These matters are also discussed in
Note 3 to the financial statements.
RESULTS OF OPERATIONS: 1995 COMPARED TO 1994
Revenues:
Revenues increased to $2,835,206 in 1995 from $1,047,414 in 1994,
representing a $1,787,792, or 171%, increase. Revenues consisted of system sales
and installations of $2,508,206 in 1995 and $885,102 in 1994, and maintenance
and support of $300,000 in 1995 and $162,312 in 1994. The increase in system
sales and installations (over sixty installations in 1995 and less than six
installations in 1994) was primarily attributable to marketing activities from
an increased sales staff, from the Company's enhanced products, and from new
market accessibility as a result of the acquisitions of Delta and GIS.
In 1995, the Company's principal products Select-a-Seat, Admits Platinum
and Admits Gold represented approximately 39%, 28% and 11% of revenues,
respectively. In 1994 the principal product represented 85% of revenues.
Maintenance and support represented 11% and 15% of revenues in 1995 and 1994,
respectively. In 1996, the Company anticipates a similar product mix for
Select-a-Seat and Admits Platinum with Admits Gold increasing to approximately
20% of revenues. While maintenance and support revenue for 1996 is expected to
increase, its percentage of total revenues is not expected to increase.
-3-
<PAGE>
In 1995, no customers represented 10% or more of revenues. As the total
customer base grows the likelihood of having certain customers exceed 10% of
total revenues in future years is reduced. In 1994, two major customers
represented 48% and 10% of total revenues, respectively.
Although no assurances can be given, based on actual sales for the first
two months of 1996 and committed sales orders to date, revenues for 1996 will be
at least at the level achieved in 1995, with greater revenues being targeted.
The foregoing is a forward looking statement contingent upon no cancellation of
existing sales orders and the receipt of future sales orders at the current
rate.
Cost of Revenues:
Cost of revenues in 1995 included the costs associated with the hardware
and software acquired for the Company's customers and the estimated direct costs
associated with the engineering and installation of the systems, and the
provision of customer support. While the Company believes that the estimated
direct costs are reasonably stated and classified in all material respects, the
Company plans to further refine its procedures for capturing and reporting this
information in 1996. Such refinement could, to some extent, affect the
comparability of this information.
In 1994, cost of revenues included principally the third party hardware and
software acquired for customer installations and support. The estimated direct
costs associated with engineering and installing systems and providing customer
support were not specifically categorized and reported as cost of revenues. In
1994, such costs were included in development costs. In 1995, approximately
$900,000 of these categories of costs were separately identified and classified
as cost of revenues.
For discussion purposes herein, cost of revenues will exclude the amounts
of direct cost allocated from development costs to cost of revenues in 1995.
Cost of revenues (exclusive of direct costs) increased to $1,522,440
($2,422,440 less $900,000 of direct costs in 1995) from $914,838 in 1994,
representing a $607,602, or 66%, increase. The increase resulted from the costs
related to increased sales. As a percentage of revenues, cost of revenues in
1995 was 54% of revenues compared to 87% of revenues in 1994. The ratio of cost
of revenues to revenues is a function of whether the sales or services are
hardware or software intensive. Hardware sales result in lower gross margins as
hardware is not developed by the Company but acquired, as is certain software,
for the customers. Sales of the Company's software and related systems
development and support activities provides the Company greater gross margins.
In addition, the Company's ability to price its products and services favorably
impacts gross margins and therefore the cost of revenues percentage. These
factors contributed to the change in the cost of revenues to revenues percentage
between 1995 and 1994 since in 1995 a greater percentage of revenues was made up
of systems development and support.
-4-
<PAGE>
Development Costs:
Development costs increased to $1,485,348 ($585,348 plus $900,000 of direct
costs) in 1995 from $345,379 in 1994, an increase of $1,139,929, or 330%. As a
percentage of revenues, development cost increased to 52% in 1995 from 33% in
1994. The increase reflects the increased revenues in 1995, the costs of
development of four new products and the integration costs associated with
integrating products of the Company, GIS and Delta. The Company intends to
continue to develop products and enhance existing products to ensure competitive
viability in the marketplace.
Selling, General and Administrative:
Selling, general and administrative expenses increased to $4,082,914 in
1995 from $2,091,116 in 1994, representing a $1,991,798, or 95% increase. As a
percentage of revenues, these expenses were 144% in 1995 and 200% in 1994 which
reflects the increase in revenues in 1995.
The principal components of the $1,991,798 increase in selling, general and
administrative in 1995 as compared to 1994 are described below:
Sales and marketing expenses increased to $1,036,506 in 1995 from $525,180
in 1994, representing a $511,326 increase. This increase was attributed to
increased salaries and commissions of $338,756 and travel and entertainment of
$95,129 associated with the Company's increased marketing efforts in 1995. The
significantly increased marketing efforts are partly responsible for increased
revenues in 1995 and should also benefit future period results.
General and administrative expenses increased to $3,046,408 in 1995 from
$1,565,936 in 1994, representing a $1,480,472 increase. The principal components
of the increase are as follows:
* Amortization of intangibles in the amount of $515,078 related to the Delta
and GIS acquisitions (none in 1994).
* $427,731 of legal costs associated with various items, including matters
related to Delta and GIS which were not capitalized, Securities and
Exchange Commission filings and related contracts and agreements, and
defense of legal actions. In 1994, approximately $80,000 of legal costs
were incurred, excluding legal fees related to the 1994 public offering
which were netted against the offerings' proceeds.
* $98,148 of bad debt expense related to increased revenues. In 1994, bad
debt expense was $44,965.
* $112,500 of executive compensation associated with the granting of
non-qualified stock options.
-5-
<PAGE>
Other Income (Expense):
Interest expense decreased to $45,061 in 1995 from $80,035 in 1994,
reflecting in part the payment and/or conversion to stock of certain of the
Company's debt existing in 1994.
Net other income (expense) increased to $93,775 in 1995 from ($18,430) in
1994, an increase of $112,205. The increase is composed of an increase in
earnings from an equity interest in a joint venture of $85,496 (See Note 2 to
the financial statements), an increase in interest income of $10,232, and an
increase in miscellaneous income of $16,475.
Income Taxes:
The Company currently has substantial net operating loss carry forward for
which the Company has not recognized a tax benefit due to the uncertainty
related to when and how much of the tax benefits will be ultimately realized
(See Note 10 to the financial statements).
Net Loss:
Net loss increased to $4,206,782 ($1.39 a share) in 1995 from $2,402,384
($1.62 a share) in 1994. As discussed above, the Company believes that 1995
operations were impacted by various factors including the integration process
involved with combining the Company with Delta and GIS.
The Company incurred total compensation expense and related costs of
$2,361,280 in 1995 compared to $1,477,268 in 1994, an increase of $884,012 or
60%. A portion of this increase was attributable to the integration process. As
a result of substantially completing this integration process in 1995, the
Company was able to curtail or eliminate in many cases the use of consultants by
December 31, 1995. Although no assurances can be given, based on actual
compensation expense and related costs for the first two months of 1996 and
management's plan for 1996, reduced levels of these costs are expected to
maintain the current sales level described earlier. The foregoing is a forward
looking statement contingent on several factors including: no unexpected
turnover of personnel; no need for additional expenses for unbudgeted personnel;
and no unexpected adjustment to compensation levels currently being paid.
FINANCIAL CONDITION: 1995 COMPARED TO 1994
Total assets increased to $6,406,236 on December 31, 1995 from $3,478,831
on December 31, 1994, representing an increase of $2,927,405, or 84%. The
principal contributing factor to the increase was the acquisition of GIS
effective January, 1995. On December 31, 1995 the balance sheet reflects
intangibles of $3,229,000 (e.g., goodwill) related to the acquisition.
Total liabilities increased to $4,719,465 on December 31, 1995 from
$1,920,339 on December 31, 1994, representing an increase of $2,799,126, or
146%. The principal contributing factors to the increase are the $2,324,335
promissory notes associated with the GIS acquisition subsequently repaid at a
substantial discount, (See Note 4 to the financial statements and "Liquidity and
Capital Resources" below), and the increase in deferred revenues of $667,406
($729,406 in 1995 and $62,000 in 1994), resulting from increased revenues.
