SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30,
1997.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________
to _____________
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
(Exact name of small business issuer in its charter)
Florida 59-2543206
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28050 US 19 N, Suite 502, Clearwater, Florida 34761
---------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
Class Outstanding at November 12, 1997
- ----- --------------------------------
Common stock $0.03 par value 7,462,061
Transitional Small Business Disclosure Format (check one)
Yes [_] No [X]
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 1997 3
(unaudited) and December 31, 1996
Consolidated Statements of Operations 4
(unaudited) for the three months and nine months ended
September 30, 1997 and 1996
Consolidated Statements of Cash Flows 5
(unaudited) for the nine months ended
September 30, 1997 and 1996
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan 11
of Operation
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 239,672 $ 1,924,825
Accounts receivable, net of allowance for
doubtful accounts of $161,980 and $147,124 528,214 868,931
Inventories 148,572 254,901
Prepaid expenses 57,839 40,966
------------ ------------
Total current assets 3,089,623 974,297
Property and equipment, net 309,344 304,024
Note receivable-trade 153,910 --
Systems and software costs, net of amortization of $1,581,427
and $1,525,856 445,612 242,739
Goodwill, net of amortization of $365,310 and $265,568 2,282,963 2,382,705
Customer lists and support contracts, net of amortization of
$425,000 and $141,667 -- 283,333
Other assets, net 10,733 134,521
------------ ------------
Total Assets $ 4,176,859 $ 6,436,945
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, bank: 24,888 28,628
Accounts payable, trade 655,073 542,671
Deferred revenues 1,100,640 909,516
Accrued product costs 546,697 570,919
Accrued expenses 774,866 1,128,658
Total current liabilities 3,102,164 3,180,392
Common stock subject to put options 140,000 140,000
------------ ------------
Total liabilities 3,242,164 3,320,392
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares authorized,
7,945 and 8,000 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 238 240
Common stock, $.03 par value, 20,000,000 shares authorized,
7,462,061 and 7,362,061 issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 223,862 220,862
Additional paid-in capital 19,815,771 19,818,769
Less: Common stock, $.03 par value, 20,000 shares
at September 30, 1997 and December 31, 1996, respectively,
subject to put options (140,000) (140,000)
Accumulated deficit (18,965,176) (16,783,318)
------------ ------------
Total stockholders' equity 934,695 3,116,553
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,176,859 $ 6,436,945
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,042,114 $ 1,005,860 $ 3,346,578 $ 3,575,790
Operating expenses:
Cost of Revenues 735,349 481,203 2,536,414 2,273,254
Development 106,578 150,821 316,264 312,884
Selling, general and administrative
(Including write-down of intangibles of
$1,075,000 in June 1996 and $285,000
in September 1997) 1,040,877 946,694 2,704,792 4,674,753
----------- ----------- ----------- -----------
Operating Loss (840,690) (572,858) (2,210,892) (3,685,101)
Other income (expense) 10,509 36,965 29,034 (4,003)
----------- ----------- ----------- -----------
Net loss ($ 830,181) ($ 535,893) ($2,181,858) ($3,689,104)
=========== =========== =========== ===========
Net loss per common share ($ .11) ($ 0.07) ($ .29) ($ 0.65)
=========== =========== =========== ===========
Weighted Average Common Stock Outstanding 7,462,061 7,428,274 7,452,537 5,656,674
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,181,858) ($3,689,104)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation, write-down and amortization 568,803 1,490,775
Increase in provision for doubtful accounts 14,856 57,644
Stock-based compensation -- 244,988
Decrease (increase) in:
Accounts receivable, trade 325,861 (551,520)
Inventories 106,329 232,744
Prepaid expense (16,873) 55,425
Other current assets 102,538 (87,375)
Other assets -- 77,790
Increase (decrease) in:
Accounts payable and accrued expenses (241,384) 308,663
Accrued product costs (24,222) 173,684
Deferred revenue 191,124 (52,039)
----------- -----------
Net cash used in operating activities (1,154,826) (1,738,325)
=========== ===========
Cash flows from investing activities:
(Additions) to, disposal of, property and equipment (114,227) (123,725)
Capitalized software development costs (258,445) --
----------- -----------
Net cash provided (used) in investing activities (372,672) (123,725)
----------- -----------
Cash flows from financing activities:
Issuance of note receivable (153,910) --
Repayment of loans, related parties -- (300,000)
Proceeds from loans -- 30,200
Repayment of loans, other (3,745) (29,067)
Repayment of obligations under capital leases -- (31,092)
(Settlement)of acquisition obligations -- (1,550,000)
Net proceeds from issuance of stock -- 6,623,082
Redemption of Preferred Stock -- (1,000,000)
----------- -----------
Net cash provided by financing activities (157,655) 3,743,123
Net increase (decrease) in cash and cash equivalents (1,685,153) 1,881,073
Cash and cash equivalents, beginning of period 1,924,825 656,506
----------- -----------
Cash and cash equivalents, end of period $ 239,672 $ 2,537,579
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
INTERIM PRESENTATION
The interim consolidated financial statements of Lasergate Systems, Inc. (the
"Company") are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto in its Form 10-KSB for the year ended
December 31, 1996. In the opinion of management, the accompanying consolidated
financial statements (with all explanations contained in these Notes ) contain
all adjustments necessary for a fair presentation of the results of operations
for this interim period. Interim results are not necessarily indicative of the
results for a full fiscal year.
