SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1997.
/_/ 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28050 US 19 N, Suite 502, Clearwater, Florida 34761
- --------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
Class Outstanding at August 15, 1997
Common stock $0.03 par value 7,462,061
Transitional Small Business Disclosure Format (check one)
Yes [_] No [X}
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 1997 3
(unaudited) and December 31, 1996
Consolidated Statements of Operations 4
(unaudited) for the three months and six months
ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows 5
(unaudited) for the six months ended
June 30, 1997 and 1996
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan 11
of Operation
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 135,678 $ 1,924,825
Accounts receivable, net of allowance for
doubtful accounts of $149,479 and $147,124 713,604 868,931
Inventories 127,072 254,901
Prepaid expenses 82,507 40,966
------------ ------------
Total current assets 1,058,861 3,089,623
Property and equipment, net 330,415 304,024
Note receivable-trade 148,477 --
Systems and software costs, net of amortization of $1,553,100
and $1,525,856 401,060 242,739
Goodwill, net of amortization of $332,063 and $265,568 2,316,211 2,382,705
Customer lists and support contracts, net of amortization of
$177,083 and $141,667 247,917 283,333
Other assets, net 37,726 134,521
------------ ------------
Total Assets $ 4,540,667 $ 6,436,945
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, bank: 26,162 28,628
Accounts payable, trade 715,465 542,671
Deferred revenues 385,172 909,516
Accrued product costs 533,938 570,919
Accrued expenses 975,053 1,128,658
------------ ------------
Total current liabilities 2,635,790 3,180,392
------------ ------------
Common stock subject to put options 140,000 140,000
------------ ------------
Total liabilities 2,775,790 3,320,392
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares authorized,
7,945 and 8,000 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 238 240
Common stock, $.03 par value, 20,000,000 shares authorized,
7,462,061 and 7,3621,061 issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 223,862 220,862
Additional paid-in capital 19,815,771 19,818,769
Less: Common stock, $.03 par value, 20,000 shares
at June 30, 1997 and December 31, 1996, respectively,
subject to put options (140,000) (140,000)
Accumulated deficit (18,134,994) (16,783,318)
------------ ------------
Total stockholders' equity 1,764,877 3,116,553
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,540,667 $ 6,436,945
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,025,888 $ 1,103,940 2,304,464 $ 2,569,929
Operating expenses:
Cost of Revenues 947,766 1,040,161 1,801,066 1,792,051
Development 77,048 129,533 209,685 156,209
Selling, general and administrative
(Including write-down of software in
June 1996 of $1,075,000) 796,831 2,870,100 1,663,914 3,733,911
----------- ----------- ----------- -----------
Operating Loss (795,757) (2,935,854) (1,370,201) (3,112,242)
Other income (expense) 6,879 (53,401) 18,525 (40,968)
----------- ----------- ----------- -----------
Net loss (788,878) ($2,989,255) (1,351,676) ($3,153,210)
=========== =========== =========== ===========
Net loss per common share ($ 0.11) ($ 0.60) ($ 0.18) ($ 0.67)
=========== =========== =========== ===========
Weighted Average Common Stock Outstanding 7,462,061 4,972,207 7,447,617 4,738,483
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1997 June 30, 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss (1,351,676) ($3,153,210)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation, of property and equipment 70,347 46,073
Amortization of intangibles 143,322 1,343,614
Increase in provision for doubtful accounts 2,355 54,043
Stock-based compensation -- 198,113
Decrease (increase) in:
Accounts receivable, trade 152,972 (646,285)
Inventories 127,829 125,523
Prepaid expense (41,541) 50,533
Other current assets -- --
Other assets 82,629 77,790
Increase (decrease) in:
Accounts payable and accrued expenses (19,186) 349,108
Accrued product costs (36,981) 183,807
Deferred revenue (524,344) 283,407
----------- -----------
Net cash used in operating activities (1,355,896) (1,087,484)
----------- -----------
Cash flows from investing activities:
(Additions) to, disposal of, property and equipment (96,738) (51,998)
Capitalized software development costs (185,565) --
----------- -----------
Net cash used in investing activities (282,303) (51,998)
----------- -----------
Cash flows from financing activities:
Issuance of note receivable (148,477) --
Repayment of loans, related parties -- (300,000)
Repayment of loans, other (2,471) (18,649)
Repayment of obligations under capital leases -- (2,108)
Settlement of acquisition obligations -- (1,550,000)
Net proceeds from issuance of stock -- 6,623,082
Redemption of Preferred Stock -- (1,000,000)
----------- -----------
Net cash (used in) provided by financing activities (150,948) 3,752,325
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,789,147) 2,612,843
Cash and cash equivalents, beginning of period 1,924,825 656,506
----------- -----------
Cash and cash equivalents, end of period $ 135,678 $ 3,269,349
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
Interim Presentation
The interim consolidated financial statements of Lasergate Systems, Inc. (the
"Company") are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto in its Form 10-KSB for the year ended
December 31, 1996. In the opinion of management, the accompanying consolidated
financial statements (with all explanations contained in these Notes ) contain
all adjustments necessary for a fair presentation of the results of operations
for this interim period. Interim results are not necessarily indicative of the
results for a full fiscal year.