-6-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of
In March 1994, the Financial Accounting Standards Board issued the SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles held and used by the entity along with goodwill
should be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum
of the expected future cash flows (undiscounted and without interest) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the asset. SFAS No.
121 also generally required long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of the carrying amount
or the fair value less cost to sell. SFAS No. 121 will be effective for the
Company's 1996 fiscal year. The Company has not finalized its assessment of the
potential impact of adopting SFAS No. 121 at this time; however, on a
preliminary basis management does not believe the impact will be material to the
financial statements.
Accounting for Stock Based Compensation
SFAS No. 123 Accounting for Stock Based Compensation was issued by the
Financial Accounting Standards Board in October 1995. As it relates to stock
options granted to employees, SFAS No. 123 permits companies to continue using
the accounting method promulgated by the Accounting Principals Board Opinion No.
25 ("APB No. 25"), Accounting for Stock Issued to Employees, to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. SFAS No. 123's accounting
recognition method can be adopted anytime subsequent to the issuance of the
Statement in October 1995, and would pertain to stock option awards granted or
modified or settled for cash after the date of adoption. If the Company elects
to continue using the method under APB No. 25, SFAS No. 123's pro forma
disclosures are required after December 31, 1995. Management has not completely
analyzed the provisions of SFAS No. 123; accordingly, management has not
determined whether or not SFAS No. 123's accounting recognition provisions will
be adopted or APB No. 25's method will be continued. In addition, management has
not yet determined the potential effect that SFAS No. 123's accounting
provisions, if adopted, will have on the Company's financial statements.
-7-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flow for 1995
and 1994:
1995 1994
Net cash used in operating activities $(2,833,237) $(1,631,156)
Net cash used in investing activities (708,917) (675,531)
Net cash provided by financing activities 2,608,823 3,881,147
------------ ------------
Net increase(decrease) in cash
And cash equivalents $ (933,331) $ 1,574,460
============ ============
The Company used cash of $2,833,237 in 1995 and $1,631,156 in 1994 for
operating activities. From its inception in October 1985 through December 31,
1995, the Company incurred a cumulative loss of $11,785,356 with a loss of
$4,206,782 for the year ended December 31, 1995. The Company's net loss of
$4,206,782 in 1995 was due primarily to expenditures related to the factors
referred to under the caption "Results of Operations: 1995 Compared to 1994"
above. Included in the net loss for 1995 were non-cash expenses and income
totaling $1,034,175 which included (i) depreciation/amortization expenses of
$575,985, and (ii) equity-related transactions totaling $487,250 of compensation
expense recognized from the grant of stock options. Cash which was used to
purchase items classified as current assets increased by $480,110 with accounts
receivable increasing by $505,141, investment in inventories increasing by
$115,022 and prepaid expenses and insurance decreasing by $140,053. These uses
of cash were offset by an increase in accounts payable and accrued expenses of
$152,074 and an increase in deferred revenue of $667,406.
The Company used cash for investment purposes in the amounts of $708,917 in
1995 and $675,531 in 1994 principally related to the acquisition of GIS
($559,000) and Delta ($500,000), respectively.
The Company was provided cash by financing activities of $2,608,823 in 1995
and $3,881,147 in 1994. The Company relied on net proceeds from public and
private offerings and loans and advances from related parties to fund its
operations during 1995 and 1994. A private offering in 1995 and a public
offering in 1994, provided $1,870,976 and $3,906,002, respectively. The
Company's private placement of 208,600 shares of non-transferable, convertible
Series D Preferred Stock was completed October 1995.
In 1995 the Company borrowed $859,505, consisting of $559,505 as an
unsecured cash advance from two former shareholders as evidenced by a promissory
note due October 1996, at an annual interest rate of 8%, and $300,000 as an
additional unsecured cash advance from the same parties evidenced by a
convertible secured promissory note due March 30, 1996, at an annual interest
rate of 9.5%. In June 1995, the Company issued 79,950 shares of its Series A
Preferred Stock in satisfaction of the $559,505 promissory note and $200,000 of
additional note payables outstanding since 1994. In 1994 loans from the same
individuals provided $1,259,505 to the Company all but $200,000 of which had
been previously repaid.
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<PAGE>
In February 1995, the Company acquired substantially all of the assets of
GIS for an aggregate consideration of approximately $3,700,000. The purchase
price consisted of 109,333 shares of the Company's Common Stock valued at
$765,331, 111,800 shares of the Company's Series B Preferred Stock valued at
$559,000, and the Company's unsecured, non-interest bearing promissory notes in
the aggregate amount of $2,324,335. In addition, the Company agreed to assume
certain liabilities of GIS and loaned GIS $559,000 as evidenced by a promissory
note from GIS due March 31, 1996, which was secured by the pledge to the Company
of the 111,800 shares of the Company's Series B Preferred Stock.
On March 11, 1996, the Company and GIS Systems Limited Partnership executed
an agreement whereby the parties agreed to, among other things, settle the
remaining obligation to GIS totaling $2,324,335 at a discount, cancel the
$559,000 note receivable from GIS, cancel the $199,359 account receivable from
GIS, and redeem the 109,333 shares of Common Stock and 111,800 shares of Series
B Preferred Stock previously issued to GIS. In connection therewith, the Company
agreed to pay to GIS the sum of $1,550,000.
The cash payment of $1,550,000 made to GIS on April 12, 1996, the date of
closing, was principally provided from the net proceeds of the April 1996
Private Placement described below.
On March 27, 1996, the Company commenced a Private Placement of the
Company's newly established Series E Preferred Stock at $10.00 per share.
Through April 15, 1996, the Company received $1,271,982 and from April 16, 1996
through April 22, 1996, the Company received $178,000 for a total of $1,450,582,
net of commissions and offering expenses, for the sale of 162,500 shares of
preferred stock. As of April 22, 1996, the Private Placement was considered
complete. As of June 28, 1996, 150,000 shares of the Series E Preferred Stock
had been converted into 2,453,686 shares of the Company's Common Stock
subsequent to year end.
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 Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 such shares. Also, on June 27, 1996, the Company used $300,000 of the
proceeds of the Series F Preferred Stock Private Placement to pay off the notes
payable to related parties and on June 28, 1996 the Company used $1,000,000 of
the proceeds to redeem 95,950 shares of Series A Convertible Preferred Stock
held by the same party. These preferred shares were potentially convertible into
2,636,126 shares of Common Stock had they not been redeemed.
Each share of Series F Preferred Stock is also convertible into the
Company's Common Stock, at a conversion price which is tied to the trading price
of the Company's Common Stock at the time of conversion; provided, however, that
for purposes of such conversion, a trading price which is less than $.45 per
share will be deemed to be $.45 and a trading price which is more than $1.00 per
share will be deemed to be $1.00.
Upon payment of the $300,000 note and redemption of the Series A
Convertible Preferred Stock, each of which was held by the same private
investors, three members of the Company's board of directors (Stewart L. Krug,
Lawrence Umstadter and Timothy Mahoney) who were nominated by such private
investors and served at their request, resigned from the board. The Company
intends to fill the vacancies created by such resignations once qualified
replacements have been identified.
While no assurances can be given, management believes that the current
organization infrastructure and the Company's products are sufficient to support
revenues greater than the levels achieved in 1995. In addition, while no
assurances can be given, management believes that the Company's operations
should continue to progress throughout 1996 and that the net proceeds from the
April 1996 Private Placement and the operating revenues from sales in 1996
should be sufficient to fund operations through 1996.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the
year ended December 31, 1995, which include the following items:
PAGE
Report of Independent Certified Public Accountants ............. F-1
Consolidated Balance Sheets......................................F-2
Consolidated Statements of Operations............................F-3
Consolidated Statements of Stockholders' Equity (Deficit)........F-4
Consolidated Statements of Cash Flows............................F-5
Notes to Consolidated Financial Statements ......................F-7
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LASERGATE SYSTEMS, INC.
