SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
ON
FORM 10-KSB/A
[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
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State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
28050 U.S. 19 North, Suite 502, Clearwater, Florida 34621
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(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
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(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.
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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.
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, 7,462,061 shares of Common Stock were outstanding. 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.
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.
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.
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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 NT7 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.
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
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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
Windows7 95/NT platform.
During the fourth quarter of 1996, the Company began selling the
next generation of its ticketing system, Admits. It is a Windows7 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 Windows7 based clients. The Company plans to take the
current functions of the Select-a-Seat product and integrate them into this
Windows7 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 Windows7-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
Windows7 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.
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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 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
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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 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.
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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 IMAXJ 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.
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 tracks 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,
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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 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.
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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.
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
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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. Also provided are 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 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
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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.
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. 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 our 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. 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 will
provide a highly effective means for delivery business solution to the
entertainment industry.
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Accordingly, the Company commenced the development effort to support
this new marketing approach in 1996. As of December 31, 1996, the Company had
not completed any installations of the new product and, accordingly, had not
realized any revenue from the new product. As of March, 1997, the Company has
installed limited functionality versions of the new product in five customer
sites, resulting in $881,000 of revenue recognized in the first quarter due to
the new product. These limited functionality versions had fully functional
ticketing modules and some additional features, but not all of the features
planned for the general release version. The Company anticipates completing the
development 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. Beta sites will continue to be selected to
facilitate testing of each module in a live environment and new configurations
with the additional modules will be sold before general release of the products
which is anticipated to be in June of 1997. The current legacy software products
will continue to be marketed and the Company will support this software for some
period of time beyond availability of the 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 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. 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
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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. Management believes the backlog was less than
the prior year because of the transition in sales from legacy products to the
new product. As is common within the software industry, some prospective
customers refused to consider a system which did not have a lengthy history of
performance at sizable installations within their market segment. 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.
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.
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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.
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 marks and trade secret laws and
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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 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
On June 15, 1995, the Company's founder and former President and
Chief Executive Officer, Donald Turner, has commenced an action against the
Company in the Circuit Court for Pinellas County, Florida, Civil Division. Mr.
Turner alleges, among other things, that he was wrongfully terminated from his
employment and
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<PAGE>
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.
In January 1997, Derek Betty and James Potter 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.
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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 $7
June 20, 1995 9 4
September 30, 1995 6 3
December 31, 1995 6 1
March 31, 1996 2 7/8
June 30, 1996 1 11/16
September 30, 1996 1 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 over the course of 1995 and 1996 all of the
Company's senior executives, as well as most of its other personnel. This
included the President/CEO, the Vice President of Finance/CFO (twice), the Vice
President of Development/Operations and the Vice President of Sales. Some of
this turnover of senior executives was encouraged or effected by the Board of
Directors.
These events 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). and
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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 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
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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 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 Windows7 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 totaled $568,000 and warranty
work charged against the allowance in 1996 totaled $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-K 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.
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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
substantial 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.
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.
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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.
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 $ 1,268,319 $ (933,331)
equivalents
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
-21-
<PAGE>
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 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
-22-
<PAGE>
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 convertible into 1,879,837 shares of
Common Stock and potentially convertible into as many as 2,590,650 shares of
Common Stock had they not been redeemed (plus additional shares for any
dividends which would have accrued).
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 Series AF convertible
preferred shares were converted into 100,000 shares of common stock at a
conversion price of $.55 a 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 income from
operations should continue to progress throughout 1997, such that the net loss
in 1997 should be less than the net loss in 1996.
-23-
<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.
