SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT
ON
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997
|_| 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.
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(Name of small business issuer in its charter)
Florida 59-2543206
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State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization
2189 Cleveland Street, Suite 230, Clearwater, Florida 33765
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (813) 803-1574
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 Redeemable Warrants
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(Title of Class) (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 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 $4,917,536.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days.
At April 28, 1998, the aggregate market value of the Common Stock of Lasergate
Systems, Inc. held by non-affiliates ( 15,184,550 shares) was $1,898,069.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
At April 28, 1998, 15,299,393 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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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 generally 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 that employs applications of
various technologies 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.
These technologies include proximity or radio frequency identification (RFID)
scanning, laser (bar code) scanning, and reading magnetic stripe data. 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.
In March, 1997, the Company introduced its newest version of the general
admission ticketing product called Admits for Windows(R), a Windows NT(R)
ticketing system. The system provides computerized point-of-sale general
admission tickets, including timed admission tickets and/or wristband tickets
for amusement and water parks. The Company has discontinued the sale of its
previous general admission products, Admits Gold and Admits Platinum, but is
still providing technical support for those products to customers with support
agreements. During 1998, the Company plans to stop offering support agreements
for Admits Gold and Admits Platinum products.
The Company markets its Video Imaging Season Pass system, in conjunction with
the Admits for Windows(R) product. 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
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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:
The American Skiing Company
Tatilya Park, Istanbul, Turkey
Sun Valley, a ski and golf resort in Sun Valley, Idaho
World of Coca Cola, Atlanta, Georgia and Las Vegas,
Nevada Snowbird, a ski resort in Snowbird, Utah
Blackpool Pleasure Beach, Ltd., Blackpool, England Regal
Cinemas Fun Centers Art Gallery of Ontario National
Science Center Museum of African American History,
Detroit, Michigan
The Company's Select-a-Seat system is used by over 80 facilities including:
Carnegie Hall, New York, New York
Contemporary Group (providing tickets for the St. Louis Blues),
St. Louis, Missouri
Datatix (providing tickets for the Utah Jazz), Salt Lake City, Utah
Kravis Center, West Palm Beach, Florida
Current installations vary from systems which provide for simple general
admission tickets to those which allow access by patrons to an entertainment
facility, to 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 for Windows(R) system and authorized for use by the holder upon printing.
Relevant data concerning the remaining value and restrictions of the ticket are
available from the access control system each time the bar code is read and
processed. With bar codes, no information is actually contained in the bar code,
but instead is held by the Admits for Windows(R) 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 for Windows(R) 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
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one product with a modular solution orientation; substituting a standard product
with customized modules for customized application solutions; and moving from
multiple platforms including DOS and UNIX to a Windows(R) platform.
During the fourth quarter of 1996, the Company began selling the next generation
of its ticketing system, Admits for Windows(R). It is a Windows(R) version that
includes ticketing, access control, concession sales, reporting and advanced
reservations as well as other features currently under development designed to
meet the many needs of Windows(R) based clients. The Company is currently
integrating functions of the Select-a-Seat product into a Windows(R) NT based
product. This will create a single product platform with the ability to generate
general admission and reserved seat tickets, thereby providing customers with an
integrated solution for multiple ticketing requirements.
ADMITS FOR WINDOWS(R)
Admits for Windows(R) is a Windows(R) based point-of-sale (POS) system that
integrates technologies that enhance ticketing and access control operation. The
system can be used to issue tickets, wristbands or receipts and provide access
control both for general admission or timed admission events. A minimum
configuration for an Admits for Windows(R) for Windows system presently consists
of the following basic components: a personal computer, a printer, and the
Company's Admits for Windows(R) 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, as well as third party software for specialized applications.
Admits for Windows(R) is designed to handle the diverse needs of a ticketing
office including cash control, ticket printing, event set-up and financial
reporting. It can also include point-of-sale software for gift shops and
concession stands, as well as access control using turnstiles and proximity or
radio frequency identification (RFID) scanning or laser (bar code) scanning.
Although it is not protected by a registered copyright, Admits for Windows(R) 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"). What the Company
believes to be the proprietary nature of the Admits for Windows (R) system 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,
access control, capacity ticketing, and additional products provided by third
parties, such as fund raising. Admits for Windows(R) can be a stand-alone POS
device or multiple POS stations networked together, selling from one common
inventory of available events. Using the Windows(R) platform, Admits for
Windows(R) delivers a superior price/performance ticketing and access control
solution.
The Admits for Windows(R) 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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The Company's Admits for Windows(R) 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.
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 for
Windows(R). 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 for Windows(R) 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 for
Windows(R) in the snow skiing resort market. The system provides for fast lift
ticketing and season pass production in addition to mobile scanning at lift
entry areas. Recent installations include the American Skiing Company's seven
resorts, including Sunday River, Maine, Killington, Vermont, and The Canyons in
Utah.
This combined admission control system utilizes the following basic components:
TICKET. A bar-coded ticket is printed at one of several locations.
Since the bar code is ink on paper and is printed by a standard
thermal or laser printer, it cannot be demagnetized (unlike magnetic
tickets) and will generally remain valid even if the ticket is
folded or mutilated. The system can be expanded to provide season
passes with photographic identification cards as well as group
ticketing and reservation applications to print numerous tickets
simultaneously for sales through brokers or to groups.
ATTENDED AND AUTOMATED POINT OF SALE TERMINALS. Tickets can be sold
either by an attendant with a point-of-sale terminal, which includes
a cash drawer, a terminal to select the ticket type and ticket
printer, or by an automated point-of-sale terminal. As a ticket is
printed, a computer record is made of the bar code, the type of
ticket sold, its cost and the type of payment. These can be
reconciled later against the funds collected by a ticket attendant.
The terminal can also be utilized to record 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 or credit card 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 for Windows(R) software to
read bar-coded tickets produced by the Admits for Windows(R) software. Scanners
can be hand-held or integrated with access control equipment.
PRICE. The price for the Admits for Windows(R) system varies widely 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 for
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Windows(R) systems the Company has installed were sold for prices ranging from
approximately $55,000 to $300,000.
ADMITS FOR WINDOWS (R) FEATURES. Admits for Windows(R) 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 for Windows(R) 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 for Windows(R) system
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.
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 also utilizes magnetic stripe
and proximity chip technologies providing equally unique characteristics.
The Company's technology, through its admission and access control system,
reduces fraud and labor costs while enhancing accountability and profitability.
Within the United States alone, the entertainment and recreation industries
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 permits the access control system to closely monitor general attendance
at both amusement/theme park facilities as well as ski resorts. By determining
the validity of each ticket based on its identification number encoded in its
barcode or proximity chip, these scanning devices reduce the possibility of
admission from counterfeit tickets.
FEATURES. The Company's access control system, which is an optional feature with
the Admits for Windows(R) family of products, integrates the scanning technology
of bar codes and proximity chips with laser scanners placed in turnstiles, and
hand-held or stationary proximity readers. The Company believes the proprietary
nature of the access control system is the inter-relationship of the components,
as well as the software that links them, rather than the components themselves.
To gain entry to a facility or an individual attraction, the bar code or chip on
or in the card or ticket is scanned by a laser scanner located at the point of
entry. The ticket holder
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can scan the ticket in any direction. 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.
SELECT-A-SEAT
The Company's reserved seating software system is called Select-a-Seat.
Select-a-Seat is a broad in-house computerized box office management,
reservation and event marketing system. For reserved seating as well as general
admission sales. Select-a-Seat has 90 installations servicing over 200
facilities, which are selling in excess of 40 million tickets annually in the
United States, Canada, Malaysia, and Singapore. The software can be used for
distribution and control of admission tickets for theaters, professional sports
teams, university athletic departments, multi-purpose arenas, racetracks,
casinos, concert halls, performing arts organizations, museums and IMAX
theaters.
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 . 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. 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. 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.
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 held
in the system, unavailable for other sales, 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.
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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 citywide ticket distribution networks as an
alternative to a national service bureau. The Select-a-Seat system is an
alternative to a national service bureau, allowing facilities to control their
own ticket inventory, maintain reasonable service charges, and retain service
charge revenue. The Company has sold and installed Select-a-Seat Systems that
sell tickets where the event is held, as well as over the telephone and through
remote ticket distribution points. When organizations purchase Select-a-Seat,
tickets sold over the telephone and at remote sales locations can 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.
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, citywide ticket
bureaus and professional sports teams.
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.
DISCONTINUED PRODUCTS. During 1997, the Company did not have any sales of its
legacy products (Lasergate Admits Gold and Admits Platinum). None of these
products were a primary focus of the Company in 1997, and the Company considers
them to be discontinued.
PRODUCT SERVICING AND ADMINISTRATION
The Company has developed a number of common procedures for producing and
servicing each of its products, as explained below.
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.
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INSTALLATION AND TRAINING. The Company's technicians install each of the
Company's systems, providing any customization required and overseeing the
placement of all equipment. The purchaser is responsible for installation of
cabling to link each component to the central computer. Low-voltage cables are
dedicated to the system and are not expensive or difficult to install. This
cabling method allows both new and existing purchasers to easily install the
Company's systems and allows existing installations to expand their existing
systems as their business grows. The Company also provides interfaces into
various local area networks (LAN's) and fiber-optics systems.
The Company provides initial training for the administrators and/or facility
personnel of each system at each installation and provides a user manual. The
Company encourages training of personnel at the supervisory level and encourages
these individuals to train the end users that 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.
As of December 31, 1997, the Company has accrued $554,000 to provide for costs
which may be incurred to fix software errors ("bugs") including estimated costs
to make discontinued products "Year 2000 Compliant." Management believes all
current products are "Year 2000 Compliant."
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 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
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by advertising in trade periodicals. Qualified leads, generated as a result of
these marketing efforts, and high profile, target accounts selected from the
above vertical markets, provide the basis upon which the direct sales
organization pursues new opportunities. Additionally, some new prospects have
been attracted by the positive impressions created through discussions with or
visits to existing customer installations.
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 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 views its installed base as a very important source of new leads
and, in fact, it has led to substantial business in 1997. The Company intends to
continue to explore these references and use its installed base as a basis for
getting new business.
The Company markets products that typically require substantial customization in
order to meet the customers' 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 Company's
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 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 that
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 more effective means of delivering business solutions to the entertainment
industry.
This modular concept was implemented in the Company's new Admits for Windows(R)
product which was introduced in May, 1997. For most of 1997, the additional
costs of introducing the new product more than offset any cost savings achieved,
but the Company has begun to achieve cost reductions as a result of this
development effort and new product introduction in areas of product development
and customer support. In addition, the product has a new appearance that is more
user friendly and allows the user to modify a configuration layer (without
access to the source code), which can remain in place when updating the product
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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 are
several examples of installations:
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 FOR WINDOWS(R) AT AMERICAN SKIING COMPANY. Admits for Windows(R) is
installed at seven ski resorts operated by American Skiing Company. These sites
include Killington, Sugarbush, Attitash, and Mount Snow in Vermont; Sunday River
and Sugarloaf in Maine; and The Canyons in Utah. This installation represents
the largest networked computing application to date for the Company. It includes
new radio frequency identification scanning (proximity scanning) technology and
new applications designed and developed to enhance the customer's ability to
market and ensure their guests' convenience and satisfaction. All sites include
multiple point-of-sale stations, video ID stations, and RFID pass scanning at
the lifts. The proximity cards issued to guests act as debit cards, frequent
visitor cards, and season passes, permitting card holders to proceed directly to
the lifts without waiting in point-of-sale ticketing lines.
ADMITS FOR WINDOWS(R) AT SUN VALLEY SKI RESORT, SUN VALLEY, IDAHO. The Admits
for Windows(R) at Sun Valley Ski Resort includes 27 point-of-sale stations for
lift ticket sales, six video ID stations for season passes, and 6 radio
frequency ski lift scanning stations for access control. It processes over
400,000 tickets per year.
ADMITS FOR WINDOWS(R) AT ART GALLERY OF ONTARIO, ONTARIO, CANADA. The Admits for
Windows(R) system at the Art Gallery of Ontario ("AGO") was installed in the
first quarter of 1997. It includes 12 point-of-sale stations for main ticketing,
group sales and back office ticketing applications. The system has enabled AGO
to implement an Art Card which provides bar coded access control through 6 entry
points utilizing custom ticket stock imprinted with selected artwork.
Due to the length of time it takes for the Company to purchase, customize and
install certain of its products, there may occasionally be a backlog of orders
for equipment. As of December 31, 1997 and December 31, 1996, the Company's
backlog was $893,000 and $963,000 respectively. The backlog represented sales to
numerous sites with purchase prices ranging from approximately $90,000 to
$196,000. 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 that did not have a lengthy history of performance at sizable
installations within their market segment. In 1996, Bayindir Insaat Turizm
Ticaret (a large, indoor amusement park in Istanbul, Turkey) represented 12% of
the Company's sales. In 1997, American Skiing Company (owner of multiple U.S.
ski resorts) represented 54% of the Company's sales.
11
<PAGE>
COMPETITION
The Company faces significant competition from different sources. This
competitive activity can be analyzed by the following areas: product features
and capabilities, price, service/support, product availability, technology, and
corporate structure.
PRODUCT FEATURES AND CAPABILITIES
ADMITS FOR WINDOWS(R). There are several companies in the United States offering
basic computerized ticketing capabilities which are similar to those the Company
offers through its Admits for Windows(R) 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 for
Windows(R) 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 that a customer might already
own. The computerized reserved seat ticket industry has historically been
dominated by two national ticketing companies: Ticketron, Inc. and Ticketmaster,
Inc. Ticketron, Inc. was acquired by Ticketmaster, Inc., leaving only one
national ticketing company, Ticketmaster, Inc. Ticketmaster, Inc. leases their
equipment and software to arenas, stadiums and theaters and establishes remote
sales locations and telephone reservations centers to sell tickets. Ticket
buyers pay a service charge to Ticketmaster, Inc. for their services. Service
charges can range from $1.50 per ticket to over $7.50 per ticket. The Company's
Select-a-Seat system, as an alternative to the national ticketing companies,
allows facilities to retain control of their ticket inventory, and ticketing
service charges. When organizations purchase Select-a-Seat, all tickets sold
over the telephone, the Internet, or at remote sales locations can carry a
per-ticket service charge (if the owner chooses to do so) which the owner of the
system retains. Therefore, many organizations purchase Select-a-Seat as a source
of revenue. For a discussion of Select-a-Seat, see the information included
under the caption "Select-a-Seat" above.
ACCESS CONTROL. The primary competing technology for the Company's access
control system is magnetic strips, such as those located on the back of most
credit cards and many forms of paper tickets as well as various forms of bar
code readers. Competitors in this arena include VGS and Gateway Ticketing
Systems. The Company's primary competitor for its access control system is Data
Service Company of America, Inc. which offers access control by allowing users
to swipe their bar-coded ticket through a slot reader. The Company believes its
access control system competes effectively with Data Service Company of America,
Inc.
PRICING
There is significant and consistent competitive pressure to adjust and modify
pricing, particularly for hardware components. The Admits for Windows product,
with its differentiated feature set continues to command a premium price,
however as the product matures and as competitors develop their competitive
offerings, the price will need to be reduced. The Select-a-Seat product is
market priced, however due to its life cycle position, the Company will be
forced to consider additional investment of development resources in an aging
product versus giving price reductions to maintain the Company's competitive
position.
12
<PAGE>
SERVICE AND SUPPORT
The majority of the Company's competitors have established customer service
centers, help desks, and technical support services. The ability to provide
highly reliable, well skilled support staffs generally extends the competitive
position of each company. The Company has deployed these functions to support
customer needs, and is able to remain competitive in most markets served.
PRODUCT AVAILABILITY
Currently, the Company distributes its products through its direct sales
channel, and although this remains to be an effective method, reserved seat
customers have recently expressed alternative buying preferences. The Company's
major competitors have responded quickly to these preferences by deploying
on-line ticketing through the Internet. Although this method of distribution is
unrefined, it has captured the interest of many, and has created significant
discussion in the market. The Company has recognized the value of the
distribution channel and intends to develop its own offering.
TECHNOLOGY
The Company's products conform to industry standards, and the product
architecture provides customers with seamless integration of third party
packages. This capability is currently unsurpassed in the industry to
management's knowledge and provides the Company a competitive advantage.
CORPORATE STRUCTURE AND OTHER
The Company is publicly held, and as such is required to disclose all
activities, financial and otherwise. At times, this has been a disadvantage,
allowing competitors to obtain and publicize information in ways that have
created concern among prospective customers.
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 which 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 are Digital Equipment, Tech Data, Data General,
BOCA Systems, Inc., Peak Technologies, Brady Signmark, Alvarado Manufacturing
Co., Indiana Cash Drawer Corporation, and Jetstar, Inc. The other products the
Company offers are primarily software.
The Company typically assembles and tests its software at its headquarters and
installs it along with appropriate hardware on-site for its various customers.
13
<PAGE>
PERSONNEL
In order to reduce its overhead costs, the Company entered into an agreement
effective December 16, 1996, with a firm that provides all administrative
services relating to payroll, personnel and employee benefits (an employee
leasing agreement). Management continues to hire, dismiss, set pay rates, and
supervise the employees.
As of December 31, 1997, the Company employed (or employee leased) 38
individuals, including 4 in management, 7 in engineering, 10 in operations, 10
in sales and marketing, 4 in finance and accounting and 3 support staff
personnel. The Company retained one individual as a contract employee and
another 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 are excellent.
INTELLECTUAL PROPERTY
The Company holds a copyright for 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 copyright 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 mark and trade secret laws as well as 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
copyright 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
14
<PAGE>
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 has applied for copyrights in order to protect its new Admits for
Windows(R) product There can be no assurance that a copyright will be obtained
or that it 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 service marks for the names Select-a-Seat
and Lasergate Systems, Inc.; Admits for Windows(R) is a product of the Company.
All other brands and products mentioned in this report are trademarks of their
respective holder(s).
YEAR 2000 COMPUTER ISSUES
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning around January
1999, these date code fields will need to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than one year, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance. Although the Company's current products (its new Windows(R) products
and the current version of its reserved seat product, Select-a-Seat) are
designed to be Year 2000 compliant, some legacy products are not Year 2000
compliant. Many versions of non-compliant products have been sold and installed
in the past; however, the terms of their licenses may expire or the customer may
decide to replace their system before any modifications would be necessary.
Thus, some versions may have no impact upon the Company, but other versions may
require modifications or upgrades and the resources required to complete these
modifications and upgrades may be substantial. Additionally, there can be no
absolute assurance that the Company's software products that are designed to be
Year 2000 compliant are actually compliant. Management is currently evaluating
the impact of Year 2000 requirements upon the Company, and developing a plan to
limit the Company's exposure and cost of compliance. Management currently
estimates the cost of compliance to be approximately $100,000 and has provided
for this cost as part of its warranty provision.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leased approximately 11,910 square feet of office space in
Clearwater, Florida, until November 1997. The monthly rent expense during 1997
was approximately $14,000 per month. The lease did not expire until April 30,
1999, but was terminated early without a cancellation penalty.
In November 1997, the Company leased approximately 10,160 square feet of office
space in Clearwater, Florida. The lease expires on November 30, 2002. 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 office complex as space becomes
available. Until November 1998, the rent payable will be approximately $8,200
per month.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On June 15, 1995, the Company's founder and former President and Chief Executive
Officer, Donald Turner, 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 that 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.
On or about June 27, 1997, a class action was commenced in the United States
district Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera, on behalf of themselves individually, and on behalf of
all others similarly situated against inter alia, the Company, Sterling Foster,
& Co., Inc. ("Sterling Foster"), the Company's former underwriter, counsel for
Sterling Foster and certain issuer defendants for whom Sterling Foster acted as
underwriter. The Complaint alleges that in connection with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's stock, to create a
short position at the inflated price and then cover the short position with
shares from shareholders who had been secretly released from "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose in its Registration Statement that prior to the date the offering
became effective, Sterling Foster had secretly agreed to release certain
shareholders from "lock-up" agreements for the purpose of selling their shares
to Sterling Foster at reduced prices. The Plaintiffs' claims allege that the
Company violated Sections 11 and 12 (2) of the Securities Act of 1933, Sections
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Section 349 of the New York General Business Law, as well as
making negligent misrepresentations. In February 1998 the Company moved to
dismiss the complaint in its entirety. The Company believes that it has defenses
to these claims and intends to vigorously defend itself in this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following tables set forth the high and low sales prices for the Common
Stock on the NASDAQ Stock Market for the periods indicated:
QUARTER ENDED HIGH SALES PRICE LOW SALES PRICE
- ------------- ---------------- ---------------
March 31, 1996 $2 $7/8
June 30, 1996 1 11/16
September 30, 1996 1 17/32
December 31, 1996 25/32 7/32
March 31, 1997 3/4 9/32
June 30, 1997 15/32 7/32
September 30, 1997 7/16 7/32
December 31, 1997 1/2 1/8
As of April 28, 1998, there were 4,197 holders of record of the Common Stock. No
dividends have ever been declared or paid on the Company's Common Stock and the
Company does not presently intend to pay any dividends on its Common Stock. The
closing price of the Common Stock on April 28, 1998, was $1/8 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The Company has a net loss for 1997 of $2,923,069, and a history of operating
losses that have accumulated to $19,706,387, at December 31, 1997. 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 report of our independent
certified public accountants is qualified as to this going concern uncertainty.
