U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
Commission File Number: 0-27776
Gateway Data Sciences Corporation
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(Exact name of small business issuer as specified in its charter)
Arizona 86-0527788
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(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
3410 E. University Drive, Phoenix, AZ 85034
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(Address of principal executive offices)
(602) 968-7000
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(Issuer's telephone number, including area code)
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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity: 2,804,721 shares of common stock, $.01 par value (as of December 13,
1996)
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GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1996
and January 31, 1996 3
Consolidated Statements of Operations for the
Three and Nine Months ended October 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Nine Months ended October 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION 14
Signatures 15
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<PAGE>
PART I, ITEM 1. FINANCIAL STATEMENTS
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND JANUARY 31, 1996
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,142,928 $ 93,402
Trade receivables- less allowance of $84,800 and $63,100, respectively 8,489,465 2,914,154
Inventories 1,575,672 388,041
Prepaid expenses and other assets 386,672 928,287
------------ ------------
Total Current Assets 12,594,737 4,323,884
PROPERTY AND EQUIPMENT - Net 1,774,497 1,139,770
NET INVESTMENT IN LEASE RESIDUALS 1,572,253 1,558,547
OTHER ASSETS 515,396 116,216
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$ 16,456,883 $ 7,138,417
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,647,745 $ 1,279,947
Accrued liabilities 2,157,136 2,121,871
Accrued payroll and benefits 836,066 262,719
Due to officers and employees (Note 3) -- 536,172
Current portion of notes payable 154,788 136,436
Current portion of capital lease obligations 76,256 58,798
Line of Credit 1,971,655 311,555
Deferred revenue 1,012,013 808,731
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Total Current Liabilities 7,855,659 5,516,229
DEFERRED REVENUE, recognized after one year 1,531,280 1,769,314
NOTES PAYABLE, less current portion 323,541 1,252,038
CAPITAL LEASE OBLIGATIONS, less current portion 72,848 61,545
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Total Liabilities 9,783,328 8,599,126
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
2,804,721 shares issued and outstanding at October 31, 1996 and
1,543,199 shares issued and outstanding at January 31, 1996 28,047 15,431
Additional paid-in capital 9,158,099 2,587,848
Deferred compensation (3,900) (11,700)
Accumulated deficit (2,508,690) (4,052,288)
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Total shareholders' equity (deficit) 6,673,556 (1,460,709)
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$ 16,456,883 $ 7,138,417
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</TABLE>
See notes to consolidated financial statements
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<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
(Unaudited) (Unaudited)
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Product revenue $ 7,163,221 $ 5,981,333 $ 14,383,153 $ 16,832,177
Software license revenue 726,211 445,863 3,108,475 2,004,510
Professional services revenue 774,336 447,355 1,928,397 1,139,589
------------ ------------ ------------ ------------
Total revenue 8,663,768 6,874,551 19,420,025 19,976,276
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Products sold 4,909,630 4,484,157 10,064,921 12,710,852
Software development 1,016,712 686,958 2,825,201 2,132,567
Professional services 794,717 450,077 1,991,982 1,306,543
Sales and marketing 492,950 425,265 1,365,073 1,272,159
General and administrative 625,113 431,630 1,442,635 1,195,569
------------ ------------ ------------ ------------
Total expenses 7,839,122 6,478,087 17,689,812 18,617,690
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 824,646 396,464 1,730,213 1,358,586
OTHER (INCOME) EXPENSE:
Interest expense 101,469 114,662 188,505 567,922
Other 294 196 (1,890) (2,944)
------------ ------------ ------------ ------------
Total other expense, net 101,763 114,858 186,615 564,978
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 722,883 281,606 1,543,598 793,608
PROVISION FOR INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
NET INCOME $ 722,883 $ 281,606 $ 1,543,598 $ 793,608
============ ============ ============ ============
NET INCOME PER COMMON AND
COMMON EQUIVALENT
SHARE (Note 2) $ 0.26 $ 0.19 $ 0.57 $ 0.53
============ ============ ============ ============
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING (Note 2) 2,819,776 1,543,562 2,610,456 1,687,150
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
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1996 1995
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(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,543,598 $ 793,608
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization 430,371 247,339
Amortization of deferred compensation 7,800 --
Effect of changes in assets and liabilities:
Trade receivables (5,575,311) (2,374,322)
Inventories (1,187,631) 1,336,805
Prepaid expenses and other assets 142,435 (493,588)
Accounts payable 367,798 1,268,084
Accrued liabilities 48,484 (1,071,694)
Accrued payroll and benefits 573,347 81,116
Accrued interest (13,219) 51,291
Deferred revenue (34,752) 20,890
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Net cash used in operating activities (3,697,080) (140,471)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (1,065,099) (547,146)
Net investment in lease residuals (13,706) (834,728)
