SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO _______
COMMISSION FILE NUMBER 0-15873
LASERGATE SYSTEMS, INC.
----------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
FLORIDA 59-2543206
------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2189 CLEVELAND STREET, SUITE 230, CLEARWATER, FLORIDA 33765
-----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (727) 803-1574
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
CLASS OUTSTANDING AT NOVEMBER 13, 1998
- ----- --------------------------------
Common stock $0.03 par value 15,299,393
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [X]
<PAGE>
LASERRGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 1998 3
(unaudited) and December 31, 1997
Consolidated Statements of Operations 4
(unaudited) for the three months and nine months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows 5
(unaudited) for the nine months ended
September 30, 1998 and 1997
Notes to Financial Statements (unaudited 6
Item 2. Management's Discussion and Analysis or Plan 9
of Operation
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
-2-
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS September 30 December 31
1998 1997
<S> <C> <C>
Current Assets (Unaudited)
Cash and cash equivalents $ 65,179 $ 390,762
Accounts receivable, net of allowance for doubtful
accounts of $118,345 and $157,690 154,194 455,001
Note receivable, current portion 61,185 50,251
Inventories 131,332 232,192
Prepaid expenses 18,532 30,838
------------ ------------
Total Current Assets $ 430,422 1,159,044
------------ ------------
Note receivable, long-term portion $ 59,268 59,091
Property and equipment, net 206,745 305,509
Systems and software costs, net of write-down and
amortization of $1,679,753 and $1,611,753 726,938 475,491
Goodwill, net of amortization of $498,299 and $398,577 2,149,974 2,249,716
Other assets, net 16,638 19,137
------------ ------------
Total Assets $ 3,589,985 $ 4,267,988
------------ ------------
LIABILITIES & STOCKHOLDERS EQUITY
Current Liabilities
Notes payable, bank $ 319,107 23,575
Accounts payable, trade 698,675 780,271
Deferred revenues 374,921 356,471
Accrued warranty costs 523,524 554,497
Accrued expenses 407,679 912,190
------------ ------------
Total liabilities $ 2,323,906 $ 2,627,004
------------ ------------
Stockholders equity
Preferred stock, $.03 par value, 2,000,000 shares authorized
5,700 and 7,500 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively $ 171 $ 225
Common stock, $.03 par value, 20,000,000 shares authorized
15,299,393 and 7,362,061 issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 458,982 223,862
Additional paid-in capital 20,888,218 21,123,284
Accumulated deficit (20,081,292) (19,706,387)
------------ ------------
Total stockholders' equity $ 1,266,079 1,640,984
------------ ------------
Total liabilities and stockholders' equity $ 3,589,985 $ 4,267,988
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements
-3-
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 733,291 $ 1,042,114 $ 2,711,289 $ 3,346,578
Operating Expenses
Cost of Revenues 413,687 763,676 1,551,893 2,591,985
Development 3,688 106,578 48,516 316,264
Selling, general and administrative
(Including write-down of intangibles
of $285,000 in September 1997) 57,002 1,012,550 1,501,202 2,649,221
------------ ------------ ------------ ------------
Operating Income (Loss) $ 258,914 $ (840,690) $ (390,322) $ (2,210,892)
Other income (expense) 7,502 10,509 16,418 29,034
------------ ------------ ------------ ------------
Net Income (Loss) $ 266,416 $ (830,181) $ (373,904) $ (2,181,858)
------------ ------------ ------------ ------------
Net Gain (Loss) per common share $ 0.02 $ (0.11) $ (0.03) $ (0.29)
------------ ------------ ------------ ------------
Weighted Average Common Stock 15,299,393 7,462,061 12,399,867 7,452,537
Outstanding ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements
-4-
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (373,904) $(2,181,858)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation, write-down and amortization $ 294,288 $ 568,803
Increase (decrease) in provision in doubtful accounts (44,265) 14,856
Decrease (increase) in:
Accounts receivable, trade 334,490 325,861
Inventories 100,860 106,329
Prepaid expense 12,188 (16,873)
Other current assets 2,500 102,538
Note receivable and accrued interest (6,074) (153,910)
Increase (decrease) in:
Accounts payable and accrued expenses (586,107) (241,384)
Accrued product costs (30,973) (24,222)
Deferred revenue 23,112 191,124
----------- -----------
Net cash used in operating activities $ (273,885) $ 1,308,736
----------- -----------
Cash flows from investing activities:
(Additions) to, disposal of, property and equipment $ (27,783) $ (114,227)
Capitalized software development costs (319,447) (258,445)
----------- -----------
Net cash provided (used) in investing activities $ (347,230) $ (372,672)
----------- -----------
Cash flows from financing activities:
Proceeds from loans $ 299,700 $ --
Repayment of loans, other (4,168) (3,745)
----------- -----------
Net cash provided by financing activities $ 295,532 $ (3,745)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (325,583) $(1,685,153)
Cash and cash equivalents, beginning of period 390,762 1,924,825
----------- -----------
Cash and cash equivalents, end of period $ 65,179 $ 239,672
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
-5-
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
INTERIM PRESENTATION
The interim consolidated financial statements of Lasergate Systems, Inc. (the
ACompany@) are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto in its Form 10-KSB, as amended, for the
year ended December 31, 1997. In the opinion of management, the accompanying
consolidated financial statements (with all explanations contained in these
Notes) contain all adjustments necessary for a fair presentation of the results
of operations for this interim period. Interim results are not necessarily
indicative of the results for a full fiscal year.