The following commentary addresses the Company's operations for 1997 and its
plan to improve future results.
Since June, 1996, the Company has committed substantial resources to the design,
development, and marketing of its new Admits for Windows(R) product.
Concurrently, the Company has dedicated significant resources to maintenance of
its Legacy products. While these development, marketing and maintenance costs
were being incurred, the Company began a product launch designed to fully
replace its main product line. The new Admits for Windows(R) general admission
ticketing and access control products are rich in features desired by customers,
and the product platform, Windows NT(R), is the platform of choice for many
customers. Management believes that the Company's product direction is focused
correctly and that the Company will continue to gain market share as the product
matures over the next year. However, the sales force had limited success in
1997, primarily due to the reluctance of customers to license software that is
critical to their business until it has been installed for an extended period of
time at a facility similar to their own. This situation began to change in late
1997 as the Company's prospective customers were able to obtain references
regarding the Company's product from several existing customers who had been
using the product since early in the year, and the Company succeeded at selling
and installing the new Admits for Windows(R) product at eighteen installations
in 1997, including all four of the targeted market segments for the product as
follows:
Unaudited
---------------------------------
Market Segment Installations Customers
-------------- ------------- ---------
Ski Resorts 9 3
Museums, Aquariums & Zoos 5 4
Family Entertainment Centers 3 1
Theme Parks and Amusement Parts 1 1
-- --
Totals 18 9
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Management believes that having the Admits for Windows(R) product installed at
the above sites will improve its ability to sell the product and expects 1998
sales opportunities to be at least the same as those experienced in 1997.
However, the Company's financial stability has affected its sales. The company
cannot provide an absolute guarantee to customers that development of products
will continue. For this reason, the Company continues to seek and actively
pursue a possible relationship with a strategic partner who could improve
customers' perceptions of the Company's financial stability as well as the
Company's actual financial position. Any such relationship would probably
include an equity investment in the Company. The Company may also review other
financing opportunities.
It should be noted that the Company has been seeking a strategic partner for
approximately one year now, but has been unable to find a suitable partner that
is willing to invest a significant amount of capital on terms that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and negative working capital. Current liabilities are in excess of current
assets by $1,467,960 at December 31, 1997. These circumstances require that the
Company exercise greater caution in conducting its business and, at certain
times, take extraordinary measures. In the past, such measures have included
asking certain vendors to extend payment terms by as much as 120 days, and, on
occasion, delaying payroll for senior management. Although Management recognizes
the critical nature of the Company's cash position and attempts to manage the
Company's expenditures accordingly, there is a risk that under certain
conditions, immediate financing could be required. The costs of obtaining such
financing are unknown and the likelihood of obtaining such financing is
uncertain. Management intends to continue to operate the Company in a
conservative manner through its efforts to further reduce operating expenses and
product costs and to focus on higher margin sales opportunities. While
Management believes the Company will be able to operate without interruption, it
intends to continue discussions with certain potential partners and to seek out
additional potential candidates who can potentially enhance the Company's
financial position and marketing abilities. However, no assurances can be made
that a suitable partner will be found or that sufficient capital will be raised
if necessary to allow the Company to continue its operations in the
conservative, cost-saving manner in which they are currently being conducted.
RESULTS OF OPERATIONS: 1997 COMPARED TO 1996
Revenues
Revenues increased to $4,917,536 in 1997 from $4,204,626 in 1996, representing a
17% increase. Revenues consisted of system sales and installations of $4,470,626
in 1997 and $3,588,383 in 1996, and maintenance and support of $446,910 in 1997
and $616,243 in 1996. The increase in system sales and installations was
primarily attributable to the introduction of the Admits for Windows(R) product
and significant new sales to American Skiing Company. The decrease in
maintenance and support revenue was partially due to fewer customers renewing
maintenance agreements on legacy products, but largely due to a one-time sale of
support services to Bayindir Insaat Tuerizm Ticaret in 1996 of approximately
$90,000.
In 1996, the Company's principal products, Select-a-Seat, Admits Platinum, and
Admits Gold, represented approximately 33%, 35%, and 16% of revenues. In 1997,
the Company discontinued sales of Admits Platinum and Admits Gold and introduced
Admits for Windows(R). Admits for Windows(R) represented 89% of revenues
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<PAGE>
in 1997, and Select-a-Seat represented 11%. Maintenance and support represented
9% of revenues in 1997 and 14% in 1996
In 1997, one customer, American Skiing Company, the owner of multiple U.S. ski
resorts, represented 54% of revenues. In 1996, one customer, Bayindir Insaat
Turizm Ticaret, a large, indoor amusement park in Istanbul, Turkey, represented
12% of revenues. In 1998, the Company expects to continue the beneficial
relationship with American Skiing Company who will represent a significant share
of 1998 revenue. Sales to other customers are expected to increase which will
reduce the sales percentage attributable to American Skiing Company in 1998.
Cost of Revenues
- ----------------
Cost of revenues in 1997 and 1996 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, the full costs
associated with the provision of customer support, and the amortization of
capitalized software.
Cost of revenues increased to $3,809,442 from $3,104,792. This 23% increase was
the result of costs related to a 17% increase in sales and reduced gross margins
on sales to American Skiing Company, partially offset by increased efficiencies
in installing products. Warranty provisions for 1997 totaled $146,654 and
warranty work charged against the allowance in 1997 totaled $163,076. As a
percentage of revenues, cost of revenues in 1997 represented 77% of revenues
compared to 74% of revenues in 1996. This decline is a result of reduced margins
on significant sales to American Skiing Company.
Although the sales mix for hardware versus software has been relatively
consistent during 1997 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 decreased slightly to $445,365 in 1997 from $460,709 in 1996,
a decrease of $15,344, or 3%. As a percentage of revenues, development costs
decreased from 11% in 1996 to 9% in 1997. This was due primarily to the increase
in revenue and capitalization of development costs. Development costs for 1997
do not include $318,650 of capitalized costs or $123,578 of costs charged to the
warranty allowance. Development costs for 1996 do not include $25,000 of
capitalized costs or $91,000 of costs charged to warranty allowance. By adding
these amounts back to development costs, gross spending on development
activities can be calculated. Gross spending increased from $576,709 in 1996 to
$887,593 in 1997. This represents a 54% increase, which was primarily due to
increased staffing and consulting costs . The Company expects to continue
development efforts in 1998 at about the same level as in 1997, with the
majority of the development effort focused on its new modular products.
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<PAGE>
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses decreased from $4,547,990 in 1996
to $3,396,415 in 1997, representing a 25% decrease. As a percentage of revenues,
these expenses were 69% in 1997 and 108% in 1996, which reflects substantial
cost reductions in 1997.
The principal components of the decrease in selling, general and administrative,
in 1997 as compared to 1996 are described below:
General and administrative expenses decreased from $3,274,239 in 1996 to
$2,186,182 in 1997, representing a 33% decrease. The principal components of the
decrease are decreases in executive compensation of $436,347, legal fees of
$227,090, bad debt expense of $161,511, shareholder relation's expenses of
$109,487, and printing costs of $45,974.
Sales and marketing expenses decreased to $1,210,233 in 1997 from $1,273,751 in
1996, representing a 5% decrease. This decrease was primarily attributable to
reduced sales commissions.
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 2 to the financial statements).
Write Down of Customer Lists and Support Contracts
- --------------------------------------------------
As a result of the Company's review for potential impairment of intangibles and
review of costs associated with customers acquired through the acquisitions of
Delta Information Services and GIS Information Systems, Inc., the remaining
value of customer lists and support contracts ($230,208) was written off.
Other Income (Expense)
- ----------------------
Net interest income was $40,825 in 1997 compared to $53,557 in 1996.
Net other income/(expense) represented $67,674 of expense in 1996 primarily
associated with 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. The
joint venture discontinued operations in 1997 and the results of operations in
1997 were provided for in 1996.
Income Taxes
- ------------
The Company currently has a substantial net operating loss carry forward for
which the Company has not recognized a tax benefit due to the uncertainty
related to when and how much of the tax benefits will be ultimately realized
(See Note 9 to the financial statements).
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Net Loss
- --------
Net loss decreased to $2,923,069 in 1997 from $4,997,962 in 1996. The Company's
operations were affected by various factors as discussed above with the largest
components being a reduction of general and administrative expenses of
$1,088,057 and a reduction in the writedown of intangibles of $844,792.
Net Loss Per Share
- ------------------
In March 1997, the Securities and Exchange Commission (SEC) announced its
position on accounting for the issuance of convertible preferred stock with a
non-detachable conversion feature that is deemed "in the money" at the date of
issue (a "beneficial conversion feature"). The Company's preferred stock has
such features. As a result, the Company has recognized the intrinsic value of
beneficial conversion features of preferred stock as dividends to preferred
shareholders. The accounting described herein for the intrinsic value of
beneficial conversion features does not affect the financial statements,
including the reported net loss and, stockholders' equity (including retained
earnings), with the exception that the reported net loss per common share has
been increased by the amount of the preferred dividends. After recognizing
dividends of $475,570 for 1997 and $2,836,353 for 1996, the net loss per common
share is $(.46) for 1997 and $(1.29) for 1996.
New Accounting Pronouncements Adopted
- -------------------------------------
SFAS No. 128, Calculation of Earnings per Share, was implemented for 1997. There
was no effect on the Company's financial statements.
New Accounting Pronouncements to be Adopted
- -------------------------------------------
SOP 97-2, Software Revenue Recognition, will be adopted in 1998. The Company
does not expect that the adoption of SOP 97-2 will have a material effect on its
financial statements.
SFAS No. 130, Reporting Comprehensive Income, will be adopted in 1998 and the
Company expects no material impact to the financial statement presentation.
SFAS No. 131, Disclosures about segments of an Enterprise and Related
Information, will be adopted in 1998, which has a possible impact only to the
Company's disclosure information and not its results of operations.
Financial Condition: 1997 Compared to 1996
- ------------------------------------------
Total assets decreased from $6,436,945 on December 31, 1996, to $4,267,988 on
December 31, 1997, representing a decrease of $2,168,957, or 34%. This includes
a decrease in cash of $1,534,063.
Total liabilities decreased to $2,627,004 on December 31, 1997, from $3,320,392
on December 31, 1996, representing a decrease of $693,388, or 21%. The principal
contributing factors to the decrease are the reduction in deferred revenue of
$553,045 and accrued expenses of $216,468 partially offset by an increase in
accounts payable of $237,600. In addition, the Company's obligation to issue
$140,000 of common stock was eliminated with the settlement of the Potter/Betty
litigation. (See Note 10 to the Financial Statements)
Liquidity and Capital Resources
- -------------------------------
The following table represents a summary of the Company's cash flow for 1997 and
1996:
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1997 1996
---- ----
Net cash used in operating activities $(2,520,099) $(2,282,971)
Net cash used in investing activities (456,411) (228,663)
Net cash provided by financing activities 1,442,447 3,779,953
Net increase (decrease) in cash and cash
equivalents $(1,534,063) $ 1,268,319
The Company used cash of $2,520,099 in 1997 and $2,282,971 in 1996 for operating
activities. From its inception in October 1985 through December 31, 1997, the
Company has incurred cumulative losses of $19,706,387, with a loss of $2,923,069
for the year ended December 31, 1997. The company's net loss in 1997 was due
primarily to expenditures related to the factors referred to under the caption
"Results of Operations: 1997 Compared to 1996" above. Included in the net loss
for 1997 were non-cash expenses totaling $677,395, which included (i) a
write-down of customer lists of $230,208 and (ii) depreciation/amortization
expenses of $436,621. Cash generated from changes in assets totaled $413,910
with accounts and notes receivable decreasing by $293,904, investment in
inventories decreasing by $22,709, and prepaid expenses and other assets
decreasing by $97,297. These uses of cash were offset by a decrease in accounts
payable and accrued expenses of $118,868, a decrease in accrued warranty costs
of $16,422, and a decrease in deferred revenue of $553,045.
The Company used cash in investing activities in the amount of $456,411 in 1997,
which was used for additions to property, equipment, and software costs, and
used cash in investment activities in the amount of $228,663 in 1996,
principally used for additions to property, equipment, and software costs.
The Company was provided cash by financing activities of $1,442,447 in 1997 and
$3,779,953 in 1996. The Company relied on net proceeds from public and private
offerings and loans and advances from related parties to fund its operations
during 1997 and 1996. A private offering in 1997 and two private offerings in
1996 provided $7,447,500 and $6,623,082, respectively.
On March 11, 1996, the Company and GIS Systems Limited Partnership executed an
agreement whereby the parties agreed, among other things, to settle the
remaining obligation to GIS totaling $2,324,335, cancel the $559,000 note
receivable from GIS, cancel the $199,359 account receivable from GIS, and redeem
the 109,333 shares of Common Stock and 111,800 shares of Series B Preferred
Stock previously issued to GIS. In connection therewith, the Company agreed to
pay to GIS the sum of $1,550,000.
The cash payment of $1,550,000 made to GIS on April 12, 1996, the date of
closing, was principally provided from the net proceeds of the April 1996
Private Placement described below.
On March 27, 1996, the Company commenced a Private Placement of the Company's
newly established Series E Preferred Stock at $10.00 per share and completed the
private placement as of April 22, 1996. The Company received $1,450,582, net of
commissions and offering expenses, for the sale of 162,500 shares of preferred
stock. As of June 28, 1996, 150,000 shares of the Series E Preferred Stock had
been converted into 2,453,686 shares of the Company's Common Stock.
On June 10, 1996, the Company commenced a Private Placement of 8,000 shares, at
$750 a share, of the Company's newly established Series F Convertible Preferred
Stock. On June 27, 1996, the Private Placement closed with the Company receiving
$5,172,500, net of commissions and offering expenses, for the sale of 8,000 such
shares. Also, on June 27, 1996, the Company used $300,000 of the proceeds of the
Series F Preferred Stock Private Placement to pay off the notes payable to
related parties and on June 28, 1996, the Company used $1,000,000 of the
proceeds to redeem 95,950 shares of Series A Convertible Preferred Stock held by
the
22
<PAGE>
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 that would have accrued).
Each share of Series F Preferred Stock was 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, was deemed to
be $.45 and a trading price that was more than $1.00 per share was deemed to be
$1.00. On January 27, 1997, 55 Series F convertible preferred shares were
converted into 100,000 shares of common stock at a conversion price of $.55 a
share. The conversion price was calculated as of September 30, 1996, the
conversion requests date.
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
("Series G") to RBB Bank, AG as nominee for its clients (who are the beneficial
owners of such shares) for $7,500,000 pursuant to an exemption from the
registration requirements of the Securities Act, as amended, under Regulation S
promulgated thereunder. RBB Bank, AG has no voting power, directly or
indirectly, nor investment power, with respect to such shares. Pursuant to the
transaction, the Company redeemed 7,945 shares of the Company's Series F
Preferred Stock owned by some of the Series G investors for $6 million leaving
the Company with $1,447,500 of net proceeds after giving effect to expenses of
the offering. No sales commissions were paid.
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. Mr. Barrington and Mr.
Signore resigned as Directors of the Company on February 24, 1998 and May 1,
1998, respectively.)
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 1997, and that income from
operations should continue to progress throughout 1998, such that the results of
operations in 1998 should be closer to a break-even than the net loss in 1997.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the year
ended December 31, 1997, which include the following items:
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of
December 31, 1997 and December 31, 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997 and December 31, 1996 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and December 31, 1996 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and December 31, 1996 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>
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
---- --- -------- ----- ----------------
Bruce D. Barrington 55 1996 II --
John J. Chluski 74 1996 II Director
Eric T. Jager 54 1997 I Director
Jacqueline E. Soechtig 47 1994 III President, Chief
Executive Officer
and Chairman of
the Board
Frank W. Swacker 75 1995 III Vice Chairman of
the Board
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 III Director is to expire at the
1998 Annual Meeting of Shareholders and the term of each Class II Director is to
expire at the 1999 Annual Meeting. Mr. Jager was appointed mid-term as a Class I
Director to fill a vacancy. Mr. Jager will be up for re-election at the 1998
Annual Meeting of Shareholders and such term will expire at the 2000 Annual
Meeting of Shareholders. 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. Mr. Barrington and Mr. Signore resigned as Directors of the Company
on February 24, 1998 and May 1, 1998, respectively.
JOHN J. CHLUSKI has been a member of the Board of Directors of the Company since
November 1, 1996, and is presently Chairman of the Audit Committee. 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.
ERIC T. JAGER has been a member of the Board of Directors of the Company since
May 28, 1997, and is presently Chairman of the Nominating Committee. Mr. Jager
is the Executive Vice President - Investments of Bartlett & Company ("Bartlett")
and President of Windcrest Investment Management, a division of Bartlett
involved in diversified portfolio management. Mr. Jager has served in these
positions since 1983 and prior thereto he served as a Senior Vice President,
Investment Analyst and Director of Investment Research at Eppler, Guerin &
Turner, an investment banking firm in Dallas, Texas. Mr. Jager is a Director of
Nygaard Corporation, Bartlett Futures, Scout Mutual Funds, Johnson County
Business Tech Center and Tech-Industry Consultants. Mr. Jager is also the
Chairman of the Board of Shawnee Mission Education Foundation and a Director and
Co-Chairman of Kansas Inc.
JACQUELINE E. SOECHTIG has been a Director of the Company and the Company's
President and Chief Executive Officer since October 31, 1994. She is also
Chairman of the Board of Directors. From September
25
<PAGE>
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 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.
FRANK W. SWACKER has been a member of the Board of Directors of the Company
since May 3, 1995, and is presently Vice Chairman of the Board and Chairman of
the Compensation Committee. 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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act"), 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 Act 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 Act, during the year ended December 31,
1997, have been complied with except as follows: Eric T. Jager (a current
Director of the Company) and James H. Moore, Jr. (a current Officer of the
Company) were each inadvertently late in filing one report of transactions.
Frank W. Swacker (a current Director of the Company) was inadvertently late in
filing two reports of transactions.
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
Plan 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.
26
<PAGE>
During the fiscal year ended December 31, 1997, the Board of Directors of the
Company held fifteen meetings, the Audit Committee held two meetings and the
Compensation Committee held one meeting. 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 a Director during the
fiscal year ended December 31, 1997, except Mr. Barrington did not attend either
of the Audit Committee Meetings. For the year ended December 31, 1997, The Audit
Committee and the Compensation Committee both consisted of Mr. Barrington, Mr.
Chluski, Mr. Jager and Mr. Swacker.
REMUNERATION OF NON-EMPLOYEE DIRECTORS
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 Plan, to be granted a non-qualified stock 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, 1997, Mr. Chluski and
Mr. Jager were each granted options to purchase 5,000 shares under the Company's
1994 Stock Option Plan at an exercise price of approximately $.24 (85% of the
market value at time of grant). As a further inducement to his agreeing to serve
on the Board, Mr. Jager was granted an additional option to purchase 37,500
shares outside of the 1994 Stock Option Plan at an exercise price of
approximately $.28 (100% of the market value at time of grant). In order to
compensate Mr. Swacker at the same rate as all other non-employee Directors, Mr.
Swacker was granted an option to purchase 37,500 shares outside of the 1994
Stock Option Plan at an exercise price of approximately $.28 (100% of the market
value at time of grant).
27
<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, 1997 and each of the
Company's Executive Officers whose total cash compensation for the year ended
December 31, 1997 exceeded $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -------------------------
Awards Payouts
Name ------ -------
and Securities
Principal Underlying All Other
Position Year Salary $ Bonus $ Options(#) Compensation
-------- ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jacqueline E. Soechtig(1)(4) 1997 222,500 -- -- --
President and 1996 220,000 100,000 -- --
Chief Executive 1995 220,000 20,170 -- --
Officer
Glenn W. Phillips(2)(4) 1997 102,404 -- -- --
Vice President--Sales 1996 130,950 50,000 -- --
& Marketing 1995 -- -- -- --
James H. Moore, Jr.(3)(4) 1997 100,000 -- -- --
Vice President-- 1996 100,000 50,000 -- --
Operations, 1995 100,000 -- -- --
Assistant Secretary
</TABLE>
(1) Ms. Soechtig has been employed by the Company since October 31, 1994.
