SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5
on
FORM 10-KSB/A
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 59-2543206
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State or other jurisdiction of (I.R.S. Employer Identification No.)
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
(Title of Class)
Redeemable Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ____
The issuer's revenue for its most recent fiscal year was $4,204,626.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
At January 26, 1998, 7,462,061 shares of Common Stock were outstanding. At
January 26, 1998, the aggregate market value of the Common Stock of Lasergate
Systems, Inc. held by non-affiliates (7,196,718 shares) was $1,236,936.
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Due to the Company's net loss for 1996 of $4,997,962, and its history
of operating losses that have accumulated to $16,783,318, at December 31, 1996,
our independent certified public accountants have qualified their accountants'
report dated March 28, 1997, on the Company's 1996 financial statements as to a
going concern uncertainty. The following commentary within Management's
Discussion and Analysis addresses the Company's operations for 1996 and its plan
to improve future results. These matters are also discussed in Note 3 to the
financial statements.
Since the second quarter of 1994, a number of significant events have
had a material impact upon the Company's operating results and its current and
future prospects. In addition to a change in control and a public offering of
its securities, the changes included replacement of the majority of the Board of
Directors during 1996 and over the course of 1995 and 1996 all of the Company's
senior executives, as well as most of its other personnel. This included the
President/CEO, the Vice President of Finance/CFO (twice), the Vice President of
Development/Operations and the Vice President of Sales. Some of this turnover of
senior executives was encouraged or effected by the Board of Directors.
These events also included two acquisitions (Delta and GIS Systems
Limited Partnership ("GIS") with a combined customer base of over 200 sites, and
various product integration and development efforts)
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and required more than two years of sustained effort and substantial amounts of
capital. At the beginning of 1996, the Company had very little working capital.
This situation grew worse during the first half of the year, resulting in
shipments to customers falling behind schedule because orders for their product
were not placed with vendors, in that the Company had utilized all credit
extended to it by its vendors. Given those circumstances, the Company undertook
two private placements of convertible preferred stock during that time period,
for which the Company received a combined total of $6,623,082, net of
commissions and offering expenses. That capital infusion allowed the Company to
initiate two basic programs designed to move the Company toward profitability.
First was development of a new modular product (Admits) allowing the product to
be customized more easily and installed more efficiently. The second was
committing additional funds to marketing efforts, including a doubling of the
sales force aimed at substantially increasing revenues and potentially moving
the Company beyond the break-even point and towards profitability in the future.
The development effort was immediately focused upon the general
admission product since it would most likely yield the fastest and largest
payback. The core of the product was developed earlier than planned and was in
Beta testing by November 1996. The experience of the development team and the
ability to forego the creation of a detailed program design by utilizing the
software programs of the legacy products as a production plan accelerated
development. With the Company's efforts to satisfy new and existing customer
demands for programming changes to the Delta and GIS products, a substantial
portion of the Company's resources remained dedicated to the legacy products in
all areas: development, installation, customer support, training, documentation,
and marketing. However, the Company kept the general admission development
effort on schedule. At the present time, management believes the Company will
have the new Admits general admission product available for general release by
June 1997.
For most of 1996 the Company employed three or four field sales
representatives. During the fourth quarter of 1996, two systems engineers were
dedicated to providing pre-sales support and an inside sales department was
organized with two inside sales representatives hired initially. During February
and March of 1997, two additional field sales representatives were hired,
bringing the total to six sales personnel. Thus, for most of 1997, the Company
plans to have ten employees dedicated to sales efforts compared to three or four
during 1996.
The result for the Company expanding its sales force and delivering the
new Admits general admission product on schedule should favorably impact upon
revenue during the latter part of 1997. Management believes it can thus achieve
a reduction of the operating loss by the end of 1997 and lay the foundation for
future profitability. Although no assurance can be given, management believes
that sustained expenditure and cash controls, would maintain adequate working
capital through 1997, based upon the further premise that the new general
admission Admits product will be completed as planned by June 1997.
Nevertheless, the Company intends to seek and actively pursue a possible
relationship with a strategic partner, which would include an equity investment
in the Company and may review other financing opportunities.
Results of Operations: 1996 Compared to 1995
REVENUES
Revenues increased to $4,204,626 in 1996 from $2,835,206 in 1995,
representing a 48% increase. Revenues consisted of system sales and
installations of $3,588,383 in 1996 and $2,538,206 in 1995, and
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maintenance and support of $616,243 in 1996 and $300,000 in 1995. The increase
in system sales and installations was primarily attributable to marketing
activities from an increased sales staff, and from the Company's enhanced
products.
In 1996, the Company's principal products, Select-a-Seat, Admits
Platinum, and Admits Gold, represented approximately 33%, 35%, and 16% of
revenues, respectively, compared to 42%, 30%, and 12% of revenues, respectively,
in 1995. By the end of 1997, the Company expects the revenue from Admits
Platinum and Admits Gold to be substantially replaced by revenue from Admits,
the Company's modular Windows7 based general admission product. Maintenance and
support represented 14% of revenues in 1996 and 11% in 1995. While maintenance
and support revenue for 1997 is expected to increase, its percentage of total
revenues is not expected to increase.
In 1996, one customer, Bayindir Insaat Turizm Ticaret, a large, indoor
amusement park in Istanbul, Turkey, represented 12% of revenues. In 1995, no
customers represented 10% or more of revenues.
COST OF REVENUES
Cost of revenues in 1996 and 1995 included the costs associated with
the hardware and software acquired for the Company's customers, the full costs
associated with the engineering and installation of the systems, and the full
costs associated with the provision of customer support, and the amortization of
the capitalized software costs.
Cost of revenues increased to $3,104,792 from $2,902,769. This 7%
increase was the result of costs related to a 48% increase in sales and
increased warranty costs, partially offset by increased efficiencies in
installing products. Warranty provisions for 1996 totaled $568,000 and warranty
work charged against the allowance in 1996 totaled $430,000. The warranty work
was primarily a continuation of the enhancements to original Delta and GIS sites
as discussed in the Company's annual report on Form 10-K for the year ended
December 31, 1995. As a percentage of revenues, cost of revenues in 1996
represented 74% of revenues compared to 102% of revenues in 1995. This
improvement represents more efficient installation and support of products.
Although the sales mix for hardware versus software has been relatively
consistent during 1995 and 1996, it should be noted that the ratio of cost of
revenues-to-revenues is also a function of whether the sales or services are
hardware or software intensive. Hardware sales result in lower gross margins as
hardware is not developed by the Company, but acquired for customers, as is a
small portion of software. Sales of the Company's software and related systems
development activities provide the Company greater gross margins.
DEVELOPMENT COSTS
Development costs increased to $460,709 in 1996 from $348,352 in 1995,
an increase of $112,357, or 32%. As a percentage of revenues, development costs
decreased from 12% in 1995 to 11% in 1996. The Company expects to continue
development efforts in 1997 at about the same level as in 1996, with the
majority of the development effort focused on its new modular products.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $4,547,990 in
1996 from $3,839,581 in 1995, representing a 18% increase. As a percentage of
revenues, these expenses were 108% in 1996 and 135% in 1995, which reflects the
substantial increase in revenues in 1996.
The principal components of the increase in selling, general and
administrative, in 1996 as compared to 1995 are described below:
Sales and marketing expenses increased to $1,273,751 in 1996 from
$1,036,506 in 1995, representing a 23% increase. This increase was attributed to
increased salaries, benefits, and commissions of $467,213, associated with the
Company's additions to the sales force, offset by a reduction of $234,715 in the
amount paid to independent contractors who performed similar functions in 1995.
General and administrative expenses increased to $3,274,239 in 1996
from $2,803,075 in 1995, representing a 12% increase. The principal components
of the increases are increase in shareholder relations expenses, executive
compensation, employee wages, legal fees, and bad debt expense.
WRITE DOWN OF CAPITALIZED SOFTWARE COSTS
In 1996, the Company decided to offer its products in a modular fashion
and the Company commenced the development of the new modular product.
Accordingly, the Company wrote down the value of capitalized software $1,075,000
under the net realizable value determination provisions of SFAS No. 86 Computer
Software to be Sold, Leased, or Otherwise Marketed. (See Note 7 to the financial
statements). In 1995, there was no write down of assets.
OTHER INCOME (EXPENSE)
Interest expense was $45,061 in 1995. Due to the funds received from
the private offering in June 1996, the Company paid off its debt and invested
the remaining funds, earning net interest income in 1996 of $53,577.
Net other income/(expense) represented $67,674 of expense in 1996 as
compared to $93,775 of income in 1995. The decrease is primarily due to the
results of operations of the Company's joint venture in Australia with P.M.S.I.
Group Pty. Limited. The company's share of the joint venture's net
earnings/(loss) from operations was a $77,790 loss in 1996 compared to earnings
of $48,060 in 1995.
INCOME TAXES
The Company currently has a substantial net operating loss carryforward
for which the Company has not recognized a tax benefit due to the uncertainty
related to when and how much of the tax benefits will be ultimately realized
(See Note 10 to the financial statements).
NET LOSS
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Net loss increased to $4,997,962 in 1996 from $4,206,782 in 1995. The
Company's operations were affected by various factors as discussed above with
the largest component being a one-time write down of capitalized software in the
amount of $1,075,000.
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 nondetachable 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 restated the financial statements to
recognize the intrinsic value of beneficial conversion features of preferred
stock as dividends to preferred shareholders (see Note 17). 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 $2,836,353 for 1996 and
$1,534,445 for 1995, the net loss per common share is $(1.29) for 1996 and
$(1.90) for 1995.