Operational and Funding Matters and Reporting Basis
The information contained in Note 3 to the Financial Statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 remains current related to the status of certain of the Company's
operational and funding matters and, accordingly, should be referred to in
conjunction with this Form 10-QSB.
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. For the six months ended June 30, 1997, the Company
incurred a loss of $1,385,676 and has an accumulated deficit of $18,168,994 and
used cash in operating activities of $1,355,899 during the first half of 1997.
In recent years the Company has relied upon proceeds from private and public
placements and loans (some of which were converted to stock) from former
principal stockholders to fund its operations.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the Company's balance
sheet is dependent upon continued operation of the Company, which in turn is
dependent upon the Company's ability to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
The Company is presently seeking one or more potential strategic partners who
can complement the Company's marketing and development efforts and increase its
financial stability. As part of any arrangement, the Company would require a
capital infusion in the Company which could result in a further dilution of the
present shareholders' equity interests. Management believes this is necessary in
order to continue increasing revenue each year. Moreover, if a capital infusion
is not made by a potential strategic partner, alternative financing will be
required by the Company prior to year-end to even continue operations at their
current level. The ability to obtain, as well as the costs of obtaining, any
such capital or credit are uncertain at this time.
On March 27, 1996, the Company commenced the Private Placement of the Company's
newly established Series E Preferred Stock at $10.00 per share. On April 22,
1996, 162,500 shares of the Series E Convertible Preferred Stock successfully
closed with the Company receiving total proceeds, net of offering costs of
$1,450,582.
On June 10, 1996, the Company commenced a Private Placement of 8,000 shares, at
$750 per share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock.
On June 27, 1996 the Company used $329,359 of the proceeds of the Series F
Private Placement to repay the entire Note Payable-Related Party of $300,000 and
the interest accrued through that date. In addition, on June 28, the Company
used
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$1,000,000 of the proceeds to redeem 95,950 shares of Series A Convertible
Preferred Stock held by the same parties. These shares were potentially
convertible into 2,636,126 shares of common stock had they not been redeemed.
Revenue Recognition
Revenues from the sale of equipment and software licenses, 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 the sale of equipment and software licenses with a planned
installation period exceeding 90 days are accounted for using the percentage of
completion method.
Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
Classification of Expenses
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts.
Net Loss Per Common Share
The net loss per common share amount is based on the weighted average number of
common shares outstanding during the periods. Common stock equivalents (options
and warrants) and the effect of the convertible securities were not included in
the calculation of net loss per share because they are antidilutive. At June 30,
1997, there were options and warrants outstanding to purchase 2,951,067 common
shares at prices ranging from $0.2391 to $5.50 per share, and 7,945 Series F
shares which can convert into as many as 17,655,556 common shares
NOTE 2 - SYSTEMS AND SOFTWARE COSTS
Historically, the Company has marketed products that typically require
substantial customization in order to meet the customers' particular
requirements. During 1996, the Company changed its strategy and decided to
design products in a modular fashion. The modules will consist of a primary
product with optional pre-developed modules and a configuration layer to meet
specific customer needs that would require limited or no customization by the
Company. The implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Accordingly, the Company commenced the
development of this new product.