Commencing November 1, 1997, Ms. Soechtig's annual salary is $235,000. A
$20,170 bonus payable in 1994 upon Ms. Soechtig's employment with the
Company was paid during 1995. During the year ended December 31, 1996, Ms.
Soechtig was awarded a bonus of $100,000.
(2) Mr. Phillips was employed by the Company from January, 1996 until August,
1997. Mr. Phillips' annual salary was $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 $50,000.
(4) No formal meeting of the Compensation Committee was held during 1996, in
that two of its three members had resigned from the Board of Directors on
June 28, 1996, prior to the time at which 1996 performance was evaluated.
The continuing member, recognizing the accomplishments of the officers of
the Company, submitted a written recommendation to the Board of Directors
outlining cash and non-cash incentive pay recommendations for each officer
of the Company based on an evaluation of their performances and the
Company's performance. The recommendation was submitted to the Board of
Directors at its meeting on
28
<PAGE>
October 21, 1996, at which all of the directors were present. The Board of
Directors accepted the recommendation unanimously, with Ms. Soechtig
abstaining with respect to her compensation.
NO OPTIONS(1) were granted during the Company's 1997 fiscal year to the current
and former Executive Officers named in the Summary Compensation Table above.
The following table sets forth certain information concerning the number of
shares of Common Stock acquired upon the exercise of stock options during the
year ended December 31, 1997 by, and the number and value at December 31, 1997
of shares of Common Stock subject to unexercised options held by, the
individuals listed in the Summary Compensation Table.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options/SARs Options/SARs
Acquired Value At FY-End (#) At FY-End ($)
on Realized Exercisable/ Exercisable/
NAME Exercise (#) ($) Unexercisable Unexercisable
- ---- ------------ --- ------------- -------------
Jacqueline E. -- -- 375,000/0 0/0
Soechtig
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 was $220,000 per annum. The agreement also provided
for incentive compensation in the form of bonuses. A performance bonus of
$100,000 was paid to Ms. Soechtig in 1996. 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. In accordance with accounting provisions of APB No. 25, the Company
recorded compensation expense of $375,000 in 1994, $562,500 in 1995 and $187,500
in 1996. These amounts represent 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. 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.
- --------
1 On March 13, 1997, the Board of Directors granted options to purchase
shares of Common Stock to each of Jacqueline E. Soechtig and James H.
Moore, which grant is subject to and will become effective upon approval
by the Shareholders at the 1998 Annual Meeting of the Shareholders.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 28, 1998
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 five percent 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.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT OF PRESENTLY ISSUED
PRESENTLY ISSUED AND OUTSTANDING
AND OUTSTANDING COMMON STOCK
AMOUNT PERCENT OF COMMON STOCK PLUS COMMON
AND PRESENTLY PLUS COMMON STOCK ISSUABLE
NAME AND ADDRESS NATURE OF ISSUED AND STOCK ISSUABLE UPON CONVERSION
OF BENEFICIAL OUTSTANDING UPON OF SERIES G SHARES
BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK CONVERSION OF SERIES G SHARES(2)
---------------- ------------ ------------ ------------- ------------------
<S> <C> <C> <C> <C>
Jacqueline E. Soechtig 398,500(3) 2.5% 398,500(3) 1.0%
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
John J. Chluski 100,827(4) * 100,827(4) *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
Frank W. Swacker 80,500(5) * 80,500(5) *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
Eric T. Jager 176,500(6) 1.1% 176,500(6) *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
James H. Moore 16 * 16 *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT OF PRESENTLY ISSUED
PRESENTLY ISSUED AND OUTSTANDING
AND OUTSTANDING COMMON STOCK
AMOUNT PERCENT OF COMMON STOCK PLUS COMMON
AND PRESENTLY PLUS COMMON STOCK ISSUABLE
NAME AND ADDRESS NATURE OF ISSUED AND STOCK ISSUABLE UPON CONVERSION
OF BENEFICIAL OUTSTANDING UPON OF SERIES G SHARES
BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK CONVERSION OF SERIES G SHARES(2)
---------------- ------------ ------------ ------------- ------------------
<S> <C> <C> <C> <C>
Glenn W. Phillips 0 * * *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
Philip P. Signore 0 * * *
c/o Lasergate Systems, Inc.
2189 Cleveland Street
Suite 230
Clearwater, FL 33765
RBB Bank, AG (as 7,937,332(7) 51.9% 32,755,549(7) 81.6%
nominee for its clients, who
are the beneficial owners)
Burgring 16
8010 Graz
Austria
All Directors and Executive 756,343(8) 10.3% 853,843(8) 2.1%
Officers of the Company as
A group (8 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 the Company's Series G Convertible Preferred
Stock into a total of 32,655,549 shares of Common Stock representing 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 47,500 shares of Common Stock which Mr. Chluski has the right to
acquire pursuant to presently exercisable stock options.
(5) Includes (i) 52,500 shares of Common Stock which Mr. Swacker has the right
to acquire pursuant to presently exercisable stock options; (ii) 13,000
shares of Common Stock jointly owned by Mr. And Mrs. Swacker; and
(iii)15,000 shares of Common Stock owned by Mr. Swacker's wife as to which
Mr. Swacker disclaims beneficial ownership.
(6) 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.
31
<PAGE>
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.
(7) RBB Bank, AG holds such shares as nominee for its clients who are the
beneficial owners of such shares, none of whom holds more than 5% of the
outstanding shares of the Company. RBB Bank, AG has no voting power,
directly or indirectly, nor investment power with respect to such shares
and therefore disclaims beneficial ownership of such shares.
(8) Includes shares of Common Stock which such Directors and Executive
Officers have the right to acquire pursuant to presently exercisable stock
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank AG as nominee for its clients (who are the beneficial owners of such
shares) for $7,500,000. Each share of Series G Preferred Stock is convertible
into 4,354 shares of Common Stock. Prior to the transaction, many of the Series
G Investors were beneficial owners of 7,945 shares of Series F Preferred Stock
and 100,000 shares of Common Stock. Pursuant to the transaction, the Company
redeemed 7,945 shares of Series F Preferred Stock for $6,000,000.
During 1997, the Company paid $156,630 to a vendor in which an outside director
had a substantial financial interest for programming services, paid $36,000 to a
relative of the chief executive officer for consulting services, and accrued
$50,000 for services performed by outside directors, which have not been paid as
of April 10, 1998.
32
<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 Articles of Amendment of Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K dated November
19, 1997, File No. 0-15873).
3.3 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 Regulation S Subscription Agreement between RBB Bank
Akiengesellschaft and the Company (incorporated by reference to the
Company's Form 8-K dated November 19, 1997, File No. 0-15873).
4.2 Registration Rights Agreement between Herbert Strauss (as Headtrader
of RBB Bank Aktiengesellschaft) and the Company (incorporated by
reference to the Company's Form 8-K dated November 19, 1997, File
No. 0-15873).
4.3 Letter Agreement between the Company and RBB Aktiengesellschaft
granting the Company the right to return its Series F Preferred
Stock (incorporated by reference to the Company's Form 8-K dated
November 19, 1997, File No. 0-15873).
4.4 Amended and Restated 1994 Stock Option Plan.
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* Office Building Lease, dated October 21, 1997, between DCS Real
Estate and the Company.
10.3 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).
10.4 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).
10.5 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.
10.6 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).
10.7 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).
10.8 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).
33
<PAGE>
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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.
Form 8-K, dated November 19, 1997.
34
<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
Chairman, President and
Chief Executive Officer
Date: May 6, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME CAPACITY DATE
/s/ JACQUELINE E. SOECHTIG Chairman, President and Chief May 4, 1998
- --------------------------- Executive Officer
Jacqueline E. Soechtig
/s/ PHILIP P. SIGNORE Chief Financial Officer May 4, 1998
- ---------------------------
Philip P. Signore
/s/ FRANK W. SWACKER Director May 4, 1998
- ---------------------------
Frank W. Swacker
/s/ JOHN J. CHLUSKI Director May 4, 1998
- ---------------------------
John J. Chluski
/s/ ERIC T. JAGER Director May 4, 1998
- ---------------------------
Eric T. Jager
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LASERGATE SYSTEMS, INC.
AND SUBSIDIARIES
December 31, 1997 and 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Report of Independent Certified Public Accountants.......................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996................ F-2
Consolidated Statement of Operations for the Years
Ended December 31, 1997 and 1996.......................................... F-3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 1997 and 1996........................................ F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996 ........................................ F-5
Notes to Consolidated Financial Statements.................................. F-7
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Lasergate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lasergate
Systems, Inc. and Subsidiaries as of December 31, 1997, and 1996, 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, 1997, and 1996, 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 $2,923,069 during the year ended December 31,
1997, and, as of that date, the Company has an accumulated deficit of
$19,706,387. In addition, the Company's current liabilities exceed its current
assets by $1,467,960 at December 31, 1997. The Company's operating loss history
raises substantial doubt about the Company's ability to continue as a going
concern. 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 or
from strategic corporate partnerships will be necessary to fund its operations
in 1998. 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
April 29, 1998
F-1
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 390,762 $ 1,924,825
Accounts receivable, net of allowance for doubtful accounts of
$157,690 and $147,124 455,001 868,931
Note receivable, current portion 50,251 --
Inventories 232,192 254,901
Prepaid expenses 30,838 40,966
------------ ------------
Total current assets 1,159,044 3,089,623
------------ ------------
Note receivable, long-term portion 59,091 --
Property and equipment, net 305,509 304,024
Systems and software costs, net of write-down and amortization
of $1,611,753 and $1,525,856 475,491 242,739
Goodwill, net of amortization of $398,557 and $265,568 2,249,716 2,382,705
Customer lists and support contracts, net of amortization of
$425,000 and $141,667 -- 283,333
Other assets, net 19,137 134,521
------------ ------------
Total assets $ 4,267,988 $ 6,436,945
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, bank 23,575 28,628
Accounts payable, trade 780,271 542,671
Deferred revenues 356,471 909,516
Accrued warranty costs 554,497 570,919
Accrued expenses 912,190 1,128,658
------------ ------------
Total current liabilities 2,627,004 3,180,392
Obligations to repurchase common stock -- 140,000
------------ ------------
Total Liabilities 2,627,004 3,320,392
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
Authorized, 7,500 and 8,000 shares issued and outstanding at
December 31, 1997, and 1996, respectively 225 240
Common stock, $.03 par value, 20,000,000 shares authorized,
7,462,061 and 7,362,061 issued and outstanding at December 31,
1997, and 1996, respectively 223,862 220,862
Additional paid-in capital 21,123,284 19,818,769
Less: Common stock, $.03 par value, 20,000 shares at December
31, 1996, subject to put options -- (140,000)
Accumulated deficit (19,706,387) (16,783,318)
------------ ------------
Total stockholders' equity 1,640,984 3,116,553
------------ ------------
Total liabilities and stockholders' equity $ 4,267,988 $ 6,436,945
============ ============
</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,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 4,917,536 $ 4,204,626
Operating Expenses:
Cost of revenues 3,809,442 3,104,792
Development 445,365 460,709
Selling, general and administrative 3,396,415 4,547,990
Write down of intangibles 230,208 1,075,000
----------- -----------
Operating loss (2,963,894) (4,983,865)
Other income (expense)
Interest income (expense) 40,825 53,557
Other, net -- (67,654)
----------- -----------
Loss before income taxes (2,923,069) (4,997,962)
Income taxes -- --
----------- -----------
Net loss (2,923,069) (4,997,962)
Dividends to preferred shareholders (intrinsic value
Of beneficial conversion features-see Note 11) (475,570) (2,836,353)
----------- -----------
Net loss available to common shareholders $(3,398,639) $(7,834,315)
=========== ===========
Net loss per common share $ (.46) $ (1.29)
=========== ===========
Weighted Average Common Stock Outstanding 7,454,938 6,063,633
=========== ===========
</TABLE>
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, 1997 and 1996
<TABLE>
<CAPTION>
[TABLE 1 OF 2]
PREFERRED STOCK COMMON STOCK
---------------------------- ----------------------------
PAR PAR
SHARES VALUE SHARES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 387,750 $ 11,633 3,125,013 $ 93,751
Retirement of common stock and Series B
preferred stock in settlement of
acquisition obligations (111,800) (3,355) (109,333) (3,279)
Issuance of Series E preferred stock 162,500 4,875 -- --
Preferred stock dividend, Series E
(intrinsic value of Beneficial
conversion features) -- -- -- --
Issuance of Series F preferred stock 8,000 240 -- --
Preferred stock dividend, Series F
(intrinsic value of Beneficial
conversion features) -- -- -- --
Redemption of Series A preferred stock (95,950) (2,878) -- --
Conversion of Series D preferred to
common stock (180,000) (5,400) 1,673,479 50,204
Conversion of Series E preferred to
common stock (162,500) (4,875) 2,627,902 78,836
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
Conversion of Series F preferred to
common stock (55) (2) 100,000 3,000
Issuance of Series G preferred stock; net
of $52,500 of offering costs. 7,500 225 -- --
Preferred stock dividend, Series G
(intrinsic value of Beneficial
conversion features) -- -- -- --
Redemption of Series F preferred stock (7,945) (238) -- --
Cancellation of Put Option -- -- -- --
Net Loss -- -- -- --
------------ ------------ --------- ------------
BALANCE, DECEMBER 31,1997 7,500 $ 225 7,462,061 $ 223,862
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
[TABLE 2 OF 2]
COMMON
STOCK
ADDITIONAL SUBJECT NOTES
PAID-IN TO PUT RECEIVABLE ACCUMULATED
CAPITAL OPTION STOCKHOLDERS DEFICIT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 14,065,743 $ (140,000) $ (559,000) $(11,785,356)
Retirement of common stock and Series B
preferred stock in settlement of
acquisition obligations 22,609 -- 559,000 --
Issuance of Series E preferred stock 2,142,136 -- -- --
Preferred stock dividend, Series E
(intrinsic value of Beneficial
conversion features) (696,429) -- -- --
Issuance of Series F preferred stock 7,312,184 -- -- --
Preferred stock dividend, Series F
(intrinsic value of Beneficial
conversion features) (2,139,924) -- -- --
Redemption of Series A preferred stock (997,121) -- -- --
Conversion of Series D preferred to
common stock (44,804) -- -- --
Conversion of Series E preferred to
common stock (73,961) -- -- --
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) 0 (16,783,318)
Conversion of Series F preferred to
common stock (2,998) -- -- --
Issuance of Series G preferred stock; net
of $52,500 of offering costs. 7,922,845 -- -- --
Preferred stock dividend, Series G
(intrinsic value of Beneficial
conversion features) (475,570) -- -- --
Redemption of Series F preferred stock (5,999,762) -- -- --
Cancellation of Put Option (140,000) 140,000 -- --
Net Loss -- -- -- (2,923,069)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31,1997 $ 21,123,284 $ 0 $ 0 $(19,706,387)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement
F-4
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,923,069) $(4,997,962)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 436,621 513,153
Write-down of capitalized software costs -- 1,075,000
Write-down of customer list 230,208 --
(Gain) loss in joint venture -- 77,790
Increase in allowance for doubtful accounts 10,566 110,997
Compensation recognized from issuance of stock
and grant of stock options -- 229,686
Decrease (increase) in:
Accounts receivable, trade 403,364 (540,617)
Note receivable (109,460) --
Inventories 22,709 70,763
Prepaid expenses 10,246 43,426
Other 87,051 (83,598)
Increase (decrease) in:
Accounts payable and accrued expenses (118,868) 764,362
Accrued warranty costs (16,422) 273,919
Deferred revenue (553,045) 180,110
----------- -----------
Net cash used in operating activities (2,520,099) (2,282,971)
----------- -----------
Cash flows from investing activities:
Net additions to property, equipment, and software costs (137,762) (203,663)
Capitalized software development costs (318,649) (25,000)
----------- -----------
Net cash used in investing activities (456,411) (228,663)
----------- -----------
Cash flows from financing activities:
Proceeds from secondary public or private offering, 7,447,500 6,623,082
net of offering costs
Redemption of preferred stock (6,000,000) (1,000,000)
Settlement of acquisition obligations -- (1,550,000)
Proceeds from loans, other -- 30,200
Repayment of loans, other (5,053) (23,329)
Repayment of loans, related parties -- (300,000)
----------- -----------
Net cash provided by financing activities 1,442,447 3,779,953
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,534,063) 1,268,319
----------- -----------
Cash and cash equivalents, beginning of year 1,924,825 656,506
----------- -----------
Cash and cash equivalents, end of year $ 390,762 $ 1,924,825
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
YEAR ENDED DECEMBER 31,
1997 1996
---- ----
Interest $ 2,810 $17,494
Income taxes -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1996:
In March 1996, the Company settled its acquisition obligation with GIS 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 Company recognized $2,836,353 of preferred dividends for 1996 based on the
intrinsic value of beneficial conversion features (see Note 11).
1997
- ----
The Company recognized $475,570 of preferred dividends for 1997 based on the
intrinsic value of beneficial conversion features (see Note 11).
The Company cancelled its obligation to issue common stock of $140,000 in
connection with the Potter settlement agreement. (See Note 10).
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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 introduced a new product in 1997, Admits for Windows(R), which
represented 89% of product revenues, with Select-a-Seat representing 11% of
product revenue. In 1996, the Company's discontinued products, Admits Platinum
and Admits Gold, represented 35% and 16% respectively of product revenue, and
Select-a-Seat represented 33%.
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 inter-company
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, allowance for
doubtful accounts, valuation of intangibles, litigation, and certain taxes that
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 receivables 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, 1997 and 1996 are
reasonably stated.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined principally by the use of the first-in, first-out method.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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 capitalized software costs (at full
cost) of software development for the Company's new Admits for Windows(R)
product plus $200,000 of remaining acquisition costs for old products (Admits,
Delta, and Select-a-Seat) which was estimated to be the value of a detailed
product plan for the new products (the Company did not incur any costs for a
detailed product plan - it was able to use the old products to serve that
purpose). 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 Admits for Windows(R) products,
technological feasibility was achieved with the creation of a working model 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 have been
included in development costs. Expenditures related to development of Admits for
Windows(R) from December 1996 through December 1997 have been capitalized.
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
softwares' estimated net realizable value. (See Note 6.) Amortization of system
and software costs in 1997 and 1996, exclusive of the write down discussed
above, was $95,014, and $167,523 and is included in Cost of Revenues. In
previously published 1996 financial statements, these costs were included as a
component of Selling, General, and Administrative Expense, and accordingly,
those financial statement amounts have been reclassified.
INTANGIBLES
Intangibles that 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 1997 and 1996 was
$214,447 and $232,156, 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 that could
warrant an adjustment to the carrying values. As a result of this review, the
remaining net balance of customer list and support contracts of approximately
$230,000 was written off. Undiscounted cash flow projections associated with the
acquired business is the primary focal point in the assessment and analysis for
potential impairment. During 1997 and 1996, no impairment was identified
exclusive of the write down of software costs and customer lists discussed
above.
F-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
Management believes that the following assumptions used in the determination of
the referred to undiscounted cash flow projections are reasonable: estimated
period of recovery - 17 years; estimated annual increase in revenues - 14%;
estimated cost of revenues - 60%; estimated increase in selling, general and
administrative expenses - 6%; and estimated income tax rate - 39%.
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, 1997 and 1996, 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 1997 and 1996 was $0 and ($77,790), respectively, and
was classified in other income/expense in the consolidated financial statements.
The net carrying value of the Company's investment in/advances to the joint
venture at December 31, 1997, and 1996, was $0.
At the end of 1996, the Company decided to dissolve the joint venture and the
1996 results include an estimated provision to accomplish this. In 1997, the
joint venture discontinued operations. As the Company has not guaranteed any of
the joint venture's liabilities and the Company has no further funding
commitments to the joint venture, the Company believes no further losses
relating to the joint venture will occur.
WARRANTY COSTS AND WARRANTY LIABILITY (ALLOWANCE)
Effective in 1996, the Company began providing for warranty costs each month as
a percentage of sales in order to more closely match these costs with the
associated revenue. The total provision during 1997 was $146,654 or 3.0% of
sales, and charges against the allowance amounted to $163,076. The warranty
liability at December 31, 1997 is $554,497 which management believes is
sufficient to cover all known and unknown warranty costs which will be incurred
in the future to satisfy customers for sales through December 31, 1997,
including estimated costs to make discontinued products "Year 2000 Compliant."
Management believes all current products are "Year 2000 Compliant."
Provisions for the warranty allowance are classified as cost of revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, and December 31, 1996, 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.
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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 the
sale of equipment and software licenses with a planned installation period
exceeding ninety days are accounted for using the percentage of completion
method.
Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
Revenues include product sales and service revenues. Service revenues represent
approximately 9% and 14%, respectively, of total revenues in 1997 and 1996.
