SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended January 31, 1996
Commission file number 0-27776
------------------------
GATEWAY DATA SCIENCES CORPORATION
(Name of Small Business Issuer in Its Charter)
ARIZONA 86-0527788
- - -------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
3410 East University Drive, Suite 100
Phoenix, Arizona 85034
(602) 968-7000
(Address, including zip code, and telephone number, including area code,
of issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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 No X
--- ---
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year: $23,939,574.
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: As of June
5, 1996 - $8,005,406.25.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of June 5, 1996 - 2,798,949.
Documents incorporated by reference: None.
In accordance with Rule 15(d)-2 under the Exchange Act, this Special Financial
Report contains only certified financial statements for the Small Business
Issuer's fiscal year ended January 31, 1996, which preceded the fiscal year in
which Registration Statement No. 33-98512-LA became effective. Registration
Statement No. 33-98512-LA became effective on March 15, 1996.
<PAGE>
GATEWAY DATA SCIENCES CORPORATION
INDEX TO SPECIAL FINANCIAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED JANUARY 31, 1996
Page
Report of Independent Public Accountants.....................................1
Consolidated Balance Sheet as of January 31, 1996............................2
Consolidated Statements of Operations for the Years
Ended January 31, 1996 and 1995...........................................3
Consolidated Statements of Shareholders' Deficit
for the Years Ended January 31, 1995 and 1996.............................4
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1996 and 1995...........................................5
Notes to Consolidated Financial Statements...................................6
Part IV, Item 13. Exhibits and Reports on Form 8-K.........................16
Signatures..................................................................17
i
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Gateway Data Sciences Corporation
We have audited the accompanying consolidated balance sheet of Gateway
Data Sciences Corporation (the "Company") and subsidiary as of January 31, 1996,
and the related consolidated statements of operations, shareholders' deficit and
cash flows for each of the two years in the period ended January 31, 1996. 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 the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gateway Data
Sciences Corporation and subsidiary as of January 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended January 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
May 2, 1996.
-1-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,402
Trade receivables -- less allowance of $90,100 (Notes 5 and 6) 2,914,154
Inventories (Notes 5 and 6) 388,041
Prepaid expenses and other assets 928,287
-------------
Total current assets 4,323,884
PROPERTY AND EQUIPMENT -- Net (Notes 3, 5 and 6) 1,139,770
NET INVESTMENT IN LEASE RESIDUALS (Note 4) 1,558,547
OTHER ASSETS 116,216
-------------
$ 7,138,417
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,279,947
Accrued liabilities (Note 1) 2,107,207
Accrued payroll and benefits 262,719
Due to officers and employees (Note 11) 536,172
Accrued interest (Notes 5 and 6) 14,664
Current portion of notes payable (Note 6) 136,436
Current portion of capital lease obligations (Note 7) 58,798
Deferred revenue 808,731
-------------
Total current liabilities 5,204,674
DEFERRED REVENUE, recognized after one year 1,769,314
NOTES PAYABLE, less current portion (Note 6) 1,252,038
LINE OF CREDIT (Note 5) 311,555
CAPITAL LEASE OBLIGATIONS, less current portion (Note 7) 61,545
-------------
Total liabilities 8,599,126
-------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 6, 7, 8 and 11)
SHAREHOLDERS' DEFICIT (Note 8):
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding -
Common stock, $.01 par value, 20,000,000 shares authorized,
1,543,199 shares issued and outstanding 15,431
Additional paid-in capital 2,587,848
Deferred compensation (11,700)
Accumulated deficit (4,052,289)
-------------
Total shareholders' deficit (1,460,710)
-------------
$ 7,138,417
=============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE (Note 1):
Product revenue $ 19,543,549 $ 18,956,270
Software license revenue 2,947,205 1,009,322
Professional services 1,448,820 740,745
------------- --------------
Total revenues 23,939,574 20,706,337
------------- --------------
OPERATING EXPENSES:
Products sold 14,240,309 13,869,601
Software development 2,876,895 2,140,763
Professional services 1,794,591 1,092,776
Sales and marketing 1,626,538 1,453,459
General and administrative 1,546,021 1,059,348
------------- --------------
Total expenses 22,084,354 19,615,947
------------- --------------
INCOME FROM OPERATIONS 1,855,220 1,090,390
OTHER (INCOME) EXPENSE:
Interest expense 777,422 554,787
Other, net (5,683) (30,100)
------------- --------------
Total other expense, net 771,739 524,687
------------- --------------
INCOME BEFORE INCOME TAXES 1,083,481 565,703
PROVISION FOR INCOME TAXES (Note 9) -- --
------------- ------------