AND SUBSIDIARIES
December 31, 1995 and 1994
<PAGE>
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-7
<PAGE>
(GRANT THORNTON LLP Letterhead)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lasergate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lasergate
Systems, Inc. And Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating an overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lasergate Systems, Inc. and
Subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
In our report, dated April 12, 1996 (except for Paragraph 10 of Note 3 and Note
16, as to which the date was April 15, 1996), on the financial statements as of
and for the year ended December 31, 1995, we had indicated in a separate
explanatory paragraph that there was a substantial doubt about the Company's
ability to continue as a going concern unless additional financing and/or
capital infusion was obtained. As described in Note 3 to the financial
statements, on June 28, 1996 the Company completed two private placements, thus
obtaining the additional capital infusion. Accordingly, our report, as presented
herein, does not contain the separate paragraph pertaining to the going concern
uncertainty which was included in our previously issued report.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
April 12, 1996, (Except for Note 3 and Note 16,
as to which the date is June 28, 1996)
F-1
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1995 1994
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 656,506 $ 1,589,837
Accounts receivable, net of allowance for
doubtful accounts of $36,000 and $17,000 439,311 152,529
Account receivable, related party 199,359 -
Inventories 325,664 124,680
Prepaid expenses 84,392 116,948
------------ -----------
Total current assets 1,705,232 1,983,994
Property and equipment, net 246,568 96,993
Systems and software costs, net of amortization of
$283,333 and $-0- 1,416,667 529,558
Goodwill, net of amortization of $132,579 and $-0- 2,515,694 536,919
Customer lists and support contracts, net of amortization of
$70,833 and $-0- 354,167 125,000
Other assets, net 167,908 206,367
------------ -----------
$ 6,406,236 $ 3,478,831
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, related parties $ 300,000 $ -
Notes payable, other 21,757 74,910
Accounts payable, trade 634,863 530,260
Deferred revenues 729,406 62,000
Accrued product costs 297,000 281,075
Accrued expenses 272,104 112,094
------------ -----------
Total current liabilities 2,255,130 1,060,339
Notes payable, related party - 200,000
Promissory notes payable, stockholders with conversion futures 2,324,335 -
Obligations to issue common stock and common stock options - 450,000
Common stock subject to put options 140,000 210,000
------------ -----------
Total liabilities 4,719,465 1,920,339
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
authorized, 387,750 and 36,364 shares issued and
outstanding at December 31, 1995 and 1994, respectively 11,633 1,091
Common stock, $.03 par value, 20,000,000 shares authorized,
3,125,013 and 2,913,680 issued and outstanding at
December 31, 1995 and 1994, respectively 93,751 87,412
Additional paid-in capital 14,065,743 9,258,563
Less: Common stock, $.03 par value, 20,000 and 30,000 shares
at December 31, 1995 and 1994, respectively,
subject to put options (140,000) (210,000)
Notes receivable, stockholders (559,000) -
Accumulated deficit (11,785,356) (7,578,574)
----------- -----------
1,686,771 1,558,492
----------- -----------
$ 6,406,236 $ 3,478,831
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Revenues $ 2,835,206 $ 1,047,414
Operating Expenses:
Cost of revenues 2,422,440 914,838
Development 585,348 345,379
Selling, general and administrative 4,082,914 2,091,116
----------- -----------
Operating loss (4,255,496) (2,303,919)
Other income (expense)
Interest expense (45,061) (80,035)
Other, net 93,775 (18,430)
----------- -----------
Loss before income taxes (4,206,782) (2,402,384)
Income taxes - -
----------- -----------
Net loss $(4,206,782) $(2,402,384)
=========== ===========
Net loss per common share $ (1.39) $ (1.62)
=========== ===========
Weighted Average Common Stock Outstanding 3,023,346 1,487,246
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ---------------- Common
Stock Notes
Additional Subject Receivables Accu-
Par Par Paid-in to Put Stock- mulated
Shares Value Shares Value Capital Option holders Deficit
-------- ------ ---------- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 424,032 $12,721 $3,648,676 $(5,176,190)
Issuance of common stock at $.36-$.50 per
share for performance awards and services
Executives and/or major stockholders 290,483 8,715 95,860
Financing costs, executives 37,907 1,137 12,510
Major stockholders (related to December 31,
1993 obligation) 833,333 25,000 275,000
Major stockholders 200,000 6,000 94,000
Cancellation of options
Executives 26,667 800 8,800
Other 10,000 300 3,300
Issuance of common stock at $5.00 per share for
satisfaction of debt
Executives 36,083 1,083 179,336
Employees 13,925 418 69,208
Employment services contributed by
officers/stockholders 83,200
Issuance of units in secondary public offering
at $4.95 per unit (net of underwriter's
discount/commissions), less offering expenses
of $647,998 920,000 27,600 3,878,402
Exercise of warrants 21,250 638 14,362
Issuance of common stock at $7.00 per share in
connection with Delta acquisition 100,000 3,000 697,000
Issuance of Series A preferred stock for
satisfaction of notes payable
Major stockholders 36,364 $1,091 198,909
Common stock (30,000 shares) subject to put
option at $7.00 per share (210,000)
Net loss (2,402,384)
-------- ------ ---------- ------- ---------- -------- ------- ---------
Balance, December 31, 1994 36,364 1,091 2,913,680 87,412 9,258,563 (210,000) (7,578,574)
-------- ------ ---------- ------- ---------- -------- ------- ---------
Issuance of common stock at $7.00 a share and
preferred stock at $5.00 per share in
connection with GIS acquisition 111,800 3,353 109,333 3,279 1,317,697
Less: note receivable collateralized by preferred
stock (559,000)
Issuance of preferred stock in Private Placement at
$10 per share less offering expenses of $215,024 208,600 6,258 1,864,718
Grants of stock options for 1994 and 1995
executive compensation 937,250
Conversion of preferred to common stock (28,600) (858) 110,000 3,300 (2,442)
Issuance of common stock for satisfaction of
notes payable, related party 79,950 2,400 757,106
Exchange of preferred stock (36,364) (1,091)
16,000 480 611
Issuance of common stock under stock option plan 2,000 60 1,940
Exercise of common stock put option (10,000) (300) (69,700) 70,000
Net loss - - - - - - - (4,206,782
-------- ------ ---------- ------- ---------- -------- ------- ---------
Balance, December 31, 1995 387,750 $11,633 3,125,013 $93,751 $14,065,743 $(140,000) $(559,000)$(11,715,356
======== ====== ========== ======= ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,206,782) $(2,402,384)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization of property and equipment 59,778 7,433
Amortization of intangibles 516,207 74,637
(Gain) loss in joint venture (48,060) 37,486
Increase (decrease) in allowance for doubtful accounts 19,000 (70,855)
Common stock issued principally for services - 131,422
Obligations to issue options granted as
compensation for services (75,000) 450,000
Compensation recognized from grant of stock options 562,250 -
Employment services contributed by officers/stockholders - 83,200
Financing costs satisfied and to be satisfied by issuance
of common stock - 100,000
Decrease (increase) in:
Accounts receivable, trade (305,782) 70,107
Account receivable, related party (199,359) -
Inventories (115,022) (46,423)
Prepaid expenses 53,028 (116,849)
Other (principally related to prepaid insurance) 87,025 (65,313)
Increase (decrease) in:
Accounts payable and accrued expenses 136,149 (130,422)
Accrued product costs 15,925 281,075
Deferred revenue 667,406 (34,270)
----------- ----------
Net cash used in operating activities (2,833,237) (1,631,156)
----------- ----------
Cash flows from investing activities:
Additions to property and equipment (121,772) (82,213)
Loan to GIS stockholders related to GIS acquisition (559,000) -
Advances to joint venture - (63,761)
Acquisition of Delta - (500,000)
Other acquisition costs (28,145) -
Other - (29,557)
----------- ----------
Net cash used in investing activities (708,917) (675,531)
----------- ----------
Cash flows from financing activities:
Proceeds from secondary public or private offering, net of
offering costs 1,870,976 3,906,002
Proceeds from exercise of warrants/stock options 2,000 15,000
Repurchase of common stock subject to put option (70,000) -
Proceeds from loans, other 36,924 95,584
Proceeds from loans, related parties 859,000 1,259,505
Repayment of loans, related parties - (887,005)
Repayment of loans, other (90,077) (120,674)
Repayment of loans, bank - (387,265)
----------- ----------
Net cash provided by financing activities 2,608,823 3,881,147
----------- ----------
Net increase (decrease) in cash and cash equivalents (933,331) 1,574,460
Cash and cash equivalents, beginning of year 1,589,837 15,377
----------- ----------
Cash and cash equivalents, end of year $ 656,506 $1,589,837
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1995 and 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
Year ended December 31,
--------------------------------
1995 1994
---- ----
Interest $31,155 $81,847
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1995:
The Company acquired substantially all the assets of GIS Systems Limited
Partnership for total consideration of approximately $3,700,000 (common stock of
$765,331, preferred stock of $559,000, and promissory note of $2,324,335) and
recorded assets at aggregate fair value of approximately $3,750,000, with
assumed payables of approximately $50,000.