Deferred revenues include customer deposits and advanced billings in accordance
with contract terms of $356,471 and $909,516 at December 31, 1997 and 1996,
respectively.
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers, the estimated full costs associated with
the engineering and installation (mostly software customization) of the system,
and amortization of capitalized software. Cost of revenues also includes the
estimated full cost related to support and maintenance. The Company believes
that the estimated full costs are reasonably stated and classified in all
material respects.
During 1997 and 1996, 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 1997 and 1996.
RECLASSIFICATIONS
Certain 1996 financial statement amounts have been reclassified in order to
reflect these amounts on a basis consistent with 1997 presentation. Amortization
of capitalized software development costs is now included in Cost of Revenues.
These amounts were reclassified from Selling, General and Administrative Expense
to Cost of Revenues in the 1996 Statement of Operations.
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.
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during the periods. Options and warrants and the effect of the
convertible securities were not included in the calculation of net loss per
share because they were anti-dilutive. The net loss used in the calculation is
the net loss available to common shareholders, which reflects preferred stock
dividends (intrinsic value of beneficial conversion features-see Note 11).
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share". This new standard eliminates primary and fully diluted
earnings per share (the same in 1997 and 1996 because of anti-dilution) and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard did not have a material impact on the disclosure of earnings per share
in the financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles held and used by an
entity along with goodwill are reviewed by management 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 should be reported
at the lower of the carrying amount or the fair value less cost to sell.
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 Principles
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 11).
NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
The AICPA Accounting Standards Executive Committee has issued SOP 97-2, Software
Revenue Recognition, which supercedes SOP 91-1. SOP 97-2 will be adopted in 1998
and retroactive application is prohibited. This SOP retains the same basic
revenue recognition criteria of SOP 91-1; however, with respect to bundled
contracts, a new criterion for allocation of contract fee is
introduced--"vendor-specific objective evidence of fair value". In addition,
further guidance is given as to revenue recognition issues when elements of a
contract are not all delivered, including services and post-contract customer
support. The Company does not expect that the adoption of SOP 97-2 will have a
material effect on its financial statements.
SFAS No. 130 Reporting Comprehensive Income is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The requirements of this statement
include:
(a) Classifying items of other comprehensive income by their nature in a
financial statement and
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
(b) Displaying the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equities
section of the balance sheet.
The Company plans to adopt SFAS No. 130 for the year ending December 31, 1998,
and expects no material impact to the Company's financial statement
presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
information, is effective for fiscal years beginning after December 15, 1997.
This statement supercedes SFAS No. 14 Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of all Majority Owned
Subsidiaries. This Statement requires annual financial statements to disclose
information about products and services, geographic areas, and major customers
based on a management approach, along with interim reports. The management
approach requires disclosing financial and descriptive information about an
enterprise's reportable operating segments, based on reporting information the
way management organizes the segments for making business decisions and
assessing performance. The Company plans to adopt SFAS No. 131 in 1998, which
has a possible impact only to the Company's disclosure information and not its
results of operations.
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The Company has a net loss for 1997 of $2,923,069, and a history of operating
losses that have accumulated to $19,706,387, at December 31, 1997. 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 1997 and its plan to improve future results.
Since June, 1996, the Company has committed substantial resources to the design,
development, and marketing of its new Admits for Windows(R) product.
Concurrently, the Company has dedicated significant resources to maintenance of
its legacy products. While these development, marketing and maintenance costs
were being incurred, the Company began a product launch designed to fully
replace its main product line. The new Admits for Windows(R) general admission
ticketing and access control products are rich in features desired by customers,
and the product platform, Windows NT(R), is the platform of choice for many
customers. Management believes that the Company's product direction is focused
correctly and that the Company will continue to gain market share as the product
matures over the next year. However, the sales force had limited success in
1997, primarily due to the reluctance of customers to license software that is
critical to their business until it has been installed for an extended period of
time at a facility similar to their own. This situation began to change in late
1997 as the Company's prospective customers were able to obtain references
regarding the Company's product from several existing customers who had been
using the product since early in the year, and the Company succeeded at selling
and installing the new Admits for Windows(R) product at eighteen installations
in 1997, including all four of the targeted market segments for the product as
follows:
(Unaudited)
--------------------------
Market Segment Installations Customers
-------------- ------------- ---------
Ski Resorts 9 3
Museums, Aquariums & Zoos 5 4
Family Entertainment Centers 3 1
Theme Parks and Amusement Parts 1 1
-- --
Totals 18 9
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
Management believes that having the Admits for Windows(R) product installed at
the above sites will improve its ability to sell the product and expects 1998
sales opportunities to be at least the same as those experienced in 1997.
However, the Company's financial stability has affected its sales. The company
cannot provide an absolute guarantee to customers that development of products
will continue. For this reason, the Company continues to seek and actively
pursue a possible relationship with a strategic partner who could improve
customers' perceptions of the Company's financial stability as well as the
Company's actual financial position. Any such relationship would probably
include an equity investment in the Company. The Company may also review other
financing opportunities.
It should be noted that the Company has been seeking a strategic partner for
approximately one year now, but has been unable to find a suitable partner that
is willing to invest a significant amount of capital on terms that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and current liabilities exceed current assets by $1,467,960 at December 31,
1997. These circumstances require that the Company exercise greater caution in
conducting its business and, at certain times, take extraordinary measures. In
the past, such measures have included asking certain vendors to extend payment
terms by as much as 120 days, and, on one occasion, delaying payroll for senior
management. Although Management recognizes the critical nature of the Company's
cash position and attempts to manage the Company's expenditures accordingly,
there is a risk that under certain conditions, immediate financing could be
required. The costs of obtaining such financing are unknown and the likelihood
of obtaining such financing is uncertain. Management intends to continue to
operate the Company in a conservative manner through its efforts to further
reduce operating expenses and product costs and to focus on higher margin sales
opportunities. While Management believes the Company will be able to operate
without interruption, it intends to continue discussions with certain potential
partners and to seek out additional potential candidates who can potentially
enhance the Company's financial position and marketing abilities. However, no
assurances can be made that a suitable partner will be found or that sufficient
capital will be raised if necessary to allow the Company to continue its
operations in the conservative, cost-saving manner in which they are currently
being conducted.
NOTE 4 - INVENTORIES
Inventories as of December 31 consist of the following:
1997 1996
-------- --------
Installations-in-process $104,930 $199,561
Parts and systems 127,262 55,340
-------- --------
$232,192 $254,901
======== ========
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, consist of the following:
1997 1996
-------- --------
Furniture and equipment $452,171 $507,311
Purchased software 10,269 19,244
Test equipment 45,323 52,902
-------- --------
507,763 579,457
Less accumulated depreciation 202,254 275,433
-------- --------
$305,509 $304,024
======== ========
Depreciation expense was $137,513 and $102,612 for 1997 and 1996. During 1997,
$212,399 of assets were retired.
NOTE 6 - SYSTEMS AND SOFTWARE COST
Historically, the Company has marketed products that typically required
substantial customization in order to meet the customers' particular
requirements. During 1996, the Company changed its strategy and decided to
design products in a modular fashion. The modules consist of a primary product
with optional pre-developed modules and a configuration layer to meet specific
customer needs that requires limited or no customization by the Company. The
implementation of this project has afforded 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.
As of June 1997, the Company had installed limited functionality versions at
four different sites. These versions had fully functional ticketing modules and
some additional features, but not all the features planned for the general
release version. As of May 13, 1997 the Company had completed the general
release version of Admits for Windows(R) (the new general admission product) and
has since installed it at a number of sites within several market segments,
including all sites that had earlier versions. During June 1997, the development
effort was focused on two groups of applications for the ski industry. The first
group of ski applications was released on July 1, 1997, and the second group of
ski applications was released on September 30, 1997. During the fourth quarter
of 1997, the majority of the development effort was focused on refinements of
the ski applications (including "bug fixes"). Although these applications were
developed for the ski industry, management expects many of these features to be
well received in other market segments too. Future development efforts will be
focused on a reserved seating module that the Company will develop as soon as a
customer is willing to purchase it.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions beginning in the first quarter of 1998 in
areas of product development and customer support. In addition, the product has
a new appearance which is more user friendly and will allow the user to modify a
configuration layer (without access to the source code) which can remain in
place when updating the product of a new revision level. As a result, the
Company expects its new products to be more competitive in the market.
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
In 1997, approximately $319,000 of development costs were incurred for the new
general admission product, and the entire amount was capitalized. Since
inception, development costs incurred for the new product total approximately
$450,000 of which $344,000 has been capitalized.
The Company estimates the cost of developing a reserved seating module for the
new product will total approximately $300,000 to $500,000, of which $15,000 has
been incurred, none of which has been capitalized.
NOTE 7 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1997 1996
-------- --------
Non-competition agreement net of
Amortization $85,000 and $56,667 $ -- $ 28,333
Other 19,137 106,188
-------- --------
$ 19,137 $134,521
======== ========
NOTE 8 - NOTES PAYABLE
At December 31, 1997, the Company had an outstanding balance of $23,575 due to a
bank. The note matures on August 23, 2001, has an annual interest rate of 10%
and is collateralized with office equipment.
NOTE 9 - INCOME TAXES
The Company has a net operating loss (NOL) for income tax purposes of
approximately $14,500,000 at December 31, 1997, 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 as of December 31, are as follows:
1997 1996
----------- -----------
Basis difference in intangible assets $ 33,000 $ 53,000
Warranty cost 205,000 211,000
Bad debt allowance, employee vacation pay
And other accruals 320,000 326,000
Compensation related to stock options 415,000 415,000
Net operating loss carry forward (1) 5,385,000 4,310,000
----------- -----------
6,358,000 5,315,000
Less valuation allowance (6,358,000) (5,315,000)
----------- -----------
$ 0 $ 0
=========== ===========
(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
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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:
1997 1996
---- ----
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%
==== ====
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facility as well as some office
equipment under operating leases.
Future minimum payments under these operating leases are as follows:
1998 $121,786
1999 136,643
2000 147,061
2001 144,710
2002 130,545
--------
$680,745
========
Total lease payments for the years ended December 31, 1997 and 1996 were
$167,620 and $144,569, respectively.
LEGAL PROCEEDINGS
On June 15, 1995, the Company's founder, former President and Chief Executive
Officer, Donald Turner (and four family members hereinafter referred to as the
"Turners"), commenced an action against the Company, Jeffrey Markowitz and
Richard Friedman in the Circuit Court for Pinellas County, Florida, Civil
Division. Trial is currently set for the week of June 22, 1998. Mr. Turner
alleges, among other things, that he was wrongfully terminated from his
employment and seeks damages that in the aggregate could exceed $1,000,000. The
Company believes Mr. Turner's suit is substantially without merit and intends to
continue vigorously defending the action. The Company's legal counsel believes
that if plaintiffs prevail and obtain a judgment for damages against the
Company, an estimate of probable damages would be approximately $200,000
exclusive of palintiffs' costs, attorney fees and pre- and post-judgment
interest.
On or about June 27, 1997, a class action was commenced in the United States
district Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera, on behalf of themselves individually, and on behalf of
all others similarly situated against inter alia, the Company, Sterling Foster,
& Co., Inc. ("Sterling Foster"), the Company's former underwriter, counsel for
Sterling Foster and certain issuer defendants for whom Sterling Foster acted as
underwriter. The Complaint alleges that in connection with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's stock, to create a
short position at the inflated price and then cover the short position with
shares from shareholders who had been secretly released from "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose in its Registration Statement that prior to the date the offering
became effective, Sterling Foster had secretly agreed to release certain
shareholders from "lock-up" agreements for the purpose of selling their shares
to Sterling Foster at reduced prices. The Plaintiffs' claims allege that the
Company violated Sections 11 and 12 (2) of the Securities Act of 1933, Sections
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Section 349 of the New York General Business Law, and made
negligent misrepresentations. In February 1998 the Company moved to dismiss the
complaint in its entirety. The Company believes that it has defenses to these
claims and intends to vigorously defend itself in this action.
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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 was
entitled Derek Betty v. Lasergate Systems, Inc. (the "Betty Action") and the
second action was entitled James Potter v. Lasergate Systems, Inc. and 1103065
Ontario, Inc. (the "Potter Action"). The Betty Action alleged that the Company
failed to return shares of the Company's stock which were being held in escrow
pursuant to a Collateral Stock Pledge Agreement executed in connection with the
sale of Delta Information Services, Inc. ("Delta") to the Company. The Betty
Action also alleged a breach of the terms and conditions of Registration Rights
and Put Option Agreement executed in connection with the sale of Delta to the
Company. The Betty Action sought damages in an amount in excess of $15,000. The
Potter Action also alleged a breach of the Registration Rights and Put Option
Agreement. Moreover, the Potter Action included allegations concerning James
Potter's Consulting Agreement with the Company and a Non-Compete Agreement. The
Potter Action sought a declaratory judgment determining that the Company and
1103065 Ontario Inc ("Ontario") were in material breach of the Non-Compete
Agreement and that Potter be relieved of all obligations to perform under the
Non-Compete Agreement. The Company succeeded in consolidating both proceedings
in arbitration and filed a counterclaim. On November 7, 1997, the Company signed
a settlement agreement with Derek Betty and James and Marion Potter which ended
the arbitration proceeding. The settlement agreement, among other things,
canceled the outstanding put options (which would have required the Company to
purchase 20,000 shares of its Common Stock for $140,000), left the Non-Compete
Agreement in place, and required the Company to make a cash payment of $30,000.
The Company is also involved in other legal actions. Management does not believe
that the ultimate resolution of these other matters will have a material effect
on the Company's financial position. However, should the Turners prevail and
obtain a judgment against the Company, the Company would need to obtain
immediate financing of some nature. The costs of such financing are unknown and
the likelihood of obtaining such financing is uncertain.
OTHER MATTERS
Management has executed voluntary disclosure agreements with several states
regarding its sales tax reporting obligations. Management believes the reported
sales tax liability as of December 31, 1997, is reasonably adequate.
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has 20,000,000 authorized shares of Common Stock, of which
10,471,228 are either issued and outstanding or reserved for options and
warrants. Additionally, 7,500 shares of Series G preferred stock are outstanding
which can convert into 32,655,549 Common Shares.
The Company disclosed to Series G shareholders that it did not have sufficient
shares of Common Stock for all the Series G shares to be converted. The Board of
Directors have authorized an increase in the number of shares subject to
shareholders approval to allow full conversion of the Series G shares, and the
terms of the Series G subscription document provide for significant penalties if
the additional shares are not authorized by the shareholders. These penalties
have been temporarily suspended by the Series G shareholders but could be
reinstated at their discretion. If reinstated, these penalties would amount to
$375,000 if sufficient Common Shares are not authorized within sixty (60) days
and an additional $750,000 for every one hundred twenty (120) days thereafter.
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
PREFERRED STOCK
The Company's articles of incorporation authorize a total of 2,000,000 shares of
preferred stock. The Company's Board of Directors has established and authorized
the Series G convertible preferred stock that is presently outstanding as well
as Series A through F which are no longer outstanding
F G Total
---------------------------------
Total Authorized shares
December 31, 1997 -- 8,000 8,000
December 31, 1996 8,000 -- 8,000
Outstanding shares
December 31, 1997 -- 7,500 7,500
December 31, 1996 8,000 -- 8,000
Outstanding share amounts
December 31, 1997 -- $ 225 $ 225
December 31, 1996 $ 240 -- $ 240
Both series contain or contained specific provisions as to conversion into
shares of common stock and liquidation values. The shares are or were nonvoting
and participate or participated equally as to dividends declared with the
Company's common stock. None of the preferred stock above has or had mandatory
redeemable provisions.
For discussion of Series E, F, and G shares see Issuance of Stock--Private
Placements.
PREFERRED STOCK DIVIDENDS
In March, 1997 the Securities and Exchange Commission (SEC) announced its
position on accounting for the issuance of convertible preferred stock with a
nondetachable conversion feature that is deemed "in the money" at the date of
issue (a "beneficial conversion feature"). The beneficial conversion feature is
initially recognized and measured by allocating a portion of the preferred stock
proceeds equal to the intrinsic value of that feature to additional paid-in
capital. The intrinsic value is calculated at the date of issue as the
difference of the conversion price and the quoted market price of the Company's
common stock, into which the security is convertible, multiplied by the number
of shares into which the security is convertible. The discount resulting from
the allocation of proceeds to the beneficial conversion feature is treated as a
dividend and is recognized as a return to the preferred shareholders over the
minimum period in which the preferred shareholders can realize that return (i.e.
from the date the securities are issued to the date they are first convertible).
The accounting for the beneficial conversion feature requires the use of an
unadjusted quoted market price (i.e. no valuation discounts allowed) as the fair
value used in order to determine the intrinsic value dividend. However, since
the proceeds of some series of preferred stock have been used to redeem
previously issued preferred stock, the intrinsic value is reduced by the amount
of any previously recognized dividend on the redeemed shares. The intrinsic
value of dividends to preferred shareholders are added to the net loss before
calculating the net loss per common share. The intrinsic value of beneficial
conversion features to preferred shareholders are $475,570 and $2,836,353 for
1997 and 1996 respectively.
F-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
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 had a face value of $1,000, and
was 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 would have been 96% of such average market price, and on
or after June 6, 1998, the conversion would have been 94% of such average market
price, but if such average market price were more than $1.00, the conversion
price would have been $1.00, and one preferred share would have converted into
1,000 shares of common stock; and if such average market price were less than
$0.45, the conversion price would have been $0.45, and one preferred share would
have converted into 2,222 shares of common stock. Thus, the 8,000 Series F
shares were convertible into between 8,000,000 and 17,777,778 shares of common
stock. The entire Series F was 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 had 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. On November 4, 1997, the
remaining 7,945 Series F Shares were redeemed in connection with the issuance of
Series G Shares.
On October 30, 1997, the Board of Directors authorized a new series of
convertible preferred stock, par value $.03, designated as Series G Convertible
Preferred Stock ("Series G Shares"). The authorized number of such shares is
8,000. Each share has a face value of $1,000 and is convertible into 4,354
shares of Common Stock (a conversion price of $0.22967 per Common Share).
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank, AG as nominee for its clients (who are the beneficial owners of
such shares) for $7,500,000 pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended , under Regulation S
promulgated thereunder. The Series G Shares are convertible into 32,655,549
common shares. Pursuant to the transaction, the Company redeemed 7,945 shares of
the company's Series F Preferred Stock for $6 million, leaving the Company with
$1,447,500 of net proceeds after giving effect to expenses of the offering. No
sales commissions were paid.
Under the terms of the subscription agreement, the Company will pay a penalty of
5% of the face value of outstanding Series G Shares ($375,000) if shareholders
have not approved an increase in the authorized number of Common Shares in an
amount sufficient to allow for conversion of all Series G Shares within 120 days
of the
F-19
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
subscription agreement (by March 4, 1998). An additional penalty of 10% will be
incurred for each 120 days beyond March 4, 1998, until shareholders authorize an
amendment to the Articles of Incorporation to increase the authorized number of
Common Shares in an amount sufficient to allow for conversion of all Series G
Shares into Common Shares (the "Amendment"). Such penalties shall be payable in
cash. If sufficient cash is not available to legally pay the penalty, the
Company will issue a note payable to the Series G holders in the amount of the
penalty bearing interest at a rate of 20% per annum.
The penalties described in the preceding paragraph have been temporarily
suspended by the Series G investors on the condition that the Company
expeditiously propose the Amendment to the shareholders at the 1998 Annual
Meeting of shareholders such that for the Series G investors will be able to
convert all the Series G shares into common shares. However, the Series G
investors may reinstate these penalties upon sixty days notice. On April 11,
1998, the Company converted 1,800 of the 7,500 Series G Shares into 7,837,332
common shares.
RESERVATION AND AUTHORIZATION OF COMMON STOCK
Upon the redemption of all outstanding Series F Shares, the Company unreserved
8,000,000 shares of common stock. Then, upon the sale of the Series G , the
Company reserved 8,000,000 shares of common stock to provide for their
conversion. The Series G Shares are convertible into 32,655,549 common shares
but the subscription agreement provided for the reservation of only 8,000,000
shares. The Board of Directors plans to recommend to the Company's stockholders
at the 1998 Annual Meeting of Stockholders that 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 24,655,549 additional shares to allow for the
possibility of the Series G shares converting into as many as 32,655,549 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"). The Plan permits the grant of
options that 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
that 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 that 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 Plan that
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. Automatic grants of
5,000 options were made during 1997 to each of John J. Chluski (an outside
Director), Bruce D. Barrington (who served as an outside Director until February
24, 1998), and Eric T. Jager (an outside Director). A total of 40,000 options
have been granted under the Plan. The automatic grants were the only grants made
under the Plan in 1997.