NET INCOME $ 1,083,481 $ 565,703
============= ==============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 1) $ .71 $ .39
============= ==============
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 1) 1,601,180 1,661,952
============= ==============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Deferred Accumulated
Amount Shares Capital Compensation Deficit Total
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994........ $ 10,459 1,045,920 $ 1,352,565 $ -- $ (5,701,473) $(4,338,449)
Net income.................... -- -- -- -- 565,703 565,703
----------- ----------- ----------- ------------- -------------- -----------
BALANCE, JANUARY 31, 1995........ 10,459 1,045,920 1,352,565 -- (5,135,770) (3,772,746)
Conversion of debentures
payable, notes payable and
related accrued interest into
common stock................ 4,942 494,218 1,219,713 -- -- 1,224,655
Issuance of common stock to
non-employee directors...... 30 3,061 15,570 (15,600) -- --
Amortization of deferred
compensation................ -- -- -- 3,900 -- 3,900
Net income.................... -- -- -- -- 1,083,481 1,083,481
----------- ----------- ----------- ------------- -------------- -----------
BALANCE, JANUARY 31, 1996........ $ 15,431 1,543,199 $ 2,587,848 $ (11,700) $ (4,052,289) $(1,460,710)
=========== =========== =========== ============= ============== ===========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
January 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 1,083,481 $ 565,703
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization............................................... 344,775 236,183
Provision for doubtful accounts............................................. 53,100 10,000
Net gain on property dispositions and other................................. -- (5,605)
Recognition of non-employee director compensation........................... 3,900 --
Effect of changes in assets and liabilities:
Trade receivables........................................................... (1,435,824) (575,010)
Inventories................................................................. 2,302,435 (2,085,311)
Prepaid expenses and other assets........................................... (928,846) 7,007
Accounts payable............................................................ (410,566) 270,997
Accrued liabilities......................................................... 19,793 2,038
Accrued payroll and benefits................................................ (226,109) 220,784
Accrued interest............................................................ 64,509 (3,560)
Deferred revenue............................................................ 122,377 1,252,918
------------- -------------
Net cash provided by (used in) operating activities.............. 983,025 (103,856)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................................. (801,135) (135,143)
Proceeds from sale of property and equipment.................................... -- 2,131
Net investment in lease residuals............................................... (1,034,236) 44,714
------------- -------------
Net cash used in investing activities............................ (1,835,371) (88,298)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from additional borrowings on notes payable............................ 810,000 4,620,398
Principal payments on notes payable............................................. (113,000) (4,182,269)
Principal payments on capital lease obligations................................. (204,534) (67,515)
Borrowings on line of credit.................................................... 311,555 --
Net proceeds from borrowings from (payments to) officers and employees.......... (170,189) 131,159
------------- -------------
Net cash provided by financing activities........................ 633,832 501,773
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................... (218,514) 309,619
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 311,916 2,297
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................. $ 93,402 $ 311,916
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 712,913 $ 566,191
============= =============
Cash paid during the period for income taxes.................................... $ -- $ 46,042
============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING TRANSACTIONS:
Capital lease obligation incurred............................................. $ -- $ 260,401
============= =============
Conversion of notes payable and debentures payable to common stock............ $ 1,224,655 $ --
============= =============
Fair market value of stock issued to non-employee directors................... $ 15,600 $ --
============= =============
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations -- Gateway Data Sciences Corporation (the "Company") and its
wholly owned subsidiary, Gateway Credit Corporation ("GCC"), design, develop,
market, and implement software products and provide related customer support
services and hardware (principally International Business Machines Corp. ("IBM")
products) for point-of-sale management, retail merchandising, and warehouse
automation systems. The Company also provides full service product installation,
maintenance, and training.