OPERATIONAL AND FUNDING MATTERS AND REPORTING BASIS
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB as
amended, for the fiscal year ended December 31, 1997, the Company's auditors
qualified their opinion as to a going concern. The information contained in Note
3 to the Financial Statements included in the Company's Annual Report on Form
10-KSB as amended, for the fiscal year ended December 31, 1997 remains current
related to the status of certain of the Company's operational and funding
matters and, accordingly, should be referred to in conjunction with this Form
10-QSB.
For the nine months ended September 30, 1998, the Company incurred a loss of
$373,904 and used cash and operating activities of $273,885. From its inception
in March, 1985 through September 30, 1998, the Company has an accumulated
deficit of $20,081,292. In recent years the Company has relied upon proceeds
from private and public placements of equity securities (some of which were
converted to stock) and loans in order to fund its operation..
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the Company's balance
sheet is dependent upon continued operation of the Company, which in turn is
dependent upon the Company's ability to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Sales opportunities in 1998 are expected to be less than sales in 1997.
Management believes the Company's financial stability has adversely affected
sales for the third and fourth quarters of 1998. The Company cannot provide the
necessary assurances 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
over one year, 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 $1,893,484 at September 30, 1998. 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. 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. However, as part of any
financing arrangement, the Company would require a capital infusion in the
Company which could result in a further dilution of the present shareholders'
equity interest. Management believes a capital infusion is necessary in order to
increase the Company's revenues.
Management intends to continue to operate the Company in a conservative manner
through its efforts to further reduce operating expenses and product costs and
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
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 to allow the Company to
continue its operations.
-6-
<PAGE>
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 do not approve an increase in the authorized number of Common
Shares in an amount sufficient to allow for conversion of all Series G Shares
within 120 days of the subscription agreement (by March 4, 1998). An additional
penalty of 10% will be incurred for each 120 days beyond March 4, 1998, until
shareholders 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 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. As of the date hereof, the
Company has not held its 1998 Annual Meeting of shareholders and the Series G
investors have not made a demand to reinstate the penalties. On April 11, 1998,
the Company converted 1,800 of the 7,500 Series G Shares into 7,837,332 common
shares.
REVENUE RECOGNITION
Revenues from the sale of equipment and software licenses, which have been
predominately under short-term contracts during the periods presented herein,
are recognized upon the acceptance of the system by the customer provided that
no significant vendor or post-contract support obligations remain outstanding
and collection of the resulting receivable is probable. Revenues from special
sales sold under evaluation periods are recognized at the end of this period.
Revenues from the sale of equipment and software licenses with a planned
installation period exceeding 90 days are accounted for using the percentage of
completion method.
Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
CLASSIFICATION OF EXPENSES
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts and amortization of
capitalized software development costs.
NET INCOME (LOSS) PER COMMON SHARE
The net income (loss) per common share amount is based on the weighted average
number of common shares outstanding during the period. Options and warrants and
the effect of the convertible securities are not included in the calculation of
net income (loss) per share because they are antidilutive. At September 30,
1998, there were options and warrants outstanding to purchase 2,791,667 common
shares at prices ranging from $0.24 to $4.50 per share, and 5,700 Series G
shares which can convert into 24,818,217 common shares
NOTE 2 - SYSTEMS AND SOFTWARE COSTS
From June 1996 until June 1997 the Company rewrote its general admission product
in order to make it Windows(R) based. Since June 1997, the Company has been
adding additional features and functions to the product.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions in areas of product development and customer
support. In addition, the product has a new appearance which is more user
friendly and allows the user to modify
-7-
<PAGE>
a configuration layer (without access to the source code) which can remain in
place when updating the product to a new revision level. As a result, the
Company expects its new products to be more competitive in the market.