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
SFAS No. 123, Accounting for Stock Based Compensation was implemented
during 1996. The affect upon the Company's financial statements was immaterial.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of was implemented during 1996. The effect
upon the Company's financial statements was immaterial.
FINANCIAL CONDITION: 1996 COMPARED TO 1995
Total assets remained relatively constant at $6,436,945 on December 31,
1996, from $6,406,236 on December 31, 1995, representing an increase of $30,709,
or less than 1%. This includes an increase in cash of $1,268,319 as a result of
two private placements and a decrease in systems and software costs of
$1,173,928, primarily due to a write-down of these costs.
Total liabilities decreased to $3,320,392 on December 31, 1996, from
$4,719,465 on December 31, 1995, representing a decrease of $1,399,073, or 30%.
The principal contributing factors to the decrease are the repayment of notes
payable of $300,000 and the repayment of the promissory notes payable to
stockholders with conversion futures, which had a balance of $2,324,335
partially offset by increases in deferred revenue, accrued warranty costs, and
accrued expenses. (See Note 4 to the financial statements and Liquidity and
Capital Resources below).
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flow for
1996 and 1995:
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1996 1995
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Net cash used in operating activities $(2,282,971) $(2,833,237)
Net cash used in investing activities (228,663) (708,917)
Net cash provided by financing activities 3,779,953 2,608,823
Net increase (decrease) in cash and cash $ 1,268,319 $ (933,331)
equivalents
The Company used cash of $2,282,971 in 1996 and $2,833,237 in 1995 for
operating activities. From its inception in October 1985 through December 31,
1996, the Company has incurred cumulative losses of $16,783,318, with a loss of
$4,997,962 for the year ended December 31, 1996. The company's net loss in 1996
was due primarily to expenditures related to the factors referred to under the
caption Results of Operations: 1996 Compared to 1995 above. Included in the net
loss for 1996 were non-cash expenses totaling $2,006,626, which included (I) a
write-down of capitalized software costs of $1,075,000; (ii)
depreciation/amortization expenses of $513,153; and (iii) equity-related
transactions totaling $229,686 of compensation expense recognized as a result of
the issuance of stock in 1996 and the grant of stock options in 1994. Cash that
was used to purchase items classified as current assets totaled $426,428 with
accounts receivable increasing by $540,617, investment in inventories decreasing
by $70,763, and prepaid expenses decreasing by $43,426. These uses of cash were
offset by an increase in accounts payable and accrued expenses of $764,362, an
increase in accrued warranty costs of $273,919, and an increase in deferred
revenue of $180,110.
The Company used cash in investing activities in the amount of $228,663
in 1996, which was used for additions to property, equipment, and software
costs, and used cash in investment activities in the amount of $708,917 in 1995,
principally related to the loan to GIS stockholders of $559,000.
The Company was provided cash by financing activities of $3,779,953 in
1996 and $2,608,823 in 1995. The Company relied on net proceeds from public and
private offerings and loans and advances from related parties to fund its
operations during 1996 and 1995. Two private offerings in 1996 and a private
offering in 1995 provided $6,623,082 and $1,870,976, respectively.
In 1995, the Company borrowed $859,505, consisting of $559,505 as an
unsecured cash advance from two former shareholders as evidenced by a promissory
note due October 1996, at an annual interest rate of 8% and $300,000 as an
additional unsecured cash advance from the same parties evidenced by a
convertible secured promissory note due March 30, 1996, at an annual interest
rate of 9.5%. In June 1995, the Company issued 79,950 shares of its Series A
Preferred Stock in satisfaction of the $559,505 promissory note and $200,000 of
additional note payables outstanding since 1994.
In February 1995, the Company acquired substantially all of the assets
of GIS for an aggregate consideration of approximately $3,700,000. The purchase
price consisted of 109,333 shares of the Company's Common Stock valued at
$765,331, 111,800 shares of the company's Series B Preferred Stock valued at
$559,000, and the Company's unsecured, non-interest-bearing promissory notes in
the aggregate amount of $2,324,335. In addition, the Company agreed to assume
certain liabilities of GIS and loaned GIS $559,000 as evidenced by a promissory
note from GIS due March 31, 1996, which was secured by the pledge to the Company
of the 111,800 shares of the Company's Series B Preferred Stock.
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On March 11, 1996, the Company and GIS Systems Limited Partnership
executed an agreement whereby the parties agreed, among other things, to settle
the remaining obligation to GIS totaling $2,324,335, cancel the $559,000 note
receivable from GIS, cancel the $199,359 account receivable from GIS, and redeem
the 109,333 shares of Common Stock and 111,800 shares of Series B Preferred
Stock previously issued to GIS. In connection therewith, the Company agreed to
pay to GIS the sum of $1,550,000.
The cash payment of $1,550,000 made to GIS on April 12, 1996, the date
of closing, was principally provided from the net proceeds of the April 1996
Private Placement described below.
On March 27, 1996, the Company commenced a Private Placement of the
Company's newly established Series E Preferred Stock at $10.00 per share and
completed the private placement as of April 22, 1996. The Company received
$1,450,582, net of commissions and offering expenses, for the sale of 162,500
shares of preferred stock. As of June 28, 1996, 150,000 shares of the Series E
Preferred Stock had been converted into 2,453,686 shares of the Company's Common
Stock.
On June 10, 1996, the Company commenced a Private Placement of 8,000
shares, at $750 a share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the Private Placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 such shares. Also, on June 27, 1996, the Company used $300,000 of the
proceeds of the Series F Preferred Stock Private Placement to pay off the notes
payable to related parties and on June 28, 1996, the Company used $1,000,000 of
the proceeds to redeem 95,950 shares of Series A Convertible Preferred Stock
held by the same party. These preferred shares were convertible into 1,879,837
shares of Common Stock and potentially convertible into as many as 2,590,650
shares of Common Stock had they not been redeemed (plus additional shares for
any dividends which would have accrued).
Each share of Series F Preferred Stock is also convertible into the
Company's Common Stock, at a conversion price that is tied to the trading price
of the Company's Common Stock at the time of conversion; provided, however, that
for purposes of such conversion, a trading price that is less than $.45 per
share, will be deemed to be $.45 and a trading price that is more than $1.00 per
share will be deemed to be $1.00. On January 27, 1997, 55 Series 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 request date.
Upon payment of the $300,000 note and redemption of the Series A
Convertible Preferred Stock, each of which was held by the same private
investors, three members of the Company's board of directors (Stewart L. Krug,
Lawrence W. Umstadter, and Timothy E. Mahoney) who were nominated by such
private investors and served at their request, resigned from the board. The
company filled the vacancies created by such resignations by appointing three
new directors. (Bruce D. Barrington, John J. Chluski, and Philip P. Signore)
While no assurances can be given, management believes that the current
organization infrastructure and the Company's products are sufficient to support
revenues greater than the levels achieved in 1996, and that income from
operations should continue to progress throughout 1997, such that the net loss
in 1997 should be less than the net loss in 1996.
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ITEM 7. FINANCIAL STATEMENTS
Following this page are the Company's financial statements for the year
ended December 31, 1996 which include the following items:
Page
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Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of
December 31, 1996 and December 31, 1995 F-2
Consolidated Statements of Operations for the years ended
December 31, 1996 and December 31, 1995 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996 and December 31, 1995 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and December 31, 1995 F-5
Notes to Consolidated Financial Statements F-7
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PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of Amendment No. 1 to the Company's
Quarterly Report on Form 10-QSB, File No. 0-15873, for the quarter
ended June 30, 1996).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.4 of the
Company's Annual Report on Form 10-K, File No. 0-15878, for the year
ended December 31, 1994).
4.1 Form of Subscription Agreement for Series D Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-KSB, File No. 0-15873, for the year ended December
31, 1995).
4.2 Form of Subscription Agreement for Series E Preferred Stock
(incorporated by reference to Exhibit 4.2 of the Company's Annual
Report on Form 10-KSB, File No. 0-15873, for the year ended December
31, 1995).
4.3 Form of Subscription Agreement for Series F Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-QSB, File No. 0-15873, for the quarter ended June
30, 1996).
4.4 Form of Registration Rights Agreement with Respect to the Purchase of
Shares of Series F Preferred Stock (incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K, File No.
0-15873, for the year ended December 31, 1995).
10.1 Lease, dated as of February 20, 1995, between the Company and 28050
Corporate Square Associates, L.P. (incorporated by reference to
Exhibit 10.2 of the Company's Annual Report on Form 10- K, File No.
0-15873, for the year ended December 31, 1994).
10.2 Stock Purchase Agreement by and among 1103065 Ontario Inc., Delta
Information Services, Inc., James Potter, Marion Audrey Potter and
Derek Betty (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated December 22, 1994, File No. 0-15873).
10.3 Registration Rights and Put Agreement by and among James Potter,
Marion Audrey Potter, Derek Betty and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K dated December
22, 1994, File No. 0-15873).
10.4 Asset Purchase Agreement by and between the Company and GIS Systems
Limited Partnership (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.5 Series B Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.1 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
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10.6 Series C Promissory Note made by the Company payable to GIS Systems
Limited Partnership (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.7 Promissory Note made by GIS Systems Limited Partnership payable to
the Company (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.8 The Series B Preferred Stock Pledge and Call Agreement by and among
the Company, GIS Systems Limited Partnership and NationsBank of
Florida, N.A. (incorporated by reference to Exhibit 99.4 to the
Company's Form 8-K dated February 15, 1995, File No. 0-15873).
10.9 Consulting Agreement by and between the Company and Fred Maglione
(incorporated by reference to Exhibit 99.5 to the Company's Form 8-K
dated February 15, 1995, File No. 0-15873).