Significant Accounting Policies --
a. Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiary, GCC. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
b. Cash and Cash Equivalents -- Cash and cash equivalents include all
bank accounts and short-term investments with a maturity of three months or
less when purchased.
c. Inventories -- Inventories are stated at the lower of cost or
market. During the fourth quarter of fiscal 1996, the Company changed its
inventory pricing method from specific identification to weighted average.
This change did not have a material effect on the accompanying consolidated
financial statements. Inventories at January 31, 1996, consist of the
following:
New equipment................................. $ 117,090
Used equipment................................ 270,951
-----------
Total inventories $ 388,041
===========
The Company purchases substantially all new hardware, certain software
applications, and certain maintenance from IBM. During the years ended
January 31, 1996 and 1995, approximately $15,635,000 and $15,165,000, or
66% and 73%, respectively, of total revenue resulted from sales of such
hardware, software, and maintenance purchased from IBM (Note 2).
d. Property and Equipment -- Property and equipment are recorded at
cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets as follows: leasehold
improvements -- over the term of the respective lease or life of the asset,
if shorter; furniture and fixtures -- five years; computer and office
equipment and other assets -- three to five years.
e. Income Taxes -- Effective February 1, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which, among other things, provides for the
establishment of deferred income taxes for temporary differences between
the financial and income tax basis of reporting.
f. Revenue Recognition -- Product revenue in the accompanying financial
statements includes hardware, third-party software, and third-party
maintenance sold to the Company's customers. Product and third-party
software revenue is recognized upon the shipment of merchandise from the
vendor (principally IBM) to the end user, or when shipped from the Company,
whichever is appropriate. Third-party maintenance revenue is deferred and
recognized straight-line over the
-6-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
term of the maintenance contract. Software license revenue in the
accompanying financial statements includes revenue from the licensing of
the Company's proprietary software offerings as well as revenue from the
customization and modification of the Company's software for its customers.
Software license revenue is recognized in accordance with Statement of
Position 91-1, Software Revenue Recognition. Accordingly, revenue from
software licensing is recognized when (i) shipment of the software has
occurred, (ii) a signed non-cancelable license agreement has been received
from the customer and, (iii) any remaining obligations under the license
agreement have been completed. Revenue related to insignificant obligations
is deferred and recognized as the obligations are fulfilled. Revenue from
software licensing agreements which involve significant customization,
modification, or production of the licensed software is deferred and
recognized using the percentage of completion method of accounting. Revenue
from software license fees related to the Company's obligation to provide
certain post-contract customer support without charge is unbundled from the
software license fee at its fair value and is deferred and recognized
straight-line over the contract support period. Revenue from annual or
other renewals of maintenance contracts is deferred and recognized
straight-line over the term of the contracts. Revenue from professional
services is generally billed on a time and materials basis and recognized
as the related services are provided.
g. Product Development -- SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to software development expenses in the accompanying
consolidated statements of operations.
h. Net Income Per Common and Common Equivalent Share -- Net income per
common and common equivalent share is computed using the weighted average
number of common and common equivalent shares outstanding during each
period as adjusted for the reverse stock splits described in Note 8.
Convertible debt, all of which was converted into 494,218 shares of common
stock on September 1, 1995, is retroactively treated as if converted to
common stock on the respective dates of original issuance. Common stock
equivalents consist of stock options and warrants.
i. Concentrations of Credit Risk -- Financial instruments which
potentially expose the Company to concentrations of credit risk, as defined
by SFAS No. 105, consist primarily of trade accounts receivable. The
Company does not require collateral upon delivery of its products or
services.
j. Fair Value of Financial Instruments -- The estimated fair value of
financial instruments has been determined by the Company using available
market information and valuation methodologies. Considerable judgment is
required in estimating fair values. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current market
exchange.