OPERATIONAL AND FUNDING MATTERS AND REPORTING BASIS
The information contained in Note 3 to the Financial Statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 remains current related to the status of certain of the Company's
operational and funding matters and, accordingly, should be referred to in
conjunction with this Form 10-QSB.
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. For the nine months ended September 30, 1997, the
Company incurred a loss of $2,181,858 and has an accumulated deficit of
$18,965,176 and used cash in operating activities of $1,154,826 during the nine
months of 1997.
In recent years the Company has relied upon proceeds from private and public
placements and loans (some of which were converted to stock) from former
principal stockholders to fund its operations.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the Company's balance
sheet is dependent upon continued operation of the Company, which in turn is
dependent upon the Company's ability to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
The Company is presently seeking one or more potential strategic partners who
can complement the Company's marketing and development efforts and increase its
financial stability. As part of any arrangement, the Company would require a
capital infusion in the Company which could result in a further dilution of the
present shareholders' equity interests. Management believes this is necessary in
order to increase the Company's revenues.
On March 27, 1996, the Company commenced the Private Placement of the Company's
newly established Series E Preferred Stock at $10.00 per share. On April 22,
1996, 162,500 shares of the Series E Convertible Preferred Stock successfully
closed with the Company receiving total proceeds, net of offering costs of
$1,450,582.
On June 10, 1996, the Company commenced a Private Placement of 8,000 shares, at
$750 per share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock.
On June 27, 1996, the Company used $329,359 of the proceeds of the Series F
Private Placement to repay the entire Note Payable-Related Party of $300,000 and
the interest accrued through that date. In addition, on June 28, the Company
used $1,000,000 of the proceeds to redeem 95,950 shares of Series A Convertible
Preferred Stock held by the same related parties who held the $300,000 in notes.
These shares were potentially convertible into 2,636,126 shares of common stock
had they not been redeemed. 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.
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank, AG ("RBB") for $7,500,000 pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, under
Regulation S promulgated thereunder. Pursuant to the transaction, the Company
redeemed 7,945 shares of the Company's Series F Preferred Stock owned by RBB for
$6 million, leaving the Company with $1,447,500 of net proceeds after giving
effect to expenses of the offering. No sales commissions were paid.
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<PAGE>
REVENUE RECOGNITION
Revenues from the sale of equipment and software licenses, which have been
predominately under short-term contracts during the periods presented herein,
are recognized upon the acceptance of the system by the customer provided that
no significant vendor or post-contract support obligations remain outstanding
and collection of the resulting receivable is probable. Revenues from special
sales sold under evaluation periods are recognized at the end of this period.
Revenues from the sale of equipment and software licenses with a planned
installation period exceeding 90 days are accounted for using the percentage of
completion method.
Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
CLASSIFICATION OF EXPENSES
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts. Amortization of
capitalized software development costs and other intangible assets is classified
as Selling, General and Administrative Expense.