10.10 Consulting Agreement between James Potter, 1103065 Ontario Inc. and
the Company (incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K dated December 22, 1994, File No. 0-15873).
10.11 Letter Agreement among the Company, GIS Systems Limited Partnership,
Nicholas Flaskay, and Fred Maglione (incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10- KSB, File
No. 0-15873, for the year ended December 31, 1995).
10.12 Employment Agreement of Jacqueline E. Soechtig (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form
10-K, File No. 0-15873, for the year ended December 31, 1994).
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of the Company's Annual Report on Form 10-K, File No. 0-15873,
for the year ended December 31, 1994).
27.1* Financial Data Schedule
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* Filed herewith.
For the Company's financial statements for the period ended December
31, 1996, see Part II, Item 7 of this Report on Form 10-KSB.
(b) Reports on Form 8-K.
None
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CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LASERGATE SYSTEMS, INC.
AND SUBSIDIARIES
December 31, 1996 and 1995
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TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants................. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995....... F-2
Consolidated Statement of Operations for the Years
Ended December 31, 1996 and 1995................................. F-3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 1996 and 1995............................... F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995................................. F-5
Notes to Consolidated Financial Statements......................... F-7
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lasergate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Lasergate Systems, Inc. and Subsidiaries as of December 31, 1996, and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating an overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lasergate Systems,
Inc. and Subsidiaries at December 31, 1996, and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared, assuming that
the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $4,997,962 during the year ended
December 31, 1996, and, as of that date, the Company has an accumulated deficit
of $16,783,318. The Company has historically relied on net proceeds from public
and private offerings and loans and advances from related parties to fund its
operations. Management believes that additional monies from these sources will
not be necessary to fund its operations in 1997. However, the Company's
operating loss history raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As described in Note 17 to the financial statements, the Company's
previously issued financial statements for 1996 and 1995 have been restated to
account for preferred stock dividends which are based on the intrinsic value of
the beneficial conversion features of the Company's preferred stock.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
March 28, 1997
(Except for Note 17 as to which the date is February 13, 1998)
F-1
<PAGE>
<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,924,825 $656,506
Accounts receivable, net of allowance for
doubtful accounts of $147,000 and $36,000 868,931 439,311
Account receivable, related party - 199,359
Inventories 254,901 325,664
Prepaid expenses 40,966 84,392
------ ------
Total current assets 3,089,623 1,705,232
--------- ---------
Property and equipment, net 304,024 246,568
Systems and software costs, net of write down and amortization
of $1,525,856 and $283,333 242,739 1,416,667
Goodwill, net of amortization of $265,568 and $132,579 2,382,705 2,515,694
Customer lists and support contracts, net of amortization of $141,667 and $70,833 283,333 354,167
Other assets, net 134,521 167,908
------- -------
Total assets $6,436,945 $6,406,236
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, related parties $ - $ 300,000
Notes payable, other 28,628 21,757
Accounts payable, trade 542,671 634,863
Deferred revenues 909,516 729,406
Accrued warranty costs 570,919 297,000
Accrued expenses 1,128,658 272,104
--------- -------
Total current liabilities 3,180,392 2,255,130
Promissory notes payable, stockholders with conversion futures - 2,324,335
Obligations to issue common stock 140,000 140,000
------- -------
Total liabilities 3,320,392 4,719,465
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares
authorized, 8,000 and 387,750 shares issued and
outstanding at December 31, 1996 and 1995, respectively 240 11,633
Common stock, $.03 par value, 20,000,000 shares authorized,
7,362,061 and 3,125,013 issued and outstanding at
December 31, 1996 and 1995, respectively 220,862 93,751
Additional paid-in capital 19,818,769 14,065,743
Less: Common stock, $.03 par value, 20,000 shares
at December 31, 1996 and 1995, respectively,
subject to put options (140,000) (140,000)
Notes receivable, stockholders - (559,000)
Accumulated deficit (16,783,318) (11,785,356)
----------- -----------
Total stockholders' equity 3,116,553 1,686,771
--------- ---------
Total liabilities and stockholders' equity $ 6,436,945 $6,406,236
============= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31,
Restated (see Note 17)
1996 1995
----------- -----------
Revenues $ 4,204,626 $ 2,835,206
Operating Expenses:
Cost of revenues 3,104,792 2,902,769
Development 460,709 348,352
Selling, general and administrative 4,547,990 3,839,581
Write down of capitalized software costs 1,075,000 --
----------- -----------
Operating loss (4,983,865) (4,255,496)
Other income (expense)
Interest income (expense) 53,577 (45,061)
Other, net (67,674) 93,775
----------- -----------
Loss before income taxes (4,997,962) (4,206,782)
Income taxes -- --
Net loss $(4,997,962) $(4,206,782)
Dividends to preferred shareholders
(intrinsic value of beneficial conversion
features - see Note 17) (2,836,353) (1,534,445)
---------- ----------
Net loss available to common shareholders $(7,834,315) $(5,741,227)
========== ==========
Net loss per Common Share $ (1.29) $ (1.90)
=========== ===========
Weighted Average Common Stock Outstanding 6,063,633 3,023,346
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Common
Stock Notes
Additional Subject Receivable
Par Par Paid-In to Put Stock- Accumulated
Shares Value Shares Value Capital Option holders Deficit
------ ----- ------ ----- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 36,364 $ 1,091 2,913,680 $87,412 $9,258,563 $(210,000) $(7,578,574)
Issuance of common stock and Series B
preferred stock in connection
with GIS acquisition 111,800 3,353 109,333 3,279 1,317,697
Less: note receivable collateralized by
preferred stock (559,000)
Issuance of Series D preferred stock less
offering expenses of $215,024 208,600 6,258 2,987,949
Preferred stock dividend, Series D (intrinsic
value of beneficial conversion features) (1,123,231)
Grants of stock options for executive
compensation 937,250
Conversion of Series D preferred to common
stock (28,600) (858) 110,000 3,300 (2,442)
Issuance of Newly Designated Series A
preferred stock in satisfaction of note
payable, related party 79,950 2,400 1,099,749
Preferred stock dividend, Series A (intrinsic
value of beneficial conversion features) (342,643)
Exchange of newly designated Series A for
previously designated Series A preferred
stock:
Previously Designated Series A Shares
redeemed (36,364) (1,091)
Newly Designated Series A Shares issued 16,000 480 69,182
Preferred stock dividend, Series A (intrinsic
value of beneficial conversion features) (68,571)
Issuance of common stock under stock option
plan 2,000 60 1,940
Exercise of common stock put option (10,000) (300) (69,700) 70,000
Net loss - - - - - - - (4,206,782)
------- ------- --------- ------- ----------- --------- --------- ------------
BALANCE, DECEMBER 31, 1995 387,750 $11,633 3,125,013 $93,751 $14,065,743 $(140,000) $(559,000)$(11,785,356)
------- ------- --------- ------- ----------- --------- --------- ------------
Retirement of Common Stock and Series B
preferred stock in settlement of acquisition
obligations (111,800) (3,355) (109,333) (3,279) 22,609 559,000
Issuance of Series E preferred stock 162,500 4,875 2,142,136
Preferred stock dividend, Series E (intrinsic
value of beneficial conversion features) (696,429)
Issuance of Series F preferred stock 8,000 240 7,312,184
Preferred stock dividend, Series F (intrinsic
value of beneficial conversion features) (2,139,924)
Redemption of Series A preferred stock (95,950) (2,878) (997,121)
Conversion of Series D preferred to common
stock (180,000) (5,400) 1,673,479 50,204 (44,804)
Conversion of Series E preferred to common
stock (162,500) (4,875) 2,627,902 78,836 (73,961)
Issuance of common stock as compensation 45,000 1,350 40,836
Grant of stock options for
Executive compensation 187,500
Net loss (4,997,962)
------- ------- --------- ------- ----------- --------- --------- ------------
BALANCE, DECEMBER 31, 1996 8,000 $ 240 7,362,061 $220,862 $19,818,769 $(140,000) $ - $(16,783,318)
======= ======= ========= ======= =========== ========= ========= ============
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
<TABLE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<CAPTION>
1996 1995
------ ------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(4,997,962) $(4,206,782)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 513,153 575,985
Write down of capitalized software costs 1,075,000 -
(Gain) loss in joint venture 77,790 (48,060)
Increase in allowance for doubtful accounts 110,997 19,000
Obligations to issue options granted as - (75,000)
compensation for services
Compensation recognized from issuance of stock and grand of stock options 229,686 562,250
Decrease (increase) in:
Accounts receivable, trade (540,617) (305,782)
Accounts receivable, related party -- (199,359)
Inventories 70,763 (115,022)
Prepaid expenses 43,426 53,028
Other (83,598) 87,025
Increase (decrease) in:
Accounts payable and accrued expenses 764,362 136,149
Accrued warranty costs 273,919 15,925
Deferred revenue 180,110 667,406
---------- ----------
Net cash used in operating activities (2,282,971) (2,833,237)
---------- ----------
Cash flows from investing activities:
Net additions to property, equipment, and software costs (228,663) (121,772)
Loans to GIS stockholders related to GIS acquisition - (559,000)
Other acquisition costs - (28,145)
---------- ----------
Net cash used in investing activities (228,663) (708,917)
---------- ----------
Cash flows from financing activities:
Proceeds from secondary public or private offering, net of 6,623,082 1,870,976
offering costs
Proceeds from exercise of warrants/stock options - 2,000
Repurchase of common stock subject to put option - (70,000)
Redemption of preferred stock (1,000,000) -
Settlement of acquisition obligations (1,550,000) -
Proceeds from loans, other 30,200 36,924
Repayment of loans, other (23,329) (90,077)
Proceeds from loans, related parties - 859,000
Repayment of loans, related parties (300,000) -
---------- ----------
Net cash provided by financing activities 3,779,953 2,608,823
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,268,319 (933,331)
---------- ----------
Cash and cash equivalents, beginning of year 656,506 1,589,837
---------- ----------
Cash and cash equivalents, end of year $ 1,924,825 $ 656,506
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1996 and 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
Year ended December 31,
-----------------------
1996 1995
---- ----
Interest $17,494 $31,155
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1995:
The Company acquired substantially all the assets of GIS Systems
Limited Partnership for total consideration of approximately $3,700,000 (common
stock of $765,331, preferred stock of $559,000, and promissory note of
$2,324,335) and recorded assets at aggregate fair value of approximately
$3,750,000, with assumed payables of approximately $50,000 (see Note 4).