-7-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The carrying amounts of cash, trade receivables and accounts payable
approximate fair values. The carrying amounts of the Company's borrowings
under the line of credit agreement, notes payable and capital lease
obligations approximate their fair value. The fair value of the Company's
long-term debt and line of credit is estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
2. OPERATIONS AND BASIS OF PRESENTATION
Operations -- Sales of IBM products (hardware, software, and
maintenance) accounted for approximately 66% and 73% of the Company's total
revenue for the years ended January 31, 1996 and 1995, respectively. The
Company's reseller agreement with IBM expires in July 1997. The Company does not
anticipate that the reseller agreement will extend beyond its expiration date.
The Company intends to significantly accelerate its emphasis on the sale of its
recently developed proprietary software products, and the Company anticipates
this shift will result in a change in its product revenue mix. The Company
believes that, although the change in product mix may initially result in lower
total revenue, it should also result in a more favorable gross profit margin for
the Company, reduced borrowing requirements, and a higher net margin as
licensing of software becomes an increasingly higher percentage of total
revenue. There can be no assurance, however, that the Company will be able to
successfully complete the transition of its business focus or that any
internally developed products or services will be accepted in the marketplace.
Basis Of Presentation -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements, at January
31, 1996, the Company's current liabilities exceeded its current assets by
$880,790 and its total liabilities exceeded its total assets by $1,460,709.
The Company has obtained from Sundance Venture Partners, L.P. and El Dorado
Investment Company, significant shareholders of the Company, commitments to fund
any cash deficits through November 1, 1996 if the Company is not able to obtain
adequate financing elsewhere. However, the Company believes that its existing
borrowing facilities and cash flow from operations will enable the Company to
meet its cash requirements through November 1, 1996.
In March 1996 the Company completed an initial public offering of its
common stock. The Company sold 1,250,000 shares of its common stock at $6.75 per
share, resulting in net proceeds to the Company of approximately $6.9 million.
The Company used the proceeds to pay down the line of credit (Note 5) and retire
the bridge notes payable (Note 6). The Company also intends to use a portion of
the net proceeds to develop new software applications and enhancements to
existing applications, to modify its software products to operate on open
architecture platforms, to expand
-8-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
marketing and sales operations, to make additional capital investments, and for
working capital purposes. The following unaudited pro forma summary presents the
balance sheet of the Company as if the net proceeds of the initial public
offering had been received and the line of credit and bridge notes payable had
been retired at January 31, 1996:
<TABLE>
<CAPTION>
Actual As Adjusted
------------- -------------
<S> <C> <C>
Working capital (deficiency) $ (880,790) $ 4,884,280
Total assets 7,138,417 12,903,487
Notes payable 1,388,474 578,474
Line of credit 311,555 -
Shareholders' equity (deficit) (1,460,710) 5,425,916
</TABLE>
Recently Issued Accounting Standards -- SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which is required to be adopted by the Company in fiscal 1997, is not expected
to have a material effect on the Company's financial position or its results of
operations upon adoption. SFAS No. 123, Accounting for Stock-Based Compensation,
is required to be adopted by the Company in fiscal 1997. Pursuant to the
provisions of SFAS No. 123, the Company will continue to account for
transactions with its employees pursuant to Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued To Employees. Therefore, this statement is
not expected to have a material effect on the Company's financial position or
its results of operations when adopted.
3. PROPERTY AND EQUIPMENT
Property and equipment at January 31, 1996, consist of the following:
Leasehold improvements............................... $ 39,628
Furniture and fixtures............................... 421,594
Computer and office equipment........................ 1,457,663
Other................................................ 213,112
------------
Total 2,131,997
Less accumulated depreciation and amortization....... (992,227)
------------
Property and equipment, net.......................... $ 1,139,770
============
Computer and office equipment includes $231,800, net, of equipment under
capital leases.
4. NET INVESTMENT IN LEASE RESIDUALS
The Company frequently assists its customers by arranging long-term
financing for the purchase of hardware, software, and third-party maintenance.
The Company generally uses an affiliate of IBM for these transactions. In
certain of such transactions, the Company may choose to accept the assignment of
the customer's end-of-lease purchase option as consideration for a portion of
the sales price. The end-of-lease purchase options are recorded as net
investment in lease residual and represent less than 10%, measured on a present
value basis, of the fair value of the related hardware sold. Total residual
values held by the Company were $1,558,547 as of January 31, 1996.