-24-
<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
-ii-
<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
[PART 1 OF 2]
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- ----------------------------
Par Par
Shares Value Shares Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 36,364 1,091 2,913,680 87,412
------------ ------------ ------------ ------------
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
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 -- --
Grants of stock options for 1994 and 1995
executive compensation -- -- -- --
Conversion of preferred to common stock (28,600) (858) 110,000 3,300
Issuance of preferred stock for satisfaction of
notes payable, related party 79,950 2,400 -- --
Exchange of preferred stock: Shares redeemed (36,364) (1,091)
Shares issued 16,000 480 -- --
Issuance of common stock under stock option plan -- -- 2,000 60
Exercise of common stock put option -- -- (10,000) (300)
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 387,750 $ 11,633 3,125,013 $ 93,751
------------ ------------ ------------ ------------
Retirement of stock in settlement of acquisition
obligations (111,800) (3,355) (109,333) (3,279)
Issuance of Series E preferred stock 162,500 4,875 -- --
Issuance of Series F preferred stock 8,000 240 -- --
Redemption of preferred stock (95,950) (2,878) -- --
Conversion of preferred to common stock (342,500) (10,275) 4,301,381 129,040
Issuance of common stock as compensation -- -- 45,000 1,350
Grant of stock options for
Executive compensation -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 8,000 240 7,362,061 220,862
============ ============ ============ ============
</TABLE>
[PART 2 OF 2]
<TABLE>
<CAPTION>
Common
Stock Notes
Additional Subject Receivables
Paid-In to Put Stock- Accumulated
Capital Option holders Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 9,258,563 (210,000) -- (7,578,574)
------------ ------------ ------------ ------------
Issuance of common stock at $7.00 a share and
preferred stock at $5.00 per share in
connection with GIS acquisition 1,317,697 -- -- --
Less: note receivable collateralized by preferred
stock -- -- (559,000) --
Issuance of preferred stock in Private Placement at
$10 per share less offering expenses of $215,024 1,864,718 -- -- --
Grants of stock options for 1994 and 1995
executive compensation 937,250 -- -- --
Conversion of preferred to common stock (2,442) -- -- --
Issuance of preferred stock for satisfaction of
notes payable, related party 757,106 -- -- --
Exchange of preferred stock: Shares redeemed
Shares issued 611 -- -- --
Issuance of common stock under stock option plan 1,940 -- -- --
Exercise of common stock put option (69,700) 70,000 -- --
Net loss -- -- -- (4,206,782)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 $ 14,065,743 $ (140,000) $ (559,000) $(11,785,356)
------------ ------------ ------------ ------------
Retirement of stock in settlement of acquisition
obligations 22,609 -- 559,000 --
Issuance of Series E preferred stock 1,445,707 -- -- --
Issuance of Series F preferred stock 5,172,260 -- -- --
Redemption of preferred stock (997,121) -- -- --
Conversion of preferred to common stock (118,765) -- -- --
Issuance of common stock as compensation 40,836 -- -- --
Grant of stock options for
Executive compensation 187,500 -- -- --
Net loss -- -- -- (4,997,962)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 19,818,769 (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 -- (75,000)
compensation for services
Compensation recognized from issuance of stock and grand 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 6,623,082 1,870,976
offering costs
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
reasonably stated.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, with cost
being determined principally by the use of the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being
provided using the straight-line method over the estimated economic useful lives
(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.
All development costs are capitalized once technological feasibility
has been achieved on a product until the product is released for general sale,
at which time, only the costs of development of significant additions to a
product's features and functions are capitalized. Technological feasibility is
determined on a project by project basis. For the software which the Company is
reporting upon, technological feasibility is defined to be the creation of a
working model which was created by December 1996. Thus, the Company's
expenditures related to the development of its systems and software prior to
December 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 G & A expenses.
F-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Intangibles which were recognized in connection with the Company's
acquisition of GIS and Delta in 1995 and 1994, respectively, relate to systems
and software costs (see above), non-competition agreements, customer list and
support contracts, and goodwill. Such costs have been and are being amortized
using the straight-line method over their respective estimated useful lives:
systems and software costs (see above), non-competition agreements--three (3)
years, customer list and support contracts--six (6) years, and goodwill--twenty
(20) years. Amortization expense (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 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,
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
basis as that used for 1996. The Company believes that the estimated full costs
are reasonably stated 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 those 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
proforma 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 and over the course of 1995 and 1996 all of the
Company's senior executives, including the President/CEO (October 1994) 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 these 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. Second 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 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 (see discussion of
warranty costs and warranty liability in Note 2 of the financial statements),
required keeping a substantial portion of the Company's resources 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.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 3 - OPERATIONAL AND FUNDING MATTERS (CONTINUED)
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.
The Company continues to incur net losses and negative cash flows.
However, management still expects to realize the carrying value of goodwill
($2,382,705 at December 31, 1996) through the receipt of future cash flows
(undiscounted). The elements of goodwill still remain. These are the value of
the acquired market share, market acceptance, product name, proprietary
knowledge, and industry expertise which the Company has acquired and has
substantially maintained. Management's last quarterly review of intangibles
indicated no new events which would necessitate changes to the carrying values
or useful lives of any intangible assets.