The Company issued 79,950 shares of preferred stock in satisfaction of
related party notes payable of $759,505.
The Company recognized $1,534,445 of preferred dividends for 1995 based
on the intrinsic value of beneficial conversion features (see Note 17).
1996:
In March 1996, the Company settled its acquisition obligation with GIS
(see Note 10) as follows:
Promissory notes payable, stockholders $2,324,335
Less:
Cash payment 1,550,000
---------
Accounts receivable canceled 199,359
Note receivable canceled 559,000
Retirement of common and preferred stock 15,976
---------
$ -
=========
The Company recognized $2,836,353 of preferred dividends for 1996
based on the intrinsic value of beneficial conversion features (see Note 17).
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - DESCRIPTION OF BUSINESS
Lasergate Systems, Inc. (the "Company") was organized and incorporated
in the State of Florida in 1985. The Company is engaged in the development,
assembly, marketing, servicing and installation of admission control and revenue
accounting systems for both general admission and reserved seating. These
systems are used primarily at amusement parks, theme parks, water parks,
museums, aquariums, zoos, casinos, ski resorts, night clubs, theaters,
professional and university athletic and multi-purpose arenas, and other public
facilities, including state, county and local fairs, movie theaters, race tracks
and golf courses.
The Company's principal products "Select-a-Seat", "Admits Platinum" and
"Admits Gold", represent approximately 33%, 35% and 16% of revenues in 1996,
respectively, and 42%, 30%, and 12% of revenues in 1995, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. These
estimates are a major factor in providing for warranty costs, doubtful accounts
valuation of intangibles litigation, and certain taxes which are further
described herein. While actual results could differ from those estimates,
management does not expect the variances, if any, to have a material effect on
the financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are reported net of allowance for doubtful
accounts. At least quarterly, management reviews the collection status of its
accounts and provides an appropriate allowance, if necessary. Based on these
reviews, management believes that its accounts at December 31, 1996 and 1995 are
reasonably stated.
F-7
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined principally by the use of the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being
provided using the straight-line method over the estimated economic useful lives
(3-5 years) for financial statement and income tax purposes.
SYSTEMS AND SOFTWARE COSTS
Systems and software costs represent the fair values assigned in
connection with the Company's acquisition of Delta and GIS in December 1994 and
January 1995 (see Note 4) as adjusted by a one-time write-down of $1,075,000
during 1996. Such costs are amortized on a product-by-product basis. The annual
amortization expense is the greater of the amount computed using the ratio that
current gross revenues for each product bear to the total of current and
anticipated future gross revenues for that product or the straight-line method
over the remaining estimated economic life (6 years) of the product.
All development costs are capitalized once technological feasibility
has been achieved on a product until the product is released for general sale,
at which time, only the costs of development of significant additions to a
product's features and functions are capitalized. Technological feasibility is
determined on a project by project basis. For the software which the Company is
reporting upon, technological feasibility is defined to be the creation of a
working model which was created by December 1996. Thus, the Company's
expenditures related to the development of its systems and software prior to
December 1996, along with the cost to integrate GIS and Delta products with the
Company's products in 1996 and 1995, have been expended and included in
development costs. No amounts have been capitalized by the Company during 1996
and 1995, except those recorded as a result of the GIS and Delta acquisitions,
and approximately $25,000 during the fourth quarter of 1996 (See Note 7), since
either the amounts qualifying for capitalization under Statement of Financial
Accounting Standards (SFAS) No. 86 "Accounting for Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" once technological feasibility (as
defined) has been achieved, have been insignificant or the customer specifically
funded the development of the unique and discrete systems and software through
the customer contract.
During 1996, the Company decided to convert all of their products
into one modular Windows(R) based product. Accordingly, the softwares carrying
values were written down $1,075,000 to approximately $200,000, representing the
software's estimated net realizable value. (See Note 7.) Amortization of system
and software costs in 1996 and 1995, exclusive of the write down discussed
above, was $167,523, and $283,333 and is included in Cost of Revenues. In
previous financial statements, these costs were included as a component of
Selling, General, and Administrative Expense, and accordingly, those financial
statement amounts have been reclassified.
F-8
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES
Intangibles which were recognized in connection with the Company's
acquisition of GIS and Delta in 1995 and 1994, respectively, relate to systems
and software costs (see above), non-competition agreements, customer list and
support contracts, and goodwill. Such costs have been and are being amortized
using the straight-line method over their respective estimated useful lives:
systems and software costs (see above), non-competition agreements--three (3)
years, customer list and support contracts--six (6) years, and goodwill--twenty
(20) years. Amortization expense (exclusive of software) for 1996 and 1995 was
$232,156 and $231,745, and is included in selling, general and administrative
expenses. Management reviews, at least on a quarterly basis, whether or not any
impairment has occurred with respect to such acquired intangibles which could
warrant an adjustment to the carrying values. Undiscounted cash flow projections
associated with the acquired business is the primary focal point in the
assessment and analysis for potential impairment. During 1996 and 1995, no
impairment was identified exclusive of the write down of software costs
discussed above.
INVESTMENT IN JOINT VENTURE
The Company uses the equity method of accounting for its 50% investment
in Lasergate Systems Asia-Pacific Pty. Limited. At December 31, 1996 and 1995,
and for the years then ended, the joint venture's assets, liabilities and
results of operations are not significant. The Company's share of the joint
venture's net (loss) from operations for 1996 and 1995 was ($77,790) and
$48,060, respectively, and was classified in other income/expense in the
accompanying consolidated financial statements for 1996 and 1995. The net
carrying value of the Company's investment in/advances to the joint venture at
December 31, 1996, and 1995, was $0 and $77,790, respectively, and was
classified in other assets. The Company has not guaranteed any of the joint
venture's liabilities nor does the Company have any commitments to fund its
operations. The Company intends to dissolve this joint venture as of June 30,
1997.
WARRANTY COSTS AND WARRANTY LIABILITY (ALLOWANCE)
The Company has historically offered a three month warranty for its
products. For the period commencing after the end of the warranty period, the
Company had offered its customers a maintenance and service contract for an
annual fee. However, both companies acquired, Delta and GIS, offered a one year
warranty period followed by a maintenance and service contract. The Company
continued the one year warranty practice into 1996. Effective June 1, 1996 the
Company returned to its original 90-day warranty period. This warranty period
primarily relates to telephone support of customers. The related costs are
charged to cost of revenues as incurred.
At December 31, 1995, the Company had an accrued warranty liability
(warranty allowance) of $297,000, which had been provided to cover the cost of
enhancements to be made (free of charge) to systems installed in prior periods.
However, some of these modifications were more costly to perform than originally
estimated, and the Company has committed to make similar enhancements for
additional customers. As a result, an additional $487,000 was accrued during
1996 in order to provide for the cost of completing all known warranty claims.
In addition, during 1996, management reviewed all warranty costs incurred within
the past year, which had been provided for by estimating and recording known
warranty liabilities each quarter. Based on this review and management's
expectation that the number of installations will continue
F-9
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
to grow and, therefore, make it more difficult to review all installations
individually, management began providing for warranty costs by accruing a
warranty allowance of 5% of revenues. During 1996, this amounted to $81,000. The
balance of the accrued warranty allowance at December 31, 1996, was $571,000.
Management believes 5% is a conservative estimate of these costs (which are
unknown at time of sale) but will continue to monitor them to ensure they are
provided for on a current basis in order to match the cost with the associated
revenue.
Provisions for the warranty allowance are classified as cost of
revenues.
While warranty modifications are often enhancements that may result in
future product and service revenues, no absolute assurance can be given at this
time.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, and December 31, 1995, the carrying amount of
cash, accounts receivable, accounts payable and accrued expenses and notes
payable, approximate fair value because of the short-term maturities of these
assets and liabilities.
REVENUE RECOGNITION
Revenues from the sale of equipment, which have been predominately
under short-term contracts during the periods presented herein, are recognized
upon the acceptance of the system by the customer provided that no significant
vendor or post-contract support obligations remain outstanding and collection of
the resulting receivable is probable. Revenues from special sales sold under
evaluation periods are recognized at the end of this period.
Revenues from post contract customer support maintenance are recognized
ratably over the maintenance period if collectibility is probable.
Revenues include product sales and service revenues. Service revenues
represent approximately 14% and 11%, respectively, of total revenues in 1996 and
1995.
Deferred revenues include customer deposits of $335,467 and $384,731
and advanced billings in accordance with contract terms of $418,063 and $344,675
at December 31, 1996 and 1995, respectively.