The Company issued 79,950 shares of preferred stock in satisfaction of related
party notes payable of $759,505.
1994:
The Company issued 833,333 shares of common stock in satisfaction of an
obligation to issue the common stock which existed at December 31, 1993 for
financing costs of $300,000 recorded for the year ended December 31, 1993.
During June 1994, current liabilities totaling $250,044 were converted into
50,008 shares of common stock ($5.00 per share).
The Company acquired Delta Information Services, Inc. for total consideration of
$1,200,000 (cash of $500,000 and common stock of $700,000) and recorded
intangible assets at an aggregate fair value of $1,200,000. No liabilities were
assumed in the transaction (see Note 4).
The Company issued 36,364 shares of Series A preferred stock to two major
stockholders of the Company in satisfaction of $200,000 of debt owed to them by
the Company.
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (LSI) (the "Company") was organized and incorporated in
the State of Florida in 1985. The Company is engaged in the development,
assembly, marketing, servicing and installation of admission control and revenue
accounting systems for both general admission and reserve seating. These systems
are used primarily at amusement parks, theme parks, water parks, night clubs and
other public facilities including state, county and local fairs, theaters,
professional and university athletic and multi-purpose arenas, movie theaters,
aquariums, race tracks, museums, zoos, casinos, ski resorts and golf courses.
The Company's principal products "Select-a-Seat", "Admits Platinum" and "Admits
Gold", represent approximately 39%, 28% and 11% of revenues in 1995,
respectively.
In March 1993, the Company formed a joint venture (Lasergate Systems
Asia-Pacific Pty. Limited) with PMSI Group Pty. Limited, an Australian company,
to market and sell products of Lasergate Systems, Inc. (see Note 2).
In December 1994, the Company formed Lasergate Systems Canada Company to
facilitate the acquisition of Delta Information Services, Inc. (Delta) (see Note
4).
Effective January 1995, the Company acquired substantially all the assets of GIS
Systems Limited Partnership (GIS) (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Lasergate Systems, Inc. (the Company) and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. While
actual results could differ from those estimates, management does not expect the
variances, if any, to have a material effect on the financial statements.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined principally by the use of the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided using
the straight-line method over the estimated economic useful lives (5-10 years)
for financial statement and income tax purposes.
SYSTEMS AND SOFTWARE COSTS
Systems and software costs represent the fair values assigned in connection with
the Company's acquisition of GIS and Delta in December 1994 and January 1995
(see Note 4). Such costs are amortized on a product-by-product basis. The annual
amortization expense is the greater of the amount computed using the ratio that
current gross revenues for each product bear to the total of current and
anticipated future gross revenues for that product or the straight-line method
over the remaining estimated economic life (6 years) of the product.
The Company's expenditures related to the development of its systems and
software along with the cost to integrate GIS and Delta products with the
Company's products in 1995 have been expensed and included in development costs.
No amounts have been capitalized by the Company during 1995 and 1994, except
those recorded as a result of the GIS and Delta acquisitions, since either the
amounts qualifying for capitalization under Statement of Financial Accounting
Standards (SFAS) No. 86 "Accounting for Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" once technological feasibility (as defined) has
been achieved, have been insignificant or the customer specifically funded the
development of the unique and discrete systems and software through the customer
contract.
F-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INTANGIBLES
Intangibles which were recognized in connection with the Company's acquisition
of GIS and Delta in 1995 and 1994, respectively, relate to systems and software
costs (see above), non-competition agreements, customer list and support
contracts, and goodwill. Such costs have been and are being amortized using the
straight-line method over their respective estimated useful lives: systems and
software costs (see above), non-competition agreements--three (3) years,
customer list and support contracts--six (6) years, and goodwill--twenty (20)
years. Amortization expense for 1995 was $516,207 and is included in selling,
general and administrative expenses. Management reviews, at least on a quarterly
basis, whether or not any impairment has occurred with respect to such acquired
intangibles which could warrant an adjustment to the carrying values.
Undiscounted cash flow projections associated with the acquired business is the
primary focal point in the assessment and analysis for potential impairment.
During 1995 and 1994, no impairment has been identified.
INVESTMENT IN JOINT VENTURE
The Company uses the equity method of accounting for its 50% investment in
Lasergate Systems Asia-Pacific Pty. Limited. At December 31, 1995 and 1994, and
for the years then ended, the joint venture's assets, liabilities and results of
operations are not significant. The Company's investment in/advances to ($77,790
and $29,730) and share of the joint venture's net earnings (loss) from
operations ($48,060 and $(37,436)) are classified in other assets and other
income (expense), respectively, in the accompanying consolidated financial
statements for 1995 and 1994, respectively. The Company has not guaranteed any
of the joint venture's liabilities nor does the Company have any commitments to
fund its operations.
PRODUCT COST LIABILITY
The Company has established a product cost liability. The Company has
historically offered a three month warranty for its products. For the period
commencing after the end of the warranty period, the Company had offered its
customers a maintenance and service contract for an annual fee. However, both
companies acquired, Delta and GIS, offered a one year warranty period followed
by a maintenance and service contract. The Company continued the one year
warranty practice throughout 1995. Effective June 1, 1996 the Company returned
to its original 90 day warranty period.
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In early 1995, the Company intended to install the "Delta" product at all of the
original "Lasergate" product sites. The Company had reserved $281,000 at
December 31, 1994 for the conversions. However, the Company was ultimately able
to enhance the Lasergate product at many of these sites which made
reinstallation unnecessary. As a result, only $21,400 was spent in 1995 for
required conversions. The remaining original Lasergate sites present upgrade
opportunities in 1996 and $57,000 has been reserved to accomplish the upgrades.
In 1996, the Company intends to enhance, at no charge to their customers,
several of the original Delta and GIS sites and has reserved $240,000 at
December 31, 1995 to accomplish this. While these enhancements are likely to
result in future product and service revenues, no absolute assurance can be
given at this time.
Product cost provisions are classified as cost of revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995, the carrying amount of cash, accounts receivable, accounts
payable and accrued expenses and notes payable, approximate fair value because
of the short-term maturities of these assets and liabilities.
REVENUE RECOGNITION
Revenues from the sale of equipment, which have been predominately under
short-term contracts during the periods presented herein, are recognized upon
the acceptance of the system by the customer provided that no significant vendor
or post-contract support obligations remain outstanding and collection of the
resulting receivable is probable. Revenues from special sales sold under
evaluation periods are recognized at the end of this period.
Revenues from post contract customer support arrangements are recognized ratably
over the contract period if collectibility is probable.
Revenues include product sales and service revenues. Service revenues represent
approximately 11% and 15%, respectively, of total revenues in 1995 and 1994.
