SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1
TO
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
[_] Transition report under 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.
(Name of small business issuer in its charter)
Florida 59-2543206
- ------------------------------ ----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
28050 U.S. 19 North, Suite 502, Clearwater, Florida 34621
- --------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (813) 725-0882
--------------
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $0.03 per share
---------------------------------------
(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 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 $4,204,626.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
At March 20, 1997, the aggregate market value of the Common Stock of Lasergate
Systems, Inc. held by non-affiliates (7,235,234 shares) was $2,713,213.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
At March 20, 1997, 7,362,061 shares of Common Stock were outstanding.
Documents incorporated by reference: Selected portions of the Proxy Statement
for the Company's 1997 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-KSB.
<PAGE>
PART I
Some of the statements contained in this document are based on current
expectations. These statements are forward looking and actual results may differ
materially based upon certain risk factors. These impacting factors may include,
but are not limited to, technological change, availability and cost of
financing, long-term investment cycles, customer acceptance, product ship
schedules, product integration, saturation, corporate licenses, cost of
revenues, sales and marketing and support investments, intellectual property
rights, and litigation.
ITEM 1. DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (the "Company") is a corporation that was organized
under the laws of the State of Florida in 1985. The Company is an integrator and
provider of admission control and revenue accounting systems.
GENERAL
The Company is engaged in the development, assembly, marketing, servicing,
installation, and sales of computerized admission control and revenue accounting
systems. These products include a reserved seating ticketing system, general
admission ticketing system and an access control solution which are marketed to
ticketing operations at a variety of entertainment venues. The Company's
products are marketed to the facility based entertainment industry and are used
at many types of facilities, including amusement parks, theme parks, ski
resorts, multi-purpose stadiums and arenas, performing arts theaters, museums,
casinos, aquariums, and zoos in the United States, Canada, and certain countries
outside of North America.
The Company has developed an access control system which employs various
applications of laser scanning bar code technology to automate and verify
admission to attractions and to provide revenue control and accountability,
while reducing fraud inherent in situations involving cash transactions when
proper controls are not implemented. The system creates a detailed record of and
permits individual charges for both overall facility admission and access to
each of its attractions or events. The access control system has been designed
to interface with any of the Company's general admission ticketing systems, thus
providing a seamless solution.
The Company has developed three versions of the general admission ticketing
product called "Admits," "Admits Gold" and "Admits Platinum." Each system
provides computerized point-of-sale general admission tickets, including timed
admission tickets and/or wristband tickets for amusement and water parks. Admits
Gold is generally marketed to smaller facilities with ten or less points of
sale. Admits Platinum is marketed to facilities with more than ten points of
sale. The Company's newest offering, Admits, is a Windows NT(R) based ticketing
system.
The Company markets the Passmaker video ID system, in conjunction with the
Admits family of products. This system allows the venue to issue on-the-spot
personalized credentials for season passes, membership cards, and employee
cards. Producing a personalized credential involves bringing together
information, a photo image, a bar code, and some fixed text onto a medium for
tamper proof, durable use by a customer, employee, or member.
The Company's reserved seating ticketing product, "Select-a-Seat," allows the
customer to sell tickets and assigns individual seats for a particular
performance or for a series of performances. The Select-a-Seat system controls
individual box office ticket sales and optionally has the capability of taking
telephone and mail order reservations, group reservations, remote outlet sales
and season subscription sales.
2
<PAGE>
The Company has installed general admission ticketing systems in over 200
facilities including:
KNOTT'S CAMP SNOOPY at the Mall of America in Bloomington, Minnesota
TATILYA PARK, Istanbul, Turkey
UNIVERSAL STUDIOS, Los Angeles, California
SUN VALLEY, a ski and golf resort in Sun Valley, Idaho WORLD OF COCA COLA,
Atlanta, Georgia
SNOWBIRD, a ski resort in Snowbird, Utah
HOUSE OF BLUES, a night club chain in Los Angeles, California, New Orleans,
Louisiana and Cambridge, Massachusetts
THE FLORIDA AQUARIUM, Tampa, Florida
THE GUGGENHEIM MUSEUM, New York, New York
SUNDAY RIVER, a ski resort in Bethel, Maine
STEAMBOAT SPRINGS SKI RESORT, Steamboat Springs, Colorado
THE BASKETBALL HALL OF FAME, Springfield, Massachusetts
ROCK N ROLL HALL OF FAME, Cleveland, Ohio
The Company's Select-a-Seat system is used by over 80 facilities including:
CARNEGIE HALL, New York, New York
BOSTON RED SOX, Boston, Massachusetts
MGM GRAND HOTEL, Las Vegas, Nevada
DATATIX (providing tickets for the Utah Jazz), Salt Lake City, Utah
Current installations vary from systems which provide for simple general
admission tickets to those which allow access by patrons to an entertainment
facility, or systems which provide for more complex arrangements, such as
tickets of decrementing value, (the point or monetary value of the ticket
decreases with each use), which permit limited access to individual events and
attractions within a park. Individually bar-coded tickets are printed by the
Admits system and authorized for use by the holder upon printing. Relevant data
concerning the remaining value and restrictions of the ticket are available from
the access control system each time the bar code is read and processed. With bar
codes, no information is actually contained in the bar code, but instead is held
by the Admits system in individual records identified by the unique bar code.
The bar code is scanned by a laser scanner and, if the bar code is valid, the
access control system releases a turnstile. This validation process, in
conjunction with proprietary processing and storage features, permits the Admits
system to utilize many printing point-of-sale stations and turnstiles at
individual attractions to process simultaneous information at all locations.
NEW PRODUCT STRATEGY
The Company's product strategy is focused on integrating leading edge hardware
and software technologies into a cohesive family of products that provide users
with the flexibility and control to positively impact their business results.
Three elements of this new strategy include: transitioning from separate
products to offering one product with a modular solution orientation,
substituting a standard product with customized modules for customized
application solutions; and moving from a DOS or UNIX platform to a Windows(R)
95/NT platform.
During the fourth quarter of 1996, the Company began selling the next generation
of its ticketing system, Admits. It is a Windows(R) version which includes
ticketing, access control, concession sales, reporting and advanced reservations
as well as other features currently under development designed to meet the many
needs of Windows(R)
3
<PAGE>
based clients. The Company plans to take the current functions of the
Select-a-Seat product and integrate them into this Windows(R) based product.
This will create a singular product with the ability to generate general
admission and reserved seat ticketing, thereby providing customers with an
integrated solution for multiple ticketing requirements.
ADMITS
Admits is a Windows(R)-based point-of-sale (POS) system that integrates
technologies that enhance ticketing and access control operation. The system can
be used to issue tickets, wristbands or receipts and provide access control both
for general admission or timed admission events. A minimum configuration for an
Admits system presently consists of the following basic components: a personal
computer, a printer, and the Company's Admits engineered ticketing software. It
may also have optional peripherals, including but not limited to: touch screen
monitor; specialized keyboards; ticket, wristband or receipt printer; credit
card reader; and a customer display.
Admits is designed to handle the diverse needs of a ticketing office including
cash control, ticket printing, event set-up and financial reporting. Admits can
be a stand-alone POS device or multiple POS stations networked together, selling
from one common inventory of available events. Using the Windows(R) 95/NT
platform, Admits delivers a superior price/performance ticketing and access
control solution.
The Admits product architecture uses a layered approach that provides the user
with a relatively powerful set of user definable configuration options in
addition to a high level of integrity of operations. The Company deploys this
product architecture to enhance performance and provide customers with
application and programming flexibility. The configuration layer of the
architecture provides software development tools for custom configurations. By
developing this configuration layer, the Company has given the end user the
ability to configure systems more effectively and efficiently with less risk and
expense of software modifications.
ADMITS GOLD AND ADMITS PLATINUM
The Company's Admits computer software system provides general admission
ticketing for facilities that desire the flexibility of offering tickets that
can be printed for a variety of applications, with and without bar codes. It
ranges from simple entry fees to timed admission and tickets of decrementing
value.
ADMITS GOLD. Admits Gold is particularly well-suited for use by smaller
facilities with one to ten selling stations. The computer program is installed
on a personal computer with an MS-DOS operating system.
ADMITS PLATINUM Admits Platinum is a comprehensive admission system that is
flexible enough to meet a variety of customer needs. Admits Platinum is
better-suited than Admits Gold for larger applications, such as ski resorts and
large amusement parks, in which numerous ticketing stations are required.
Operating on a personal computer workstation with a UNIX host, Admits Platinum
can include, in addition to the ticketing issuance capabilities of Admits Gold,
point-of-sale software for gift shops and concession stands as well as access
control using bar code scanners and turnstiles. The Admits Platinum software,
although not protected by a registered copyright, is deemed by the Company to be
proprietary, and the Company relies upon a combination of contract and trade
secret laws to protect its proprietary interest in such software (See
"Intellectual Property."). It is the Company's belief that this comprehensive
system provides the Company with an advantage over its competitors by providing
customers with a variety of functions which can be customized to the needs of an
installation. The system competes on the basis of its reputation in the market,
based on the number and quality of its installed sites. When using the access
control features of the Admits Platinum system, each ticket is given a unique
bar code that, when
4
<PAGE>
processed, identifies the conditions under which it can be used, the remaining
value of that ticket and the time, place and frequency of admission. As a ticket
passes a laser scanner, the bar codes are scanned, allowing the access control
system to simultaneously release the turnstile or perform another function while
reducing the value of the ticket. This system may accommodate millions of active
tickets in use and thousands of different ticket types, varying from tickets
that admit holders during specified hours, during specified days or that are
issuable for children, adults, senior citizens or other special categories.
Unlike other forms of admission control which can be subject to tampering, the
Company's access control system maintains the records for each ticket holder on
the system computer and only recognizes those tickets produced by Admits
Platinum. This makes counterfeiting nearly impossible and prevents ticket
holders from manipulating the value of their ticket. While competitors offer
systems which supply many of the same features as Admits Platinum, the Company
believes that the large number of features and flexibility of its system gives
the Company a competitive advantage in marketing its products (See
"Competition.").
The Company continues its success with respect to the installation of Admits
Platinum in the ski area market. The system provides for fast lift ticketing and
season pass production in addition to mobile scanning at lift entry areas.
Recent installations include Sugarloaf, Maine; Shawnee Mountain, Pennsylvania;
and Massanutten, Virginia.
This combined admission control system utilizes the following basic components:
TICKET. A bar-coded ticket is printed at one of several locations. Since the bar
code is ink on paper and is printed by a standard thermal or laser printer, it
cannot be demagnetized (unlike magnetic tickets) and will generally remain valid
even if the ticket is folded or mutilated. The system can be expanded to provide
season passes with photographic identification cards as well as group ticketing
and reservation applications to print numerous tickets simultaneously for sales
through brokers or to groups.
ATTENDED AND AUTOMATED POINT OF SALE TERMINALS. Tickets can be sold either by an
attendant with a point-of-sale terminal, which includes a cash drawer, a
terminal to select the ticket type and ticket printer, or by an automated
point-of-sale terminal. As a ticket is printed, a computer record is made of the
bar code, the type of ticket sold, its cost and the type of payment. These can
be reconciled later against the funds collected by a ticket attendant. The
terminal can also be operated to request patron survey information.
An automated point-of-sale terminal menu is much like a bank ATM. The patron
answers questions about the type of ticket desired on a touch screen, inserts
cash and the terminal prints the ticket. Both the automated and attended
point-of-sale terminal have the capability of directly communicating with credit
card companies to check the patron's credit and make the appropriate charge.
Accountability for cash receipts occurs by tracking and reporting all cash and
other collections and the subsequent use of the ticket issued. Each transaction
and entry updates the record for each bar code.
SCANNERS. Scanners can be directly linked to Admits Platinum software to read
bar-coded tickets produced by the Admits Platinum software.