-9-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LINE OF CREDIT
In August 1995, the Company obtained a line of credit from Concord Growth
Corporation ("Concord") for borrowings in an amount that is the lower of
$2,000,000 or 75% of eligible accounts receivable as defined in the line of
credit agreement. This line of credit is secured by all of the Company's assets
and is guaranteed by the Company's president. The line of credit bears interest
at the prime rate (8.5% at January 31, 1996) plus 8% and matures on August 22,
1996. The Company is required to pay a monthly minimum fee of $5,000 along with
an administrative fee based on the average daily balance outstanding each month.
A facility fee of 1.5% of the maximum credit is due annually. The line of credit
agreement requires that the Company maintain positive working capital; however,
at the time of borrowing and at January 31, 1996, the Company was in a negative
working capital position. Concord has waived this requirement through the
maturity of the line of credit. Subsequent to January 31, 1996, the Company paid
off the balance of the line of credit outstanding at January 31, 1996, with a
portion of the net proceeds from its initial public offering. Accordingly, the
balance outstanding has been classified as noncurrent in the accompanying
balance sheet.
6. NOTES PAYABLE
Notes payable at January 31, 1996, consists of the following:
Bridge notes payable, interest payable monthly at 12% per
annum beginning February 1, 1996, due March 31, 1996
unless extended for up to six months at the option of the
holders, collateralized by the Company's trade receivables,
inventories and property equipment................................ $ 810,000
Note payable to ZCMI, interest at 15%, principal and
interest payment of $18,682 due monthly through March 1999........ 578,474
-----------
Total........................................... 1,388,474
Less current portion.............................................. 136,436
-----------
Total long-term portion......................... $ 1,252,038
===========
In connection with the issuance of $810,000 of bridge notes payable in
October 1995, the Company also issued warrants to purchase a total of 322,907,
as adjusted, shares of the Company's common stock at an exercise price of $5.09
per share to the holders of the bridge notes. Bridge notes payable in the amount
of $660,000 and warrants to purchase 252,997 shares of the Company's common
stock were issued to certain of the Company's officers, members of the Company's
Board of Directors, and an affiliated party. Additionally, the Company paid
approximately $60,000 to Sundance Venture Partners, L.P., a significant
shareholder of the Company, for management and due diligence fees in connection
with the issuance of the bridge notes. The bridge notes payable were retired by
the Company subsequent to January 31, 1996, with a portion of the net proceeds
from its initial public offering. Accordingly, the balance outstanding has been
classified as noncurrent in the accompanying balance sheet.
-10-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On September 1, 1995, the Company issued 100,680, 373,321, and 20,217
shares of common stock upon conversion of $491,143, $634,883, and $98,629 of
principal and interest on outstanding indebtedness held by Sundance Venture
Partners, L.P., Sundance Capital Corporation, and El Dorado Investment Company,
respectively.
At January 31, 1996, scheduled maturities, excluding the bridge notes
payable retired in connection with the Company's initial public offering, for
the years ending January 31 are as follows:
1997................................................... $ 136,436
1998................................................... 161,438
1999................................................... 191,021
2000................................................... 89,579
-----------
Total......................................... $ 578,474
===========
Sundance Venture Partners, L.P. ("SVP") and El Dorado Investment Company
("El Dorado"), whose majority shareholder is Sundance Capital Corporation
("SCC"), own 254,423 and 145,728 shares, respectively, of the Company's common
stock. The Company incurred interest expense of approximately $69,200 and
$88,000 for the years ended January 31, 1996 and 1995, respectively. Interest
payable to these related parties at January 31, 1996, was approximately $15,000.
7. LEASE COMMITMENTS
Operating Leases -- The Company conducts its operations in leased
facilities and also leases certain property and equipment.
The aggregate minimum rental commitments under the operating leases for the
years ended January 31 are as follows:
1997................................................ $ 454,897
1998................................................ 399,009
1999................................................ 139,842
2000................................................ 30,653
------------
Total...................................... $ 1,024,401
============
Rental expense on operating leases was $507,676 and $508,108 for the years
ended January 31, 1996 and 1995, respectively. Included in these amounts are
officer and other employee-related operating lease expenses of $108,595 and
$220,209 for the years ended January 31, 1996 and 1995, respectively.