NET LOSS PER COMMON SHARE
The net loss per common share amount is based on the weighted average number of
common shares outstanding during the periods. Common stock equivalents (options
and warrants) and the effect of the convertible securities were not included in
the calculation of net loss per share because they are antidilutive. At
September 30, 1997, there were options and warrants outstanding to purchase
3,015,000 common shares at prices ranging from $0.2391 to $5.50 per share, and
7,945 Series F shares which can convert into as many as 17,655,556 common shares
NOTE 2 - SYSTEMS AND SOFTWARE COSTS
Historically, the Company has marketed products that typically require
substantial customization in order to meet the customers' particular
requirements. During 1996, the Company changed its strategy and decided to
design products in a modular fashion. The modules will consist of a primary
product with optional pre-developed modules and a configuration layer to meet
specific customer needs that would require limited or no customization by the
Company. The implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Accordingly, the Company commenced the
development of this new product.
As of June 1997, the Company had installed limited functionality versions at
four different sites. These versions had fully functional ticketing modules and
some additional features, but not all of the features planned for the general
release version. As of May 13, 1997 the Company had completed the general
release version of the new general admission product and has since installed it
at 16 sites including all sites which had earlier versions. During June 1997,
the development effort was focused on two groups of applications for the ski
industry. The first group of ski applications was released on July 1, 1997, and
the second group of ski applications was released on September 30, 1997. Future
development efforts will be focused on a reserved seating module which
management expects to release during the first quarter of 1998.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in the fourth quarter of 1997 in
areas of product development and customer support. In addition, the product will
have a new appearance which is more user friendly and will allow the user to
modify a configuration layer (without access to the source code) which can
remain in place when updating the product to a new revision level. As a result,
the Company expects its new products to be more competitive in the market.
The Company estimates the cost of developing the new general admission products
incorporating the modular concept will total approximately $400,000 to $450,000.
In the third quarter of 1997, $73,000 of development costs were incurred for the
new general admission products, and this entire amount was capitalized. Since
inception, development costs of the new products incurred for the new general
admission products total $389,000 of which $283,000 has been capitalized. The
Company estimates the cost of developing a reserved seating module for the new
product will total approximately $75,000 to $125,000 by the end of the first
quarter of 1998, of which $15,000 has been incurred, none of which has been
capitalized.
NOTE 3 - AMORTIZATION
Amortization Expense for the nine months ended September 30, 1997 and 1996 was
$460,000 and $2,268,000 including write-downs of $248,000 and $1,075,000,
respectively. Because of certain strategic decisions described above, the
Company reviewed the valuation of the
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<PAGE>
current software cost in accordance with the net realizable value determination
provisions under SFAS No. 86 "Computer Software to be Sold, Leased, or Otherwise
Marketed". As a result, at June 30, 1996, a write-down of $1,075,000 was made to
the software's carrying value. The software's net carrying value as adjusted of
$459,970 at September 30, 1997 is expected to be fully realized (recoverable)
through future revenues. As a result of the Company's quarterly review for
potential impairment of intangibles at September 30, 1997 and a review of costs
associated with customers acquired through the acquisitions of Delta Information
Services Inc. and GIS Information Systems, Inc., the remaining value of Customer
Lists and Support Contracts (approximately $248,000) was written off.
NOTE 4 - NOTE RECEIVABLE-TRADE
In connection with an early sale of the Company's new product, the Company
accepted a note receivable from a customer in the amount of $144,856 with a term
of 3 years and bearing interest at the rate of 10% per annum. Nine months of
interest, amounting to $9,054 has been accrued bringing the note balance to
$153,910. Payments of principal and interest are to be made on December 31,
1997, 1998, and 1999 in the amounts of $50,000, $61,185, and $65,000
respectively.
NOTE 5 - PRODUCT COST LIABILITY (WARRANTY ALLOWANCE)
Management has reviewed warranty costs incurred within the past year, and as a
result has decided to provide for known and unknown warranty costs by recording
a warranty allowance at the time of sale. As of December 31, 1996, the balance
of the warranty allowance account was $570,919. During the first three quarters
of 1997, $78,064 was accrued as an allowance, and $102,286 was spent for these
enhancements and subsequently charged against this allowance. Management
believes the allowance of $546,697 as of September 30, 1997 is a conservative
estimate of these costs but will continue to monitor them to ensure they are
provided for on a current basis in order to match the cost with associated
revenue.
NOTE 6 - LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, has
commenced an action against the Company in Florida state court. The former
president alleges, among other things, that he was wrongfully terminated from
his employment and seeks damages which in the aggregate could exceed $1,000,000.
The Company believes that the former president's suit is without merit and
intends to vigorously defend the action. There have been no significant changes
regarding this action since last quarter.