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
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - ACQUISITION OF BUSINESSES (CONTINUED)
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 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
===========
On December 22, 1994, Lasergate Systems Canada Company a
wholly-owned subsidiary of the Company, acquired the capital stock of Delta
Information Services, Inc., a Canadian company ("Delta") for aggregate
consideration of $1,200,000. The purchase price consisted of cash of $500,000
and a promissory note of $700,000, convertible into 100,000 unregistered shares
of the Company's Common Stock valued at $7.00 per share. The Common Stock
valuation reflected the agreed-upon price between the buyer and seller and was
also determined by the Board of Directors after giving effect to such factors as
the restrictions on resale and the size of the block of Common Stock. The
promissory note was immediately converted into Comon Stock in December 1994. In
addition, the Company incurred approximately $46,919 in direct acquisition costs
(principally legal and accounting fees). At the date of acquisition, Delta had
no tangible assets nor liabilities that were transferred to or assumed by the
Company. However, the Delta product was a well-known general admission ticketing
system within the ski industry and the technical "know-how" included in the
product was considered relatively valuable.
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - ACQUISITION OF BUSINESSES (CONTINUED)
The purchase price, including the direct acquisition costs, was allocated as
follows:
Computer software $ 500,000
Non-competition agreement 85,000
Customer list and support contracts 125,000
Goodwill 536,919
----------
$1,246,919
==========
In connection with the acquisition of Delta, 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.)
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
======== ========
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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.
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.
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 7 - SYSTEMS AND SOFTWARE COSTS (CONTINUED)
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
======== ========
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.
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
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
On June 15, 1995, the Company's founder and former President and
Chief Executive Officer, Donald Turner, has commenced an action against the
Company in the Circuit Court for Pinellas County, Florida, Civil Division. 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.
In January 1997, Derek Betty and James Potter 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
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
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.
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 C D E F
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total 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
above have or had mandatory redeemable provisions.
F-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
The 95,950 Series A Shares issued were convertible into fully paid
and nonassessable shares of the Corporation's Common Stock, upon the terms
hereinafter set forth at the rate (the "conversion Rate") of one share of Common
Stock for each Conversion Factor Dollar Amount (as defined below) of Liquidation
Value represented by the shares of Series A Preferred Stock being converted. The
per share Liquidation Value was equal to $10.00 plus any accrued and unpaid
dividends on such share, subject to reduction if thereafter paid. The Conversion
Factor Dollar Amount was the lesser of (i) 70% of the average of the closing bid
prices of the Corporation's Common Stock as quoted on NASDAQ for the five
trading days immediately preceding conversion, (ii) 70% of the average of the
closing bid prices of the Corporation's Common Stock as quoted on NASDAQ for the
five trading days of June 26, 1995 through June 30, 1995, and (iii) the lowest
price at which shares of Common Stock were sold to third party investors during
the period from July 1, 1995 to June 30, 1996.
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.
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 PLACEMENTS
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
F-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
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 $0.55 a 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 converting into as many as 17,777,778 common shares.
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
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
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, the Board of Directors authorized the grant of
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. This consisted of an option to purchase 20,000
shares at an exercise price of $2.00 which is exercisable through December 31,
1997 and an option to purchase 100,000 shares at an exercise price of $0.66
which is exercisable 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).
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
======== =======
F-24
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Weighted Average Weighted
Range of Number Remaining Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123 A Accounting of Stock-Based Compensation, as it
relates to employment awards. It applies APB Opinion No. 25, A 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 wards 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 $4,997,562 $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%;
rick-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
insignificant 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 volatility 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
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
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 exercise
price of the lower of $1.00 or the average conversion price of the Series F
Convertible Preferred Stock (currently $0.55).
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 volatility of
122%, 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.
F-26
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
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
Warrants canceled or forfeited -- --
Warrants outstanding, December 31, 1996 2,621,067 $ 4.88
The following table summarizes information concerning currently outstanding and
exercisable warrants:
<TABLE>
<CAPTION>
Weighted Average Weighted
Range of Number Remaining Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
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
</TABLE>
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 Ticare (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. 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 for programming services.