-11-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Capital Leases -- The Company leases computers under capital leases (Note
3). Capital lease obligations bear interest rates ranging from 9% to 17%, due in
varying monthly installments through January 1998. At January 31, 1996,
maturities are as follows:
1997................................................... $ 69,240
1998................................................... 65,108
----------
Total......................................... 134,348
Less amount representing interest...................... (14,005)
----------
Total......................................... 120,343
Less current portion................................... 58,798
----------
Total......................................... $ 61,545
==========
8. CAPITAL STOCK
Reverse Stock Split -- Information in the accompanying financial statements
and notes to financial statements gives retroactive effect to a one-for-two
reverse stock split effected on October 20, 1995, a two-for-three reverse stock
split effected on December 28, 1995, and a 1.15-for-1 stock split effected on
February 14, 1996, as well as a change in the par value of common stock to $.01
per share.
Stock Option Plans -- In fiscal 1991, the Company adopted the Gateway Data
Sciences Corporation Stock Option Plan (the "Plan") for directors, executive
officers, and key employees. The Plan provides for the granting of options to
purchase a maximum of 306,665 shares of common stock. The option price per share
is determined by the Board of Directors and may not be less than 100% of the
fair market value of the stock on the date that the option is granted. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option, more than 10% of the total combined voting power of all classes of
stock of the Company is eligible to receive incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
common stock subject to the option on the date of the grant. The maximum term of
an option may not exceed 10 years. From the effective date of grant, options
vest 40% after two years, 60% after three years, 80% after four years, with 100%
vesting after five years.
During October 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the granting of options to purchase
common stock, the direct granting of common stock, and the granting of stock
appreciation rights and cash awards, up to a maximum of 800,000 shares of common
stock. An aggregate of 3,064 shares of common stock and options to acquire an
aggregate 9,200 shares of common stock at an exercise price of $7.83 per share
were automatically granted to the Company's non-employee directors pursuant to
the 1995 Plan on the date on which the Company's shareholders approved the 1995
Plan.
-12-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following summarizes the activity under the Plans.
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------------------------------------
1996 1995
------------------------- ------------------------
Option Option
Number Price Number Price
of Shares Per Share of Shares Per Share
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year............................. 151,435 $4.88-$6.52 128,473 $4.88-$6.52
Granted.......................................... 113,678 $6.16-$7.83 58,612 $6.16
Canceled/expired................................. (58,829) $4.88-$6.16 (35,650) $4.88-$6.16
Exercised........................................ - -
----------- -----------
Options outstanding, end of
year.......................................... 206,284 $4.28-$7.83 151,435 $4.88-$6.52
=========== ===========
Options exercisable, end of
year.......................................... 42,916 $4.88-$6.52 49,292 $4.88-$6.16
=========== ===========
Options available for grant...................... 900,381 155,230
=========== ===========
</TABLE>
Common Stock Warrants -- At January 31, 1996, there are warrants
outstanding for the purchase of 322,907 shares of the Company's common stock at
$5.09 per share in connection with the bridge financing discussed in Note 6. The
warrants become exercisable on October 13, 1996.
On September 13, 1993, in connection with related debt obligations, the
Company entered into Stock Warrant Agreements with SVP and El Dorado that grant
the holders the right to purchase up to 24,958 and 30,748 shares, respectively,
of common stock at a price of $4.88 per share, which was considered to be the
fair market value at the date of grant. The warrants are exercisable by SVP and
El Dorado at any time until their expiration on December 31, 1999. No warrants
have been exercised as of January 31, 1996.