Deferred revenues include customer deposits of $384,731 and $62,000 and advanced
billings in accordance with contract terms of $344,675 and $-0- at December 31,
1995 and 1994, respectively.
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts. While the Company
believes that the estimated direct costs are reasonably stated and classified in
all material respects, the Company intends to further refine its procedures of
capturing and reporting this information in 1996. Such refinement could, to some
extent, effect the comparability of the information being reported on.
During 1994 and 1995, certain of the Company's contracts with customers afforded
the Company the opportunity to develop products for their customers which were
also new products for the Company not subject to exclusive arrangements with the
customers. The resulting cost of these products is included in development costs
versus cost of revenues along with other development costs related to
enhancement of existing products during 1995.
In 1994, cost of revenues included principally the hardware and software
acquired for customer installations and support. The estimated direct costs
associated with engineering and installing systems and providing customer
support were not specifically categorized and reported as cost of revenues as
was done in 1995. In 1994, such costs were included in development costs. In
1995, approximately $900,000 of these types of costs were separately identified
and classified as cost of revenues.
INCOME TAXES
Under the liability method specified in Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during the periods. Common stock equivalents (options and warrants)
and the effect of the convertible securities were not included in the
calculation of net loss per share because they were either antidilutive and/or
insignificant.
RECLASSIFICATIONS
Certain reclassifications of accounts and amounts have been made to the 1994
financial statements to conform to the 1995 presentation.
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of
In March 1994, the Financial Accounting Standards Board issued the SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity along with goodwill should
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest) is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset. SFAS No. 121 also
generally required long-lived assets and certain identifiable intangibles to be
disposed of to be reported at the lower of the carrying amount or the fair value
less cost to sell. SFAS No. 121 will be effective for the Company's 1996 fiscal
year. The Company has not finalized its assessment of the potential impact of
adopting SFAS No. 121 at this time; however, on a preliminary basis management
does not believe the impact will be material to the financial statements.
Accounting for Stock Based Compensation
SFAS No. 123 Accounting for Stock Based Compensation was issued by the Financial
Accounting Standards Board in October 1995. As it relates to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principals Board Opinion No. 25
("APB No. 25"), Accounting for Stock Issued to Employees, to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. SFAS No. 123's accounting
recognition method can be adopted anytime subsequent to the issuance of the
Statement in October 1995, and would pertain to stock option awards granted or
modified or settled for cash after the date of adoption. If the Company elects
to continue using the method under APB No. 25, SFAS No. 123's pro forma
disclosures are required after December 31, 1995. Management has not completely
analyzed the provisions of SFAS No. 123; accordingly, management has not
determined whether or not SFAS No. 123's accounting recognition provisions will
be adopted or APB No. 25's method will be continued. In addition, management has
not yet determined the potential effect that SFAS No. 123's accounting
provisions, if adopted, will have on the Company's financial statements.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
For the year ended December 31, 1995, the Company incurred a loss of $4,206,782
and has an accumulated deficit of $11,785,356 at December 31, 1995 and used cash
in operating activities of $2,833,237 during 1995. In addition, current
liabilities exceeded current assets by $ 549,898 at December 31, 1995.
In recent years the Company has had to rely on proceeds from private and public
placements and loans (some of which were converted to stock) from former
principal stockholders to fund its operations. (See Statements of Cash Flows).
A number of significant events have had a material impact on the Company's 1995
operating results, and its future prospects. The significant events included
replacement of all of the Company's senior executives, including the
President/CEO (late 1994) as well as most of its other personnel, two
acquisitions which included an additional customer base responsibility of over
200 locations, integration of personnel from both acquired companies, various
related product integration and development efforts and a physical relocation to
consolidate the operations and personnel of all companies. These events were
expensive in terms of both time and money and took considerable attention from
the management team to focus on these activities.
Although revenues increased to $2,835,206 in 1995 from $1,047,414 in 1994, the
increased costs related to the integration process together with the other costs
related to the other changes at the Company referred to above more than offset
the increased revenues. The acquisitions and integration of Delta and the
business assets of GIS also resulted in increased consulting, legal and
accounting expenses and other non-recurring operating expenses.
Personnel related expenses, including fees paid to consultants holding key
positions in sales, marketing and technical areas totaled $2,361,280. However,
as the integration process progressed in 1995, the Company was able to curtail
or eliminate in many cases the use of consultants by the end of 1995. By
December 31, 1995 personnel in the Company totaled 27 individuals and several
consultants. The current staffing level at June 30, 1996 is 34.
Although no assurances can be given, based on actual compensation expense and
related costs for the first three months of 1996 (unaudited) and management's
plan for 1996, reduced levels of these costs are expected to maintain the
current sales level described below. The foregoing is a forward looking
statement contingent on several factors including: no unexpected turnover of
personnel; no need for additional expenses for unbudgeted personnel; and no
unexpected adjustment to compensation levels currently being paid.
Although no assurances can be given, based on actual sales for the first three
months of 1996 (unaudited) and committed sales orders to date (unaudited),
revenues for 1996 will be at least at the level achieved in 1995, with greater
revenues being targeted. The foregoing is a forward looking statement contingent
upon no cancellation of existing sales orders and the receipt of future sales
orders at the current rate.
On March 27, 1996, the Company commenced a Private Placement of the Company's
newly established Series E Convertible Preferred Stock at $10.00 per share.
Through April 22, 1996 (the date on which the offering terminated), the Company
received $1,450,582, net of commissions and offering expenses, for the sale of
162,500 shares of preferred stock (see Note 16).
On April 12, 1996, the Company paid GIS the sum of $1,550,000 to settle the
remaining obligations to GIS at a substantial discount. This payment included
the redemption of 109,333 shares of common stock and 111,800 shares of Series B
Preferred Stock previously issued to GIS. (See Note 16).
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 Private Placement closed with the Company receiving
$5,172,500, net of commissions and offering expenses, for the sale of 8,000 such
shares (see Note 16).
Also, on June 27, 1996, the Company used $300,000 of the proceeds of the Series
F Private Placement to pay off the notes payable to related parties and on June
28, 1996 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 preferred
shares were potentially convertible into 2,636,126 shares of Common Stock had
they not been redeemed.
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 4 - ACQUISITION OF BUSINESSES
On February 15, 1995, effective January 1, 1995 (the date control transferred),
the Company acquired substantially all of the assets of GIS Systems Limited
Partnership ("GIS"). The purchase price for the acquisition was valued at
approximately $3,700,000. The purchase price consisted of 109,333 shares of the
Company's common stock valued at $765,331, 111,800 shares of the Company's
Series B Preferred Stock valued at $559,000, the Company's promissory note in
the principal amount of $591,000 (see Note 9) and the Company's promissory note
in the principal amount of $1,733,335 (see Note 9). In addition, the Company
agreed to assume certain liabilities of GIS (aggregating $45,718) and loaned GIS
$559,000 (see paragraph below). Direct acquisition costs aggregating $82,744
(principally legal and accounting fees) were incurred in connection with the
acquisition. The promissory notes, totalling $2,324,335, were convertible into
preferred stock and derived their valuation from the underlying preferred stock.
The common stock valuation of $7.00 per share and the preferred stock valuation
of $5.00 per share reflected the agreed-upon price between the buyer and sellers
and was approved by the Company's Board of Directors after giving effect to such
factors as the restrictions and the size of the blocks of common and preferred
stock.
The loan of $559,000 to GIS evidenced by a promissory note is secured by the
111,800 shares of the Company's Series B Preferred Stock and was due March 31,
1996. The sellers had the option of returning preferred stock if the assignable
call provision of $5.00 per share was not exercised. Accordingly, the note
receivable is presented as a reduction of stockholders' equity.
The total purchase price of GIS was allocated based on fair value of net
tangible assets acquired, with the excess allocated to identifiable intangible
components based on their individual estimated fair values and the remainder was
allocated to goodwill.