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Net cash used in investing activities (1,078,805) (1,381,874)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from additional borrowings of notes payable -- 810,000
Principal payments on notes payable (910,145) (95,000)
Additional borrowings on capital lease obligations 66,344 --
Principal payments on capital lease obligations (37,583) (190,844)
Additional borrowings on line of credit 1,660,100 1,097,594
Proceeds from issuance of common stock 51,058 --
Net proceeds from initial public offering 6,531,809 --
Payments to officers and employees (536,172) (153,148)
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Net cash provided by financing activities 6,825,411 1,468,602
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,049,526 (53,743)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 93,402 311,916
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,142,928 $ 258,173
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 201,724 $ 516,323
=========== ===========
Cash paid during the period for income taxes $ 39,500 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
1. INTERIM FINANCIAL REPORTING
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for the periods presented have been made. The results of operations
for the three-month and nine-month periods ended October 31, 1996 are not
necessarily indicative of the operating results that may be expected for the
entire year ending January 31, 1997. These financial statements should be read
in conjunction with the Company's Form 10-KSB for the fiscal year ended January
31, 1996.
2. 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. Common stock equivalents consist of stock options and
warrants.
3. TRANSACTIONS WITH RELATED PARTIES
During the nine months ended October 31, 1996, the Company used a
portion of the proceeds of its initial public offering (Note 4) to retire
$536,172 of accrued liabilities due to certain officers and employees and
$660,000 of bridge notes payable due to certain of the Company's officers,
members of the Board of Directors, and an affiliated party.
4. INITIAL PUBLIC OFFERING
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 $6.5 million.
The Company used a portion of the proceeds to pay down its line of credit and
retire the bridge notes payable (Note 3). 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 marketing and sales
operations, to make additional capital investments, and for working capital
purposes.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's "expectations",
"anticipation", "intentions", "beliefs", or "strategies" regarding the future.
Forward looking statements include statements regarding revenue, margins,
expenses, and earnings analysis for the remainder of fiscal 1997 and thereafter;
future products or product development; future research and development spending
and the Company's product development strategy; and liquidity and anticipated
cash needs and availability. All forward looking statements included in this
document are based on information available to the Company on the date of this
Report, and the Company assumes no obligation to update any such forward looking
statement. It is important to note that the Company's actual results could
differ materially from those in such forward looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in this Report as well as in the "Risk Factors" section included in
the Company's Registration Statement on Form S-B2, as declared effective by the
Securities and Exchange Commission on March 22, 1996 (Reg. No. 333-2708-LA).
Operations
The Company designs, develops, markets and implements software products
and provides related customer support services and hardware for customers in
retailing and logistics. The Company also provides professional services,
including installation, training, maintenance, customization, and modifications
in conjunction with sales of its software products. The Company markets its
products and services entirely through an internal sales force.
Founded in 1985, the Company historically derived its revenue primarily
from sales of hardware and software products developed by third parties,
primarily International Business Machines Corp. ("IBM"). The Company's
dependence on the resale of third parties' products adversely affected the
Company's competitive position, gross profit margins, and operating results. As
a result, in 1991 the Company changed its business strategy to emphasize the
development and sale of its own software products. The Company intends to use a
substantial portion of the proceeds from its initial public offering completed
in March 1996 to significantly accelerate the transition of its business focus
to proprietary software products. As a result, the Company anticipates that
revenue from third-party hardware and software products will continue to
decrease from historical levels and that revenue from software licenses and
professional services will increase in dollar amounts as well as a percentage of
total revenue during the next several years. The Company believes that, although
the change in revenue mix may initially result in lower total revenue, it will
also result in a more favorable gross profit margin for the Company, reduced
borrowing requirements, and a higher net margin as sales of software and
services become a higher percentage of total revenue.
Product revenue includes hardware, third-party software, and
third-party maintenance sold to the Company's customers. Software license
revenue 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. Professional services revenue includes
services to install the Company's software products and third-party hardware and
software products, and services to train customers in the use of the Company's
software products and third-party hardware and software products.
Cost of products sold includes costs of those products (software and
hardware) not manufactured by the Company and maintenance resold by the Company.