9. INCOME TAXES
A reconciliation of the difference between the provision for income taxes
and the amount that would be computed using statutory federal income tax rates
is as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Provision computed at federal rate of 34%................... $ 368,000 $ 192,300
State income tax provision ................................. 65,000 33,900
Penalties................................................... 111,000 --
Other....................................................... 10,000 17,900
Federal Alternative Minimum Tax............................. -- 5,800
Utilization of net operating loss carryover................ (554,000) (249,900)
----------- ----------
Total.............................................. $ -- $ --
=========== ==========
</TABLE>
-13-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A detail of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1996 1995
----------- ----------
<S> <C> <C>
Current:
Reserves not currently deductible.................. $ 10,000 $ 4,000
Other expenses not currently deductible............ 252,000 202,000
Non-current:
Accelerated tax depreciation....................... 10,000 (6,000)
Tax effect of net operating loss carryforwards..... 550,000 1,166,000
Other.............................................. 36,000 26,000
----------- ----------
Net deferred tax asset................................. 858,000 1,392,000
Valuation allowance.................................... (814,000) (1,368,000)
----------- ----------
Net deferred tax asset................................. $ 44,000 $ 24,000
=========== ==========
</TABLE>
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not than some portion or all of the deferred tax assets will not be realized.
The Company's net operating loss ("NOL") carryovers expire through the year
2009 for federal income tax purposes. Stock issuances by the Company, including
an initial public offering, may cause a change in ownership under the provisions
of Internal Revenue Code Section 382; accordingly, the utilization of the
Company's net operating loss carryforwards may be subject to annual limitations.
Management does not believe that any NOL limitations resulting from a change in
the ownership will have a material adverse effect on the Company's results of
operations or financial condition.
10. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan -- The Company has a profit sharing plan and an
executive compensation plan. Employees are eligible immediately to earn a
contribution based on their qualified annual compensation, if the Company
achieves its Earnings Before Interest and Tax ("EBIT") objective. The Company
did not meet its EBIT objectives during the years ended January 31, 1995 and
1996.
401(K) Profit Sharing Plan -- In May 1992, the Company adopted a profit
sharing plan pursuant to Section 401(k) (the "401(k) Plan") of the Internal
Revenue Code of 1986, as amended. Pursuant to the 401(k) Plan, all eligible
employees may make elective contributions through payroll deductions. In
addition, the 401(k) Plan provides that the Company may make matching and
discretionary contributions in such amounts as may be determined by the Board of
Directors. During the fiscal years ended January 31, 1996 and 1995, the Company
expensed discretionary contributions pursuant to the 401(k) Plan in the amount
of $51,800 and $32,800, respectively.
Employee Stock Purchase Plan -- The Company's employee stock purchase plan
(the "Purchase Plan") was adopted by the Company's Board of Directors and
approved by the shareholders of the Company in February 1996. A total of 200,000
shares of the Company's common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase shares
of the Company's common stock during concurrent 24-month offering periods (an
"Offering Period"). Each Offering Period will be divided into four consecutive
6-month purchase periods (a "Purchase Period"). Employees may purchase shares of
common stock pursuant to the
-14-
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Purchase Plan at a purchase price equal to 85% of the lower of (i) the fair
market value of the common stock on the first day of the Offering Period, or
(ii) the fair market value of the common stock on the last day of the Purchase
Period. The initial Offering Period commenced on the date of the initial public
offering of the Company's common stock.
11. TRANSACTIONS WITH RELATED PARTIES
In addition to related party transactions and balances disclosed elsewhere
in these financial statements and the notes thereto, the Company has $536,172 of
accrued liabilities due to certain officers and employees as of January 31,
1996.
As of January 31, 1996, remaining lease commitments due to officers and
employees by the Company for various computer operating leases expiring through
the year ended January 31, 1997 are approximately $39,000.
12. SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its total revenue from
relatively few customers. The percentage of total revenue of customers to whom
sales exceed 10% of total revenue were as follows:
Year Ended January 31,
----------------------
1996 1995
---- ----
Customer #1.................... 18.2% 17.6%
Customer #2.................... -- 12.3
Customer #3.................... 12.1 --
Customer #4.................... 10.2 --
Because of the nature of the Company's business operations, the Company
anticipates that customers that represent more than 10% of total revenue will
vary from period to period depending on the placement of orders by a particular
customer or customers in any given period.