NON-QUALIFIED STOCK OPTIONS
The Company granted an additional 37,500 options outside of the Plan to each of
Mr. Chluski, Mr. Barrington, and Mr. Jager shortly after their appointment to
the Board of Directors as an inducement for them to join the Board in addition
to the automatic grants of 5,000 options each. These options are exercisable for
10 years at exercise prices ranging from $.28125 to $.65625 and were immediately
vested. In order to compensate Mr. Swacker at the same rate as all other
non-employee Directors, Mr. Swacker was granted an option to purchase 37,500
shares outside of the 1994 Stock Option Plan at an exercise price of
approximately $.28 (100% of the market value at time of grant).
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
In 1997, the Board of Directors granted options to purchase shares of common
stock to officers of the Company which are subject to and will become effective
upon approval by the shareholders at the 1998 Annual Meeting of Shareholders.
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 such 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 1997 of $0 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. During 1997 20,000 of these options were cancelled. The
remaining options grant the right to purchase 100,000 shares at an exercise
price of $0.66 and are exercisable until one year after registration of the
underlying stock (the underlying stock has not been registered as of April 28,
1998).
A summary of the status of the Company's outstanding stock options as of
December 31, 1997, and 1996, and changes during the years ending on those dates
is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
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
Options granted 90,000 $ 0.27
Options canceled or forfeited (26,000) $ 1.00
-------- --------
Options outstanding, December 31, 1997 665,000 $ 1.41
The following table summarizes information concerning currently outstanding and
exercisable stock options:
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED
EXERCISE NUMBER CONTRACT LIFE AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE
------ ----------- ------- --------
Outstanding Options: $0.24-$0.66 275,000 7.1 $ 0.52
$2.00-$2.76 390,000 6.7 $ 2.03
Exercisable Options: $0.24-$0.66 275,000 7.1 $ 0.52
$2.00-$2.76 390,000 6.7 $ 2.03
The Company has adopted only the disclosure provisions of Financial Accounting
Standard No. 123 Accounting for Stock-Based Compensation, as it relates to
employment awards. It applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans and does not
recognize
F-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
compensation expense for its stock-based compensation plans other than for
restricted stock. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's net loss
available to common shareholders would be increased to the pro forma amounts
indicated below for the years ended December 31:
1997 1996
---- ----
Net loss available to common As reported $ 3,398,639 $ 7,834,315
shareholders Pro forma (unaudited) $ 3,416,889 $ 7,929,715
Loss per common share As reported $ .46 $ 1.29
Pro forma (unaudited) $ .46 $ 1.31
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 1997 and 1996, respectively, no dividend yield for all years,
expected volatility of approximately 128% for 1997 and 112% for 1996; risk-free
interest rates of approximately 6.0% for both years, and expected lives of
approximately 2.5 years for both years.
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, including a reduction of the price per
share of common stock to less than the redemption price.
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, 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
average conversion price of the Series F Convertible Preferred Stock ($0.55),
with anti-dilution provisions which reduce the exercise price to the average
conversion price of any subsequent issuance of convertible preferred stock
(Series G = $0.22967). In 1997, Series G Preferred Stock was issued with a
conversion price of $0.22967. Accordingly, the exercise price of these warrants
was reduced to $0.22967. In 1996, 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. A SFAS No.123 valuation of these warrants in 1997 based upon the
new exercise price did not result in a higher fair value than $190,000 and
accordingly this amount has not been revalued. 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
F-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
paid-in capital are offsetting amounts of $190,000, the Company has chosen not
to reflect them separately in the Statement of Stockholders' Equity.
A summary of the status of the Company's outstanding warrants as of December 31,
1997, and 1996, and changes during the years ending on those dates is presented
below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Warrants outstanding, December 31, 1995 2,121,067 $5.96
Warrants granted 500,000 .23
Warrants canceled or forfeited -- --
---------- -----
Warrants outstanding, December 31, 1996 2,621,067 $4.87
Warrants granted -- --
Warrants canceled or forfeited (276,900) 9.08
---------- -----
Warrants outstanding, December 31, 1997 2,344,167 $4.37
========== =====
The following table summarizes information concerning currently outstanding and
exercisable warrants:
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED
EXERCISE NUMBER CONTRACT LIFE AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE
Outstanding Warrants: $0.23 500,000 3.5 $0.23
$3.75-$5.50 1,844,167 1.8 $5.50
Exercisable Warrants: $0.23 500,000 3.5 $0.23
$3.75-$5.50 1,844,167 1.8 $5.50
NOTE 12 - SALES TO MAJOR CUSTOMERS
In 1997, one customer, American Skiing Company (owner/operator of nine ski
resorts in the United States) represented 54% of revenues.
In 1996, one customer, Bayindir Insaat Turizm Ticaret (a large, indoor amusement
park in Istanbul, Turkey) represented 12% of revenues.
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
NOTE 13 - 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 401(k) Plan during 1996 or 1997.
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 14 - RELATED PARTY TRANSACTIONS
During 1997, the Company paid $156,630 to a vendor in which an outside director
had a substantial financial interest for programming services, paid $36,000 to a
relative of the chief executive officer for consulting services, and accrued
$50,000 for services performed by outside directors, which have not been paid as
of April 10, 1998.
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 had a
substantial financial interest for programming services.
F-24
1994 STOCK OPTION PLAN
of
LASERGATE SYSTEMS, INC.
(as amended through February 17, 1997)
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan")
is designed to provide an incentive to key employees (including officers and
directors who are key employees), Outside Directors (as defined in Paragraph 19)
and consultants of Lasergate Systems, Inc., a Florida corporation (the
"Company"), and its present and future subsidiary corporations, as defined in
Paragraph 19 ("Subsidiaries"), and to offer an additional inducement in
obtaining the services of such individuals. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options ("NQSOs"), but the Company makes no warranty as to the qualification of
any option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 12, the aggregate number of shares of Common Stock, $.03 par value per
share, of the Company ("Common Stock") for which options may be granted under
the Plan shall not exceed 4,000,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of Directors"),
consist either in whole or in part of authorized but unissued shares of Common
Stock or shares of Common Stock held in the treasury of the Company. The Company
shall at all times during the term of the Plan reserve and keep available such
number of shares of Common Stock as will be sufficient to satisfy the
requirements of the Plan. Subject to the provisions of Paragraph 13, any shares
of Common Stock subject to an option which for any reason expires, is cancelled
or is terminated unexercised or which ceases for any reason to be exercisable
shall again become available for the granting of options under the Plan.
3. ADMINISTRATION OF PLAN. The Plan shall be administered by
the Company's Board of Directors which, to the extent that it may determine, may
delegate its powers with respect to the administration of the Plan to a
committee of the Board of Directors (the "Committee") consisting of not less
than two Directors, each of whom shall be a "Non-Employee Director" within the
meaning of Rule 16b-3 (or any successor rule or regulation) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). References
in the Plan to determinations or actions by the Committee shall be deemed to
include determinations and actions by the Board of Directors.
Subject to the express provisions of the Plan, the committee
shall have the authority, in its sole discretion, with respect to Employee
Options (as defined in Paragraph 19) and Consultant Options (as defined in
Paragraph 19) to determine: the key employees and consultants who shall receive
options; the times when they shall receive options; whether an Employee Option
shall be an ISO or a NQSO; the number of shares of Common Stock to be
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<PAGE>
subject to each option; the term of each option; the date each option shall
become exercisable; whether an option shall be exercisable in whole, in part or
in installments, and, if in installments, the number of shares of Common Stock
to be subject to each installment; whether the installments shall be cumulative;
the date each installment shall become exercisable and the term of each
installment; whether to accelerate the date of exercise of any installment;
whether shares of Common Stock may be issued on exercise of an option as partly
paid and, if so, the dates when future installments of the exercise price shall
become due and the amounts of such installments; the exercise price of each
option; the form of payment of the exercise price; the amount, if any, necessary
to satisfy the Company's obligation to withhold taxes; the fair market value of
a share of Common Stock; whether to restrict the sale or other disposition of
the shares of Common Stock acquired upon the exercise of an option and to waive
any such restriction; whether to subject the exercise of all or any portion of
an option to the fulfillment of contingencies as specified in the Contract (as
described in Paragraph 11), including without limitations, contingencies
relating to entering into a covenant not to compete with the Company and its
Parent and Subsidiaries, to financial objectives for the Company, a Subsidiary,
a division, a product line or other category, and/or the period of continued
employment of the optionee with the Company or its Subsidiaries, and to
determine whether such contingencies have been met; to construe the respective
Contracts and the Plan; with the consent of the optionee, to cancel or modify an
option, provided such option as modified would be permitted to be granted on
such date under the terms of the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; and to make all other determinations necessary
or advisable for administering the Plan. The determinations of the Committee on
the matters referred to in this Paragraph 3 shall be conclusive. No member or
former member of the Committee shall be liable for any action or determination
made in good faith with respect to the Plan or any option granted hereunder.
4. ELIGIBILITY; GRANTS. The Committee may, consistent with the
purposes of the Plan, grant Employee Options from time to time, to key employees
(including officers and directors who are key employees) and Consultant Options
to consultants of the Company or any of its Subsidiaries. Options granted shall
cover such number of shares of Common Stock as the Committee may determine;
provided, however, that the maximum number of shares subject to Employee Options
that may be granted to any individual during any calendar year shall not exceed
200,000 shares, and further provided that the aggregate market value (determined
at the time the option is granted) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
for the first time by such optionee during any calendar year shall not exceed
$100,000. The $100,000 ISO limitation shall be applied by taking ISOs into
account in the order in which they were granted. Any option (or the portion
thereof) granted in excess of such amount shall be treated as a NQSO.
5. EXERCISE PRICE. The exercise price of the shares of Common
Stock under each Employee Option and Consultant Option shall be determined by
the Committee; provided, however, that the exercise price of an ISO shall not be
less than 100% of the fair market value of the Common Stock subject to such
option on the date of grant and the exercise price of a NQSO shall not be less
than 25% of the fair market value of the Common Stock subject to such
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<PAGE>
option on the date of grant; and further provided, that if, at the time an ISO
is granted, the optionee owns (or is deemed to own under Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, of any of its Subsidiaries or of a Parent, the
exercise price of such ISO shall not be less than 110% of the fair market value
of the Common Stock subject to such ISO on the date of grant. The exercise price
of each Director option shall be equal to 85% of the fair market value of the
Common Stock subject to the option on the date of grant.
The fair market value of a share of Common Stock on any day
shall be (a) if the principal market for the Common Stock is a national
securities exchange, the average between the high and low sales prices per share
of the Common Stock on such day as reported by such exchange or on a
consolidated tape reflecting transactions on such exchange, (b) if the principal
market for the Common Stock is not a national securities exchange and the Common
Stock is quoted on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ"), and (i) if actual sales price information is
available with respect to the Common Stock, the average between the high and low
sales prices per share of the Common Stock on such day on NASDAQ, or (ii) if
such information is not available, the average between the highest bid and the
lowest asked prices for the Common Stock on such day on NASDAQ, or (c) if the
principal market for the Common Stock is not a national securities exchange and
the Common Stock is not quoted on NASDAQ, the average between the highest bid
and lowest asked prices per share for the Common Stock on such day as reported
on the NASDAQ OTC Bulletin Board Service, National Quotation Bureau,
Incorporated or a comparable service; provided that if clauses (a), (b) and (c)
of this Paragraph are all inapplicable, or if no trades have been made or no
quotes are available for such day, the fair market value of a share of Common
Stock shall be determined by the Committee by any method consistent with
applicable regulations adopted by the Treasury Department relating to stock
options.
6. TERM. The term of each option granted pursuant to the Plan
shall be such term as is established by the Committee, in its sole discretion,
at or before the time such option is granted; provided, however, that the term
of each ISO granted pursuant to the Plan shall be for a period not exceeding 10
years from the date of grant thereof, and further, provided, that if, at the
time an ISO is granted, the optionee owns (or is deemed to own under Section
424(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, of any of its Subsidiaries or of a
Parent, the term of the ISO shall be for a period not exceeding five years from
the date of grant. Employee Options and Consultant Options shall be subject to
earlier termination as hereinafter provided. Each Director Option shall be
exercisable for a term of 10 years commencing on the date of grant.
7. EXERCISE. An option (or any part or installment thereof),
to the extent then exercisable, shall be exercised by giving written notice to
the Company at its principal office (at present 28050 U.S. 19 North, Corporate
Square, Suite 502, Clearwater, Florida 34621, Attn: Secretary), stating which
ISO or NQSO is being exercised, specifying the number of shares of
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<PAGE>
Common Stock as to which such option is being exercised and accompanied by
payment in full of the aggregate exercise price therefor (or the amount due on
exercise if the Contract permits installment payments) (a) in cash or by
certified check or (b) with the consent of the Committee (in the Contract or
otherwise), with previously acquired shares of Common Stock having an aggregate
fair market value, on the date of exercise, equal to the aggregate exercise
Price of all options being exercised, or with any combination of cash, certified
check or shares of Common Stock.
The Committee may, in its discretion, permit payment of the
exercise price of an option by delivery by the optionee of a properly executed
exercise notice, together with a copy of his irrevocable instructions to a
broker acceptable to the Committee to deliver promptly to the Company the amount
of sale or loan proceeds sufficient to pay such exercise price. In connection
therewith, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of
an option shall not have the rights of a shareholder with respect to such shares
of Common Stock until the date of issuance of a stock certificate to him for
such shares; provided, however, that until such stock certificate is issued, any
option holder using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a shareholder with
respect to such previously acquired shares.
8. TERMINATION OF RELATIONSHIP. Any holder of an Employee
Option whose employment with the Company (and its Parent and Subsidiaries) has
terminated for any reason other than his death or Disability (as defined in
Paragraph 19) may exercise such option, to the extent exercisable on the date of
such termination, at any time within three months after the date of termination,
but not thereafter and in no event after the date the option would otherwise
have expired; provided, however, that if his employment shall be terminated
either (a) for cause, or (b) without the consent of the Company, said option
shall terminate immediately. Employee Options granted under the Plan shall not
be affected by any change in the status of the holder so long as he continues to
be a full-time employee of the Company, its Parent or any of the Subsidiaries
(regardless of having been transferred from one corporation to another).
For purposes of the Plan, an employment relationship shall be
deemed to exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days or, if longer, so long as the individual's right to
reemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave. In addition, for purposes of the Plan, an optionee's employment
with a Subsidiary or
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<PAGE>
Parent of the Company shall be deemed to have terminated on the date such
corporation ceases to be a Subsidiary or Parent of the Company.
The termination of an optionee's relationship as a consultant
of the Company or of a Subsidiary of the Company shall not affect the option
except as may otherwise be provided in the Contract. A Director Option may be
exercised at any time during its 10 year term. The Director Option shall not be
affected by the holder ceasing to be a director of the Company or becoming an
employee or consultant of the Company or any of its Subsidiaries.
Nothing in the Plan or in any option granted under the Plan
shall confer on any individual any right to continue in the employ or as a
consultant or director of the Company, its Parent or any of its Subsidiaries, or
interfere in any way with the right of the Company, its Parent or any of its
Subsidiaries to terminate such relationship at any time for any reason
whatsoever without liability to the Company, its Parent or any of its
Subsidiaries.
9. DEATH OR DISABILITY OF AN OPTIONEE. If an optionee dies (a)
while he is employed by the Company, its Parent or any of its Subsidiaries, (b)
within three months after the termination of his employment (unless such
termination was for cause or without the consent of the Company) or (c) within
one year following the termination of his employment by reason of Disability, an
Employee Option may be exercised, to the extent exercisable on the date of his
death, by his executor, administrator or other person at the time entitled by
law to his rights under such option, at any time within one year after death,
but not thereafter and in no event after the date the option would otherwise
have expired.
Any optionee whose employment has terminated by reason of
Disability may exercise his Employee Option, to the extent exercisable upon the
effective date of such termination, at any time within one year after such date,
but not thereafter and in no event after the date the option would otherwise
have expired.
The death or Disability of an optionee to whom a Consultant
Option has been granted under the Plan shall not affect the option, except as
may otherwise be provided in the Contract. The term of a Director Option shall
not be affected by the death or Disability of the optionee. In such case, the
option may be exercised at any time during its term by his executor,
administrator or other person at the time entitled by law to the optionee's
rights under such option.
10. COMPLIANCE WITH SECURITIES LAWS. The Committee may
require, in its discretion, as a condition to the exercise of any option that
either (a) a Registration Statement under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Common Stock to be issued
upon such exercise shall be effective and current at the time of exercise, or
(b) there is an exemption from registration under the Securities Act for the
issuance of shares of Common Stock upon such exercise. Nothing herein shall be
construed as requiring the Company to register shares subject to any option
under the Securities Act.
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<PAGE>
The Committee may require the optionee to execute and deliver
to the Company his representations and warranties, in form and substance
satisfactory to the Committee, that (i) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distri bution
thereof, and (ii) any subsequent resale or distribution of shares of Common
Stock by such optionee will be made only pursuant to (a) a Registration
Statement under the Securities Act which is effective and current with respect
to the shares of Common Stock being sold, or (b) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel, in form
and substance sat isfactory to the Company, as to the applicability of such
exemption to the proposed sale or distribution.
In addition, if at any time the Committee shall determine in
its discretion that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange or under any applicable law,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of an option,
or the issuance of shares of Common Stock thereunder, such option may not be
exercised in whole or in part unless such listing, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by
an appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms and conditions not inconsistent herewith
as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Not withstanding
any other provisions of the Plan, in the event of any change in the outstanding
Common Stock by reason of a stock dividend, recapitalization, merger or
consolidation in which the Company is the surviving corporation, split-up,
combination or exchange of shares or the like, the aggregate number and kind of
shares subject to the Plan, the aggregate number and kind of shares subject to
each outstanding option and the exercise price thereof and the maximum number
and kind of shares subject to Employee Options that may be granted to any
individual in any calendar year shall be appropriately adjusted by the Board of
Directors, whose determination shall be conclusive.
In the event of (a) the liquidation or dissolution of the
Company, (b) a merger or consolidation in which the Company is not the surviving
corporation, or (c) any other capital reor ganization (other than a
recapitalization) in which more than 50% of the shares of Common Stock of the
Company entitled to vote are exchanged, any outstanding options shall terminate,
unless other provision is made therefor in the transaction.
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<PAGE>
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on February 5, 1994 and amended on March 23,
1995. No option may be granted under the Plan after February 4, 2004. The Board
of Directors, without further approval of the Company's shareholders, may at any
time suspend or terminate the Plan, in whole or in part, or amend it from time
to time in such respects as it may deem advisable, including, without
limitation, in order that ISO's granted hereunder meet the requirements for
"incentive stock options" under the Code, to comply with the provisions of Rule
16b-3 promul gated under the Exchange Act or Section 162(m) of the Code, and to
conform to any change in applicable law or to regulations or rulings of
administrative agencies; provided, however, that no amendment shall be effective
without the requisite prior or subsequent shareholder approval which would (a)
except as contemplated in Paragraph 12, increase the maximum number of shares of
Common Stock for which options may be granted under the Plan, (b) materially
increase the benefits to participants under the Plan or (c) change the
eligibility requirements for individuals entitled to receive options hereunder.
Notwithstanding the foregoing, the provisions regarding the selection of
Directors for participation in, and the amount, the price or the timing of,
Director Options shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act or the rules thereunder. No termination, suspension or amendment of
the Plan shall, without the consent of the holder of an existing option affected
thereby, adversely affect his rights under such option. The power of the
Committee to construe and administer any options granted under the Plan prior to
the termination or suspension of the Plan nevertheless shall continue after such
termination or during such suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under
the Plan shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the holder
thereof, only by him or his legal representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process.
15. WITHHOLDING TAXES. The Company may withhold cash and/or
shares of Common Stock to be issued with respect thereto having an aggregate
fair market value equal to the amount which it determines is necessary to
satisfy its obligation to withhold Federal, state and local income taxes or
other taxes incurred by reason of the grant or exercise of an option, its
disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made. Fair market value of the shares of Common Stock shall
be determined in accordance with Paragraph 5.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such
legend or legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in
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respect of such shares as it determines, in its discretion, to be necessary or
appropriate to (a) prevent a violation of, or to perfect an exemption from, the
registration requirements of the Securities Act, (b) implement the provisions of
the Plan or any agreement between the Company and the optionee with respect to
such shares of Common Stock or (c) permit the Company to determine the
occurrence of a "disqualifying disposition," as described in Section 421(b) of
the Code, of the shares of Common Stock transferred upon the exercise of an ISO
granted under the Plan.
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock upon the exercise of an option granted under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares
of Common Stock pursuant to the exercise of options under the Plan shall be
added to the general funds of the Company and used for its general corporate
purposes as the Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the shareholders,
substitute new options for prior options of a Constituent Corporation (as
defined in Paragraph 19) or assume the prior options of such Constituent
Corporation.