As of June 1997, the Company had installed limited functionality versions at
four different sites. These versions had fully functional ticketing modules and
some additional features, but not all of the features planned for the general
release version. As of May 13, 1997 the Company had completed the general
release version of the new general admission product and has since installed it
at 10 sites including all sites which had earlier versions. The development
effort was then focused on two groups of applications for the ski industry. The
first group of ski applications was released on July 1, 1997, and the second
group of ski applications is scheduled for release on September 1, 1997. Future
development efforts will be focused on a reserved seating module which
management expects to release during the fourth quarter.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in late 1997 in areas of product
development and customer support. In addition, the product will have a new
appearance which is more user friendly and will allow the user to modify a
configuration layer (without access to the source code) which can remain in
place when updating the product to a new revision level. As a result, the
Company expects its new products to be more
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competitive in the market.
The Company estimates the cost of developing the new general admission products
incorporating the modular concept will total approximately $400,000 to $450,000
by the third quarter of 1997. In the second quarter of 1997, $94,000 of
development costs were incurred for the new general admission products, and this
entire amount was capitalized. Since inception, development costs incurred total
$317,000 of which $211,000 has been capitalized.
NOTE 3 - AMORTIZATION
Amortization Expense for the six months ended June 30, 1997 and 1996 was
$143,322 and $1,343,614. This includes a write-down at June 30, 1996 of
$1,075,000. Because of certain strategic decisions described above, the Company
reviewed the valuation of the current software cost in accordance with the net
realizable value determination provisions under SFAS No. 86 "Computer Software
to be Sold, Leased, or Otherwise Marketed". As a result, a write-down of
$1,075,000 was made to the software's carrying value. The software's net
carrying value as adjusted of $401,060 at June 30, 1997 is expected to be fully
realized (recoverable) through future revenues.
NOTE 4 - NOTE RECEIVABLE-TRADE
In connection with an early sale of the Company's new product, the Company
accepted a note receivable from a customer in the amount of $144,856 with a term
of 3 years and bearing interest at the rate of 10% per annum. Six months of
interest, amounting to $3,621 has been accrued bringing the note balance to
$148,477. Payments of principal and interest are to be made on December 31,
1997, 1998, and 1999 in the amounts of $50,000, $61,185, and $65,000
respectively.
NOTE 5 - PRODUCT COST LIABILITY (WARRANTY ALLOWANCE)
Management has reviewed warranty costs incurred within the past year, and as a
result has decided to provide for known and unknown warranty costs by recording
a warranty allowance at the time of sale. As of December 31, 1996, the balance
of the warranty allowance account was a $570,919. During the first two quarters
of 1997, $60,929 was accrued as an allowance, and $97,910 was spent for these
enhancements and subsequently charged against this allowance. Management
believes the allowance of $533,938 as of June 30, 1997 is a conservative
estimate of these costs but will continue to monitor them to ensure they are
provided for on a current basis in order to match the cost with associated
revenue.
NOTE 6 - LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, has
commenced an action against the Company in Florida state court. The former
president alleges, among other things, that he was wrongfully terminated from
his employment and seeks damages which in the aggregate could exceed $1,000,000.
The Company believes that the former president's suit is without merit and
intends to vigorously defend the action. There have been no significant changes
regarding this action since the last quarter.
On or about June 27, 1997, a class action was commenced in the United States
District Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera, on behalf of themselves individually, and on behalf of
all others similarly situated against inter alia, the Company, Sterling Foster,
& Co., Inc. ("Sterling Foster"), the Company's former underwriter, counsel for
Sterling Foster and certain issuer defendants for whom Sterling Foster acted as
underwriter. The Complaint alleges that in connection with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's stock, to create a
short position at the
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inflated price and then cover the short position with shares from shareholders
who had been secretly released from "lock-up" agreements. With respect to the
Company, the Complaint alleges that it failed to disclose in its Registration
Statement that prior to the date the offering became effective, Sterling Foster
had secretly agreed to release certain shareholders from"lock-up" agreements for
the purpose of selling their shares to Sterling Foster at reduced prices. The
Plaintiffs claims allege that the Company violated Sections 11 and 12(2) of the
Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, Section 349 of the New York General
Business Law; and negligent misrepresentation. The Company believes that it has
defenses to these claims and intends to vigorously defend itself in this action.