In the third quarter, 1998, $ 115,263 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
$796,446, of which $663,446 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 3 - PRODUCT COST LIABILITY (WARRANTY ALLOWANCE)
An accrued warranty allowance of $523,524 has been provided to cover the cost of
enhancements to be made (free of charge) to systems installed in prior periods
and to provide for Year 2000 compliance of legacy products. During the third
quarter of 1998, $48,400 was spent for these enhancements and subsequently
charged against this allowance. Management has reviewed warranty costs incurred
within the past year, and believes this provision is a conservative estimate of
these costs but will continue to monitor them to ensure they are provided for on
a current basis in order to match the cost with associated revenue.
NOTE 4 - 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 of Pinellas County, Florida, Civil
Division. Mr. Turner alleged, among other things, that he was wrongfully
terminated from his employment and sought damages that in the aggregate could
have exceeded $1,000,000. Trial was set for the week of June 22, 1998, but all
parties agreed to a full settlement amount of $312,500 without a trial. Mr.
Friedman and Mr. Markowitz paid $150,000 and Lasergate Systems, Inc. paid
$150,000 on July 31, 1998 using outside funding obtained from RBB Bank, AG. The
remaining balance of $12,500 is payable by Lasergate Systems, Inc. on or before
December 31, 1998.
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. There have been
no significant changes regarding this action since the last quarter.
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.
NOTE 5 - NOTES PAYABLE
On July 31, 1998 the Company borrowed $300,000 from RBB Bank, AG. The loan is
payable in one (1) year at an interest rate of 10% per annum. The loan also
included issuance of 300,000 stock warrants, on terms to be agreed upon, and is
secured by Admits source code.
-8-
<PAGE>
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NINE MONTHS ENDED
--------------------
INTEREST AND INCOME TAXES PAID: 1998 1997
------ ------
Interest $2,010 $2,192
Income Taxes -0- -0-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with the financial
statements and notes thereto, and is qualified in its entirety by reference
thereto.
The statements contained in or incorporated by reference into this Quarterly
Report which are not historical facts contain forward looking information with
respect to plans, projections or future performance of the Company, the
occurrence of which involve certain risks and uncertainties that could cause the
Company's actual results to differ materially from those expected by the
Company, including the history of operating losses; uncertainty of future
financial results; possible negative cash flow from operating activities;
additional financing requirements; no assurance of successful and timely
development of new products; risks inherent in software development; customer
acceptance; employee turnover; litigation; dependence on regulatory approvals;
uncertainty of software and hardware pricing or profitability; unpredictability
of patent protection; rapid technological change; competition; and other
uncertainties detailed in the Company's Annual Report on Form 10-KSB, as
amended.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES:
Revenues were $733,291 and $1,042,114 in the third quarter of 1998 and the third
quarter of 1997 respectively, representing a decrease of $308,823 or 30%.
Product sales represented $533,425 and $915,600 in the third quarter of 1998 and
1997 respectively and revenue from maintenance and support of existing customers
represented $199,866 and $126,514 in the third quarter of 1998 and 1997
respectively.
COST OF REVENUES:
Cost of revenues were $413,687 and $763,676 in the third quarter of 1998 and the
third quarter of 1997 respectively, representing a $349,989, or 46% decrease. As
a percentage of revenues, cost of revenues in the third quarter of 1998 was 56%
of revenues compared to 73% of revenues in the third quarter of 1997. This was
primarily due to the increase in software sales relative to hardware sales. The
ratio of cost-of-revenues to revenues is 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
provide the Company with significantly higher gross margins.
DEVELOPMENT COSTS:
Development costs were $3,688 and $106,578 in the third quarter of 1998 and the
third quarter 1997 respectively, representing a decrease of $102,890, or 97%.
Development costs for the third quarter of 1998 do not include $115,263 of
capitalized costs related to the new Admits for Windows(R) product, $48,340 of
costs charged to the warranty allowance, or $24,305 charged to cost of revenues.