On or about June 27, 1997, a class action was commenced in the United States
District Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera, on behalf of themselves individually, and on behalf of
all others similarly situated against inter alia, the Company, Sterling Foster,
& Co., Inc. ("Sterling Foster"), the Company's former underwriter, counsel for
Sterling Foster and certain issuer defendants for whom Sterling Foster acted as
underwriter. The Complaint alleges that in connection with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's stock, to create a
short position at the inflated price and then cover the short position with
shares from shareholders who had been secretly released from "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose in its Registration Statement that prior to the date the offering
became effective, Sterling Foster had secretly agreed to release certain
shareholders from"lock-up" agreements for the purpose of selling their shares to
Sterling Foster at reduced prices. The Plaintiffs claims allege that the Company
violated Sections 11 and 12(2) of the Securities Act of 1933, Sections 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
Section 349 of the New York General Business Law, and negligent
misrepresentation. The Company believes that it has defenses to these claims and
intends to vigorously defend itself in this action. There have been no
significant changes regarding this action since last quarter.
In early 1997, Derek Betty and James Potter instituted actions against the
Company. The first action is entitled Derek Betty v. Lasergate Systems, Inc.
("the Betty Action") and the second action is entitled James Potter v. Lasergate
Systems, Inc. and 1103065 Ontario, Inc. ("the Potter Action"). Both actions were
brought in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas
County, Florida. The Betty Action alleged that the Company failed to return
shares of the Company's stock which were 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
alleged 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 sought damages in an amount in excess of $15,000. The Potter
Action also alleged a breach of the Registration Rights and Put Option
Agreement. Moreover, the Potter Action included allegations concerning James
Potter's Consulting Agreement with the Company and a Non- Compete Agreement. The
Potter Action sought a declaratory judgment determining that the Company and
1103065 Ontario, Inc. ("Ontario") were in material breach of the Non-Compete
Agreement and that Potter be relieved of all obligations to perform under the
Non-Compete Agreement. The Company succeeded in consolidating all of the
proceedings in arbitration. On November 7, 1997, the Company signed a settlement
agreement with Derek Betty and James and Marion Potter which ended the
arbitration proceeding. The settlement agreement, among other things, canceled
the outstanding put options, left the Non-Compete Agreement in place, and
required the Company to make a cash payment of $30,000.
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.
-8-
<PAGE>
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Nine Months Ended
-----------------
INTEREST AND INCOME TAXES PAID: 1997 1996
------ -------
Interest $2,192 $29,359
Income Taxes -0- -0-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1996 and 1997: None.
NOTE 8 - SUBSEQUENT EVENTS
SALE OF SECURITIES
On October 30, 1997, the Board of Directors authorized a new series of
convertible preferred stock, par value $.03, designated as Series G Convertible
Preferred Stock ("Series G Shares"). The authorized number of such shares is
8,000. Each share has a face value of $1,000 and is convertible into 4,354
shares of Common Stock (a conversion price of $0.22967 per Common Share). The
Series G shares limit the rights of the holders of Common Stock or Series F
Convertible Preferred Shares (Series F Shares) by providing a liquidation
preference of $1,000 per Series G Share. The Series G Shares rank pari passu
with the Series F Shares.
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank, AG ("RBB") for $7,500,000 pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, under
Regulation S promulgated thereunder. Pursuant to the transaction, the Company
redeemed 7,945 shares of the Company's Series F Preferred Stock owned by RBB for
$6 million, leaving the Company with $1,447,500 of net proceeds after giving
effect to expenses of the offering. No sales commissions were paid.
Under the terms of the subscription agreement, the Company will pay a penalty of
5% of the face value of outstanding Series G Shares ($375,000) if shareholders
have not approved an increase in the authorized number of Common Shares in an
amount sufficient to allow for conversion of all Series G Shares within 120 days
of the subscription agreement (by March 4, 1998). An additional penalty of 10%
will be incurred for each 120 days beyond March 4, 1998 until shareholders
approve an increase in the authorized number of Common Shares in an amount
sufficient to allow for conversion of all Series G Shares. Such penalties shall
be payable in cash. If sufficient cash is not available to legally pay the
penalty, the Company will issue a note payable to RBB in the amount of the
penalty, bearing interest at a rate of 20% per annum.
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<PAGE>
NOTE 8 - SUBSEQUENT EVENTS (CONTINUED)
The following table sets forth a pro forma condensed balance sheet as of
September 30, 1997, as if the subsequent events described above had occurred at
September 30, 1997.