Derek Betty and James Potter have instituted actions against the Company. The
first action is entitled Derek Betty v. Lasergate Systems, Inc. ("the Betty
Action") and the second action is entitled James Potter v. Lasergate Systems,
Inc. and 1103065 Ontario, Inc. ("the Potter Action"). Both actions are pending
in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County,
Florida. The Betty Action alleges that the Company has failed to return shares
of the Company's stock which are being held in escrow pursuant to a Collateral
Stock Pledge Agreement executed in connection with the sale of Delta Information
Services, Inc. ("Delta") to the Company. The Betty Action also alleges a breach
of the terms and conditions of a Registration Rights and Put Option Agreement
executed in connection with the sale of Delta to the Company. The Betty Action
seeks damages in an amount in excess of $15,000, which is the jurisdiction
amount, but it is anticipated that damages could be in excess of $25,000. The
Potter Action also alleges a breach of the Registration Rights and Put Option
Agreement. Moreover, the Potter Action includes allegations concerning James
Potter's Consulting Agreement with the Company and a Non-Compete Agreement. The
Potter Action seeks a declaratory judgment determining that the Company and
1103065 Ontario, Inc. ("Ontario") are in material breach of the Non-Compete
Agreement and that Potter is relieved of all obligations to perform under the
Non-Compete Agreement. The Company has moved to dismiss both actions and to
compel arbitration pursuant to an arbitration provision in the Stock Purchase
Agreement relating to the acquisition of Delta. The Company's motion to compel
arbitration with regard to the Betty Action was granted on May 2, 1997, and with
regard to the Potter Action on May 14, 1997. On June 13, 1997, the Company
initiated an arbitration proceeding against Derek Betty and James and Marion
Potter claiming misrepresentation in connection with the Stock Purchase
Agreement which was executed in connection with the sale of Delta to the
Company. The Company seeks damages in the amount of $200,000. The Company has
succeeded in consolidating all three arbitration proceedings and intends to
vigorously pursue damages while defending the claims of the Potter and Betty
actions.
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.
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NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months Ended
----------------
Interest And Income Taxes Paid: 1997 1996
------ -------
Interest $1,534 $29,359
Income Taxes -0- -0-
Non-Cash Investing And Financing Activities:
1996 and 1997: None.
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ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with the financial
statements and notes thereto, and is qualified in its entirety by reference
thereto.
The statements contained in or incorporated by reference into this Quarterly
Report which are not historical facts contain forward looking information with
respect to plans, projections or future performance of the Company, the
occurrence of which involve certain risks and uncertainties that could cause the
Company's actual results to differ materially from those expected by the
Company, including the history of operating losses; uncertainty of future
financial results; possible negative cash flow from operating activities;
additional financing requirements; no assurance of successful and timely
development of new products; risks inherent in software development; customer
acceptance; employee turnover; litigation; dependance on regulatory approvals;
uncertainty of software and hardware pricing or profitability; unpredictability
of patent protection; rapid technological change; competition; and other
uncertainties detailed in the Company's Annual Report on Form 10-KSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996
Revenues:
Revenues were $1,025,888 and $1,103,940 for the second quarter of 1997 and 1996
respectively, representing a decrease of $78,052 or 7%. Revenue for the second
quarter of 1996 included an additional two sales of the new general admission
product to World of Coca Cola and Regal Cinemas totaling $209,000 plus $642,000
of revenue recognized on a large contract with American Skiing Company based on
the percentage completion method. This contract and the additions to it have a
total revenue value of $2,397,000. As of August 15, 1997, the remaining portion
of these orders amounts to $1,755,000. Management expects this installation to
be substantially complete by September 30, 1997.
Maintenance revenues represented 11% of total revenues for each of the three
month periods ended June 30, 1997 and June 30, 1996.
Cost of Revenues:
Cost of revenues were $947,766 and $1,040,161 for the second quarter of 1997 and
1996 respectively, representing a decrease of $92,395, or 9% due primarily to
lower revenues. Cost of revenues represented 92% of revenues during the second
quarter of 1997 as compared to 94% during the second quarter of 1996.
Development Costs:
Development costs were $77,048 and $129,533 for the second quarter of 1997 and
1996 respectively, representing a decrease of $52,485, or 41% . Development
costs for the second quarter of 1997 do not include $94,000 of capitalized costs
related to the new product or $55,000 of costs charged to the warranty
allowance. Development costs for the second quarter of 1996 do not include
$78,000 of costs charged to the warranty allowance. With the addition of these
amounts, costs have increased $18,515 between years. This represents a 9%
increase, which is primarily due to an increase in the number of employees on
the development staff. Assuming the Company can secure additional funding within
the next few months, the Company expects to continue development efforts at
approximately the same level for the remainder of 1997 with the majority of the
development effort focused on its new modular products (see Note 2 to the
Financial Statements).