F-28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
YEAR
FIRST
BECAME PRESENT POSITION
NAME AGE DIRECTOR CLASS WITH THE COMPANY
- - ---- --- -------- ----- ----------------
Jacqueline E. Soechtig 47 1994 III President, Chief Executive
Officer and Director
Philip P. Signore 38 1996 I Vice President, Chief
Financial
Officer, Treasurer, Secretary
and Director
Bruce D. Barrington 54 1996 II Director
John J. Chluski 73 1996 II Director
Frank W. Swacker 74 1995 III Director
John J. Lettieri, Jr. 40 -- -- Vice President -
Ticketing Services
James H. Moore, Jr. 54 -- -- Vice President - Operations and
Assistant Secretary
Glenn W. Phillips 55 -- -- Vice President - Sales and
Marketing
William R. Stapleton 52 -- -- Vice President - Engineering and
Product Management
The Company's Articles of Incorporation and By-Laws provide for a
classified Board of Directors. The Board is divided into three classes
designated Class I, Class II and Class III. The term of each Class II Director
is to expire at the 1997 Annual Meeting, the term of each Class III Director is
to expire at the 1998 Annual Meeting of Shareholders and the term of each Class
I Director is to expire at the 1999 Annual Meeting. Directors hold office until
their respective successors are elected and duly qualified, or until death,
resignation or removal. Officers hold office until the meeting of the Board of
Directors following each Annual Meeting of Shareholders and until their
successors have been chosen and qualified.
JACQUELINE E. SOECHTIG has been a director of the Company and the
Company's President and Chief Executive Officer since October 31, 1994. From
September 1994 until immediately prior to her employment by the Company, Ms.
Soechtig was a consultant to the Company. During the ten-month period prior
thereto, Ms. Soechtig purchased and operated a restaurant in Clearwater, Florida
together with her spouse. From February 1992 through December 1993, Ms. Soechtig
was the President and Chief Executive Officer of Precision Systems, Inc.
("PSI"), a company engaged in the production and sales of voice and call
processing systems. Prior to her employment with PSI, Ms. Soechtig served as
vice president of business development for Sprint Corp. (May 1990 through
February 1992). She also held the position of vice president of MCI
Telecommunications Corporation where she served in various sales, marketing and
technical capacities from May 1984 through May 1990. Both
-25-
<PAGE>
Sprint and MCI are engaged in the telecommunications industry. Additionally,
from 1970 to 1983, Ms. Soechtig was employed by International Business Machines
Corp. in various technical and sales positions.
PHILIP P. SIGNORE has been the Company's Vice President - Finance,
Chief Financial Officer, Treasurer and Secretary since May 1996 and has been a
member of the Board of Directors since June 1996. Mr. Signore served as Chief
Financial Officer of Commercial Design Services, Inc., an office furniture
dealership, from March 1993 to May 1996. From July 1989 to March 1993, Mr.
Signore was the Operations Controller for Briggs Industries, Inc., a plumbing
fixtures manufacturer. Previously, Mr. Signore held various financial management
positions in the areas of financial planning and analysis while at Paradyne
Corporation from 1983 to 1988 as well as internal auditing at Moore McCormack
Resources from 1981 to 1983. He began his career working as a CPA at the
international accounting firm of Peat Marwick Mitchell & Co. from 1979 to 1981.
BRUCE D. BARRINGTON has been a member of the Board of Directors of
the Company since November 1, 1996 and has also served since that time as the
Company's Chief Technology Advisor, a capacity in which he is able to contribute
to the direction of the Company's products. Since 1982, Mr. Barrington has
served as the Chairman and CEO of Top Speed Corporation (formerly Clarion
Software Corporation and prior thereto Barrington Systems, Inc.), a software
company which develops and markets a sophisticated line of software development
tools aimed at the Windows(R) environment. Mr. Barrington founded Top Speed
Corporation in 1982. From 1980 to 1983 Mr. Barrington served as a Director of
HBO & Company, a publicly-held software solutions provider to the health care
industry which he co-founded in 1973. From 1973 to 1980, Mr. Barrington served
as Vice President of Research & Development for HBO & Company. Previously, Mr.
Barrington was employed as a Manager of Hospital Systems Development for
McDonnel Douglas Automation Company from 1967 to 1973 and as a Systems Analyst
for Caterpillar Tractor Company from 1965 to 1967.