19. DEFINITIONS.
(a) Subsidiary. The term "Subsidiary" shall have the same
definition as "subsidiary corporation" in Section 424(f) of the Code.
(b) Parent. The term "Parent" shall have the same definition
as "parent corporation" in Section 424(e) of the Code.
(c) Constituent Corporation. The term "Constituent
Corporation" shall mean any corporation which engages with the Company, its
Parent or any Subsidiary in a transaction to which Section 424(a) of the Code
applies (or would apply if the option assumed or substituted were an ISO), or
any Parent or any Subsidiary of such corporation.
(d) Disability. The term "Disability" shall mean a permanent
and total disability within the meaning of Section 22(e)(3) of the Code.
(e) Outside Director. The term "Outside Director" shall mean
an individual who, on the date of grant of a NQSO hereunder, is a director of
the Company but is not a common law employee of the Company or of any of its
Subsidiaries or its Parent.
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(f) Employee Option. The term "Employee Option" shall mean
an option granted pursuant to the Plan to an individual who, on the date of
grant, is a key employee of the Company or a Subsidiary of the Company.
(g) Consultant Option. The term "Consultant Option" shall
mean a NQSO granted pursuant to the Plan to a person who, on the date of grant,
is a consultant to the Company or a Subsidiary of the Company and who is not an
employee or an Outside Director of the Company or any of its Subsidiaries on
such date.
(h) Director Option. The term "Director Option" shall mean a
NQSO granted pursuant to the Plan to a director of the Company who, on the date
of grant, is not an employee or consultant of the Company or a Subsidiary of the
Company.
20. GOVERNING LAW. The Plan, such options as may be granted
hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Florida.
21. PARTIAL INVALIDITY. The invalidity or illegality of any
provision herein shall not affect the validity of any other provision.
22. SHAREHOLDER APPROVAL. The amendments to the Plan under
Section 2 whereby the number of options which may be granted is increased to
900,000 and to Section 4 by deleting the Outside Director formula grants, shall
be subject to approval by a majority of the votes cast at the next duly held
meeting of the Company's shareholders at which a majority of the outstanding
voting shares are present, in person or by proxy, and voting on the Plan. No
options granted pursuant to such amendments may be exercised prior to such
approval, provided that the date of grant of any options granted hereunder shall
be determined as if the Plan had not been subject to such approval unless
otherwise specified by the Committee. Notwithstanding the foregoing, if the
amendments to the Plan are not approved by a vote of the shareholders of the
Company on or before February 16, 1997, any options granted thereunder shall
terminate, but the Plan shall continue in full force and effect as it existed
immediately prior to the adoption of such amendments.
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OFFICE BUILDING LEASE
State of Florida
County of Pinellas
1. This Lease, made and entered into this 21st day of October, 1997 by
and between DCS Real Estate, a Florida Corporation whose address for purposes
hereof is P.O. Box 5688 Clearwater, FL 33758 (hereinafter called "Landlord") and
Lasergate Systems, Inc. whose address for purposes hereof is Suite 230 (Building
K) 2189 Cleveland St. Clearwater, FL 33765 (hereinafter called "Tenant").
2. LEASE OF PREMISES. Landlord is the owner of Belcher Plaza an office
building (the "Building", containing approximately 92,760 square feet "Gross
Rentable Area of Building") situated on certain real estate commonly known as 50
S. Belcher Rd. Clearwater, FL 34625 (the Building and real estate being
hereinafter called "Property"). Landlord does hereby lease unto Tenant, and
Tenant does hereby lease from Landlord, upon the terms and conditions
hereinafter set forth, approximately 10,160 square feet, (Tenants Gross Rentable
Area") of office space known and described as Suite numbers 226 to 233 Building
K the lease space being shown on Exhibit "A" attached hereto and made a part
hereof (hereinafter called the "Premises"). Premises shall be improved as shown
on Exhibit "B" (floor plan) attached hereto prior to date of commencement of the
Term; and specifications shown on Exhibit "C" (items furnished by landlord)
attached hereto. If Landlord or Landlord's general contractor upon the request
of the Tenant installs or constructs any items or equipment for Tenant in the
space leased not contained in Exhibit "C', such items or equipment shall be paid
for by Tenant within ten (10) days after receipt of a bill therefor. SEE
ADDENDUM
3. TERM. Subject to and upon the conditions set forth herein, Or in any
exhibit or addendum hereto, this lease shall continue in force for a term of 60
months and 15 days commencing on the 15th day of November, 1997 and ending on
the 30th day of November, 2002 unless sooner terminated as herein provided
(hereinafter referred to as "Term").
4. CONDITION OF PREMISES. Tenant's taking possession of the Premises
shall be conclusive evidence as against Tenant that the Premises were in good
order and satisfactory condition when Tenant took possession. No agreement of
Landlord to alter, remodel, decorate, clean or improve the Premises or the
Building and no representation respecting the condition of the Premises or the
Building has been made by Landlord to Tenant other than as may be contained in
this Lease or in a separate work letter agreement between Tenant and Landlord.
5. POSSESSION. If the Premises are not substantially ready for
occupancy on the date specified in Section 3 as the commencement of the Term, or
if for any reason Landlord cannot deliver Premises to Tenant on said date, this
Lease shall remain in effect, and Landlord shall not be subject to any liability
therefor, but the commencement date of the Term shall be extended to the date on
which the Premises are substantially ready for occupancy, or any earlier date on
which the Premises would have been substantially ready for occupancy but for
delay due to, but not limited to any of the following: special equipment,
fixtures or materials, or changes, alterations or add-ons requested by Tenant,
delay of Tenant in submitting plans, supplying information or approving or
authorizing plans, specifications, estimates or other matters; or any other act
or omission of Tenant. The expiration date of the ten-n shall be extended for a
like period. If Tenant shall occupy all or any part of the Premises prior the
date specified in Section 3 for the commencement of the Term, all of the Term,
all of the
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covenants and condition of this Lease, including the obligation to pay Rent,
shall be binding upon the parties hereto in respect of such occupancy as if the
first day of the Term, had been the date when Tenant began such occupancy, but
the termination date of the Tenn shall not be accelerated, except upon 'or
written consent of Landlord. SEE ADDENDUM: Financial Penalty
6. RENT: Tenant shall and hereby agrees to pay landlord Rent during the
Term as follows:
A. BASE RENT. Tenant shall pay, Landlord rent for the Premises ("Rent")
at the base annual rate of $98,552.00 payable in equal monthly installments of
$8,212.67. from the commencement of the Term until notification from Landlord of
an adjustment of rental rate in accordance with Paragraph 31 hereof, and
thereafter until the end of the Tenn at the adjusted annual rate determined in
accordance with Paragraph 31. Further, Tenant hereby agrees to pay monthly, as
additional rent any sales or use tax, or any other tax, which may be imposed
upon rents, (excluding State and/or Federal Income Tax) now or hereafter by any
Federal, State, Local, or other governing body. Sales tax at the commencement
date of this Lease is 7% of the monthly rent or $574.89 per month. SEE ADDENDUM
B. TIME AND PLACE OF PAYMENT. The Rent shall be paid 'in advance on or
before the first day of each calendar month during the Term. If the Term begins
on a day other than the first day of a calendar month or ends on a day other
than the last day of a calendar month, the Rent for such month shall be
prorated. Tenant shall pay the Rent to Landlord at Landlord's office in the
Building, or to such other person or at such other place as Landlord shall
designate. Tenants covenant to pay Rent shall be independent of every other
covenant contained in this Lease, Should Tenant be three (3) business days
delinquent in any rental payment due, then Tenant agrees to pay as a late rent
payment charge the lesser of 10% of the base monthly Rent or $150.00, in
addition to any Rent due hereunder.
7. SECURITY DEPOSIT. As additional security for the faithful and prompt
performance of its obligations hereunder, Tenant has concurrently with the
execution of this Lease paid to Landlord the sum of $16,637.00 Said security
deposit may be applied by landlord for the purpose of curing any default or
defaults of Tenant hereunder, in which event Tenant shall replenish said deposit
in full by promptly paying to landlord the amount so applied- Landlord shall not
pay any interest on such deposit, except as required by law. If Tenant has not
defaulted hereunder, Landlord has not applied said deposit to cure a default and
Tenant has replenished the same, then said deposit, or such applicable portion
thereof, shall be refunded to Tenant after the termination of this Lease. Said
deposit shall not be deemed an advance payment of Rent or a measure of
Landlord's damages for any default hereunder by Tenant. To the extent permitted
by law, Landlord shall be entitled to commingle Tenants security deposit with
other funds of Landlord. In no event shall Tenant be entitled to 'interest on
said deposit, except the extent required by applicable law.
8. ALTERATIONS.
A. Tenant shall not, without prior written consent of Landlord, make
any alterations, improvements, additions or installations or perform any
decorating, painting, or other similar work or in about the Premises. If
Landlord so consents, before commencement of any such work or delivery of any
materials into the Premises or the Building, Tenant shall furnish the Landlord
for approval: architectural plans and specifications, names and addresses of all
contractors, contracts, necessary permit and licences, certificates of insurance
and instruments of indemnification and waivers of lien against any and all
claims, costs, expenses, damages and liabilities which may arise in connection
with such work, all in such form and amount as may be satisfactory to Landlord.
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Whether or not Tenant furnishes the foregoing, Tenant agrees to hold Landlord,
and Landlord's beneficiaries, agents and employees forever harmless against all
claims and liabilities of every kind, nature and description which may arise out
of and in such manner as Landlord may from time to time designate. Tenant shall
pay the cost of all such work and the cost of decorating the Premises and the
Building occasioned thereby. Upon completion of such work, Tenant shall furnish
Landlord with contractor's affidavits and full and final waivers of lien and
receipted bill covering all labor and materials expended and used in connection
therewith. All such works shall comply with all insurance requirements and with
all laws, ordinances, rules and regulations of all governmental authorities, and
shall be done in a good and workmanlike manner with the use of good grades of
materials. Tenant shall permit Landlord to supervise and monitor construction
operations in connection with such work. All alterations, improvements,
additions and installations by Tenant to or on the Premises, other than built-in
furniture, shall become part of the Premises at the time of their installations,
and shall remain upon and be surrendered under the Premises as a part thereof at
the termination or expiration of this Lease. Consent of Landlord shall not be
unreasonably withheld.
B. Tenant agrees not to suffer or permit any lien of any mechanic or
materialman to be placed or filed against the Properly or the Premises. In case
any such lien shall be filed, Tenant shall immediately satisfy and release such
lien of record. If Tenant shall fail to have such lien immediately satisfied and
released of record, Landlord may, on behalf of Tenant, without being responsible
for making any investigation as to the validity thereof, pay the amount of said
lien and Tenant shall promptly reimburse Landlord therefor. Tenant has no
authority or power to cause or permit any lien or encumbrance of any kind
whatsoever, whether created by act of Tenant, operation of law or otherwise, to
attach to or be placed upon Landlords title or interest in the Premises, and any
and all liens and encumbrances created by tenant shall be attached to Tenant's
interest only.
9. SERVICES OF LANDLORD
A. Landlord covenants that it will, at the proper season, from 8:00
o'clock A.M. to 6:00 P.M. Monday through Friday and Saturdays from 8:00 A.M
until 1:00 P.M. (Holidays excepted) furnish electric power as provided herein
water, heat and air conditioning sufficient in Landlords judgment to keep the
premises comfortable for use and occupation, Further, Landlord shall make every
effort to comply with governmental guidelines regarding energy conservation and
temperature regulation. Tenant shall be permitted at least one "3 hr override"
per day to cool or beat space additional hours.
B. Landlord will furnish electric power only for lighting purposes and
operating small business machines such as small computers, copiers and fax
machines. Electric power, and installations for any and all other equipment
beyond those stated on Exhibits "B" and "C" shall be at Tenants sole cost and
expense.
C. Landlord will cause the Premises and Building to be cleaned and
generally cared for by its janitor in accordance with the standards of the
Building, five days weekly, excluding Holidays.
D. Landlord shall not be liable in damages by abatement of rent, or
otherwise, for failure to furnish or delay in furnishing electric power, heat,
air conditioning, water or janitorial service when such failure to furnish or
delay in furnishing is caused, in whole or in part, by the need for repairs, a
strike or labor controversy, the inability to secure fuel for the building, any,
accident or casualty, unauthorized act or default by janitors, other tenants,
Tenant, or employees of Landlord, or any cause beyond reasonable control of
landlord. Any such failure or delay in furnishing any service shall be without
liability of Landlord to Tenant and shall not be deemed to be an eviction or
disturbance in any manner or Tenants use and possession of the
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Premises or relieve Tenant from its obligation to pay Rent when due or from any
other obligation hereunder. Nor shall Landlord be liable for injury to persons
or property caused by any defects in the heating, air conditioning, electric
power or water system or arising out of failure to furnish heating, air
conditioning, water, electric power, and janitorial service.
10. LANDLORD'S REPAIRS.
A. Landlord shall have no duty to Tenant to make any repairs and
improvements to Building except structural repairs necessary for safety and
tenant ability; and maintenance and repair of all plumbing, lines, and equipment
installed for the general supply of hot and cold water, heat, ventilation, air
conditioning, and electricity, except that Tenant shall be responsible for any
and all repairs attributable to obstructions or objects deliberately or
inadvertently introduced or placed in the fixtures or lines leading thereto by
Tenant, its employees, servants, agents, licensees or invitees; and such other
repairs as provided for herein.
B. Landlord shall not be liable for any damage to any property, whether
or not owned by Tenant, in the Premises or in or near the Building caused by
gas, smoke, water, rain, ice or snow, which may leak into, or issue from any
part of the Building. Landlord shall not be liable for any damage whatsoever
either to person or property sustained by Tenant or other persons due to
Building or any part thereof being out of repair, or due to the happening of any
accident in or about Building, or due to any act of negligence of any tenant or
occupant of Building or any other person. Tenant shall use it's best efforts to
correct or prevent any roof Leakage or leakage of any nature within the
reasonable control of Landlord.
C. Landlord may enter the Premises at all reasonable times to make such
repairs and alterations to the Premises or any property or equipment located
thereon as Landlord shall desire, deem necessary or be required to do so by any
governmental authority or judicial order.
D. Tenant agrees to report immediately in Writing to Landlord any
defective condition in or about Premises or building known to Tenant whether
Landlord is obligated to make such repair or not, and negligent failure to
report shall make Tenant liable to Landlord for any expense of damage to
Landlord resulting from such failure to notify.
11. USE OF PREMISES. Unless other uses are specifically stated and
authorized herein the Premises shall be used and occupied by Tenant solely for
the purpose of office space. The Premises shall not be occupied or used for any
illegal purpose nor violation of any valid regulation of any governmental body
nor m any manner which would injure the reputation of the Building, nor in any
manner to create any nuisance or trespass, nor in any manner to invalidate or to
increase the premium rate for any policy of insurance carried on the building or
covering its operation or to violate the terms thereof. Tenant will pay all
increased insurance premiums on said Building which may be caused by Tenant's
use or occupancy of the Premises, which increase said insurance loss risk.
12. QUIET ENJOYMENT. If Tenant shall pay the rent reserved herein and
other amounts to be paid by tenant to landlord, and well and faithfully keep,
perform and reserve all of the covenants, agreements and conditions herein
stipulated to be kept, performed and observed by Tenant, Tenant shall at all
times during the term of this Lease have the peaceful and quiet enjoyment of
said Premises without hindrance of Landlord, or any person lawfully claiming
under Landlord, subject, however, to the term of this Lease and any mortgage
provided for in Paragraph 27.
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13. ASSIGNMENT AND SUBLETTING. Tenant may not, without the poor written
consent of Landlord, assign this lease or any interest thereunder, or sublet the
premises or any part thereof, or permit the use of the Premises by any other
party other than Tenant. Such consent shall not be unreasonably withheld.
Consent to one assignment or sublease shall not destroy or waive this provision
and all later assignments arid subleases shall likewise be made only upon the
poor written consent of Landlord. Subtenants or assignees shall become liable to
Landlord for all obligations of Tenant hereunder without relieving tenants
liability therefor. No such ass or sublease shall be terminated, canceled,
surrendered, modified or otherwise affected m any way to the detriment of any of
Landlord's rights without written consent of Landlord. No such assignment or
Sublease shall terminate or be terminated by reason of the termination of this
lease unless the Subtenant shall be given notice by Landlord of such
termination. Further, in the event a Sublease or Assignment is made, as provided
above, Tenant shall pay to the Landlord a charge of Two Hundred Fifty Dollars
(250.00) in order to reimburse Landlord for all of the necessary legal and
accounting services required to accomplish such subletting or Assignment.
14. REPAIRS BY TENANT. Tenant shall during the Term of this Lease and
any renewal or extension thereof, at its sole expense, keep the interior of the
space leased in as good order and repair as it is at the date of the
commencement of this lease, reasonable wear and tear and damages by accidental
fire or other casualty excepted. Further, Tenant agrees to use chair mats or
other suitable protection, at Tenant's expense, to prevent deterioration of the
carpet or floor covering. If any damage shall be caused by the negligence of
Tenant, its agents, employees, or invitees, Landlord may, at its option, repair
such damage, whether caused to the Building or tenants thereof, and Tenant shall
thereupon reimburse Landlord for the cost of repairing such damage, both to the
Building and to the tenants thereof within ten days of being billed therefor.
15. PROPERTY OF TENANT. Tenant may (if not in default hereunder) prior
to the expiration of the Lease, or any extension thereof, remove all personal
property which has placed in the Premises, provided Tenant repairs all damages
to the Premises caused by such removal, and restores said Premises to the
original condition, reasonable wear and tear excepted.
16. DAMAGE OR THEFT OF PERSONAL PROPERTY. Tenant agrees that all
personal property brought into the Premises shall be at the risk of Tenant only,
and Landlord shall not be liable for theft thereof or any damage thereto
occasioned by any acts of any tenants, or other occupants of the Building or any
other person.
17. INSURANCE. Tenant shall maintain at its own cost and expense:
A. Fire and Extended Coverage Insurance in an amount adequate to cover
the cost of replacement of all decorations, improvements, and contents in the
space leased in the event of fire, vandalism, theft, malicious mischief, or
other casualty generally included in extended coverage policies.
B. Public Liability Insurance on an occurrence basis with minimum
limits of liability in an amount of One Million ($1,000,000) Dollars, for bodily
injury, personal injury, or death to any one or more persons, and Fifty Thousand
($50,000) Dollars with respect to damage to property.
18. WAIVER OF CLAIMS AND INDEMNITY.
A. Tenant hereby releases and waives all claims against Landlord.,
Landlord's agents and servants for injury or damage to person, property or
business sustained in or about the Building or the Premises by Tenant,
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its agents, employees or servants, which injury or damages results from any act,
neglect, occurrence or condition in or about the building or the Premises,
except to the extent that such injury or damage is caused by the negligence or
willful or wanton act or omission of Landlord, Landlord's agents, employees or
servants.
B. Tenant agrees to indemnify and hold harmless Landlord, Landlord's
agents, employees, and servants against any and all claims, demands, costs, and
expenses of any kind and nature, including reasonable attorneys' fees for the
defense thereof, arising from Tenants occupancy of the Premises or from any
breach or default on the part of Tenant in the performance of any agreement of
Tenant to be performed pursuant to the terms of this Lease, or from any act or
neglect of Tenant, its employees, agents, servants, invitees or customers in or
about the Premises. In case any such proceeding is brought against any of said
persons, Tenant covenants to defend such proceeding at its sole cost and expense
by legal counsel reasonably satisfactory to Landlord, if requested by Landlord.
19. NO ESTATE IN LAND. This Lease shall create the relationship of
Landlord and Tenant between Landlord and Tenant; no estate shall pass out of
Landlord; and Tenant has only a usufruct which is not subject to levy and sale.
20. COMPLIANCE WITH LAWS. Both Landlord and Tenant shall comply with
all applicable laws, statues, ordinances, and regulations of duly constituted
public authorities now or hereafter 'in any manner affecting the space leased,
specifically including but not limited to those provisions regarding default,
eviction, and the due process of law, whether or not any such laws, ordinances
or regulations which may be hereafter enacted involve a change of policy on the
part of the governmental body enacting the same. Lessee agrees, at its own
expense, to promptly comply with all requirements of any legally constituted
public authority necessitated by reason of Lessee's occupancy of said Premises.