Cost of revenues includes the costs associated with the hardware and
software acquired for the Company's customers and the estimated full costs
associated with the engineering (mostly software customization) and installation
of the system. Cost of revenues also includes the estimated full cost related to
support and maintenance. The Company refined its procedures for capturing and
reporting such information in 1996. This refinement affected the comparability
of the information being reported. Thus, cost of revenues, development costs,
and selling, general and administrative expenses were reclassified for 1995,
using the same basis as that used for 1996. The Company believes that the
estimated full costs are reasonably stated and classified in all material
respects.
F-10
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
During 1996 and 1995, certain of the Company's contracts with
customers afforded the Company the opportunity to develop products for their
customers which were also new products for the Company not subject to exclusive
arrangements with those customers. The resulting cost of those products is
included in development costs versus cost of revenues along with other
development costs related to enhancement of the Company's existing products
during 1996 and 1995.
RECLASSIFICATIONS
Certain reclassifications of accounts and amounts have been made to the
1995 financial statements to conform to the 1996 presentation.
INCOME TAXES
Under the liability method specified in Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of
shares outstanding during the periods. Common stock equivalents (options and
warrants) and the effect of the convertible securities were not included in the
calculation of net loss per share because they were antidilutive. 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 17).
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity along with goodwill should be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected future cash flows (undiscounted and
without interest) is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of that loss would be based on the fair value of
the asset. SFAS No. 121 also generally requires long-lived assets and certain
identifiable intangibles to be disposed of to be reported at the lower of the
carrying amount or the fair value less cost to sell. The adoption of SFAS No.
121 had an insignificant effect on the Company's financial statements.
Effective January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock Based Compensation. For employee stock awards, as allowed
by SFAS No. 123, the Company has elected to continue using the accounting method
promulgated by the Accounting Principals Board Opinion No. 25. Accounting for
Stock Issued to Employees to measure compensation. As a result, SFAS No. 123
proforma disclosures are required in these financial statements. The adoption of
SFAS No. 123's accounting and reporting provisions had an insignificant effect
on the Company's financial statements (see Note 13).
F-11
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The Company has a net loss for 1996 of $4,997,962, and a history of
operating losses that have accumulated to $16,783,318, at December 31, 1996. In
view of these matters, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operation of the Company, which in turn is dependent upon the Company's ability
to succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence. The following commentary
addresses the Company's operations for 1996 and its plan to improve future
results.
Since the second quarter of 1994, a number of significant events have
had a material impact upon the Company's operating results and its current and
future prospects. In addition to a change in control and a public offering of
its securities, the changes included replacement of the majority of the Board of
Directors during 1996 and over the course of 1995 and 1996 all of the Company's
senior executives, including the President/CEO (October 1994) as well as most of
its other personnel. They also included two acquisitions (Delta and GIS Systems
Limited Partnership (GIS)) with a combined customer base of over 200 sites, and
various product integration and development efforts.
These changes required more than two years of sustained effort and
substantial amounts of capital. At the beginning of 1996, the Company had very
little working capital. This situation grew worse during the first half of the
year, resulting in shipments to customers falling behind schedule because orders
for their product were not placed with vendors, in that the Company had utilized
all credit extended to it by its vendors. Given these circumstances, the Company
undertook two private placements of convertible preferred stock during that time
period, for which the Company received a combined total of $6,623,082, net of
commissions and offering expenses. That capital infusion allowed the Company to
initiate two basic programs designed to move the Company toward profitability.
First was development of a new modular product (Admits) allowing the product to
be customized more easily and installed more efficiently. Second committing
additional funds to marketing efforts, including a doubling of the sales force
aimed at substantially increasing revenues and potentially moving the Company
beyond the break-even point and towards profitability in the future.
The development effort was immediately focused upon the general
admission product since it would most likely yield the fastest and largest
payback. The core of the product was developed earlier than planned and was in
Beta testing by November 1996. The experience of the development team and the
ability to forego the creation of a detailed program design by utilizing the
software programs of legacy products as a production plan accelerated
development. With the Company's efforts to satisfy new and existing customer
demands for programming changes to the Delta and GIS products (see discussion of
warranty costs and warranty liability in Note 2 of the financial statements),
required keeping a substantial portion of the Company's resources dedicated to
the legacy products in all areas: development, installation, customer support,
training, documentation, and marketing. However, the Company kept the general
admission development effort on schedule. At the present time, management
believes the Company will have the new Admits general admission product
available for general release by June 1997.
F-12
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 3 - OPERATIONAL AND FUNDING MATTERS (continued)
For most of 1996 the Company employed three or four field sales
representatives. During the fourth quarter of 1996, two systems engineers were
dedicated to providing pre-sales support and an inside sales department was
organized with two inside sales representatives hired initially. During February
and March of 1997, two additional field sales representatives were hired,
bringing the total to six sales personnel. Thus, for most of 1997, the Company
plans to have ten employees dedicated to sales efforts compared to three or four
during 1996.
The result for the Company expanding its sales force and delivering
the new Admits general admission product on schedule should favorably impact
upon revenue during the latter part of 1997. Management believes it can thus
achieve a reduction of the operating loss by the end of 1997 and lay the
foundation for future profitability. Although no assurance can be given,
management believes that sustained expenditure and cash controls, would maintain
adequate working capital through 1997, based upon the further premise that the
new general admission Admits product will be completed as planned by June 1997.
Nevertheless, the Company intends to seek and actively pursue a possible
relationship with a strategic partner, which would include an equity investment
in the Company and may review other financing opportunities.
Although revenues increased to $4,204,626 in 1996 from $2,835,206 in
1995, increased costs more than offset the increased revenues, such that the net
loss increased from $4,206,782 in 1995 to $4,997,962 in 1996. The largest
component of the increase was a one-time write-down of capitalized software in
the amount of $1,075,000.
Although no assurances can be given, based on actual sales for the
first three months of 1997 (unaudited) and committed sales orders to date
(unaudited), revenues for 1997 will be at least at the level achieved in 1996,
with greater revenues being targeted. The foregoing is a forward looking
statement contingent upon no cancellation of existing sales orders and the
receipt of future sales orders at the current rate.
The Company continues to incur net losses and negative cash flows.
However, management still expects to realize the carrying value of goodwill
($2,382,705 at December 31, 1996) through the receipt of future cash flows
(undiscounted). The elements of goodwill still remain. These are the value of
the acquired market share, market acceptance, product name, proprietary
knowledge, and industry expertise which the Company has acquired and has
substantially maintained. Management's last quarterly review of intangibles
indicated no new events which would necessitate changes to the carrying values
or useful lives of any intangible assets.
NOTE 4 - ACQUISITION OF BUSINESSES
On February 15, 1995, effective January 1, 1995 (the date control
transferred), the Company acquired substantially all of the assets of GIS
Systems Limited Partnership ("GIS"). The purchase price for the acquisition was
valued at approximately $3,700,000. The purchase price consisted of 109,333
shares of the Company's common stock valued at $765,331, 111,800 shares of the
Company's Series B Preferred Stock valued at $559,000, the Company's promissory
note in the principal amount of $591,000 (see Note 9) and the Company's
promissory note in the principal amount of $1,733,335 (see Note 9). In addition,
the Company agreed to assume certain liabilities of GIS (aggregating $45,718)
and loaned GIS $559,000 (see
F-13
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 4 - ACQUISITION OF BUSINESSES (continued)
paragraph below). Direct acquisition costs aggregating $82,744 (principally
legal and accounting fees) were incurred in connection with the acquisition. The
promissory notes, totaling $2,324,335, were convertible into preferred stock and
derived their valuation from the underlying preferred stock. The common stock
valuation of $7.00 per share and the preferred stock valuation of $5.00 per
share reflected the agreed-upon price between the buyer and sellers and was
approved by the Company's Board of Directors after giving effect to such factors
as the restrictions and the size of the blocks of common and preferred stock.
The loan of $559,000 to GIS evidenced by a promissory note was secured
by the 111,800 shares of the Company's Series B Preferred Stock and was due
March 31, 1996. The sellers had the option of returning preferred stock if the
assignable call provision of $5.00 per share was not exercised. Accordingly, the
note receivable was presented as a reduction of stockholders' equity.
See Note 9 for discussion about the settlement of the acquisition
obligations.
The total purchase price of GIS was allocated based on fair value of
net tangible assets acquired, with the excess allocated to identifiable
intangible components based on their individual estimated fair values and the
remainder was allocated to goodwill.
The purchase price, including the direct acquisition costs, was
allocated as follows:
Inventory $ 85,962
Prepaid expenses and other current assets 20,472
Fixed assets 87,581
Accounts payables assumed (45,718)
Systems and software costs 1,200,000
Customer list and support contracts 300,000
Goodwill 2,083,113
---------
$ 3,731,410
============
On December 22, 1994, Lasergate Systems Canada Company a wholly-owned
subsidiary of the Company, acquired the capital stock of Delta Information
Services, Inc., a Canadian company ("Delta") for aggregate consideration of
$1,200,000. The purchase price consisted of cash of $500,000 and a promissory
note of $700,000, convertible into 100,000 unregistered shares of the Company's
Common Stock valued at $7.00 per share. The Common Stock valuation reflected the
agreed-upon price between the buyer and seller and was also determined by the
Board of Directors after giving effect to such factors as the restrictions on
resale and the size of the block of Common Stock. The promissory note was
immediately converted into Common Stock in December 1994. In addition, the
Company incurred approximately $46,919 in direct acquisition costs (principally
legal and accounting fees). At the date of acquisition, Delta had no tangible
assets nor liabilities that were transferred to or assumed by the Company.
However, the Delta product was a well-known general admission ticketing system
within the ski industry and the technical "know-how" included in the product was
considered relatively valuable.