PRICE. The price for the Admits Platinum or the Admits Gold system varies
widely, ranging from approximately $30,000 to $750,000, depending on the
complexity of the system desired, the kinds of additional features added to the
system, and the number of people expected to use the system, which affects the
number of entry points and the equipment required. To date, most of the Admits
Platinum systems the Company has installed were sold for
5
<PAGE>
prices ranging from approximately $50,000 to $250,000. The price for the Admits
Gold system also varies depending on generally the same factors as Admits
Platinum. However, as this product is specifically targeted to the lower end of
the market, the price range is generally under $100,000.
ADMITS FEATURES. Admits systems are adaptable to allow a facility to meet its
ticketing requirements. Applications range from ticketing for simple general
admission to a facility to more complex ticketing, such as season passes,
tickets which admit the holder to certain or all rides and/or areas of the park
and discount tickets which may only be used at certain times of the day or on
certain days. Admits systems are menu driven, allowing individuals without
computer skills to operate them. The Systems are also flexible, allowing
facility personnel to modify the charge (i.e., apply a coupon or discount, give
consideration to the age of the ticket holder, etc.) to the ticket holder for a
given ride or attraction. A ticket or card can be printed at one of several
locations and can include the name of the facility. The type of ticket and any
other information specified by the facility may also be included. Tickets can be
designed in the form of paper tickets for single day use, laminated plastic
cards with photographs for season pass use, or wristbands for use by children or
in water parks.
Facilities are able to utilize the ability of the Admits systems to generate a
wide variety of ticket types and to easily change the value of a ticket-type to
enhance revenues. For example, an amusement park can lower the points needed to
enter an attraction during low-usage periods to equalize patron traffic and
generate more revenue during low-use time periods. Similarly, a park can offer
commercial sponsorship for various attractions during specific time periods,
attracting advertising income. The system's flexibility permits numerous
variations of ticketing strategies to encourage facility attendance and increase
usage.
Admits Gold and Admits Platinum are computer software systems. Each can be
purchased separately for inclusion in a facility's existing computer system or,
more typically, with a number of additional optional hardware or software
components with which the Company can integrate at the customer's request. Such
additional hardware items may include ticket printers, cash drawers, personal
computers, customer display devices and attended or automated point-of-sale
terminals. What the Company believes to be the proprietary nature of the Admits
systems is a result of the inter-relationship of these components and the
increased number of functions that this relationship provides, as well as the
software which links them, rather than the components themselves. Additional
software systems could include, but are not limited to, credit card processing,
season pass capability, fund raising, and access control.
SELECT-A-SEAT
The Company's reserved seating software system is called Select-a-Seat.
Select-a-Seat software controls reserved seating as well as general admission
sales. Select-a-Seat has 90 installations servicing over 200 facilities, which
are selling in excess of 30 million tickets annually in the United States,
Canada, Australia, Malaysia, Singapore and Ireland. The software can be used for
distribution and control of admission tickets for theaters, professional sports
teams, university athletic departments, multi-purpose arenas, race tracks,
casinos, concert halls, performing arts organizations, museums and IMAX(TM)
theaters.
Select-a-Seat is a broad "in-house" computerized box office management,
reservation and event marketing system. The system maintains an inventory of
available seats, storing the section, row and seat information. At the time of
sale, the system prints tickets for a customer; printing the pertinent
performance information as well as the seating location in the facility.
Select-a-Seat controls reserved seating and general admission box office sales,
telephone and mail order reservations, group reservations, remote outlet sales,
and season subscription ticket sales.
6
<PAGE>
In addition to ticket sales and revenue control, Select-a-Seat stores a database
of ticket buyers. Facilities can maintain such information as name, address,
purchase and payment history, and demographic information such as age,
performance preference and source of account.
When selling tickets, Select-a-Seat displays a series of prompts on a computer
screen, leading the ticket seller through the selling process. Tickets are only
held unavailable in the system while a transaction is in process. Once a ticket
sale is completed, all pertinent performance records are updated and inventory
is immediately depleted. Any unsold tickets held for that transaction are made
available again.
The Select-a-Seat season ticketing program provides for fast, efficient and
simple entry of season purchase or account data, seat assignment, payment
posting, account verification, financial auditing, seat status auditing, ticket
printing and client invoicing.
In addition to being a comprehensive ticket and revenue control system,
Select-a-Seat is an important marketing tool. It stores parking, novelty
purchases, and track buyer characteristics such as show preference and
advertising response. Demographic and biographic information about a ticket
buyer or prospective ticket buyer is stored in Select-a-Seat.
The Select-a-Seat system is also purchased by entrepreneurs and governmental
agencies to set up regional or city-wide ticket distribution networks as an
alternative to a national service bureau. The Select-a-Seat system is an
alternative to the national service bureau, allowing facilities to control their
own ticket inventory, maintain reasonable service charges, and retain service
charge revenue. The Company has sold and installed Select-A-Seat Systems that
sell tickets where the event is held, as well as over the telephone and through
remote ticket distribution points. When organizations purchase Select-a-Seat,
tickets sold over the telephone and at remote sales locations carry a per ticket
service charge which the owner of the system retains. Therefore, many
organizations will purchase Select-a-Seat to be used as a source of generating
additional revenue for the facility as well as controlling inventory and ticket
sales.
TICKETING. Select-a-Seat maintains an inventory of available seats in a
facility, including section, row and seat information. At the time of sale, the
system prints tickets for a customer with the pertinent performance information
as well as the seating location in the facility. Select-a-Seat displays a series
of prompts on a computer screen, leading the ticket seller through the selling
process. Once a ticket sale is completed, all pertinent performance records are
updated and inventory is simultaneously depleted. The Select-a-Seat season
ticketing program provides for rapid, efficient and simple entry of season
ticket purchases or account data, seat assignment, payment posting, account
verification, financial auditing, seat status auditing, ticket printing and
client invoicing.
MARKETING. In addition to ticket and revenue control functions, Select-a-Seat
can be used to store various characteristics of each individual patron, such as
car parking preferences, novelty purchases made, performance preferences and
past responses to various forms of advertising. These characteristics, combined
with demographic and biographic data, give system owners a powerful tool for
direct mailings.
Select-a-Seat offers features specifically designed to meet the needs of various
market niches such as performing arts venues, large stadiums, city-wide ticket
bureaus and professional sports teams.
PRICE. The price of Select-a-Seat varies depending on the modules purchased and
the number of concurrent users
7
<PAGE>
provided for, ranging from a price of $7,000 for a single terminal box office to
$600,000 for multi-terminal access and modules to support season tickets,
telephone orders, reporting and credit card authorizations. To date, most of the
Select-a-Seat systems installed were sold for prices ranging from approximately
$35,000 to $200,000.
ACCESS CONTROL
BACKGROUND. Bar codes, which have been available for use since the 1970's,
consist of a series of lines or bars printed on paper or plastic. By varying the
width of the bars and spaces between the bars, a bar code provides an item, such
as a ticket, with a unique identity.
The Company's technology, through its admission and access control system
(previously sold under the name of Gatepas), reduces fraud and labor costs while
enhancing accountability and profitability. Within the United States alone, the
entertainment and recreation industry encompass tens of thousands of facilities
adaptable to the Company's systems. Included are family entertainment centers,
fairgrounds, stadiums, water parks, amusement parks, arenas, zoos, aquariums,
museums, ice skating facilities, movie theaters and convention centers.
Use of bar codes and standard scanning equipment or radio frequency hand-held
scanners permit the access control system to closely monitor general attendance
at both amusement/theme park facilities as well as ski resorts. By recognizing
tickets with valid bar codes, these scanning devices reduce the possibility of
admission from counterfeit tickets. Bar-coded tickets cannot be successfully
altered by the holder to defeat the system and are more durable than the fragile
magnetic strips.
FEATURES. The Company's access control system, which is an optional feature with
the Admits family of products, integrates the scanning technology of bar codes
with scanners placed in turnstiles, and hand-held or stationary readers. The
Company believes the proprietary nature of the access control system is the
inter-relationship of the components, as well as the software which links them,
rather than the components themselves. To gain entry to a facility or an
individual attraction, the bar code on the card or ticket is scanned by a laser
scanner located at the point of entry. The ticket can be scanned in any
direction by the ticket holder. After it is processed, if the ticket is valid,
the access control system responds with an audible signal and, if desired, opens
a turnstile. If the ticket holder does not pass through the turnstile, the
ticket retains its prior value. In facilities where tickets decrease in value as
used, display devices may be placed throughout the facility to simply read the
ticket value so that a holder can determine the remaining value of a ticket.
Facility personnel can thus access a summary of cash receipts, attendance and
other statistical information about admissions as it is occurring. The computer
can be programmed to generate a summary of the day's activity, including the
cash and credit card transactions, the number of patrons entering the facility
and individual attractions and other statistical information. Such data, along
with summary weekly, monthly or annual data, assists facilities in managing
their business and can highlight irregularities in ticket collections.
DISCONTINUED PRODUCTS. During 1996, the Company did not have any sales of its
Facility Management System, or its Resort Management System. The Facility
Management System is a third-party software designed to manage events at a
meeting facility, such as a convention center for which the Company has
marketing rights. The Resort Management System is software owned by the Company
that provides the ability to manage golf tee times and tennis reservations.
Neither of these products was a primary focus of the Company in 1996, and the
Company considers them to be discontinued.
8
<PAGE>
SOFTWARE AND COMPUTERS. The Company holds a federal registered copyright,
granted in 1987, on its gate-control software included in the access control
system. The system was designed and developed by the Company. This copyright
affords the Company the protection of the federal copyright laws. The Company
has introduced an upgrade to its ticketing and reporting software, based on
software acquired when the Company purchased Delta and GIS. The software upgrade
is not protected by a registered copyright; however, the Company deems it
proprietary and relies upon a combination of contract, copyright and trade
secret laws to protect its proprietary interest in the upgraded software (See
"Intellectual Property.").
PRODUCT SERVICING AND ADMINISTRATION
The Company has developed a number of common procedures for producing and
servicing each of its products.
ASSEMBLY AND TESTING. The Company purchases components for its systems, such as
the computer equipment and circuit boards, turnstiles, metal housings, laser
scanners and ticket printers from a variety of carefully selected sources and
assembles and integrates critical components with its proprietary software. Many
of the components are enhanced by off-the-shelf hardware readily available from
numerous sources. However, all subsections and unique operating environments are
fully integrated and all Company software is tested to ensure proper operation
and delivery of the highest quality product possible.
INSTALLATION AND TRAINING. The Company's technicians install each of the
Company's systems, providing any customization required and overseeing the
placement of all equipment. The purchaser is responsible for installation of
cabling to link each component to the central computer. Low-voltage cables are
dedicated to the system and are not expensive or difficult to install. This
cabling method allows both new and existing purchasers to easily install the
Company's systems and allows existing installations to expand their existing
systems as their business grows. The Company also provides interfaces into
various local area networks (LAN's) and fiber-optics systems.
The Company provides initial training for the administrators and/or facility
personnel of each system at each installation and provides a user manual. The
Company encourages training of personnel at the supervisory level and encourages
these individuals to train the end users who operate the Company's system within
the customer's environment. Additional training is available either at the
installation site or the Company's headquarters at the option and expense of the
purchaser.
WARRANTY MAINTENANCE AND SERVICING. The Company offers a 90 day warranty for its
software products. After the end of the warranty period, the Company offers its
customers maintenance and servicing for an annual fee. The Company provides for
telephone response to calls for assistance during certain business hours and
days, or available around the clock, seven days a week for certain additional
charges, standard updates to the system purchased, user guides and repair or
replacement (at customer expense) of hardware components. The Company's customer
support staff is often able to diagnose and correct problems through computer
link-up from the Company's headquarters to each site. If more extensive
modifications are required or if a facility requires training for additional
personnel, Company personnel will make additional site visits for a fee.