Development costs for the third quarter of 1997 do not include $72,879 of
capitalized software costs or $12,000 of costs charged to the warranty
allowance. The Company expects to continue to develop enhancements to its
products for the remainder of 1998 and will continue to capitalize this cost in
the 4th Quarter. Future development efforts will be focused on a reserved
seating module as soon as resources become available and customer demands
justify.
-9-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $57,002 and $1,012,550 for the
third quarter of 1998 and 1997 respectively, representing a $955,548 or 95%
decrease. This decrease is attributable to Management's actions to operate in a
conservative manner and reduce operating expenses, including salary expense,
travel expense, rent expense, and employee recruitment expenses; a write-off of
intangible assets of $285,000 during September 1997; and the elimination or
reduction to previously established estimated reserves or accrued expenses to
reflect current facts and circumstances... including bonuses (78,000), annual
report ($28,000), Asian Pacific Shutdown ($40,000), and sales taxes ($75,000).
Net income was $266,416, or $.02 per common share, for the third quarter of 1998
compared to a net loss of $830,181, or $.11 per common share, for the third
quarter 1997. The components of the increase in the Company's net profit are
explained above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES:
Revenues were $2,711,289 and $3,346,578 for the nine months ended September 30,
1998 and 1997 respectively, representing a decrease of $635,289 or 19%. Product
sales represented $2,241,727 and $3,009,942 for the nine months ended September
1998 and 1997 respectively and revenue from maintenance and support of customers
represented $469,562 and $336,636 for the nine months ended September 30, 1998
and 1997 respectively.
COST OF REVENUES:
Cost of revenues were $1,551,893 and $2,591,985 in the nine months ended
September 30, 1998 and 1997 respectively, representing a $1,040,092, or 40%
decrease. As a percentage of revenues, cost of revenues decreased to 57% from
77% for the first nine months ended September 30, 1998. This was primarily due
to the increase in software sales relative to hardware sales and increases in
maintenance and support revenues without a comparable increase in the costs
associated with such revenues. The ratio of cost-of- revenues to revenues is 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 provide the Company with significantly higher gross
margins.
DEVELOPMENT COSTS:
Development costs were $48,516 and $316,264 for the nine months ended September
30, 1998 and 1997 respectively, representing a decrease of $267,748 or 85%.
Development costs for the nine months ended September 30, 1998 do not include
$319,447 of capitalized costs related to the new Admits for Windows(R) product,
$82,640 of costs charged to the warranty allowance, or $78,500 charged to cost
of revenues. Development costs for the nine months ended September 30, 1997 do
not include $258,445 of capitalized software costs or $108,527 of costs charged
to the warranty allowance, or $31,381 charged to cost of revenue. With the
addition of these amounts, costs have decreased $185,514 for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
This represents a 26% decrease, which is primarily due to a reduction in outside
contract labor. In early 1997, the Company used extensive contract labor
associated with development of the new Admits for Windows(R) software. The
Company expects to continue to develop enhancements to its products for the
remainder of 1998. Future development efforts will be focused on a reserved
seating module as soon as resources become available and customer demands
justified.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $1,501,202 and $2,649,221 for
the nine months of 1998 and 1997 respectively, representing a $1,148,019 or 43%
decrease. Again, this decrease is attributable to Management's actions to
operate in a conservative manner and reduce operating expenses and the
elimination of reduction to previously established estimated reserves or accrued
expenses to reflect current facts and circumstances... including salary and
benefits ($350,000), travel expense ($175,000), contract labor ($103,000), legal
fees ($110,000), and employee recruitment ($70,000).
Net loss decreased to $373,904, or $0.02 per common share for the nine months
ended September 30, 1998 from $2,181,858, or $.29 per common share for the nine
months ended September 30, 1997. The components of the decrease in the Company's
net loss are explained above.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB, as
amended, for the fiscal year ended December 31, 1997, the Company's auditors
qualified their opinion as to a going concern. The information contained in Note
3 to the Financial Statements included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 remains current related to
the status of certain of the Company's operational and funding matters and,
accordingly, should be referred to in conjunction with this Form 10-QSB.
For the nine months ended September 30, 1998, the Company used $273,885 of cash
in operating activities and incurred a loss of $373,904. From its inception in
March 1985 through September 30, 1998, the Company has incurred a cumulative
loss of $20,081,291. In recent years the Company has relied upon proceeds from
private and public placements and loans in order to fund its operations.