The purchase price, including the direct acquisition costs, was allocated as
follows:
Inventory $ 85,962
Prepaid expenses and other current assets 20,472
Fixed assets 87,581
Accounts payables assumed (45,718)
Systems and software costs 1,200,000
Customer list and support contracts 300,000
Goodwill 2,083,113
--------------
$ 3,731,410
==============
See Note 16.
On December 22, 1994, Lasergate Systems Canada Company, a wholly-owned
subsidiary of the Company, acquired the capital stock of Delta Information
Services, Inc. (Delta) (a Canadian company) for aggregate consideration of
$1,200,000. The purchase price consisted of cash of $500,000 and a promissory
note of $700,000, convertible into 100,000 shares of the Company's unregistered
and restricted $.03 par value common stock valued at $7.00 a share. The common
stock valuation reflected the agreed-upon price between the buyer and seller and
was also determined by the Board of Directors after giving effect to such
factors as the restrictions and the size of the block of common stock, etc. The
promissory note was immediately converted into common stock in December 1994. In
addition, the Company incurred approximately $46,919 in direct acquisition costs
(principally legal and accounting fees). At the date of acquisition, Delta had
no tangible assets nor liabilities that were transferred to or assumed by the
Company.
The purchase price, including the direct acquisition costs, was allocated as
follows:
Computer software $ 500,000
Non-competition agreement 85,000
Customer list and support contracts 125,000
Goodwill 536,919
-----------
$ 1,246,919
===========
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 4 - ACQUISITION OF BUSINESSES - Continued
Pursuant to the acquisition of Delta, the Company effectively acquired a 50%
equity interest in Deltan Limited Partnership, which was inactive and had no
significant assets nor liabilities. In addition, the Company did not assume any
funding obligations and/or guarantees associated with their interest in the
limited partnership. Accordingly, the Company did not assign any value to the
partnership interest in the allocation of the purchase price of Delta.
The sellers were granted certain registration rights for two years with respect
to the shares of common stock issued and a put option to sell to the Company up
to 10,000 of the shares of the Company's common stock at $7.00 per share each
year for the next three years. The put option which has an aggregate value of
$210,000 has been classified as common stock subject to put options in the
consolidated balance sheets and represents the amount the Company would be
required to pay if all the put options were exercised. During 1995, 10,000
options were exercised resulting in $70,000 of common stock (10,000 shares)
being retired, leaving a remaining balance subject to put options at December
31, 1995, of $140,000.
The above two transactions have been accounted for as purchases in accordance
with APB No. 16 Business Combinations, accordingly, the results of Delta's and
GIS' operations have been included in the Company's consolidated financial
statements from the date of acquisition. The following are the unaudited pro
forma results of operations for the year ended December 1994, assuming the
transactions were effective January 1, 1994, after including the impact of
certain adjustments such as consulting fees, amortization of intangibles and
reduction of selling, general and administrative expenses (principally salaries
and wages and rent to reflect personnel not transferred and lease space not
assumed).
Delta and
Delta GIS GIS Combined
------------ ------------ ------------
Revenues $ 1,801,000 $ 4,473,000 $ 5,208,000
Net Income (Loss) $(2,521,000) $(2,322,000) $(2,440,000)
Income (Loss) per
Common Share $(1.50) $(1.45) $(1.37)
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the period presented and are
not intended to be a projection of future results of operations.
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 5 - INVENTORIES
Inventories as of December 31, consist of the following:
1995 1994
-------- -------
Installations-in-process $172,411 $111,016
Parts and systems 153,253 13,664
--------- --------
$325,664 $124,680
========= ========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, consist of the following:
1995 1994
-------- --------
Furniture and equipment $357,346 $167,061
Vehicles - 16,705
Purchased software 12,231 8,976
Test equipment 49,812 34,002
-------- --------
419,389 226,744
Less accumulated depreciation 172,821 129,751
-------- --------
$246,568 $ 96,993
======== ========
NOTE 7 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1995 1994
-------- -------
Non-competition agreement net of amortization
of $28,333 and $-0- $ 56,667 $ 85,000
Investment in and advances to joint venture 77,790 29,730
Other 33,451 91,637
-------- --------
$167,908 $206,367
======== ========
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 8 - NOTES PAYABLE
At December 31, 1995 and 1994, the Company had an outstanding balance of $21,757
and $74,910 under a premium financing agreement due in 1996, at an annual
interest rate of 9.25%.
At December 31, 1994, the Company had outstanding borrowings under promissory
notes payable to two former stockholders of $200,000 representing unsecured cash
advances due in October 1996, at an annual interest rate of 8%. In February
1995, the Company increased the borrowings to $759,505 which was subsequently
settled in full in June 1995 by the issuance of 79,950 shares of Series A
Preferred Stock. In June 1995, the Company borrowed $300,000 under a convertible
secured promissory note due March 30, 1996 from these same individuals at an
annual rate of 9.5% (see Note 16).
NOTE 9 - ACQUISITION OBLIGATIONS
At December 31, 1995, the "promissory notes payable, stockholders with
conversion features" totaling $2,324,335 which is associated with the GIS
acquisition (see Note 4) were, at the Company's election, either payable in cash
or by conversion into preferred and common stock prior to March 31, 1996. The
promissory notes for $591,000 were convertible into 118,200 shares of Series B
Preferred Stock. The other promissory notes totaling $1,733,335 were convertible
into the number of common stock shares determined by dividing $1,733,335 by the
quoted market value of the common stock near the date of the conversion. The
Company's stated intent since the acquisition date of GIS and at December 31,
1995 has been to satisfy the obligations, which are non-interest bearing, by the
issuance of preferred stock and common stock and not by a cash payment.
Accordingly, the promissory notes at December 31, 1995 were not classified as
current liabilities as current assets will not be used to satisfy the promissory
notes. The obligations were subsequently satisfied in April 1996 as part of the
March 11, 1996 agreement between the Company and GIS, such agreement was not
contemplated at December 31, 1995. The settlement did involve some amount of
cash along with other consideration, however, such cash was provided by a
Private Placement completed in April 1996 (See Note 16).
At December 31, 1995, the balance sheet reflects "common stock subject to put
options" of $140,000. This obligation is further described in Note 4 as it
pertains to the Company's acquisition of Delta.
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 10 - INCOME TAXES
The Company has a net operating loss (NOL) for income tax purposes of
approximately $9,000,000 at December 31, 1995 which begins to expire in the year
2000. The deferred tax benefit is determined based on the difference between the
financial reporting and tax bases of assets and liabilities as measured by the
enacted tax rate which will be in effect when these differences are realized.
The Company cannot reasonably predict when it can utilize the NOL carryforward
and, therefore, the Company has recognized an equivalent valuation allowance
against the deferred tax benefit.
The principal types of temporary differences and their related tax effects that
give rise to the deferred tax assets are as follows:
December 31,
--------------------------
1995 1994
---- ----
Intangibles $ 70,000 $ --
Bad debt allowance, employee
vacation pay, and other accruals 190,000 10,000
Compensation related to stock options 350,000 168,000
Net operating loss carryforward (1) 3,340,000 2,250,000
---------- ----------
3,950,000 2,428,000
Less valuation allowance (3,950,000) (2,428,000)
---------- ----------
$ - $ -
============ ==========
(1) Certain transactions involving the beneficial ownership of the Company have
occurred which resulted in a stock ownership change for purposes of Section
382 of the Internal Revenue Code of 1986, as amended. Consequently, a
portion of the Company's net operating loss carryforward is subject to
limitation on their utilization against future income.
The Company's computed effective tax rate differs from the Federal statutory tax
rate as follows:
1995 1994
------ -----
Federal statutory rate 34 % 34 %
Effect of net operating losses (NOL) or NOL carryforward (34)% (34)%
----- -----
Effective tax rate, after the effect of NOL 0 % 0 %
===== =====
F-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facilities under an operating lease,
which expires in 1999.
Future minimum payments under this operating lease are as follows:
1996 $116,148
1997 134,512
1998 173,521
1999 50,218
2000 and thereafter -
------------
$474,399
============
Rental expense for the years ended December 31, 1995 and 1994 was $89,027 and
$51,305, respectively.
LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, has
commenced an action against the Company in Florida state court. The individual
alleges, among other things, that he was wrongfully terminated from his
employment and seeks damages which in the aggregate could exceed $1,000,000. The
Company believes the suit is without merit and intends to vigorously defend the
action.
The Company is also involved in other legal actions. Management does not believe
that the ultimate resolution of these and the above matter will have a material
effect on the Company's financial position.
F-19
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY
COMMON STOCK
During October 1994, the Company completed a secondary offering of 920,000 units
at a price of $5.50 per share. Each unit consisted of one share of stock and two
redeemable warrants. Net proceeds to the Company was approximately $3,906,000
after deducting underwriters' discounts/commissions of $506,000 and offering
costs of $647,998.
In December 1995, the Company's authorized shares of common stock was increased
from 5,000,000 to 20,000,000.
PREFERRED STOCK
The Company's articles of incorporation authorize a total of 2,000,000 shares
preferred stock. The Company's Board of Directors has established Series A, B, C
and D convertible preferred stock (see Note 16).
Series of Preferred Stock
-------------------------------------------------
A B C D Total
Authorized shares
December 31, 1995 200,000 230,000 350,000 350,000 1,130,000
Outstanding shares
December 31, 1995 95,950 111,800 - 180,000 387,750
December 31, 1994 36,364 - - - 36,364
Outstanding share amounts
December 31, 1995 $2,879 $3,354 - $5,400 $11,633
December 31, 1994 $1,091 - - - $ 1,091
All series contain specific provisions as to conversion into shares of common
stock and liquidation values. The shares are nonvoting and, except for Series A,
participate equally as to dividends declared with the Company's common stock.
The Series A preferred stock bears a cumulative dividend at an annual rate of 8%
of its liquidation value ($959,500).
In June 1995, the Company issued 95,950 shares of its newly designated Series A
preferred stock to former principal stockholders in satisfaction of $759,505 in
promissory notes due October 1996 and in conversion of 36,364 shares of
previously designated Series A preferred stock.
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
ISSUANCE OF COMMON STOCK FOR SERVICES
During the year ended December 31, 1994, the Company issued an aggregate of
1,398,390 shares of its common stock for: (1) performance awards and services to
executives and/or major stockholders, (2) financing arrangements with executives
and/or major stockholders, (3) consulting and marketing services; and (4) other
purposes. Since the Company's common stock trading activity had been relatively
limited and these shares were issued prior to the secondary public offering in
October 1994, its estimated fair value has been determined by the Board of
Directors considering various factors. As a result, the value of the services
rendered or received were used to determine the value of the transactions and
not the estimated fair value of the common stock issued. The fair value of the
services provided by executives and/or major stockholders was approved or
determined by the Board of Directors. The fair value of consulting and marketing
services was based on agreements with the parties involved. The valuation of
services resulted in 200,000 shares being issued at $.50/share in September 1994
and 1,198,390 shares being issued at $.36/share from April to September 1994.
On April 5, 1993, the Company entered into an agreement with an individual to
obtain funding for operations. As part of this agreement, the individual pledged
a $300,000 certificate of deposit to enable the Company to obtain a line of
credit with a financial institution. Under the terms of the agreement, the
Company committed to issuing shares of its common stock as an inducement for the
pledge of the certificate of deposit, the number of shares to be calculated upon
the occurrence of certain events, as defined. The Company also granted a
security interest in substantially all assets of the Company. During October
1993, upon the expiration of the agreement and the occurrence of certain events,
the Company became obligated to issue 833,333 shares of its common stock to this
individual with a value of $300,000. In April 1994, the Company completed its
obligation through the issuance of the shares of common stock to this individual
and his designees, after notice was duly given to stockholders, to complete its
obligation.
In September 1994, the Company issued 200,000 shares of common stock valued at
$.50 per share to two former stockholders as consideration for providing funds
to the Company. In September 1994, the Company also issued 32,250 shares of
common stock to a consultant and former director and Chief Executive Officer of
the Company, in payment of $161,251 of debt owed to him, 4,233 shares of common
stock to an employee of the Company and the son of a consultant, former director
and Chief Executive Officer, in payment of $21,167 of debt owed to him, 9,692
shares of common stock to a former employee of the Company and the son of a
consultant and former director and Chief Executive Officer, in payment of
$48,459 of debt owed to him, and 3,833 shares of common stock to a director and
executive officer of the Company, in payment of $19,167 of debt owed to her.
Total debt and liabilities satisfied aggregated $250,044.
F-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
1988 INCENTIVE STOCK OPTION PLAN
In 1988, the Company adopted an incentive stock option plan. The number of
shares of common stock of the Company that may be awarded is 24,306. The option
price per share shall be determined by the option committee, but shall not be
less than 100% of the fair market value of the Company's common stock at the
time the option is granted. There were no options granted during 1993 and none
were outstanding as of December 31, 1993. During 1994, the Company terminated
this incentive stock option plan, and a new stock option plan was approved by
the Board of Directors (see below).
STOCK OPTION PLANS
In February 1994, the Board of Directors authorized the establishment of the
Company's 1994 Stock Option Plan. The plan permits the grant of options which
may be either incentive stock options (ISO's) or non-qualified stock options
(NQSO's). The total number of shares of common stock for options which may be
granted under the plan may not exceed 58,333 subject to adjustment, as defined.
The Compensation/Stock Option Committee of the Board of Directors is authorized
to determine the number of options to be granted, the number of shares which
will be subject to any option and the exercise price. The exercise price for
non-qualified stock options may not be less than 25% of the fair market value of
the common stock on the date of grant.
On February 5, 1994, the Board of Directors granted NQSO's to the former Senior
Vice President--Chief Technical Officer, Executive Vice President and a
marketing consultant to purchase up to 16,667, 12,500, and 12,500 shares,
respectively, of the Company's common stock. These options were waived by these
individuals effective May 23, 1994.
In June 1994 and October 1994, respectively, the Board of Directors granted
40,000 ISO's to officers and employees and 18,300 NQSO's to employees to
purchase shares of the Company's common stock at a price of $1.00 per share for
a term of five (5) years. In October 1994, the Board of Directors amended the
vesting requirement to be one year of continuous service to the Company, with
past service to be counted toward the requirement. Additionally, the Board of
Directors granted an ISO to a former employee to purchase 1,000 shares of the
Company's common stock at a price equal to the fair market value of the stock on
this date (after the secondary offering), exercisable upon the execution of a
general release form acceptable to the Company.
F-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
In March 1995, the Board of Directors, subject to stockholder approval, adopted
amendments to the Company's 1994 stock option plan which included that the
number of shares which could be granted under the Plan would be increased from
58,333 to 600,000 shares. At the annual stockholders meeting in December 1995,
the proposal to increase the number of shares was not approved.
Information as to shares subject to options is as follows:
<TABLE>
<CAPTION>
Shares Price per Share
------------------ ---------------
ISO NQSO
------- -------
<S> <C> <C> <C>
Options outstanding, January 1, 1994 -- --
Options granted 82,667 18,300 $1.00 - 13.00
Options canceled or forfeited (45,667) $1.00
Options exercised (500) (1,500) $1.00
------- -------
Options outstanding, December 31, 1994 36,500 16,800
Options granted -- --
Options canceled or forfeited (3,500) (14,800) $1.00 - $3.63
------- -------
Options outstanding, December 31, 1995 33,000 2,000
======= =======
Exercise price range per share of options
outstanding at year end $ 1.00 $1.00 - 13.00
======= ==============
</TABLE>
As of December 31, 1995, all stock options are exercisable
NON-QUALIFIED STOCK OPTIONS
On March 7, 1995, the Board of Directors authorized the grant of 375,000
non-qualified stock options at an exercise price of $2.00 per share to the
Company's President and Chief Executive Officer in connection with a three year
employment agreement. Of the total options granted, 125,000 were granted as a
signing bonus effective October 31, 1994 and were immediately exerciseable since
their issuance was not contingent on future services as are the remaining
250,000 options. Accordingly, compensation expense of $375,000 representing the
difference between the fair value of $5.00 per share (determined by the Board of
Directors considering various factors as restrictions, etc.) and the exercise
price, has been recorded in the consolidated statement of operations for 1994.