At December 31, 1995, the Company had $297,000 reserved to accomplish upgrades
of original Delta and GIS sites. Most of this was accomplished during 1996;
however, additional upgrades and enhancements were committed to customers during
1996. These were primarily customers who purchased Delta product (Admits
Platinum) from the Company during 1995 and early 1996. At December 31, 1996, the
Company has $571,000
9
<PAGE>
reserved to accomplish these upgrades and enhancements as well as a certain
amount of upgrades and enhancements that may be committed in the future (a
warranty allowance) on 1996 sales.
RESEARCH AND DEVELOPMENT
The Company's engineers are engaged in developing enhancements and applications
for the Company's technology. Such applications are intended to create new
products for the Company's markets and to enhance product competitiveness. The
Company's technical staff will concentrate their efforts on completing the
technology necessary for such new installations, although there can be no
assurance that the Company will be able to develop or market such new products
or applications.
MARKETING
The Company's overall marketing strategy is focused on a distribution model that
provides for direct and indirect selling channels of distribution. The Company's
products are segmented to address requirements targeted at specific
entertainment venues which include amusement/theme parks, ski resorts, stadiums
and arenas, performing arts theaters, museums, aquariums and zoos and regional
ticketing networks.
The Company has traditionally marketed its products and services through a
direct sales channel. Marketing efforts take place principally at selected
industry trade shows which are aligned with the above defined vertical markets,
at regional seminars which focus on application solutions, through targeted
direct mail campaigns and by advertising in trade periodicals. Qualified leads,
generated as a result of these marketing efforts, and high-profile, target
accounts selected from the above vertical markets, provide the basis upon which
the direct sales organization pursues new opportunities. Additionally, some new
prospects have been attracted by the positive impressions created through
discussions with or visits to existing customer installations.
In 1996, the Company began marketing its products through two additional
channels; an in-house telemarketing group, and a value added reseller (VAR)
program. The telemarketing group is responsible for qualifying new leads
generated through the Company's marketing programs, pursuing new or add-on sales
opportunities that have a revenue value of between ten thousand dollars and
fifty thousand dollars and initiating specific sales promotions targeted at the
existing installed base. The VAR program has led to the recruitment of three
qualified resellers in targeted metropolitan areas. Resellers are focused on
low-end general admission opportunities that have a revenue value of up to ten
thousand dollars. For the resellers to become certified by the Company, they
must have completed a comprehensive certification process which includes
formalized product and technical training at the Company's training facility.
This program is designed to prepare them to sell and install the product, train
the users and support their future application needs.
The Company believes that certain of its prior customers using one or more of
the Company's products may currently have or may soon develop a need for
additional products offered by the Company. Therefore, in addition to seeking
new customers and new markets for its products, the Company intends to market
its full product line to its existing customer base through targeted direct mail
campaigns and telemarketing.
The Company has also recently aligned itself with certain companies that sell
other products used for ticketing, admissions, and access control, and has
successfully secured sales contracts in the process. The most significant of
these is a recent alliance with Neighborhood Box Office, a manufacturer of
ticketing kiosks. The Company does not have exclusive arrangements with any
vendors with whom the Company has from time-to-time partnered; however, as these
arrangements have been mutually beneficial in the past, the Company intends to
further pursue this type of joint marketing.
10
<PAGE>
The Company markets products that typically require substantial customization in
order to meet the customer's particular requirements. While the Company has
reduced the cost of installing, customizing and servicing (maintaining) the
customized software these costs have remained higher than desired.
They will consist of a primary product with optional pre-developed modules and a
configuration layer to meet specific customer needs that would require limited
or no customization by the Company. Additionally, the implementation of this
project will afford the Company an opportunity to employ the same development
tool ( a high level Rapid Application Development language) for each module,
which will provide a high degree of consistency and efficiency in the product
development process. Although no assurances can be given, management expects
that applying the Company's proprietary technology in this fashion provide will
be a highly effective means for delivering business solutions to the
entertainment industry.
With this in mind, in June, 1996, the Company initiated an internal assessment
of its marketing and product management strategies to determine whether the
current software could be modified in order to provide a broader range of
product options to its customers without incurring substantial customization
costs.
As a result of the assessment, the Company has concluded that its principal
application components for ticketing, revenue management and access control will
continue to provide significant benefits to its customers and prospects,
however, rather than continue to market products that require substantial
customization, it will design and offer products in a modular fashion that allow
the user to define how the software is set up or configured for a particular
site through a table-driven set of parameters selected by the user.
Accordingly, the Company commenced the development effort to support this new
marketing approach in 1996. As of March, 1997, the Company has installed limited
release versions of the new product in five customer sites. The Company
anticipates the completion of additional modules, at an average rate of and per
month until approximately June, 1997, when the Company anticipates having the
entire general admission product line rewritten. Beta sites will continue to be
selected to facilitate testing of each module in a live environment and new
configurations with additional modules will be sold before general release of
the products which is anticipated to be in Juen of 1997. the current legacy
software products will continue to be marketed and the Company will support this
software for some peeiod of thime beyond availability of general release version
of the new general admissions product for the customers who desire to continue
using the current software. As a result of this development effort and new
product introduction, the Company expects to achieve cost reduction beginning in
late 1997 in areas of product development and customer support. The Company has
sold and installed beta versions of the new software consisting of three
modules. The Company anticipates the completion of additional modules at an
average rate of one per month until approximately June 1997, when the Company
anticipates having the entire general admission product line rewritten.
Additional beta sites will be selected so each module can be fully tested in a
"live" environment and new configurations with additional modules will be sold
before general release of the products.
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 that 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.
11
<PAGE>
As a result, the Company expects its new products to be more competitive in the
market.
CUSTOMERS
The Company has sold its products to a variety of customers. Listed below is one
example of each type of installation:
SELECT-A-SEAT AT CARNEGIE HALL, NEW YORK, NEW YORK. Select-a-Seat was installed
in Carnegie Hall in 1987. There are over 35 users of this system that sell
tickets to all concert performances, taking telephone reservations and
processing season subscription ticket sales;
ADMITS GOLD WITH ACCESS CONTROL AT ROCK N ROLL HALL OF FAME, CLEVELAND, OHIO.
The Admits Gold system installed at the Rock n Roll Hall of Fame includes 10
point-of-sale ticketing stations and provides for automated scanning and access
control. The system has been operating since opening day in September, 1995 and
has processed over 1,000,000 tickets;
ADMITS PLATINUM AT SUN VALLEY SKI RESORT, SUN VALLEY, IDAHO. The Admits Platinum
at Sun Valley Ski Resort includes 27 point-of-sale stations for lift ticket
sales, 6 video ID stations for season passes, and 6 radio frequency ski lift
scanning stations for access control. It has processed over 3,000,000 skier
visits since it was installed and currently processes over 400,000 tickets per
year.
ADMITS PLATINUM WITH ACCESS CONTROL AT THE FLORIDA AQUARIUM, TAMPA, FLORIDA. The
Company installed its Admits Platinum and access control systems at The Florida
Aquarium in early 1995. The systems provide for a computerized point-of-sale
ticketing system and laser scanning bar code technology to automate and verify
admission and access to the facility. The systems have sold and scanned
approximately 1.9 million tickets since its grand opening in 1995.
ADMITS AT ART GALLERY OF ONTARIO, ONTARIO, CANADA. The Admits system at the Art
Gallery of Ontario was installed in the first quarter of 1997. It includes 12
point-of-sale stations for main ticketing, group sales and back office ticketing
applications. The system has enabled AGO to implement an "Art Card" which
provides bar coded access control through 6 entry points utilizing custom ticket
stock imprinted with selected artwork.
Due to the length of time it takes for the Company to purchase, customize and
install certain of its products, there may occasionally be a backlog of orders
for equipment. As of December 31, 1996 and December 31, 1995, the Company's
backlog was $963,000 and $1,190,000 respectively. The backlog represented sales
to numerous sites with purchase prices ranging from approximately $52,000 to
$326,000. In 1995, no one customer represented more than 10% of the Company's
sales. In 1996, Bayindir Insaat Turizm Ticaret (a large, indoor amusement park
in Istanbul, Turkey) represented 12% of the Company's sales.
COMPETITION
The Company faces competition from different sources with respect to each of its
products. The Company is unaware of any one competitive source with the
capabilities to supply the number of different admission and ticketing products
which the Company offers. The Company believes it has a competitive advantage
over any other single company due to the Company's ability to satisfy a great
variety of software or hardware requirements a customer might have with respect
to general admission ticketing, access control and reserved seating.
12
<PAGE>
ADMITS. There are several companies in the United States offering basic
computerized ticketing capabilities which are similar to those the Company
offers through its Admits Gold and Admits Platinum systems. They include, among
others, PACER CATS and Gateway Ticketing Systems. While those firms have
automated ticketing programs similar to that of the Company, and have resources
substantially greater than those of the Company, the Company believes Admits
competes effectively with these companies on the basis of pricing and ease of
installation, use and maintenance.
SELECT-A-SEAT. The Company's Select-a-Seat reserved seating system competes
against companies such as Ticketmaster, Inc., Select Ticketing Systems and
Prologue Systems, Inc. Some of those companies have resources substantially
greater than the Company. The Company believes that it competes effectively both
in pricing and over all functionality of its Select-a-Seat system and that the
Company has a competitive advantage in that the Select-a-Seat software will
operate with a wide variety of hardware products which a customer might already
own. The computerized reserved seat ticket industry has historically been
dominated by two national ticketing companies: Ticketron, Inc. and Ticketmaster,
Inc. Ticketron, Inc. was acquired by Ticketmaster, Inc., leaving only one
national ticketing company, Ticketmaster, Inc. Ticketmaster, Inc. leases their
equipment and software to arenas, stadiums and theaters and establishes remote
sales locations and telephone reservations centers to sell tickets. Ticket
buyers pay a service charge to Ticketmaster, Inc. for their services. Service
charges can range from $1.50 per ticket to over $7.50 per ticket. The Company's
Select-a-Seat system, as an alternative to the national ticketing companies,
allows facilities to retain control of their ticket inventory, and ticketing
service charges. When organizations purchase Select-a-Seat, all tickets sold
over the telephone, the Internet, or at remote sales locations can carry a
per-ticket service charge (if the owner chooses to do so) which the owner of the
system retains. Therefore, many organizations purchase Select-a-Seat as a source
of revenue. For a discussion of Select-a-Seat, see the information included
under the caption "Select-a-Seat" above.
ACCESS CONTROL. The primary competing technology for the Company's access
control system is magnetic strips, such as those located on the back of most
credit cards and many forms of paper tickets as well as various forms of bar
code readers. Competitors in this arena include VGS and Gateway Ticketing
Systems. The Company's primary competitor for its access control system is Data
Service Company of America, Inc. which offers access control by allowing users
to swipe their bar-coded ticket through a slot reader. The Company believes its
access control system competes effectively with Data Service Company of America,
Inc.
GENERAL. The Company generally enters into non-disclosure agreements related to
its proprietary technologies and trade secrets with its employees and with those
companies and individuals with whom it has contractual agreements.
PRODUCTION AND SUPPLIERS
The Company produces each of its systems by enhancing, integrating and
assembling various components readily available from numerous suppliers. A few
components, such as metal housings and circuit boards are specially manufactured
for the Company to its specifications and ordered from one or more suppliers.
The Company's major suppliers of such components are Digital Equipment, Tech
Data, Data General, BOCA Systems, Inc., Alvarado Manufacturing Co., Indiana Cash
Drawer Corporation, Jetstar, Inc., Arco Distributors, Inc. The other products
the Company offers are primarily software.
The Company assembles and tests its software at its headquarters and installs it
along with appropriate hardware on-site for its various customers.
13
<PAGE>
PERSONNEL
In order to reduce its overhead costs, the Company entered into an agreement
effective January 1, 1996, with a firm that provides all administrative services
relating to payroll, personnel and employee benefits (an employee leasing
agreement). The Company signed an agreement with a new employee leasing company
effective December 16, 1996. Management continues to hire, dismiss, set pay
rates, and supervise the employees.