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------
Pro forma Pro forma
Historical Adjustments As Adjusted
---------- ----------- -----------
ASSETS:
<S> <C> <C> <C>
Cash $ 239,672 $ 1,497,500 $ 1,737,172
Other current assets 734,625 (50,000) 684,625
------------ ------------
Total current assets 974,297 2,421,797
Non-current assets 3,202,562 3,202,562
------------ ------------
Total assets $ 4,176,859 $ 5,624,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Total current liabilities $ 3,102,164 $ 3,102,164
Common stock subject to put option 140,000 140,000
------------ ------------
Total liabilities 3,242,164 3,242,164
------------ ------------
Preferred Stock 238 (13) 225
Common Stock 223,862 223,862
Additional paid-in capital 19,815,771 1,447,513 21,263,284
Common Stock subject to put option (140,000) (140,000)
Accumulated deficit (18,965,176) (18,965,176)
------------ ------------
Total Stockholders' Equity 934,695 2,382,195
------------ ------------
Total Liabilities & Stockholders' Equity $ 4,176,859 $ 5,624,359
============ ============
</TABLE>
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<PAGE>
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with the financial
statements and notes thereto, and is qualified in its entirety by reference
thereto.
The statements contained in or incorporated by reference into this Quarterly
Report which are not historical facts contain forward looking information with
respect to plans, projections or future performance of the Company, the
occurrence of which involve certain risks and uncertainties that could cause the
Company's actual results to differ materially from those expected by the
Company, including the history of operating losses; uncertainty of future
financial results; possible negative cash flow from operating activities;
additional financing requirements; no assurance of successful and timely
development of new products; risks inherent in software development; customer
acceptance; employee turnover; litigation; dependance on regulatory approvals;
uncertainty of software and hardware pricing or profitability; unpredictability
of patent protection; rapid technological change; competition; and other
uncertainties detailed in the Company's Annual Report on Form 10-KSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES:
Revenues were $1,042,114 and $1,005,860 for the third quarter of 1997 and 1996
respectively, representing an increase of $36,254 or 4%. Revenue for the third
quarter of 1997 included $596,000 of revenue recognized on a contract with
American Skiing Company (ASC) based on the percentage completion method and
$169,000 of revenue from other sales to ASC. Activities during the quarter
included substantial completion of installations at six ASC resorts and the
commencement of the delivery of proximity cards which will be used by ASC as
annual passes. Proximity scanning is a new technology which the Company has
integrated into the product that utilizes radio frequencies to "scan" a ticket
instead of laser scanning or magnetic strip reading. Of the $1,755,000 of orders
from ASC which were in the Company's backlog at August 15, 1997, $765,000 of
deliveries were completed during the third quarter, $932,000 of deliveries were
postponed to the fourth quarter, and $58,000 of orders were canceled. The
Company continues to receive orders from ASC and as of November 12, 1997 the
Company has received orders totaling more than $2,400,000 with approximately
$700,000 of these orders unfilled.
Maintenance revenues represented 12% and 11% of total revenues for the three
month periods ended September 30, 1997 and September 30, 1996, respectively.
COST OF REVENUES:
Cost of revenues were $735,349 and $481,203 for the third quarter of 1997 and
1996 respectively, representing 71% of revenues during the third quarter of 1997
as compared to 48% during the third quarter of 1996. This increase was caused by
the Company accepting ASC orders with a lower gross profit percentage than it
normally receives. This was partially due to the size of the contract but was
primarily due to it being the first sale of the complete general admission
product (all modules of the new Windows(C) based system, including access
control using proximity scanning).
DEVELOPMENT COSTS:
Development costs were $106,578 and $150,821 for the third quarter of 1997 and
1996 respectively, representing a decrease of $44,243, or 29% . Development
costs for the third quarter of 1997 do not include $72,879 of capitalized costs
related to the new product or $12,000 of costs charged to the warranty
allowance. Development costs for the third quarter of 1996 do not include
$60,000 of costs charged to the warranty allowance. With the addition of these
amounts, costs have decreased $19,364 between years. This represents a 9%
decrease, which is primarily due to a decrease in the number of employees on the
development staff. The Company expects to continue development efforts at
approximately the same level for the remainder of 1997 with the development
effort primarily focused on a reserved seating module for its new Windows(C)
product (see Note 2 to the Financial Statements).