F-14
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
The purchase price, including the direct acquisition costs, was allocated as
follows:
Computer software $ 500,000
Non-competition agreement 85,000
Customer list and support contracts 125,000
Goodwill 536,919
-------
$ 1,246,919
============
In connection with the acquisition of Delta, the sellers were granted a
put option to sell to the Company up to 10,000 of the shares of the Company's
common stock at $7.00 per share each year for the next three years. The put
option which had an aggregate value of $210,000 has been classified as common
stock subject to put options in the consolidated balance sheets and represents
the amount the Company would be required to pay if all the put options were
exercised. During 1995, 10,000 options were exercised resulting in $70,000 of
common stock (10,000 shares) being retired, leaving a remaining balance subject
to put options at December 31, 1995, of $140,000. During 1996, an additional
10,000 options were presented by the option holders in order to exercise them.
However, the Company did not allow them to be exercised due to a disagreement
with the sellers regarding the stock purchase agreement. (See Note 12.)
NOTE 5 - INVENTORIES
Inventories as of December 31, consist of the following:
1996 1995
---- ----
Installations-in-process $199,561 $172,411
Parts and systems 55,340 153,253
------ -------
$254,901 $325,664
======== ========
F-15
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, consist of the following:
1996 1995
---- ----
Furniture and equipment $507,311 $357,346
Purchased software 19,244 12,231
Test equipment 52,902 49,812
------ ------
579,457 419,389
Less accumulated depreciation 275,433 172,821
------- -------
$304,024 $246,568
======== ========
NOTE 7 - SYSTEMS AND SOFTWARE COSTS
The Company markets products that typically require substantial
customization in order to meet the customers' particular requirements. In June
1996, the Company commenced an assessment of its marketing strategy related to
the Company's current software products. While the Company has reduced the cost
of installing, customizing, and servicing (maintaining) the customized software,
these costs have remained higher than desired levels. With anticipated increased
revenues, though no assurances are given, the company continues to believe that
it would successfully generate profits from the current software. The Company
commissioned an assessment to determine whether the Company's computer products
could be modified in order to provide more product options to its customers
without incurring substantial customization costs. Although the assessment
principally focused on the conceptual design of the products to be offered and
was not an inquiry as to whether any technological innovations needed to be
implemented in order for the Company to competitively market its products, the
Company's marketing and development personnel confirmed that the ticketing,
access control, and other technologies that define the current products remain
competitive in the marketplace.
The Company concluded as a result of the assessment, that instead of
marketing products that require substantial customization, to design and offer
its products in a modular fashion. They will consist of a primary product with
optional pre-developed modules and a configuration layer to meet specific
customer needs that would require limited or no customization by the Company.
Additionally, the implementation of this project will afford the Company the
opportunity to use the same development tool (high level programming language)
for each module, thus providing a certain degree of consistency and efficiency
in the product development process. Although no assurances can be given,
management expects that applying the Company's proprietary technology in this
fashion will be a highly effective method of providing business solutions to the
entertainment industry.
Accordingly, the Company has commenced the development of this new
marketing approach and expects the new general admission products, incorporating
the modular concept, will be available for sale by the second quarter of 1997.
As of March 1997, the Company has installed limited functionality versions of
the new product in four different sites. The current software will continue to
be marketed and the Company will continue to support the present software for
some period beyond the introduction of the new general admission product for
those customers who intend to continue using the current software.
F-16
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 7 - SYSTEMS AND SOFTWARE COSTS (continued)
Because of the recent strategic decision described above, the Company
reviewed the valuation of the current software cost (pre-write-down amortized
balance of $1,275,000 at June 30, 1996) in accordance with the net realizable
value determination provisions under SFAS No. 86 Computer Software to be Sold,
Leased, or Otherwise Marketed. As a result, a write-down of $1,075,000 has been
made to the software's carrying value. The software's estimated net realizable
value as adjusted of $200,000 at June 30, 1996, principally relates to the
Company's engineers' estimate of the recoverable value of the current products
proven program and product design, which will be incorporated into the new
product concept and is expected to be fully realized (recoverable) through
future revenues.
The Company estimates the cost of developing the new general admission
products incorporating the modular concept will total approximately $400,000 to
$500,000 by the second quarter of 1997. To date, the Company has incurred
approximately $131,000 in development costs for these products, of which
approximately $25,000 has been capitalized at December 31, 1996.
NOTE 8 - OTHER ASSETS
Other assets as of December 31, consist of the following:
1996 1995
---- ----
Non-competition agreement net of
amortization $56,667 and $28,333 $ 28,333 $ 56,667
Investment in and advances to joint venture - 77,790
Other 106,188 33,451
------- ------
$134,521 $167,908
======== ========
NOTE 9 - NOTES PAYABLE
At December 31, 1995, the Company had an outstanding balance of $21,757
under a premium financing agreement, which was paid off during 1996, at an
annual interest rate of 9.25%.
At December 31, 1996, the Company had an outstanding balance of $28,628
due to a bank. The note matures on August 23, 2001, has an annual interest rate
of 10% and is collateralized with office equipment.
F-17
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 10 - ACQUISITION OBLIGATIONS
At December 31, 1995, the "promissory notes payable, stockholders with
conversion features" totaling $2,324,335, which was associated with the GIS
acquisition (see Note 4) were, at the Company's election, either payable in cash
or by conversion into preferred and common stock prior to March 31, 1996. The
promissory notes for $591,000 were convertible into 118,200 shares of Series B
Preferred Stock. The other promissory notes totaling $1,733,335 were convertible
into the number of common stock shares determined by dividing $1,733,335 by the
quoted market value of the common stock near the date of the conversion. The
Company's stated intent since the acquisition date of GIS and at December 31,
1995, was to satisfy the obligations, which are non-interest bearing, by the
issuance of preferred stock and common stock and not by a cash payment.
Accordingly, the promissory notes at December 31, 1995, were not classified as
current liabilities as current assets were not used to satisfy the promissory
notes.
In order to simplify the Company's capital and debt structure, on March
11, 1996, the Company and GIS agreed, among other things, to settle the
remaining obligation to GIS totaling $2,324,335 by the Company making a cash
payment to GIS of $1,550,000, canceling the $559,000 note receivable from GIS,
and canceling the $199,359 account receivable from GIS, and with the Company
redeeming for retirement the 109,333 shares of Common Stock and 111,800 shares
of Series B Preferred Stock previously issued to GIS. On April 12, 1996, the
transactions contemplated by the March 11 agreement were consummated. Because
the promissory notes included conversion features and had other characteristics
similar to capital stock, the settlement had no income effect and was recognized
through the related balance sheet accounts, including stockholders' equity. (See
Statements of Stockholders' Equity and Cash Flows).
At December 31, 1995, the balance sheet reflects "common stock subject
to put options" of $140,000. This obligation is further described in Note 4 as
it pertains to the Company's acquisition of Delta.
F-18
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 11 - INCOME TAXES
The Company has a net operating loss (NOL) for income tax purposes of
approximately $12,000,000 at December 31, 1996, which begins to expire in the
year 2000. The deferred tax benefit is determined based on the difference
between the financial reporting and tax bases of assets and liabilities as
measured by the enacted tax rate which will be in effect when these differences
are realized. The Company cannot reasonably predict when it can utilize the NOL
carry forward and, therefore, the Company has recognized an equivalent valuation
allowance against the deferred tax benefit.
The principal types of temporary differences and their related tax
effects that give rise to the deferred tax assets are as follows:
December 31,
------------
1996 1995
---- ----
Basis difference in intangible assets $ 53,000 $ 70,000
Warranty costs 211,000 110,000
Bad debt allowance, employee
vacation pay, and other accruals 326,000 80,000
Compensation related to stock options 415,000 350,000
Net operating loss carry forward (1) 4,310,000 3,340,000
---------- ----------
5,315,000 3,950,000
Less valuation allowance (5,315,000) (3,950,000)
---------- ----------
$ - $ -
========== ==========
(1) Certain transactions involving the beneficial ownership of the Company
have occurred which resulted in a stock ownership change for purposes
of Section 382 of the Internal Revenue Code of 1986, as amended.
Consequently, a portion of the Company's net operating loss carry
forward is subject to limitation on their utilization against future
income.
The Company's computed effective tax rate differs from the Federal
statutory tax rate as follows:
1996 1995
---- ----
Federal statutory rate 34 % 34 %
Effect of net operating losses (NOL) or NOL carry forward (34)% (34)%
--- ---
Effective tax rate, after the effect of NOL 0 % 0 %
===== =====
F-19
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and warehouse facilities as well as some
office equipment under operating leases.
Future minimum payments under these operating leases are as follows:
1997 148,564
1998 187,573
1999 64,270
2000 7,026
2001 -
--------
$407,433
========
Total lease payments for the years ended December 31, 1996 and 1995
were $144,569 and $89,027, respectively.
LEGAL PROCEEDINGS
On June 15, 1995, the Company's founder and former President and Chief
Executive Officer, Donald Turner, has commenced an action against the Company in
the Circuit Court for Pinellas County, Florida, Civil Division. Mr. Turner
alleges, among other things, that he was wrongfully terminated from his
employment and seeks damages which in the aggregate could exceed $1,000,000. The
Company believes Mr. Turner's suit is without merit and intends to continue
vigorously defending the action.
In January 1997, Derek Betty and James Potter instituted actions
against the Company arising pursuant to agreements entered into at the time of
the sale of Delta Information Services, Inc. ("Delta") to the Company. The first
action is entitled Derek Betty v. Lasergate Systems, Inc. (the "Betty Action")
and the second action is entitled James Potter v. Lasergate Systems, Inc. and
1103065 Ontario, Inc. ( the "Potter Action"). Both actions are pending in the
Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida.