JOHN J. CHLUSKI has been a member of the Board of Directors of the
Company since November 1, 1996. Since 1988 Mr. Chluski has been an international
business consultant and advisor. He has served as an active Board Member of
several ITT subsidiaries and is presently a Director of ITT Composants (France).
Mr. Chluski is also a Director of Howmet S.A. (France), and serves as Advisor to
the Chairman of Marceau Investissements, a Paris-based investment fund, and
Advisor to Monitor Company, a global strategy consulting firm based in
Cambridge, Massachusetts. From 1972 to 1988, Mr. Chluski held several executive
management positions at ITT Corporation, including Group Executive-Engineered
Products-Europe, and Senior Vice President and Executive Representative of the
Chairman.
FRANK W. SWACKER has been a member of the Board of Directors of the
Company since May 3, 1995. Mr. Swacker has been engaged in the practice of law
for the past 46 years, more than the last five of such years as a sole
practitioner under the name of Swacker & Associates, P.C. Between 1968 and 1978,
he was the International Counsel for Allis-Chalmers Corporation in Milwaukee,
Wisconsin. Mr. Swacker has published articles focusing on international foreign
trade and the financial, antitrust and cross-cultural aspects of transnational
business and is the lead author of the 1996 two volume work entitled "World
Trade Without Barriers," a comprehensive treatise on the World Trade
Organization and dispute resolution. Additionally, he has advised the United
States House of Representatives on international trade treaties and has served
as Special Assistant Deputy Attorney General for the State of New York. Since
1960, Mr. Swacker has been a member of the National Panel of Arbitrators of the
American Arbitration Association.
JOHN J. LETTIERI, JR. has been the Company's Vice President of
Ticketing Services since March 1997. From August 1980 to February 1997, he
worked for the Carnegie Hall Corporation, serving as the first Director of
Ticket Operations from June 1989 until his departure. Mr. Lettieri's management
responsibilities included sales, customer service, and technological support.
Prior to August of 1980, Mr. Lettieri was employed by the Metropolitan Opera in
New York City.
-26-
<PAGE>
JAMES H. MOORE, JR. has been the Company's Vice President of
Operations since January 1995. From April 1993 to December 1994, Mr. Moore was
the Vice President of Internal Operations of Precision Systems, Inc. From March
1962 to February 1993, he worked for General Motors Corporation serving from
March 1990 as Production Superintendent of its Arlington, Texas assembly plant.
While at General Motors, Mr. Moore had production management responsibility and
also served as a quality expert and consultant to various General Motors plants
throughout North America.
GLENN W. PHILLIPS has been the Company's Vice President of Worldwide
Sales and Marketing since January 1996. From May 1995 to December 1995 Mr.
Phillips was Vice President of Sales and Marketing for Syntrex Technologies,
Inc., a network systems integrator. From June 1994 to April 1995, Mr. Phillips
acted as a sales and marketing consultant to various companies. Prior thereto,
from October 1990, Mr. Phillips was employed by Software AG, a systems software
provider, as an Area Vice President of Sales until February 1993 and as Vice
President of Sales and Operations until May 1994.
WILLIAM R. STAPLETON has been the Company's Vice President of
Development and Product Management since February 1997. From October 1995 to
January 1997, Mr. Stapleton served as President (and Principal) of The Redington
Group, a business management and marketing consulting firm. From June 1961 to
September 1995 he worked for AT&T Corporation, holding various executive
management positions, most recently Corporate Director of Strategic Marketing
and Business Planning.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and any persons who own
more than 10% of any class of the Company's equity securities which are
registered under the Securities and Exchange Act of 1934, as amended (the
"1934") to file certain reports relating to their ownership of such securities
and changes in such ownership with the Securities and Exchange Commission and
NASDAQ, and to furnish the Company with copies of such reports. To the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company, all Section 16 (a) filing requirements applicable to such officers,
directors and owners of over 10% of the Company's equity securities registered
under the 1934 Act, during the year ended December 31, 1996, have been complied
with except as follows: Bruce D. Barrington (a current Director of the Company)
and John J. Chluski (a current Director of the Company) were each inadvertently
late in filing a report upon becoming a Director and in filing a report of
transactions; Philip P. Signore (a current Officer and Director of the Company)
was inadvertently late in filing a report upon becoming an officer of the
Company; and Frank W. Swacker (a current Director of the Company) and Jacqueline
E. Soechtig (a current Officer and Director of the Company) were each
inadvertently late in filing reports of transactions. Fred Maglione (a former
officer of the Company) was inadvertently late in filing a report upon the
termination of his employment with the Company. To the Company's knowledge, John
P. Warnick (a former officer of the Company) did not file a report upon the
termination of his employment with the Company.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee recommends to the Board of Directors the
appointment of independent auditors to audit the Company's consolidated
financial statements, reviews the Company's internal control procedures and
advises the Company on tax and other matters connected with the growth of the
Company. The Audit Committee also reviews with management the annual audit and
other work performed by the independent auditors. The Compensation Committee
administers the Company's 1994 Stock Option Plan and recommends to the Board of
Directors the nature and amount of compensation to be paid to the Company's
Executive Officers.