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.
During the nine months ended September 30, 1998, accounts receivable decreased
$334,490 primarily due to increased collection efforts. Inventory decreased
$100,860 due to fewer installations being in process at September 30, 1998 than
at December 31, 1997. Accounts payable and accrued expenses decreased by
$586,107 primarily due to the Turner legal settlement ($230,000), reduction of
work-in-process at September 30, 1998 vs. December 31, 1997 ($130,000),
reduction in accrued payroll ($60,000), reduction of sales tax accrual
($75,000), and reduction of the Asian Pacific Shutdown accrual ($40,000).
Since the Company does not purchase components for its products until an order
is received, there is typically a backlog of orders for systems. The Company
defines backlog as a signed contract, typically with some type of financial
assurance such as a deposit. As of September 30, 1998 and December 31, 1997, the
Company's backlog was approximately $288,909 and $880,721, respectively.
The penalties described on page 7, paragraph 4, 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 the Series G investors will be able to convert all the
Series G shares into common shares. As of the date hereof, the Company has not
held its 1998 Annual Meeting of shareholders and the Series G investors have not
made a demand to reinstate the penalties. 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.
Management believes that having the Admits for Windows(R) product installed at
several high profile accounts since mid-1997 will improve its ability to sell
the product and expects 1998 sales opportunities to be less than sales in 1997.
Management believes that the Company's lack of financial stability has affected
its sales. The Company cannot provide the necessary assurances 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
over 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 $1,893,484 at September 30, 1998.
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. 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.
-11-
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that with modifications to existing software and conversions to new software,
the Year 2000 Issue can be mitigated. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company has determined it has no exposure to contingencies
The Company has used internal and external resources to reprogram, or replace,
and test the Company's software products for Year 2000 compliance. The Company
believes that its 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. There can be no absolute assurance that the Company's software
products that are designed to be Year 2000 compliant are actually compliant.
Some legacy products, it is believed, are not Year 2000 compliant. The Company
has notified, or attempted to notify, the users of the non-Year 2000 compliant
software of its non-compliancy, and that the Company will no longer support the
software or attempt to reprogram it to be Year 2000 compliant.
In terms of the cost associated with the Year 2000 project, the Company
estimates that approximately ninety percent (90%) of the cost has already been
incurred. The total remaining cost is estimated to be approximately $10,000, and
will be expensed as incurred over the next several months. This cost is not
expected to have a material effect on the results of the operations. To date,
the Company has incurred and expensed approximately $90,000 related to the
assessment of, and preliminary efforts in connection with, its Year 2000 project
and the development of a remedial plan
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 1- 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), commended an action against the Company, Jeffery Markowitz and Richard
Friedman in the Circuit Court of Pinellas County, Florida, Civil Division. Mr.
Turner alleged, among other things, that he was wrongfully terminated from his
employment and sought damages that in the aggregate could have exceeded
$1,000,000. Trial was set for the week of June 2, 1998, but all parties agreed
to a full settlement amount of $312,500 without a trail. Mr. Friedman and Mr.
Markowitz paid $150,000 and Lasergate Systems, Inc. paid $150,000 on July 31,
1998, using outside funding obtained from RBB Bank, AG. The remaining balance of
$12,500 is payable by Lasergate Systems, Inc. on December 31, 1998.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: 27.1 Financial Data Schedule
(b) Reports on Form 8-K: The Company has not filed any reports on Form 8-K
during the quarter ended September 30, 1998.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1998.
-13-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lasergate Systems, Inc.
Registrant
Date: November 16, 1998 /s/ ALFRED P. JONES
-------------------
Vice President
Chief Financial Officer
-14-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 65,179
<SECURITIES> 0
<RECEIVABLES> 272,539
<ALLOWANCES> 118,345
<INVENTORY> 131,333
<CURRENT-ASSETS> 430,422
<PP&E> 535,545
<DEPRECIATION> 328,800
<TOTAL-ASSETS> 3,589,985
<CURRENT-LIABILITIES> 2,323,906
<BONDS> 0
0
171
<COMMON> 458,982
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,589,985
<SALES> 2,711,289
<TOTAL-REVENUES> 2,711,289
<CGS> 1,551,893
<TOTAL-COSTS> 1,549,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,010
<INCOME-PRETAX> (373,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> (373,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (373,904)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