21. HOLDING OVER. If Tenant retains possession of the Premises or any
part thereof after the termination of this Lease by lapse of time or otherwise,
Tenant shall pay to Landlord the monthly installments of Rent, at double the
rate payable for the month immediately preceding said holding over, computed on
a per- month basis, for each month or part thereof (without reduction for any
such partial month) that Tenant thus remains in possession and, in addition
thereto, Tenant shall pay to Landlord all direct and consequential damages
sustained by reason of Tenant's retention of possession. Alternatively, at the
election of Landlord expressed in a written notice to Tenant and not otherwise,
such retention of possession by Tenant shall constitute a renewal of this Lease
on all the terms and conditions contained herein for a period of one year. The
provisions of this Section 21 shall not be deemed to limit or exclude any of
Landlords rights of reentry or any other right granted to Landlord hereunder or
under law.
22. EMINENT DOMAIN.
A. In the event the whole or any substantial part of the Building or
the Premises shall be taken or condemned by any competent authority for any
public or quasi-public use or purpose, this Lease shall terminate as of the date
of taking of possession by the condemning authority, and Rent shall be
apportioned as of said date.
B. In the event less than a substantial part of the Building or the
Premises shall be taken or condemned for any public or quasi-public use or
purpose, or if any adjacent property or street shall be condemned or improved in
such manner as to require the use of any part of the Premises or of the
Building, then at the election of Landlord expressed by delivery of written
notice to Tenant within ninety days after said date of taking, condemnation or
improvement, this Lease shall terminate as of said date without any payment to
Tenant therefor.
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C. Landlord shall be entitled to receive the entire award from any
taking or condemnation without any payment to Tenant, and Tenant hereby assigns
to Landlord Tenants interest, if any, in such award-, provided, however, Tenant
shall be entitled to receive any award or portion of specifically designated as
being compensation for Tenant's movable trade fixtures, improvements installed
by Tenant and/or Tenants an award relocation expenses.
23. DAMAGE BY FIRE OR OTHER CASUALTY.
A. If the Building or the Premises are made substantially untenantable
by fire or other casualty Landlord may elect either to:
(i) terminate this Lease as of the date of such fire or other
casualty by delivery of notice of termination to Tenant within sixty (60) days
after said date; or
(ii) without termination of this Lease proceed with due
diligence to repair, restore, or rehabilitate the Building or the Premises,
other than leasehold improvements paid by Tenant, at Landlord's expense.
B. If the Premises or the Building are damaged by fire or other
casualty, but are not made substantially untenantable, then Landlord shall
proceed with due diligence to repair and restore the Building or the Premises,
other than leasehold improvements paid for by Tenant, unless such damage occurs
during the last twelve months of the Term, in which event Landlord shall have
the right to terminate this Lease as of the date of such fire or other casualty
by delivery or written notice termination to Tenant within thirty days after
said date.
C. If all or any part of the Premises are rendered substantially
untenantable by fire or other casualty and this Lease is not terminated, Rent
shall abate for all or said part of the Premises which are untenantable on a per
diem basis from and after the date of the fire or other casualty and until the
Premises are repaired and restored.
24. RIGHTS OF RECOVERY. Landlord and Tenant agree to have all fire and
extended coverage and material damage insurance which may be carried with
respect to the Premises or to the property located therein endorsed with a
clause substantially as follows: "This insurance shall not be invalidated should
the insured waive in writing poor to a loss any or all rights of recovery
against any part for loss occurring to the property described "herein". Landlord
and Tenant hereby waive all claims for recovery from each other for any loss or
damage to them or to any of their property insured under valid and collectible
insurance policies to the extent of the proceeds collected under such insurance
policies.
25. ENTRY BY LANDLORD. Landlord may enter the Premises at reasonable
hours to exhibit the same to prospective purchasers or tenants, to inspect the
Premises to see that the Tenant is complying with all its obligations hereunder,
to make repairs required of Landlord or deemed necessary or desirable by
Landlord under the terms hereof or necessary to Landlords adjoining property,
and to conduct and monitor the satisfactory completion of services provided by
Landlord. The Landlord shall also be allowed to take any and all needed
materials and equipment that may be required to make such repairs, additions,
alterations, and improvements into and through the Premises without being liable
to Tenant in any manner whatsoever. During the time such work is being done in
or about the Premises, the Rent provided herein shall in nowise abate, and
Tenant waives any claim and cause of action against Landlord for damages by
reason of interruption to Tenants business or loss of
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profits therefrom.
26. CHANGE OF PREMISES. If the space described herein contains less
than 2,500 square feet, Landlord reserves the right to remove Tenant to other
similarly improved space in said Building (and such new space shall be deemed
the Premises for all purposes hereunder) on sixty (60) days notice, Tenant to
have the option within ten (10) days from the date of such notice to agree with
Landlord upon new space. In case Landlord and Tenant do not agree within ten
(10) days upon the terms of removal, then the Lease shall become null and void
and of no further effect, after sixty (60) days from the date of above notice.
Landlord agrees to pay expenses not exceeding the amount of one (1) months base
rental for moving Tenant to the new space agreed upon, subject to adjustment by
Tenant a authentication of Tenant's actual relocation expenses.
27. MORTGAGEE'S RIGHTS. Tenant agrees that this Lease and the rights of
Tenant shall be and are hereby made subject and subordinate to any loan deed or
mortgage to the full extent of all debts and charges secured thereby and to any
renewals or extensions of any part thereof and to any loan deed or mortgage
which any owner of the Building or Property may hereafter, at any time, elect to
place on the Building and Tenant agrees upon request to hereafter execute any
papers which counsel for Landlord may deem necessary to accomplish that end and,
in default of Tenant so doing, Landlord is hereby empowered to execute such
paper or papers in the name of Tenant as the act and deed of Tenant, and this
authority is hereby declared to be coupled with an interest and not revocable.
In the event of foreclosure pursuant to any such loan deed, Tenant agrees to
attorn to the purchaser pursuant to any foreclosure sale, and, at the option of
such purchaser, Tenant shall thereafter remain bound pursuant to the terms of
this Lease as if a new and identical lease between such purchaser, as Landlord,
and Tenant, as Tenant, had been entered into for the remainder of the Term
hereof.
28. EXTERIOR SIGNS. Tenant shall not paint or place signs visible upon
or from the windows or corridor doors of the Premises except with prior written
consent of Landlord: and Tenant shall place no signs upon the outside walls or
the roof of the Premises or Building.
29. NOTICES. Any written notice required or allowed by this Lease to be
given to either Landlord or Tenant shall be deemed delivered when mailed by
certified or registered mail postage prepaid and deposited in the United States
mail properly addressed to the parties at the addresses that appear after their
names at Paragraph I herein above.
30. RULES AND REGULATIONS. The Rules and Regulations m regard to the
Building, attached hereto as Exhibit "D", and all Rules and Regulations winch
Landlord may hereafter from time to time adopt and promulgate for the government
and management of said Building, are hereby made a part of this Lease and shall,
during the term of this Lease be in all things observed and performed by Tenant
and Tenant's clerks, employees servants and agents Tenant does hereby accept and
agree for itself, its employees, agents, clients, customers, invitees, and
guests, to abide by, uphold and fully comply with the Rules and Regulations as
shown on Exhibits "D" and with such reasonable modifications thereof and
additions thereto as Landlord may make. Insofar as the attached standard Rules
and Regulations conflict with any of the terms and provisions of this Lease, the
terms and provisions of thus Lease shall control. Tenant further agrees that
Landlord shall have the right to waive any or all such rules in the case of any
one or more tenants in the Building without affecting Tenants obligations under
this Lease and the Rules and Regulations and that Landlord shall not be
responsible to Tenant for the failure of any other t to comply with the Rules
and Regulations.
31. ADJUSTMENT OF RENTAL RATE. The monthly base rent for each twelve
month period subsequent to the first complete Twelve month period occurring
during the term of this Lease or any renewal
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thereof shall be computed by multiplying the base rent, as set forth in the
Paragraph titled, "Rent & Security Deposit", by a fraction whose numerator shall
by the Consumer Price Index (US. City Average- (1967=100)- All items, Bureau of
Labor Statistics of the United States Department of Labor) for the third month
prior to the appropriate anniversary date and whose denominator shall be said
Consumer Price Index (US. City Average-All items) for the month of the
commencement date of this Lease, provided that in no event shall such base rent
be less than the base rent stated in the Paragraph titled "Rent & Security
Deposit". In the event that the Consumer Price index shall cease being
published, Lessor shall have the right to substitute a similar index covering
the appropriate time period. The Lessor shall notify the Lessee of the adjusted
monthly base rent, in writing prior to the respective anniversary date or as
soon thereafter as possible if such rent adjustment occurs. If the Consumer
Price Index for the third mouth poor to the anniversary date has not been
published at the time Lessor wishes to make notification to Lessee, Lessor may
compute the new rent using the latest month available. The agrees to pay the
adjusted monthly base rent together with any applicable taxes, (sales and use
tax) on the first day of each and every month for the following twelve month
period or for those months remaining in said period after modification by
Lessor, however, the Lessee shall not be liable for rent adjustment for any
portion of any twelve month period prior to notification by Lessor.
Notwithstanding any waiver by the corporation of rent
otherwise chargeable hereunder, the corporation shall at all times be authorized
to calculate and charge annual rent adjustments without regard to such waiver
CPI, when applicable, will not exceed 7% nor be less than 2% SEE ADDENDUM for
Rent Schedule
32. REMEDIES OF LANDLORD.
A. In the Event:
(i) Tenant defaults in the payment of Rent and does not cure
the default within five (5) days after written demand;
(ii) Tenant defaults in the prompt and full performance of any
other provision of this Lease or fails to comply with any of the Rules and
Regulations now or hereafter established for the government of the Building, and
does not cure the default within fifteen (15) days after written demand by
Landlord that the default be cured or with respect to a default which cannot
reasonably be cured within fifteen (15) days. Tenant fails to commence such cure
within said fifteen (15) day period or fails to diligently conclude such cure
thereafter,
(iii) Tenant makes an assignment for the benefit of creditors,
admits its inability to pay its debts or takes any action towards a general
compromise of its debts or a composition with its creditors;
(iv) All or any substantial part of the assets of Tenant,
including the leasehold interest hereunder of Tenant, are attached, seized, or
become subject to a writ or distress warrant, are levied upon or come within the
possession of any receiver, or assignee for the benefit of creditors and such
attachment, seizure, writ warrant or levy is not withdrawn or removed within ten
(10) days after becoming effective;
(v) A notice of lien or levy if filed with respect to all or
any of Tenants assets located on the Premises by any federal, state, county or
municipal body, department, agency or instrumentality for taxes or debts then
owing by Tenant and such notice is not released or withdrawn within twenty (20)
days after its filing;
(vi) A judgment of other claim becomes a lien or encumbrance
upon all or any of Tenant's assets located on the Premises and such judgment or
claim is not vacated or satisfied within twenty (20) days after its entry or
filing; or
(vii) Any petition is filed by or against Tenant under any
section or chapter of the National Bankruptcy Act;
(viii) Tenant vacates or abandons the Premises or fails to
take possession of the Premises within fifteen (15) days after the commencement
of the Term;
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then and in any such event Landlord may, if Landlord so elects, either
immediately terminate this Lease and Tenant's right possession of the Premises
or, without terminating this Lease, immediately terminate Tenant's right to
possession of the Premises.
Notwithstanding the foregoing, Landlords all be obligated to give
notice of default in payment of Rent and Tenant shall have the aforesaid five
day grace period in which to cure such default, only one time each calendar
year, any subsequent default entitling Landlord immediately to exercise any one
or move of the remedies it may have at law or as hereinafter provided upon
default be Tenant.
B. In the event Landlord elects, pursuant to subsection A above, to
terminate this Lease and Tenant's right to possession, Landlord shall be
entitled to recover immediately from Tenant liquidated damages 'in an amount
equal to the present value of all Rent reserved hereunder for the remainder of
the Tenn following such termination (discounted at the rate of 6% annum) plus
all unpaid Rent and other sums then owed by Tenant to landlord at the time of
such termination; provided, however, that from and after the full payment to
Landlord of such liquidated damages Landlord shall refund to Tenant on the first
day of each month during the remainder of the term an amount equal to the
monthly Rent received by Landlord upon any reletting of the Premises less all
Landlord's expenses of reletting, but in no event shall any such refund exceed
the monthly Rent reserved hereunder Landlord's said refund obligations shall not
be binding upon any mortgagee 'in the event of any mortgage foreclosure.
C. In the event Landlord elects, pursuant to subsection A above, to
terminate Tenant's right to possession only without terminating this Lease.
Landlord may, at Landlord's option enter into the Premises, remove Tenants signs
and other evidence of tenancy, and take and hold possession thereof, as provided
in subsection E below, provided, however, that such entry and possession shall
not terminate this Lease or release Tenant, 'in whole or in part, from Tenants
obligation to pay Rent reserved hereunder for the full Term or from any other
obligation of Tenant under this Lease. If the rent collected by Landlord upon
any reletting of the Premises for Tenants account is insufficient to pay when
due the full amount of all unpaid Rent and other sums owed by Tenant to Landlord
plus all of Landlord's expenses of reletting, Tenant shall pay to Landlord from
time to time the amount of each monthly deficiency promptly upon demand.
D. Upon and after Landlord's entry into possession with or without
termination of this Lease, Landlord may, but need not , relet the Premises of
any part thereof to any person, firm or corporation other than Tenant, for such
Rent, for such Term and upon such conditions as Landlord in Landlord's sole
discretion shall determine, and Landlord shall not be required to accept any
Tenant offered by Tenant (provided that such acceptance shall not be
unreasonably refused) or to observe any instructions given by Tenant concerning
such reletting. In any such case, Landlord may incur expenses for repairs,
alterations, improvements, additions and decorations of or to the Premises of
the extent deemed necessary or desirable by Landlord for the purpose of
reletting the Premises. All such expenses plus all brokers! commissions and
attorneys' fees incurred by Landlord in connection with any reletting of the
Premises shall be included as "Landlord's expenses of reletting" as that term is
used in subsections B and C above.
F. Upon termination of this Lease, whether by lapse of time or
otherwise, or upon any termination of Tenant's right to possession of the
Premises upon termination of the Lease, Tenant shall surrender and vacate the
Premises immediately and deliver possession thereof to Landlord in a clean, good
and tenantable condition, ordinary wear and damage by fire or other casualty
excepted. Upon any termination which occurs other than by reason of Tenant's
default , Tenant shall be entitled to remove from the Premises all built-in
furniture and
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carpeting, provided that Tenant shall repair all damage resulting from such
removal and shall restore the Premises in a tenantable condition. All other
additions, decorations, fixture hardware, and all improvements, temporary or
permanent, in or about the Premises, whether placed there by Tenant or Landlord,
shall unless Landlord directs their removal, remain Landlord's property and
shall remain upon the Premises without compensation, allowance, or credit to
Tenant. In the event possession is not immediately delivered to Landlord or if
Tenant shall fall to remove all such property which is entitled or directed to
remove. Tenant hereby grants to Landlord full and free license to enter into and
upon the Premises with or without process of law for the purpose of returning to
Landlord the Premises as of Landlord's former estate, to expel or remove Tenant
and any others who may be occupying the Premises and to remove any and all
property there from using such force as may be necessary, without being deemed
guilty of trespass, eviction or forcible entry or detainer, and without
relinquishing Landlord's right to Rent or any other right hereunder.
E. Any and all property winch may be removed from the Premises by
Landlord pursuant to subsection E above or pursuant to law shall be conclusively
presumed to have been abandoned by Tenant and title therein shall pass to
Landlord without any cost by setoff , credit or otherwise, and Landlord may, at
its option:
(i) accept title to such property in which event Tenant shall
be conclusively presumed to have conveyed such property to Landlord under this
lease as a bill of sale;
(ii) at Tenant's expense, dispose of such property in any
manner that Landlord shall choose; or
(iii) at Tenant's expense, store such property.
In no event, however, shall Landlord be responsible for the value, preservation
or safe keeping of such property.
F. Tenant shall pay upon demand all of Landlord's costs, charges, and
expenses, including reasonable attorney's fees, incurred by Landlord in
enforcing Tenant's obligations hereunder.
G. If Tenant shall default in the performance of any of its obligations
hereunder and said default shall continue after the expiration of any notice or
grace period herein provided, Landlord may perform such obligation for the
account and expense of Tenant without notice, and Tenant shall reimburse
Landlord therefor upon demand.
H. All rights and remedies of Landlord upon this Section 32 and
elsewhere in this Lease shall be distinct, separate and cumulative and none
shall exclude any other night or remedy of Landlord set forth in this Lease or
allowed by law. Tenants obligations under this Section 32 shall survive the
expiration of the Term.
33. ESTOPPEL CERTIFICATE. Tenant shall from time to time, upon not less
than ten (10) days prior written request by Landlord, deliver to Landlord a
statement in writing certifying;
A. that this Lease is unmodified and in full force and effect, or , if
there have been modifications that the Lease modifications that the Lease as
modified is in full force and effect.
B. the dates to which Rent and other charges have been paid; and
3
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C. that Landlord is not in default under any provision of this Lease or
if in default, a detailed description thereof.
34. BROKERAGE REPRESENTATION. Tenant represents it has not had any
deals with any Realtor, broker, agent, or finder, in connection with the
procuring or negotiation of this Lease other than Commercial Partners Realty,
Inc. (CPR) whom will be compensated by Landlord according to a written agreement
between Scott Clendening of CPR and Daniel Slesser of D.C.S. Real Estate, Inc.
further, Tenant hereby indemnifies and waives any claim against Landlord for any
such fee unless stated in writing to the contrary.
35. MISCELLANEOUS.
A. All unpaid amounts due to Landlord under this Lease for Rent shall
bear interest at 15 percent annum or the highest legal rate, whichever is less,
from the date due until paid. All other amounts due to Landlord under this Lease
shall be considered, for purposes of this Paragraph 35A, as Rent.
B. All of the representations, agreements, and obligations of Landlord
are contained herein, and no modification waiver or amendment of the provisions
of this Lease shall be binding upon Landlord unless in writing and signed by
Landlord or by a duly authorized agent of Landlord.
C. Submission of this instrument by Landlord to Tenant for examination
shall not bind Landlord in any manner, and no lease, option, agreement to lease,
or other obligation of Landlord shall arise until this instrument is signed by
Landlord and delivered to Tenant.
D. No rights to light or air over any property, whether belonging to
Landlord or to any other person, are granted to Tenant by this Lease.
E. No receipt of money by Landlord from Tenant after the termination of
this Lease or Tenants right to possession of the Premises, the service of any
notice, the commencement of any suit, or any final judgment for possession of
the Premises shall reinstate, continue or extend the Term or affect any such
event.
F. No waiver of any default of Tenant hereunder shall be implied from
any failure by Landlord to take any action on account of such default whether or
not such default persists or is repeated, and no express waiver shall affect any
default other than the default specified in such waiver and then only for the
time and to the extent therein stated.
G. Each provision hereof shall be binding upon and inure to the benefit
of the Landlord and Tenant and their respective heirs, assigns, executors,
administers, legal representatives and successors,
H. The headings or captions of Sections are for convenience only, and
are not part of this Lease, and shall not affect the interpretation of this
Lease.
I. Tenant hereby consents to any future assignment by Landlord of any
part or all of its rights hereunder.
J. This Lease instrument shall not be recorded by the Tenant without
the execution and acknowledgment of an appropriate memorandum or short form of
this Lease and Landlord's prior written consent.
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K. Landlord in its sole discretion may request that tenant not utilize
more than 5.25 parking spaces per 1,000 sq ft of leased space by tenant or its
employees or invitees.
36. RADON DISCLOSURE: Radonisanaturally g radioactive gas that when it
had accumulated in a building in sufficient quantities may present health risks
to persons who are exposed to it over time. Levels of radon that exceed federal
and guidelines have been found in buildings in Florida. Additional information
regarding radon and radon testing may be obtained from your county public health
unit.
37. AMERICANS DISABILITIES ACT: Tenant at Tenants sole expense shall
comply with all laws, rules orders, ordinances, directors, regulations, and
requirements of federal, state, county, and municipal authorities now in force
or which shall impose any duty upon Landlord or Tenant with respect to the use,
occupation or alteration of the Premises, including, without limitation the
Americans with Disabilities Act.
38. RIDER- All riders, exhibits, and guaranty forms attached to this
Lease and signed or initialed by Landlord and Tenant are made a part hereof and
are incorporated herein by reference.
SEE ADDENDUM: two (2) pages signed by all parties
Time is of the essence with regard to all terms of
this lease.
IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to be duly
executed as of the date first written above.
LESSOR: LESSEE:
DCS Real Estate, Inc. Lasergate Systems, Inc.
By:______________________________ By:_________________________________________
Daniel Slesser, President Philip Signore, VP Chief Financial Officer
Witness: x Witness: x
Printed: x Printed: x
Witness: x Witness: x
Printed: x Printed: x
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ADDENDUM:
(1) GENERAL: First full months rent (for period of 12/1/97 to 12/31/97) and
security deposit (equal to 1 and 1/2 times monthly rent in year 5) shall be paid
concurrently with Lease execution. Rent for the period of 11/15/97 to 11/30/97
($4,106.33 plus Sales tax of $292.01) shall be due at time of move-in.