-27-
<PAGE>
On June 28, 1996, three members of the Board of Directors resigned
as Directors of the Company (in connection with the redemption of the Company's
Series A Convertible Preferred Stock.) On the same day, Philip P. Signore, the
Company's Vice President and Chief Financial Officer was appointed to the Board
of Directors. As a result, there was only one non-employee director on the Board
of Directors from June 28, 1996 until October 21, 1996. During this period, the
duties normally performed by the audit committee and compensation committee were
assumed by the sole remaining non-employee director, Frank W. Swacker. On
December 16, 1996, the Company established new audit and compensation
committees. The Audit Committee consists of Messrs. Barrington, Chluski and
Swacker. The Compensation Committee consists of Messrs. Barrington, Chluski and
Swacker.
During the fiscal year ended December 31, 1996, the Board of
Directors of the Company held 18 meetings, the Audit Committee held one meeting
and the Compensation Committee held four meetings. Each director attended at
least 75% of the aggregate number of meetings of the Board of Directors and the
committees, which were held during the period the director served as director
during the fiscal year ended December 31, 1996.
REMUNERATION OF NON-EMPLOYEE DIRECTORS
Effective January 1, 1996, the Company commenced paying non-employee
Directors fees equal to $1,000 per meeting attended in person, and $500 per
meeting attended by telephone.
In addition, upon the initial election and upon each re-election of
an outside Director to serve a term as a Director of the Company, such Director
is entitled under the Company's 1994 Stock Option Plan, to be granted an option
to purchase 5,000 shares of Common Stock for each year of such term, with 5,000
of such options to vest at the beginning of each year of such term provided that
the Director continues to serve in such capacity at the time of the scheduled
vesting. The exercise price of such options is set at 85% of market value at
time of grant. During the fiscal year ended December 31, 1996, each of Messrs.
Barrington and Chluski were granted options to purchase 5,000 shares under the
Company's 1994 Stock Option Plan at an exercise price of $.425 per share (85% of
the market value at time of grant). As a further inducement to their agreeing to
serve on the Board, they were each granted additional options to purchase 37,500
shares outside of the 1994 Stock Option Plan at an exercise price of $.656 per
share (the market value at time of grant). All such options are exercisable for
10 years.
-28-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information
concerning compensation with respect to each person who served as the Company's
Chief Executive Officer during the fiscal year ended December 31, 1996 and each
of the Company's executive officers whose total cash compensation for the year
ended December 31, 1996 exceeded $100,000:
AWARDS
------
PAYOUTS
-------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY $ BONUS $ OPTIONS(#) COMPENSATION
------------------ ---- -------- ------- --------- ------------
Jacqueline E. Soechtig(1) 1996 220,000 100,000 -- --
President and Chief 1995 220,000 20,170 -- --
Executive Officer 1994 54,347 375,000 --
Glenn W. Phillips(2) 1996 130,950 50,000 -- --
Vice President - 1995 -- -- -- --
Sales & Marketing 1994 -- -- -- --
James H. Moore, Jr.(3) 1996 100,000 50,000 -- --
Vice President - 1995 100,000 -- -- --
Operations, Assistant 1994 -- -- -- --
Secretary
- - --------------
(1) Ms. Soechtig has been employed by the Company since October 31, 1994. Ms.