As of December 31, 1996, the Company employed (or employee leased) 42
individuals, including 4 in management, 8 in engineering, 13 in operations, 8 in
sales and marketing, 5 in finance and accounting and 4 support staff personnel.
The Company also retained 1 individual who served as a part-time consultant.
The Company generally enters into non-disclosure and non-competition agreements
with its employees. None of the Company's employees is represented by a union or
covered by a collective bargaining agreement. The Company believes its relations
with its employees is excellent.
INTELLECTUAL PROPERTY
The Company holds copyrights for the software comprising its access control
system and the software comprising the Select-a-Seat system. The Company has
service marks for the names Select-a-Seat and Lasergate Systems, Inc. and also
for the Select-a-Seat and LSi logos. The Company believes that its copyrights
and service marks provide it with a competitive advantage and are valuable
assets.
The Company regards certain features of its internal operations, software and
documentation as proprietary. The Company relies on a combination of contract,
copyright, service marksand trade secret laws and other measures to protect its
proprietary information. The Company generally enters into confidentiality
agreements with each of its employees and customers and, where appropriate, with
certain vendors, in which each party agrees not to use the Company's proprietary
intellectual property for purposes other than those for the benefit of the
Company. In addition, the Company safeguards its technology through security
measures such as passwords and codes. Policing unauthorized use of the Company's
information and technology is difficult, and there can be no assurance that
these safeguard measures will be successful or that the Company will have the
financial resources necessary to enforce its proprietary rights. Trade secret
laws in the computer technology area are rapidly developing and, should the
Company's proprietary products be appropriated it may seek to enforce its
rights.
While the Company's competitiveness may be affected by its ability to protect
its proprietary information, the Company believes that because of the rapid pace
of technological change in the computer software industry, trade secret and
copyright protection are less significant competitive factors than the know-how,
ability and experience of the Company's employees, frequent product enhancements
and the timeliness and quality of support services. While competitors may be
able to develop software products with similar capabilities, the Company
believes that a competitor would have to devote substantial resources to develop
products that can compete effectively with the Company's products. Accordingly,
although the Company deems its proprietary interest in its service marks and
copyrights to be important, it does not believe that its failure or inability to
protect that interest would have a material adverse effect on its business. The
competitive advantage derived from the technology involved in each of the
Company's products is a result of the inter-relationships of the components and
the variety of features that they are able to provide when integrated, and the
software that links them, rather than the individual components themselves.
The Company intends to apply for copyrights when feasible in order to protect
its product enhancements as they
14
<PAGE>
are developed. There can be no assurance that copyrights will be obtained or
that they will afford sufficient protection for the Company's products. In
addition, the Company may not have the resources necessary to enforce its rights
with respect to any of its copyrights, trade secrets, service marks or
prospective filings since this can sometimes involve protracted legal battles.
As referred to above, the Company has servicemarks for the names Select-A-Seat
and Lasergate Systems, Inc.; Admits is a product of the Company. All other
brands and products mentioned in this report are trademarks of their respective
holder(s).
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 11,910 square feet of office space in
Clearwater, Florida. The lease expires on April 30, 1999. The Company has the
right under its written lease agreement to one five-year renewal of the lease at
prevailing market rates. The Company also has a right of first refusal for
additional office space in the same building as space becomes available. From
March 1997 through February 1998, the rent payable will be approximately $14,000
per month.
ITEM 3. LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, Donald
Turner, has commenced an action against the Company in a Florida state court.
Mr. Turner alleges, among other things, that he was wrongfully terminated from
his employment and seeks damages which in the aggregate could exceed $1,000,000.
The Company believes Mr. Turner's suit is without merit and intends to continue
vigorously defending the action.
Derek Betty and James Potter have instituted actions against the Company arising
pursuant to agreements entered into at the time of the sale of Delta Information
Services, Inc. ("Delta") to 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.
A hearing on the motion in the Potter Action is scheduled for April 1, 1997, and
a hearing on the motion in the Betty Action is scheduled for May 2, 1997. The
Company intends to vigorously defend both actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following tables set forth the high and low sales prices for the Common
Stock on the NASDAQ Stock Market for the periods indicated:
Quarter Ended High Sales Price Low Sales Price
March 31, 1995 $ 13 3/4 $ 7 1/2
June 30, 1995 9 5/8 4 3/8
September 30, 1995 6 1/4 3 3/4
December 31, 1995 6 5/8 1 3/4
March 31, 1996 2 7/8
June 30, 1996 1 7/8 11/16
September 30, 1996 1 3/8 17/32
December 31, 1996 25/32 7/32
As of March 20, 1997, there were 1,616 holders of record of the Common Stock. No
dividends have ever been declared or paid on the Company's Common Stock. The
closing price of the Common Stock on March 20, 1997, was $3/8 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Due to the Company's net loss for 1996 of $4,997,962, and its history of
operating losses that have accumulated to $16,783,318, at December 31, 1996, our
independent certified public accountants have qualified their accountants'
report dated March 28, 1997, on the Company's 1996 financial statements as to a
going concern uncertainty. The following commentary within "Management's
Discussion and Analysis" addresses the Company's operations for 1996 and its
plan to improve future results. These matters are also discussed in Note 3 to
the financial statements.
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 the majority of the Board of
Directors during 1996 and from October 1994 through May 1996 all of the
Company's senior executives, including the President/CEO as well as most of its
other personnel. They also included two acquisitions (Delta and GIS Systems
Limited Partnership ("GIS")) with a combined customer base of over 200 sites,
and various product integration and development efforts.
These changes required more than two years of sustained effort and substantial
amounts of capital. At the beginning of 1996, the Company had very little
working capital. This situation grew worse during the first half of the year,
resulting in shipments to customers falling behind schedule because orders for
their product were not placed with vendors, in that the Company had utilized all
credit extended to it by its vendors. Given those circumstances, the Company
undertook two private placements of convertible preferred stock during that time
period, for which the Company received a combined total of $6,623,082, net of
commissions and offering expenses. That capital infusion allowed the Company to
initiate two basic programs designed to move the Company toward profitability.
First, was development of a new modular product (Admits) allowing the product to
be customized more easily and installed more efficiently. The second was
committing additional funds to marketing efforts, including a doubling of the
sales force aimed at substantially increasing revenues and potentially moving
the Company beyond the break-even point and towards profitability in the future.
The development effort was immediately focused upon the general admission
product since it would most likely yield the fastest and largest payback. The
core of the product was developed earlier than planned and was in Beta testing
by November 1996. The experience of the development team and the ability to
forego the creation of a detailed program design by utilizing the software
programs of the legacy products as a production plan accelerated development.
With the Company's efforts to satisfy new and existing customer demands for
programming changes to the Delta and GIS products, a substantial portion of the
Company's resources remained dedicated to the legacy
16
<PAGE>
products in all areas: development, installation, customer support, training,
documentation, and marketing. However, the Company kept the general admission
development effort on schedule. At the present time, management believes the
Company will have the new Admits general admission product available for general
release by June 1997.
For most of 1996 the Company employed three or four field sales representatives.
During the fourth quarter of 1996, two systems engineers were dedicated to
providing pre-sales support and an inside sales department was organized with
two inside sales representatives hired initially. During February and March of
1997, two additional field sales representatives were hired, bringing the total
to six sales personnel. Thus, for most of 1997, the Company plans to have ten
employees dedicated to sales efforts compared to three or four during 1996.
The result for the company expanding its sales force and delivering the new
Admits general admission product on schedule should favorably impact upon
revenue during the latter part of 1997. Management believes it can thus achieve
a reduction of the operating loss by the end of 1997 and lay the foundation for
future profitability. Although no assurance can be given, management believes
that sustained expenditure and cash controls, would maintain adequate working
capital through 1997, based upon the further premise that the new general
admission Admits product will be completed as planned by June 1997.
Nevertheless, the Company intends to seek and actively pursue a possible
relationship with a strategic partner, which would include an equity investment
in the Company and may review other financing opportunities.
RESULTS OF OPERATIONS: 1996 COMPARED TO 1995
Revenues
Revenues increased to $4,204,626 in 1996 from $2,835,206 in 1995,
representing a 48% increase. Revenues consisted of system sales and
installations of $3,588,383 in 1996 and $2,538,206 in 1995, and maintenance and
support of $616,243 in 1996 and $300,000 in 1995. The increase in system sales
and installations was primarily attributable to marketing activities from an
increased sales staff, and from the Company's enhanced products.
In 1996, the Company's principal products, Select-a-Seat, Admits
Platinum, and Admits Gold, represented approximately 33%, 35%, and 16% of
revenues, respectively, compared to 42%, 30%, and 12% of
17
<PAGE>
revenues, respectively, in 1995. By the end of 1997, the Company expects the
revenue from Admits Platinum and Admits Gold to be substantially replaced by
revenue from Admits, the Company's modular Windows(R) based general admission
product. Maintenance and support represented 14% of revenues in 1996 and 11% in
1995. While maintenance and support revenue for 1997 is expected to increase,
its percentage of total revenues is not expected to increase.
In 1996, one customer, Bayindir Insaat Turizm Ticaret, a large,
indoor amusement park in Istanbul, Turkey, represented 12% of revenues. In 1995,
no customers represented 10% or more of revenues. As the total customer base
grows, the likelihood of having certain customers account for more than 10% of
revenues in future years is reduced.
Cost of Revenues
Cost of revenues in 1996 and 1995 included the costs associated with
the hardware and software acquired for the Company's customers, the full costs
associated with the engineering and installation of the systems, and the full
costs associated with the provision of customer support.
Cost of revenues increased to $2,937,269 from $2,619,436. This 12%
increase was the result of costs related to a 48% increase in sales, and
increased warranty costs, partially offset by increased efficiencies in
installing products. Warranty provisions for 1996 totalled $568,000 and warranty
work charged against the allowance in 1996 totalled $430,000. The warranty work
was primarily a continuation of the enhancements to original Delta and GIS sites
as discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995. As a percentage of revenues, cost of revenues in 1996
represented 70% of revenues compared to 92% of revenues in 1995. This
improvement represents more efficient installation and support of products.
Although the sales mix for hardware versus software has been
relatively consistent during 1995 and 1996, it should be noted that the ratio of
cost of revenues-to-revenues is also 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 for customers, as is a
small portion of software. Sales of the Company's software and related systems
development activities provide the Company greater gross margins.
Development Costs
Development costs increased to $460,709 in 1996 from $348,352 in
1995, an increase of $112,357, or 32%. As a percentage of revenues, development
costs decreased from 12% in 1995 to 11% in 1996. The Company expects to continue
development efforts in 1997 at about the same level as in 1996, with the
majority of the development effort focused on its new modular products.
Selling, General and Administrative
Selling, general and administrative expenses increased to $4,715,513
in 1996 from $4,122,914 in 1995, representing a 14% increase. As a percentage of
revenues, these expenses were 112% in 1996 and 145% in 1995, which reflects the
subtantial increase in revenues in 1996.
The principal components of the increase in selling, general and
administrative, in 1996 as compared to 1995 are described below:
Sales and marketing expenses increased to $1,273,751 in 1996 from
$1,036,506 in 1995, representing a 23% increase. This increase was attributed to
increased salaries, benefits, and commissions of $467,213, associated with the
Company's additions to the sales force, offset by a reduction of $234,715 in the
amount paid to independent contractors who performed similar functions in 1995.
18
<PAGE>
General and administrative expenses increased to $3,441,762 in 1996
from $3,086,408 in 1995, representing a 12% increase. The principal components
of the increase are increase in shareholder relations expenses, executive
compensation, employee wages, legal fees, and bad debt expense.
Write Down of Capitalized Software Costs
In 1996, the Company decided to offer its products in a modular
fashion and the Company commenced the development of the new modular product.