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $1,026,520 and $946,694 for
the third quarter of 1997 and 1996 respectively, representing a $79,826 or 8%
increase. The increase is due to the write-off of the customer list asset in the
amount of $247,916 partially offset by decreases in professional fees of
$47,000, bad debt expense of $61,000 and other expenses of $60,090.
-11-
<PAGE>
Net loss increased to $830,181 ($.11) a share for the third quarter of 1997 from
$535,893 ($.07) a share for the third quarter of 1996. The components of the
decrease in the Company's net loss are explained above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES:
Revenues were $3,346,578 and $3,575,790 for the nine months ended September 30,
1997 and 1996 respectively, representing a decrease of $229,212 or 6%. Revenue
through the first three quarters of 1997 includes seven sales of the new general
admission product to several well- known customers including the Art Gallery of
Ontario and Blackpool Pleasure Beach totaling $1,149,000 plus $1,238,000 of
revenue recognized on a contract with American Skiing Company (ASC) based on the
percentage completion method and $169,000 of revenue from other sales to ASC. Of
the $1,755,000 of orders from ASC which were in the Company's backlog at August
15, 1997, $765,000 of deliveries were completed during the third quarter,
$932,000 of deliveries were postponed to the fourth quarter, and $58,000 of
orders were canceled. As of November 12, 1997 $ the Company has received more
than $2,400,000 of orders from ASC and approximately $700,000 of orders from ASC
are unfilled including orders for two new resorts recently acquired by ASC.
Management expects these orders to be substantially complete by December 31,
1997. . Maintenance revenues represented 10% and 11% of total revenues for the
nine months ended September 30, 1997 and September 30, 1996, respectively. This
was primarily due to less customers accepting maintenance contracts on the
legacy products. This trend appears to be reversing now that sales of the new
products are consistently occurring and sales of the legacy products have almost
stopped.
COST OF REVENUES:
Cost of revenues were $2,536,414 and $2,273,254 for the nine months ended
September 30, 1997 and 1996 respectively, representing 76% of revenue during
1997 and 64% during 1996.. This was primarily due to increased costs associated
with early installations of the new general admission product and a lower gross
profit percentage on ASC orders then it normally receives. This was partially
due to the size of the contract but was primarily due to it being the first sale
of the complete general admission product (all modules of the new Windows(C)
based system, including access control using proximity scanning).
DEVELOPMENT COSTS:
Development costs were $316,264 and $312,884 for the nine months ended September
30, 1997 and 1996 respectively, representing an increase of $3,380, or 1%.
Development costs for the nine months ended September 30, 1997 do not include
$258,445 of capitalized costs related to the new products (see Note 2 to the
Financial Statements) or $108,527 of costs charged to the warranty allowance.
Development costs for the nine months ended September 30, 1996 do not include
$341,000 of costs charged to the warranty allowance. With the addition of these
amounts, costs have increased $29,352 between years. This represents a 4%
increase, which is primarily due to an increase in the average number of
employees on the development staff.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $2,704,792 and $4,674,753 for
the nine months ended September 30, 1997 and 1996 respectively, representing a
$1,969,961 or 42% decrease. These amounts represent 81% of revenues in 1997 and
130% of revenues in 1996. The decrease is attributable to a number of expenses
from 1996 that did not reoccur in 1997. First, capitalized software was written
down $1,075,000 at September 30, 1996 due to the development of a replacement
product (see Notes 2 and 3 to the financial statements). Other components of the
decrease from year to year are a decrease of $400,000 due to a provision for
incentive compensation for the executive group and managers in 1996, and a
decrease of $225,000 due to a provision for contingent legal settlements in
1996. No such provisions were made in 1997. Other components of the decrease
include decreases of $109,000 in investor relations expenses, $67,000 in
accounting and auditing expenses, and $74,000 in legal expenses. These are
primarily due to the costs of the private placements of Preferred Stock of the
Company during 1996. Additional components of the decrease are $247,000 of
non-cash compensation and $102,000 of bad debt expense. These decreases were
partially offset by a write-down of intangible assets asset at September 30,
1997 in the amount of $285,000 and increases in all other expenses of $44,039.
Net loss decreased to $2,181,858 ($.29) a share for the nine months ended
September 30, 1997 from $3,689,104 ($.65) a share for the nine months ended
September 30, 1996. The components of the decrease in the Company's net loss are
explained above.
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed.