-15-
<PAGE>
PART IV, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Exhibit
- - ------ -------
1 Form of Underwriting Agreement(1)
3.1 Second Amended and Restated Articles of Incorporation of the
Registrant (1)
3.2 Second Amended and Restated Bylaws of the Registrant(1)
4.1 Form of Certificate representing shares of Common Stock, par value
$.01 per share(1)
4.2 Form of Representatives' Warrant Agreement(1)
4.3 Form of Warrant to Purchase Securities of the Registrant dated October
13, 1995(1)
4.4 Form of Common Stock Purchase Warrant dated September 13, 1993(1)
10.1 1990 Stock Option Plan, as amended(1)
10.2 Amended and Restated 1995 Stock Option Plan(1)
10.3 Loan Agreement dated August 22, 1995, between the Registrant and
Concord Growth Corporation, with Amendment(1)
10.4 Security Agreement dated August 22, 1995, between the Registrant and
Concord Growth Corporation(1)
10.5 General Continuing Guaranty to Concord Growth Corporation by Michael
M. Gordon(1)
10.6 Form of Unit Subscription Agreement dated October 13, 1995(1)
10.7 Form of Promissory Note dated October 13, 1995(1)
10.8 Form of Security Agreement dated October 13, 1995(1)
10.9 IBM Business Partner Agreement between the Registrant and
International Business Machines Corporation(1)
10.10 Amendment to IBM Business Partner Agreement between the Registrant and
International Business Machines Corp.(1)
10.11 Form of Master Customer Agreement(1)
10.12 Amendment, Termination and Waiver Agreement dated as of September 1,
1995 among the Registrant, Sundance Venture Partners, L.P.,
Sundance Capital Corporation, El Dorado Investment Company, Michael
M. Gordon, J. Michael McPheeters, and Matthew J. Gordon (1)
10.12.1 Amendment No. 1 to Amendment, Termination, and Waiver Agreement(1)
10.13 Employee Stock Purchase Plan, as amended through February 28, 1996(1)
10.14 Form of Indemnity Agreement(1)
16 Letter Re: Change in Accountant(1)
21 List of Subsidiaries(1)
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- - ------------
(1)Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 and amendments thereto (No.33-98512-LA) as declared effective by the
Securities and Exchange Commission on March 15, 1996.
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GATEWAY DATA SCIENCES CORPORATION
Date: June 6, 1996 /s/ Michael M. Gordon
---------------------
Michael M. Gordon,
Chairman of the Board
and President
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
-------- ----
<S> <C> <C>
/s/ Michael M. Gordon Chairman of the Board and President June 6, 1996
- - ----------------------- (Principal Executive Officer)
Michael M. Gordon
/s/ Matthew J. Gordon Vice President and Secretary June 6, 1996
- - -----------------------
Matthew J. Gordon
/s/ Vickie B. Jarvis Vice President - Finance, Treasurer, June 6, 1996
- - ----------------------- and Chief Financial Officer
Vickie B. Jarvis (Principal Financial and Accounting Officer)
/s/ Gregory S. Anderson Director June 5, 1996
- - -----------------------
Gregory S. Anderson
/s/ Larry J. Wells Director June 6, 1996
- - -----------------------
Larry J. Wells
/s/ Steven A. Rothstein Director June 6, 1996
- - -----------------------
Steven A. Rothstein
</TABLE>
17
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into Gateway Data Science Corporation's
previously filed registration statement of Form S-8 (File No. 333-02976).
/s/ Arthur Anderson LLP
Arthur Anderson LLP
Phoenix, Arizona
June 6, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<EXCHANGE-RATE> 1
<CASH> 93
<SECURITIES> 0
<RECEIVABLES> 2914
<ALLOWANCES> 90
<INVENTORY> 388
<CURRENT-ASSETS> 4,324
<PP&E> 2131
<DEPRECIATION> 992
<TOTAL-ASSETS> 7138
<CURRENT-LIABILITIES> 5205
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7138
<SALES> 23940
<TOTAL-REVENUES> 23940
<CGS> 14240
<TOTAL-COSTS> 22084
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 777
<INCOME-PRETAX> 1083
<INCOME-TAX> 0
<INCOME-CONTINUING> 1083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1083
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