The Company does not capitalize any software development costs associated with
the development of its proprietary
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<PAGE>
software products and has expensed all payroll and related costs for software
development as incurred. Software development cost also includes all other
general and administrative costs associated with software development personnel.
Professional services expense consists of salaries, benefits and other general
and administrative costs attributable to professional services personnel. Sales
and marketing expenses consist primarily of salaries, commissions, benefits,
marketing materials and travel expenses and other general and administrative
costs associated with or allocated to the Company's sales and marketing
personnel. General and administrative expenses include the cost of finance and
accounting, human resources, corporate information systems and other
administrative functions of the Company.
The Company's revenue and operating results are subject to quarterly
and other fluctuations as a result of a variety of factors, including the
budgeting and purchasing practices of its customers, the length of the customer
evaluation process for Company products, the timing of customer system
conversions, and, to a lesser extent, the Company's sales commission practices,
which are based partly on quarterly incentives and annual quotas, and other
factors. The Company's professional services revenue tends to fluctuate due to
the completion or commencement of significant projects, which may continue over
multiple quarters, the number of working days in a quarter, and the utilization
rate of professional services personnel. The Company has often recognized a
substantial portion of its license revenue in the last month of the quarter,
sometimes in the last week. A significant portion of the Company's operating
expenses is relatively fixed, since personnel levels and other expenses are
based upon anticipated revenue. Because a substantial portion of this revenue
may not be generated until the end of each quarter, the Company may not be able
to reduce spending in response to sales shortfalls or delays. These important
factors can cause significant variations in operating results from quarter to
quarter. The Company believes that quarter-to-quarter comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Results of Operations of the Company for the Three Months ended October 31, 1996
and 1995
Revenue. Total revenue increased by 26% from approximately $6.8 million
in the three months ended October 31, 1995 to approximately $8.6 million in the
three months ended October 31, 1996. Product revenue increased by 20% from
approximately $6.0 million to approximately $7.1 million during the same
periods. As a percentage of total revenue, product revenue decreased from 87%
during the three months ended October 31, 1995 to 83% during the three months
ended October 31, 1996. Software license revenue increased 63% from
approximately $446,000 in the three months ended October 31, 1995 to
approximately $726,000 in the three months ended October 31, 1996. As a
percentage of total revenue, software license revenue increased from 6% to 8%
during the same period. Professional services revenue increased 73% from
approximately $447,000 to approximately $774,000 during the three month periods
ending October 31, 1995 and 1996, respectively. As a percentage of total
revenue, professional services revenue increased from approximately 7% during
the three months ended October, 1995 to approximately 9% of total revenue during
the three months ended October 31, 1996.
The increase in product revenue is attributed to increased sales of
third-party hardware products, principally those manufactured by IBM, including
the IBM AS/400. IBM had delayed shipment on its new AS/400 line of RISC (Reduced
Instruction Set Computing) processors during the first quarter of fiscal 1997,
with shipments beginning in the Company's second quarter. The increase in
software revenue is attributed to new software products announced and shipped
during the Company's third quarter. During the three months ended October 31,
1996 the Company announced general availability of its Wireless Inventory
Manager module, Release 2.0 of its Internet and kiosk-enabled Gift Registry
module, and MPower(TM), its new retail merchandising product. The increase in
professional services revenue resulted from the Company's continued focus on
providing professional services to its customer base.
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<PAGE>
Cost of Products Sold. Cost of products sold increased 9% from
approximately $4.5 million during the three months ended October 31, 1995 to
approximately $4.9 million during the three months ended October 31, 1996. This
increase is attributed to the corresponding increase in sales of third-party
hardware products during the same period. As a percentage of product revenue,
cost of products sold was approximately 69% and 75% during the three months
ended October 31, 1996 and 1995, respectively.
Software Development Expense. Software development expense increased
from approximately $687,000 during the three months ended October 31, 1995 to
approximately $1.0 million during the three months ended October 31, 1996. The
48% increase is attributed to increased research and development effort
associated with the development of the Company's proprietary software products.
Professional Services Expense. Professional services expense increased
by 77% from approximately $450,000 during the three months ended October 31,
1995 to approximately $795,000 during the three months ended October 31, 1996.
Additional personnel contributed to this increase. As a percentage of
professional services revenue, professional services expense increased from 101%
in the three months ended October 31, 1995 to 103% in the three months ended
October 31, 1996. This increase as a percentage is attributed to low utilization
rates of professional services personnel.