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Selling, General and Administrative:
Selling, general and administrative expenses were $796,831 and $2,870,100 for
the second quarter of 1997 and 1996 respectively, representing a $2,073,269 or
72% decrease. These amounts represent 97% and 260% of revenues in 1997 and 1996
respectively. The decrease is attributable to a number of expenses from 1996
that did not reoccur in 1997. First, capitalized software was written down
$1,075,000 at June 30, 1996 due to the development of a replacement product (see
Notes 2 and 3 to the financial statements). There were no write-downs of any
assets during 1997. Other components of the decrease from year to year are a
decrease of $365,000 due to a provision for incentive compensation for the
executive group and managers in 1996 and a decrease of $225,000 due to a
provision for contingent legal settlements in 1996. No such provisions were made
in 1997. Other components of the decrease include decreases of $107,000 in
investor relations expenses, $34,000 in accounting and auditing expenses and
$91,000 in legal expenses. These are primarily due to the costs of the private
placements of Preferred Stock of the Company during 1996.
Net loss decreased to $788,878 ($.11) a share for the second quarter of 1997
from $2,989,255 ($.60) a share for the second quarter of 1996. The components of
the decrease in the Company's net loss are explained above.
SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996
Revenues:
Revenues were $2,304,464 and $2,569,929 for the six months ended June 30, 1997
and 1996 respectively, representing a decrease of $265,465 or 10%. Revenue for
the first half of 1997 includes seven sales of the new general admission product
to several well-known customers including the Art Gallery of Ontario and
Blackpool Pleasure Beach totaling $1,149,000 plus $642,000 of revenue recognized
on a large contract with American Skiing Company based on the percentage
completion method. Management expects this installation to be substantially
complete by September 30, 1997.
Maintenance revenues represented 9% and 11% of total revenues for the three
months ended June 30, 1997 and June 30, 1996, respectively. This was primarily
due to less customers accepting maintenance contracts on the legacy products.
This trend appears to be reversing now that sales of the new products are
exceeding sales of the legacy products.
Cost of Revenues:
Cost of revenues were $1,801,066 and $1,792,051 for the six months ended June
30, 1997 and 1996 respectively, representing an increase of $9,015 or 1%. As a
percentage of revenues, cost of revenues increased to 78% from 70% for the six
months ended June 30, 1997. This was primarily due to increased costs associated
with early installations of the new general admission product.
Development Costs:
Development costs were $209,685 and $156,209 for the six months ended June 30,
1997 and 1996 respectively, representing an increase of $53,476, or 34%.
Development costs for the six months ended June 30, 1997 do not include $186,000
of capitalized costs related to the new products (see Note 2 to the Financial
Statements) or $95,000 of costs charged to the warranty allowance. Development
costs for the six months ended June 30, 1996 do not include $281,000 of costs
charged to the warranty allowance. With the addition of these amounts, costs
have increased $53,476 between years. This represents a 12% increase, which is
primarily due to an increase in the number of employees on the development
staff.
Selling, General and Administrative:
Selling, general and administrative expenses were $1,663,914 and $3,733,911 for
the six months ended June 30, 1997 and 1996 respectively, representing a
$2,069,997 or 55% decrease. These amounts represent 79% of revenues in 1997 and
145% of revenues in 1996. The decrease is attributable to a number of expenses
from 1996 that did not reoccur in 1997. First, capitalized software was written
down $1,075,000 at June 30, 1996 due to the development of a replacement product
(see Notes
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2 and 3 to the financial statements). There were no write-downs of any assets
during 1997. Other components of the decrease from year to year are a decrease
of $365,000 due to a provision for incentive compensation for the executive
group and managers in 1996, and a decrease of $225,000 due to a provision for
contingent legal settlements in 1996. No such provisions were made in 1997.
Other components of the decrease include decreases of $131,000 in investor
relations expenses, $44,000 in accounting and auditing expenses, and $52,000 in
legal expenses. These are primarily due to the costs of the private placements
of Preferred Stock of the Company during 1996.
Net loss decreased to $1,351,676 ($.18) a share for the six months ended June
30, 1997 from $3,153,210 ($.67) a share for the six months ended June 30, 1996.
The components of the decrease in the Company's net loss are explained above.
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of earnings per share
in the financial statements. The effect of adopting this new standard has not
been determined.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, the Company's auditors qualified their
opinion as to a going concern. The information contained in Note 3 to the
Financial Statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996 remains current related to the status of
certain of the Company's operational and funding matters and, accordingly,
should be referred to in conjunction with this Form 10-QSB.