Accordingly, the Company wrote down the value of capitalized software $1,075,000
under the net realizable value determination provisions of SFAS No. 86 "Computer
Software to be Sold, Leased, or Otherwise Marketed". (See Note 7 to the
financial statements). In 1995, there was no write down of assets.
Other Income (Expense)
Interest expense was $45,061 in 1995. Due to the funds received from
the private offering in June 1996, the Company paid off its debt and invested
the remaining funds, earning net interest income in 1996 of $53,577.
Net other income/(expense) represented $67,674 of expense in 1996 as
compared to $93,775 of income in 1995. The decrease is primarily due to the
results of operations of the Company's joint venture in Australia with P.M.S.I.
Group Pty. Limited. The company's share of the joint venture's net
earnings/(loss) from operations was a $77,790 loss in 1996 compared to earnings
of $48,060 in 1995.
Income Taxes
The Company currently has a substantial net operating loss
carryforward 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 $4,997,962 ($.82 a share) in 1996 from
$4,206,782 ($1.39 a share) in 1995. The Company's operations were affected by
various factors as discussed above with the largest component being a one-time
write down of capitalized software in the amount of $1,075,000.
New Accounting Pronouncements Adopted
SFAS No. 123 Accounting for Stock Based Compensation was implemented
during 1996. The affect upon the Company's financial statements was immaterial.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of was implemented during 1996. The effect
upon the Company's financial statements was immaterial.
Financial Condition: 1996 Compared to 1995
Total assets remained relatively constant at $6,436,945 on December
31, 1996, from $6,406,236 on December 31, 1995, representing an increase of
$30,709, or less than 1%. This includes an increase in cash of $1,268,319 as a
result of two private placements and a decrease in systems and software costs of
$1,173,928, primarily due to a write-down of these costs.
19
<PAGE>
Total liabilities decreased to $3,320,392 on December 31, 1996, from
$4,719,465 on December 31, 1995, representing a decrease of $1,399,073, or 30%.
The principal contributing factors to the decrease are the repayment of notes
payable of $300,000 and the repayment of the promissory notes payable to
stockholders with conversion futures, which had a balance of $2,324,335
partially offset by increases in deferred revenue, accrued warranty costs, and
accrued expenses. (See Note 4 to the financial statements and "Liquidity' and
Capital Resources" below).
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flow for 1996 and
1995:
1996 1995
----------- -----------
Net cash used in operating activities $(2,282,971) $(2,833,237)
Net cash used in investing activities (228,663) (708,917)
Net cash provided by financing activities 3,779,953 2,608,823
Net increase (decrease) in cash
and cash equivalents $ 1,268,319 $ (933,331)
The Company used cash of $2,282,971 in 1996 and $2,833,237 in 1995 for operating
activities. From its inception in October 1985 through December 31, 1996, the
Company has incurred cumulative losses of $16,783,318, with a loss of $4,997,962
for the year ended December 31, 1996. The company's net loss in 1996 was due
primarily to expenditures related to the factors referred to under the caption
"Results of Operations: 1996 Compared to 1995" above. Included in the net loss
for 1996 were non-cash expenses totaling $2,006,626 , which included (i) a
write-down of capitalized software costs of $1,075,000; (ii)
depreciation/amortization expenses of $513,153; and (iii) equity-related
transactions totaling $229,686 of compensation expense recognized as a result of
the issuance of stock in 1996 and the grant of stock options in 1994. Cash that
was used to purchase items classified as current assets totaled $426,428 with
accounts receivable increasing by $540,617, investment in inventories decreasing
by $70,763, and prepaid expenses decreasing by $43,426. These uses of cash were
offset by an increase in accounts payable and accrued expenses of $764,362, an
increase in accrued warranty costs of $273,919, and an increase in deferred
revenue of $180,110.
The Company used cash in investing activities in the amount of $228,663 in 1996,
which was used for additions to property, equipment, and software costs, and
used cash in investment activities in the amount of $708,917 in 1995,
principally related to the loan to GIS stockholders of $559,000.
The Company was provided cash by financing activities of $3,779,953 in 1996 and
$2,608,823 in 1995. The Company relied on net proceeds from public and private
offerings and loans and advances from related parties to fund its operations
during 1996 and 1995. Two private offerings in 1996 and a private offering in
1995 provided $6,623,082 and $1,870,976, respectively.
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 February 1995, the Company acquired substantially all of the assets of GIS
for an aggregate consideration of
20
<PAGE>
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, among other things, to settle the
remaining obligation to GIS totaling $2,324,335, 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 and completed the
private placement as of April 22, 1996. The Company received $1,450,582, net of
commissions and offering expenses, for the sale of 162,500 shares of preferred
stock. 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.
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 that 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 that is less than $.45 per share,
will be deemed to be $.45 and a trading price that is more than $1.00 per share
will be deemed to be $1.00. On January 27, 1997 55 shares of the Series F
Preferred Stock were converted into 100,000 shares of common stock at a
conversion price of $.55 per share. The conversion price was calculated as of
September 30, 1996, the conversion request date.
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 W.
Umstadter, and Timothy E. Mahoney) who were nominated by such private investors
and served at their request, resigned from the board. The company filled the
vacancies created by such resignations by appointing three new directors (Bruce
D. Barrington, John J. Chluski, and Philip P. Signore).
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 1996, and that operations should
continue to progress throughout 1997.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the year ended
December 31, 1996 which include the following items:
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of
December 31, 1996 and December 31, 1995 F-2
Consolidated Statements of Operations for the years ended
December 31, 1996 and December 31, 1995 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996 and December 31, 1995 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and December 31, 1995 F-5
Notes to Consolidated Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference
herein in the "Election of Directors" section of the Company's definitive Proxy
Statement to be filed for the Company's 1997 Annual Meeting of Shareholders
pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
herein in the "Executive Compensation" section of the Company's definitive Proxy
Statement to be filed for the Company's 1997 Annual Meeting of Shareholders
pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
herein in the "Security Ownership of Certain Beneficial Owners and Management"
section of the Company's definitive Proxy Statement to be filed for the
Company's 1997 Annual Meeting of Shareholders pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
herein in the "Certain Relationships and Related Transactions" section of the
Company's definitive Proxy Statement to be filed for the Company's 1997 Annual
Meeting of Shareholders pursuant to Regulation 14A.
23
<PAGE>
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of Amendment No. 1 to the Company's
Quarterly Report on Form 10-QSB, File No. 0-15873, for the quarter
ended June 30, 1996).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.4 of the
Company's Annual Report on Form 10-K, File No. 0-15878, for the year
ended December 31, 1994).
4.1 Form of Subscription Agreement for Series D Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-KSB, File No. 0-15873, for the year ended December
31, 1995).
4.2 Form of Subscription Agreement for Series E Preferred Stock
(incorporated by reference to Exhibit 4.2 of the Company's Annual
Report on Form 10-KSB, File No. 0-15873, for the year ended December
31, 1995).
4.3 Form of Subscription Agreement for Series F Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-QSB, File No. 0-15873, for the quarter ended June
30, 1996).
4.4 Form of Registration Rights Agreement with Respect to the Purchase
of Shares of Series F Preferred Stock (incorporated by reference to
Exhibit 4.2 of the Company's Quarterly Report on Form 10-QSB, File
No. 0-15873, for the quarter ended June 30, 1995).
10.1 Lease, dated as of February 20, 1995, between the Company and 28050
Corporate Square Associates, L.P. (incorporated by reference to
Exhibit 10.2 of the Company's Annual Report on Form 10-K, File No.
0-15873, for the year ended December 31, 1994).
10.2 Stock Purchase Agreement by and among 1103065 Ontario Inc., Delta
Information Services, Inc., James Potter, Marion Audrey Potter and
Derek Betty (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated December 22, 1994, File No. 0-15873).
10.3 Registration Rights and Put Agreement by and among James Potter,
Marion Audrey Potter, Derek Betty and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K dated December
22, 1994, File No. 0-15873).
10.4 Asset Purchase Agreement by and between the Company and GIS Systems
Limited Partnership (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated February 15, 1995, File No.
0-15873).
10.5 Series B Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.1 to
the Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.6 Series C Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.2 to
the Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.7 Promissory Note made by GIS Systems Limited Partnership payable to
the Company (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.8 The Series B Preferred Stock Pledge and Call Agreement by and among
the Company, GIS Systems Limited Partnership and NationsBank of
Florida, N.A. (incorporated by reference to Exhibit 99.4 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.9 Consulting Agreement by and between the Company and Fred Maglione
(incorporated by reference to Exhibit 99.5 to the Company's Form 8-K
dated February 15, 1995, File No. 0-15873).
10.10 Consulting Agreement between James Potter, 1103065 Ontario Inc. and
the Company (incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K dated December 22, 1994, File No. 0-15873).
10.11 Letter Agreement among the Company, GIS Systems Limited Partnership,
Nicholas Flaskay, and Fred Maglione (incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-KSB, File
No. 0-15873, for the year ended December 31, 1995).
10.12 Employment Agreement of Jacqueline E. Soechtig (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form
10-K, File No. 0-15873, for the year ended December 31, 1994).
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of the Company's Annual Report on Form 10-K, File No. 0-15873,
for the year ended December 31, 1994).
27.1* Financial Data Schedule.
- ----------------------
* Filed herewith.
For the Company's financial statements for the period ended December 31, 1996,
see Part II, Item 7 of this Report on Form 10-KSB.
(b) Reports on Form 8-K.
None.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LASERGATE SYSTEMS, INC.
By: /s/ JACQUELINE E. SOECHTIG
Jacqueline E. Soechtig
President and Chief
Executive Officer
Date: March 31, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME CAPACITY DATE
/s/ JACQUELINE E. SOECHTIG President, Chief Executive Officer March 31, 1997
Jacqueline E. Soechtig (Principal Executive Officer)
and Director
/s/PHILIP P. SIGNORE Vice President - Finance, Chief March 31, 1997
Philip P. Signore Financial Officer, Secretary,
Treasurer, and Director
(Principal Financial and Accounting
Officer)
/s/ FRANK W. SWACKER Director March 31, 1997
Frank W. Swacker
/s/BRUCE D. BARRINGTON Director March 31, 1997
Bruce D. Barrington
/s/JOHN J. CHLUSKI Director March 31, 1997
John J. Chluski
25
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LASERGATE SYSTEMS, INC.