Sales and Marketing Expense. Sales and marketing expense increased 16%
from approximately $425,000 during the three months ended October 31, 1995 to
approximately $493,000 during the three months ended October 31, 1996. The
increase can be attributed to costs incurred for new marketing literature,
additional sales and marketing personnel, and increased marketing activities.
General and Administrative Expense. General and administrative expense
increased from approximately $432,000 in the three months ended October 31, 1995
to approximately $625,000 in the three months ended October 31, 1996. This
increase is attributed to additional personnel and associated costs, increased
insurance costs, and additional building rent cost.
Other Income (Expense). Interest expense was approximately $101,000
during the three months ended October 31, 1996, as compared with approximately
$115,000 during the three months ended October 31, 1995.
Net Income. Net income increased 157% from approximately $282,000, or
$.19 per share, in the three months ended October 31, 1995 to approximately
$723,000, or $.26 per share, in the three months ended October 31, 1996. The
Company attributes this increase to improved sales of higher margin product and
reduced operating costs.
Results of Operations of the Company for the Nine Months ended October 31, 1996
and 1995
Revenue. Total revenue decreased by 3% from approximately $20.0 million
in the nine months ended October 31, 1995 to approximately $19.4 million in the
nine months ended October 31, 1996. Product revenue decreased by 15% from
approximately $16.8 million to approximately $14.4 million during the same
periods. As a percentage of total revenue, product revenue decreased from 84%
during the nine months ended October 31, 1995 to 74% during the nine months
ended October 31, 1996. Software license revenue increased by 55% from
approximately $2.0 million in the nine months ended October 31, 1995 to
approximately $3.1 million in the nine months ended October 31, 1996. As a
percentage of total revenue, software license revenue increased from 10% to 16%
during the same periods. Professional services revenue increased 69% from
approximately $1.1 million to approximately $1.6 million during the nine month
periods ending October 31, 1995 and 1996,
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respectively. As a percentage of total revenue, professional services revenue
increased from 6% to 10% during the nine months ended October 31, 1995 and 1996,
respectively.
The overall decrease in total revenue is attributed to significantly
lower product revenue during the first three months of fiscal 1997. The decrease
in product revenue is a result of reduced sales of third-party hardware
products, principally those manufactured by IBM, including the IBM AS/400. IBM
had delayed shipment on its new AS/400 line of RISC (Reduced Instruction Set
Computing) processors, thus delaying sales to many of the Company's customers
during that period. Product revenue increased when IBM began shipping those
products in the second quarter of fiscal 1997. The increase in software license
and professional services revenue resulted from the Company's continued focus on
sales of its proprietary software products, as well as the Company's continuing
efforts to provide professional services to implement its software products.
Although revenue from third-party products rebounded during the three months
ended October 31, 1996, the Company continues to believe that revenue from
third-party products will decrease as a percentage of total revenue.
Cost of Products Sold. Cost of products sold decreased 21% from
approximately $12.7 million during the nine months ended October 31, 1995 to
approximately $10.0 million during the nine months ended October 31, 1996. This
decrease is attributed to the corresponding decrease in sales of third-party
products during the same period. As a percentage of product revenue, cost of
products sold was approximately 70% and 76% during the nine months ended October
31, 1996 and 1995, respectively.
Software Development Expense. Software development expense increased
from approximately $2.1 million to approximately $2.8 million during the nine
months ended October 31, 1995 and 1996, respectively. The 32% increase is
attributed to increased research and development efforts associated with the
development of the Company's proprietary software products. As a percentage of
total revenue, software development costs increased from 11% in the nine months
ended October 31, 1995 to 15% in the nine months ended October 31, 1996.
Professional Services Expense. Professional services expense increased
by 52% from approximately $1.3 million to approximately $1.6 million during the
nine months ended October 31, 1995 and 1996, respectively. Additional personnel
contributed to this increase. As a percentage of professional services revenue,
professional services expense decreased from 115% in the nine months ended
October 31, 1995 to 103% in the nine months ended October 31, 1996. This
decrease as a percentage is attributed to better utilization of professional
services personnel.
Sales and Marketing Expense. Sales and marketing expense increased 7%
from approximately $1.3 million to approximately $1.4 million in the nine months
ended October 31, 1995 and 1996, respectively. The increase can be attributed to
costs incurred for marketing literature, additional sales and marketing
personnel, and an increased marketing presence at industry trade shows.
General and Administrative Expense. General and administrative expense
increased from approximately $1.2 million in the nine months ended October 31,
1995 to approximately $1.4 million in the nine months ended October 31, 1996.