For the six months ended June 30, 1997, the Company used $1,355,896 of cash in
operating activities and incurred a loss of $1,385,676. From its inception in
March 1985 through June 30, 1997, the Company has incurred a cumulative loss of
$18,168,994. In recent years the Company has relied upon proceeds from private
and public placements and loans in order to fund its operations.
The Company is presently seeking one or more potential strategic partners who
can complement the Company's marketing and development efforts and increase its
financial stability. As part of any arrangement, the Company would require a
capital infusion in the Company which could result in a further dilution of the
present shareholders' equity interests. Management believes this is necessary in
order to continue increasing revenue each year. Moreover, if a capital infusion
is not made by a potential strategic partner, alternative financing will be
required by the Company prior to year-end to even continue operations at their
current level. The ability to obtain, as well as the costs of obtaining, any
such capital or credit are uncertain at this time.
In order to procure the contract with American Skiing Company, the Company
decided to accept a lower gross profit percentage than it normally receives on
smaller contracts. This was the primary cause of the increase in the cost of
revenue percentage (cost of revenue as a percentage of revenue) from 67% in the
first quarter of 1997 to 92% in the second quarter of 1997. A secondary cause
was lower than expected margins on maintenance revenue.
Since the Company does not purchase components for its products until an order
is received, there is typically a backlog of orders for systems. The Company
defines backlog as a signed contract or customer's purchase order, typically
with some type of financial assurance such as a deposit. As of June 30, 1997 and
December 31, 1996, the Company's backlog was approximately $1,614,000 and
$963,000, respectively.
During the first half of 1997, accounts receivable decreased $359,972 primarily
due to increased collection efforts, inventory decreased $127,829 due to more
efficient management and fewer installations being in process at June 30, 1997
than at
-13-
<PAGE>
December 31, 1996, and accounts payable decreased $153,808 primarily due to the
payment of accrued payroll, payroll taxes and other expenses which were accrued
at year end. The decrease in accrued payroll and payroll taxes arose because
payroll is payable on the last day of each month, but near year-end the Company
changed its payroll service provider and the new provider did not charge the
Company for the December 31, 1996 payroll until January 2, 1997. At December 31,
1996 accrued payroll and payroll taxes were $210,000 and at June 30, 1997
accrued payroll and payroll taxes were $9,656. All other accounts payable and
accrued expenses increased $46,536 during 1997.
Also, during the first quarter of 1997, an installation was completed for a
customer who agreed to participate in the development process by being an early
installation site for the new product in exchange for extended payment terms on
approximately half of their purchase. As a result, the Company accepted a note
receivable from the customer in the amount of $144,856 with a term of three
years and bearing interest at the rate of 10% per annum.
The Company estimates the cost of developing the new general admission products
incorporating the modular concept will total approximately $400,000 to $450,000
by the third quarter of 1997. In the first six months of 1997, $186,000 of
development costs were incurred, and this entire amount was capitalized. Since
inception, development costs incurred total $317,000 of which $211,000 has been
capitalized.
Warranty costs accrued during the first half of 1997 were $60,929 and the value
of warranty work performed was $97,910. Management continues to monitor these
costs to ensure that sufficient provisions have been recorded in order to
reasonably match these costs with the associated revenues as well as to ensure
that this work is performed as efficiently as possible.
Although no assurance can be given, management believes that, assuming the
Company is able to secure additional financing within the next few months, the
recent on-schedule product launch of the new Admits general admission product
will enable the Company to achieve an increase in revenues and a reduction of
the operating loss by the end of 1997 and lay the foundation for future
profitability. The foregoing is a forward-looking statement and actual results
may differ materially based upon certain risk factors. These impacting factors
include the risk of not obtaining sufficient financing in the next few months
which would materially impact the Company's ability to continue operations at
their current levels. These factors also include, but are not limited to
customer acceptance, technological change, employee turnover, third party
development schedules, installation schedules, and litigation.
-14-
<PAGE>
Part II - Other Information
Item 6-Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: The Company has not filed any reports on Form 8-K
during the quarter ended June 30, 1997.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 1997.
-15-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lasergate Systems, Inc.
Registrant
Date: August 14, 1997 /s/Philip P. Signore
----------------------------
PHILIP P. SIGNORE
Vice President and
Chief Financial officer
-16-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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