In addition, the corresponding obligation to issue (grant) common stock options
also has been reflected in the balance sheet as of December 31, 1994. Of the
remaining balance of 250,000 options, 125,000 options vested on October 31, 1995
and 125,000 options will vest on October 31, 1996. In accordance with accounting
provisions of APB No. 25, the Company has recorded compensation expense in 1995
of $562,500 and will record additional expense of $187,500 in 1996.
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
With the Company granting options in 1995 with the full vesting of the 125,000
options related to the 1994 sign-up bonus and the related December 31, 1994
obligation of $375,000 along with the additional 125,000 options vesting October
1995, paid-in capital in 1995 was increased by $937,250.
WARRANTS
In connection with the secondary public offering completed in October 1994, the
Company issued 1,840,000 redeemable warrants to purchasers of the Company's
common stock. These redeemable warrants were immediately detachable and
separately tradable from the common stock with which they were issued. Each
redeemable warrant expires on October 16, 1999, and entitles the holder,
commencing one year from the effective date of the offering, to purchase one
share of the Company's common stock for $5.50, the exercise price. The
redeemable warrants are subject to redemption commencing one year after the
effective date at a price of $.05 per redeemable warrant subject to the
occurrence of certain events, as defined.
Additionally, a warrant to purchase 276,000 shares at $9.08 was granted to the
underwriter, exercisable during the four years commencing one year from the
closing date of the offering.
The Company granted warrants to purchase 4,167 shares of the Company's common
stock at an exercise price of $4.50 per share, which expire on May 20, 1998 and
granted warrants to purchase 900 shares of the Company's common stock at an
exercise price of $3.75 per share, which expire in July 1997, in connection with
financing activities in 1993.
Information as to warrants is as follows:
Range of
Price per
Shares Share
---------- ----------
Warrants outstanding, January 1, 1994 . 13,400 $ 4.50
Warrants granted ...................... 2,128,917 $ .706 - 9.08
Warrants exercised .................... (21,250) $ .706
---------- -------------
Warrants outstanding, December 31, 1994 2,121,067 3.75 - 9.08
Warrants granted ...................... -- --
Warrants exercised .................... -- --
---------- -------------
Warrants outstanding, December 31, 1995 2,121,067 $3.75 - 9.08
========== =============
F-24
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 12 - STOCKHOLDERS' EQUITY - Continued
As of December 31, 1995, all warrants were exercisable.
RESERVATION OF COMMON STOCK
At December 31, 1995, the aggregate number of the Company's shares of common
stock reserved for issuance upon exercise of options and warrants, conversion of
convertible debt, and preferred stock totaled approximately 6,130,000 shares.
NOTE 13 - FOURTH QUARTER ITEMS
During the fourth quarter of 1995, there were several adjustments related to
revenues, and selling, general and administrative items which in the aggregate
increased net loss by approximately $242,000 ($.08 a share) related to the
previous three quarters of 1995.
There were no material fourth quarter adjustment in 1994 that affected the
previous three quarters of 1994.
For the financial statements for the year ended December 31, 1995, the Company
reclassified certain amounts to cost of revenues (formerly cost of products
sold) previously included in selling, general and administrative expenses (see
Note 2). The reclassification had no effect on the reported operating loss in
the previous three quarters of 1995.
NOTE 14 - SALES TO MAJOR CUSTOMERS
Percentage of Net Sales
Year ended December 31,
-----------------------------
Customer 1995 1994
-------- -------- ---------
A - 47.9%
B - 10.4%
In 1995, there were no customers representing 10% or more of revenues.
In 1994, the major customers are also foreign customers whose sales aggregated
approximately $611,000, including sales to Lasergate Systems Asia-Pacific Pty.
Limited of $109,000 (see Note 1).
F-25
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 15 - EMPLOYEE BENEFIT PLAN
Effective July 1, 1995 the Lasergate Systems, Inc. Profit Sharing 401(k) Plan
was established covering substantially all employees. The Company made no
contribution to the Plan during 1995.
NOTE 16 - SUBSEQUENT EVENTS
On March 27, 1996, the Company commenced a Private Placement of the Company's
newly established Series E Convertible Preferred Stock at $10.00 per share.
Through April 15, 1996, the Company received $1,271,982 and from April 16, 1996
through April 22, 1996, the Company received $178,000 for a total of $1,450,582,
net of commissions and offering expenses, for the sale of 162,500 shares of
preferred stock. As of April 22, 1996, the Private Placement was considered
complete. As of June 28, 1996, 150,000 shares of the Series E Preferred Stock
have been converted into 2,453,686 shares of the Company's Common Stock
subsequent to year end.
On March 11, 1996, the Company and GIS Systems Limited Partnership executed an
agreement whereby the parties agreed to, among other things, settle the
remaining obligation to GIS totaling $2,324,335 by making a cash payment to GIS
of $1,550,000, cancelling the $559,000 note receivable from GIS, cancelling the
$199,359 account receivable from GIS, and with GIS returning to the Company for
retirement the 109,333 shares of Common Stock and 111,800 shares of Series B
Preferred Stock previously issued to GIS. The cash payment of $1,550,000 to GIS
on April 12, 1996 was principally provided from the proceeds of the Private
Placement described above.
On June 10, 1996, the Company commenced another 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 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.
Also, on June 27, 1996, the Company used $300,000 of the proceeds of the Series
F Preferred Stock Private Placement to pay off the notes payable to related
parties and on June 28, 1996 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 preferred shares were potentially convertible into 2,636,126
shares of Common Stock had they not been redeemed.
F-26
<PAGE>
The following table sets forth a pro forma condensed balance sheet as of
December 31, 1995, as if the subsequent events described above had occurred at
December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------
Pro forma Pro forma
Historical Adjustments as adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Cash $ 656,506 (1) 6,623,082
(2)(1,550,000) 4,429,588
(3)(1,300,000)
Other current assets 1,048,726 (2) (199,359) $ 849,367
--------- -----------
Total current assets 1,705,232 5,278,955
Non-current assets 4,701,004 4,701,004
--------- -----------
Total Assets $ 6,406,236 $ 9,979,959
========== ===========
Notes payable, related parties $ 300,000 (3) (300,000) $ -
Other current liabilities 1,955,130 1,955,130
--------- ----------
Total current liabilities 2,255,130 1,955,130
Promissory notes payable, shareholders 2,324,335 (2)(2,324,335) -
Common stock subject to put option 140,000 140,000
--------- ----------
Total liabilities 4,719,465 2,095,130
STOCKHOLDER'S EQUITY
Preferred stock 11,633 (1) 5,010
(2) (3,354)
(3) (2,879)
(4) (4,500) 5,910
Common stock 93,751 (2) (3,279)
(4) 73,611 164,083
Additional paid-in capital 14,065,743 (1) 6,618,072
(2) 22,609
(3) (997,121)
(4) (69,111) 19,640,192
Put option (140,000) (140,000)
Notes receivable, shareholders (559,000) (2) 559,000 -
Accumulated deficit (11,758,356) (11,785,356)
------------ ------------
Total Stockholders' Equity 1,686,771 7,884,829
------------ ------------
Total Liabilities and Stockholder's Equity $ 6,406,236 $ 9,979,959
============ ============
</TABLE>
(1) Reflects Private Placements, see above
(2) Reflects GIS settlement, see above
(3) Reflects satisfaction of related party debt (exclusive of interest) and
redemption of Series A Preferred Shares, see above
(4) Reflects conversion of Series E Preferred Stock to Common Stock, see above
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LASERGATE SYSTEMS, INC.
(Registrant)
By: /S/ JACQUELINE E. SOECHTIG
---------------------------
Jacqueline E. Soechtig
President and Chief
Executive Officer
Dated: July 12, 1996