This 21% increase is attributed to additional personnel and associated costs,
additional insurance costs, and increased building rent costs.
Other Income (Expense). Interest expense was approximately $189,000
during the nine months ended October 31, 1996, as compared with approximately
$568,000 during the nine months ended October 31, 1995. In September 1995, the
Company converted approximately $1.2 million of debt into shares of common
stock. Interest expense related to this debt, together with interest expense due
to vendor late payments that were incurred during the nine months ended October
31, 1995, were not incurred during the nine month period ended October 31, 1996.
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Net Income. Net income increased 95% from approximately $794,000, or
$.53 per share, in the nine months ended October 31, 1995 to approximately $1.5
million, or $.57 per share, in the nine months ended October 31, 1996. The
Company attributes this increase to the 67% decrease in interest expense during
the comparable periods, together with the 27% increase in income from
operations.
Liquidity and Capital Resources
The Company's working capital position increased from a deficit of
approximately ($880,000) at January 31, 1996 to approximately $4.7 million at
October 31, 1996. In March 1996, the Company completed an initial public
offering of 1,250,000 shares of common stock and raised net proceeds of
approximately $6.5 million. The Company used a portion of the proceeds from this
offering to retire $810,000 of bridge notes and related accrued interest, to
purchase approximately $528,000 of capital equipment, to retire approximately
$536,000 of debt to officers and employees, to fund additional development for
new software products, and to develop new marketing collateral material.
The Company used net cash of approximately $3.7 million for operations
during the nine months ended October 31, 1996, primarily as a result of the
increase in accounts receivable and inventories, partially offset by an increase
in accounts payable and accrued payroll and benefits. The increase in inventory
can be attributed to timing of inventory in transit to the Company's customers,
and is temporary in nature.
Capital expenditures for the nine-month period ended October 31, 1996
totaled approximately $1.1 million, of which approximately $847,000 was for the
purchase of computer hardware and software products needed for the continued
efficient development of the Company's proprietary software products. The
balance of $217,000 was used for the expansion of physical office space and
related purchases of furniture and fixtures.
Financing activities provided net cash of approximately $6.8 million in
the nine months ended October 31, 1996. The Company completed its initial public
offering in March 1996, which, together with additional borrowings of $1.6
million on the Company's line of credit, generated approximately $8.1 million,
partially offset by retirement of approximately $810,000 in bridge notes
payable, approximately $100,000 in notes payable, approximately $38,000 in
capital lease obligations, and payments to officers and employees of
approximately $536,000.
The Company currently has an agreement with Concord Growth Corporation
providing for a line of credit that expires August 22, 1997, in the
amount that is the lower of $2.0 million or 75% of eligible accounts receivable.
The line of credit bears interest at the prime rate of interest quoted in the
Wall Street Journal on the first day of each month plus 8% and requires a
monthly minimum payment of $5,000. The Company is currently seeking a more
favorable borrowing facility and anticipates a marked decrease in its cost of
borrowing, beginning in the fourth quarter of fiscal 1997.
The Company believes that existing cash balances, cash generated from
operations, and available borrowings will be sufficient to meet the Company's
liquidity needs for the next 12 months at its current level of operations.
However, the Company may be required to obtain additional capital to fund its
planned growth in the future, particularly to provide funds required to finance
the Company's planned software development programs and increased sales and
marketing efforts. Potential sources of such capital may include the proceeds
from the exercise of outstanding options and warrants, bank financing, strategic
alliances, and additional offerings of the Company's equity or debt securities.
There can be no assurance that such capital will be available on acceptable
terms from these or other potential sources, and the lack of such capital could
have a material adverse effect on the Company's operations.
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Business Outlook and Risk Factors
The trends indicated by the Company's operating results for the nine
months ended October 31, 1996 reflect the Company's belief that although total
revenue may remain flat or grow only slightly in the near future, software and
services revenue should contribute a larger share of overall revenue, which
should result in an increase in gross profit margins and net margins. The
Company continues to invest heavily in research and development of new and
enhanced software products in order to reach a larger segment of its targeted
market. The Company recently announced new software products that are platform
independent and contain added and improved functionality. The transition to
hardware platform independence is designed to lead to a broader market for the
Company's products and to decrease dependence on IBM as a primary vendor. The
Company's current contract with IBM expires in July 1997, and there can be no
assurance that the Company will continue that relationship after the contract
expires. The Company's total revenue and product mix could be materially and
adversely affected by many factors, some of which are beyond the control of the
Company. Those factors include the Company's ability to maintain the software
design and development capabilities necessary to design and produce innovative
and desirable products on a timely and cost-effective basis; the Company's
ability to penetrate new markets and attract new customers; the budgeting and
purchasing practices or constraints of its customers; the length of the
Company's sales cycle; the complicated nature of the Company's product
installations; and unanticipated postponement or cancellation of significant
orders.