The Betty Action alleges that the Company has failed to return shares of the
Company's stock which are being held in escrow pursuant to a Collateral Stock
Pledge Agreement executed in connection with the sale of Delta Information
Services, Inc. ("Delta") to the Company. The Betty Action also alleges a breach
of the terms and conditions of a Registration Rights and Put Option Agreement
executed in connection with the sale of Delta to the Company. The Betty Action
seeks damages in an amount in excess of $15,000, which is the jurisdiction
amount, but it is anticipated that damages could be in excess of $25,000. The
Potter Action also alleges a breach of the Registration Rights and Put Option
Agreement. Moreover, the Potter Action includes allegations concerning James
Potter's Consulting Agreement with the Company and a Non-Compete Agreement. The
Potter Action seeks a declaratory judgment determining that the Company and
1103065 Ontario Inc ("Ontario") are in material breach of the Non-Compete
Agreement and that Potter is relieved of all obligations to perform under the
Non-Compete Agreement. The Company has moved to dismiss both actions and to
compel arbitration pursuant to an arbitration provision in the Stock Purchase
Agreement relating to the acquisition of Delta. A hearing on the motion in the
Potter Action is scheduled for April 1, 1997, and a hearing on the motion in the
Betty Action is scheduled for May 2, 1997. The Company intends to vigorously
defend both actions.
F-20
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 12 -COMMITMENTS AND CONTINGENCIES (continued)
The Company is also involved in other legal actions. Management does
not believe that the ultimate resolution of these and the above matters will
have a material effect on the Company's financial position.
OTHER MATTERS
Management is presently reviewing the methods and procedures used for
determining its sales tax reporting obligations. Management believes the
reported sales tax liability as of December 31, 1996, is reasonably adequate.
NOTE 13 - STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1995, the Company's authorized shares of common stock was
increased from 5,000,000 to 20,000,000.
PREFERRED STOCK
The Company's articles of incorporation authorize a total of 2,000,000
shares preferred stock. The Company's Board of Directors has established Series
A, B, D, E, and F convertible preferred stock.
Series of Preferred Stock
-------------------------------------------------------
A B C D E F
Total Authorized shares
December 31, 1996 200,000 230,000 --- 350,000 --- 8,000
Outstanding shares
December 31, 1996 --- --- --- --- --- 8,000
December 31, 1995 95,950 111,800 --- 180,000 --- ---
Outstanding share amounts
December 31, 1996 --- --- --- --- --- $240
December 31, 1995 $2,879 $3,354 --- $5,400 --- ---
All series contain specific provisions as to conversion into shares
of common stock (see Note 17) and liquidation values. The shares are nonvoting
and, except for Series A, participate equally as to dividends declared with the
Company's common stock. The Series A Preferred Stock bears a cumulative dividend
at an annual rate of 8% of its liquidation value ($959,500). None of the
preferred stock above have or had mandatory redeemable provisions.
F-21
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
The 95,950 Series A Shares issued were convertible into fully paid and
nonassessable shares of the Corporation's Common Stock, upon the terms
hereinafter set forth at the rate (the "conversion Rate") of one share of Common
Stock for each Conversion Factor Dollar Amount (as defined below) of Liquidation
Value represented by the shares of Series A Preferred Stock being converted. The
per share Liquidation Value was equal to $10.00 plus any accrued and unpaid
dividends on such share, subject to reduction if thereafter paid. The Conversion
Factor Dollar Amount was the lesser of (i) 70% of the average of the closing bid
prices of the Corporation's Common Stock as quoted on NASDAQ for the five
trading days immediately preceding conversion, (ii) 70% of the average of the
closing bid prices of the Corporation's Common Stock as quoted on NASDAQ for the
five trading days of June 26, 1995 through June 30, 1995, and (iii) the lowest
price at which shares of Common Stock were sold to third party investors during
the period from July 1, 1995 to June 30, 1996. On June 28, 1996, the Company
used $1,000,000 of the proceeds of Series F Shares to redeem all 95,950 shares
of Series A Preferred Stock which was convertible into 1,879,837 shares of
Common Stock.
On February 15, 1995, the Company issued all 111,800 shares of Series B
Preferred Stock to GIS in connection with that acquisition (see Note 4). Series
B Preferred Shares were immediately convertible into an equal number of Common
Shares. On April 12, 1996, all 111,800 shares of Series B Preferred Stock were
redeemed by the Company as part of the settlement of the related acquisition
obligation. (See Note 10).
In October 1995, the Company completed the private placement of all
208,600 shares of Series D Convertible Preferred Stock. As of December 31, 1996,
all 208,600 Series D shares have converted into 1,664,463 shares of common
stock.
For discussion of Series E and F shares see Issuance of Stock--Private
Placements.
ISSUANCE OF COMMON STOCK FOR SERVICES
In June 1996, the Company issued 45,000 shares of restricted common
stock to non-employee directors as compensation for past services as directors.
Compensation for the services totaled approximately $42,000 based upon the
market value of the Company's common stock which approximated the value of
services rendered.
ISSUANCE OF STOCK--PRIVATE PLACEMENTS
On March 27, 1996, the Company commenced a private placement of shares
of the Company's newly established Series E Preferred Stock at $10.00 per share.
On April 22, 1996, 162,500 shares of the Series E Preferred Stock successfully
closed with the Company receiving total proceeds, net of commissions and
offering costs, of $1,450,582. As of July 3, 1996, all 162,500 Series E shares
converted into 2,627,902 shares of common stock.
On June 10, 1996, the Company commenced a private placement of 8,000
shares, at $750 a share, of the Company's newly established Series F Convertible
Preferred Stock. On June 27, 1996, the placement closed with the Company
receiving $5,172,500, net of commissions and offering expenses, for the sale of
8,000 shares of preferred stock. Each Series F share has a face value of $1,000,
and is convertible into shares of common stock after August 7, 1996, at,
generally, the average market price for the five trading days preceding
conversion. However, for any conversion effected on or after June 6, 1997, but
prior to June 6,
F-22
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
1998, the conversion price shall be 96% of such average market price, and on or
after June 6, 1998, the conversion price shall be 94% of such average market
price, but if such average market price is more than $1.00, the conversion price
will be $1.00, and one preferred share will convert into 1,000 shares of common
stock; and if such average market price is less than $0.45, the conversion price
will be $0.45, and one preferred share will convert into 2,222 shares of common
stock. Thus, the 8,000 Series F shares are convertible into between 8,000,000
and 17,777,778 shares of common stock. The entire Series F is redeemable at the
price of $1.00 per share any time on or after June 7, 1999 at the Company's
option upon giving 30 days notice to the holders of the Series F Preferred
Stock. Series F shares have a liquidation value of $1,000 per share. On January
27, 1997, 55 Series F convertible preferred shares were converted into 100,000
shares of common stock at a conversion price of $0.55 a share. The conversion
price was calculated as of September 30, 1996, the conversion request date.
RESERVATION AND AUTHORIZATION OF COMMON STOCK
Upon the sale of 8,000 shares of Series F Convertible Preferred Stock,
the Company reserved 8,000,000 shares of common stock to provide for their
conversion. If the average market price of the Company's common stock for the
five trading days prior to conversion is less than $1.00 per share (thus
permitting the holders of the Company's Series F Preferred Stock to convert such
shares into more than 8,000,000 shares of common stock), the Company would not
have a sufficient number of authorized shares of common stock to permit
conversion to all the Series F Preferred Stock. The Board of Directors plans to
recommend to the Company's stockholders at the 1996 Annual Meeting of
Stockholders than they approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock. Upon
approval of this amendment by the stockholders of the Company, the Company will
reserve 9,777,778 additional shares to allow for the possibility of the Series F
shares converting into as many as 17,777,778 common shares.
STOCK OPTION PLANS
In February 1994, the Board of Directors authorized the establishment
of the Company's 1994 Stock Option Plan. The plan permits the grant of options
which may be either incentive stock options (ISO's) or non-qualified stock
options (NQSO's). The total number of shares of common stock for options which
may be granted under the plan may not exceed 58,333 subject to adjustment, as
defined. The Compensation/Stock Option Committee of the Board of Directors is
authorized to determine the number of options to be granted, the number of
shares which will be subject to any option and the exercise price. The exercise
price for non-qualified stock options may not be less than 25% of the fair
market value of the common stock on the date of grant.
At the 1995 annual meeting of shareholders, shareholders approved
changes to the 1994 Stock Option Plan (the "Plan") which authorized grants of
5,000 options per term year, at an exercise price of 85% of the market value,
for each outside Director. The options vest at the rate of 5,000 shares per
year, at the beginning of each term year. Accordingly, Frank W. Swacker (an
outside Director) was granted 15,000 options on December 21, 1995 at an exercise
price of $2.76 of which 5,000 shares vested on December 21, 1995, 5,000 vested
on December 21, 1996 and 5,000 will vest on December 21, 1997.
The Company granted 37,500 options outside of the Plan to each of John
J. Chluski (an outside Director) and Bruce D. Barrington (an outside Director)
shortly after their appointment to the Board of Directors as an inducement for
them to join the Board in addition to the automatic grants of 5,000 options
each. Their options are exercisable for 10 years at exercise prices ranging from
$0.425 to $0.65625 and were immediately vested.