-12-
<PAGE>
The adoption of this new standard is not expected to have a material impact on
the disclosure of earnings per share in the financial statements. The effect of
adopting this new standard has not been determined.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, the Company's auditors qualified their
opinion as to a going concern. The information contained in Note 3 to the
Financial Statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996 remains current related to the status of
certain of the Company's operational and funding matters and, accordingly,
should be referred to in conjunction with this Form 10-QSB.
For the nine months ended September 30, 1997, the Company used $1,154,826 of
cash in operating activities and incurred a loss of $2,181,858 From its
inception in March 1985 through September 30, 1997, the Company has incurred a
cumulative loss of $18,965,176. In recent years the Company has relied upon
proceeds from private and public placements and loans in order to fund its
operations.
The Company is presently seeking one or more potential strategic partners who
can complement the Company's marketing and development efforts and increase its
financial stability. As part of any arrangement, the Company would require a
capital infusion in the Company which could result in a further dilution of the
present shareholders' equity interests. Management believes this is necessary in
order to increase revenue .
In order to procure a contract with American Skiing Company for $1,375,000 of
software and hardware, the Company decided to accept a lower gross profit
percentage than it normally receives. This was partially due to the size of the
contract but was primarily due to it being the first sale of the complete
general admission product (all modules of the new Windows(C) based system,
including access control using proximity scanning). This was the primary cause
of the increase in the cost of revenue percentage (cost of revenue as a
percentage of revenue) from 67% in the first quarter of 1997 to 76% in the third
quarter of 1997.
Since the Company does not purchase components for its products until an order
is received, there is typically a backlog of orders for systems. The Company
defines backlog as a signed contract or customer's purchase order, typically
with some type of financial assurance such as a deposit. As of September 30,
1997 and December 31, 1996, the Company's backlog was approximately $1,535,000
and $963,000, respectively.
During 1997, accounts receivable decreased $340,717 primarily due to increased
collection efforts, inventory decreased $106,329 due to more efficient
management and fewer installations being in process at September 30, 1997 than
at December 31, 1996, and accounts payable and accrued expenses decreased
$241,390 primarily due to the payment of accrued payroll, payroll taxes and
other expenses which were accrued at year end. The decrease in accrued payroll
and payroll taxes arose because payroll is payable on the last day of each
month, but near year-end the Company changed its payroll service provider and
the new provider did not charge the Company for the December 31, 1996 payroll
until January 2, 1997. At December 31, 1996 accrued payroll and payroll taxes
were $210,000 and at September 30, 1997 accrued payroll and payroll taxes were
$7,100.
Also, during the first quarter of 1997, an installation was completed for a
customer who agreed to participate in the development process by being an early
installation site for the new product in exchange for extended payment terms on
approximately half of their purchase. As a result, the Company accepted a note
receivable from the customer in the amount of $144,856 with a term of three
years and bearing interest at the rate of 10% per annum.
The Company estimates the cost of developing the new general admission products
incorporating the modular concept will total approximately $400,000 to $450,000.
In the first nine months of 1997, $258,000 of development costs were incurred,
and this entire amount was capitalized. Since inception, development costs
incurred total $389,000 of which $283,000 has been capitalized. The Company
estimates the cost of developing a reserved seating module for the new product
will total approximately $75,000 to $125,000 by the first quarter of 1998, none
of which has yet been incurred.
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank, AG ("RBB") for $7,500,000 pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, under
Regulation S promulgated thereunder. Pursuant to the transaction, the Company
redeemed 7,945 shares of the Company's Series F Preferred Stock owned by RBB for
$6 million, leaving the Company with $1,447,500 of net proceeds after giving
effect to expenses of the offering. No sales commissions were paid.
Although no assurance can be given, management believes that the recent
on-schedule product launch of the new Admits general admission product will
enable the Company to achieve an increase in revenues and a reduction of the
operating loss by the end of 1997 and lay the foundation for future
profitability. The foregoing is a forward-looking statement and actual results
may differ materially based upon certain risk factors. These impacting
-13-
<PAGE>
factors include, but are not limited to customer acceptance, technological
change, employee turnover, third party development schedules, installation
schedules, availability of sufficient working capital, and litigation.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended September 30, 1997.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1997.
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lasergate Systems, Inc.
Registrant
Date: November 14, 1997 /s/Philip P. Signore
-----------------------------
PHILIP P. SIGNORE
Vice President and
Chief Financial Officer
-15-
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