AND SUBSIDIARIES
December 31, 1996 and 1995
<PAGE>
TABLE OF CONTENTS
PAGE
Report of Independent Certified Public Accountants....................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-2
Consolidated Statement of Operations for the Years
Ended December 31, 1996 and 1995....................................... F-3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 1996 and 1995..................................... F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995....................................... F-5
Notes to Consolidated Financial Statements............................... F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lasergate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Lasergate Systems, Inc. and Subsidiaries as of December 31, 1996, and 1995, and
the related consolidated statements of operations, stockholders' equity 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, 1996, and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared, assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $4,997,962 during the year ended
December 31, 1996, and, as of that date, the Company has an accumulated deficit
of $16,783,318. The Company has historically relied on net proceeds from public
and private offerings and loans and advances from related parties to fund its
operations. Management believes that additional monies from these sources will
not be necessary to fund its operations in 1997. However, the Company's
operating loss history raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
March 28, 1997
F-1
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,924,825 $ 656,506
Accounts receivable, net of allowance for
doubtful accounts of $147,000 and $36,000 868,931 439,311
Account receivable, related party -- 199,359
Inventories 254,901 325,664
Prepaid expenses 40,966 84,392
------------ ------------
Total current assets 3,089,623 1,705,232
------------ ------------
Property and equipment, net 304,024 246,568
Systems and software costs, net of write down and amortization
of $1,525,856 and $283,333 242,739 1,416,667
Goodwill, net of amortization of $265,568 and $132,579 2,382,705 2,515,694
Customer lists and support contracts, net of amortization
of $141,667 and $70,833 283,333 354,167
Other assets, net 134,521 167,908
------------ ------------
Total assets $ 6,436,945 $ 6,406,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, related parties $ -- $ 300,000
Notes payable, other 28,628 21,757
Accounts payable, trade 542,671 634,863
Deferred revenues 909,516 729,406
Accrued warranty costs 570,919 297,000
Accrued expenses 1,128,658 272,104
------------ ------------
Total current liabilities 3,180,392 2,255,130
Promissory notes payable, stockholders with conversion futures -- 2,324,335
Obligations to issue common stock 140,000 140,000
------------ ------------
Total liabilities 3,320,392 4,719,465
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
authorized, 8,000 and 387,750 shares issued and
outstanding at December 31, 1996 and 1995, respectively 240 11,633
Common stock, $.03 par value, 20,000,000 shares authorized,
7,362,061 and 3,125,013 issued and outstanding at
December 31, 1996 and 1995, respectively 220,862 93,751
Additional paid-in capital 19,818,769 14,065,743
Less: Common stock, $.03 par value, 20,000 shares
at December 31, 1996 and 1995, respectively,
subject to put options (140,000) (140,000)
Notes receivable, stockholders -- (559,000)
Accumulated deficit (16,783,318) (11,785,356)
------------ ------------
Total stockholders' equity 3,116,553 1,686,771
------------ ------------
Total liabilities and stockholders' equity $ 6,436,945 $ 6,406,236
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31,
1996 1995
----------- -----------
Revenues $ 4,204,626 $ 2,835,206
Operating Expenses:
Cost of revenues 2,937,269 2,619,436
Development 460,709 348,352
Selling, general and administrative 4,715,513 4,122,914
Write down of capitalized software costs 1,075,000 --
----------- -----------
Operating loss (4,983,865) (4,255,496)
Other income (expense)
Interest income (expense) 53,577 (45,061)
Other, net (67,674) 93,775
----------- -----------
Loss before income taxes (4,997,962) (4,206,782)
Income taxes -- --
----------- -----------
Net loss $(4,997,962) $(4,206,782)
=========== ===========
Net loss per common share $ (.82) $ (1.39)
=========== ===========
Weighted Average Common Stock Outstanding 6,063,633 3,023,346
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
(PART 1 OF 2)
Preferred Stock Common Stock
--------------- ------------
Additional
Par Par Paid-In
Shares Value Shares Value Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 36,364 1,091 2,913,680 87,412 9,258,563
------------ ------------ ------------ ------------ ------------
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
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 preferred stock for satisfaction of
notes payable, related party 79,950 2,400 757,106
Exchange of preferred stock: Shares redeemed (36,364) (1,091)
Shares issued 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)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 387,750 $ 11,633 3,125,013 $ 93,751 $ 14,065,743
------------ ------------ ------------ ------------ ------------
Retirement of stock in settlement of acquisition (111,800) (3,355) (109,333) (3,279) 22,609
obligations
Issuance of Series E preferred stock 162,500 4,875 1,445,707
Issuance of Series F preferred stock 8,000 240 5,172,260
Redemption of preferred stock (95,950) (2,878) (997,121)
Conversion of preferred to common stock (342,500) (10,275) 4,301,381 129,040 (118,765)
Issuance of common stock as compensation 45,000 1,350 40,836
Grant of stock options for
Executive compensation 187,500
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 8,000 240 7,362,061 220,862 19,818,769
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(PART 2 OF 2)
Common
Stock Notes
Subject Receivables
to Put Stock- Accumulated
Option holders Deficit
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 (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
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
Grants of stock options for 1994 and 1995
executive compensation
Conversion of preferred to common stock
Issuance of preferred stock for satisfaction of
notes payable, related party
Exchange of preferred stock: Shares redeemed
Shares issued
Issuance of common stock under stock option plan
Exercise of common stock put option 70,000
Net loss -- -- (4,206,782)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 $ (140,000) $ (559,000) $(11,785,356)
------------ ------------ ------------
Retirement of stock in settlement of acquisition 559,000
obligations
Issuance of Series E preferred stock
Issuance of Series F preferred stock
Redemption of preferred stock
Conversion of preferred to common stock
Issuance of common stock as compensation
Grant of stock options for
Executive compensation
Net loss (4,997,962)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 (140,000) -- (16,783,318)
============ ============ ============
</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>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,997,962) $(4,206,782)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 513,153 575,985
Write down of capitalized software costs 1,075,000 --
(Gain) loss in joint venture 77,790 (48,060)
Increase in allowance for doubtful accounts 110,997 19,000
Obligations to issue options granted as
compensation for services -- (75,000)
Compensation recognized from issuance of stock and
grant of stock options 229,686 562,250
Decrease (increase) in:
Accounts receivable, trade (540,617) (305,782)
Accounts receivable, related party -- (199,359)
Inventories 70,763 (115,022)
Prepaid expenses 43,426 53,028
Other (83,598) 87,025
Increase (decrease) in:
Accounts payable and accrued expenses 764,362 136,149
Accrued warranty costs 273,919 15,925
Deferred revenue 180,110 667,406
----------- -----------
Net cash used in operating activities (2,282,971) (2,833,237)
----------- -----------
Cash flows from investing activities:
Net additions to property, equipment, and software costs (228,663) (121,772)
Loans to GIS stockholders related to GIS acquisition -- (559,000)
Other acquisition costs -- (28,145)
----------- -----------
Net cash used in investing activities (228,663) (708,917)
----------- -----------
Cash flows from financing activities:
Proceeds from secondary public or private offering, net of
offering costs 6,623,082 1,870,976
Proceeds from exercise of warrants/stock options -- 2,000
Repurchase of common stock subject to put option -- (70,000)
Redemption of preferred stock (1,000,000) --
Settlement of acquisition obligations (1,550,000) --
Proceeds from loans, other 30,200 36,924
Repayment of loans, other (23,329) (90,077)
Proceeds from loans, related parties -- 859,000
Repayment of loans, related parties (300,000) --
----------- -----------
Net cash provided by financing activities 3,779,953 2,608,823
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,268,319 (933,331)
----------- -----------
Cash and cash equivalents, beginning of year 656,506 1,589,837
----------- -----------
Cash and cash equivalents, end of year $ 1,924,825 $ 656,506
=========== ===========
</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, 1996 and 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
Year ended December 31,
-----------------------
1996 1995
----------- -----------
Interest $ 17,494 $ 31,155
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 (See Note 4).
The Company issued 79,950 shares of preferred stock in satisfaction
of related party notes payable of $759,505.
1996:
In March 1996, the Company settled its acquisition obligation with
GIS (See Note 10) as follows:
Promissory notes payable, stockholders $2,324,335
Less:
Cash payment 1,550,000
Accounts receivable canceled 199,359
Note receivable canceled 559,000
Retirement of common and preferred stock 15,976
----------
$ --
==========
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, 1996 and 1995
NOTE 1 - DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (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 reserved
seating. These systems are used primarily at amusement parks, theme parks, water
parks, museums, aquariums, zoos, casinos, ski resorts, night clubs, theaters,
professional and university athletic and multi-purpose arenas, and other public
facilities, including state, county and local fairs, movie theaters, race tracks
and golf courses.
The Company's principal products "Select-a-Seat", "Admits Platinum"
and "Admits Gold", represent approximately 33%, 35% and 16% of revenues in 1996,
respectively, and 42%, 30%, and 12% of revenues in 1995, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of 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. These estimates are a major factor in providing for warranty costs,
doubtful accounts, valuation of intangibles, litigation, and certain taxes which
are further described herein. 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are reported net of allowance for doubtful
accounts. At least quarterly, management reviews the collection status of its
accounts and provides an appropriate allowance, if necessary. Based on these
reviews, management believes that its accounts at December 31, 1996 and 1995 are
reasonbaly stated.
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.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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
(3-5 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 Delta and GIS in December 1994 and
January 1995 (see Note 4) as adjusted by a one-time write-down of $1,075,000
during 1996. 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 prior to the fourth quarter of 1996, along with the cost to
integrate GIS and Delta products with the Company's products in 1996 and 1995,
have been expensed and included in development costs. No amounts have been
capitalized by the Company during 1996 and 1995, except those recorded as a
result of the GIS and Delta acquisitions, and approximately $25,000 during the
fourth quarter of 1996 (See Note 7), 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.
During 1996, the Company decided to convert all of their products
into one modular Windows(R) based product. Accordingly, the softwares' carrying
values were written down $1,075,000 to approximately $200,000, representing the
software's estimated net realizable value. (See Note 7.) Amortization of system
and software costs in 1996 and 1995, exclusive of the write down discussed
above, was $167,523, and $283,333 and is included in Selling General and
Administrative Expenses.
INTANGIBLES
Intangibles which were recognized in connection with the Company's
acquisition of GIS and Delta in 1996 and 1995, 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 (exclusive of software) for 1996 and 1995 was
$232,156 and $231,745, and is included in selling, general and administrative
expenses. Management reviews, at least on
F-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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 1996 and 1995, no impairment was identified, exclusive of the
write-down of software costs discussed above.
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, 1996
and 1995, and for the years then ended, the joint venture's assets, liabilities
and results of operations are not significant. The Company's share of the joint
venture's net (loss) from operations for 1996 and 1995 was ($77,790) and
$48,060, respectively, and was classified in other income/expense in the
accompanying consolidated financial statements for 1996 and 1995. The net
carrying value of the Company's investment in/advances to the joint venture at
December 31, 1996, and 1995, was $0 and $77,790, respectively, and was
classified in other assets. The Company has not guaranteed any of the joint
venture's liabilities nor does the Company have any commitments to fund its
operations. The Company intends to dissolve this joint venture as of June 30,
1997.
WARRANTY COSTS AND WARRANTY LIABILITY (ALLOWANCE)
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 into 1996. Effective June 1, 1996 the
Company returned to its original 90-day warranty period. This warranty period
primarily relates to telephone support of customers. The related costs are
charged to cost of revenues as incurred.
At December 31, 1995, the Company had an accrued warranty liability
(warranty allowance) of $297,000, which had been provided to cover the cost of
enhancements to be made (free of charge) to systems installed in prior periods.
However, some of these modifications were more costly to perform than originally
estimated, and the Company has committed to make similar enhancements for
additional customers. As a result, an additional $487,000 was accrued during
1996 in order to provide for the cost of completing all known warranty claims.
In addition, during 1996, management reviewed all warranty costs incurred within
the past year, which had been provided for by estimating and recording known
warranty liabilities each quarter. Based on this review and management's
expectation that the number of installations will continue to grow and,
therefore, make it more difficult to review all installations individually,
management began providing for warranty costs by accruing a warranty allowance
of 5% of revenues. During 1996, this amounted to $81,000. The balance of the
accrued warranty allowance at December 31, 1996, was $571,000. Management
believes 5% is a
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
conservative estimate of these costs (which are unknown at time of sale) but
will continue to monitor them to ensure they are provided for on a current basis
in order to match the cost with the associated revenue.
Provisions for the warranty allowance are classified as cost of
revenues.
While warranty modifications are often enhancements that may result
in future product and service revenues, no absolute assurance can be given at
this time.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, and 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 maintenance are
recognized ratably over the maintenance period if collectibility is probable.
Revenues include product sales and service revenues. Service
revenues represent approximately 14% and 11%, respectively, of total revenues in
1996 and 1995.
Deferred revenues include customer deposits of $335,467 and $384,731
and advanced billings in accordance with contract terms of $418,063 and $344,675
at December 31, 1996 and 1995, respectively.
Cost of revenues includes the costs associated with the hardware and
software acquired for the Company's customers and the estimated full costs
associated with the engineering (mostly software customization) and installation
of the system. Cost of revenues also includes the estimated full cost related to
support and maintenance. The Company refined its procedures for capturing and
reporting such information in 1996. This refinement affected the comparability
of the information being reported. Thus, cost of revenues, development costs,
and selling, general and administrative expenses were reclassified for 1995,
using the same basis as that used for 1996. The Company believes that the
estimated full costs are reasonably stated
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
and classified in all material respects.