F-23
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
NON-QUALIFIED STOCK OPTIONS
In October 1994, the Board of Directors authorized the grant of 375,000
non-qualified stock options at an exercise price of $2.00 per share were granted
to the Company's President and Chief Executive Officer in connection with a
three year employment agreement. Of the total options granted, 125,000 were
granted as a signing bonus effective October 31, 1994 and were immediately
exercisable since their issuance was not contingent on future services as are
the remaining 250,000 options. Accordingly, compensation expense of $375,000
representing the difference between the fair value of $5.00 per share
(determined by the Board of Directors considering various factors as
restrictions, etc.) and the exercise price, was recorded in the consolidated
statement of operations for 1994. In addition, the corresponding obligation to
issue (grant) common stock options also has been reflected in the balance sheet
as of December 31, 1994. Of the remaining balance of 250,000 options, 125,000
options vested on October 31, 1995 and 125,000 options vested on October 31,
1996. In accordance with accounting provisions of APB No. 25, the Company
recorded compensation expense in 1995 of $562,500 and $187,500 in 1996.
The Company granted options to purchase 120,000 shares of common stock
to an executive officer for services rendered during 1996. These options vested
on October 31, 1996. This consisted of an option to purchase 20,000 shares at an
exercise price of $2.00 which is exercisable through December 31, 1997 and an
option to purchase 100,000 shares at an exercise price of $0.66 which is
exercisable until the later of: a) December 31, 1997 or; b) one year after
registration of the underlying stock (the underlying stock has not been
registered as of March 31, 1997).
A summary of the status of the Company's outstanding stock options as
of December 31, 1996, and 1995, and changes during the years ending on those
dates is presented below:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding, December 31, 1994 428,300 $1.88
Options granted 15,000 $2.76
Options canceled or forfeited (29,800) $1.09
------- -----
Options outstanding, December 31, 1995 413,500 $1.97
Options granted 205,000 $ .78
Options canceled or forfeited (17,500) $1.00
------- -----
Options outstanding, December 31, 1996 601,000 $1.59
======= =====
F-24
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
The following table summarizes information concerning currently
outstanding and exercisable stock options:
Weighted Average Weighted
Range of Number Remaining Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
Outstanding Options:
- --------------------
$0.425-$0.66 185,000 5.1 $ 0.64
$1.00 6,000 2.5 $ 1.00
$2.00-$2.76 410,000 7.6 $ 2.03
Exercisable Options:
- --------------------
$0.425-$0.66 185,000 5.1 $ 0.64
$1.00 6,000 2.5 $ 1.00
$2.00-$2.76 405,000 7.6 $ 2.02
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123 Accounting for Stock-Based Compensation, as it
relates to employment awards. It applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock. If the Company had elected
to recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by SFAS
123, the Company's net loss per common share would be increased to the pro forma
amounts indicated below for the years ended December 31:
1996 1995
---- ----
Net loss As reported $4,997,562 $4,206,782
Pro forma (unaudited) $5,092,962 $4,221,782
Net loss available to As reported $7,834,315 $5,741,227
common shareholders Pro forma (unaudited) $7,929,715 $5,756,227
Loss per common share As reported $ 1.29 $ 1.90
Pro forma (unaudited) $ 1.31 $ 1.90
The fair value of each option grant is estimated on the date of grant
using the Binomial options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively, no dividend yield
for all years, expected volatility of approximately 112%; rick-free interest
rates of approximately 6.0%, and expected lives of approximately 2.5 years. The
Company's common stock activity has had an extremely volatile history since and
including 1994. Because of the insignificant effect on the pro forma amounts
presented above, the Company has elected not to attempt to adjust (lower) the
volatility factor used. Such adjustment would account for the various factors or
conditions that probably impacted the Company's common stock prices and which
are possibly non-recurring. Such an adjustment which would lower the volatility
factor used would further reduce the calculated fair value of the options.
F-25
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
WARRANTS
In connection with the secondary public offering completed in October
1994, the Company issued 1,840,000 redeemable warrants to purchasers of the
Company's common stock. These redeemable warrants were immediately detachable
and separately tradable from the common stock with which they were issued. Each
redeemable warrant expires on October 16, 1999, and entitles the holder,
commencing one year from the effective date of the offering, to purchase one
share of the Company's common stock for $5.50, the exercise price. The
redeemable warrants are subject to redemption commencing one year after the
effective date at a price of $.05 per redeemable warrant subject to the
occurrence of certain events, as defined.
Additionally, a warrant to purchase 276,000 shares at $9.08 was granted
to the underwriter, exercisable during the four years commencing one year from
the closing date of the offering.
The Company granted warrants to purchase 4,167 shares of the Company's
common stock at an exercise price of $4.50 per share, which expire on May 20,
1998 and granted warrants to purchase 900 shares of the Company's common stock
at an exercise price of $3.75 per share, which expire in July 1997, in
connection with financing activities in 1993.
In connection with the private placement of Series F Convertible
Preferred Stock completed in June 1996, the Company issued 500,000 warrants to
the placement agent. These warrants expire on September 30, 2001, and entitle
the holder to purchase one share of the Company's common stock at an exercise
price of the lower of $1.00 or the average conversion price of the Series F
Convertible Preferred Stock (currently $0.55).
The estimated fair value of these warrants for the placement agent
services rendered, based on SFAS No. 123 provisions is approximately $190,000,
determined by using a binomial option-pricing model with assumed volatility of
122%, risk-free rate of 6.0%, and expected holding period of three years. For
financial statement purposes, the value of the services (compensation) is
reflected as a reduction to the proceeds received from the related private
placement and, accordingly, a reduction to paid-in capital. In addition, the
value assigned to the warrants is reflected as an addition to paid-in capital
(Stockholders' Equity). Because the reduction and increase to paid-in capital
are offsetting amounts of $190,000, the Company has chosen not to reflect them
separately in the Statement of Stockholders' Equity.
F-26
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 13 -STOCKHOLDERS EQUITY (continued)
A summary of the status of the Company's outstanding warrants as of
December 31, 1996, and 1995, and changes during the years ending on those dates
is presented below:
Weighted Average
Shares Exercise Price
------ --------------
Warrants outstanding, December 31, 1994 2,121,067 $5.90
Warrants granted -- --
Warrants canceled or forfeited -- --
Warrants outstanding, December 31, 1995 2,121,067 $5.90
Warrants granted 500,000 $ .55
Warrants canceled or forfeited -- --
Warrants outstanding, December 31, 1996 2,621,067 $4.88
The following table summarizes information concerning currently outstanding and
exercisable warrants:
Weighted Average Weighted
Range of Number Remaining Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------ --------
Outstanding Warrants:
- ---------------------
$0.55 500,000 4.5 $ 0.55
$3.75-$5.50 1,845,067 2.8 $ 5.50
$9.08 276,000 2.8 $ 9.08
Exercisable Warrants:
- ---------------------
$0.55 500,000 4.5 $ 0.55
$3.75-$5.50 1,845,067 2.8 $ 5.50
$9.08 276,000 2.8 $ 9.08
F-27
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 14 - SALES TO MAJOR CUSTOMERS
In 1996, one customer, Bayindir Insaat Turizm Ticaret (a large, indoor
amusement park in Istanbul, Turkey) represented 12% of revenues.
In 1995, there were no customers representing 10% or more of revenues.
NOTE 15 - EMPLOYEE BENEFITS
Effective July 1, 1995, the Lasergate Systems, Inc. Profit Sharing
401(k) Plan was established covering substantially all employees. The Company
made no contribution to the Plan during 1995 or 1996.
In order to reduce its overhead costs, the Company entered into an
employee leasing agreement effective January 1, 1996, with a firm that provides
all administrative services relating to payroll, personnel and employee
benefits. The Company signed an agreement with a new employee leasing company
effective December 16, 1996. Management continues to hire, dismiss, set pay
rates, and supervise the employees.
NOTE 16 - RELATED PARTY TRANSACTIONS
During 1996, the Company made a cash payment of $14,000 to an outside
Director of the Company for extensive business consulting services. The Company
also paid approximately $20,000 to a vendor in which another outside Director
has a financial interest for programming services.
NOTE 17 - RESTATEMENT
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.
Prior to conforming to the accounting described above, the Company had not
previously recognized an intrinsic value dividend on its preferred stock. The
discounted conversion feature of its preferred stock (generally a 30-35%
discount) was provided to its holders, in essence to avail them of a valuation
discount (e.g. large block discount) against the Company's quoted market price
of its common stock on the date the preferred stock converts. This valuation
discount is similar to that provided when the Company has issued other large
blocks of its common stock associated with acquisitions and other transactions.
F-28
<PAGE>
Lasergate Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
NOTE 17 - RESTATEMENT (continued)
The Company's preferred stock has been issued in various series, as further
described in Note 13. During 1995, Series A and D were issued resulting in the
recognition of preferred dividends (intrinsic value of beneficial conversion
features) of $411,214 and $1,123,231 respectively. During 1996, Series E and F
were issued resulting in the recognition of preferred dividends (intrinsic value
of beneficial conversion features) of $696,429 and $2,139,924 respectively.
The restatement of the previously issued 1996 and 1995 financial statements, in
order to conform to 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 available to common
shareholders has been increased by $2,836,353 in 1996 and $1,534,445 in 1995 to
reflect the intrinsic value of the preferred stock dividend as described herein:
Loss per Common Share
1996 1995
---- ----
As previously reported $( .82) $(1.39)
Preferred Stock dividend effect $( .47) $( .51)
------- -------
As Adjusted $(1.29) $(1.90)
From the statement of stockholders' equity standpoint, the initial recognition
of the beneficial conversion feature is an increase in paid-in-capital and the
recognition (amortization) of the dividend being recorded is an equivalent
decrease in additional paid-in-capital.
F-29
<PAGE>
SIGNATURE
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: February 13, 1998
-13-
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