Soechtig's annual salary is currently $220,000. During the year ended
December 31, 1994, Ms. Soechtig was awarded stock options to purchase
375,000 shares of Common Stock, all of which are presently exercisable. In
addition, a $20,170 bonus payable in 1994 upon Ms. Soechtig's employment
with the Company was paid during 1995.
(2) Mr. Phillips has been employed by the Company since January, 1996. Mr.
Phillips= annual salary is currently $150,000. During the year ended
December 31, 1996, Mr. Phillips was awarded a bonus of $50,000.
(3) Mr. Moore has been employed by the Company since January, 1995. Mr.
Moore's annual salary is currently $100,000. During the year ended
December 31, 1996, Mr. Moore was awarded a bonus of $50,000.
No options were granted during the Company's 1996 fiscal year to the
current and former executive officers named in the Summary Compensation Table
above.
-29-
<PAGE>
The following table sets forth certain information concerning the
number of shares of Common Stock acquired upon the exercise of stock options
during the year ended December 31, 1996 by, and the number and value at December
31, 1996 of shares of Common Stock subject to unexercised options held by, the
individuals listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
VALUE OPTIONS/SARS OPTIONS/SARS
REALIZED AT FY-END (#) AT FY-END ($)
NAME ON EXERCISE (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - ---- --------------- ------ ------------------------- -------------------------
<S> <C> <C> <C>
Jacqueline E. -- -- 375,000/0 0/0
Soechtig
</TABLE>
- - ----------------
(1) Represents the closing bid price on the National Association of Securities
Dealers Automated Quotation System of the underlying shares of Common
Stock on the date of exercise less the option exercise price.
EMPLOYMENT AGREEMENT
Jacqueline E. Soechtig, President and Chief Executive Officer of the
Company, is a party to an employment agreement with the Company, which commenced
on October 31, 1994 for a term of three years. Ms. Soechtig's base salary for
the entire three-year term is $220,000 per annum. The agreement also provided
for incentive compensation in the form of bonuses that were paid in the amounts
of and $100,000 for 1995 and 1996, respectively. Pursuant to the agreement and
as a signing bonus, Ms. Soechtig was paid $20,170 and was granted ten-year stock
options to purchase 375,000 shares of Common Stock, which are all presently
exercisable at an exercise price of $2.00 per share. Ms. Soechtig was granted
certain registration rights with respect to the shares of Common Stock
underlying all of such options. The fair value of the 375,000 shares of Common
Stock underlying Ms. Soechtig's options was determined by the Board of Directors
to be $5.00 per share at the time of the option grant considering various
factors such as restrictions placed on the underlying shares and their lack of
liquidity, as well as their quoted market price on October 31, 1994 of $13.50
per share. On July 30, 1997, the Board of Directors, unanimously approved a
resolution (with Ms. Soechtig abstaining) authorizing an amendment to the
employment agreement which extends the term of the agreement to October 31, 2000
and increases her base salary to $235,000.
No options were granted during the Company's 1996 fiscal year to the
current and former executive officers named in the Summary Compensation Table
above.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 28,
1997 regarding the beneficial ownership of shares of Common Stock by (I) each
person (including any "group" as that term is used in Section 13 (d)(3) of the
Securities Exchange Act of 1934, as amended) who is known by the Company to be
the beneficial owner of more than 5% of the Common Stock, its only class of
voting securities (ii) each director and nominee, (iii) each current and former
executive officer named in the Summary Compensation table herein titled
"Executive Compensation" and (iv) all directors and executive Officers of the
Company as a group.
-30-
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF
PRESENTLY ISSUED PRESENTLY ISSUED
AND OUTSTANDING AND OUTSTANDING
COMMON STOCK PLUS COMMON STOCK PLUS
COMMON STOCK COMMON STOCK
AMOUNT AND PERCENT OF ISSUABLE UPON ISSUABLE UPON
NATURE PRESENTLY ISSUED CONVERSION OF CONVERSION OF
NAME AND ADDRESS OF BENEFICIAL AND OUTSTANDING OUTSTANDING OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK PREFERRED SHARES PREFERRED SHARES (2)
------------------- ------------ ------------ ---------------- --------------------
<S> <C> <C> <C>
Jacqueline E. Soechtig 398,500(3) 5.2% 398,500(3) *
c/o Lasergate Systems, Inc.