During 1996 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 those 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 the Company's existing products
during 1996 and 1995.
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 antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (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 requires 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. The
adoption of SFAS No. 121 had an insignificant effect on the Company's financial
statements.
Effective January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock Based Compensation. For employee stock awards, as allowed
by SFAS No. 123, the Company has elected to continue using the accounting method
promulgated by the Accounting Principals Board Opinion No. 25. Accounting for
Stock Issued to Employees to measure compensation. As a result, SFAS No.123
pro-forma disclosures are required in these financial statements. The adoption
of SFAS No. 123's accounting and reporting provisions had an insignificant
effect on the Company's financial statements. See Note 13.
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The Company has a net loss for 1996 of $4,997,962, and a history of
operating losses that have accumulated to $16,783,318, at December 31, 1996. In
view of these matters, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operation of the Company, which in turn is dependent upon the Company's ability
to succeed in its future operations. 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 following commentary
addresses the Company's operations for 1996 and its plan to improve future
results.
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 the majority of the Board
of Directors during 1996 from October 1994 through May 1996 all of the Company's
senior executives, including the President/CEO as well as most of its other
personnel. They also included two acquisitions (Delta and GIS Systems Limited
Partnership ("GIS")) with a combined customer base of over 200 sites, and
various product integration and development efforts.
These changes required more than two years of sustained effort and
substantial amounts of capital. At the beginning of 1996, the Company had very
little working capital. This situation grew worse during the first half of the
year, resulting in shipments to customers falling behind schedule because orders
for their product were not placed with vendors, in that the Company had utilized
all credit extended to it by its vendors. Given those circumstances, the Company
undertook two private placements of convertible preferred stock during that time
period, for which the Company received a combined total of $6,623,082, net of
commissions and offering expenses. That capital infusion allowed the Company to
initiate two basic programs designed to move the Company toward profitability.
First, was development of a new modular product (Admits) allowing the product to
be customized more easily and installed more efficiently. The second was
committing additional funds to marketing efforts, including a doubling of the
sales force aimed at substantially increasing revenues and potentially moving
the Company beyond the break-even point and towards profitability in the future.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The development effort was immediately focused upon the general
admission product since it would most likely yield the fastest and largest
payback. The core of the product was developed earlier than planned and was in
Beta testing by November 1996. The experience of the development team and the
ability to forego the creation of a detailed program design by utilizing the
software programs of the legacy products as a production plan accelerated
development. With the Company's efforts to satisfy new and existing customer
demands for programming changes to the Delta and GIS products, a substantial
portion of the Company's resources remained dedicated to the legacy products in
all areas: development, installation, customer support, training, documentation,
and marketing. However, the Company kept the general admission development
effort on schedule. At the present time, management believes the Company will
have the new Admits general admission product available for general release by
June 1997.
For most of 1996 the Company employed three or four field sales
representatives. During the fourth quarter of 1996, two systems engineers were
dedicated to providing pre-sales support and an inside sales department was
organized with two inside sales representatives hired initially. During February
and March of 1997, two additional field sales representatives were hired,
bringing the total to six sales personnel. Thus, for most of 1997, the Company
plans to have ten employees dedicated to sales efforts compared to three or four
during 1996.
The result for the company expanding its sales force and delivering
the new Admits general admission product on schedule should favorably impact
upon revenue during the latter part of 1997. Management believes it can thus
achieve a reduction of the operating loss by the end of 1997 and lay the
foundation for future profitability. Although no assurance can be given,
management believes that sustained expenditure and cash controls, would maintain
adequate working capital through 1997, based upon the further premise that the
new general admission Admits product will be completed as planned by June 1997.
Nevertheless, the Company intends to seek and actively pursue a possible
relationship with a strategic partner, which would include an equity investment
in the Company and may review other financing opportunities.
Although revenues increased to $4,204,626 in 1996 from $2,835,206 in
1995, increased costs more than offset the increased revenues, such that the net
loss increased from $4,206,782 in 1995 to $4,997,962 in 1996. The largest
component of the increase was a one-time write-down of capitalized software in
the amount of $1,075,000.
Although no assurances can be given, based on actual sales for the
first three months of 1997 (unaudited) and committed sales orders to date
(unaudited), revenues for 1997 will be at least at the level achieved in 1996,
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.
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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, totaling $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 was
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
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
receivable was presented as a reduction of stockholders' equity.
See Note 9 for discussion about the settlement of the acquisition
obligations.
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
===========
In connection with the acquisition of Delta Information Services,
Inc. (Delta) in 1994, the sellers were granted 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 had 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. During 1996, an additional 10,000 options were presented
by the option holders in order to exercise them. However, the Company did not
allow them to be exercised due to a disagreement with the sellers regarding the
stock purchase agreement. (See Note 12.)
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 5 - INVENTORIES
Inventories as of December 31, consist of the following:
1996 1995
-------- --------
Installations-in-process $199,561 $172,411
Parts and systems 55,340 153,253
-------- --------
$254,901 $325,664
======== ========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, consist of the following:
1996 1995
-------- --------
Furniture and equipment $507,311 $357,346
Purchased software 19,244 12,231
Test equipment 52,902 49,812
-------- --------
579,457 419,389
Less accumulated depreciation 275,433 172,821
-------- --------
$304,024 $246,568
======== ========
NOTE 7 - SYSTEMS AND SOFTWARE COSTS
The Company markets products that typically require substantial
customization in order to meet the customers' particular requirements. In June
1996, the Company commenced an assessment of its marketing strategy related to
the Company's current software products. While the Company has reduced the cost
of installing, customizing, and servicing (maintaining) the customized software,
these costs have remained higher than desired levels. With anticipated increased
revenues, though no assurances are given, the company continues to believe that
it would successfully generate profits from the current software. The Company
commissioned an assessment to determine whether the Company's computer products
could be modified in order to provide more product options to its customers
without incurring substantial customization costs. Although the assessment
principally focused on the conceptual design of the products to be offered and
was not an inquiry as to whether any technological innovations needed to be
implemented in order for the Company to competitively market its products, the
Company's marketing and development personnel confirmed that the ticketing,
access control, and other technologies that define the current products remain
competitive in the marketplace.
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The Company concluded as a result of the assessment, that instead of
marketing products that require substantial customization, to design and offer
its products in a modular fashion. They will consist of a primary product with
optional pre-developed modules and a configuration layer to meet specific
customer needs that would require limited or no customization by the Company.
Additionally, the implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Although no assurances can be given,
management expects that applying the Company's proprietary technology in this
fashion will be a highly effective method of providing business solutions to the
entertainment industry.
Accordingly, the Company has commenced the development of this new
marketing approach and expects the new general admission products, incorporating
the modular concept, will be available for sale by the second quarter of 1997.
As of March 1997, the Company has installed limited functionality versions of
the new product in four different sites. The current software will continue to
be marketed and the Company will continue to support the present software for
some period beyond the introduction of the new general admission product for
those customers who intend to continue using the current software.
Because of the recent strategic decision described above, the
Company reviewed the valuation of the current software cost (pre-write-down
amortized balance of $1,275,000 at June 30, 1996) in accordance with the net
realizable value determination provisions under SFAS No. 86 "Computer Software
to be Sold, Leased, or Otherwise Marketed". As a result, a write-down of
$1,075,000 has been made to the software's carrying value. The software's
estimated net realizable value as adjusted of $200,000 at June 30, 1996,
principally relates to the Company's engineers' estimate of the recoverable
value of the current products proven program and product design, which will be
incorporated into the new product concept and is expected to be fully realized
(recoverable) through future revenues.
The Company estimates the cost of developing the new general
admission products incorporating the modular concept will total approximately
$400,000 to $500,000 by the second quarter of 1997. To date, the Company has
incurred approximately $131,000 in development costs for these products, of
which approximately $25,000 has been capitalized at December 31, 1996.
NOTE 8 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1996 1995
-------- --------
Non-competition agreement net of
amortization $56,667 and $28,333 $ 28,333 $ 56,667
Investment in and advances to joint venture -- 77,790
Other 106,188 33,451
-------- --------
$134,521 $167,908
======== ========
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 9 - NOTES PAYABLE
At December 31, 1995, the Company had an outstanding balance of
$21,757 under a premium financing agreement, which was paid off during 1996, at
an annual interest rate of 9.25%.
At December 31, 1996, the Company had an outstanding balance of
$28,628 due to a bank. The note matures on August 23, 2001, has an annual
interest rate of 10% and is collateralized with office equipment.
NOTE 10 - ACQUISITION OBLIGATIONS
At December 31, 1995, the "promissory notes payable, stockholders
with conversion features" totaling $2,324,335, which was 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, was 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 were not used to satisfy the promissory
notes.
In order to simplify the Company's capital and debt structure, on
March 11, 1996, the Company and GIS agreed, among other things, to settle the
remaining obligation to GIS totaling $2,324,335 by the Company making a cash
payment to GIS of $1,550,000, canceling the $559,000 note receivable from GIS,
and canceling the $199,359 account receivable from GIS, and with the Company
redeeming for retirement the 109,333 shares of Common Stock and 111,800 shares
of Series B Preferred Stock previously issued to GIS. On April 12, 1996, the
transactions contemplated by the March 11 agreement were consummated. Because
the promissory notes included conversion features and had other characteristics
similar to capital stock, the settlement had no income effect and was recognized
through the related balance sheet accounts, including stockholders' equity. (See
Statements of Stockholders' Equity and Cash Flows).
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-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 11 - INCOME TAXES
The Company has a net operating loss (NOL) for income tax purposes
of approximately $12,000,000 at December 31, 1996, 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
carry forward 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,
----------------------------
1996 1995
----------- -----------
Basis difference in intangible assets $ 53,000 $ 70,000
Warranty costs 211,000 110,000
Bad debt allowance, employee
vacation pay, and other accruals 326,000 80,000
Compensation related to stock options 415,000 350,000
Net operating loss carry forward (1) 4,310,000 3,340,000
----------- -----------
5,315,000 3,950,000
Less valuation allowance (5,315,000) (3,950,000)
----------- -----------
$ -- $ --
=========== ===========
(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
carry forward 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:
1996 1995
---- ----
Federal statutory rate 34 % 34 %
Effect of net operating losses (NOL) or NOL carry forward (34)% (34)%
---- ----
Effective tax rate, after the effect of NOL 0 % 0 %
==== ====
F-19
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facilities as well as
some office equipment under operating leases.
Future minimum payments under these operating leases are as follows:
1997 $ 148,564
1998 187,573
1999 64,270
2000 7,026
2001 --
----------
$ 407,433
Total lease payments for the years ended December 31, 1996 and 1995
were $144,569 and $89,027, 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.
Derek Betty and James Potter have instituted actions again the
Company. The first action is entitled Derek Betty v. Lasergate System, 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
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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. A hearing on the motion in the Potter Action is scheduled
for April 1, 1997, and a hearing on the motion in the Betty Action is scheduled
for May 2, 1997. The Company intends to vigorously defend both actions.
The Company is also involved in other legal actions. Management does
not believe that the ultimate resolution of these and the above matters will
have a material effect on the Company's financial position.
OTHER MATTERS
Management is presently reviewing the methods and procedures used
for determining its sales tax reporting obligations. Management believes the
reported sales tax liability as of December 31, 1996, is reasonably adequate.
NOTE 13 - STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1995, the Company's authorized shares of common stock
was increased from 5,000,000 to 20,000,000.
F-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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, D, E, and F convertible preferred stock.