(2) RENT SCHEDULE: the following shall supersede Paragraph 31 during the initial
term of Lease (e.g.; prior to any renewals)
<TABLE>
<CAPTION>
YR# Term: $ per SF Rent Tax @ 7% Total Monthly Payments
- --- ----- -------- ---- -------- ----------------------
<S> <C> <C> <C> <C> <C>
1 15/Nov/97 to 30/Nov/98 $9.70 $8,212.67 $574.89 $8,787.55
2 1/Dec/98 to 30/Nov/99 $11.10 $9,398.00 $657.86 $10,055.86
3 1/Dec/99 to 30/Nov/2000 $12.10 $10,244.67 $717.13 $10,961.79
4 1/Dec/2000 to 30/Nov/2001 $12.60 $10,668.00 $746.76 $11,414.76
5 1/Dec/2001 to 30/Nov/2002 $13.10 $11,091.33 $776.39 $11,867.73
</TABLE>
(3) RENEWAL OPTIONS: This provision applies only to the initial term of said
lease and not to any renewals: Provided Tenant is not in default under the Terms
of this Lease, Tenant will be granted an option to renew this Lease at the end
of Lease term for a period of either a 1, 2 , 3, 4 or 5 year term under similar
terms and conditions with rent escalations based on the CPI but no greater than
7% annually nor less than 2%. Year 1 (of the new Lease term) base rate shall be
at a CPI (as referred to in Parag. 31) escalation from year 5 of this Lease
using, however, a base rate of $13.25 for Year 5 for purposes of calculating the
first year of renewal term. Should such renewal option be exercised, Landlord
agrees to furnish tenant improvement dollar amounts as follows which instead of
T.I. allowance may credited toward a rate reduction:
Term of Renewal Tenant Improvements or Rate Reduction at Tenants option:
1 Year Renewal: $1.00 per square foot allowance paid by landlord
2 Year Renewal: $2.00 per square foot allowance paid by landlord
3 Year Renewal: $3.00 per square foot allowance paid by landlord
4 Year Renewal: $4.00 per square foot allowance paid by landlord
5 Year Renewal: $5.00 per square foot allowance paid by landlord
Option may be exercised by Tenant on at least 90 days written notice prior to
the end of the fifth year of the Lease. Landlord Reserves to night to terminate
such option to renew in the event Landlord, in Landlords reasonable discretion,
determines it is in the best interest of the landlord, for a owner occupant to
occupy Premises or for a redevelopment (e.g.; substantial structural
modification of Belcher Plaza) to occur. Should Tenant wish to exercise such
option and Landlord elects to terminate this option; Tenant shall be reimbursed
to the extent, if any, that such option renewal price is low comparable market
rates for similar building space as defined by the 'Bayside Market-. Pinellas
County and surveyed by publications such as the Maddux Report; Blacks Guide and
commercial Realtor surveys such as Grubb & Ellis; and Cushman & Wakefield.
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(4) RIGHT OF FIRST REFUSAL: This provision applies only to the initial term of
said lease and not to any renewals: At anytime during the term of Lease, Tenant
shall have a right of first refusal for the following suite(s) shown on "Site
Plan: Exhibit A" Building: I Suite(s) # All Building: J Suite(s) # All
Building,: Suite(s) # all Building: Suite(s)#
Building: Suite(s) Building: Suite(s) Building:
Suite(s) Building: Suite(s)
Should Landlord have the opportunity to lease the above referenced suites He
shall immediately notify Tenant. Tenant must then execute or reject their right
in writing by 5:00 PM E.S.T. on the following business day (Monday to Friday;
national holidays excepted). In the event tenant elects to Lease any of the
above referenced space within this Tenn; Lease rates shall be at the same rate
as shown 'in Addendum parag. #(2) above ($ per sq. ft.) to coincide with the
same term as this Lease. However in no event shall rate be less than $11.25 per
square foot Tenant shall have no Right of Refusal in the case of Lease Renewals.
(5) PREMISES: This provision applies only to the initial term of said lease and
not to any renewals: (1) Reference Exhibit A-2 : areas highlighted and
referenced as suite 227 and suite 228. At Landlord's option, suite # 227 and/or
suite #228 may not, at Landlords option, be made available to Tenant until, but
no later than February 15, 1998. However Tenant agrees to take occupancy to
either or both suites upon 15 days notice by Landlord of it's intent to provide
said space to Tenant. Upon such notice Tenant shall be provided 15 days of rent
abatement (applicable only to suites 227 and 228) such period beginning on the
day Landlord provides notice. Suite improvements shall be in accordance with
Exhibit C. Prior to Tenants occupancy of each suite 227 and 228, Lease rates
shall be adjusted by deducting for the unoccupied square footage using; for
purposes hereof; the following and correlating to a daily rate for deductions:
Suite #227: 863 s.f. = $23.29 per diem Suite #228: 420 s.f.= $11.34 per diem
(6) POSSESSION: FINANCIAL PENALTY(S) TO LANDLORD: This provision applies only to
the initial term of said lease and not to any renewals: In the event Premises
are not substantially ready for occupancy on the date specified in Section 3 as
the commencement of the Term, unless delay is specifically a result of Tenant in
submitting plans, supplying information or approving or authorizing plans,
specifications, estimates or other matters; or any other act or omission of
Tenant; Landlord agrees to the following schedule of Penalties:
Penalty (A) Should overall Premises (other than Suites #227 and #228) not be
substantially ready for occupancy by 11/15/97: Landlord agree to pay as
liquidated damages (but not to the Termination of this Lease): $500.00 per day
to Tenant beginning on 11/15/97 and continuing on to and including 11/23/97.
Penalty (B) Should overall Premises (other than Suites #227 and #228) not be
substantially ready for occupancy by 11/24/97 Landlord agree to pay as
liquidated damages (but not to the Termination of this Lease): $1,000.00 per day
to Tenant beginning on 11/24/97 and continuing until space is substantially
ready for occupancy. For items 6(A & B) above; "Substantially Ready" shall mean
Tenant is not precluded from conducting their normal operations due to Premises
condition and Tenant shall not have to relocate or move furniture and
furnishings in order for Landlord to continue balance of improvements. Penalty
(C) Reference Exhibit B-2: area referenced as "Support". In the event said area,
as highlited on
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Ex. B-2 is not substantially ready and for occupancy on 11/15/97 as a result of
Landlord's neglect or failure to timely provide for improvements under Landlords
control unless delay is specifically a result of Tenant in submitting plans,
supplying information or approving or authorizing plans, specifications,
estimates or other matters; or any other act or omission of Tenant: Landlord
agree to pay as liquidated damages (but not to the Termination of this Lease):
$5 000 00 per day to Tenant beginning on 11/15/97 and continuing until space is
substantially ready for occupancy. However, on or about 11/14/97 Landlord has
the right to request an inspection by Tenant and for approval in writing; in the
event material and substantial problems are determined Landlord shall have the
right to a 24 to 48 hr corrective period after which Tenant shall, upon
reasonable completion by Landlord as necessary, sign a waiver of Penalty in
respect; to Penalty "C". If a list of all material and substantial problems is
not presented by Tenant at such time, all penalties shall be waived. This clause
is in no way applicable for areas not made available referenced as suite 227 or
suite 228 and shown and highlited on Exhibit A-2 in respect to this Par. (6)
above. Penalties shall not apply if completion is beyond any reasonable control
of Landlord; (e.g. an act of God or extreme catastrophe). All penalty provisions
above shall not be applicable due to minor punch list items which can be
completed without any undue interruption to Tenants operations.
(7) RECREATION/BREAK AREA: as shown on exhibit "F" landlord shall provide
standard improvements including new carpet, new ceiling tiles; and texture and
paint, in addition up to $500.00 of wall modifications. Tenant shall have
exclusive use of the space at no charge during the initial term of the Lease.
Suite shall be completed no later than 3/31/98
(8) SHARED TENANT CONFERENCE ROOM: as shown on exhibit "F "Landlord shall
construct and furnish a shared conference room. Tenant shall have the right to
use the space at no charge on a space available basis under reasonable "Rules
and Regulations" as designated by Landlord. Landlord shall furnish Conference
room table(s) to seat twenty people. Tenant shall be guaranteed a minimum usage
of 40 hours per month. Suite shall be completed no later than January 15, 1998.
(9) "WORKOUT ROOM": as shown on exhibit "F" Landlord shall designate and furnish
improvements and equip a designated suite to be used, at the sole discretion of
landlord, by Tenants of the Belcher Plaza at the choosing of landlord under the
sole discretion of Landlord a "workout room"; (i.e. gym with shower and bath).
Landlord commits to a total tenant improvement allowance of $6,000.00 towards
improvements of the "Workout Room" to be jointly agreed to with Tenant; but not
to exclude the installation of a Stairmaster and a Lifecycle. However Tenant
shall be allowed free usage at all times of "Workout Room". Space shall be
completed by February 28, 1998 Tenant shall abide by reasonable "Rules and
Regulations" as designated by Landlord at all times.
(10) RESERVED PARKING SPACES landlord shall provide six (6) parking spaces to be
located as highlited on Exhibit E
(11) Walkway/Common are improvements: Landlord agrees to reasonably care for and
clean garden area walkways, planter beds, and benches during the term of this
Lease. In addition, Landlord agrees to install the following for the
non-exclusive use of Tenant:
(a) Landlord agrees to acquire and install (2) round concretetables(approx.
42" diameter & seating
6) for exterior usage to be located as shown on Exhibit "F"
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(a) LANDSCAPING Landlord agrees to commit to program at Landlords expense to be
completed by the end of the first quarter of 1998 to upgrade and improve common
area walkway planter beds as well as overall landscaping throughout the complex.
(12) Landlord hereby consents to Tenant operating turnstiles, laser, and radio
frequency scanners, and other ticketing and access control equipment.
(13) Subsequent to eighteenth month of Lease Term, provided Tenant is not in
default under the terms of Lease, Landlord shall refund 1/3 (one-third) of
Security Deposit.
LESSOR: LESSEE:
DCS Real Estate, Inc. Lasergate Systems, Inc.
By: By:
Daniel Slesser, President Philip Signore, VP Chief Financial Officer
Witness: Witness:
Witness: Witness:
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<PAGE>
Exhibit C
Building K: Lasergate Systems, Inc.
Suite Preparation
Structural/Mechanical/Electrical:
Modify walls and doors to result in floorplan as shown on Exhibit B
Install Double 3'0" Entry doors (adjacent to 'Product Storage' area):
exterior solid core or steel ext. doors (at Landlords option)
Lighting fixtures shall be 2' x 4' recessed fluorescent fixtures to provide
output as typical in comparable buildings or so as to meet the
reasonable request of Tenant
HVAC systems: 12 Heilbrand (installed aprox Dec. 1993) package units @ 2.5 tons
cooling capacity ea.
HVAC ductwork shall be modified as needed to provide a properly balanced system
of air supplies and air
returns
New Honeywell T7300, or similar, Thermostats (12) to be installed
Ceiling insulation to be removed and replace with new insulation batts to meet
an efficiency rating of R-19 Sound insulations ('Polymaster' plastic foram or a
similar product) to be installed in Executive/Conference
area as highlited in blue on floorplan
Coordinate only: Remove all existing phone jacks per Tenant's oral instructions
All phone work shall be contracted and for exclusively by Tenant
Main Rest Room area: existing common area rest rooms shall be isolated to
the usage of "K" building Additionally, these restrooms shall be
remodeled to approximate the condition of the #300 common area
restrooms existing at Belcher Plaza. (This item shall have a completion
date of 2/28/97)
Special Electric requirements:
Provide up to 6 isolated electric receptacles on one circuit Throughout: Texture
spray interior walls with a orange peel or knockdown finish
Landlord shall provide wallpaper in 3 or 4 Executive office andin ExecutiveConf.
room as shown on floorplan: covering all labor and an allowance of up to $.50
per sf allowance for material
Paint all walls with Glidden Ultra Hide Flat (or similar) Paint doors/trim with
Glidden Ultra Hide Semi Gloss (or similar) New door hardware to be installed:
all doors shall have Standard passage sets
Eight doors shall have Keyed Locksets
Install new carpet throughout (except for designated tiled areas and upgraded
carpet in up to 150 sq yds) using 20 oz commercial gluedown loop pile
carpet or similar
Install new vinyl cove base molding throughout
Install new off-white PVC vertical blinds on all fixed glass windows.
Install doors stops as needed.
Replace all Ceiling Tiles
Replace all Light Lenses.
Replace or repair interior doors as needed
Entry:
Install ceramic tile (12" x 12" or similar standard contractor grade glazed
tile) in both main entry areas aprox. 200 s.f.
Main Hallway:
Landlord shall provide wallpaper in main hallway covering all labor and an
allowance of up to $.50 per sf
19
<PAGE>
allowance for material
Upgraded carpet shall be installed in hallway
Rest Room ADA Compliant:
As shown on floorplan:
Install vanities with standard Mills Pride white vanities with mica tops.
Install new lav and comode.
Install ceramic tile on floors.
Install exhaust fans.
Rest Room:
As shown on floorplan:
Install vanities with standard Mills Pride white vanities with mica tops.
Install new lav and comode.
Install ceramic tile on floors.
Install exhaust fans.
Signage:
Standard directory strips to be provided in all directories.
as follows:
Building standard door signs to be provided.
as follows:
Building K: aprox. 4" lettering shall be provided on building exterior. Landlord
shall install Tenant signage,
provided by Tenant in the form of color corporate logo, to be attached to Bldg K
near 4" lettering. Logo shall not
exceed 18" x 30" in size.
NOTE: Items in italics are not subject to 11/15/97 deadline Penalties ref. in
Addendum lPar. 6, however
Landlord shall use its best efforts to complete them in a timely manner and in
no case shall completion
be later than 12/31/97 with the exception of Main rest roomareawith a completion
date of 2/28/98.
20
<PAGE>
Exhibit D
Rules and Regulations
1. Tenant shall not operate any machinery or apparatus other than usual
small business machines and small computers. No article deemed hazardous because
of flammability and no explosive or other articles of an intrinsically hazardous
nature shall be brought into the Building. A business machine other than a small
computer, fax machine, or copier may be used in Premises only if Landlord gives
its prior written consent, and Tenant agrees to bear the cost of such
installation and possible modification to Premises.
2. No additional locks or similar devices shall be placed upon doors of
Premises and no locks shall be changed except with written consent of Landlord.
Upon termination of Lease Tenant shall surrender to Landlord all keys to
Premises.
3. Tenant shall be permitted to move furniture and office furnishings
into or out of Building only at such times and in such a manner designated by
Landlord so as to cause the least inconvenience to other tenants.
Safes, furniture, boxes, or other bulky articles shall be brought into
and placed in Building only with prior written consent of Landlord and only in
accordance with Landlord's directions. Any damage done to Building, Tenants, or
other persons by moving a safe or other bulky article in or out of Premises, or
by overloading the floor, shall be paid for by tenant causing such damage.
4. No person shall be employed by Tenant to do janitorial work in
Premises, and no persons other than the janitors for Building shall clean
Premises, unless Landlord shall first give its written consent. Any person
employed by Tenant with Landlord's consent to do janitorial work, shall, while
in Building, be subject to and under the control and direction of the Building
Superintendent, but shall not be considered the agent or servant of the Building
Superintendent or of Landlord.
5. Window coverings other than building standard, either inside or
outside the windows, may only be installed with Landlord's prior written consent
and must be furnished, installed and maintained at the expense of the Tenant and
at Tenant's risk, and must be of such shape, color, material, quality and design
as may be prescribed by Landlord.
6. If Tenant desires additional telegraphic or telephonic connections,
or the installation of any other electrical wiring, Landlord will, upon
receiving a written request from Tenant and at Tenant's expense, direct the
electricians as to where and how the wires are to be introduced and run, and
without such direction no boring, cutting or installation of wires will be
permitted. Tenant shall not install or erect any antennae, aerial writes or
other equipment inside or outside the Building without in every instance
obtaining prior written approval from Landlord.
7. The sidewalks, entrances, passages, courts, corridors, vestibules,
halls in or about the Building shall not be obstructed or used for storage or
for any other purpose other than ingress and egress by Tenant.
8. Tenant shall not create or maintain a nuisance in the Premises or
make any noise or odor or use or operate any electric or electronic devices that
emit loud sounds, airwaves, or odors, that are objectionable to other occupants
or tenants of this or any adjoining building or premises; nor shall the Premises
be used for lodging or sleeping nor for any immoral or illegal purpose that will
damage the Premises, or injure the reputation
21
<PAGE>
of the Building.
9. Tenant and occupants shall observe and obey all parking and traffic
regulations imposed by Landlord on the Premises. Landlord in all cases reserves
the right to designate "no parking" zones, traffic right- of-ways and general
parking area procedures. Landlord in its sole discretion may require that tenant
not utilize more than 4 parking spaces per 1000 square feet of Tenant's leased
space for tenant or its employees or invitees. At the termination of the Lease
Tenant and its agents and employees shall return all parking cards. Failure of
Tenant to comply with parking regulations will constitute a violation of the
Lease. Landlord may institute such measures for proper parking as are
necessitated by conditions existing at a particular time; including but not
limited to towing, impounding and/or tagging of improperly parked vehicles.
10. Landlord reserves the right all times to exclude newsboys,
loiterers, vendors, solicitors and peddlers from the Building and to require
registration, satisfactory identification and credentials from all persons
seeking access to any part of the Building at all times other than during
ordinary business hours. Landlord shall exercise its best judgment in executing
such control but shall not be held liable for granting or refusing such access.
11. Any sign, lettering, picture, notice or advertisement installed
within the Premises which is visible from the public corridors within the
Building shall be installed in such a manner and be of such character and style
as Landlord shall approve in writing. No sign, lettering, picture, notice or
advertisement shall be placed on any outside window or in a position to be
visible from outside the Building.
12. Tenant shall not use the name of Building for any purpose other
than that of the business address of Tenant, and shall not use any picture or
likeness of the Building in any circulars, notices, advertisements or
correspondence, without Landlord's prior written consent.
13. No animals or pets or bicycles or skateboards or other vehicles
shall be brought or permitted to be in the Building or the Premises.
14. Tenant shall not make any room-to-room canvass to solicit business
from other tenants of the Building.
15. Tenant shall not waste electricity, water or air-conditioning, and
shall cooperate fully with Landlord to assure the most effective operation of
the Building's heating and air-conditioning. Tenant shall not adjust any
controls other than room thermostats installed for Tenant's use. Tenant shall
not tie, wedge, or otherwise fasten open any water faucet or outlet. Tenant
shall keep all corridor doors closed.
16. Tenant assumes full responsibility for protecting the Premises from
theft, robbery and pilferage. Except during Tenant's normal business hours,
Tenants shall keep all doors to the Premises locked and other means of entry to
the Premises closed and secured, and be liable for any loss caused by negligence
thereto.
17. Tenant shall not overload any floor and shall not install any heavy
objects, safes, business machines, files or other equipment without having
recieved Landlord's prior written consent as to size, maximum weight, routing
and location thereof. Safes, furniture, equipment, machines and other large or
bulky articles shall be brought through the Building and into and out of the
Premises at such times and in such manner as the Landlord shall direct and at
Tenant's sole risk and responsibility. Prior to Tenant's removal of such
articles from the Building, Tenant shall obtain written authorization therefor
at the Landlord's office and shall present such
22
<PAGE>
writings to a designated employee of Landlord.
18. Tenant shall not in any manner deface or damage the Building.
19. Tenant shall not use more electrical current from individual or
collective circuits as is designated by the amperage rating of said circuits at
the circuit breaker panels for Tenant's suite. Should Tenant exceed the safe
capacity as stated on the circuit breakers then Tenant shall bear the entire
expense of modifications to adjust or increase the amperage for Tenant's safe
and proper electrical consumption. Landlord's consent of such modifications to
the electrical system shall not relieve Tenant from the obligation not to use
more electricity than such safe capacity.
20. Landlord reserves the right to make such further reasonable rules
and regulations as in its judgment may from time to time be necessary for
safety, care and cleanliness of the Premises and for the preservation of good
order therein. Any additional rules and regulations promulgated by Landlord
shall be binding upon the parties hereto with the same force and effect as if
they had been inserted herein at the time of execution hereof.
Tenant shall be responsible for the observance of all of the foregoing
rules and regulations by Tenant's employees, agents, clients, customers,
renters, and guests. Landlord shall not be responsible for any violation of the
foregoing rules and regulations by other tenants of the Building and shall have
no obligation to enforce the same against other tenants.
23
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<NAME> LASERGATE SYSTEMS, INC.
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