28050 U.S. 19 Highway North
Suite 502
Clearwater, FL 34621
Bruce D. Barrington 92,500(4)(5) 1.2% 92,500(4)(5) *
c/o Lasergate Systems, Inc
28050 U.S. 19 Highway North
Suite 502
Clearwater, FL 34621
John J. Chluski 95,827(4) 1.3% 95,827(4) *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
Frank W. Swacker 52,500(6) * 52,500(6) *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
Eric T. Jager 176,500(7) 2.4 176,500(7) *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
James H. Moore 16 * 16 *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
Glenn W. Phillips * * * *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
-31-
<PAGE>
AMOUNT OF PERCENT OF
PRESENTLY ISSUED PRESENTLY ISSUED
AND OUTSTANDING AND OUTSTANDING
COMMON STOCK PLUS COMMON STOCK PLUS
COMMON STOCK COMMON STOCK
AMOUNT AND PERCENT OF ISSUABLE UPON ISSUABLE UPON
NATURE PRESENTLY ISSUED CONVERSION OF CONVERSION OF
NAME AND ADDRESS OF BENEFICIAL AND OUTSTANDING OUTSTANDING OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK PREFERRED SHARES PREFERRED SHARES (2)
------------------- ------------ ------------ ---------------- --------------------
Philip P. Signore * * * *
c/o Lasergate Systems, Inc
28050 U.s. 19 Highway North
Suite 502
Clearwater, FL 34621
RBB Bank, AG 100,000 1.3 50,411,105 87.1%
Burgring 16
8010 Graz
Austria
All Directors and Executive 815,827(8) 10.3% 815,827(7) 1.4%
Officers of the Company as a
group (10 persons)
</TABLE>
- - -------------------
* LESS THAN 1%.
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) Assumes full conversion of (i) the Company's Series F Convertible
Preferred Stock (the "Series F Preferred Stock") into a total of
17,755,556 shares of Common Stock based upon conversions already effected
plus conversion of the remaining outstanding Series F Convertible
Preferred Stock, assuming they were converted on August 26, 1997 at a
price of $.45 per share of Common Stock and (ii) the Company's Series G
Convertible Preferred Stock into a total of 32,655,549 shares of Common
Stock. Pursuant to its agreement with RBB Bank, AG ("RBB"), the Company
will redeem the shares of Series F Preferred Stock, at which time RBB
would have the right to acquire 81.4% of the Company's Common Stock.
(3) Includes 375,000 shares of Common Stock which Ms. Soechtig has the right
to acquire pursuant to presently exercisable stock options.
(4) Includes 42,500 shares of Common Stock which each of Messrs. Barrington
and Chluski has the right to acquire pursuant to presently exercisable
stock options.
(5) Includes 50,000 shares of Common Stock owned by a Trust of which Mr.
Barrington acts as trustee.
(6) Includes 47,500 shares of Common Stock which Mr. Swacker has the right to
acquire pursuant to presently exercisable stock options.
(7) Includes (i) 124,000 shares of Common Stock owned by a mutual fund which
Mr. Jager manages and with respect to which Mr. Jager has voting power,
(ii) 10,000 shares of Common Stock owned by Mr. Jager's wife as to which
Mr. Jager disclaims beneficial ownership, and (iii) 42,500 shares of
common stock which Mr. Jager has the right to acquire pursuant to
presently exercisable stock options.
(8) Includes shares of Common Stock which such Directors and Executive
Officers have the right to acquire pursuant to presently exercisable stock
options.
-32-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 4, 1997, the Company sold 7,500 shares of Series G
Preferred Stock to RBB for $7,500,000. Each share of Series G Preferred Stock is
convertible into 4,354 shares of Common Stock. Prior to the transaction, RBB was
the beneficial owner of 7,945 shares of Series F Preferred Stock and 100,000
shares of Common Stock. Pursuant to the transaction, the Company will redeem
RBB's Series F Preferred Stock for $6 million.
-33-
<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 Annual Report on Form
10-K, File No. 0-15873, for the year ended December 31, 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).
-34-
<PAGE>
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.
-35-
<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: November 5, 1997
-36-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000797324
<NAME> LASERGATE SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,924,825
<SECURITIES> 0
<RECEIVABLES> 868,931
<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> 222,961
<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>