<TABLE>
<CAPTION>
Series of Preferred Stock
------------------------------------------------------------------------
A B D E F Total
<S> <C> <C> <C> <C> <C> <C>
Authorized shares
December 31, 1996 200,000 230,000 350,000 350,000 8,000 1,138,000
Outstanding shares
December 31, 1996 -- -- -- -- 8,000 8,000
December 31, 1995 95,950 111,800 180,000 -- -- 387,750
Outstanding share amounts
December 31, 1996 -- -- -- -- 240 240
December 31, 1995 $ 2,879 $ 3,354 $ 5,400 -- -- $ 11,633
</TABLE>
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). None of the preferred stock have
or had mandatory redeemable provisions.
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. On June 28,
1996, the Company redeemed all 95,950 shares of Series A Preferred Stock for
$1,000,000. The $1,000,000 cash payment was principally provided from the
proceeds of the Series F Private Placement.
On February 15, 1995, the Company issued all 111,800 shares of
Series B Preferred Stock to GIS in connection with that acquisition (see Note
4). On April 12, 1996, all 111,800 shares of Series B Preferred Stock were
redeemed by the Company as part of the settlement of the related acquisition
obligation. (See Note 10).
In October 1995, the Company completed the private placement of all
208,600 shares of Series D Convertible Preferred Stock. As of December 31, 1996,
all 208,600 Series D shares have converted into 1,664,463 shares of common
stock. For discussion of Series E and F Shares see Issuance of Stock -- Private
Placements.
F-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
ISSUANCE OF COMMON STOCK FOR SERVICES
In June 1996, the Company issued 45,000 shares of restricted common
stock to non-employee directors as compensation for past services as directors.
Compensation for the services totaled approximately $42,000 based upon the
market value of the Company's common stock which approximated the value of
services rendered.
ISSUANCE OF STOCK - PRIVATE PLACEMENT
On March 27, 1996, the Company commenced a private placement of
shares of the Company's newly established Series E Preferred Stock at $10.00 per
share. On April 22, 1996, 162,500 shares of the Series E Preferred Stock
successfully closed with the Company receiving total proceeds, net of
commissions and offering costs, of $1,450,582. As of July 3, 1996, all 162,500
Series E shares converted into 2,627,902 shares of common stock.
On June 10, 1996, the Company commenced a private placement of 8,000
shares, at $750 a share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock. Each Series F share has a face value of $1,000,
and is convertible into shares of common stock after August 7, 1996, at,
generally, the average market price for the five trading days preceding
conversion. However, for any conversion effected on or after June 6, 1997, but
prior to June 6, 1998, the conversion price shall be 96% of such average market
price, and on or after June 6, 1998, the conversion price shall be 94% of such
average market price, but if such average market price is more than $1.00, the
conversion price will be $1.00, and one preferred share will convert into 1,000
shares of common stock; and if such average market price is less than $0.45, the
conversion price will be $0.45, and one preferred share will convert into 2,222
shares of common stock. Thus, the 8,000 Series F shares are convertible into
between 8,000,000 and 17,777,778 shares of common stock. The entire Series F is
redeemable at the price of $1.00 per share any time on or after June 7, 1999 at
the Company's option upon giving 30 days notice to the holders of the Series F
Preferred Stock. Series F shares have a liquidation value of $1,000 per share.
On January 27, 1997 55 Series F convertible preferred shares were converted into
100,000 shares of common stock at a conversion price of $.55 per share. The
conversion price was calculated as of September 30, 1996, the conversion request
date.
RESERVATION AND AUTHORIZATION OF COMMON STOCK
Upon the sale of 8,000 shares of Series F Convertible Preferred
Stock, the Company reserved 8,000,000 shares of common stock to provide for
their conversion. If the average market price of the Company's common stock for
the five trading days prior to conversion is less than $1.00 per share (thus
permitting the holders of the Company's Series F Preferred Stock to convert such
shares into more than 8,000,000 shares of common stock), the Company would not
have a sufficient number of authorized shares of common stock to permit
conversion to all the Series F Preferred Stock. The Board of Directors plans to
recommend to the Company's stockholders at the 1996 Annual Meeting of
Stockholders than they approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock. Upon
approval of this amendment by the stockholders of the Company, the Company will
reserve 9,777,778 additional shares to allow for the possibility of the Series F
shares into as many as 17,777,778 common shares.
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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.
At the 1995 annual meeting of shareholders, shareholders approved
changes to the 1994 Stock Option Plan (the "Plan") which authorized grants of
5,000 options per term year, at an exercise price of 85% of the market value,
for each outside Director. The options vest at the rate of 5,000 shares per
year, at the beginning of each term year. Accordingly, Frank W. Swacker (an
outside Director) was granted 15,000 options on December 21, 1995 at an exercise
price of $2.76 of which 5,000 shares vested on December 21, 1995, 5,000 vested
on December 21, 1996 and 5,000 will vest on December 21, 1997.
The Company granted 37,500 options outside of the Plan to each of
John J. Chluski (an outside Director) and Bruce D. Barrington (an outside
Director) shortly after their appointment to the Board of Directors as an
inducement for them to join the Board in addition to the automatic grants of
5,000 options each. Their options are exercisable for 10 years at exercise
prices ranging from $0.425 to $0.65625 and were immediately vested.
NON-QUALIFIED STOCK OPTIONS
In October 1994 375,000 non-qualified stock options at an exercise
price of $2.00 per share were granted 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 exercisable 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, was 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 vested on October 31, 1996. In accordance with accounting provisions of
APB No. 25, the Company recorded compensation expense in 1995 of $562,500 and
$187,500 in 1996.
The Company granted options to purchase 120,000 shares of common
stock to an executive officer for services rendered during 1996. These options
vested on October 31, 1996. The terms of the options are as follows: an option
to purchase 20,000 shares at an excercise price of $2.00 which is excercisable
through December 31, 1997 and an option to purchase 100,000 shares at an
excercise price of $0.66 which is excercisable until the later of: a) December
31, 1997; or b) one year after registration of the underlying stock (the
underlying stock has not been registered as of March 31, 1997).
F-24
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
A summary of the status of the Company's outstanding stock options
as of December 31, 1996, and 1995, and changes during the years ending on those
dates is presented below:
Weighted Average
Shares Exercise Price
-------- --------------
Options outstanding, December 31, 1994 428,300 $ 1.88
Options granted 15,000 $ 2.76
Options canceled or forfeited (29,800) $ 1.09
--------
Options outstanding, December 31, 1995 413,500 $ 1.97
Options granted 205,000 $ .78
Options canceled or forfeited (17,500) $ 1.00
-------- -------
Options outstanding, December 31, 1996 601,000 $ 1.59
======== =======
The following table summarizes information concerning currently outstanding and
exercisable stock options:
Weighted Average
Remaining Weighted
Range of Number Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
Outstanding Options:
$0.425-$0.66 185,000 5.1 $ 0.64
$1.00 6,000 2.5 $ 1.00
$2.00-$2.76 410,000 7.6 $ 2.03
Exercisable Options:
$0.425-$0.66 185,000 5.1 $ 0.64
$1.00 6,000 2.5 $ 1.00
$2.00-$2.76 405,000 7.6 $ 2.02
The company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock. If the Company had elected
to recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by SFAS
123, the Company's net loss per common share would be increased to the pro forma
amounts indicated below for the years ended December 31:
1996 1995
Net loss As reported $4,997,962 $4,206,782
Pro forma (unaudited) $5,092,962 $4,221,782
Loss per common share As reported $ .82 $ 1.39
Pro forma (unaudited) $ .84 $ 1.39
The fair value of each option grant is estimated on the date of grant using
the Binomial options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively, no dividend yield
for all years, expected volatility of approximately 112%; risk-free interest
rates of approximately 6.0%, and expected lives of approximately 2.5 years. The
Company's common stock activity has had an extremely volatile history since and
including 1994. Because of the insignificat effect on the pro forma amounts
presented above, the Company has elected not to attempt to adjust (lower) the
volatility factor used. Such adjustment would account for the various factors or
conditions that probably impacted the Company's common stock prices and which
are possibly non-recurring. Such an adjustment which would lower the volatitity
factor used would further reduce the calculated fair value of the options.
F-25
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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.
In connection with the private placement of Series F Convertible
Preferred Stock completed in June 1996, the Company issued 500,000 warrants to
the placement agent. These warrants expire on September 30, 2001, and entitle
the holder to purchase one share of the Company's common stock at an excercise
price of the lower of $1.00 or the average conversion price of the Series F
Convertible Preferred Stock (currently $.55).
The estimated fair value of these warrants for the placement agent
services rendered, based on SFAS No. 123 provisions is approximately $190,000,
determined by using a binomial option-pricing model with assumed
F-26
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
volatility of 112%, risk-free rate of 6.0%, and expected holding period of three
years. For financial statement purposes, the value of the services
(compensation) is reflected as a reduction to the proceeds received from the
related private placement and, accordingly, a reduction to paid-in capital. In
addition, the value assigned to the warrants is reflected as an addition to
paid-in capital (Stockholders' Equity). Because the reduction and increase to
paid-in capital are offsetting amounts of $190,000, the Company has chosen not
to reflect them separately in the Statement of Stockholders' Equity.
A summary of the status of the Company's outstanding warrants as of
December 31, 1996, and 1995, and changes during the years ending on those dates
is presented below:
Weighted Average
Shares Exercise Price
------ --------------
Warrants outstanding, December 31, 1994 2,121,067 $ 5.90
Warrants granted -- --
Warrants canceled or forfeited -- --
Warrants outstanding, December 31, 1995 2,121,067 $ 5.90
Warrants granted 500,000 $ .55
Warramts camceled or forfeited -- --
Warrants outstanding, December 31, 1996 2,621,067 $ 4.88
The following table summarizes information concerning currently outstanding and
exercisable warrants:
Weighted Average
Remaining Weighted
Range of Number Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
Outstanding Warrants:
$ 0.55 500,000 4.5 $ 0.55
$3.75-$5.50 1,845,067 2.8 $ 5.50
$ 9.08 276,000 2.8 $ 9.08
Exercisable Warrants:
$ 0.55 500,000 4.5 $ 0.55
$3.75-$5.50 1,845,067 2.8 $ 5.50
$ 9.08 276,000 2.8 $ 9.08
F-27
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 14 - SALES TO MAJOR CUSTOMERS
In 1996, one customer, (Bayindir Insaat Turizm Ticaret, a large,
indoor amusement park in Istanbul, Turkey) represented 12% of revenues.
In 1995, there were no customers representing 10% or more of
revenues.
NOTE 15 - EMPLOYEE BENEFITS
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 or 1996.
In order to reduce its overhead costs, the Company entered into an
employee leasing agreement effective January 1, 1996, with a firm that provides
all administrative services relating to payroll, personnel and employee
benefits, including those provided by the leasing company's 401(k) plan. The
Company signed an agreement with a new employee leasing company effective
December 16, 1996. Management continues to hire, dismiss, set pay rates, and
supervise the employees.
NOTE 16 - RELATED PARTY TRANSACTIONS
During 1996, the Company made a cash payment of $14,000 to an
outside Director of the Company for extensive business consulting services. The
Company also paid approximately $20,000 to a vendor in which another outside
Director has a financial interest.
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000797324
<NAME> LASERGATE SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,924,825
<SECURITIES> 0
<RECEIVABLES> 1,015,931
<ALLOWANCES> 147,000
<INVENTORY> 254,901
<CURRENT-ASSETS> 3,089,623
<PP&E> 579,457
<DEPRECIATION> 275,433
<TOTAL-ASSETS> 6,436,945
<CURRENT-LIABILITIES> 3,180,392
<BONDS> 0
0
240
<COMMON> 220,862
<OTHER-SE> 2,895,451
<TOTAL-LIABILITY-AND-EQUITY> 6,436,945
<SALES> 4,024,626
<TOTAL-REVENUES> 4,024,626
<CGS> 2,937,269
<TOTAL-COSTS> 9,188,491
<OTHER-EXPENSES> (67,674)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,577
<INCOME-PRETAX> (4,997,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,997,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,997,962)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> 0
</TABLE>