The Company continues to invest in sales and marketing in order to
enhance its image and brand awareness. The Company added seven new marketing and
sales personnel during the last six months, updated its industry trade-show
presence and image, invested heavily in collateral marketing materials, and
redefined the Company's look and feel through a new corporate logo. Although the
Company believes that its increased sales and marketing efforts will contribute
to an increased number of customers and increased revenue associated with the
sales of software products, certain risk factors exist that could have a
material adverse effect on the Company's operating results. Those risk factors
include lack of assurance that its products will achieve or maintain market
acceptance; the complexity of the Company's software programs, which may cause
delays in product development and could result in loss of market acceptance,
loss of sales, and reduction of market share; and the fact that the Company's
software products compete with those of many major domestic and international
companies, many of which have greater market recognition and substantially
greater financial, technical, and marketing resources than the Company
possesses.
The Company plans to continue to increase the utilization of
professional services personnel. An increase in utilization of professional
services personnel can have a direct impact on revenue without any additional
associated costs. Risk factors that could, however, materially affect the
ability of the Company to increase utilization rates and professional services
revenue include factors such as fluctuating demand for professional services and
lack of assurance that there will continue to be a demand for the Company's
services. The Company may not be able to react to a significant decrease in
demand for its services during any given quarter, which could result in
continued expenses for professional personnel without offsetting revenue.
Although the Company has focused on controlling administrative costs,
it recognizes the added costs associated with attracting and retaining key
personnel. Because it operates in an industry that is characterized by a high
cost of recruiting and a current lack of qualified personnel, the Company
constantly evaluates employee benefits and the work environment that it provides
its employees. The high cost associated with industry hiring practices could
have a material adverse affect on the Company's quarterly operating results. The
Company intends to continue to moderate general and administrative costs so that
revenue growth will continue to exceed operating expenses. There can be no
assurance, however, that the Company will be able to predict or respond to a
-12-
<PAGE>
shortfall in sales during any given quarter in order to reduce its fixed general
and administrative expenses on a timely basis.
The Company believes that the industry in which it markets its products
and services has a strong outlook, with expanding markets characterized by a
highly fragmented group of competitors. As competition for consumer products
rises, retailers that represent a significant portion of the Company's current
and potential customers increasingly are aware of the need for business
information systems that allow them to focus on efficiently managing inventory
and of finding new ways to bring customers into their stores. The Company
strives to provide market-leading solutions that address those real-world
problems. Due to the risk factors discussed and to other factors that generally
affect high technology companies, there can be no assurance that the Company
will be able to successfully penetrate these markets in the future.
-13-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Securities
Not Applicable
Item 4. Submissions of Matter to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature:
- ----------
GATEWAY DATA SCIENCES CORPORATION
<TABLE>
<S> <C> <C>
/s/ Michael M. Gordon Chairman of the Board, December 14, 1996
- ---------------------------------- President, and Chief
Michael M. Gordon Executive Officer
(Principal Executive
Officer)
/s/ Vickie B. Jarvis Vice President, Finance and December 14, 1996
- ---------------------------------- Chief Financial Officer
Vickie B. Jarvis (Principal Financial and
Accounting Officer)
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the period ended
October 31, 1996 and is qualified in its entirety by reference to such financial
statements. This Exhibit shall not be deemed filed for purposes of Section 11 of
the Securities Act of 1933 and Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of such Sections, nor shall it be
deemed a part of any other filing which incorporates this report by reference,
unless such other filing expressly incorporates this Exhibit by reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,143
<SECURITIES> 0
<RECEIVABLES> 8,489
<ALLOWANCES> 85
<INVENTORY> 1,576
<CURRENT-ASSETS> 12,595
<PP&E> 3,197
<DEPRECIATION> 1,423
<TOTAL-ASSETS> 16,457
<CURRENT-LIABILITIES> 7,856
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,457
<SALES> 19,420
<TOTAL-REVENUES> 19,420
<CGS> 10,065
<TOTAL-COSTS> 17,690
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> 1,544
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,544
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
